-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K1C7wXOeuo+swPn1YMRB9Dx+Bf8hYMiXbRNiKKbW5CwZcLHh3TJLeD9A2jhyarwH VJNNqQ72aUpNvXqzAcVg0Q== 0000217087-96-000005.txt : 19960301 0000217087-96-000005.hdr.sgml : 19960301 ACCESSION NUMBER: 0000217087-96-000005 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19960229 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SBL FUND CENTRAL INDEX KEY: 0000217087 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 480873454 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-59353 FILM NUMBER: 96528732 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-02753 FILM NUMBER: 96528733 BUSINESS ADDRESS: STREET 1: 700 HARRISON CITY: TOPEKA STATE: KS ZIP: 66636 BUSINESS PHONE: 9132953127 485APOS 1 N1A-PEA 27-REGISTRATION STATEMENT Registration No. 811-2753 Registration No. 2-59353 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_| Post-Effective Amendment No. 27 |X| ----- and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |_| Post-Effective Amendment No. 27 |X| ------ (Check appropriate box or boxes) SBL FUND (Exact Name of Registrant as Specified in Charter) 700 HARRISON STREET, TOPEKA, KANSAS 66636-0001 (Address of Principal Executive Offices/Zip Code) Registrant's Telephone Number, including area code: (913) 295-3127 Copies To: John D. Cleland, President Amy J. Lee, Secretary SBL Fund SBL Fund 700 Harrison Street 700 Harrison Street Topeka, KS 66636-0001 Topeka, KS 66636-0001 (Name and address of Agent for Service) It is proposed that this filing will become effective (check appropriate box): |_| immediately upon filing pursuant to paragraph (b) |_| on April 29, 1996, pursuant to paragraph (b) |_| 60 days after filing pursuant to paragraph (a)(i) |X| on April 29, 1996, pursuant to paragraph (a)(i) |_| 75 days after filing pursuant to paragraph (a)(ii) |_| on April 29, 1996, pursuant to paragraph (a)(ii) of rule 485 If appropriate, check the following box: |_| this post-effective amendment designates a new effective date for a previously filed post-effective amendment -------------------- Pursuant to Regulation 270.24f-2 under the Investment Company Act of 1940, the Registrant has elected to register an indefinite number of its shares of Common Stock. The Registrant filed the Notice required by 24f-2 on February 27, 1996. SBL FUND FORM N-1A CROSS REFERENCE SHEET Form N-1A ITEM NUMBER CAPTION PART A PROSPECTUS 1. Cover Page 2. Not Applicable 2a. Not Applicable 3. Financial Highlights; Performance Information 4. Investment Objectives and Policies of the Series 5. Management of the Fund; Portfolio Management; Custodian, Transfer Agent and Dividend-Paying Agent 6. General Information; Organization; Contractowner Inquiries; Distributions and Federal Income Tax Considerations; Foreign Taxes 7. Sale and Redemption of Shares; Determination of Net Asset Value; Trading Practices and Brokerage 8. Sale and Redemption of Shares 9. Not Applicable PART B STATEMENT OF ADDITIONAL INFORMATION 10. Cover Page 11. Table of Contents 12. What is SBL Fund? 13. Investment Objectives and Policies of the Series; Investment Policy Limitations 14. Officers and Directors; Ownership and Management 15. Remuneration of Directors and Others 16. Investment Management; Portfolio Management; Custodian, Transfer Agent and Dividend-Paying Agent 17. Portfolio Transactions; Portfolio Turnover 18. Capital Stock and Voting 19. Sale and Redemption of Shares; Determination of Net Asset Value; Repurchase Agreements 20. Distributions and Federal Income Tax Considerations; Foreign Taxes 21. Not Applicable 22. Performance Information 23. Financial Statements; Independent Auditors SBL Fund Member of the Security Benefit Group of Companies 700 Harrison, Topeka, Kansas 66636-0001 Prospectus April 30, 1996 SBL Fund (the "Fund") is an open-end, diversified series management investment company offering eleven portfolios with different investment objectives and strategies. Series A (Growth Series) seeks long-term capital growth by investing in a broadly-diversified portfolio of common stocks, securities convertible into common stocks, preferred stocks and bonds and other debt securities. Series B (Growth-Income Series) seeks long-term growth of capital with secondary emphasis on income. Series B seeks these objectives by investing in various types of securities, including common stocks, convertible securities, preferred stocks and debt securities which may include higher yielding, higher risk securities ordinarily characteristic of securities in the lower rating categories of the recognized rating services. Series C (Money Market Series) seeks as high a level of current income as is consistent with preservation of capital by investing in money market securities with varying maturities. Series D (Worldwide Equity Series) seeks long-term growth of capital primarily through investment in common stocks and equivalents of companies domiciled in foreign countries and the United States. Series E (High Grade Income Series) seeks to provide current income with security of principal by investing in a broad range of debt securities, including U.S. and foreign corporate debt securities and securities issued by the U.S. and foreign governments. Series S (Social Awareness Series) seeks high total return through a combination of income and capital appreciation by investing in various types of securities, including common stocks, convertible securities, preferred stocks and debt securities that meet certain social criteria established for the Series. Series J (Emerging Growth Series) seeks capital appreciation by investing in a diversified portfolio of securities which may include common stocks, preferred stocks, debt securities and securities convertible into common stocks. Series K (Global Aggressive Bond Series) seeks high current income and, as a secondary objective, capital appreciation by investing in a combination of foreign and domestic high-yield, lower rated debt securities (commonly known as "junk bonds"). Series M (Specialized Asset Allocation Series) seeks high total return, consisting of capital appreciation and current income. The Series seeks this objective by following an asset allocation strategy that contemplates shifts among a wide range of investment categories and market sectors, including equity and debt securities of domestic and foreign issuers. Series N (Managed Asset Allocation Series) seeks a high level of total return by investing primarily in a diversified portfolio of debt and equity securities. Series O (Equity Income Series) seeks to provide substantial dividend income and also capital appreciation by investing primarily in dividend-paying common stocks of established companies. An investment in the Fund, including an investment in Series C, is neither insured nor guaranteed by the U.S. Government. In addition to other risks, the high yield, high risk bonds in which Series B, Series K, Series N and Series O may invest are subject to greater fluctuations in value and risk of loss of income and principal due to default by the issuer than are lower yielding, higher rated bonds. The Fund's shares are sold to Security Benefit Life Insurance Company ("SBL") for allocation to one or more separate accounts established for funding variable life insurance policies and variable annuity contracts issued by SBL. This Prospectus sets forth concisely the information that a prospective investor should know about SBL Fund. It should be read and retained for future reference. A Statement of Additional Information about the Fund, dated April 30, 1996, which is incorporated by reference in this Prospectus, has been filed with the Securities and Exchange Commission. It is available at no charge by writing Security Distributors, Inc., 700 Harrison Street, Topeka, Kansas 66636-0001, or by calling (913) 295-3127 or (800) 888-2461. 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. AN INVESTMENT IN THE FUND INVOLVES RISK, INCLUDING LOSS OF PRINCIPAL, AND IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED BY ANY BANK. THE FUND IS NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. 1 SBL FUND FINANCIAL HIGHLIGHTS The following financial highlights for each of the years presented have been audited by Ernst & Young LLP. Such information for each of the five years in the period ended December 31, 1995, should be read in conjunction with the financial statements of the Fund and the report of Ernst & Young LLP, the Fund's independent auditors, appearing in the December 31, 1995 Annual Report which is incorporated by reference in this Prospectus. The Fund's Annual Report also contains additional information about the performance of the Fund and may be obtained without charge by calling Security Distributors, Inc. at 1-800-888-2461. The informatio for each of the periods preceding and including the year ended December 31, 1990 is not covered by the report of Ernst & Young LLP.
Net Net Total Ratio of Income Asset Net Net Gain from Distri- Net Net Expenses (Loss) Fiscal Value Invest- (Loss) on Invest- Dividends butions Asset Assets to to Year Begin- ment Securities ment (from Net (from Return Total Value End of Average Average Portfolio Ended ning of Income (Realized & Opera- Investment Capital of Distri- End of Total Period Net Net Turnover Dec.31 Period (Loss) Unrealized) tions Income) Gains) Capital butions Period Return(d)(thousands) Assets Assets Rate - ------------------------------------------------------------------------------------------------------------------------------------ SERIES A 1986 $12.29 $ 0.27 $ 0.54 $ 0.81 $(0.37) $ --- $ --- $(0.37) $12.73 6.6% $107,984 0.65% 2.19% 199% 1987 12.73 0.29(a) 0.711 1.001 (0.458) (2.083) --- (2.541) 11.19 6.2% 127,627 0.64% 1.94% 249% 1988 11.19 0.36 0.776 1.136 --- (0.006) --- (0.006) 12.32 10.2% 113,111 0.66% 2.47% 211% 1989 12.32 0.40 3.90 4.30 (0.37) --- --- (0.37) 16.25 35.9% 144,576 0.79% 2.34% 113% 1990 16.25 0.30 (1.95) (1.65) (0.64) (1.06) --- (1.70) 12.90 (9.8%) 165,554 0.85% 2.31% 98% 1991 12.90 0.29 4.34 4.63 (0.27) --- --- (0.27) 17.26 36.1% 235,115 0.87% 1.97% 95% 1992 17.26 0.23 1.615 1.845 (0.242) (0.533) --- (0.775) 18.33 11.1% 296,548 0.86% 1.46% 77% 1993 18.33 0.39 2.076 2.466 (0.224) (0.752) --- (0.976) 19.82 13.7% 317,407 0.86% 2.01% 108% 1994 19.82 0.20 (0.442) (0.242) (0.38) (3.198) --- (3.578) 16.00 (1.7%) 332,288 0.84% 1.13% 90% 1995(g) 16.00 0.18 5.648 5.828 (0.153) (0.645) --- (0.798) 21.03 36.8% 519,891 0.83% 1.13% 83% SERIES B 1986 $14.47 $ 0.54 $ 2.20 $ 2.74 $(0.76) $ --- $ --- $(0.76) $16.45 19.2% $ 59,079 0.66% 4.46% 26% 1987 16.45 0.63(a) 0.08 0.71 (0.937) (0.513) --- (1.45) 15.71 3.6% 84,601 0.62% 3.31% 28% 1988 15.71 1.14 1.888 3.028 --- (0.008) --- (0.008) 18.73 19.3% 106,620 0.64% 6.50% 33% 1989 18.73 0.65 4.61 5.26 (1.03) (0.51) --- (1.54) 22.45 28.4% 163,155 0.79% 4.03% 52% 1990 22.45 0.70 (1.70) (1.00) (0.67) (0.57) --- (1.24) 20.21 (4.4%) 197,472 0.87% 4.32% 62% 1991 20.21 0.58 6.953 7.533 (0.66) (0.233) --- (0.893) 26.85 37.7% 348,969 0.86% 3.39% 62% 1992 26.85 0.65 0.999 1.649 (0.583) (0.156) --- (0.739) 27.76 6.3% 467,208 0.86% 3.22% 56% 1993 27.76 0.64 2.009 2.649 (0.679) --- --- (0.679) 29.73 9.6% 583,599 0.86% 2.63% 95% 1994 29.73 0.51 (1.34) (0.83) (0.680) (1.68) --- (2.36) 26.54 (3.0%) 595,154 0.84% 2.07% 43% 1995(g) 26.54 0.79 7.16 7.95 (0.540) --- --- (0.540) 33.95 30.1% 795,113 0.83% 2.70% 94% SERIES C 1986 $12.48 $ 0.75 $ --- $ 0.75 $(1.15) $ --- $ --- $(1.15) $12.08 6.5% $ 31,125 0.69% 6.12% --- 1987 12.08 0.76(a) --- 0.76 (1.43) --- --- (1.43) 11.41 6.4% 44,463 0.66% 6.37% --- 1988 11.41 0.822 --- 0.822 (0.002) --- --- (0.002) 12.23 7.2% 82,904 0.65% 7.17% --- 1989(a) 12.23 1.09 --- 1.09 (0.53) --- --- (0.53) 12.79 9.0% 94,560 0.63% 8.58% --- 1990(a) 12.79 1.00 --- 1.00 (1.05) --- --- (1.05) 12.74 8.0% 73,599 0.60% 7.66% --- 1991(a) 12.74 0.69 0.01 0.70 (0.92) --- --- (0.92) 12.52 5.6% 86,610 0.61% 5.42% --- 1992 12.52 0.43 (0.03) 0.40 (0.71) --- --- (0.71) 12.21 3.2% 87,246 0.61% 3.19% --- 1993 12.21 0.29 0.027 0.317 (0.437) --- --- (0.437) 12.09 2.6% 99,092 0.61% 2.65% --- 1994 12.09 0.41 0.035 0.445 (0.265) --- --- (0.265) 12.27 3.7% 118,668 0.61% 3.70% --- 1995(g) 12.27 0.74 (0.085) 0.655 (0.585) --- --- (0.585) 12.34 5.4% 105,436 0.60% 5.27% --- SERIES D 1986 $11.85 $ 1.50(a) $(0.97) $ 0.53 $(0.76) $ --- $ --- $(0.76) $11.62 4.5% $ 18,500 0.75% 12.41% 72% 1987 11.62 1.41(a) (2.012) (0.692) (2.888) --- --- (2.888) 8.13 (5.9%) 12,651 0.77% 12.71% 111% 1988 8.13 1.22 (0.82) 0.40 --- --- --- --- 8.53 4.9% 12,310 0.67% 13.27% 108% 1989 8.53 1.14 (1.81) (0.67) (1.33) --- --- (1.33) 6.53 (8.9%) 10,270 0.80% 13.97% 111% 1990 6.53 1.00 (2.30) (1.30) (1.26) --- --- (1.26) 3.97 (22.7%) 5,522 0.93% 14.11% 96% 1991 3.97 0.15 0.34 0.49 (0.55) --- --- (0.55) 3.91 12.7% 11,688 1.58% 3.95% 113% (a)(b) 1992(a) 3.91 0.02 (0.122) (0.102) (0.048) --- --- (0.048) 3.76 (2.6%) 25,183 1.62% 0.50% 81% 1993(a) 3.76 0.02 1.166 1.186 (0.006) --- --- (0.006) 4.94 31.6% 98,252 1.42% 0.38% 70% 1994(a) 4.94 0.02 1.115 0.135 (0.005) --- --- (0.005) 5.07 2.7% 147,033 1.34% 0.50% 82% 1995 5.07 0.05 0.4989 0.5489 (0.0009) (0.058) --- (0.0589) 5.56 10.9% 177,781 1.31% 0.90% 169%
2
Net Net Total Ratio of Income Asset Net Net Gain from Distri- Net Net Expenses (Loss) Fiscal Value Invest- (Loss) on Invest- Dividends butions Asset Assets to to Year Begin- ment Securities ment (from Net (from Return Total Value End of Average Average Portfolio Ended ning of Income (Realized & Opera- Investment Capital of Distri- End of Total Period Net Net Turnover Dec.31 Period (Loss) Unrealized) tions Income) Gains) Capital butions Period Return(d)(thousands) Assets Assets Rate - ------------------------------------------------------------------------------------------------------------------------------------ SERIES E 1986 $11.19 $ 1.08(a) $(0.02) $ 1.06 $(0.38) $ --- $ --- $(0.38) $11.87 9.7% $ 22,261 0.76% 9.32% 44% 1987 11.87 0.93(a) (0.658) 0.272 (1.662) --- --- (1.662) 10.48 2.4% 22,025 0.75% 7.86% 138% 1988 10.48 1.02 (0.26) 0.76 --- --- --- --- 11.24 7.3% 23,338 0.65% 9.17% 68% 1989 11.24 0.73 0.59 1.32 (0.91) --- --- (0.91) 11.65 11.9% 34,811 0.78% 9.00% 56% 1990 11.65 0.82 (0.07) 0.75 (0.73) --- --- (0.73) 11.67 6.7% 43,908 0.85% 8.83% 28% 1991 11.67 0.76 1.17 1.93 (0.78) --- --- (0.78) 12.82 17.0% 63,602 0.86% 8.24% 24% 1992 12.82 0.78 0.168 0.948 (0.748) --- --- (0.748) 13.02 7.4% 81,440 0.86% 7.41% 76% 1993 13.02 0.64 1.02 1.66 (0.79) (0.11) --- (0.90) 13.78 12.6% 112,900 0.86% 6.21% 151% 1994 13.78 0.76 (1.713) (0.953) (0.69) (0.617) --- (1.307) 11.52 (6.9%) 107,078 0.85% 6.74% 185% 1995(g) 11.52 0.74 1.36 2.10 (0.76) --- --- (0.76) 12.86 18.6% 125,652 0.85% 6.60% 180% SERIES J 1992(c)$10.00 $ 0.01 $ 2.46 $ 2.47 $ --- $ --- $ --- $ --- $12.47 24.7% $ 7,113 1.06% 0.22% 4% 1993 12.47 (0.01) 1.711 1.701 (0.001) --- --- (0.001) 14.17 13.6% 42,096 0.91% (0.14%) 117% 1994 14.17 (0.01) (0.713) (0.723) --- (0.007) --- (0.007) 13.44 (5.1%) 76,940 0.88% (0.11% 91% 1995(g) 13.44 0.04 2.58 2.62 --- --- --- --- 16.06 19.5% 93,379 0.84% 0.26% 202% SERIES S 1991(c)$10.00 $ 0.05 $ 0.50 $ 0.55 $ --- $ --- $ --- $ --- $10.55 5.5% $ 2,711 1.00% 1.49% 162% 1992(a) 10.55 0.03 1.691 1.721 (0.021) --- --- (0.021) 12.25 16.4% 9,653 0.92% 0.24% 110% 1993 12.25 0.02 1.432 1.452 (0.012) --- --- (0.012) 13.69 11.9% 19,490 0.90% 0.23% 105% 1994 13.69 0.08 (0.595) (0.515) (0.02) (0.185) --- (0.205) 12.97 (3.7%) 24,539 0.90% 0.75% 67% 1995(g) 12.97 0.09 3.507 3.597 (0.077) --- --- (0.077) 16.49 27.7% 36,830 0.86% 0.75% 122% SERIES K 1995 $10.00 $ 0.54 $ 0.22 $ 0.76 $(0.466) $(0.044)$(0.03)$(0.540) $10.22 7.6% $ 5,678 1.63% 11.03% 127% (a)(e)(f) SERIES M 1995 $10.00 $ 0.169 $ 0.541 $ 0.71 $ --- $ --- $ --- $ --- $10.71 7.1% $ 15,976 1.94% 3.2% 181% (a)(e) SERIES N 1995 $10.00 $ 0.156 $ 0.574 $ 0.73 $ --- $ --- $ --- $ --- $10.73 7.3% $ 10,580 1.90% 2.8% 26% (a)(e) SERIES O 1995 $10.00 $ 1.66 $ 1.534 $ 1.70 $ --- $ --- $ --- $ --- $11.70 17.0% $ 13,528 1.40% 3.0% 3% (a)(e)
(a) Net investment income per share has been calculated using the weighted monthly average number of capital shares outstanding. (b) Effective May 1, 1991, the investment objective of Series D was changed from high current income to long-term capital growth through investment in common stocks and equivalents of companies domiciled in foreign countries and the United States. (c) The dates of inception for Series J and S were October 1, 1992 and May 1, 1991 respectively. On these dates the respective Series commenced operations each with a net asset value of $10 per share. Percentage amounts for the initial periods of each series have been annualized, except for total return. (d) Total return information does not take into account (i) any sales charges paid at the time of purchase, (ii) expenses of the separate account, or (iii) expenses of the related variable annuity or variable life insurance contract. Inclusion of these charges would reduce the total return information for all periods shown. Total return is not annualized for periods less than one year. (e) Series K, M, N and O were initially capitalized on June 1, 1995 each with net asset values of $10.00 per share. Percentage amounts for the period have been annualized, except for total return. (f) Fund expenses were reduced by the Investment Manager during the period, and expense ratios absent such reimbursement would have been 2.03 percent for Series K. (g) Expense ratios were calculated without the reduction for custodian fees earnings credits. Expense ratios with such reductions would have been as follows: 1995 ---- Series A 0.83% Series B 0.83% Series C 0.60% Series E 0.85% Series J 0.83% Series S 0.84% 3 SBL FUND SBL Fund (the "Fund"), a Kansas corporation, was organized on May 26, 1977, to serve as the investment vehicle for certain of Security Benefit Life Insurance Company's ("SBL") variable annuity and variable life separate accounts. Shares of the Fund will be sold to SBL for allocation to such separate accounts established for the purpose of funding variable annuity and variable life insurance contracts issued by SBL. The Fund reserves the right to expand the class of persons eligible to purchase shares of any Series of the Fund. The Fund is subject to certain investment policy limitations which may not be changed without stockholder approval. Among these limitations, the more important ones are that the Fund will not, with respect to 75 percent of its total assets, invest more than 5 percent of the value of its assets in any one issuer other than the U.S. Government or its agencies or instrumentalities, or purchase more than 10 percent of the outstanding voting securities of any issuer. In addition, no Series will invest more than 25 percent of its total assets in any one industry. The full text of the investment policy limitations is set forth in the Fund's "Statement of Additional Information." It is conceivable that in the future it may be disadvantageous for variable life insurance separate accounts and variable annuity separate accounts to invest in the Fund simultaneously. Although neither SBL nor SBL Fund currently foresee any such disadvantages, either to variable life insurance policyowners or to variable annuity contractowners, the Fund's Board of Directors intends to monitor events in order to identify any material conflicts between such policyowners and contractowners resulting from changes in state insurance law, changes in federal income tax regulation, changes in the investment management of any portfolio of the underlying fund, and the differences between voting instructions given by policyowners and contractowners. The Board will determine what action, if any, should be taken in response to any such conflicts. If the Board of Directors were to conclude that separate funds should be established for variable life and variable annuity separate accounts, SBL would bear the attendant expenses, but variable life insurance policyowners and variable annuity contractowners would no longer have the economies of scale resulting from a larger combined fund. INVESTMENT OBJECTIVES AND POLICIES OF THE SERIES The investment objective of each Series is described below. There are risks inherent in the ownership of any security and there can be no assurance that such investment objective will be achieved. Some of the risks involved are described below and in the Statement of Additional Information. The investment objective and policies of each Series may be modified at any time without stockholder approval. However, each of the Series is subject to certain investment policy limitations set forth in the Statement of Additional Information, which may not be changed without stockholder approval. Each of the Series may borrow money from banks as a temporary measure for emergency purposes, to facilitate redemption requests, or for other purposes consistent with the Series' investment objective and policies. See the discussion of borrowing under "Investment Methods and Risk Factors." Pending investment in other securities or to meet potential redemptions or expenses, each Series may invest in certificates of deposit issued by banks, bank demand accounts, repurchase agreements and high quality money market instruments. Series A (Growth Series) The investment objective of Series A is to seek long-term capital growth by investing in those securities which, in the opinion of the Investment Manager, have the most long-term capital growth potential. Series A seeks to achieve its objective by investing primarily in a broadly diversified portfolio of common stocks (which may include American Depositary Receipts (ADRs)) or securities with common stock characteristics, such as securities convertible into common stocks. Series A may also invest in preferred stocks, bonds and other debt securities. Income potential will be considered to the extent doing so is consistent with Series A's investment objective of long-term capital growth. Series A may invest its assets temporarily in cash and money market instruments for defensive purposes. Series A may invest up to 5 percent of its assets in warrants (other than those attached to other securities). Series A invests for long-term growth of capital and does not intend to place emphasis upon short-term trading profits. From time to time, Series A may purchase securities on a "when issued" or "delayed delivery" basis. For a detailed discussion of ADRs and the purchase of securities on a "when issued" or "delayed delivery" basis, see "Investment Methods and Risk Factors." Series B (Growth-Income Series) The investment objective of Series B is long-term growth of capital with secondary emphasis on income. Series B seeks to achieve this objective through investment in a diversified portfolio which will ordinarily consist principally of common stocks, which may include ADRs, but may also include other securities when deemed advisable. Such other securities may include (i) securities convertible into common stocks; (ii) preferred stocks; (iii) debt securities issued by U.S. corporations; (iv) securities issued by the U.S. Government or any of its agencies or instrumentalities, including Treasury bills, certificates of indebtedness, notes - -------------------------------------------------------------------------------- No dealer, salesperson, or other person has been authorized to give any information or to make any representations, other than those contained in this Prospectus and in the "Statement of Additional Information," in connection with the offer contained in this Prospectus, and, if given or made, such other information or representation must not be relied upon as having been authorized by the Fund, the investment adviser, or the distributor. - -------------------------------------------------------------------------------- 4 and bonds; (v) securities issued by foreign governments, their agencies, and instrumentalities, and foreign corporations, provided that such securities are denominated in U.S. dollars; and (vi) higher yielding, high risk debt securities (commonly referred to as "junk bonds"). In the selection of securities for investment, the potential for appreciation and future dividends is given more weight than current dividends. From time to time, Series B may purchase government bonds or commercial notes on a temporary basis for defensive purposes. With respect to Series B's investment in debt securities, there is no percentage limitation on the amount of its assets that may be invested in securities within any particular rating classification. See the Statement of Additional Information for a description of corporate bond ratings. Series B may invest in securities which are at the time of purchase rated Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Corporation ("S&P"). In addition, Series B may invest in higher yielding, longer-term fixed-income securities in the lower rating (higher risk) categories of the recognized rating services (commonly referred to as "junk bonds"). These include securities which are at the time of purchase rated Ba or lower by Moody's or BB or lower by S&P. However, the Investment Manager will not rely principally on the ratings assigned by the rating services. Because Series B will invest in lower rated securities and unrated securities of comparable quality, the achievement of the Series' investment objective may be more dependent on the Investment Manager's own credit analysis than would be the case if investing in higher rated securities. For the year ended December 31, 1994, the dollar weighted average of Series B's debt securities had the following credit quality characteristics. Investment Percent of Net Assets ---------- --------------------- U.S. Government Securities.................. 0% Rated Fixed Income Securities A....................................... 0% Baa/BBB................................. .03% Ba/BB................................... .21% B....................................... 10.50% Caa/CCC................................. .62% Unrated Securities Comparable in Quality to A....................................... 0% Ba/BB................................... 0% B....................................... 0% Caa/CCC................................. 0% ----- Total....................................... 11.36% The above table is intended solely to provide disclosure about the Series` asset composition during the year ended December 31, 1994. The asset composition after this may or may not be approximately the same as shown above. As discussed above, Series B may invest in foreign debt securities that are denominated in U.S. dollars. Such foreign debt securities may include debt of foreign governments, including Brady Bonds, and debt of foreign corporations. The Series expects to limit its investment in foreign debt securities, excluding Canadian securities, to not more than 15 percent of its total assets and its investment in debt securities of issuers in emerging markets, excluding Brady Bonds, to not more than 5 percent of its net assets. See the discussion of the risks associated with investing in foreign securities and Brady Bonds under "Investment Methods and Risk Factors" -- "Emerging Markets Risks," "Foreign Investment Risks" and "Brady Bonds." For a detailed discussion of risks associated with high yield investing and ADRs, respectively, see "Investment Methods and Risk Factors" -- "Risks Associated with Investments in High-Yield Lower-Rated Debt Securities" and "American Depositary Receipts (ADRs)." The Series may purchase securities that are restricted as to disposition under the federal securities laws, provided that such securities are eligible for resale to qualified institutional investors pursuant to Rule 144A under the Securities Act of 1933 and subject to the Series' policy that not more than 10 percent of its total assets will be invested in illiquid securities. See "Investment Methods and Risk Factors" -- "Restricted Securities." Series C (Money Market Series) The investment objective of Series C is to seek as high a level of current income as is consistent with preservation of capital, similar to the objective associated with a "money market" fund or series. The Series will attempt to achieve its objective by investing at least 95 percent of its total assets, measured at the time of investment, in a diversified portfolio of highest quality money market instruments (e.g., instruments rated Aaa or Prime-1 by Moody's or AAA or A-1 by S&P or unrated securities that are determined to be of equivalent quality by the Investment Manager under procedures adopted by the Fund's Board of Directors). Series C may also invest up to 5 percent of its total assets, measured at the time of investment, in money market instruments that are in the second-highest rating category for short-term debt obligations (e.g., instruments rated Aa or Prime-2 by Moody's or AA or A-2 by S&P). Series C will purchase only securities that the Investment Manager determines present minimal credit risk under procedures adopted by the Fund's Board of Directors and that satisfy the quality requirements of Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"). The Series may invest in money market instruments with varying maturities (but not longer than thirteen months), consisting of obligations issued or guaranteed (as to principal or interest) by the United States Government or its agencies (such as the Federal Housing Administration and Government National Mortgage Association), or instrumentalities (such as Federal Home Loan Banks and Federal Land Banks) (see the Statement of Additional Information for a description of the differing levels of guarantees associated with these types of securities) and instruments fully collateralized with such obligations such as repurchase agreements; obligations of banks or savings and loan associations that are members of 5 the Federal Deposit Insurance Corporation, and instruments fully collateralized with such obligations such as repurchase agreements (the additional risks involved in such agreements are discussed under "Investment Methods and Risk Factors"); or commercial paper issued by corporations or other corporate debt instruments, subject to the limitations on investment in instruments in the second-highest rating category, discussed above. The Statement of Additional Information contains a description of commercial paper and corporate bond ratings. Series C may invest in instruments having rates of interest that are adjusted periodically according to a specified market rate for such investments ("Variable Rate Instruments"). The interest rate on Variable Rate Instruments is ordinarily determined by reference to, or is a percentage of, an objective standard such as a bank's prime rate or the 91-day U.S. Treasury Bill rate. Generally, the changes in the interest rate on Variable Rate Instruments reduce the fluctuation in the market value of such securities. Accordingly, as interest rates decrease or increase, the potential for capital appreciation or depreciation is less than for fixed-rate obligations. Series C determines the maturity of Variable Rate Instruments in accordance with Rule 2a-7 under the 1940 Act which allows the Series to consider the maturity date of such instruments to be the period remaining until the next readjustment of the interest rate rather than the maturity date on the face of the instrument. Certain of the securities purchased by Series C may be restricted as to disposition under the federal securities laws provided that such securities are eligible for resale to qualified institutional investors pursuant to Rule 144A under the Securities Act of 1933 and subject to the Series' policy that not more than 10 percent of total assets will be invested in illiquid securities. See the description of such securities under "Investment Methods and Risk Factors" -- "Restricted Securities." Investment in Series C involves minimal market risk and, to reduce the effect of fluctuating interest rates on the net asset value of its shares, Series C intends to maintain a dollar weighted average maturity in its portfolio of not more than 90 days. In addition to general market risks, Series C investments in non-government obligations are subject to the ability of the issuer to satisfy its obligations. The Statement of Additional Information contains a description of the principal types of securities and instruments in which Series C will invest. Series D (Worldwide Equity Series) The investment objective of Series D is to seek long-term growth of capital primarily through investment in common stocks and equivalents of companies domiciled in foreign countries and the United States. Series D will seek to achieve its objective through investment in a diversified portfolio of securities which will consist primarily of various types of common stocks and equivalents (the following constitute equivalents: convertible debt securities, warrants and options). The Series may also invest in preferred stocks, bonds and other debt obligations, which include money market instruments of foreign and domestic companies and the U.S. Government and foreign governments, governmental agencies and international organizations. Series D will at all times invest at least 65 percent or more of its assets in at least three countries, one of which may be the United States. The Series is not required to maintain any particular geographic or currency mix of its investments, nor is it required to maintain any particular proportion of stocks, bonds or other securities in its portfolio. Series D may invest substantially or primarily in foreign debt securities when it appears that the capital appreciation available from investments in such securities will equal or exceed the capital appreciation available from investments in equity securities. Because the market value of debt obligations can be expected to vary inversely to changes in prevailing interest rates, investing in debt obligations may provide an opportunity for capital appreciation when interest rates are expected to decline. When a defensive position is deemed advisable in the judgment of the Series' Sub-Adviser, Lexington Management Corporation ("Lexington"), Series D may temporarily invest up to 100 percent of its assets in debt obligations consisting of repurchase agreements, money market instruments of foreign or domestic companies and the U.S. Government and foreign governments, governmental and international organizations. The Series will be moved into a defensive position when, in the judgment of Lexington, conditions in the securities markets would make pursuing the Series' basic investment strategy inconsistent with the best interests of the shareholders. Series D is intended to provide investors with the opportunity to invest in a portfolio of securities of companies and governments located throughout the world. In making the allocation of assets among the various countries and geographic regions, Lexington ordinarily considers such factors as prospects for relative economic growth between the U.S and other countries; expected levels of inflation and interest rates; government policies influencing business conditions; the range of investment opportunities available to international investors; and other pertinent financial, tax, social and national factors--all in relation to the prevailing prices of the securities in each country or region. Investments may be made in companies based in (or governments of or within) such areas and countries as Lexington may determine from time to time. Series D may invest in companies located in developing countries without limitation. See the discussion of risks associated with investment in securities of foreign issuers under "Investment Methods and Risk Factors" -- "Currency Risk," "Foreign Investment Risks" and "Emerging Markets Risks." Although the Series does not intend to invest for the purpose of seeking short-term profits, the Series' investments may be changed whenever Lexington deems it appropriate to do so, without regard to the length of time a particular security has been held. Series D may enter into forward foreign currency exchange contracts and may purchase or 6 sell foreign currencies on a "spot" (i.e., cash) basis. Series D may enter into such forward contracts to hedge certain of its portfolio positions when Lexington deems it appropriate to limit or reduce exposure in a foreign currency in order to moderate potential changes in the United States dollar value of the portfolio. The Series may also enter into forward currency exchange contracts to increase its exposure to a foreign currency that Lexington expects to increase in value relative to the United States dollar. Series D will not attempt to hedge all of its portfolio positions. Series D intends to limit portfolio hedging transactions to not more than 70 percent of its total assets. See the discussion of "Forward Currency Transactions" under "Investment Methods and Risk Factors." Series D may from time to time employ or enter into the following investment practices. Series D may make contracts to purchase securities for a fixed price at a future date beyond customary settlement time ("forward commitments"), because new issues of securities are typically offered to investors on that basis. See the discussion of forward commitments under "Investment Methods and Risk Factors." Series D may write covered call options. Such an option on an underlying portfolio security would obligate the Series to sell, and give the purchaser of the option the right to buy, that security at a stated exercise price at any time until the stated expiration date of the option. The Series may purchase securities that are restricted as to disposition under the federal securities laws, provided that such securities are eligible for resale to qualified institutional investors pursuant to Rule 144A under the Securities Act of 1933 and subject to the Series' policy that not more than 10 percent of its total assets will be invested in illiquid securities. See the discussion of restricted securities under "Investment Methods and Risk Factors." The Series may enter into repurchase agreements which are described under "Investment Methods and Risk Factors." Series E (High Grade Income Series) The investment objective of Series E is to provide current income with security of principal. In pursuing its investment objective, the Series will invest in a broad range of debt securities, including (i) securities issued by U.S. and Canadian corporations; (ii) securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities, including Treasury bills, certificates of indebtedness, notes and bonds; (iii) securities issued or guaranteed by the Dominion of Canada or provinces thereof; (iv) securities issued by foreign governments, their agencies and instrumentalities, and foreign corporations, provided that such securities are denominated in U.S. dollars; (v) higher yielding, high risk debt securities (commonly referred to as "junk bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign bank ("Yankee CDs"); and (vii) investment grade mortgage backed securities ("MBSs"). Under normal circumstances, the Series will invest at least 65 percent of its assets in U.S. Government securities and securities rated A or higher by Moody's or S&P at the time of purchase, or if unrated, of equivalent quality as determined by the Investment Manager. Series E may invest in corporate debt securities rated Baa or higher by Moody's or BBB or higher by S&P at the time of purchase, or if unrated, of equivalent quality as determined by the Investment Manager. See Appendix A to the Fund's Statement of Additional Information for a description of corporate bond ratings. Included in such securities may be convertible bonds or bonds with warrants attached which are rated at least Baa or BBB at the time of purchase, or if unrated, of equivalent quality as determined by the Investment Manager. A "convertible bond" is a bond, debenture or preferred share which may be exchanged by the owner for common stock or another security, usually of the same company, in accordance with the terms of the issue. A "warrant" confers upon its holder the right to purchase an amount of securities at a particular time and price. Securities rated Baa by Moody's or BBB by S&P have speculative characteristics. Series E may invest up to 25 percent of its net assets in higher yielding debt securities in the lower rating (higher risk) categories of the recognized rating services (commonly referred to as "junk bonds"). Such securities include securities rated Ba or lower by Moody's or BB or lower by S&P and are regarded as predominantly speculative with respect to the ability of the issuer to meet principal and interest payments. The Series will not invest in junk bonds which are rated in default at the time of purchase. See "Investment Methods and Risk Factors" for a discussion of the risks associated with investing in such securities. U.S. Government securities are obligations of or guaranteed by the U.S. Government, its agencies or instrumentalities. These include bills, certificates of indebtedness, notes and bonds issued by the Treasury or by agencies or instrumentalities of the U.S. Government. Some U.S. Government securities, such as Treasury bills and bonds, are supported by the full faith and credit of the U.S. Treasury; others are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality. Although U.S. Government securities are guaranteed by the U.S. Government, its agencies or instrumentalities, shares of the Fund are not so guaranteed in any way. The diversification rules under Section 817(h) of the Internal Revenue Code limit the ability of Series E to invest more than 55 percent of its assets in the securities of any one U.S. Government agency or instrumentality. Series E may purchase securities which are obligations of, or guaranteed by, the Dominion of Canada or a province thereof, and Canadian corporate debt securities. Canadian securities will not be purchased if subject to the foreign interest equalization tax and unless payable in U.S. dollars. 7 Series E may invest in Yankee CDs which are certificates of deposit issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the U.S. Yankee CDs are subject to somewhat different risks than are the obligations of domestic banks. The Series also may invest in debt securities issued by foreign governments, their agencies and instrumentalities and foreign corporations, provided that such securities are denominated in U.S. dollars. The Series' investment in foreign securities, including Canadian securities, will not exceed 25 percent of the Series' net assets. See "Investment Methods and Risk Factors" for a discussion of the risks associated with investing in foreign securities. Series E may invest in investment grade mortgage backed securities (MBSs), including mortgage pass-through securities and collateralized mortgage obligations (CMOs). The Series may invest up to 10 percent of its net assets in securities known as "inverse floating obligations," "residual interest bonds," or "interest-only" (IO) or "principal-only" (PO) bonds, the market values of which generally will be more volatile than the market values of most MBSs. The Series will hold less than 25 percent of its net assets in MBSs. For a discussion of MBSs and the risks associated with such securities, see "Investment Methods and Risk Factors." Series E may purchase securities on a "when issued" or "delayed delivery" basis in excess of customary settlement periods for the types of security involved. For a discussion of such securities, see "Investment Methods and Risk Factors." Series E may, for defensive purposes, invest part or all of its assets in money market instruments such as those appropriate for investment by Series C. Series S (Social Awareness Series) The investment objective of Series S is to seek high total return through a combination of income and capital appreciation by investing in various types of securities which meet certain social criteria established for the Series. Series S will invest in a diversified portfolio of common stocks, convertible securities, preferred stocks and debt securities. From time to time, the Series may purchase government bonds or commercial notes on a temporary basis for defensive purposes. Series S will seek investments that comply with the Series' social criteria and that offer investment potential. Because of the limitations on investment imposed by the social criteria, the availability of investment opportunities for the Series may be limited as compared to those of similar funds which do not impose such restrictions on investment. Series S will not invest in securities of companies that are significantly involved in: (1) the production of nuclear energy; (2) the manufacture of weapon systems; (3) practices that pollute the environment; or (4) the liquor, tobacco or gambling industries. In addition, the Series will seek out companies with fair and unbiased employment practices and companies that engage in the prudent use of natural resources. Series S will monitor the activities identified above to determine whether they are significant to an issuer's business. Significance may be determined on the basis of the percentage of revenue generated by, or the size of operations attributable to, such activities. The Series may invest in an issuer that engages in the above activities in a degree that is not deemed significant by the Investment Manager. The Investment Manager will not independently evaluate an issuer's activities to determine if it engages in any practices prohibited by the Series' social criteria, but will rely on information published by others that publish information for investors concerning the social policy implications of corporate activity. The Investment Manager may rely upon information provided by investment advisory firms that provide social research on U.S. corporations, such as Kinder, Lydenberg, Domini & Co., Inc. and Prudential-Bache Capital Funding. Investment selection on the basis of social attributes is a relatively new practice and the sources for this type of information are not well established. The Investment Manager will continue to identify and monitor sources of such information to screen issuers which do not meet the social investment restrictions of the Series. If after purchase of an issuer's securities by Series S, it is determined that such securities do not comply with the Series' social criteria, the securities will be eliminated from the Series' portfolio within a reasonable time. This requirement may cause the Series to dispose of a security at a time when it may be disadvantageous to do so. Series J (Emerging Growth Series) The investment objective of Series J is to seek capital appreciation by investing in a diversified portfolio of common stocks (which may include ADRs), preferred stocks, debt securities, and securities convertible into common stocks. On a temporary basis, there may be times when Series J may invest its assets in cash or money market instruments for defensive purposes. Securities selected for their appreciation possibilities will be primarily common stocks or other securities having the investment characteristics of common stocks, such as securities convertible into common stocks. Securities will be selected on the basis of their appreciation and growth potential. Current income will not be a factor in selecting investments, and any such income should be considered incidental. Securities considered to have capital appreciation and growth potential will often include securities of smaller and less mature companies. Such companies may present greater opportunities for capital appreciation because of high potential earnings growth, but may also involve greater risk. They may have limited product lines, markets or financial resources, and they may be dependent on a limited management group. Their securities may trade less frequently and in limited volume, and only in the over-the-counter market or on smaller securities exchanges. As a result, the securities of smaller companies may have limited marketability and may be 8 subject to more abrupt or erratic changes in value than securities of larger, more established companies. Series J may also invest in larger companies where opportunities for above-average capital appreciation appear favorable. Series J may purchase securities on a "when issued" or "delayed delivery" basis as described under "Investment Methods and Risk Factors." The Series may enter into futures contracts (or options thereon) to hedge all or a portion of its portfolio, or as an efficient means of adjusting its exposure to the stock market. The Series will not use futures contracts for leveraging purposes. The Series will limit its use of futures contracts so that initial margin deposits or premiums on such contracts used for non-hedging purposes will not equal more than 5 percent of the Series' net asset value. Futures contracts (and options thereon) and the risks associated with such instruments are described in further detail under "Investment Methods and Risk Factors." In seeking capital appreciation, Series J may, during certain periods, trade to a substantial degree in securities for the short term. That is, the Series may be engaged essentially in trading operations based on short-term market considerations, as distinct from long-term investments based on fundamental evaluations of securities. This investment policy is speculative and involves substantial risk. Series K (Global Aggressive Bond Series) The primary investment objective of Series K is to seek to provide high current income. Capital appreciation is a secondary objective. As used herein, the term "bond" is used to describe any type of debt security. Under normal circumstances, the Series will invest at least 65 percent of its total assets in bonds as defined herein. The Series under normal circumstances invests substantially all of its assets in a portfolio of debt securities of issuers in three separate investment areas: (i) the United States; (ii) developed foreign countries; and (iii) emerging markets. The Series selects particular debt securities in each sector based on their relative investment merits. Within each area, the Series selects debt securities from those issued by governments, their agencies and instrumentalities; central banks; commercial banks and other corporate entities. Debt securities in which the Series may invest consist of bonds, notes, debentures and other similar instruments. The Series may invest up to 100 percent of its total assets in U.S. and foreign debt securities and other fixed income securities that, at the time of purchase, are rated below investment grade ("high yield securities" or "junk bonds"), which involve a high degree of risk and are predominantly speculative. The Series may also invest in securities that are in default as to payment of principal and/or interest. See "Investment Methods and Risk Factors" -- "Risks Associated with Investments in High-Yield Lower-Rated Debt Securities." Many emerging market debt securities are not rated by United States rating agencies such as Moody's and S&P. The Series' ability to achieve its investment objectives is thus more dependent on the credit analysis of the Series' Sub-Advisers, Lexington and MFR Advisors, Inc. ("MFR"), than would be the case if the Series were to invest in higher quality bonds. Investors should purchase shares only as a supplement to an overall investment program and only if willing to undertake the risks involved. For the period June 1, 1995 (date of inception) to December 31, 1995, the dollar weighted average of Series K's holdings (excluding equities) had the following credit quality characteristics. Investment Percent of Net Assets ---------- --------------------- U.S. Government Securities.................. 0% Cash and other Assets, Less Liabilities..... 6.8% Rated Fixed Income Securities AAA..................................... 4.9% AA...................................... 7.0% A....................................... 13.9% Baa/BBB................................. 20.7% Ba/BB................................... 14.0% B....................................... 9.9% Caa/CCC................................. 0% Unrated Securities Comparable in Quality to A....................................... 5.2% Baa/BBB................................. 3.8% Ba/BB................................... 3.2% B....................................... 10.6% Caa/CCC................................. 0% ----- Total....................................... 100.0% The foregoing table is intended solely to provide disclosure about Series K's asset composition for the period June 1, 1995 (date of inception) to December 31, 1995. The asset composition after this may or may not be approximately the same as shown above. "Emerging markets" will consist of all countries determined by the World Bank or the United Nations to have developing or emerging economies and markets. Currently, investing in many of the emerging countries and emerging markets is not feasible or may involve political risks. Accordingly, Lexington currently intends to consider investments only in those countries in which it believes investing is feasible. The list of acceptable countries will be reviewed by Lexington and MFR and approved by the Fund's Board of Directors on a periodic basis and any additions or deletions with respect to such list will be made in accordance with changing economic and political circumstances involving such countries. An issuer in an emerging market is an entity: (i) for which the principal securities trading market is an emerging market, as defined above; (ii) that (alone or on a consolidated basis) derives 50 percent or more of its total revenue from either goods produced, sales made or services performed in emerging markets; or (iii) organized under the laws of, and with a principal office in, an emerging market. Because of the special risks associated with investing in emerging markets, an investment in the Series should be considered speculative. Investors are strongly advised to 9 consider carefully the special risks involved in emerging markets which are in addition to the usual risks of investing in developed foreign markets around the world. See the discussion of the risks of investing in emerging markets under "Investment Methods and Risk Factors" -- "Emerging Markets Risks." The Series' investments in emerging market securities consist substantially of high yield, lower-rated debt securities of foreign corporations, "Brady Bonds" and other sovereign debt securities issued by emerging market governments. "Sovereign debt securities" are those issued by emerging market governments that are traded in the markets of developed countries or groups of developed countries. The Series may invest in debt securities of emerging market issuers without regard to ratings. Currently, the substantial majority of emerging market debt securities are considered to have a credit quality below investment grade. Series K also may acquire lower quality debt securities during an initial underwriting or may acquire lower quality debt securities which are sold without registration under applicable securities laws. Such securities involve special considerations and risks. The Series may invest in bank loan participations and assignments, which are fixed and floating rate loans arranged through private negotiations between foreign entities. For a more detailed discussion of these instruments and the risks associated with investing therein, see "Sovereign Debt" and "Loan Participations and Assignments" below and the discussion of Brady Bonds under "Investment Methods and Risk Factors". The Series intends to retain the flexibility to respond promptly to changes in market and economic conditions. Accordingly, in the interest of preserving shareholders' capital and consistent with the Series' investment objectives, Lexington and MFR may employ a temporary defensive investment strategy if they determine such a strategy to be warranted. Pursuant to such a defensive strategy, the Series temporarily may hold cash (U.S. dollars, foreign currencies or multinational currency units) and/or invest up to 100 percent of its assets in high quality debt securities or money market instruments of U.S. or foreign issuers, and most or all of the Series' investments may be made in the United States and denominated in U.S. dollars. For debt obligations other than commercial paper, this includes securities rated, at the time of purchase, at least AA by S&P or Aa by Moody's, or if unrated, determined to be of comparable quality by Lexington or MFR. For commercial paper, this includes securities rated, at the time of purchase, at least A-2 by S&P or Prime-2 by Moody's, or if unrated, determined to be of comparable quality by Lexington or MFR. It is impossible to predict whether, when or for how long the Series will employ defensive strategies. To the extent the Series adopts a temporary defensive investment posture, it will not be invested so as to achieve directly its investment objectives. In addition, pending investment of proceeds from new sales of Series shares or to meet ordinary daily cash needs, the Series temporarily may hold cash (U.S. dollars, foreign currencies or multinational currency units) and may invest any portion of its assets in high quality foreign or domestic money market instruments. The Series invests in debt obligations allocated among diverse markets and denominated in various currencies, including U.S. dollars, or in multinational currency units such as European Currency Units. The Series may purchase securities that are issued by the government or a company or financial institution of one country but denominated in the currency of another country (or a multinational currency unit). The Series is designed for investors who wish to accept the risks entailed in such investments, which are different from those associated with a portfolio consisting entirely of securities of U.S. issuers denominated in U.S. dollars. See "Investment Methods and Risk Factors" - -- "Currency Risk" and "Foreign Investment Risks." Lexington and MFR will seek to allocate the assets of the Series in securities of issuers in countries and in currency denominations where the combination of fixed income market returns, the price appreciation potential of fixed income securities and currency exchange rate movements will present opportunities primarily for high current income and secondarily for capital appreciation. In so doing, Lexington and MFR intend to take full advantage of the different yield, risk and return characteristics that investment in the fixed income markets of different countries can provide for U.S. investors. Fundamental economic strength, credit quality and currency and interest rate trends will be the principal determinants of the emphasis given to various country, geographic and industry sectors within the Series. Securities held by the Series may be invested in without limitation as to maturity. Lexington and MFR evaluate currencies on the basis of fundamental economic criteria (e.g., relative inflation and interest rate levels and trends, growth rate forecasts, balance of payments status and economic policies) as well as technical and political data. If the currency in which a security is denominated appreciates against the U.S. dollar, the dollar value of the security will increase. Conversely, if the exchange rate of the foreign currency declines, the dollar value of the security will decrease. The Series may seek to protect itself against such negative currency movements through the use of sophisticated investment techniques, although the Series is not committed to using such techniques and may be fully exposed to changes in currency exchange rates. In seeking to protect against currency exchange rate or interest rate changes that are adverse to its present or prospective positions, the Series may employ certain risk management practices involving the use of forward currency contracts and options contracts, futures contracts and options on futures contracts on U.S. and foreign government securities and currencies. The Series may purchase call and put options and write such options on a "covered" basis. The Series also may enter into interest rate currency and index swaps and purchase or sell related caps, floors and collars and other derivatives. The Series may enter into derivatives securities transactions without limit. See the discussion of "Forward Currency Transactions," "Options," 10 "Futures Contracts and Related Options," and "Swaps, Caps, Floors and Collars" under "Investment Methods and Risk Factors." There can be no assurance that the Series' risk management practices will succeed. Only a limited market, if any, currently exists for forward currency contracts and options and futures instruments relating to currencies of most emerging markets, to securities denominated in such currencies or to securities of issuers domiciled or principally engaged in business in such emerging markets. The Series may purchase securities on a "when-issued" basis and may purchase or sell securities on a "forward commitment" basis in order to hedge against anticipated changes in interest rates and prices. See the discussion of when-issued and forward commitment securities under "Investment Methods and Risk Factors." The Series may enter into repurchase agreements, reverse repurchase agreements and "dollar rolls" which are discussed under "Investment Methods and Risk Factors." Loan Participations and Assignments -- Series K may invest in fixed and floating rate loans ("Loans") arranged through private negotiations between a foreign entity and one or more financial institutions ("Lenders"). The majority of Series K's investments in Loans in emerging markets is expected to be in the form of participations in Loans ("Participations") and assignments of portions of Loans from third parties ("Assignments"). Participations typically will result in Series K having a contractual relationship only with the Lender, not with the borrower government. Series K will have the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, Series K generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loan ("Loan Agreement"), nor any rights of set-off against the borrower, and Series K may not directly benefit from any collateral supporting the Loan in which it has purchased the Participation. As a result, the Series will assume the credit risk of both the borrower and the Lender that is selling the Participation. In the event of the insolvency of the Lender selling a Participation, Series K may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the borrower. Series K will acquire Participations only if the Lender interpositioned between the Series and the borrower is determined by Lexington and MFR to be creditworthy. When Series K purchases Assignments from Lenders, the Series will acquire direct rights against the borrower on the Loan. However, since Assignments are arranged through private negotiations between potential assignees and assignors, the rights and obligations acquired by Series K as the purchaser of an Assignment may differ from, and be more limited than, those held by the assigning Lender. Series K may have difficulty disposing of Assignments and Participations. The liquidity of such securities is limited and the Series anticipates that such securities could be sold only to a limited number of institutional investors. The lack of a liquid secondary market could have an adverse impact on the value of such securities and on the Series' ability to dispose of particular Assignments or Participations when necessary to meet the Series' liquidity needs or in response to a specific economic event, such as a deterioration in the creditworthiness of the borrower. The lack of a liquid secondary market for Assignments and Participations also may make it more difficult for the Series to assign a value to those securities for purposes of valuing Series K's portfolio and calculating its net asset value. The investment of Series K in illiquid securities, including Assignments and Participations, is limited to 15 percent of total assets. Zero Coupon Securities -- Series K may invest in certain zero coupon securities that are "stripped" U.S. Treasury notes and bonds. Series K also may invest in zero coupon and other deep discount securities issued by foreign governments and domestic and foreign corporations, including certain Brady Bonds and other foreign debt and payment-in-kind securities. Zero coupon securities pay no interest to holders prior to maturity, and payment-in-kind securities pay interest in the form of additional securities. However, a portion of the original issue discount on zero coupon securities and the "interest" on payment-in-kind securities will be included in the investing Series' income. Accordingly, for Series K to qualify for tax treatment as a regulated investment company and to avoid certain taxes (see "Distributions and Federal Income Tax Considerations"), Series K may be required to distribute an amount that is greater than the total amount of cash it actually receives. These distributions must be made from the Series' cash assets or, if necessary, from the proceeds of sales of portfolio securities. Series K will not be able to purchase additional income-producing securities with cash used to make such distributions and its current income ultimately may be reduced as a result. Zero coupon and payment-in-kind securities usually trade at a deep discount from their face or par value and will be subject to greater fluctuations of market value in response to changing interest rates than debt obligations of comparable maturities that make current distributions of interest in cash. Series K will not invest more than 5 percent of its total assets in zero coupon securities. Sovereign Debt -- Series K may invest in sovereign debt securities of emerging market governments, including Brady Bonds (described under "Investment Methods and Risk Factors"). Investments in such securities involve special risks. The issuer of the debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due in accordance with the terms of such debt. Periods of economic uncertainty may result in the volatility of market prices of sovereign debt, and in turn the Series' net asset value, to a greater extent than the volatility inherent in domestic fixed income securities. A sovereign debtor's willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other factors, its 11 cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor's policy toward principal international lenders and the political constraints to which a sovereign debtor may be subject. Emerging market governments could default on their sovereign debt. Such sovereign debtors also may be dependent on expected disbursements from foreign governments, multilateral agencies and other entities abroad to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on a sovereign debtor's implementation of economic reforms and/or economic performance and the timely service of such debtor's obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due, may result in the cancellation of such third parties' commitments to lend funds to the sovereign debtor, which may further impair such debtor's ability or willingness to timely service its debt. The occurrence of political, social or diplomatic changes in one or more of the countries issuing sovereign debt could adversely affect the Series' investments. Emerging markets are faced with social and political issues and some of them have experienced high rates of inflation in recent years and have extensive internal debt. Among other effects, high inflation and internal debt service requirements may adversely affect the cost and availability of future domestic sovereign borrowing to finance governmental programs, and may have other adverse social, political and economic consequences. Political changes or a deterioration of a country's domestic economy or balance of trade may affect the willingness of countries to service their sovereign debt. Although Lexington and MFR intend to manage the Series in a manner that will minimize the exposure to such risks, there can be no assurance that adverse political changes will not cause the Series to suffer a loss of interest or principal on any of its holdings. In recent years, some of the emerging market countries in which the Series expects to invest have encountered difficulties in servicing their sovereign debt obligations. Some of these countries have withheld payments of interest and/or principal of sovereign debt. These difficulties have also led to agreements to restructure external debt obligations--in particular, commercial bank loans, typically by rescheduling principal payments, reducing interest rates and extending new credits to finance interest payments on existing debt. In the future, holders of emerging market sovereign debt securities may be requested to participate in similar rescheduling of such debt. Certain emerging market countries are among the largest debtors to commercial banks and foreign governments. At times certain emerging market countries have declared a moratorium on the payment of principal and interest on external debt; such a moratorium is currently in effect in certain emerging market countries. There is no bankruptcy proceeding by which a creditor may collect in whole or in part sovereign debt on which an emerging market government has defaulted. The ability of emerging market governments to make timely payments on their sovereign debt securities is likely to be influenced strongly by a country's balance of trade and its access to trade and other international credits. A country whose exports are concentrated in a few commodities could be vulnerable to a decline in the international prices of one or more of such commodities. Increased protectionism on the part of a country's trading partners could also adversely affect its exports. Such events could diminish a country's trade account surplus, if any. To the extent that a country receives payment for its exports in currencies other than hard currencies, its ability to make hard currency payment could be affected. Investors should also be aware that certain sovereign debt instruments in which the Series may invest involve great risk. As noted above, sovereign debt obligations issued by emerging market governments generally are deemed to be the equivalent in terms of quality to securities rated below investment grade by Moody's and S&P. Such securities are regarded as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations and involve major risk exposure to adverse conditions. Some of such securities, with respect to which the issuer currently may not be paying interest or may be in payment default, may be comparable to securities rated D by S&P or C by Moody's. The Series may have difficulty disposing of and valuing certain sovereign debt obligations because there may be a limited trading market for such securities. Because there is no liquid secondary market for many of these securities, the Fund anticipates that such securities could be sold only to a limited number of dealers or institutional investors. Certain sovereign debt securities may be illiquid. The investment of Series K in illiquid securities is limited to 15 percent of total assets. Series M (Specialized Asset Allocation Series) The investment objective of Series M is to seek high total return, consisting of capital appreciation and current income. The Series seeks this objective by following an asset allocation strategy that contemplates shifts among a wide range of investment categories and market sectors. The Series will invest in the following investment categories: equity securities of domestic and foreign issuers, including common stocks, ADRs, preferred stocks, convertible securities and warrants; debt securities of domestic and foreign issuers, including mortgage-related and other asset-backed securities; exchange-traded real estate investment trusts (REITs); equity securities of companies involved in the exploration, mining, development, production and distribution of gold ("gold stocks"); and domestic money market instruments. See "Investment Methods and Risk Factors" for a discussion of the additional risks associated with investment in foreign securities and REITs and see the 12 discussion of the risks associated with investment in gold stocks below. Investment in gold stocks presents risks, because the prices of gold have fluctuated substantially over short periods of time. Prices may be affected by unpredictable monetary and political policies, such as currency devaluations or revaluations, economic and social conditions within an individual country, trade imbalances, or trade or currency restrictions between countries. The unstable political and social conditions in South Africa and unsettled political conditions prevailing in neighboring countries may have disruptive effects on the market prices of securities of South African companies. The Series is not required to maintain a portion of its assets in each of the permitted investment categories. The Series, however, under normal circumstances will maintain a minimum of 35 percent of its total assets in equity securities and 10 percent in debt securities. The Series will not invest more than 55 percent of its total assets in money market instruments (except when in a temporary defensive position), more than 80 percent of its total assets in foreign securities, nor more than 20 percent of its total assets in gold stocks. The Investment Manager receives quantitative investment research from Meridian Investment Management Corporation ("Meridian"), which research the Investment Manager uses in strategically allocating the Series' assets among the investment categories identified above, primarily on the basis of a quantitative asset allocation model. With respect to equity securities, the model analyzes a large number of equity securities based on the following factors: current earnings, earnings history, long-term earnings projections, current price, and risk. The Investment Manager then determines (based on the results of Meridian's analysis) which sectors within an identified investment category are deemed to be the most attractive relative to other sectors. For example, the model may indicate that a portion of the Series' assets should be invested in the domestic equity category of the market and within this category that pharmaceutical stocks represent a sector with an attractive total return potential. Although the Investment Manager anticipates relying on much of the research provided by Meridian, the Investment Manager has ultimate responsibility for the selection of the investment categories and the sectors within those categories. The Investment Manager identifies sectors of the domestic and international economy (based on the research provided by Meridian) in which the Series will invest and then determines which equity securities to purchase within the identified countries and/or sectors. The Investment Manager may utilize certain analytical research provided by Templeton/Franklin Investment Services , Inc. ("Templeton") in selecting equity securities, including gold stocks, for Series M. Templeton analyzes and monitors analytical research provided by third parties and makes recommendations regarding equity securities in the identified sectors based on such research. The Investment Manager has ultimate responsibility for all buy and sell decisions of Series M and may determine not to use analytical research provided by Templeton. With respect to the selection of debt securities for the Series, the asset allocation model provided by Meridian analyzes the prices of commodities and finished goods to arrive at an interest rate projection. The Investment Manager will determine the portion of the portfolio to allocate to debt securities and the duration of those securities based on the model's interest rate projections. Gold stocks and REITs will be analyzed in a manner similar to that used for equity securities. Money market instruments will be analyzed based on current returns and the current yield curve. The asset allocation model and stock selection techniques used by the Series may evolve over time or be replaced by other asset allocation models and/or stock selection techniques. There is no assurance that the model will correctly predict market trends or enable the Series to achieve its investment objective. The debt securities in which the Series may invest will, at the time of investment, consist of "investment grade" bonds, which are bonds rated BBB or better by S&P or Baa or better by Moody's or that are unrated by S&P and Moody's but considered by the Investment Manager to be of equivalent credit quality. Securities rated BBB by S&P or Baa by Moody's have speculative characteristics and may be more susceptible than higher grade bonds to adverse economic conditions or other adverse circumstances which may result in a weakened capacity to make principal and interest payments. The Series may invest in investment grade mortgage-backed securities (MBSs), including mortgage pass-through securities and collateralized mortgage obligations (CMOs). The Series will not invest in an MBS if, as a result of such investment, more than 25 percent of its total assets would be invested in MBSs, including CMOs and mortgage pass-through securities. For a discussion of MBSs and the risks associated with such securities, see "Investment Methods and Risk Factors" -- "Mortgage-Backed Securities," below. The Series may write covered call options and purchase put options on securities, financial indices and foreign currencies, and may enter into futures contracts. The Series may buy and sell futures contracts (and options on such contracts) to manage exposure to changes in securities prices and foreign currencies and as an efficient means of adjusting overall exposure to certain markets. It is the Series' operating policy that initial margin deposits and premiums on options used for non-hedging purposes will not equal more than 5 percent of the Series' net assets. The total market value of securities against which the Series has written call options may not exceed 25 percent of its total assets. The Series will not commit more than 5 percent of its total assets to premiums when purchasing put options. Futures contracts and options may not always be successful hedges and their prices can be highly volatile. Using futures contracts and options could lower the Series' total return and the potential loss from the use of futures can exceed the 13 Series' initial investment in such contracts. Futures contracts and options and the risks associated with such instruments are described in further detail under "Investment Methods and Risk Factors." Series N (Managed Asset Allocation Series) The investment objective of Series N is to seek a high level of total return by investing primarily in a diversified portfolio of fixed income and equity securities. The Series is designed to balance the potential appreciation of common stocks with the income and principal stability of bonds over the long term. Over the long term, the Series expects to allocate its assets so that approximately 40 percent of such assets will be in the fixed income sector (as defined below) and approximately 60 percent in the equity sector (as defined below). Under normal market conditions, this mix may vary over shorter time periods within the ranges set forth below: Range Fixed Income Sector 30-50% Equity Sector 50-70% The primary consideration in varying from the 60-40 allocation will be the outlook of the Series' Sub-Adviser, T. Rowe Price Associates, Inc. ("T. Rowe Price"), for the different markets in which the Series invests. Shifts between the fixed income and equity sectors will normally be done gradually and T. Rowe Price will not attempt to precisely "time" the market. There is, of course, no guarantee that T. Rowe Price's gradual approach to allocating the Series' assets will be successful in achieving the Series' objective. The Series will maintain cash reserves to facilitate the Series' cash flow needs (redemptions, expenses and purchases of Series securities) and it may invest in cash reserves without limitation for temporary defensive purposes. Assets allocated to the fixed income portion of the Series will be invested primarily in U.S. and foreign investment grade bonds, high yield bonds, short-term investments and currencies, as needed to gain exposure to foreign markets. Assets allocated to the equity portion of the Series primarily will be invested in the common stocks of a diversified group of U.S. and foreign large and small companies, currencies, as needed to gain exposure to foreign markets, and futures contracts. The Series' fixed income sector will be allocated among investment grade, high yield, U.S. and non-dollar debt securities and currencies generally within the ranges indicated below: Investment Grade 50-100% High Yield 0-30% Non-dollar 0-30% Cash Reserves 0-20% Investment grade debt securities include long, intermediate and short-term investment grade debt securities (e.g., AAA, AA, A or BBB by S&P or if not rated, of equivalent investment quality as determined by T. Rowe Price). The weighted average maturity for this portion (investment grade debt securities) of the Series portfolio is generally expected to be intermediate (3-10 years), although it may vary significantly. Non-dollar debt securities include non-dollar denominated government and corporate debt securities or currencies of at least three countries. See "Investment Methods and Risk Factors" -- "Foreign Investment Risks" and "Currency Risk" and the Statement of Additional Information for a discussion of the risks involved in foreign investing. High-yield securities include high-yielding, income-producing debt securities in the lower rating categories (commonly referred to as "junk bonds") and preferred stocks including convertible securities. High yield bonds may be purchased without regard to maturity; however, the average maturity is expected to be approximately 10 years, although it may vary if market conditions warrant. Quality will generally range from lower-medium to low and the Series may also purchase bonds in default if, in the opinion of T. Rowe Price, there is significant potential for capital appreciation. Lower-rated debt obligations are generally considered to be high risk investments. See "Investment Methods and Risk Factors" -- "Risks Associated with High-Yield Lower-Rated Debt Securities" and the Statement of Additional Information for a discussion of the risks involved in investing in high-yield, lower-rated debt securities. Securities which may be held as cash reserves include liquid short-term investments of one year or less having the highest ratings by at least one established rating organization, or if not rated, of equivalent investment quality as determined by T. Rowe Price. The Series may use currencies to gain exposure to an international market prior to investing in non-dollar securities. For the period June 1, 1995 (date of inception) to December 31, 1995, the dollar weighted average of Series N's holdings (excluding equities) had the following credit quality characteristics. Investment Percent of Net Assets ---------- --------------------- U.S. Government Securities.................. 9.2% Cash and other Assets, Less Liabilities..... 0.6% Rated Fixed Income Securities AAA..................................... 1.3% AA...................................... 1.4% A....................................... 4.6% Baa/BBB................................. 3.9% Ba/BB................................... 1.7% B....................................... 6.7% Caa/CCC................................. 0% Unrated Securities Comparable in Quality to A....................................... 0% Baa/BBB................................. 0% Ba/BB................................... 0% B....................................... 0% Caa/CCC................................. 0% ----- Total....................................... 29.40% The foregoing table is intended solely to provide disclosure about Series N's asset composition for the period June 1, 14 1995 (date of inception) to December 31, 1995. The asset composition after this may or may not be approximately the same as shown above. The Series' equity sector will be allocated among large and small capital ("Large Cap" and "Small Cap" respectively) U.S. and non-dollar equity securities, currencies and futures, generally within the ranges indicated below: Large Cap 45-100% Small Cap 0-30% Non-dollar 0-35% Large Cap securities generally include stocks of well-established companies with capitalization over $1 billion which can produce increasing dividend income. Non-dollar securities include foreign currencies and common stocks of established non-U.S. companies. Investments may be made solely for capital appreciation or solely for income or any combination of both for the purpose of achieving a higher overall return. T. Rowe Price intends to diversify the non-dollar portion of the Series' portfolio broadly among countries and to normally have at least three different countries represented. The countries of the Far East and Western Europe as well as South Africa, Australia, Canada, and other areas (including developing countries) may be included. Under unusual circumstances, however, investment may be substantially in one or two countries. Futures may be used to gain exposure to equity markets where there is insufficient cash to purchase a diversified portfolio of stocks. Currencies may also be held to gain exposure to an international market prior to investing in a non-dollar stock. Small Cap securities include common stocks of small companies or companies which offer the possibility of accelerated earnings growth because of rejuvenated management, new products or structural changes in the economy. Current income is not a factor in the selection of these stocks. Higher risks are often associated with small companies. These companies may have limited product lines, markets and financial resources, or they may be dependent on a small or inexperienced management group. In addition, their securities may trade less frequently and in limited volume and move more abruptly than securities of larger companies. However, securities of smaller companies may offer greater potential for capital appreciation since they are often overlooked or undervalued by investors. Until the Series reaches approximately $30 million in assets, the composition of the Series' portfolio may vary significantly from the percent limitations and ranges above. This might occur because, at lower asset levels, the Series may be unable to prudently achieve diversification among the described asset classes. During this initial period, the Series may use futures contracts and purchase foreign currencies to a greater extent than it will once the start-up period is over. The Series may invest up to 35 percent of its total assets in U.S. dollar-denominated and non-U.S. dollar-denominated securities issued by foreign issuers. Some of the countries in which the Series may invest may be considered to be developing and may involve special risks. For a discussion of the risks involved in investment in foreign securities, including investment in emerging markets, see "Investment Methods and Risk Factors" -- "Foreign Investment Risks" and "Emerging Markets Risks." The Series' foreign investments are also subject to currency risk described under "Investment Methods and Risk Factors" -- "Currency Risk." To manage this risk and facilitate the purchase and sale of foreign securities, the Series may engage in foreign currency transactions involving the purchase and sale of forward foreign currency exchange contracts. Although forward currency transactions will be used primarily to protect the Series from adverse currency movements, they also involve the risk that anticipated currency movements will not be accurately predicted and the Series' total return could be adversely affected as a result. For a discussion of forward currency transactions and the risks associated with such transactions, see "Investment Methods and Risk Factors" -- "Forward Currency Transactions." Purchases by the Series of currencies in substitution of purchases of stocks and bonds will subject the Series to risks different from a fund invested solely in stocks and bonds. The Series' investments include, but are not limited to, equity and fixed income securities of any type and the Series may utilize the investment methods and investment vehicles described below. The Series may enter into futures contracts (a type of derivative) (or options thereon) to hedge all or a portion of its portfolio, as a hedge against changes in prevailing levels of interest rates or currency exchange rates, or as an efficient means of adjusting its exposure to the bond, stock, and currency markets. The Series will not use futures contracts for leveraging purposes. The Series will limit its use of futures contracts so that initial margin deposits or premiums on such contracts used for non-hedging purposes will not equal more than 5 percent of the Series' net asset value. The Series may also write call and put options on a covered basis and purchase put and call options on securities, financial indices, and currencies. The aggregate market value of the Series' portfolio securities or currencies covering call or put options will not exceed 25 percent of the Series' net assets. The Series may enter into foreign futures and options transactions. See the discussion of options and futures contracts under "Investment Methods and Risk Factors." As part of its investment program and to maintain greater flexibility, the Series may invest in instruments which have the characteristics of futures, options and securities, known as "hybrid instruments." For a discussion of such instruments and the risks involved in investing therein, see "Investment Methods and Risk Factors" - -- "Hybrid Instruments." The Series may acquire illiquid securities in an amount not exceeding 15 percent of net assets. Because an active trading market does not exist for such securities the sale of 15 such securities may be subject to delay and additional costs. The Series will not invest more than 5 percent of its total assets in restricted securities (other than securities eligible for resale under Rule 144A of the Securities Act of 1933). For a discussion of restricted securities, see "Investment Methods and Risk Factors." The Series may invest in asset-backed securities, which securities involve certain risks. For a discussion of asset-backed securities and the risks involved in investment in such securities, see the discussion under "Investment Methods and Risk Factors." The Series may invest in mortgage-backed securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities or institutions such as banks, insurance companies and savings and loans. Some of these securities, such as GNMA certificates, are backed by the full faith and credit of the U.S. Treasury while others, such as Freddie Mac certificates, are not. The Series may also invest in collateralized mortgage obligations (CMOs) and stripped mortgage securities (a type of derivative). Stripped mortgage securities are created by separating the interest and principal payments generated by a pool of mortgage-backed bonds to create two classes of securities, "interest only" (IO) and "principal only" (PO) bonds. There are risks involved in mortgage-backed securities, CMOs and stripped mortgage securities. See "Investment Methods and Risk Factors" for an additional discussion of such securities and the risks involved therein. While the Series will remain invested in primarily common stocks and bonds, it may, for temporary defensive purposes, invest in cash reserves without limitation. The Series may establish and maintain reserves as T. Rowe Price believes is advisable to facilitate the Series' cash flow needs. Cash reserves include money market instruments, including repurchase agreements, in the two highest categories. Short-term securities may be held in the equity sector as collateral for futures contracts. These securities are segregated and may not be available for the Series' cash flow needs. The Series may invest in debt or preferred equity securities convertible into or exchangeable for equity securities and warrants. As a fundamental policy, for the purpose of realizing additional income, the Series may lend securities with a value of up to 33 1/3 percent of its total assets to broker-dealers, institutional investors, or other persons. Any such loan will be continuously secured by collateral at least equal to the value of the securities loaned. For a discussion of the limitations on lending and risks of lending, see "Investment Methods and Risk Factors" -- "Lending of Portfolio Securities." Series O (Equity Income Series) The investment objective of Series O is to seek to provide substantial dividend income and also capital appreciation by investing primarily in dividend-paying common stocks of established companies. In pursuing its objective, the Series emphasizes companies with favorable prospects for increasing dividend income, and secondarily, capital appreciation. Over time, the income component (dividends and interest earned) of the Series' investments is expected to be a significant contributor to the Series' total return. The Series' income yield is expected to be significantly above that of the Standard & Poor's 500 Stock Index ("S&P 500"). Total return will consist primarily of dividend income and secondarily of capital appreciation (or depreciation). The investment program of the Series is based on several premises. First, the Series' Sub-Adviser, T. Rowe Price, believes that, over time, dividend income can account for a significant component of the total return from equity investments. Second, dividends are normally a more stable and predictable source of return than capital appreciation. While the price of a company's stock generally increases or decreases in response to short-term earnings and market fluctuations, its dividends are generally less volatile. Finally, T. Rowe Price believes that stocks which distribute a high level of current income tend to have less price volatility than those which pay below average dividends. To achieve its objective, the Series, under normal circumstances, will invest at least 65 percent of its assets in income-producing common stocks, whose prospects for dividend growth and capital appreciation are considered favorable by T. Rowe Price. To enhance capital appreciation potential, the Series also uses a value-oriented approach, which means it invests in stocks it believes are currently undervalued in the market place. The Series' investments will generally be made in companies which share some of the following characteristics: established operating histories; above-average current dividend yields relative to the S&P 500; low price-earnings ratios relative to the S&P 500; sound balance sheets and other financial characteristics; and low stock price relative to the company's underlying value as measured by assets, earnings, cash flow or business franchises. The Series may also invest its assets in fixed income securities (corporate, government, and municipal bonds of various maturities). The Series would invest in municipal bonds when the expected total return from such bonds appears to exceed the total returns obtainable from corporate or government bonds of similar credit quality. Series O may invest in debt securities of any type without regard to quality or rating. Such securities would be purchased in companies which meet the investment criteria for the Series. Such securities may include securities rated below investment grade (e.g., securities rated Ba or lower by Moody's or BB or lower by S&P). The Series will not purchase such a security (commonly referred to as a "junk bond") if immediately after such purchase the Series would have more than 10 percent of its total assets invested in such securities. See "Investment Methods and Risk Factors" -- "Risks Associated with Investment in High-Yield Lower-Rated Debt Securities" for a discussion of the risks associated with investing in such securities. For the period June 1, 1995 (date of inception) to December 31, 1995, the dollar weighted average of 16 Series O's holdings (excluding equities) had the following credit quality characteristics. Investment Percent of Net Assets ---------- --------------------- U.S. Government Securities.................. 0% Cash and other Assets, Less Liabilities..... 4.0% Rated Fixed Income Securities A....................................... 0% Baa/BBB................................. 0% Ba/BB................................... 0% B....................................... 1.0% Caa/CCC................................. 0% Unrated Securities Comparable in Quality to A....................................... 0% Baa/BBB................................. 0% Ba/BB................................... 0.7% B....................................... 0% Caa/CCC................................. 0% --- Total....................................... 5.7% The foregoing table is intended solely to provide disclosure about Series O's asset composition for the period June 1, 1995 (date of inception) to December 31, 1995. The asset composition after this may or may not be approximately the same as shown above. Although the Series will invest primarily in U.S. common stocks, it may also purchase other types of securities, for example, foreign securities, convertible securities and warrants, when considered consistent with the Series' investment objective and program. The Series' investments in foreign securities include non-dollar denominated securities traded outside of the U.S. and dollar denominated securities traded in the U.S. (such as ADRs). The Series may invest up to 25 percent of its total assets in foreign securities. See the discussion of the risks associated with investing in foreign securities under "Investment Methods and Risk Factors," "American Depositary Receipts (ADRs)," "Currency Risk" and "Foreign Investment Risks." The Series may also engage in a variety of investment management practices, such as buying and selling futures and options. The Series may buy and sell futures contracts (and options on such contracts) to manage its exposure to changes in securities prices and foreign currencies and as an efficient means of adjusting its overall exposure to certain markets. The Series may purchase, sell, or write call and put options on securities, financial indices, and foreign currencies. The Series may write call and put options only on a "covered" basis. It is the Series' operating policy that initial margin deposits and premiums on options used for non-hedging purposes will not equal more than 5 percent of the Series' net asset value and, with respect to options on securities, the total market value of securities against which the Series has written call or put options may not exceed 25 percent of its total assets. The Series will not commit more than 5 percent of its total assets to premiums when purchasing call or put options. The Series may also invest up to 10 percent of its total assets in hybrid instruments which are described under "Investment Methods and Risk Factors" -- "Hybrid Instruments." Also see the discussion of "Forward Currency Transactions," "Futures Contracts and Related Options" and "Options" under "Investment Methods and Risk Factors." The Series may also invest in restricted securities described under "Investment Methods and Risk Factors." The Series' investment in such securities, other than Rule 144A securities, is limited to 5 percent of its net assets. The Series may borrow money as described under "Investment Methods and Risk Factors" -- "Borrowing." The Series may not purchase securities when borrowings exceed 5 percent of its total assets. The Series may hold a certain portion of its assets in money market securities, including repurchase agreements, in the two highest rating categories, maturing in one year or less. For temporary, defensive purposes, the Series may invest without limitation in such securities. The Series may lend securities to broker-dealers, other institutions, or other persons to earn additional income. The value of loaned securities may not exceed 33 1/3 percent of the Series' total assets. See "Investment Methods and Risk Factors" -- "Lending of Portfolio Securities" for a discussion of the risks associated with securities lending. INVESTMENT METHODS AND RISK FACTORS Some of the risk factors related to certain securities, instruments and techniques that may be used by one or more of the Series are described in the "Investment Objectives and Policies" section of this Prospectus and in the Fund's Statement of Additional Information. The following is a description of certain additional risk factors related to various securities, instruments and techniques. The risks so described only apply to those Series which may invest in such securities and instruments or which use such techniques. Also included is a general description of some of the investment instruments, techniques and methods which may be used by one or more of the Series. The methods described only apply to those Series which may use such methods. Although a Series may employ the techniques, instruments and methods described below, consistent with its investment objective and policies and any applicable law, no Series will be required to do so. Investment Vehicles Convertible Securities and Warrants -- Convertible securities are 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 non-convertible 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. 17 Warrants are options to buy a stated number of shares of common stock at a specified price any time during the life of the warrants (generally two or more years). Mortgage-Backed Securities -- Mortgage-backed securities (MBSs), including mortgage pass-through securities and collateralized mortgage obligations (CMOs), include certain securities issued or guaranteed by the United States government or one of its agencies or instrumentalities, such as the Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), or Federal Home Loan Mortgage Corporation (FHLMC); securities issued by private issuers that represent an interest in or are collateralized by mortgage-backed securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; and securities issued by private issuers that represent an interest in or are collateralized by mortgage loans. A mortgage pass-through security is a pro rata interest in a pool of mortgages where the cash flow generated from the mortgage collateral is passed through to the security holder. CMOs are obligations fully collateralized by a portfolio of mortgages or mortgage-related securities. Series E and N may invest in securities known as "inverse floating obligations," "residual interest bonds," or "interest-only" (IO) and "principal-only" (PO) bonds, the market values of which will generally be more volatile than the market values of most MBSs. IOs and POs are created by separating the interest and principal payments generated by a pool of mortgage-backed bonds to create two classes of securities. Generally, one class receives interest only payments (IO) and the other class principal only payments (PO). MBSs have been referred to as "derivatives" because the performance of MBSs is dependent upon and derived from underlying securities. Investment in MBSs poses several risks, including prepayment, market and credit risks. Prepayment risk reflects the chance that borrowers may prepay their mortgages faster than expected, thereby affecting the investment's average life and perhaps its yield. Borrowers are most likely to exercise their prepayment options at a time when it is least advantageous to investors, generally prepaying mortgages as interest rates fall, and slowing payments as interest rates rise. Certain classes of CMOs may have priority over others with respect to the receipt of prepayments on the mortgages and the Series may invest in CMOs which are subject to greater risk of prepayment. Market risk reflects the chance that the price of the security may fluctuate over time. The price of MBSs may be particularly sensitive to prevailing interest rates, the length of time the security is expected to be outstanding and the liquidity of the issue. In a period of unstable interest rates, there may be decreased demand for certain types of MBSs, and a Series invested in such securities wishing to sell them may find it difficult to find a buyer, which may in turn decrease the price at which they may be sold. IOs and POs are acutely sensitive to interest rate changes and to the rate of principal prepayments. They are very volatile in price and may have lower liquidity than most mortgage-backed securities. Certain CMOs may also exhibit these qualities, especially those which pay variable rates of interest which adjust inversely with and more rapidly than short-term interest rates. Credit risk reflects the chance that the Fund may not receive all or part of its principal because the issuer or credit enhancer has defaulted on its obligations. Obligations issued by U.S. Government-related entities are guaranteed by the agency or instrumentality, and some, such as GNMA certificates, are supported by the full faith and credit of the U.S. Treasury; others are supported by the right of the issuer to borrow from the Treasury; others, such as those of the FNMA, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; still others, are supported only by the credit of the instrumentality. Although securities issued by U.S. Government-related agencies are guaranteed by the U.S. Government, its agencies or instrumentalities, shares of the Fund are not so guaranteed in any way. The performance of private label MBSs, issued by private institutions, is based on the financial health of those institutions. There is no guarantee the Series' investment in MBSs will be successful, and the Series' total return could be adversely affected as a result. Asset-Backed Securities--Asset-backed securities represent a participation in, or are secured by and payable from, a stream of payments generated by particular assets, for example, automobile, credit card or trade receivables. Asset-backed commercial paper, one type of asset-backed security, is issued by a special purpose entity, organized solely to issue the commercial paper and to purchase interests in the assets. The credit quality of these securities depends primarily upon the quality of the underlying assets and the level of credit support and/or enhancement provided. The underlying assets (e.g., loans) are subject to prepayments which shorten the securities' weighted average life and may lower their return. If the credit support or enhancement is exhausted, losses or delays in payment may result if the required payments of principal and interest are not made. The value of these securities also may change because of changes in the market's perception of the creditworthiness of the servicing agent for the pool, the originator of the pool, or the financial institution providing the credit support or enhancement. Real Estate Investment Trusts (REITs)--A REIT is a trust that invests in a diversified portfolio of real estate holdings. Investment in REITs involves certain special risks. Equity REITs may be affected by any changes in the value of the underlying property owned by the trusts, while mortgage REITs may be affected by the quality of any credit extended. Further, equity and mortgage REITs are dependent upon management skill, are not diversified, and are therefore subject to the risk of financing single or a limited number of projects. Such trusts are also subject to heavy cash flow dependency, defaults by borrowers, self liquidation, and the possibility of failing to qualify for special tax treatment under Subchapter M of the Internal Revenue Code and to maintain 18 an exemption under the Investment Company Act of 1940. Finally, certain REITs may be self-liquidating in that a specific term of existence is provided for in the trust document. Such trusts run the risk of liquidating at an economically inopportune time. When-Issued and Forward Commitment Securities--Purchase or sale of securities on a "forward commitment" basis may be used to hedge against anticipated changes in interest rates and prices. The price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. When-issued securities and forward commitments may be sold prior to the settlement date, but the Series will enter into when-issued and forward commitments only with the intention of actually receiving or delivering the securities, as the case may be; however, a Series may dispose of a commitment prior to settlement if the Investment Manager or relevant Sub-Adviser deems it appropriate to do so. No income accrues on securities which have been purchased pursuant to a forward commitment or on a when-issued basis prior to delivery of the securities. If a Series disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it may incur a gain or loss. At the time a Series enters into a transaction on a when-issued or forward commitment basis, a segregated account consisting of cash or high grade liquid debt securities equal to the value of the when-issued or forward commitment securities will be established and maintained with its custodian and will be marked to market daily. There is a risk that the securities may not be delivered and that the Series may incur a loss. Restricted Securities--Restricted securities are acquired through private placement transactions, directly from the issuer or from security holders, generally at higher yields or on terms more favorable to investors than comparable publicly traded securities. However, the restrictions on resale of such securities may make it difficult for a Series to dispose of such securities at the time considered most advantageous, and/or may involve expenses that would not be incurred in the sale of securities that were freely marketable. Trading restricted securities pursuant to Rule 144A may enable a Series to dispose of restricted securities at a time considered to be advantageous and/or at a more favorable price than would be available if such securities were not traded pursuant to Rule 144A. However, the Rule 144A market is relatively new and liquidity of a Series' investment in such market could by impaired if trading does not develop or declines. Risks associated with restricted securities include the potential obligation to pay all or part of the registration expenses in order to sell certain restricted securities. A considerable period of time may elapse between the time of the decision to sell a security and the time a Series may be permitted to sell it under an effective registration statement. If, during a period, adverse conditions were to develop, a Series might obtain a less favorable price than prevailing when it decided to sell. The Board of Directors is responsible for developing and establishing guidelines and procedures for determining the liquidity of Rule 144A securities. As permitted by Rule 144A, the Board of Directors has delegated this responsibility to the Investment Manager. In making the determination regarding the liquidity of Rule 144A securities, the Investment Manager will consider trading markets for the specific security taking into account the unregistered nature of a Rule 144A security. In addition, the Investment Manager may consider: (1) the frequency of trades and quotes; (2) the number of dealers and potential purchasers; (3) dealer undertakings to make a market; and (4) the nature of the security and of the market place trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). Investing in Rule 144A securities could have the effect of increasing the amount of a Series' assets invested in illiquid securities to the extent that qualified institutional buyers become uninterested, for a time, in purchasing these securities. American Depositary Receipts (ADRs)--ADRs are dollar-denominated receipts issued generally by U.S. banks and which represent the deposit with the bank of a foreign company's securities. ADRs are publicly traded on exchanges or over-the-counter in the United States. Investors should consider carefully the substantial risks involved in investing in securities issued by companies of foreign nations, which are in addition to the usual risks inherent in domestic investments. See "Foreign Investment Risks," below. Brady Bonds -- Certain Series may invest in "Brady Bonds," which are debt restructurings that provide for the exchange of cash and loans for newly issued bonds. Brady Bonds are securities created through the exchange of existing commercial bank loans to public and private entities in certain emerging markets for new bonds in connection with debt restructuring under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady. Brady Bonds recently have been issued by the governments of Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic, Jordan, Mexico, Nigeria, The Philippines, Uruguay and Venezuela, and are expected to be issued by Ecuador and Poland and other emerging market countries. Approximately $150 billion in principal amount of Brady Bonds has been issued to date, the largest proportion having been issued by Mexico and Venezuela. Investors should recognize that Brady Bonds have been issued only recently and, accordingly, do not have a long payment history. Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (primarily the U.S. dollar) and are actively traded in the secondary market for Latin American debt. The Salomon Brothers Brady Bond Index provides a benchmark that can be used to compare returns of emerging market Brady Bonds with returns in other bond markets, e.g., the U.S. bond market. Series K may invest in either collateralized or uncollateralized Brady Bonds denominated in various currencies, while Series B may invest only in collateralized 19 bonds denominated in U.S. dollars. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds, are collateralized in full as to principal by U.S. Treasury zero coupon bonds having the same maturity as the bonds. Interest payments on such bonds generally are collateralized by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of rolling interest payments or, in the case of floating rate bonds, initially is equal to at least one year's rolling interest payments based on the applicable interest rate at the time and is adjusted at regular intervals thereafter. Repurchase Agreements, Reverse Repurchase Agreements and Roll Transactions--A repurchase agreement is a contract under which a Series would acquire a security for a relatively short period (usually not more than 7 days) subject to the obligation of the seller to repurchase and the Series to resell such security at a fixed time and price. The resale price is in excess of the purchase price and reflects an agreed-upon market rate unrelated to the coupon rate of the purchased security. Repurchase agreements will be fully collateralized including interest earned thereon during the entire term of the agreement. If the institution defaults on the repurchase agreement, the Series will retain possession of the underlying securities. If bankruptcy proceedings are commenced with respect to the seller, realization on the collateral by the Series may be delayed or limited and the Series may incur additional costs. In such case, the Series will be subject to risks associated with changes in market value of the collateral securities. Each of the Series intends to limit repurchase agreements to institutions believed by the Investment Manager or relevant Sub-Adviser to present minimal credit risk. Certain Series may also enter into reverse repurchase agreements with the same parties with whom they may enter into repurchase agreements. Under a reverse repurchase agreement, the Series would sell securities and agree to repurchase them at a particular price at a future date. Reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by the Series may decline below the price of the securities the Series has sold but is obligated to repurchase. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Series' obligation to repurchase the securities, and the Series' use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Certain Series also may enter into "dollar rolls," in which the Series sells fixed income securities for delivery in the current month and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities on a specified future date. During the roll period, the Series would forego principal and interest paid on such securities. The Series would be compensated by the difference between the current sales price and the forward price for the future purchase, as well as by the interest earned on the cash proceeds of the initial sale. At the time a Series enters into reverse repurchase agreements or dollar rolls, it will establish and maintain a segregated account with its custodian containing cash or liquid high grade debt securities having a value not less than the repurchase price, including accrued interest. Reverse repurchase agreements and dollar rolls will be treated as borrowings and will be deducted from the Series' assets for purposes of calculating compliance with the Series' borrowing limitation. See "Borrowing," below. Management Practices Cash Reserves--Each Series may establish and maintain reserves as the Investment Manager or relevant Sub-Adviser believes is advisable to facilitate the Series' cash flow needs (e.g., redemptions, expenses and, purchases of portfolio securities) or for temporary, defensive purposes. Such reserves may be invested in domestic, and for certain Series, foreign money market instruments rated within the top two credit categories by a national rating organization, or if unrated, the Investment Manager or Sub-Adviser equivalent. Series K, M, N and O may invest in shares of other investment companies. A Series' investment in shares of other investment companies may not exceed immediately after purchase 10 percent of the Series' total assets and no more than 5 percent of its total assets may be invested in the shares of any one investment company. Investment in the shares of other investment companies has the effect of requiring shareholders to pay the operating expenses of two mutual funds. Borrowing--Each Series may borrow money from banks as a temporary measure for emergency purposes, to facilitate redemption requests, or for other purposes consistent with the Series' investment objective and program. Such borrowings may be collateralized with Series assets. Borrowings will not exceed 5 percent of the total assets of each Series except Series M, N and O, borrowings of which may not exceed 33 1/3 percent of total assets. To the extent that a Series purchases securities while it has outstanding borrowings, it is using leverage, i.e., using borrowed funds for investment. Leveraging will exaggerate the effect on net asset value of any increase or decrease in the market value of a Series' portfolio. Money borrowed for leveraging will be subject to interest costs that may or may not be recovered by appreciation of the securities purchased; in certain cases, interest costs may exceed the return received on the securities purchased. A Series also may be required to maintain minimum average balances in connection with such borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate. Series O may not purchase securities when borrowings exceed 5 percent of its total assets. Lending of Portfolio Securities--Certain Series may lend securities to broker-dealers, institutional investors, or other 20 persons to earn additional income. The principal risk is the potential insolvency of the broker-dealer or other borrower. In this event, the Series could experience delays in recovering its securities and possibly capital losses. Any loan will be continuously secured by collateral at least equal to the value of the security loaned. Such lending could result in delays in receiving additional collateral or in the recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Forward Currency Transactions--In seeking to protect against currency exchange rate or interest rate changes that are adverse to their present or prospective positions, certain Series may employ certain risk management practices involving the use of forward currency contracts and options contracts, futures contracts and options on futures contracts on U.S. and foreign government securities and currencies. Series K also may enter into interest rate, currency and index swaps and purchase or sell related caps, floors and collars and other derivatives. See "Swaps, Caps, Floors and Collars" below. There can be no assurance that such risk management practices will succeed. Only a limited market, if any, currently exists for forward currency contracts and options and futures instruments relating to currencies of most emerging markets, to securities denominated in such currencies or to securities of issuers domiciled or principally engaged in business in such emerging markets. To the extent that such a market does not exist, a Sub-Adviser may not be able to effectively hedge its investment in such emerging markets. To attempt to hedge against adverse movements in exchange rates between currencies, certain Series may enter into forward currency contracts for the purchase or sale of a specified currency at a specified future date. Such contracts may involve the purchase or sale of a foreign currency against the U.S. dollar or may involve two foreign currencies. Such Series may enter into forward currency contracts either with respect to specific transactions or with respect to the respective Series' portfolio positions. For example, when a Series anticipates making a purchase or sale of a security, it may enter into a forward currency contract in order to set the rate (either relative to the U.S. dollar or another currency) at which a currency exchange transaction related to the purchase or sale will be made. Further, if the Investment Manager or relevant Sub-Adviser believes that a particular currency may decline compared to the U.S. dollar or another currency, certain Series may enter into a forward contract to sell the currency the Investment Manager or Sub-Adviser expects to decline in an amount up to the value of the portfolio securities held by the Fund denominated in a foreign currency. The Series' use of forward currency contracts or options and futures transactions involve certain investment risks and transaction costs to which they might not otherwise be subject. These risks include: dependence on the Investment Manager or relevant Sub-Adviser's ability to predict movements in exchange rates; imperfect correlation between movements in exchange rates and movements in the currency hedged; and the fact that the skills needed to effectively hedge against the Series' currency risks are different from those needed to select the securities in which a Series invests. The Series also may conduct foreign currency exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market. Options--A call option on a security gives the purchaser of the option, in return for a premium paid to the writer (seller), the right to buy the underlying security at the exercise price at any time during the option period. Upon exercise by the purchaser, the writer (seller) of a call option has the obligation to sell the underlying security at the exercise price. When a Series purchases a call option, it will pay a premium to the party writing the option and a commission to the broker selling the option. If the option is exercised by such Series, the amount of the premium and the commission paid may be greater than the amount of the brokerage commission that would be charged if the security were to be purchased directly. By writing a call option, a Series assumes the risk that it may be required to deliver the security having a market value higher than its market value at the time the option was written. A Series will write call options in order to obtain a return on its investments from the premiums received and will retain the premiums whether or not the options are exercised. Any decline in the market value of the Series' portfolio securities will be offset to the extent of the premiums received (net of transaction costs). If an option is exercised, the premium received on the option will effectively increase the exercise price. The Series may write only covered call options. This means that the Series will own the security or currency subject to the option or an option to purchase the same underlying security or currency, having an exercise price equal to or less than the exercise price of the "covered" option, or will establish and maintain with its custodian for the term of the option, an account consisting of cash, cash equivalents, U.S. Government securities or other high-grade liquid debt obligations having a value equal to the fluctuating market value of the optioned securities or currencies. During the option period the writer of a call option has given up the opportunity for capital appreciation above the exercise price should market price of the underlying security increase, but has retained the risk of loss should the price of the underlying security decline. Writing call options also involves the risk relating to the Series' ability to close out options it has written. A call option on a stock index is similar to a call option on an individual security, except that the value of the option depends on the weighted value of the group of securities comprising the index and all settlements are made in cash. A call option may be terminated by the writer (seller) by entering into a closing purchase transaction in which it purchases an option of the same series as the option previously written. A put option on a security gives the purchaser of the option, in return for premium paid to the writer (seller), the 21 right to sell the underlying security at the exercise price at any time during the option period. Upon exercise by the purchaser, the writer of a put option has the obligation to purchase the underlying security at the exercise price. The Series may write only covered put options, which means that the Series will maintain in a segregated account cash, cash equivalents, U.S. Government securities or other high-grade liquid debt obligations in an amount not less than the exercise price or the Series will own an option to sell the underlying security or currency subject to the option having an exercise price equal to or greater than the exercise price of the "covered" option at all times which the put option is outstanding. By writing a put option, the Series assumes the risk that it may be required to purchase the underlying security at a price in excess of its current market value. A put option on a stock index is similar to a put option on an individual security, except that the value of the option depends on the weighted value of the group of securities comprising the index and all settlements are made in cash. A Series may sell a call option or a put option which it has previously purchased prior to purchase (in the case of a call) or the sale (in the case of a put) of the underlying security. Any such sale would result in a net gain or loss depending on whether the amount received on the sale is more or less than the premium and other transaction costs paid on the call or put which is sold. Futures Contracts and Related Options--Certain Series may buy and sell futures contracts (and options on such contracts) to manage exposure to changes in securities prices and foreign currencies and as an efficient means of adjusting overall exposure to certain markets. A financial futures contract calls for delivery of a particular security at a certain time in the future. The seller of the contract agrees to make delivery of the type of security called for in the contract and the buyer agrees to take delivery at a specified future time. A Series may also write call options and purchase put options on financial futures contracts as a hedge to attempt to protect the Series' securities from a decrease in value. When a Series writes a call option on a futures contract, it is undertaking the obligation of selling a futures contract at a fixed price at any time during a specified period if the option is exercised. Conversely, the purchaser of a put option on a futures contract is entitled (but not obligated) to sell a futures contract at a fixed price during the life of the option. Financial futures contracts include interest rate futures contracts and stock index futures contracts. An interest rate futures contract obligates the seller of the contract to deliver, and the purchaser to take delivery of, interest rate securities called for in a contract at a specified future time at a specified price. A stock index assigns relative values to common stocks included in the index and the index fluctuates with changes in the market values of the common stocks included. A stock index futures contract is a bilateral contract pursuant to which two parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the stock index value at the close of the last trading day of the contract and the price at which the futures contract is originally struck. An option on a financial futures contract gives the purchaser the right to assume a position in the contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the period of the option. Regulatory Matters Related to Futures and Options--In connection with its proposed futures and options transactions, the Fund filed for the Series with the CFTC a notice of eligibility for exemption from the definition of (and therefore from CFTC regulation as) a "commodity pool operator" under the Commodity Exchange Act. The Fund represents in its notice of eligibility that: (i) it will not purchase or sell futures or options on futures contracts or stock indices if as a result the sum of the initial margin deposits on its existing futures contracts and related options positions and premiums paid for options on futures contracts or stock indices would exceed 5 percent of each Series' assets; and (ii) with respect to each futures contract purchased or long position in an option contract, each Series will set aside in a segregated account cash, cash equivalents, U.S. Government securities or other high-grade liquid debt obligations in an amount equal to the market value of such contract less the initial margin deposit. The Staff of Securities and Exchange Commission ("SEC") has taken the position that the purchase and sale of futures contracts and the writing of related options may involve senior securities for the purposes of the restrictions contained in Section 18 of the Investment Company Act of 1940 on investment companies' issuing senior securities. However, the Staff has issued letters declaring that it will not recommend enforcement action under Section 18 if an investment company: (i) sells futures contracts to offset expected declines in the value of the investment company's securities, provided the value of such futures contracts does not exceed the total market value of those securities (plus such additional amount as may be necessary because of differences in the volatility factor of the securities vis-a-vis the futures contracts); (ii) writes call options on futures contracts, stock indexes or other securities, provided that such options are covered by the investment company's holding of a corresponding long futures position, by its ownership of securities which correlate with the underlying stock index, or otherwise; (iii) purchases futures contracts, provided the investment company establishes a segregated account consisting of cash, cash equivalents, U.S. Government securities or other high-grade liquid debt obligations in an amount equal to the total market value of such futures contracts less the initial margin deposited therefor; and (iv) writes put options on futures contracts, stock indexes or other securities, provided that such options are covered by the investment company's holding of a corresponding short futures position, by establishing a cash segregated account in an amount equal to the value of its obligation under the option, or otherwise. 22 Each Series will conduct its purchases and sales of any futures contracts and writing of related options transactions in accordance with the foregoing. Swaps, Caps, Floors and Collars--Series K may enter into interest rate, currency and index swaps, the purchase or sale of related caps, floors and collars and other derivative instruments. The Series expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio, to protect against currency fluctuations, as a technique for managing the portfolio's duration (i.e., the price sensitivity to changes in interest rates) or to protect against any increase in the price of securities the Series anticipates purchasing at a later date. The Series intends to use these transactions as hedges and not as speculative investments, and will not sell interest rate caps or floors if it does not own securities or other instruments providing the income the Series may be obligated to pay at a later date. Interest rate swaps involve the exchange by the Series with another party of their respective commitments to pay or receive interest (for example, an exchange of floating rate payments for fixed rate payments) with respect to a notional amount of principal. A currency swap is an agreement to exchange cash flows on a notional amount based on changes in the values of the reference indices. The purchase of a cap entitles the purchaser to receive payments on a notional principal amount from the party selling the cap to the extent that a specified index exceeds a predetermined interest rate. The purchase of an interest rate floor entitles the purchaser to receive payments on a notional principal amount from the party selling the floor to the extent that a specified index falls below a predetermined interest rate or amount. A collar is a combination of a cap and a floor that preserves a certain return within a predetermined range of interest rates or values. Hybrid Instruments--These instruments (which are derivatives) can combine the characteristics of securities, futures and options. For example, the principal amount, redemption or conservation terms of a security could be related to the market price of some commodity, currency or securities index. The risks of such investments would reflect the risks of investing in futures, options and securities, including volatility and illiquidity. 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. Hybrids can have volatile prices and limited liquidity and their use by the Series may not be successful. Risk Factors General--Each Series' net asset value will fluctuate, reflecting fluctuations in the market value of its portfolio positions and, if applicable, its net currency exposure. The value of fixed income securities generally fluctuates inversely with interest rate movements. Longer term bonds held by a Series are subject to greater interest rate risk. There is no assurance that any Series will achieve its investment objective. Futures and Options Risk--Futures contracts and options can be highly volatile and could result in reduction of a Series' total return, and a Series' attempt to use such investments for hedging purposes may not be successful. Successful futures strategies require the ability to predict future movements in securities prices, interest rates and other economic factors. Losses from options and futures could be significant if a Series is unable to close out its position due to distortions in the market or lack of liquidity. A Series' risk of loss from the use of futures extends beyond its initial investment and could potentially be unlimited. The use of futures, options and forward contracts involves investment risks and transaction costs to which a Series would not be subject absent the use of these strategies. If the Investment Manager or relevant Sub-Adviser seeks to protect a Series against potential adverse movements in the securities, foreign currency or interest rate markets using these instruments, and such markets do not move in a direction adverse to such Series, such Series could be left in a less favorable position than if such strategies had not been used. Risks inherent in the use of futures, options and forward contracts include: (a) the risk that interest rates, securities prices and currency markets will not move in the directions anticipated; (b) imperfect correlation between the price of futures, options and forward contracts and movements in the prices of the securities or currencies being hedged; (c) the fact that skills needed to use these strategies are different from those needed to select portfolio securities; (d) the possible absence of a liquid secondary market for any particular instrument at any time; and (e) the possible need to defer closing out certain hedged positions to avoid adverse tax consequences. A Series' ability to terminate option positions established in the over-the-counter market may be more limited than in the case of exchange-traded options and may also involve the risk that securities dealers participating in such transactions would fail to meet their obligations to such Series. The use of options and futures involves the risk of imperfect correlation between movements in options and futures prices and movements in the price of securities which are the subject of a hedge. Such correlation, particularly with respect to options on stock indices and stock index futures, is imperfect, and such risk increases as the composition of the Series diverges from the composition of the relevant index. The successful use of these strategies also depends on the ability of the Investment Manager or relevant Sub-Adviser to correctly forecast interest rate movements and general stock market price movements. Foreign Investment Risks--Investment in foreign securities involves risks and considerations not present in domestic investments. Foreign companies generally are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies. The securities of non-U.S. issuers generally are not registered with the SEC, nor are the 23 issuers thereof usually subject to the SEC's reporting requirements. Accordingly, there may be less publicly available information about foreign securities and issuers than is available with respect to U.S. securities and issuers. Foreign securities markets, while growing in volume, have for the most part substantially less volume than United States securities markets and securities for foreign companies are generally less liquid and at times their prices may be more volatile than prices of comparable United States companies. Foreign stock exchanges, brokers and listed companies generally are subject to less government supervision and regulation than in the United States. The customary settlement time for foreign securities may be longer than the customary settlement time for United States securities. A Series' income and gains from foreign issuers may be subject to non-U.S. withholding or other taxes, thereby reducing its income and gains. In addition, with respect to some foreign countries, there is the increased possibility of expropriation or confiscatory taxation, limitations on the removal of funds or other assets of the Series, political or social instability, or diplomatic developments which could affect the investments of the Series in those countries. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross national product, rate of inflation, rate of savings and capital reinvestment, resource self-sufficiency and balance of payments positions. Currency Risk--Series that invest in securities denominated in currencies other than the U.S. dollar, will be affected favorably or unfavorably by exchange control regulations or changes in the exchange rates between such currencies and the U.S. dollar. Changes in currency exchange rates will influence the value of a Series' shares, and also may affect the value of dividends and interest earned by the Series and gains and losses realized by the Series. In addition, the Series may incur costs in connection with the conversion or transfer of foreign currencies. Currencies generally are evaluated on the basis of fundamental economic criteria (e.g., relative inflation and interest rate levels and trends, growth rate forecasts, balance of payments status and economic policies) as well as technical and political data. The exchange rates between the U.S. dollar and other currencies are determined by supply and demand in the currency exchange markets, the international balance of payments, governmental intervention, speculation and other economic and political conditions. If the currency in which a security is denominated appreciates against the U.S. dollar, the dollar value of the security will increase. Conversely, a decline in the exchange rate of the currency would adversely affect the value of the security expressed in U.S. dollars. Emerging Markets Risks--Because of the special risks associated with investing in emerging markets, an investment in a Series investing in such markets should be considered speculative. Investors are strongly advised to consider carefully the special risks involved in emerging markets, which are in addition to the usual risks of investing in developed foreign markets around the world. Investing in emerging markets involves risks relating to potential political and economic instability within such markets and the risks of expropriation, nationalization, confiscation of assets and property or the imposition of restrictions on foreign investment and on repatriation of capital invested. In the event of such expropriation, nationalization or other confiscation in any emerging market, the Series could lose its entire investment in that market. Many emerging market countries have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have negative effects on the economies and securities markets of certain emerging market countries. Economies in emerging markets generally are dependent heavily upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries with which they trade. The securities markets of emerging countries are substantially smaller, less developed, less liquid and more volatile than the securities markets of the United States and other more developed countries. Disclosure and regulatory standards in many respects are less stringent than in the United States and other major markets. There also may be a lower level of monitoring and regulation of emerging securities markets and the activities of investors in such markets, and enforcement of existing regulations has been extremely limited. Emerging markets may include former communist countries. There is a possibility that these countries may revert back to communism. In addition, brokerage commissions, custodial services and other costs relating to investment in foreign markets generally are more expensive than in the United States, particularly with respect to emerging markets. Such markets have different settlement and clearance procedures. In certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. The inability of the Series to make intended securities purchases due to settlement problems could cause the Series to forego attractive investment opportunities. Inability to dispose of a portfolio security caused by settlement problems could result either in losses to the Series due to subsequent declines in value of the portfolio security or, if the Series has entered into a contract to sell the security, could result in possible liability to the purchaser. The risk also exists that an emergency situation may arise in one or more emerging markets as a result of which trading of securities may cease or may be substantially curtailed and prices for the Series' portfolio securities in such markets may not be readily available. Section 22(e) of the 1940 Act permits a registered investment company to 24 suspend redemption of its shares for any period during which an emergency exists, as determined by the SEC. Accordingly, when the Series believes that appropriate circumstances warrant, it will promptly apply to the SEC for a determination that an emergency exists within the meaning of Section 22(e) of the 1940 Act. During the period commencing from the Series' identification of such conditions until the date of SEC action, the portfolio securities of the Series in the affected markets will be valued at fair value as determined in good faith by or under the direction of the Fund's Board of Directors. Risks Associated with Investments in High-Yield Lower-Rated Debt Securities--Investment in debt securities rated below investment grade involves a high degree of risk. Debt securities rated BB, B, CCC, CC and C by S&P and Ba, B Caa, Ca and C by Moody's, are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. For S&P, BB indicates the lowest degree of speculation and C the highest degree of speculation. For Moody's, Ba indicates the lowest degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Similarly, debt rated Ba or BB and below is regarded by the relevant rating agency as speculative. Debt rated C by Moody's or S&P is the lowest quality debt that is not in default as to principal or interest and such issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Such securities are also generally considered to be subject to greater risk than higher quality securities with regard to a deterioration of general economic conditions. These securities are the equivalent of high yield, high risk bonds. As noted above, certain Series may invest in debt securities rated below C, which are in default as to principal and/or interest. Ratings of debt securities represent the rating agency's opinion regarding their quality and are not a guarantee of quality. Rating agencies attempt to evaluate the safety of principal and interest payments and do not evaluate the risks of fluctuations in market value. Also, rating agencies may fail to make timely changes in credit quality in response to subsequent events, so that an issuer's current financial condition may be better or worse than a rating indicates. Description of Corporate Bond Ratings Moody's Investors Standard & Poor's Service, Inc. Corporation Definition Aaa AAA Highest quality Aa AA High quality A A Upper medium grade Baa BBB Medium grade Ba BB Lower medium grade/ speculative elements B B Speculative Caa CCC More speculative/ Ca CC possibly in or C C high risk of default --- D In default Not rated Not rated Not rated For a more complete description of the corporate bond ratings, see the Appendix to the Fund's Statement of Additional Information. The market value of lower quality debt securities tends to reflect individual developments of the issuer to a greater extent than do higher quality securities, which react primarily to fluctuations in the general level of interest rates. In addition, lower quality debt securities tend to be more sensitive to economic conditions and generally have more volatile prices than higher quality securities. Issuers of lower quality securities are often highly leveraged and may not have available to them more traditional methods of financing. For example, during an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of lower quality securities may experience financial stress. During such periods, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations may also be adversely affected by specific developments affecting the issuer, such as the issuer's inability to meet specific projected business forecasts or the unavailability of additional financing. Similarly, certain emerging market governments that issue lower quality debt securities are among the largest debtors to commercial banks, foreign governments and supranational organizations such as the World Bank and may not be able or willing to make principal and/or interest repayments as they come due. The risk of loss due to default by the issuer is significantly greater for the holders of lower quality securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of lower quality securities, especially in a thinly traded market. Lower quality debt securities of corporate issuers frequently have call or buy-back features which would permit an issuer to call or repurchase the security from the Series. If an issuer exercises these provisions in a declining 25 interest rate market, the Series may have to replace the security with a lower yielding security, resulting in a decreased return for investors. In addition, the Series may have difficulty disposing of lower quality securities because there may be a thin trading market for such securities. There may be no established retail secondary market for many of these securities, and the Series anticipates that such securities could be sold only to a limited number of dealers or institutional investors. The lack of a liquid secondary market also may have an adverse impact on market prices of such instruments and may make it more difficult for the Series to obtain accurate market quotations for purposes of valuing the securities in the portfolio of the Series. Factors having an adverse effect on the market value of lower rated securities or their equivalents purchased by the Series will adversely impact net asset value of the Series. See "Investment Methods and Risk Factors" in the Statement of Additional Information. In addition to the foregoing, such factors may include: (i) potential adverse publicity; (ii) heightened sensitivity to general economic or political conditions; and (iii) the likely adverse impact of a major economic recession. A Series also may incur additional expenses to the extent it is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings, and the Series may have limited legal recourse in the event of a default. Debt securities issued by governments in emerging markets can differ from debt obligations issued by private entities in that remedies from defaults generally must be pursued in the courts of the defaulting government, and legal recourse is therefore somewhat diminished. Political conditions, in terms of a government's willingness to meet the terms of its debt obligations, also are of considerable significance. There can be no assurance that the holders of commercial bank debt may not contest payments to the holders of debt securities issued by governments in emerging markets in the event of default by the governments under commercial bank loan agreements. MANAGEMENT OF THE FUND The management of the Fund's business and affairs is the responsibility of the Board of Directors. Security Management Company (the "Investment Manager"), 700 SW Harrison, Topeka, Kansas 66636-0001, is responsible for selection and management of the Fund's portfolio investments. The Investment Manager is a wholly-owned subsidiary of Security Benefit Life Insurance Company, a mutual life insurance company with over $15 billion of insurance in force. The Investment Manager also acts as investment adviser to Security Growth and Income Fund, Security Ultra Fund, Security Income Fund, Security Cash Fund, Security Equity Fund, and Security Tax-Exempt Fund. On September 30, 1995, Investment Manager managed over $2.6 billion in assets. The Investment Manager has engaged Lexington Management Corporation ("Lexington"), Park 80 West Plaza Two, Saddle Brook, New Jersey 07662, to provide certain investment advisory services to Series D and Series K of the Fund. Lexington is a wholly-owned subsidiary of Lexington Global Asset Managers, Inc., a Delaware corporation with offices at Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their spouses, trusts and other related entities have a majority voting control of the outstanding shares of Lexington Global Asset Managers, Inc. Lexington was established in 1938 and currently manages over $3.8 billion in assets. Lexington has entered into a sub-advisory contract with MFR Advisors, Inc. ("MFR"), One World Financial Center, 200 Liberty Street, New York, New York 10281, under which MFR will provide Series K with investment and economic research services. MFR currently acts as sub-adviser to the Lexington Ramirez Global Income Fund and also serves as an institutional manager for private clients. MFR is a subsidiary of Maria Fiorini Ramirez, Inc. ("Ramirez"), which was established in August of 1992 to provide global economic consulting, investment advisory and broker-dealer services. Ramirez is the successor firm to Maria Ramirez Capital Consultants, Inc. ("MRCC"). MRCC was formed in April 1990 as a subsidiary of John Hancock Freedom Securities Corporation and offered in-depth economic consulting services to clients. The Investment Manager has entered into a quantitative research agreement with Meridian Investment Management Corporation ("Meridian"), 12835 East Arapahoe Road, Tower II, 7th Floor, Englewood, Colorado 80112. Meridian provides research which the Investment Manager uses in strategically allocating the assets of Series M among investment categories and market sectors. Meridian is a wholly-owned subsidiary of Meridian Management & Research Corporation. The Investment Manager has entered into an analytical research agreement with Templeton/Franklin Investment Services, Inc. ("Templeton"), 777 Mariners Island Boulevard, San Mateo, California 94404. Templeton provides research used by the Investment Manager in the selection of equity securities for Series M. Templeton is an indirect wholly-owned subsidiary of Templeton Worldwide, Inc. which in turn is a direct wholly-owned subsidiary of Franklin Resources, Inc. The Investment Manager has engaged T. Rowe Price Associates, Inc. ("T. Rowe Price"), 100 East Pratt Street, Baltimore, Maryland 21202, organized in 1937 under the laws of the state of Maryland by the late Thomas Rowe Price, Jr., to provide certain investment advisory services to Series N and Series O. T. Rowe Price is a publicly held company, which with its affiliates manages over $50 billion in assets. Subject to the supervision and direction of the Fund's Board of Directors, the Investment Manager manages the Fund's portfolios in accordance with each Series' stated investment objective and policies and makes all investment decisions, except that as to Series D and K of the Fund, the Investment Manager supervises such management of those Series by Lexington and as to Series N and O, supervises management of those Series by T. Rowe Price. As compensation for its management services, the Investment 26 Manager receives on an annual basis, an amount equal to .75 percent of the average net assets of Series A, B, E, S, J and K; .50 percent of the average net assets of Series C; and 1.00 percent of the average net assets of Series D, M, N, and O, computed on a daily basis and payable monthly. The Investment Manager pays Lexington an annual fee equal to .50 percent of the average net assets of Series D and .35 percent of the average net assets of Series K, respectively, for management services provided to Series D and K. For the services provided to Lexington by MFR, MFR, receives from Lexington, on an annual basis, a fee equal to .15 percent of the average net assets of Series K, calculated daily and payable monthly. The Investment Manager pays T. Rowe Price an annual fee equal to .50 percent of the first $50,000,000 of average net assets of Series N and .40 percent of the average net assets of Series N in excess of $50,000,000 for management services provided to that Series. Such fee is calculated daily and payable monthly. This schedule is subject to a minimum first year investment management fee of $100,000. The Investment Manager pays T. Rowe Price an annual fee equal to .50 percent of the first $20,000,000 of average net assets of Series O and .40 percent of such assets in excess of $20,000,000 for management services provided to Series O. For any month in which the average daily net assets of Series O exceeds $50,000,000, T. Rowe Price will waive .10 percent of its investment management fee on the first $20,000,000 of average net assets of the Series. Such fee is calculated daily and payable monthly. The Investment Manager pays Templeton, for research provided to Series M, an annual fee equal to .30 percent of the first $50,000,000 of the average net assets of Series M invested in equity securities and .25 percent on an annual basis of the average net equity security assets in excess of $50,000,000. Such fees are calculated daily and payable monthly. The Investment Manager also pays Meridian, for research provided to Series M, an annual fee equal to .20 percent of the average net assets of that Series. Such fee is calculated daily and payable quarterly. The investment advisory fees set forth above for all Series, except Series C, are higher than those paid by many other investment companies with similar investment objectives. The Investment Manager also acts as administrative agent for each Series of the Fund, and as such performs administrative functions, bookkeeping, accounting and pricing functions for the Fund. For providing these services, the Investment Manager receives on an annual basis a fee of .045 percent of the average daily net assets of the Fund. For these services, the Investment Manager also receives, with respect to Series D an annual fee equal to the greater of .10 percent of the Series' average net assets or $60,000 and, with respect to Series K, M and N, an annual fee equal to the greater of .10 percent of each Series' average net assets or (i) $30,000 in the year ending April 29, 1996, (ii) $45,000 in the year ending April 29, 1997, and (iii) $60,000 thereafter. The Investment Manager has arranged for Lexington to provide certain administrative services relating to Series D and K of the Fund, including performing certain accounting functions and the pricing function for these Series. The expense ratio of each Series for the fiscal year ended December 31, 1994, was as follows: Series A - .84 percent; Series B - .84 percent; Series C - .61 percent; Series D - 1.34 percent; Series E - .85 percent; Series S - .90 percent; and Series J - .88 percent. The annualized expense ratio of Series K, M, N, and O, after expense reimbursements for Series M and N, for the period June 1, 1995 (date of inception) to September 30, 1995, was as follows: Series K - - 1.94 percent; Series M - 2.00 percent; Series N - 2.00 percent; and Series O - 1.49 percent. PORTFOLIO MANAGEMENT Series A (Growth Series) is managed by the Large Capitalization Team of the Investment Manager consisting of John Cleland, Chief Investment Strategist, Terry Milberger and Chuck Lauber. Terry Milberger, Senior Portfolio Manager, has day-to-day responsibility for managing Series A and has managed the Series since 1989. John Cleland directs the allocation of Series B's (Growth-Income Series) investments among common stocks and fixed income securities. The common stock portion of the Series B portfolio is managed by the Investment Manager's Large Capitalization Team described above. Mr. Milberger has day-to-day responsibility for managing the common stock portion of the Series B portfolio and has managed this portion of the Series' portfolio since 1995. The fixed income portion of the Series B portfolio is managed by the Fixed Income Team of the Investment Manager consisting of John Cleland, Greg Hamilton, Jane Tedder, Tom Swank, Steve Bowser, Barb Davison and Elaine Miller. Tom Swank, Portfolio Manager, has day-to-day responsibility for managing the fixed income portion of Series B's portfolio and has managed this portion of the portfolio since 1994. Series D (Worldwide Equity Series) is managed by an investment management team of Lexington. Alan Wapnick and Richard T. Saler have the day-to-day responsibility for managing the investments of Series D and have managed the Series since 1994. Series E (High Grade Income Series) is managed by the Fixed Income Team described above. Greg Hamilton has day-to-day responsibility for managing Series E and has managed the Series since January 1996. Series J (Emerging Growth Series) and Series S (Social Awareness Series) are managed by the Investment Manager's Small Capitalization Team and Social Responsibility Team, respectively, each of which consists of John Cleland, Chief Investment Strategist, Cindy Shields, Larry Valencia and Frank Whitsell. Cindy Shields, Portfolio Manager, has day-to-day responsibility for managing Series J and Series S and has managed the Series since 1994. Series K (Global Aggressive Bond Series) is managed by an investment management team of Lexington and MFR. Denis P. Jamison and Maria Fiorini Ramirez have day-to-day responsibility for managing Series K and have managed the 27 Series since its inception in 1995. Series M (Specialized Asset Allocation Series) is managed by an investment management team of portfolio managers and research analysts of the Investment Manager. Jane Tedder, Senior Portfolio Manager, has day-to-day responsibility for managing the Series' portfolio and for supervising the services provided by Meridian and Templeton and has had responsibility for the Series since January 1996. Series N (Managed Asset Allocation Series) is managed by an Investment Advisory Committee of T. Rowe Price consisting of Edmund M. Notzon, Chairman, Heather R. Landon, James M. McDonald, Jerome Clark, Peter Van Dyke, M. David Testa and Richard T. Whitney. Mr. Notzon has had day-to-day responsibility for managing the Series since its inception in 1995. Series O (Equity Income Series) is managed by an Investment Advisory Committee of T. Rowe Price consisting of Brian C. Rogers, Chairman, Thomas H. Broadus, Jr., Richard P. Howard and William J. Stromberg. Mr. Rogers has had day-to-day responsibility for managing the Series since its inception in 1995. John D. Cleland has been involved in the securities industry for more than 30 years. Before joining the Investment Manager in 1968, he was involved in the investment business in securities and residential and commercial real estate for approximately ten years. Mr. Cleland earned a bachelor of science degree from the University of Kansas and an M.B.A. from Wharton School of Finance, University of Pennsylvania. He is active in securities industry affairs, having served as Vice Chairman of the NASD's National Board of Governors and as District Chairman for the Association's Business Conduct Committee in District No. 4. He describes his vision of investment management as follows: "I work to always have assets fully invested, while emphasizing a long-term investment approach to asset management." Greg Hamilton has been in the investment field since 1983. He received his Bachelor of Arts degree in Business from Washburn University in 1984. Prior to joining Security Management Company in January of 1993, he was First Vice President, Treasurer and Portfolio Manager with Mercantile National Bank, Los Angeles, California, from 1990 to 1993. From 1986 to 1990, he was Managing Director of Consulting Services for Sendero Corporation, Scottsdale, Arizona. Prior to Sendero Corporation, he was employed as Fixed Income Research Analyst at Peoples Heritage Savings and Loan from 1983 to 1986. Denis P. Jamison, C.F.A., Senior Vice President, Director Fixed Income Strategy, is responsible for fixed-income portfolio management for Lexington. He is a member of the New York Society of Security Analysts. Mr. Jamison has more than 20 years investment experience. Prior to joining Lexington in 1981, Mr. Jamison had spent nine years at Arnold Bernhard & Company, an investment counseling and financial services organization. At Bernhard, he was a Vice President supervising the security analyst staff and managing investment portfolios. He is a specialist in government, corporate and municipal bonds. Mr. Jamison is a graduate of the City College of New York with a B.A. in Economics. Terry A. Milberger is a Vice President and Senior Portfolio Manager of the Investment Manager. Mr. Milberger has more than 20 years of investment experience. He began his career as an investment analyst in the insurance industry and from 1974 through 1978 he served as an assistant portfolio manager for the Investment Manager. He was then employed as Vice President of Texas Commerce Bank and managed its pension fund assets until he returned to the Investment Manager in 1981. Mr. Milberger holds a bachelor's degree in business and an M.B.A. from the University of Kansas and is a Chartered Financial Analyst. His investment philosophy is based on patience and opportunity for the long-term investor. Edmund M. Notzon joined T. Rowe Price in 1989 and has been managing investments since 1991. Prior to joining T. Rowe Price, Mr. Notzon was Director of the Analysis and Evaluation Division at the U.S. Environmental Protection Agency. Maria Fiorini Ramirez, President and Chief Executive Officer of MFR, began her career as a credit analyst with American Express International Banking Corporation in 1968. In 1972, she moved to Banco Nazionale De Lavoro in New York. The following year, she started a ten year association with Merrill Lynch, serving as Vice President and Senior Money Market Economist. She joined Becker Paribas in 1984 as Vice President and Senior Money Market Economist before joining Drexel Burnham Lambert that same year as First Vice President and Money Market Economist. She was promoted to Managing Director of Drexel in 1986. From April 1990 to August 1992, Ms. Ramirez was the President and Chief Executive Officer of Maria Ramirez Capital Consultants, Inc., a subsidiary of John Hancock Freedom Securities Corporation. Ms. Ramirez established MFR in August, 1992. She is known in international financial, banking and economic circles for her assessment of the interaction between global economic policy and political trends and their effect on investments. Ms. Ramirez holds a B.A. in Business Administration/ Economics from Pace University. Brian C. Rogers joined T. Rowe Price in 1982 and has been managing investments since 1983. Richard T. Saler is a Senior Vice President of Lexington and is responsible for international investment analysis and portfolio management. He has eight years of investment experience. Mr. Saler has focused on international markets since first joining Lexington in 1986. Most recently he was a strategist with Nomura Securities and rejoined Lexington in 1992. Mr. Saler is a graduate of New York University with a B.S. Degree in Marketing and an M.B.A. in Finance from New York University's Graduate School of Business Administration. Cindy L. Shields, Portfolio Manager of the Investment Manager, has six years experience in the securities field. She is a Chartered Financial Analyst. Ms. Shields graduated from Washburn University with a Bachelor of Business 28 Administration degree, majoring in finance and economics. She joined the Investment Manager in 1989. Tom Swank, Portfolio Manager of the Investment Manager, has over ten years of experience in the investment field. He is a Chartered Financial Analyst. Prior to joining the Investment Manager in 1992, he was an Investment Underwriter and Portfolio Manager for U.S. West Financial Services, Inc. from 1986 to 1992. From 1984 to 1986, he was a Commercial Credit Officer for United Bank of Denver. From 1982 to 1984, he was employed as a Bank Holding Company examiner for the Federal Reserve Bank of Kansas City - Denver Branch. Mr. Swank graduated from Miami University in Ohio with a Bachelor of Science degree in finance in 1982 and earned a Master of Business Administration degree from the University of Colorado. Jane Tedder, Senior Portfolio Manager of the Investment Manager, has 20 years of experience in the investment field. Prior to joining the Investment Manager in 1983, she served as Vice President and Trust Officer of Douglas County Bank in Kansas. Ms. Tedder earned a bachelor's degree in education from Oklahoma State University and advanced diplomas from National Graduate Trust School, Northwestern University, and Stonier Graduate School of Banking, Rutgers University. She is a Chartered Financial Analyst. Alan Wapnick is a Senior Vice President of Lexington and is responsible for portfolio management. He has 25 years investment experience. Prior to joining Lexington in 1986, Mr. Wapnick was an equity analyst with Merrill Lynch, J. & W. Seligman, Dean Witter and most recently Union Carbide Corporation. Mr. Wapnick is a graduate of Dartmouth College and received a Master's Degree in Business Administration from Columbia University. SALE AND REDEMPTION OF SHARES Shares of the Fund will be sold to SBL for allocation to variable annuity or variable life separate accounts. Shares are sold and redeemed at their net asset value next determined after receipt of a purchase or redemption order. No sales or redemption charge is made. The value of shares redeemed may be more or less than the stockholder's cost, depending upon the market value of the portfolio securities at the time of redemption. Payment for shares redeemed will be made as soon as practicable after receipt, but in no event later than seven days after tender, except that the Fund may suspend the right of redemption during any period when trading on the New York Stock Exchange is restricted or such Exchange is closed for other than weekends or holidays, or any emergency is deemed to exist by the Securities and Exchange Commission. DISTRIBUTIONS AND FEDERAL INCOME TAX CONSIDERATIONS Each Series intends to separately qualify and elects to be treated each year as a "regulated investment company" under Subchapter M of the Internal Revenue Code (the "Code") and, therefore, generally will not be liable for federal income taxes to the extent its net investment income and capital gains are distributed. The Fund expects to distribute, at least once a year, substantially all of each Series' net investment income and net realized capital gains. Such distributions will be reinvested on the payable date in additional shares of the respective Series at the net asset value thereof as of the record date (reduced by an amount equal to the amount of the distribution), unless the shareholder elects to receive cash. Each Series will be treated separately in determining the amounts of income and capital gains distributions to the variable life insurance accounts and the variable annuity accounts. For this purpose, each Series will reflect only the income and gains, net of losses, of that Series. To comply with regulations under Code section 817(h), each Series is required to diversify its investments. Generally, a Series will be required to diversify its investments so that on the last day of each quarter of the calendar year no more than 55 percent of the value of the total assets is represented by any one investment, no more than 70 percent is represented by any two investments, no more than 80 percent is represented by any three investments, and no more than 90 percent is represented by any four investments. If a Series fails to meet the diversification requirements under Code section 817(h), income with respect to life insurance policies and annuity contracts invested in the Series at any time during the calendar quarter in which the failure occurred could become currently taxable to the owners of such policies and contracts and income for prior periods with respect to the policies and contracts also could be taxable, most likely in the year of the failure to achieve the required diversification. Other adverse tax consequences could also ensue. If a Series fails to qualify as a regulated investment company, the results would be substantially the same as a failure to meet the diversification requirements under Code section 817(h). Certain requirements relating to the qualification of a Series as a regulated investment company and to the satisfaction of the Code section 817(h) diversification requirements may limit the extent to which a Series will be able to engage in certain investment practices, including transactions in options, futures contracts, forwards, swaps and other types of derivative securities transactions. In addition, if a Series were unable to dispose of portfolio securities due to settlement problems relating to foreign investments or due to the holding of illiquid securities, the Series' ability to qualify as a regulated investment company and to satisfy the Code section 817(h) diversification requirements might be affected. See "Distributions and Federal Income Tax Considerations" in the Statement of Additional Information for more information on taxes, including information on the taxation of distributions from a Series. The federal tax consequences to purchasers of SBL's variable annuity contracts and variable life insurance policies registered under the Securities Act of 1933 are described in the 29 prospectus applicable to such contracts and such policies, respectively. FOREIGN TAXES Investment income and gains received from sources within foreign countries may be subject to foreign income and other taxes. In this regard, withholding tax rates in countries with which the United States does not have a tax treaty are often as high as 30 percent or more. The United States has entered into tax treaties with many foreign countries which entitle certain investors to a reduced tax rate (generally 10 to 15 percent) or to certain exemptions from tax. The Fund intends to operate so as to qualify for such reduced tax rates or tax exemptions whenever possible. While policyholders and contractowners will indirectly bear the cost of any foreign tax withholding, they will not be able to claim foreign tax credit or deduction for taxes paid by the Fund. DETERMINATION OF NET ASSET VALUE The net asset value per share of each Series is determined as of the close of regular trading hours on the New York Stock Exchange on each day that the Exchange is open for trading (normally 3:00 p.m. Central time). The determination is made by dividing the value of the portfolio securities of each Series, plus any cash or other assets, less all liabilities, by the number of shares of each Series outstanding. Securities listed or traded on a recognized securities exchange will be valued on the basis of the last sales price. If there are no sales on a particular day, then the securities are valued at the last bid price. If a security is traded on multiple exchanges, its value will be based on prices from the principal exchange where it is traded. All other securities for which market quotations are available are valued on the basis of the last current bid price. If there is no bid price or if the bid price is deemed unsatisfactory by the Board of Directors or by the Investment Manager, then the securities are valued in good faith by such method as the Board of Directors determines will reflect the fair market value. The Fund will generally value short-term securities at prices based on market quotations for securities of similar type, yield, quality and duration, except that securities with 60 days or less to maturity may be valued on the basis of the amortized cost valuation technique. The amortized cost valuation technique involves valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. A similar procedure may be used for portfolio instruments when they reach 60 days to maturity, with the value of the instrument on the 61st day being used rather than cost. While this method provides certainty in valuation, it may result in periods during which value (as determined by amortized cost) is higher or lower than the price the Fund would receive if the security were sold. Generally, trading in foreign securities markets is substantially completed each day at various times prior to the close of the New York Stock Exchange. The values of foreign securities used in computing the net asset value of the shares of Series investing in foreign securities generally are determined as of the close of such foreign markets or the close of the New York Stock Exchange if earlier. Foreign currency exchange rates are generally determined prior to the close of the New York Stock Exchange. Trading on foreign exchanges and in foreign currencies may not take place on every day the New York Stock Exchange is open. Conversely trading in various foreign markets may take place on days when the New York Stock Exchange is not open and on other days when the Fund's net asset values are not calculated. Consequently, the calculation of the net asset value may not occur contemporaneously with the determination of the most current market prices for the securities included in such calculation, and events affecting the value of such securities and such exchange rates that occur between the times at which they are determined and the close of the New York Stock Exchange will not be reflected in the computation of net asset value. If during such periods, events occur that materially affect the value of such securities, the securities will be valued at their fair market value as determined in good faith by the Board of Directors. For purposes of determining the net asset value per share of the Fund, all assets and liabilities initially expressed in foreign currencies will be converted into United States dollars at the mean between the bid and offer prices of such currencies against United States dollars quoted by any major U.S. bank. TRADING PRACTICES AND BROKERAGE The annual portfolio turnover rate of Series A, S, J and M may exceed 100 percent, and at times may exceed 150 percent. The annual turnover rate of Series E and K may exceed 100 percent. The annual turnover rate of Series B, D, N and O generally will not exceed 100 percent. Since Series C's investment policies require a maturity shorter than thirteen months, its portfolio turnover rate will generally be 0 percent, although the portfolio will turn over many times during a year as a result of security maturities. The portfolio turnover rates for Series A, B, D, E, S and J for the fiscal year ended December 31, 1994 were 90 percent, 43 percent, 82 percent, 185 percent, 67 percent and 91 percent, respectively. The portfolio turnover rates for Series A, B, D, E and S for the fiscal year ended December 31, 1993 were 108 percent, 95 percent, 70 percent, 151 percent, 105 percent and 117 percent, respectively. Higher portfolio turnover subjects the Series to increased brokerage costs and may in some cases, have adverse tax effects on the Series or its stockholders. The rates of portfolio turnover may be substantially higher during any period when changing market or economic conditions suggest a shift in portfolio emphasis. Thus, a portfolio turnover rate in excess of 100 percent will 30 not necessarily indicate a variation from the stated investment policy. Transactions in portfolio securities are effected in the manner deemed to be in the best interest of the Series. In selecting a broker to execute a specific transaction, all relevant factors will be considered such as the broker's ability to obtain the best execution of a particular transaction. Portfolio transactions may be directed to brokers who furnish investment information or research services to the Investment Manager or who sell shares of the Series. Although the Investment Manager may consider sales of shares of the Series in the selection of a broker, this will not be a qualifying or disqualifying factor. Securities held by the Fund may also be held by other investment advisory clients of the Investment Manager, including other investment companies, and by the Investment Manager's parent company, Security Benefit Life Insurance Company ("SBL"). Purchases or sales of the same security occurring on the same day (which may include orders from SBL) may be aggregated and executed as a single transaction, subject to the Investment Manager's obligation to seek best execution. Aggregated purchases or sales are generally effected at an average price and on a pro rata basis (transaction costs will also be shared on a pro rata basis) in proportion to the amounts desired to be purchased or sold. See the Fund's Statement of Additional Information for a more detailed description of aggregated transactions and allocation of portfolio brokerage. PERFORMANCE INFORMATION The Fund may, from time to time, include the average annual total return and total return of all Series in advertisements or reports to stockholders or prospective investors. Quotations of average annual total return for any Series will be expressed in terms of the average annual compounded rate of return on a hypothetical investment in the Series over a period of 1, 5, and 10 years (up to the life of the Series), will reflect the deduction of a proportional share of Series expenses (on an annual basis), and will assume that all dividends and distributions are reinvested when paid. Quotations of total return for any Series will be based on a hypothetical investment in the Series for a certain period, will reflect the deduction of a proportional share of Series expenses (on an annual basis), and will assume that all dividends and distributions are reinvested when paid. The net increase or decrease in the value of the investment over the period will be divided by its beginning value to arrive at total return for the period. Total return calculated in this manner will differ from the average annual total return in that it is not expressed in terms of an average rate of return. Performance information for a Series 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"), or other unmanaged indices so that investors may compare a Series' results with those of a group of unmanaged securities widely regarded by investors as representative of the securities markets in general; (ii) other groups of mutual funds tracked by Lipper Analytical Services, a widely used independent research firm which ranks mutual funds by overall performance, investment objectives, and assets, or tracked by other services, companies, publications, or persons who rank mutual funds 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 Series. Unmanaged indices may assume the reinvestment of dividends but generally do not reflect deductions for administrative and management costs and expenses. Quotations of average annual total return or total return for the Fund will not take into account charges or deductions against the Separate Accounts to which the Fund shares are sold or charges and deductions against the Contracts issued by Security Benefit Life Insurance Company. Performance information for any Series reflects only the performance of a hypothetical investment in the Series during a particular time period on which the calculations are based. Performance information should be considered in light of the Series' investment objectives and policies, characteristics and quality of the portfolios, 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. For a description of the methods used to determine average annual total return and total return for the Series, see the Statement of Additional Information. GENERAL INFORMATION Organization SBL Fund has authorized the issuance of an indefinite number of shares of capital stock of $1.00 par value. The Fund's shares are currently issued in eleven Series, A, B, C, D, E, S, J, K, M, N and O. The shares of each Series represent a pro rata beneficial interest in that Series' net assets and in the earnings and profits or losses derived from the investment of such assets. Upon issuance and sale, such shares will be fully paid, nonassessable and redeemable. These shares have no preemptive rights, but the shareholders of each Series are entitled to receive dividends as declared for that Series by the Board of Directors of the Fund. The shares of each Series have cumulative voting rights for the election of directors. On matters affecting a particular Series, each share of that Series has equal voting rights with each other share and there are no preferences as to conversion, exchange, retirement or liquidation. On other matters, all shares (irrespective of Series) are entitled to one vote each. Pursuant to the rules and regulations of the Securities and Exchange Commission, in certain instances a vote of the outstanding shares of the combined Series may not modify the rights of holders of a particular Series without the approval of a majority of the shares of that Series. The Fund does not generally hold annual meetings of stockholders and will do so only when required by law. 31 Stockholders may remove directors from office by votes cast in person or by proxy at a meeting of stockholders. Such a meeting will be called at the written request of the holders of 10 percent of the Fund's outstanding shares. Custodian, Transfer Agent and Dividend-Paying Agent UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri, acts as the custodian for the portfolio securities of Series A, B, C, E, S and J. Chase Manhattan Bank, N.A., 4 Chase MetroTech Center, Brooklyn, New York 11245 acts as custodian for the portfolio securities of Series D, K, M, N, and O, including those held by foreign banks and foreign securities depositories which qualify as eligible foreign custodians under rules adopted by the Securities and Exchange Commission. Security Management Company acts as the Fund's transfer and dividend-paying agent. Contractowner Inquiries Contractowners who have questions concerning the Fund or wish to obtain additional information, may write to SBL Fund at 700 SW Harrison St., Topeka, Kansas 66636-0001, or call (913) 295-3127 or 1-800-888-2461, extension 3127. 32 SECURITY FUNDS APPLICATION 1. ACCOUNT REGISTRATION (SIGNATURE MUST APPEAR BELOW TO ESTABLISH AN ACCOUNT.) I hereby authorize the establishment of the account marked below and acknowledge receipt of the Fund's current prospectus. Check is enclosed for $ (minimum $100) payable to SECURITY DISTRIBUTORS, INC. as ------------------ an initial investment. I am of legal age in the state of my residence and wish to purchase shares of the Fund indicated below. By the execution of this application, the undersigned represents and warrants that the investor has full right, power and authority to make this investment and the undersigned is duly authorized to sign this application and to purchase or redeem shares of the Fund on behalf of the investor. No stock certificate is to be issued unless I so request. See the prospectus for information about an Accumulation Plan which allows a minimum investment of $100 and subsequent investments of $20. - ------------------------------------------------------------- Owner/Custodian/Trustee Name (Print) - ------------------------------------------------------------- Social Security Number Date of Birth - ------------------------------------------------------------- Joint Owner/Minor Name (Print) [ ] Check if UGMA/UTMA Account - ------------------------------------------------------------- Social Security Number Date of Birth 2. ADDRESS AND TELEPHONE NUMBER - ------------------------------------------------------------- Street Address (for first individual) - ------------------------------------------------------------- Daytime Telephone - ------------------------------------------------------------- City, State, Zip Code Citizenship [ ] U.S. [ ] Other --------------------- Indicate Country 3. INITIAL INVESTMENT CLASS OF SHARES (MUST SELECT ONE ONLY) ( ) A SHARES ( ) B SHARES (IF NO CLASS IS SELECTED, PURCHASE(S) WILL BE MADE OF A SHARES) SECURITY EQUITY FUND $ ------ SECURITY GLOBAL FUND $ ------ SECURITY ASSET ALLOCATION FUND $ ------ SECURITY GROWTH & INCOME FUND $ ------ SECURITY ULTRA FUND $ ------ SECURITY CASH FUND $ ------ SECURITY CORPORATE BOND FUND $ ------ SECURITY LIMITED MATURITY BOND FUND $ ------ SECURITY U.S. GOVERNMENT FUND $ ------ SECURITY GLOBAL AGGRESSIVE BOND FUND $ ------ SECURITY TAX-EXEMPT FUND $ ------ 4. DIVIDEND OPTION (CHECK ONE ONLY) (If no option is selected, distributions will be reinvested into the Fund that pays them.) [ ] Reinvest all dividends and capital gains [ ] Reinvest only capital gains and pay dividends in cash [ ] Cash payment of dividends and capital gains [ ] Invest dividends and capital gains into another Security Fund account (must be same class of shares; if new account, number will be assigned) Fund Name Account Number ------------------------------------ ------------------ [ ] Send distributions to third party below Account No. (if applicable) ---------------------------------------------------- Name --------------------------------------------------------------------------- Address ------------------------------------------------------------------------ 5. SYSTEMATIC WITHDRAWAL PROGRAM (FOR ACCOUNTS OF $5,000 OR MORE) You are hereby authorized to send a check(s) beginning: Month Day [ ] 11th or [ ] 26th 19 ---------------- ---- (if no date is selected withdrawal will be made on the 26th) Payable: [ ] monthly [ ] quarterly [ ] semi-annually [ ] annually Fund Name Fund Name ----------------------------- ------------------------------ Account No. (if known) Account No. (if known) ---------------- --------------- (if 3 or more funds, please send written instructions) Level Payment $ ($25 minimum) Level Payment $ ($25 minimum) -------- -------- Variable Payment based on fixed number Variable Payment based on fixed number of shares or a percentage of account of shares or a percentage of account value ($25 minimum) value ($25 minimum) Number of shares: or Number of shares: or ----------- ----------- Percentage of account value: Percentage of account value: --------- --------- Note: For Class B shares, annual withdrawals in excess of 10% of value of account at time program is established may be subject to a contingent deferred sales charge. Complete this section only if you want check payable and sent to another address (please print): Name Signature(s) of all registered owners required ---------------------------- Address Individual Signature ------------------------- ------------------------- City, State, Zip Code Joint Owner Signature ------------ ------------------------ 6. SECUR-O-MATIC[Registration Mark] BANK DRAFT PLAN I wish to make investments directly from my checking account. (Please attach a voided check to this application.) Fund Name Account Number (if known) Amount $ ------------------ ------- ------- Fund Name Account Number (if known) Amount $ ------------------ ------- ------- Date: [ ] 7th Day of Month [ ] 14th Day of Month [ ] 21st Day of Month [ ] 28th Day of Month (if no date is selected investment will be made on the 21st) Mode: [] Monthly ($20 minimum) [] Bi-Monthly ($40 minimum) [] Quarterly ($50 minimum) [] Semiannually ($100 minimum) [] Annually ($200 minimum) You should notify your bank that you are going to use this service to ensure they accept preauthorized electronic drafts. (continued on back) 7. RIGHTS OF ACCUMULATION I own shares in other Security Funds which may entitle this purchase to have a reduced sales charge under the provisions in the Fund Prospectus. - -------------------------------- --------------------------- ----------------- Current Account Registration Fund Name Account Number(s) - -------------------------------- --------------------------- ----------------- - -------------------------------- --------------------------- ----------------- 8. STATEMENT OF INTENTION [ ] Please check here if you wish to receive a Statement of Intention. This form allows you to purchase shares at reduced sales charges if you plan to invest more than: (Please check one) [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000 in installments during the next 13 months (36 months for purchases of $1 million or more). See the current prospectus for more information. 9. TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGE If you would like to have telephone exchange and/or redemption privileges, please mark one or more of the boxes below: Yes, I want [ ] telephone exchange [ ] telephone redemption privileges. By checking the applicable box(es) and signing this Application, you authorize the Investment Manager to honor any telephone request for the exchange and/or redemption of Fund shares (maximum telephone redemption is $10,000), subject to the terms of the Fund prospectus. The Investment Manager has established reasonable procedures to confirm that instructions communicated by telephone are genuine and may be liable for any losses due to fraudulent or unauthorized instructions if it fails to comply with its procedures. The procedures require that any person requesting a telephone redemption or exchange provide the account registration and number and owner's tax identification number and such request must be received on a recorded line. Neither the Fund, the Investment Manager nor the Underwriter will be liable for any loss, liability, cost or expense arising out of any telephone request, provided that the Investment Manager complied with its procedures. Thus, a stockholder may bear the risk of loss from a fraudulent or unauthorized request. 10. CERTIFICATION AND SIGNATURE TAX IDENTIFICATION NUMBER CERTIFICATION UNDER PENALTIES OF PERJURY I CERTIFY THAT: 1. The number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be issued to me); and 2. I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding. - -------------------------------------------------------------------------------- Signature of Owner Date - -------------------------------------------------------------------------------- Signature of Joint Owner Date In case of joint ownership, both must sign. If no form of ownership is indicated then it will be assumed the ownership is as "joint tenants, with right of survivorship" and not as "tenants in common." CERTIFICATION INSTRUCTIONS - You must cross out item (2) to the left if you have been notified by IRS that you are currently subject to backup withholding because of underreporting interest or dividends on your tax return. 11. INVESTMENT DEALER I (we) agree to act as dealer under this account in accordance with the provisions of the Dealer Agreement and appoint Security Distributors, Inc. to act as my (our) agent pursuant thereto. I (we) represent that the appropriate prospectus was delivered to the above indicated owner(s). - -------------------------------------------------------------------------------- Name of Firm (Print) - -------------------------------------------------------------------------------- Business Address - -------------------------------------------------------------------------------- City, State, Zip Code - -------------------------------------------------------------------------------- Signature of Authorized Dealer - ----------------------------------------------------- ------------------------ Representative's Name Account Executive Number - -------------------------------------------------------------------------------- Business Address - -------------------------------------------------------------------------------- City, State, Zip Code - -------------------------------------------------------------------------------- Representative's Telephone Number SEND COMPLETED APPLICATION TO SECURITY DISTRIBUTORS, INC., 700 SW HARRISON ST., TOPEKA, KS 66636-0001 1-800-888-2461, EXT. 3127 Attach Voided Check Here (Check must be preprinted with the bank account registration) SBL FUND STATEMENT OF ADDITIONAL INFORMATION APRIL 30, 1996 RELATING TO THE PROSPECTUS DATED APRIL 30, 1996 (913) 295-3127 (800) 888-2461 INVESTMENT MANAGER Security Management Company 700 SW Harrison Street Topeka, Kansas 66636-0001 UNDERWRITER Security Distributors, Inc. 700 SW Harrison Street Topeka, Kansas 66636-0001 CUSTODIAN UMB Bank, N.A. 928 Grand Avenue Kansas City, Missouri 64106 Chase Manhattan Bank, N.A. 4 Chase MetroTech Center Brooklyn, New York 11245 INDEPENDENT AUDITORS Ernst & Young LLP One Kansas City Place 1200 Main Street Kansas City, Missouri 64105-2143 SBL FUND A Member of The Security Benefit Group of Companies 700 SW Harrison, Topeka, Kansas 66636-0001 STATEMENT OF ADDITIONAL INFORMATION April 30, 1996 (RELATING TO THE PROSPECTUS DATED APRIL 30, 1996) This Statement of Additional Information is not a Prospectus. It should be read in conjunction with the Prospectus dated April 30, 1996. A Prospectus may be obtained by writing or calling Security Distributors, Inc., 700 SW Harrison, Topeka, Kansas 66636-0001, or by calling (913) 295-3127 or (800) 888-2461, ext. 3127. TABLE OF CONTENTS Page What is SBL Fund?........................................................... 1 Investment Objectives and Policies of the Series............................ 1 Series A (Growth Series).................................................. 2 Series B (Growth-Income Series)........................................... 2 Series C (Money Market Series)............................................ 3 Series D (Worldwide Equity Series)........................................ 5 Series E (High Grade Income Series)....................................... 6 Series S (Social Awareness Series)........................................ 8 Series J (Emerging Growth Series)......................................... 8 Series K (Global Aggressive Bond Series).................................. 9 Series M (Specialized Asset Allocation Series)............................ 14 Series N (Managed Asset Allocation Series)................................ 16 Series O (Equity Income Series)........................................... 20 Investment Methods and Risk Factors......................................... 21 Investment Policy Limitations............................................... 44 Officers and Directors...................................................... 46 Remuneration of Directors and Others........................................ 47 Sale and Redemption of Shares............................................... 48 Investment Management....................................................... 48 Portfolio Management...................................................... 51 Code of Ethics............................................................ 53 Portfolio Turnover.......................................................... 53 Determination of Net Asset Value............................................ 54 Portfolio Transactions...................................................... 54 Distributions and Federal Income Tax Considerations......................... 56 Ownership and Management.................................................... 59 Capital Stock and Voting.................................................... 59 Custodian, Transfer Agent and Dividend-Paying Agent......................... 60 Independent Auditors........................................................ 60 Performance Information..................................................... 60 Financial Statements........................................................ 61 Appendix.................................................................... 62 WHAT IS SBL FUND? SBL Fund (the "Fund"), a Kansas corporation, was organized by Security Benefit Life Insurance Company ("SBL") on May 26, 1977, and serves as the investment vehicle for certain SBL variable annuity and variable life insurance separate accounts. Shares of the Fund will be sold to SBL for allocation to such separate accounts which are established for the purpose of funding variable annuity and variable life insurance contracts issued by SBL. The Fund reserves the right to expand the class of persons eligible to purchase shares of any Series of the Fund or to reject any offer. The Fund is a diversified, open-end management investment company of the series type registered under the Investment Company Act of 1940, which currently issues its shares in eleven series: Series A, Series B, Series C, Series D, Series E, Series S, Series J, Series K, Series M, Series N and Series O ("Series"). The assets of each Series are held separate from the assets of the other Series and each Series has investment objectives which differ from those of the other Series. SBL, organized originally as a fraternal benefit society under the laws of the State of Kansas, commenced business February 22, 1892, and became a mutual life insurance company under its present name on January 2, 1950. Its home office is located at 700 Harrison Street, Topeka, Kansas. SBL is licensed in the District of Columbia and all states except New York. All investment companies are required to operate within the limitations imposed by their fundamental investment policies. (See "Investment Objectives and Policies of the Series," this page, and "Investment Policy Limitations," page 44.) As an open-end investment company, the Fund provides an arrangement by which investors may invest in a company which itself invests in securities. Each Series represents a diversified securities portfolio under professional management, and the value of shares held by SBL's separate accounts will fluctuate with changes in the value of the Series' portfolio securities. As an open-end company, the Fund is obligated to redeem its shares upon demand at current net asset value. ( See "Sale and Redemption of Shares," page 48.) Professional investment advice is provided to the Fund and to each Series by Security Management Company, an indirect wholly-owned subsidiary of SBL. Security Management Company has engaged Lexington Management Corporation ("Lexington") to provide certain investment advisory services to Series D and Series K of the Fund. Lexington has entered into a sub-advisory contract with MFR Advisors, Inc. ("MFR") to provide Series K with investment and economic research services. Security Management Company has engaged T. Rowe Price Associates, Inc. ("T. Rowe Price") to provide certain investment advisory services to Series N and O. Security Management Company has entered an agreement with each of Meridian Investment Management Corporation ("Meridian") and Templeton/Franklin Investment Services, Inc. ("Templeton") to provide certain quantitative analytic research services with respect to Series M. Pursuant to an investment advisory contract with the Fund, Security Management Company is paid an annual advisory fee of .75% of the average net assets of Series A, Series B, Series E, Series S, Series J and Series K; .5% of the average net assets of Series C; and 1.00% of the average net assets of Series D, Series M, Series N and Series O, computed daily and payable monthly, and Security Management Company has agreed that the total annual expenses of each Series (including the management compensation but excluding brokerage commissions, interest, taxes and extraordinary expenses) will not exceed any expense limitation imposed by any state. (See page 48 for a discussion of the Investment Manager and the Investment Advisory Contract.) The Fund also receives administrative, accounting and transfer agency services from Security Management Company for which the Fund pays a fee. INVESTMENT OBJECTIVES AND POLICIES OF THE SERIES The investment objective and policies of each Series are described below. There are risks inherent in the ownership of any security and there can be no assurance that such objectives will be achieved. The objectives and policies, except those enumerated under "Investment Policy Limitations," page 44, may be modified at any time without stockholder approval. To comply with regulations under Section 817(h) of the Internal Revenue Code, each Series of the SBL Fund is required to diversify its investments so that on the last day of each quarter of a calendar year no more than 55% of the value of its assets is represented by securities of any one issuer, no more than 70% is represented by securities of any two issuers, no more than 80% is represented by securities of any three issuers, and no more 1 than 90% is represented by securities of any four issuers. As to U.S. Government securities, each U.S. Government agency and instrumentality is to be treated as a separate issuer. SERIES A (GROWTH SERIES) The investment objective of Series A is to seek long-term capital growth by investing in those securities which, in the opinion of the Investment Manager, have the most long-term capital growth potential. Series A seeks to achieve its objective by investing primarily in a broadly diversified portfolio of common stocks (which may include American Depositary Receipts (ADRs) or securities with common stock characteristics, such as securities convertible into common stocks. See the discussion of ADRs and the risks associated with investing in ADRs under "Investment Methods and Risk Factors." Series A may also invest in preferred stocks, bonds and other debt securities. Income potential will be considered to the extent doing so is consistent with Series A's investment objective of long-term capital growth. Series A may invest its assets temporarily in cash and money market instruments for defensive purposes. Series A invests for long-term growth of capital and does not intend to place emphasis upon short-term trading profits. From time to time, Series A may purchase securities on a "when issued" or "delayed delivery" basis in excess of customary settlement periods for the type of security involved. Securities purchased on a when issued basis are subject to market fluctuation and no interest or dividends accrue to the Series prior to the settlement date. Series A will establish a segregated account with its custodian bank in which it will maintain cash, cash equivalents, U.S. Government securities or other appropriate high grade, liquid debt securities equal in value to commitments for such when issued or delayed delivery securities. Series A may also invest up to 5% of its total assets in warrants (other than those attached to other securities) which entitle the holder to buy equity securities at a specific price during or at the end of a particular period. A warrant ceases to have value if it is not exercised prior to its expiration date. SERIES B (GROWTH-INCOME SERIES) The investment objective of Series B is to provide long-term growth of capital with secondary emphasis on income. Assets of the Series may be invested in various types of securities, which may include (i) securities convertible into common stocks; (ii) preferred stocks; (iii) debt securities issued by U.S. corporations; (iv) securities issued by the U.S. Government or any of its agencies or instrumentalities, including Treasury bills, certificates of indebtedness, notes and bonds; (v) securities issued by foreign governments, their agencies, and instrumentalities, and foreign corporations, provided that such securities are denominated in U.S. dollars; and (vi) higher yielding, high risk debt securities (commonly referred to as "junk bonds"). In the selection of securities for investment, the potential for appreciation and future dividends is given more weight than current dividends. See the discussion of ADRs and the risks associated with investing in ADRs under "Investment Methods and Risk Factors." From time to time, Series B may purchase government bonds or commercial notes on a temporary basis for defensive purposes. With respect to its investment in debt securities, there is no percentage limitation on the amount of Series B's assets that may be invested within any particular rating classification. Series B may invest in higher yielding, longer-term fixed-income securities in the lower rating (higher risk) categories of the recognized rating services (commonly referred to as "junk bonds"). These include securities rated Ba or lower by Moody's Investors Service, Inc. or BB or lower by Standard & Poor's Corporation. Securities rated Ba or lower by Moody's or BB or lower by Standard & Poor's are regarded as predominantly speculative with respect to the ability of the issuer to meet principal and interest payments. (See the Appendix for a description of the various bond ratings utilized by the rating services.) However, the Investment Manager will not rely principally on the ratings assigned by the rating services. Because Series B will invest in lower rated securities and unrated securities of comparable quality, the achievement of the Series' investment objective may be more dependent on the Investment Manager's own credit analysis than would be true if investing in higher rated securities. To the extent that Series B invests in the high yield, high risk bonds described above, its share price and yield are expected to fluctuate more than the share price and yield of a fund investing in higher quality, shorter-term securities. High yield bonds may be more susceptible to real or perceived adverse economic and competitive industry conditions than investment grade bonds. A projection of an economic downturn, or higher interest rates, for example, could cause a decline in high yield bond prices because an advent of such events could lessen the 2 SERIES B (CONTINUED) ability of highly leveraged companies to make principal and interest payments on its debt securities. In addition, the secondary trading market for high yield bonds may be less liquid than the market for higher grade bonds, which can adversely affect the ability of the Series to dispose of its portfolio securities. Bonds for which there is only a "thin" market can be more difficult to value inasmuch as objective pricing data may be less available and judgment may play a greater role in the valuation process. See the discussion of the risks associated with investing in high yield bonds under "Investment Methods and Risk Factors" - "Special Risks Associated with Low-Rated and Comparable Unrated Bonds." The Series may purchase securities that are restricted as to disposition under the federal securities laws, provided that such securities are eligible for resale to qualified institutional investors pursuant to Rule 144A under the Securities Act of 1933 and subject to the Series' policy that not more than 10% of its total assets will be invested in illiquid securities. See "Investment Methods and Risk Factors" - "Restricted Securities." As discussed above, Series B may invest in foreign debt securities that are denominated in U.S. dollars. Such foreign debt securities may include debt of foreign governments, including Brady Bonds, and debt of foreign corporations. The Series expects to limit its investment in foreign debt securities, excluding Canadian securities, to not more than 15% of its total assets and its investment in debt securities of issuers in emerging markets, excluding Brady Bonds, to not more than 5% of its net assets. Many emerging market debt securities are not rated by United States rating agencies such as Moody's and S&P and the majority of emerging market debt securities are considered to have a credit quality below investment grade. The Series' ability to achieve its investment objective is thus more dependent on the credit analysis of the Series' Investment Manager than would be the case if the Series were to invest only in higher quality bonds. See the discussion of the risks associated with investing in foreign securities, emerging markets, and Brady Bonds under "Investment Methods and Risk Factors." SERIES C (MONEY MARKET SERIES) The investment objective of Series C is to seek as high a level of current income as is consistent with preservation of capital. The Series will attempt to achieve its objective by investing at least 95% of its total assets, measured at the time of investment, in a diversified portfolio of highest quality money market instruments. The Series may also invest up to 5% of its total assets, measured at the time of investment, in money market instruments that are in the second-highest rating category for short-term debt obligations. The Series may invest in money market instruments with maturities of not longer than thirteen months, consisting of the following: U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed (as to principal or interest) by the United States Government or its agencies (such as the Small Business Administration, the Federal Housing Administration and Government National Mortgage Association), or instrumentalities (such as Federal Home Loan Banks and Federal Land Banks), and instruments fully collateralized with such obligations, such as repurchase agreements. Some U.S. Government securities, such as treasury bills and bonds, are supported by the full faith and credit of the U.S. Treasury; others are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; still others such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality. BANK OBLIGATIONS. Obligations of banks or savings and loan associations that are members of the Federal Deposit Insurance Corporation, and instruments fully collateralized with such obligations, such as repurchase agreements. CORPORATE OBLIGATIONS. Commercial paper issued by corporations and rated Prime-1 or Prime-2 by Moody's Investors Service, Inc. or A-1 or A-2 by Standard & Poor's Corporation, or other corporate debt instruments rated Aaa or Aa or better by Moody's or AAA or AA or better by Standard & Poor's, subject to the limitations on investment in instruments in the second-highest rating category, discussed below. (See the Appendix for a description of the commercial paper and corporate bond ratings.) Series C may invest in instruments having rates of interest that are adjusted periodically according to a specified market rate for such investments ("Variable Rate Instruments"). The interest rate on a Variable Rate Instrument is ordinarily determined by reference to, or is a percentage of, an objective standard such as a bank's 3 SERIES C (CONTINUED) prime rate or the 91-day U.S. Treasury Bill rate. The Series does not purchase certain Variable Rate Instruments that have a preset cap above which the rate of interest may not rise. Generally, the changes in the interest rate on Variable Rate Instruments reduce the fluctuation in the market value of such securities. Accordingly, as interest rates decrease or increase, the potential for capital appreciation or depreciation is less than for fixed-rate obligations. Series C determines the maturity of Variable Rate Instruments in accordance with Rule 2a-7 under the Investment Company Act of 1940 which allows the Series to consider the maturity date of such instruments to be the period remaining until the next readjustment of the interest rate rather than the maturity date on the face of the instrument. Certain of the securities acquired by Series C may be restricted as to disposition under federal securities laws, provided that such restricted securities are eligible for resale pursuant to Rule 144A under the Securities Act of 1933. Rule 144A, adopted by the Securities and Exchange Commission in 1990, provides a nonexclusive safe harbor exemption from the registration requirements of the Securities Act for the resale of certain securities to certain qualified buyers. One of the primary purposes of the Rule is to create some resale liquidity for certain securities that would otherwise be treated as illiquid investments. In accordance with its investment policies, the Fund is not permitted to invest more than 10% of its total net assets in illiquid securities. The Investment Manager, under procedures adopted by the Board of Directors, will determine whether securities eligible for resale under Rule 144A are liquid or not. Investing in Rule 144A securities may have the effect of increasing the amount of the Series' assets invested in illiquid assets. See "Investment Methods and Risk Factors" - "Restricted Securities." Series C may invest only in U.S. dollar denominated money market instruments that present minimal credit risk and, with respect to 95% of its total assets, measured at the time of investment, that are of the highest quality. The Investment Manager will determine whether a security presents minimal credit risk under procedures adopted by the Fund's Board of Directors. A security will be considered to be highest quality (1) if rated in the highest rating category, (e.g., Aaa or Prime-1 by Moody's or AAA or A-1 by Standard & Poor's) by (i) any two nationally recognized statistical rating organizations ("NRSRO's") or, (ii) if rated by only one NRSRO, by that NRSRO, and whose acquisition is approved or ratified by the Board of Directors; (2) if issued by an issuer that has short-term debt obligations of comparable maturity, priority, and security and that are rated in the highest rating category by (i) any two NRSRO's or, (ii) if rated by only one NRSRO, by that NRSRO, and whose acquisition is approved or ratified by the Board of Directors; or (3) an unrated security that is of comparable quality to a security in the highest rating category as determined by the Investment Manager and whose acquisition is approved or ratified by the Board of Directors. With respect to 5% of its total assets, measured at the time of investment, the Series may also invest in money market instruments that are in the second-highest rating category for short-term debt obligations (e.g., rated Aa or Prime-2 by Moody's or AA or A-2 by S&P). A money market instrument will be considered to be in the second-highest rating category under the criteria described above with respect to instruments considered highest quality, as applied to instruments in the second-highest rating category. Series C may not invest more than 5% of its total assets, measured at the time of investment, in the securities of any one issuer that are of the highest quality or more than the greater of 1% of its total assets or $1,000,000, measured at the time of investment, in securities of any one issuer that are in the second-highest rating category, except that these limitations shall not apply to U.S. Government securities. The Series may exceed the 5% limitation for up to three business days after the purchase of the securities of any one issuer that are of the highest quality, provided that the Series has no more than one such investment outstanding at any time. In the event that an instrument acquired by the Series is downgraded, the Investment Manager, under procedures approved by the Board of Directors, (or the Board of Directors itself if the Investment Manager becomes aware that a security has been downgraded below the second-highest rating category and the Investment Manager does not dispose of the security within five business days) shall promptly reassess whether such security presents minimal credit risk and determine whether or not to retain the instrument. In the event that an instrument is acquired by the Series that ceases to be eligible for the Series, the Investment Manager will promptly dispose of such security in an orderly manner, unless the Board of Directors determines that this would not be in the best interests of the Series. While Series C does not intend to engage in short-term trading, portfolio securities may be sold without regard to the length of time that they have been held. A portfolio security could be sold prior to maturity to take advantage of new investment opportunities or yield differentials, or to preserve gains or limit losses due to changed economic conditions or the financial condition of the issuer, or for other reasons. 4 SERIES C (CONTINUED) Series C will invest in money market instruments of varying maturities (but no longer than 13 months) in an effort to earn as high a level of current income as is consistent with preservation of capital and liquidity. While investing only in high quality money market instruments, investment in Series C is not without risk. The market value of fixed income securities is generally affected by changes in the level of interest rates. An increase in interest rates will generally reduce the market value of fixed income investments, and a decline in interest rates will generally increase their value. Instruments with longer maturities are subject to greater fluctuations in value from general interest rate changes than are shorter term issues. Such market value changes could cause changes in the net asset value per share. (See "Determination of Net Asset Value," page 54.) To reduce the effect of fluctuating interest rates on the net asset value of its shares, Series C intends to maintain a weighted average maturity in its portfolio of not more than 90 days. In addition to general market risks, Series C's investments in non-government obligations are subject to the ability of the issuer to satisfy its obligations. See the Appendix for a description of the principal types of securities and instruments in which Series C will invest. SERIES D (WORLDWIDE EQUITY SERIES) The investment objective of Series D is to seek long-term growth of capital primarily through investment in common stocks and equivalents of companies domiciled in foreign countries and the United States. Series D will seek to achieve its objective through investment in a diversified portfolio of securities which will consist primarily of all types of common stocks, which may include ADRs, and equivalents (the following constitute equivalents: convertible debt securities, warrants and options). See "Investment Methods and Risk Factors" - "American Depositary Receipts." Series D may also invest in preferred stocks, bonds and other debt obligations, which include money market instruments of foreign and domestic companies and U.S. Government and foreign governments, governmental agencies and international organizations. For a full description of the Series' investment objective and policies, see the Prospectus. Certain of the securities purchased by Series D may be restricted as to disposition under the federal securities laws, provided that such restricted securities are eligible for resale to qualified institutional investors pursuant to Rule 144A under the Securities Act of 1933 and subject to the Fund's policy that not more than 10% of total assets will be invested in illiquid securities. The Investment Manager, under procedures adopted by the Board of Directors, will determine whether securities eligible for resale under Rule 144A are liquid or not. In making this determination, the Investment Manager, under the supervision of the Board of Directors, will consider trading markets for the specific security taking into account the unregistered nature of a Rule 144A security. In addition, the Investment Manager may consider: (1) the frequency of trades and quotes; (2) the number of dealers and potential purchasers; (3) dealer undertakings to make a market; and (4) the nature of the security and of the marketplace trades (e.g. the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). The liquidity of Rule 144A securities will be monitored and if as a result of changed conditions it is determined that a Rule 144A security is no longer liquid, Series D's holdings of illiquid securities will be reviewed to determine what, if any, steps are required to assure that it does not invest more than 10% of its assets in illiquid securities. Investing in Rule 144A securities could have the effect of increasing the amount of the Series' assets invested in illiquid securities, and there may be undesirable delays in selling illiquid securities. See "Investment Methods and Risk Factors" - "Restricted Securities." In seeking to achieve its investment objective, Series D may from time to time engage in the following investment practices: TRANSACTION HEDGING. When Series D enters into contracts for purchase or sale of a portfolio security denominated in a foreign currency, it may be required to settle a purchase transaction in the relevant foreign currency or receive the proceeds of a sale in that currency. In either event, Series D will be obligated to acquire or dispose of such foreign currency as is represented by the transaction by selling or buying an equivalent amount of United States dollars. Furthermore, the Series may wish to "lock in" the United States dollar value of the transaction at or near the time of a purchase or sale of portfolio securities at the exchange rate or rates then prevailing between the United States dollar and the currency in which the foreign security is denominated. Therefore, Series D may, for a fixed amount of United States dollars, enter into a forward foreign exchange contract for the purchase or sale of the amount of foreign currency involved in the underlying securities transaction. In so doing, Series D will attempt to insulate itself against possible losses and gains resulting from a 5 SERIES D (CONTINUED) change in the relationship between the United States dollar and the foreign currency during the period between the date a security is purchased or sold and the date on which payment is made or received. This process is known as "transaction hedging." To effect the translation of the amount of foreign currencies involved in the purchase and sale of foreign securities and to effect the "transaction hedging" described above, Series D may purchase or sell foreign currencies on a "spot" (i.e. cash) basis or on a forward basis whereby the Series purchases or sells a specific amount of foreign currency, at a price set at the time of the contract, for receipt of delivery at a specified date which may be any fixed number of days in the future. Such spot and forward foreign exchange transactions may also be utilized to reduce the risk inherent in fluctuations in the exchange rate between the United States dollar and the relevant foreign currency when foreign securities are purchased or sold for settlement beyond customary settlement time (as described below). Neither type of foreign currency transaction will eliminate fluctuations in the prices of Series D's portfolio or securities or prevent loss if the price of such securities should decline. PORTFOLIO HEDGING. Some or all of Series D's portfolio will be denominated in foreign currencies. As a result, in addition to the risk of change in the market value of portfolio securities, the value of the portfolio in United States dollars is subject to fluctuations in the exchange rate between such foreign currencies and the United States dollar. When, in the opinion of the Series' Sub-Adviser, Lexington Management Corporation ("Lexington"), it is desirable to limit or reduce exposure in a foreign currency in order to moderate potential changes in the United States dollar value of the portfolio, Series D may enter into a forward foreign currency exchange contract by which the United States dollar value of the underlying foreign portfolio securities can be approximately matched by an equivalent United States dollar liability. This technique is known as "portfolio hedging" and moderates or reduces the risk of change in the United States dollar value of the Series' portfolio only during the period before the maturity of the forward contract (which will not be in excess of one year). Series D, for hedging purposes only, may also enter into forward currency exchange contracts to increase its exposure to a foreign currency that Lexington expects to increase in value relative to the United States dollar. Series D will not attempt to hedge all of its foreign portfolio positions and will enter into such transactions only to the extent, if any, deemed appropriate by Lexington. Hedging against a decline in the value of currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Series D intends to limit transactions as described in this paragraph to not more than 70% of total Series assets. FORWARD COMMITMENTS. Series D may make contracts to purchase securities for a fixed price at a future date beyond customary settlement time ("forward commitments") because new issues of securities are typically offered to investors, such as Series D, on that basis. Forward commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. This risk is in addition to the risk of decline in value of Series D's other assets. Although the Series will enter into such contracts with the intention of acquiring the securities, Series D may dispose of a commitment prior to settlement if Lexington deems it appropriate to do so. Series D may realize short-term profits or losses upon the sale of forward commitments. COVERED CALL OPTIONS. Call options may also be used as a means of participating in an anticipated price increase of a security on a more limited basis than would be possible if the security itself were purchased. Series D may write only covered call options. Since it can be expected that a call option will be exercised if the market value of the underlying security increases to a level greater than the exercise price, this strategy will generally be used when Lexington believes that the call premium received by the Series, plus anticipated appreciation in the price of the underlying security, up to the exercise price of the call, will be greater than the appreciation in the price of the security. Series D will not purchase put and call options written by others. Also, Series D will not write any put options. Series D intends to limit transactions as described in this paragraph to less than 5% of total Series assets. See the discussion of writing covered call options under "Investment Methods and Risk Factors." SERIES E (HIGH GRADE INCOME SERIES) The investment objective of Series E is to provide current income with security of principal. In pursuing its investment objective, the Series will invest in a broad range of debt securities, including (i) securities issued by U.S. and Canadian corporations; (ii) securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities, including Treasury bills, certificates of indebtedness, notes and bonds; (iii) securities 6 SERIES E (CONTINUED) issued or guaranteed by the Dominion of Canada or provinces thereof; (iv) securities issued by foreign governments, their agencies and instrumentalities, and foreign corporations, provided that such securities are denominated in U.S. dollars; (v) higher yielding, high risk debt securities (commonly referred to as "junk bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign bank ("Yankee CDs"); and (vii) investment grade mortgage-backed securities ("MBSs"). Under normal circumstances, the Series will invest at least 65% of its assets in U.S. Government securities and securities rated A or higher by Moody's or S&P at the time of purchase, or if unrated, of equivalent quality as determined by the Investment Manager. Series E may invest in corporate debt securities rated Baa or higher by Moody's or BBB or higher by S&P at the time of purchase, or if unrated, of equivalent quality as determined by the Investment Manager. See Appendix A for a description of corporate bond ratings. Included in such securities may be convertible bonds or bonds with warrants attached which are rated at least Baa or BBB at the time of purchase, or if unrated, of equivalent quality as determined by the Investment Manager. A "convertible bond" is a bond, debenture or preferred share which may be exchanged by the owner for common stock or another security, usually of the same company, in accordance with the terms of the issue. A "warrant" confers upon its holder the right to purchase an amount of securities at a particular time and price. Securities rated Baa by Moody's or BBB by S&P have speculative characteristics. Series E may invest up to 25% of its net assets in higher yielding debt securities in the lower rating (higher risk) categories of the recognized rating services (commonly referred to as "junk bonds"). Such securities include securities rated Ba or lower by Moody's or BB or lower by S&P and are regarded as predominantly speculative with respect to the ability of the issuer to meet principal and interest payments. The Series will not invest in junk bonds which are rated in default at the time of purchase. See "Investment Methods and Risk Factors" for a discussion of the risks associated with investing in such securities. U.S. Government securities are obligations of or guaranteed by the U.S. Government, its agencies or instrumentalities. These include bills, certificates of indebtedness, notes and bonds issued by the Treasury or by agencies in instrumentalities of the U.S. Government. Some U.S. Government securities, such as Treasury bills and bonds, are supported by the full faith and credit of the U.S. Treasury, others are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality. Although U.S. Government securities are guaranteed by the U.S. Government, its agencies or instrumentalities, shares of the Fund are not so guaranteed in any way. The diversification rules under Section 817(h) of the Internal Revenue Code limit the ability of Series E to invest more than 55% of its assets in the securities of any one U.S. Government agency or instrumentality. Series E may purchase securities which are obligations of, or guaranteed by, the Dominion of Canada or provinces thereof, and Canadian corporate debt securities. Canadian securities would not be purchased if subject to the foreign interest equalization tax and unless payable in U.S. dollars. For fixed-income securities such as corporate debt securities or U.S. Government securities, the market value is generally affected by changes in the level of interest rates. An increase in interest rates will tend to reduce the market value of fixed-income investments, and a decline in interest rates will tend to increase their value. In addition, debt securities with longer maturities, which tend to produce higher yields, are subject to potentially greater capital appreciation and depreciation than obligations with shorter maturities. Series E may invest in Yankee CDs which are certificates of deposit issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the U.S. Yankee CDs are subject to somewhat different risks than are the obligations of domestic banks. The Series also may invest in debt securities issued by foreign governments, their agencies and instrumentalities and foreign corporations, provided that such securities are denominated in U.S. dollars. The Series' investments in foreign securities, including Canadian securities, will not exceed 25% of the Series' net assets. See "Investment Methods and Risk Factors" for a discussion of the risks associated with investing in foreign securities. Series E may invest in investment grade mortgage-backed securities (MBSs), including mortgage pass-through securities and collateralized mortgage obligations (CMOs). The Series may invest up to 10% of its net assets in securities known as "inverse floating obligations," "residual interest bonds," or "interest-only" (IO) or 7 SERIES E (CONTINUED) "principal-only" (PO) bonds, the market values of which generally will be more volatile than the market values of most MBSs. The Series will hold less than 25% of its net assets in MBSs. For a discussion of MBSs and the risks associated with such securities, see "Investment Methods and Risk Factors." Series E may purchase securities on a "when issued" or "delayed delivery" basis in excess of customary settlement periods for the types of security involved. For a discussion of such securities, see "Investment Methods and Risk Factors" - "When-Issued Securities." Series E may, for defensive purposes, invest part or all of its assets in money market instruments such as those appropriate for investment by Series C. SERIES S (SOCIAL AWARENESS SERIES) The investment objective of Series S is to seek high total return through a combination of income and capital appreciation by investing in various types of securities which meet certain social criteria established for the Series. Series S will invest in a diversified portfolio of common stocks (which may include ADRs), convertible securities, preferred stocks and debt securities. See "Investment Methods and Risk Factors" - "American Depositary Receipts." From time to time, the Series may purchase government bonds or commercial notes on a temporary basis for defensive purposes. Series S will seek investments that comply with the Series' social criteria and that offer investment potential. Because of the limitations on investment imposed by the social criteria, the availability of investment opportunities for the Series may be limited as compared to those of similar funds which do not impose such restrictions on investment. The Series will not invest in securities of companies that: (1) engage in the production of nuclear energy; (2) engage in the manufacture of weapon systems; (3) engage in practices that pollute the environment; or (4) engage in the liquor, tobacco or gambling industries. In addition, the Series will seek out companies with fair and unbiased employment practices and companies that engage in the prudent use of natural resources. Series S will monitor the activities identified above to determine whether they are significant to an issuer's business. Significance may be determined on the basis of the percentage of revenue generated by or the size of operations attributable to such activities. The Investment Manager will not independently evaluate an issuer's activities to determine if it engages in any practices prohibited by the Series' social criteria, but will rely on information published by others that publish information for investors concerning the social policy implications of corporate activity. The Investment Manager may rely upon information provided by investment advisory firms that provide social research on U.S. corporations, such as Kinder, Lydenberg & Domini & Co., Inc. and Prudential-Bache Capital Funding. Investment selection on the basis of social attributes is a relatively new practice and the sources for this type of information are not well established. The Investment Manager will continue to identify and monitor sources of such information to screen issuers which do not meet the social investment restrictions of the Series. If after purchase of an issuer's securities by Series S, it is determined that such securities do not comply with the Series' social criteria, the securities will be eliminated from the Series' portfolio within a reasonable time. This requirement may cause the Series to dispose of a security at a time when it may be disadvantageous to do so. SERIES J (EMERGING GROWTH SERIES) The investment objective of Series J is to seek capital appreciation by investing in a diversified portfolio of common stocks (which may include ADRs), preferred stocks, debt securities, and securities convertible into common stocks. See "Investment Methods and Risk Factors" - "American Depositary Receipts." On a temporary basis, there may be times when Series J may invest its assets in cash or money market instruments for defensive purposes. Securities selected for their appreciation possibilities will be primarily common stocks or other securities having the investment characteristics of common stocks, such as securities convertible into common stocks. Securities will be selected on the basis of their appreciation and growth potential. Current income will not be a factor in selecting investments, and any such income should be considered incidental. Securities considered to have capital appreciation and growth potential will often include securities of smaller and less mature companies. These companies often have a unique proprietary product or profitable market niche and the potential to grow very 8 SERIES J (CONTINUED) rapidly. Such companies may present greater opportunities for capital appreciation because of high potential earnings growth, but may also involve greater risk. They may have limited product lines, markets or financial resources, and they may be dependent on a small or inexperienced management team. Their securities may trade less frequently and in limited volume, and only in the over-the-counter market or on smaller securities exchanges. As a result, the securities of smaller companies may have limited marketability and may be subject to more abrupt or erratic changes in value than securities of larger, more established companies. Series J may also invest in larger companies where opportunities for above-average capital appreciation appear favorable. Series J may purchase securities on a "when issued" or "delayed delivery" basis in excess of customary settlement periods for the type of security involved. Securities purchased on a when issued basis are subject to market fluctuation and no interest or dividends accrue to the Series prior to the settlement date. Series J will establish a segregated account with its custodian bank in which it will maintain cash, cash equivalents, U.S. Government securities, or other appropriate high grade, liquid debt securities equal in value to commitments for such when issued or delayed delivery securities. See "Investment Methods and Risk Factors" - "When-Issued Securities." The Series may enter into futures contracts (or options thereon) to hedge all or a portion of its portfolio, or as an efficient means of adjusting its exposure to the stock market. The Series will not use futures contracts for leveraging purposes. The Series will limit its use of futures contracts so that initial margin deposits or premiums on such contracts used for non-hedging purposes will not equal more than 5% of the Series' net asset value. Futures contracts (and options thereon) and the risks associated with such instruments are described in further detail under "Investment Methods and Risk Factors." In seeking capital appreciation, Series J may, during certain periods, trade to a substantial degree in securities for the short term. That is, the Series may be engaged essentially in trading operations based on short-term market considerations, as distinct from long-term investments based on fundamental evaluations of securities. This investment policy is speculative and involves substantial risk. SERIES K (GLOBAL AGGRESSIVE BOND SERIES) The primary investment objective of Series K is to provide high current income. Capital appreciation is a secondary objective. The Series, under normal circumstances, invests substantially all of its assets in debt securities of issuers in the United States, developed foreign countries and emerging markets. For purposes of its investment objective, the Series considers an emerging country to be any country whose economy and market the World Bank or United Nations considers to be emerging or developing. The Series may also invest in debt securities traded in any market, of companies that derive 50% or more of their total revenue from either goods or services produced in such emerging countries and emerging markets or sales made in such countries. Determinations as to eligibility will be made by the Series' Sub-Advisers, Lexington and MFR Advisors, Inc. ("MFR") based on publicly available information and inquiries made to the companies. It is possible in the future that sufficient numbers of emerging country or emerging market debt securities would be traded on securities markets in industrialized countries so that a major portion, if not all, of the Series' assets would be invested in securities traded on such markets, although such a situation is unlikely at present. Currently, investing in many of the emerging countries and emerging markets is not feasible or may involve political risks. Accordingly, Lexington currently intends to consider investments only in those countries in which it believes investing is feasible. The list of acceptable countries will be reviewed by Lexington and MFR and approved by the Board of Directors on a periodic basis and any additions or deletions with respect to such list will be made in accordance with changing economic and political circumstances involving such countries. Lexington is the Sub-Adviser of the Series. Lexington has entered into a sub-advisory contract with MFR to provide Series K with investment and economic research services. In determining the appropriate distribution of investments among various countries and geographic regions for the Series, Lexington and MFR ordinarily consider the following factors: prospects for relative economic growth among the different countries in which the Series may invest; expected levels of inflation; government policies influencing business conditions; the outlook for currency relationships; and the range of the individual investment opportunities available to international investors. 9 SERIES K (CONTINUED) Although the Series values assets daily in terms of U.S. dollars, the Series does not intend to convert holdings of foreign currencies into U.S. dollars on a daily basis. The Series will do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference ("spread") between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Series at one rate, while offering a lesser rate of exchange should the Series desire to sell that currency to the dealer. The Series may invest in the following types of money market instruments (i.e., debt instruments with less than 12 months remaining until maturity) denominated in U.S. dollars or other currencies: (a) obligations issued or guaranteed by the U.S. or foreign governments, their agencies, instrumentalities or municipalities; (b) obligations of international organizations designed or supported by multiple foreign governmental entities to promote economic reconstruction or development; (c) finance company obligations, corporate commercial paper and other short-term commercial obligations; (d) bank obligations (including certificates of deposit, time deposits, demand deposits and bankers' acceptances), subject to the restriction that the Series may not invest more than 25% of its total assets in bank securities; (e) repurchase agreements with respect to the foregoing; and (f) other substantially similar short-term debt securities with comparable characteristics. SAMURAI AND YANKEE BONDS. Subject to its respective fundamental investment restrictions, the Series may invest in yen-denominated bonds sold in Japan by non-Japanese issuers ("Samurai bonds"), and may invest in dollar-denominated bonds sold in the United States by non-U.S. issuers ("Yankee bonds"). It is the policy of the Series to invest in Samurai or Yankee bond issues only after taking into account considerations of quality and liquidity, as well as yield. COMMERCIAL BANK OBLIGATIONS. For the purposes of the Series' investment policies with respect to bank obligations, obligations of foreign branches of U.S. banks and of foreign banks are obligations of the issuing bank and may be general obligations of the parent bank. Such obligations, however, may be limited by the terms of a specific obligation and by government regulation. As with investment in non-U.S. securities in general, investments in the obligations of foreign branches of U.S. banks and of foreign banks may subject the Series to investment risks that are different in some respect from those of investments in obligations of domestic issuers. Although the Series typically will acquire obligations issued and supported by the credit of U.S. or foreign banks having total assets at the time of purchase in excess of $1 billion, this $1 billion figure is not a fundamental investment policy or restriction of the Series. For the purposes of calculation with respect to the $1 billion figure, the assets of a bank will be deemed to include the assets of its U.S. and non-U.S. branches. REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS. Although repurchase agreements carry certain risks not associated with direct investments in securities, the Series intends to enter into repurchase agreements only with banks and broker/dealers believed by Lexington and MFR to present minimal credit risks in accordance with guidelines approved by the Fund's Board of Directors. Lexington and MFR will review and monitor the creditworthiness of such institutions, and will consider the capitalization of the institution, Lexington and MFR's prior dealings with the institution, any rating of the institution's senior long-term debt by independent rating agencies and other relevant factors. The Series will invest only in repurchase agreements collateralized at all times in an amount at least equal to the repurchase price plus accrued interest. To the extent that the proceeds from any sale of such collateral upon a default in the obligation to repurchase were less than the repurchase price, the Series would suffer a loss. If the financial institution which is party to the repurchase agreement petitions for bankruptcy or otherwise becomes subject to bankruptcy or other liquidation proceedings there may be restrictions on the Series' ability to sell the collateral and the Series could suffer a loss. The Series will not enter into a repurchase agreement with a maturity of more than seven days if, as a result, more than 15% of the value of its total net assets would be invested in such repurchase agreements and other illiquid investments and securities for which no readily available market exists. The Series may enter into reverse repurchase agreements. A reverse repurchase agreement is a borrowing transaction in which the Series transfers possession of a security to another party, such as a bank or broker/dealer, in return for cash, and agrees to repurchase the security in the future at an agreed upon price, which includes an interest component. The Series also may engage in "roll" borrowing transactions which involve the Series' sale of fixed income securities together with a commitment (for which the Series may receive a fee) to 10 SERIES K (CONTINUED) purchase similar, but not identical, securities at a future date. The Series will maintain, in a segregated account with a custodian, cash, U.S. Government securities or other high grade, liquid debt securities in an amount sufficient to cover its obligation under "roll" transactions and reverse repurchase agreements. BORROWING. The Series' operating policy on borrowing provides that the Series will not borrow money in order to purchase securities and the Series may borrow up to 5% of its total assets for temporary or emergency purposes and to meet redemptions. This policy may be changed by the Fund's Board of Directors. Any borrowing by the Series may cause greater fluctuation in the value of its shares than would be the case if the Series did not borrow. SHORT SALES. The Series is authorized to make short sales of securities, although it has no current intention of doing so. A short sale is a transaction in which the Series sells a security in anticipation that the market price of that security will decline. The Series may make short sales as a form of hedging to offset potential declines in long positions in securities it owns and in order to maintain portfolio flexibility. The Series only may make short sales "against the box." In this type of short sale, at the time of the sale, the Series owns the security it has sold short or has the immediate and unconditional right to acquire the identical security at no additional cost. In a short sale, the seller does not immediately deliver the securities sold and does not receive the proceeds from the sale. To make delivery to the purchaser, the executing broker borrows the securities being sold short on behalf of the seller. The seller is said to have a short position in the securities sold until it delivers the securities sold, at which time it receives the proceeds of the sale. To secure its obligation to deliver securities sold short, the Series will deposit in a separate account with its custodian an equal amount of the securities sold short or securities convertible into or exchangeable for such securities at no cost. The Series could close out a short position by purchasing and delivering an equal amount of the securities sold short, rather than by delivering securities already held by the Series, because the Series might want to continue to receive interest and dividend payments on securities in its portfolio that are convertible into the securities sold short. The Series might make a short sale "against the box" in order to hedge against market risks when Lexington and MFR believe that the price of a security may decline, causing a decline in the value of a security owned by the Series or a security convertible into or exchangeable for such security. In such case, any future losses in the Series' long position should be reduced by a gain in the short position. Conversely, any gain in the long position should be reduced by a loss in the short position. The extent to which such gains or losses in the long position are reduced will depend upon the amount of the securities sold short relative to the amount of the securities the Series owns, either directly or indirectly, and, in the case where a Series owns convertible securities, changes in the investment values or conversion premiums of such securities. There will be certain additional transaction costs associated with short sales "against the box," but the Series will endeavor to offset these costs with income from the investment of the cash proceeds of short sales. ILLIQUID SECURITIES. The Series may invest up to 15% of total net assets in illiquid securities. Securities may be considered illiquid if the Series cannot reasonably expect to receive approximately the amount at which the Series values such securities within seven days. The sale of illiquid securities, if they can be sold at all, generally will require more time and result in higher brokerage charges or dealer discounts and other selling expenses than will the sale of liquid securities, such as securities eligible for trading on U.S. securities exchanges or in the over-the-counter markets. Moreover, restricted securities, which may be illiquid for purposes of this limitation often sell, if at all, at a price lower than similar securities that are not subject to restrictions on resale. With respect to liquidity determinations generally, the Fund's Board of Directors has the ultimate responsibility for determining whether specific securities, including restricted securities pursuant to Rule 144A under the Securities Act of 1933, are liquid or illiquid. The Board has delegated the function of making day-to-day determinations of liquidity to Lexington and MFR in accordance with procedures approved by the Fund's Board of Directors. Lexington and MFR take into account a number of factors in reaching liquidity decisions, including, but not limited to: (i) the frequency of trading in the security; (ii) the number of dealers that make quotes for the security; (iii) the number of dealers that have undertaken to make a market in the security; (iv) the number of other potential purchasers; and (v) the nature of the security and how trading is effected (e.g., the time needed to sell the security, how offers are solicited and the mechanics of transfer). Lexington and MFR will monitor the liquidity of securities held by the Series and report periodically on such decisions to the Board of Directors. 11 SERIES K (CONTINUED) OPTIONS, FUTURES AND FORWARD CURRENCY STRATEGIES WRITING COVERED CALL OPTIONS. The Series may write (sell) covered call options and purchase options to close out options previously written by the Series. Covered call options generally will be written on securities and currencies which in the opinion of Lexington and MFR are not expected to make any major price moves in the near future but which, over the long term, are deemed to be attractive investments for the Series. Lexington, MFR and the Series believe that writing of covered call options is less risky than writing uncovered or "naked" options, which the Series will not do. For more information about writing covered call options, see the discussion under "Investment Methods and Risk Factors." WRITING COVERED PUT OPTIONS. The Series may write covered put options and purchase options to close out options previously written by the Series. A put option gives the purchaser of the option the right to sell, and the writer (seller) the obligation to buy, the underlying security or currency at the exercise price during the option period. The option may be exercised at any time prior to its expiration date. The operation of put options in other respects, including their related risks and rewards, is substantially identical to that of call options. See the discussion of writing covered put options under "Investment Methods and Risk Factors." PURCHASING PUT OPTIONS. The Series may purchase put options. As the holder of a put option, the Series would have the right to sell the underlying security or currency at the exercise price at any time during the option period. The Series may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. See the discussion of purchases of put options under "Investment Methods and Risk Factors." The premium paid by the Series when purchasing a put option will be recorded as an asset in the Series' statement of assets and liabilities. This asset will be adjusted daily to the option's current market value, which will be the latest sale price at the time at which the net asset value per share of the Series is computed (at the close of regular trading on the NYSE), or, in the absence of such sale, the latest bid price. The asset will be extinguished upon expiration of the option, the writing of an identical option in a closing transaction, or the delivery of the underlying security or currency upon the exercise of the option. PURCHASING CALL OPTIONS. The Series may purchase call options. As the holder of a call option, the Series would have the right to purchase the underlying security or currency at the exercise price at any time during the option period. The Series may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. Call options may be purchased by the Series for the purpose of acquiring the underlying security or currency for its portfolio. For a discussion of purchases of call options, see "Investment Methods and Risk Factors." The Series may attempt to accomplish objectives similar to those involved in using Forward Contracts (defined below), as described in the Prospectus, by purchasing put or call options on currencies. A put option gives the Series as purchaser the right (but not the obligation) to sell a specified amount of currency at the exercise price until the expiration of the option. A call option gives the Series as purchaser the right (but not the obligation) to purchase a specified amount of currency at the exercise price until its expiration. The Series might purchase a currency put option, for example, to protect itself during the contract period against a decline in the dollar value of a currency in which it holds or anticipates holding securities. If the currency's value should decline against the dollar, the loss in currency value should be offset, in whole or in part, by an increase in the value of the put. If the value of the currency instead should rise against the dollar, any gain to the Series would be reduced by the premium it had paid for the put option. A currency call option might be purchased, for example, in anticipation of, or to protect against, a rise in the value against the dollar of a currency in which the Series anticipates purchasing securities. Currency options may be either listed on an exchange or traded over-the-counter ("OTC options"). Listed options are third-party contracts (i.e., performance of the obligations of the purchaser and seller is guaranteed by the exchange or clearing corporation), and have standardized strike prices and expiration dates. OTC options are two-party contracts with negotiated strike prices and expiration dates. The Securities and Exchange Commission ("SEC") staff considers OTC options to be illiquid securities. The Series will not purchase an OTC option unless the Series believes that daily valuations for such options are readily obtainable. OTC options differ from exchange-traded options in that OTC options are transacted with dealers directly and not through a clearing corporation (which guarantees performance). Consequently, there is a risk of non-performance by the dealer. 12 SERIES K (CONTINUED) Since no exchange is involved, OTC options are valued on the basis of a quote provided by the dealer. In the case of OTC options, there can be no assurance that a liquid secondary market will exist for any particular option at any specific time. INTEREST RATE AND CURRENCY FUTURES CONTRACTS. The Series may enter into interest rate or currency futures contracts ("Futures" or "Futures Contracts") as a hedge against changes in prevailing levels of interest rates or currency exchange rates in order to establish more definitely the effective return on securities or currencies held or intended to be acquired by the Series. The Series' hedging may include sales of Futures as an offset against the effect of expected increases in interest rates or currency exchange rates, and purchases of Futures as an offset against the effect of expected declines in interest rates or currency exchange rates. The Series will enter only into Futures Contracts which are traded on national futures exchanges and are standardized as to maturity date and underlying financial instrument. The principal interest rate and currency Futures exchanges in the United States are the Board of Trade of the City of Chicago and the Chicago Mercantile Exchange. Futures exchanges and trading are regulated under the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"). Futures are exchanged in London at the London International Financial Futures Exchange. Although techniques other than sales and purchases of Futures Contracts could be used to reduce the Series' exposure to interest rate and currency exchange rate fluctuations, the Series may be able to hedge exposure more effectively and at a lower cost through using Futures Contracts. The Series will not enter into a Futures Contract if, as a result thereof, more than 5% of the Series' total assets (taken at market value at the time of entering into the contract) would be committed to "margin" (down payment) deposits on such Futures Contracts. Futures Contract provides for the future sale by one party and purchase by another party of a specified amount of a specific financial instrument (debt security or currency) for a specified price at a designated date, time and place. Brokerage fees are incurred when a Futures Contract is bought or sold, and margin deposits must be maintained at all times the Futures Contract is outstanding. For a discussion of Futures Contracts and the risks associated with investing in Futures Contracts, see "Investment Methods and Risk Factors." In the case of a Futures Contract sale, the Series either will set aside amounts, as in the case of a Futures Contract purchase, own the security underlying the contract or hold a call option permitting the Series to purchase the same Futures Contract at a price no higher than the contract price. Assets used as cover cannot be sold while the position in the corresponding Futures Contract is open, unless they are replaced with similar assets. As a result, the commitment of a significant portion of the Series' assets to cover could impede portfolio management or the Series' ability to meet redemption requests or other current obligations. OPTIONS ON FUTURES CONTRACTS. Options on Futures Contracts are similar to options on securities or currencies except that options on Futures Contracts give the purchaser the right, in return for the premium paid, to assume a position in a Futures Contract (a long position if the option is a call and a short position if the option is a put), rather than to purchase or sell the Futures Contract, at a specified exercise price at any time during the period of the option. Upon exercise of the option, the delivery of the Futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's Futures margin account which represents the amount by which the market price of the Futures Contract, at exercise, exceeds (in the case of a call) or is less than (in the case of a put) the exercise price of the option on the Futures Contract. If an option is exercised on the last trading day prior to the expiration date of the option, the settlement will be made entirely in cash equal to the difference between the exercise price of the option and the closing level of the securities, currencies or index upon which the Futures Contracts are based on the expiration date. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid. As an alternative to purchasing call and put options on Futures, the Series may purchase call and put options on the underlying securities or currencies themselves. Such options would be used in a manner identical to the use of options on Futures Contracts. To reduce or eliminate the leverage then employed by the Series, or to reduce or eliminate the hedge position then currently held by the Series, the Series may seek to close out an option position by selling an option covering the same securities or contract and having the same exercise price and expiration date. Trading in options on Futures Contracts began relatively recently. The ability to establish and close out positions on such options will be 13 SERIES K (CONTINUED) subject to the development and maintenance of a liquid secondary market. It is not certain that this market will develop. For a discussion of options on Futures Contracts and associated risks, see "Investment Methods and Risk Factors." FORWARD CURRENCY CONTRACTS AND OPTIONS ON CURRENCY. A forward currency contract ("Forward Contract") is an obligation, generally arranged with a commercial bank or other currency dealer, to purchase or sell a currency against another currency at a future date and price as agreed upon by the parties. The Series may accept or make delivery of the currency at the maturity of the Forward Contract or, prior to maturity, enter into a closing transaction involving the purchase or sale of an offsetting contract. The Series may enter into Forward Contracts either with respect to specific transactions or with respect to the Series' portfolio positions. The Series will utilize Forward Contracts only on a covered basis. See the discussion of such contracts and related options under "Investment Methods and Risk Factors." INTEREST RATE AND CURRENCY SWAPS. The Series usually will enter into interest rate swaps on a net basis if the contract so provides, that is, the two payment streams are netted out in a cash settlement on the payment date or dates specified in the instrument, with the Series receiving or paying, as the case may be, only the net amount of the two payments. Inasmuch as swaps, caps, floors and collars are entered into for good faith hedging purposes, Lexington, MFR and the Series believe that they do not constitute senior securities under the 1940 Act if appropriately covered and, thus, will not treat them as being subject to the Series' borrowing restrictions. The Series will not enter into any swap, cap, floor, collar or other derivative transaction unless, at the time of entering into the transaction, the unsecured long-term debt rating of the counterparty combined with any credit enhancements is rated at least A by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P") or has an equivalent rating from a nationally recognized statistical rating organization or is determined to be of equivalent credit quality by Lexington and MFR. If a counterparty defaults, the Series may have contractual remedies pursuant to the agreements related to the transactions. The swap market has grown substantially in recent years, with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid. Caps, floors and collars are more recent innovations for which standardized documentation has not yet been fully developed and, for that reason, they are less liquid than swaps. SERIES M (SPECIALIZED ASSET ALLOCATION SERIES) The investment objective of Series M is to seek high total return, consisting of capital appreciation and current income. The Series seeks this objective by following an asset allocation strategy that contemplates shifts among a wide range of investment categories and market sectors. The Series will invest in the following investment categories: equity securities of domestic and foreign issuers, including common stocks, preferred stocks, convertible securities and warrants; debt securities of domestic and foreign issuers, including mortgage-related and other asset-backed securities; exchange-traded real estate investment trusts (REITs); equity securities of companies involved in the exploration, mining, development, production and distribution of gold ("gold stocks"); and domestic money market instruments. See "Investment Methods and Risk Factors" in the Prospectus and this Statement of Additional Information for a discussion of the additional risks associated with investment in foreign securities, and see the discussion of the risks associated with investment in gold stocks below. Investment in gold stocks presents risks, because the prices of gold have fluctuated substantially over short periods of time. Prices may be affected by unpredictable monetary and political policies, such as currency devaluations or revaluations, economic and social conditions within an individual country, trade imbalances, or trade or currency restrictions between countries. The unstable political and social conditions in South Africa and unsettled political conditions prevailing in neighboring countries may have disruptive effects on the market prices of securities of South African companies. Series M may invest in real estate investment trusts ("REITs"). Investment in REITs involves certain special risks. Equity REITs may be affected by any changes in the value of the underlying property owned by the trusts, while mortgage REITs may be affected by the quality of any credit extended. Further, equity and mortgage REITs are dependent upon management skill, are not diversified, and are therefore subject to the risk of financing single or a limited number of projects. Such trusts are also subject to heavy cash flow dependency, defaults by borrowers, self-liquidation, and the possibility of failing to qualify for special tax treatment under Subchapter M 14 SERIES M (CONTINUED) of the Internal Revenue Code and to maintain an exemption under the Investment Company Act of 1940. Finally, certain REITs may be self-liquidating in that a specific term of existence is provided for in the trust document. Such trusts run the risk of liquidating at an economically inopportune time. The Series is not required to maintain a portion of its assets in each of the permitted investment categories. The Series, however, under normal circumstances maintains a minimum of 35% of its total assets in equity securities and 10% in debt securities. The Series will not invest more than 55% of its total assets in money market instruments (except when in a temporary defensive position), more than 80% of its total assets in foreign securities, nor more than 20% of its total assets in gold stocks. The Investment Manager receives quantitative investment research from Meridian Investment Management Company ("Meridian"), which research the Investment Manager uses in strategically allocating the Series' assets among the investment categories identified above, primarily on the basis of a quantitative asset allocation model. With respect to equity securities, the model analyzes a large number of equity securities based on the following factors: current earnings, earnings history, long-term earnings projections, current price, and price momentum. The Investment Manager then determines (based on the results of Meridian's analysis) which sectors within an identified investment category are deemed to be the most attractive relative to other sectors. For example, the model may indicate that a portion of the Series' assets should be invested in the domestic equity category of the market and within this category that pharmaceutical stocks represent a sector with an attractive total return potential. Although the Investment Manager anticipates relying on much of the research provided by Meridian, the Investment Manager has ultimate responsibility for the selection of the investment categories and the sectors within those categories. The Investment Manager identifies sectors of the domestic and international economy (based on the research provided by Meridian) in which the Series will invest and then determines which equity securities to purchase within the identified sectors. The Investment Manager may utilize certain analytical research provided by Templeton/Franklin Investment Services, Inc. ("Templeton") in selecting equity securities, including gold stocks, for Series M. Templeton's research is derived from analytical research provided by a third party that is analyzed and monitored by Templeton. The Investment Manager has ultimate responsibility for all buy and sell decisions of Series M and may determine not to use analytical research provided by Templeton. With respect to the selection of debt securities for the Series, the asset allocation model provided by Meridian, analyzes the prices of commodities and finished goods to arrive at an interest rate projection. The Investment Manager will determine the portion of the portfolio to allocate to debt securities and the duration of those securities based on the model's interest rate projections. Gold stocks and REITs will be analyzed in a manner similar to that used for equity securities. Money market instruments will be analyzed based on current returns and the current yield curve. The asset allocation model used by the Series may evolve over time or be replaced by other stock selection techniques. There is no assurance that the model will correctly predict market trends or enable the Series to achieve its investment objective. The debt securities in which the Series may invest will, at the time of investment, consist of "investment grade" bonds, which are bonds rated BBB or better by S&P or Baa or better by Moody's or that are unrated by S&P and Moody's but considered by the Investment Manager to be of equivalent credit quality. Securities rated BBB by S&P or Baa by Moody's have speculative characteristics and may be more susceptible than higher grade bonds to adverse economic conditions or other adverse circumstances which may result in a weakened capacity to make principal and interest payments. The Series may invest in investment grade mortgage-backed securities (MBSs), including mortgage pass-through securities and collateralized mortgage obligations (CMOs). The Series will not invest in an MBS if, as a result of such investment, more than 25% of its total assets would be invested in MBSs, including CMOs and mortgage pass-through securities. For a discussion of MBSs and the risks associated with such securities, see "Investment Methods and Risk Factors" - "Mortgage-Backed Securities" in the Prospectus and this Statement of Additional Information. The Series may write covered call options and purchase put options on securities, financial indices and foreign currencies and may enter into futures contracts. The Series may buy and sell futures contracts (and options on such contracts) to manage exposure to changes in securities prices and foreign currencies and as an efficient means of adjusting overall exposure to certain markets. It is the Series' operating policy that initial margin 15 SERIES M (CONTINUED) deposits and premiums on options used for non-hedging purposes will not equal more than 5% of the Series' net assets. The total market value of securities against which the Series has written call options may not exceed 25% of its total assets. The Series will not commit more than 5% of its total assets to premiums when purchasing put options. Futures contracts and options may not always be successful hedges and their prices can be highly volatile. Using futures contracts and options could lower the Series' total return and the potential loss from the use of futures can exceed the Series' initial investment in such contracts. Futures contracts and options and the risks associated with such instruments are described in further detail under "Investment Methods and Risk Factors." SERIES N (MANAGED ASSET ALLOCATION SERIES) The investment objective of Series N is to seek a high level of total return by investing primarily in a diversified group of fixed income and equity securities. The Series is designed to balance the potential appreciation of common stocks with the income and principal stability of bonds over the long term. Over the long term, the Series expects to allocate its assets so that approximately 40% of such assets will be in the fixed income sector (as defined below) and approximately 60% in the equity sector (as defined below). This mix may vary over shorter time periods within the ranges set forth below: Range Fixed Income Sector 30-50% Equity Sector 50-70% The primary consideration in varying from the 60-40 allocation will be the outlook of the Series' Sub-Adviser, T. Rowe Price Associates, Inc. ("T. Rowe Price"), for the different markets in which the Series invests. Shifts between the fixed income and equity sectors will normally be done gradually and T. Rowe Price will not attempt to precisely "time" the market. There is, of course no guarantee that T. Rowe Price's gradual approach to allocating the Series' assets will be successful in achieving the Series' objective. The Series will maintain cash reserves to facilitate the Series' cash flow needs (redemptions, expenses and purchases of Series securities) and it may invest in cash reserves without limitation for temporary defensive purposes. Assets allocated to the fixed income portion of the Series primarily will be invested in U.S. and foreign investment grade bonds, high yield bonds, short-term investments and currencies, as needed to gain exposure to foreign markets. Assets allocated to the equity portion of the Series will be allocated among U.S. and non-dollar large- and small-cap companies, currencies and futures. The Series' fixed income sector will be allocated among investment grade, high yield, U.S. and non-dollar debt securities and currencies generally within the ranges indicated below: Investment Grade 50-100% High Yield 0-30% Non-dollar 0-30% Cash Reserves 0-20% Investment grade debt securities include long, intermediate and short-term investment grade debt securities (e.g., AAA, AA, A or BBB by S&P or if not rated, of equivalent investment quality as determined by T. Rowe Price). The weighted average maturity for this portion (investment grade debt securities) of the Series' portfolio is generally expected to be intermediate (3-10 years), although it may vary significantly. Non-dollar debt securities include non-dollar denominated government and corporate debt securities or currencies of at least three countries. See "Investment Methods and Risk Factors" - "Certain Risks of Foreign Investing" for a discussion of the risks involved in foreign investing. High-yield securities include high-yielding, income-producing debt securities in the lower rating categories (commonly referred to as "junk bonds") and preferred stocks including convertible securities. High yield bonds may be purchased without regard to maturity; however, the average maturity is expected to be approximately 10 years, although it may vary if market conditions warrant. Quality will generally range from lower-medium to low and the Series may also purchase bonds in default if, in the opinion of T. Rowe Price, there is significant potential for capital appreciation. Lower-rated debt obligations are generally considered to be high risk investments. See "Investment Methods and Risk Factors" for a discussion of the risks involved in investing in 16 SERIES N (CONTINUED) high-yield, lower-rated debt securities. Securities which may be held as cash reserves include liquid short-term investments of one year or less having the highest ratings by at least one established rating organization, or if not rated, of equivalent investment quality as determined by T. Rowe Price. The Series may use currencies to gain exposure to an international market prior to investing in non-dollar securities. The Series' equity sector will be allocated among large and small capital ("Large Cap" and "Small Cap" respectively) U.S. and non-dollar equity securities, currencies and futures, generally within the ranges indicated below: Large Cap 45-100% Small Cap 0-30% Non-dollar 0-35% Large Cap securities generally include stocks of well-established companies with capitalization over $1 billion which can produce increasing dividend income. Non-dollar securities include foreign currencies and common stocks of established non-U.S. companies. Investments may be made solely for capital appreciation or solely for income or any combination of both for the purpose of achieving a higher overall return. T. Rowe Price intends to diversify the non-dollar portion of the Series' portfolio broadly among countries and to normally have at least three different countries represented. The countries of the Far East and Western Europe as well as South Africa, Australia, Canada, and other areas (including developing countries) may be included. Under unusual circumstances, however, investment may be substantially in one or two countries. Futures may be used to gain exposure to equity markets where there is insufficient cash to purchase a diversified portfolio of stocks. Currencies may also be held to gain exposure to an international market prior to investing in a non-dollar stock. Small Cap securities include common stocks of small companies or companies which offer the possibility of accelerated earnings growth because of rejuvenated management, new products or structural changes in the economy. Current income is not a factor in the selection of these stocks. Higher risks are often associated with small companies. These companies may have limited product lines, markets and financial resources, or they may be dependent on a small or inexperienced management group. In addition, their securities may trade less frequently and in limited volume and move more abruptly than securities of larger companies. However, securities of smaller companies may offer greater potential for capital appreciation since they are often overlooked or undervalued by investors. Until the Series reaches approximately $30 million in assets, the composition of the Series' portfolio may vary significantly from the percent limitations and ranges above. This might occur because, at lower asset levels, the Series may be unable to prudently achieve diversification among the described asset classes. During this initial period, the Series may use futures contracts and purchase foreign currencies to a greater extent than it will once the start-up period is over. The Series may invest up to 35% of its total assets in U.S. dollar-denominated and non-U.S. dollar-denominated securities issued by foreign issuers. Some of the countries in which the Series may invest may be considered to be developing and may involve special risks. For a discussion of the risks involved in investment in foreign securities, see "Investment Methods and Risk Factors" - "Certain Risks of Foreign Investing." The Series' foreign investments are also subject to currency risk described under "Investment Methods and Risk Factors" - "Currency Fluctuations." To manage this risk and facilitate the purchase and sale of foreign securities, the Series may engage in foreign currency transactions involving the purchase and sale of forward foreign currency exchange contracts. Although forward currency transactions will be used primarily to protect the Series from adverse currency movements, they also involve the risk that anticipated currency movements will not be accurately predicted and the Series' total return could be adversely affected as a result. For a discussion of forward currency transactions and the risks associated with such transactions, see "Investment Methods and Risk Factors" "Forward Currency Contracts and Related Options" and "Purchase and Sale of Currency Futures Contracts and Related Options." Purchases by the Series of currencies in substitution of purchases of stocks and bonds will subject the Series to risks different from a fund invested solely in stocks and bonds. 17 SERIES N (CONTINUED) The Series' investments include, but are not limited to, equity and fixed income securities of any type and the Series may utilize the investment methods and investment vehicles described below. The Series may enter into futures contracts (a type of derivative) (or options thereon) to hedge all or a portion of its portfolio, as a hedge against changes in prevailing levels of interest rates or currency exchange rates, or as an efficient means of adjusting its exposure to the bond, stock, and currency markets. The Series will not use futures contracts for leveraging purposes. The Series will limit its use of futures contracts so that initial margin deposits or premiums on such contracts used for non-hedging purposes will not equal more than 5% of the Series' net asset value. The Series may also write call and put options and purchase put and call options on securities, financial indices, and currencies. The aggregate market value of the Series' portfolio securities or currencies covering call or put options will not exceed 25% of the Series' net assets. The Series may enter into foreign futures and options transactions. As part of its investment program and to maintain greater flexibility, the Series may invest in instruments which have the characteristics of futures, options and securities, known as "hybrid instruments." For a discussion of such instruments and the risks involved in investing therein, see "Investment Methods and Risk Factors" - "Hybrid Instruments." The Series may acquire illiquid securities in an amount not exceeding 15% of net assets. Because an active trading market does not exist for such securities the sale of such securities may be subject to delay and additional costs. The Series will not invest more than 5% of its total assets in restricted securities (other than securities eligible for resale under Rule 144A of the Securities Act of 1933). For a discussion of restricted securities, see "Investment Methods and Risk Factors." The Series may invest in asset-backed securities, which securities involve certain risks. For a discussion of asset-backed securities and the risks involved in investment in such securities, see the discussion under "Investment Methods and Risk Factors." The Series may invest in mortgage-backed securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities or institutions such as banks, insurance companies and savings and loans. Some of these securities, such as GNMA certificates, are backed by the full faith and credit of the U.S. Treasury while others, such as Freddie Mac certificates, are not. The Series may also invest in collateralized mortgage obligations (CMOs) and stripped mortgage securities (a type of derivative). Stripped mortgage securities are created by separating the interest and principal payments generated by a pool of mortgage-backed bonds to create two classes of securities, "interest only" (IO) and "principal only" (PO) bonds. There are risks involved in mortgage-backed securities, CMOs and stripped mortgage securities. See "Investment Methods and Risk Factors" for an additional discussion of such securities and the risks involved therein. While the Series will remain invested in primarily common stocks and bonds, it may, for temporary defensive purposes, invest in cash reserves without limitation. The Series may establish and maintain reserves as T. Rowe Price believes is advisable to facilitate the Series' cash flow needs. Cash reserves include money market instruments, including repurchase agreements, in the two highest categories. Short-term securities may be held in the equity sector as collateral for futures contracts. These securities are segregated and may not be available for the Series' cash flow needs. The Series may invest in debt or preferred equity securities convertible into or exchangeable for equity securities and warrants. As a fundamental policy, for the purpose of realizing additional income, the Series may lend securities with a value of up to 33 1/3% of its total assets to broker-dealers, institutional investors, or other persons. Any such loan will be continuously secured by collateral at least equal to the value of the securities loaned. For a discussion of the limitations on lending and risks of lending, see "Investment Methods and Risk Factors" - "Lending of Portfolio Securities." FIXED INCOME SECURITIES. Fixed income securities in which the Series may invest include, but are not limited to, those described below. U.S. GOVERNMENT OBLIGATIONS. Bills, notes, bonds and other debt securities issued by the U.S. Treasury. These are direct obligations of the U.S. Government and differ mainly in the length of their maturities. U.S. GOVERNMENT AGENCY SECURITIES. Issued or guaranteed by U.S. Government sponsored enterprises and federal agencies. These include securities issued by the Federal National Mortgage Association, Government National Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home Administration, Banks for Cooperatives, Federal Intermediate Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business Association, and the Tennessee Valley Authority. Some of these securities are supported by the 18 SERIES N (CONTINUED) full faith and credit of the U.S. Treasury, and the remainder are supported only by the credit of the instrumentality, which may or may not include the right of the issuer to borrow from the Treasury. BANK OBLIGATIONS. Certificates of deposit, bankers' acceptances, and other short-term debt obligations. Certificates of deposit are short-term obligations of commercial banks. A bankers' acceptance is a time draft drawn on a commercial bank by a borrower, usually in connection with international commercial transactions. Certificates of deposits may have fixed or variable rates. The Series may invest in U.S. banks, foreign branches of U.S. banks, U.S. branches of foreign banks and foreign branches of foreign banks. SAVINGS AND LOAN OBLIGATIONS. Negotiable certificates of deposit and other short-term debt obligations of savings and loan associations. COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). CMOs are obligations fully collateralized by a portfolio of mortgages or mortgage-related securities. Payments of principal and interest on the mortgages are passed through to the holders of the CMOs on the same schedule as they are received, although certain classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which a Series invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-related securities. MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities representing interest in a pool of mortgages. After purchase by the Series, a security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Series. Neither event will require a sale of such security by the Series. However, T. Rowe Price will consider such event in its determination of whether the Series should continue to hold the security. To the extent that the ratings given by Moody's or S&P may change as a result of changes in such organizations or their rating systems, the Series will attempt to use comparable ratings as standards for investments in accordance with the investment policies contained in the Fund's Prospectus. The Series may also invest in the securities of certain supranational entities, such as the International Development Bank. For a discussion of mortgage-backed securities and certain risks involved therein, see this Statement of Additional Information and the Fund's Prospectus under "Investment Methods and Risk Factors." ASSET-BACKED SECURITIES. The Series may invest a portion of its assets in debt obligations known as asset-backed securities. The credit quality of most asset-backed securities depends primarily on the credit quality of the assets underlying such securities, how well the entity issuing the security is insulated from the credit risk of the originator or any other affiliated entities and the amount and quality of any credit support provided to the securities. The rate of principal payment on asset-backed securities generally depends on the rate of principal payments received on the underlying assets which in turn may be affected by a variety of economic and other factors. As a result, the yield on any asset-backed security is difficult to predict with precision and actual yield to maturity may be more or less than the anticipated yield to maturity. AUTOMOBILE RECEIVABLE SECURITIES. The Series may invest in asset-backed securities which are backed by receivables from motor vehicle installment sales contracts or installment loans secured by motor vehicles ("Automobile Receivable Securities"). CREDIT CARD RECEIVABLE SECURITIES. The Series may invest in asset-backed securities backed by receivables from revolving credit card agreements ("Credit Card Receivable Securities"). OTHER ASSETS. T. Rowe Price anticipates that asset-backed securities backed by assets other than those described above will be issued in the future. The Series may invest in such securities in the future if such investment is otherwise consistent with its investment objective and policies. For a discussion of these securities, see this Statement of Additional Information and the Fund's Prospectus under "Investment Methods and Risk Factors." In addition to the investments described in the Fund's Prospectus, the Series may invest in the following: ADDITIONAL FUTURES AND OPTIONS CONTRACTS. Although the Series has no current intention of engaging in financial futures or options transactions other than those described above, it reserves the right to do so. Such futures or options trading might involve risks which differ from those involved in the futures and options described above. 19 SERIES O (EQUITY INCOME SERIES) The investment objective of Series O is to seek to provide substantial dividend income and also capital appreciation by investing primarily in dividend-paying common stocks of established companies. In pursuing its objective, the Series emphasizes companies with favorable prospects for increasing dividend income, and secondarily, capital appreciation. Over time, the income component (dividends and interest earned) of the Series' investments is expected to be a significant contributor to the Series' total return. The Series' income yield is expected to be significantly above that of the Standard and Poor's 500 Stock Index ("S&P 500"). Total return is expected to consist primarily of dividend income and secondarily of capital appreciation (or depreciation). The Series may invest up to 35% of its total assets in U.S. dollar denominated and non U.S. dollar denominated securities issued by foreign issuers. For a discussion of the risks involved in foreign securities investments, see this Statement of Additional Information and the Prospectus under "Investment Methods and Risk Factors." The investment program of the Series is based on several premises. First, the Series' Sub-Adviser, T. Rowe Price, believes that, over time, dividend income can account for a significant component of the total return from equity investments. Second, dividends are normally a more stable and predictable source of return than capital appreciation. While the price of a company's stock generally increases or decreases in response to short-term earnings and market fluctuations, its dividends are generally less volatile. Finally, T. Rowe Price believes that stocks which distribute a high level of current income tend to have less price volatility than those which have below average dividends. To achieve its objective, the Series, under normal circumstances, will invest at least 65% of its assets in income-producing common stocks, whose prospects for dividend growth and capital appreciation are considered favorable by T. Rowe Price. To enhance capital appreciation potential, the Series also uses a value-oriented approach, which means it invests in stocks it believes are currently undervalued in the market place. The Series' investments will generally be made in companies which share some of the following characteristics: established operating histories; above-average current dividend yields relative to the S&P 500; low price-earnings ratios relative to the S&P 500; sound balance sheets and other financial characteristics; and low stock price relative to company's underlying value as measured by assets, earnings, cash flow or business franchises. The Series may also invest its assets in fixed income securities (corporate, government, and municipal bonds of various maturities). The Series would invest in municipal bonds when the expected total return from such bonds appears to exceed the total returns obtainable from corporate or government bonds of similar credit quality. Series O may invest in debt securities of any type without regard to quality or rating. Such securities would be purchased in companies which meet the investment criteria for the Series. Such securities may include securities rated below investment grade (e.g., securities rated Ba or lower by Moody's or BB or lower by S&P). The Series will not purchase such a security (commonly referred to as a "junk bond") if immediately after such purchase the Series would have more than 10% of its total assets invested in such securities. See "Investment Methods and Risk Factors" - "Special Risks Associated with Low-Rated and Comparable Unrated Debt Securities" for a discussion of the risks associated with investing in such securities. Although the Series will invest primarily in U.S. common stocks, it may also purchase other types of securities, for example, foreign securities, convertible securities and warrants, when considered consistent with the Series' investment objective and program. The Series' investments in foreign securities include non-dollar denominated securities traded outside of the U.S. and dollar denominated securities traded in the U.S. (such as ADRs). The Series may invest up to 25% of its total assets in foreign securities. See the discussions of the risks associated with investing in foreign securities under "American Depositary Receipts," "Currency Fluctuations" and "Certain Risks of Foreign Investing." The Series may also engage in a variety of investment management practices, such as buying and selling futures and options. The Series may buy and sell futures contracts (and options on such contracts) to manage its exposure to changes in securities prices and foreign currencies and as an efficient means of adjusting its overall exposure to certain markets. The Series may purchase or write (sell) call and put options on securities, financial indices, and foreign currencies. It is the Series' operating policy that initial margin deposits and premiums on options used for non-hedging purposes will not equal more than 5% of the Series' net asset value and, with respect to options on securities, the total market value of securities against which the Series has written call or put 20 SERIES O (CONTINUED) options may not exceed 25% of its total assets. The Series will not commit more than 5% of its total assets to premiums when purchasing call or put options. The Series may also invest up to 10% of its total assets in hybrid instruments which are described under "Investment Methods and Risk Factors" - "Hybrid Instruments." Also see the discussions of futures, options and forward currency transactions under "Investment Methods and Risk Factors." The Series may also invest in restricted securities described under "Investment Methods and Risk Factors." The Series' investment in such securities, other than Rule 144A securities, is limited to 5% of its net assets. The Series may borrow up to 33 1/3% of its total assets; however, the Series may not purchase securities when borrowings exceed 5% of its total assets. The Series may hold a certain portion of its assets in money market securities, including repurchase agreements, in the two highest rating categories, maturing in one year or less. For temporary, defensive purposes, the Series may invest without limitation in such securities. The Series may lend securities to broker-dealers, other institutions, or other persons to earn additional income. The value of loaned securities may not exceed 33 1/3% of the Series' total assets. See "Investment Methods and Risk Factors" - "Lending of Portfolio Securities" for a discussion of the risks associated with securities lending. INVESTMENT METHODS AND RISK FACTORS Some of the risk factors related to certain securities, instruments and techniques that may be used by one or more of the Series are described in the "Investment Objectives and Policies" and "Investment Methods and Risk Factors" sections of the Prospectus and in this Statement of Additional Information. The following is a description of certain additional risk factors related to various securities, instruments and techniques. The risks so described only apply to those Series which may invest in such securities and instruments or which use such techniques. Also included is a general description of some of the investment instruments, techniques and methods which may be used by one or more of the Series. The methods described only apply to those Series which may use such methods. Although a Series may employ the techniques, instruments and methods described below, consistent with its investment objective and policies and any applicable law, no Series will be required to do so. AMERICAN DEPOSITARY RECEIPTS. Each of the Series (except Series C and E) of the Fund may purchase American Depositary Receipts ("ADRs") which are dollar-denominated receipts issued generally by U.S. banks and which represent the deposit with the bank of a foreign company's securities. ADRs are publicly traded on exchanges or over-the-counter in the United States. Investors should consider carefully the substantial risks involved in investing in securities issued by companies of foreign nations, which are in addition to the usual risks inherent in domestic investments. Although the Series intend to invest only in nations which are considered to have relatively stable and friendly governments, there is the possibility of expropriation, nationalization or confiscatory taxation, foreign exchange controls (which may include suspension of the ability to transfer currency from a given country), political or social instability or diplomatic developments which could affect investment in securities of issuers in those nations. In addition, in many countries there is less publicly available information about issuers than is available in reports about companies in the United States. Foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards, and auditing practices and requirements may not be comparable to those applicable to U.S. companies. In many foreign countries, there is less government supervision and regulation of business and industry practices, stock exchanges, brokers and listed companies than in the United States. Foreign investments may be subject to taxation abroad. In addition, the foreign securities markets of many of the countries in which the Series may invest may also be smaller, less liquid, and subject to greater price volatility than those in the United States. REPURCHASE AGREEMENTS. A repurchase agreement involves a purchase by the Series of a security from a selling financial institution (such as a bank, savings and loan association or broker-dealer) which agrees to repurchase such security at a specified price and at a fixed time in the future, usually not more than seven days from the date of purchase. The resale price is in excess of the purchase price and reflects an agreed upon yield effective for the period of time the Series' money is invested in the security. Currently, Series A, B, C, E, S and J may enter into repurchase agreements only with federal reserve system member banks with total assets of at least one billion dollars and equity capital of at least one hundred million dollars and "primary" dealers in U.S. Government securities. These Series may enter into repurchase agreements, fully collateralized by U.S. Government or agency securities, only on an overnight basis. 21 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) Repurchase agreements are considered to be loans by the Fund under the Investment Company Act of 1940. Engaging in any repurchase transaction will be subject to any rules or regulations of the Securities and Exchange Commission or other regulatory authorities. Not more than 10% of the assets of Series A, B, C, D, E, S and J will be invested in illiquid assets, which include repurchase agreements with maturities of over seven days. Series D and K may enter into repurchase agreements only with (a) securities dealers that have a total capitalization of at least $40,000,000 and a ratio of aggregate indebtedness to net capital of no more than 4 to 1, or, alternatively, net capital equal to 6% of aggregate debit balances, or (b) banks that have at least $1,000,000,000 in assets and a net worth of at least $100,000,000 as of its most recent annual report. In addition, the aggregate repurchase price of all repurchase agreements held by each Series with any broker shall not exceed 15% of the total assets of the Series or $5,000,000, whichever is greater. The Series will not enter into repurchase agreements maturing in more than seven days if the aggregate of such repurchase agreements and other illiquid investments would exceed 10% of total assets for Series D or 15% of net assets for Series K. Series M may enter into repurchase agreements with (a) well-established securities dealers or (b) banks that are members of the Federal Reserve System. Any such dealer or bank will have a credit rating with respect to its short-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's Investors Service, Inc., or the equivalent rating by the Investment Manager. This Series may enter into repurchase agreements with maturities of over seven days, provided that it may not invest more than 15% of its total assets in illiquid securities. Series N and O may enter into repurchase agreements only with (a) securities dealers that have a net capital in excess of $50,000,000, are reasonably leveraged, and are otherwise considered as appropriate entities with which to enter into repurchase agreements, or (b) banks that are included on T. Rowe Price's list of established banks. To determine whether a dealer or bank qualifies under these criteria, T. Rowe Price's Credit Committee will conduct a thorough examination to determine that the applicable financial and profitability standards have been met. Series N and O will not under any circumstances enter into a repurchase agreement of a duration of more than seven business days if, as a result, more than 15% of the value of the Series' total assets would be so invested or invested in illiquid securities. Generally, the Series will not commit more than 50% of its gross assets to repurchase agreements or more than 5% of its total assets to repurchase agreements of any one vendor. In the event of a bankruptcy or other default of a seller of a repurchase agreement, the Series could experience both delays in liquidating the underlying securities and losses, including (a) possible decline in the value of the underlying security during the period while the Series seeks to enforce its rights thereto; (b) possible subnormal levels of income and lack of access to income during this period; and (c) expenses of enforcing its rights. The Board of Directors of the Fund has promulgated guidelines with respect to repurchase agreements. DEBT OBLIGATIONS. Yields on short, intermediate, and long-term securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering, the maturity of the obligation, and the rating of the issue. Debt securities with longer maturities tend to produce higher yields and are generally subject to potentially greater capital appreciation and depreciation than obligations with shorter maturities and lower yields. The market prices of debt securities usually vary, depending upon available yields. An increase in interest rates will generally reduce the value of portfolio investments, and a decline in interest rates will generally increase the value of portfolio investments. The ability of the Series to achieve its investment objectives is also dependent on the continuing ability of the issuers of the debt securities in which the Series invest to meet their obligations for the payment of interest and principal when due. SPECIAL RISKS ASSOCIATED WITH LOW-RATED AND COMPARABLE UNRATED DEBT SECURITIES. Low-rated and comparable unrated securities, while generally offering higher yields than investment-grade securities with similar maturities, involve greater risks, including the possibility of default or bankruptcy. They are regarded as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal. The special risk considerations in connection with such investments are discussed below. See the Appendix of this Statement for a discussion of securities ratings. The low-rated and comparable unrated securities market is relatively new, and its growth paralleled a long economic expansion. As a result, it is not clear how this market may withstand a prolonged recession or economic downturn. Such a prolonged economic downturn could severely disrupt the market for and adversely affect the value of such securities. 22 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) All interest-bearing securities typically experience appreciation when interest rates decline and depreciation when interest rates rise. The market values of low-rated and comparable unrated securities tend to reflect individual corporate developments to a greater extent than do higher-rated securities, which react primarily to fluctuations in the general level of interest rates. Low-rated and comparable unrated securities also tend to be more sensitive to economic conditions than are higher-rated securities. As a result, they generally involve more credit risks than securities in the higher-rated categories. During an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of low-rated and comparable unrated securities may experience financial stress and may not have sufficient revenues to meet their payment obligations. The issuer's ability to service its debt obligations may also be adversely affected by specific corporate developments, the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by an issuer of low-rated and comparable unrated securities is significantly greater than issuers of higher-rated securities because such securities are generally unsecured and are often subordinated to other creditors. Further, if the issuer of a low-rated and comparable unrated security defaulted, a Series might incur additional expenses to seek recovery. Periods of economic uncertainty and changes would also generally result in increased volatility in the market prices of low-rated and comparable unrated securities and thus in a Series' net asset value. As previously stated, the value of such a security will decrease in a rising interest rate market and accordingly, so will a Series' net asset value. If a Series experiences unexpected net redemptions in such a market, it may be forced to liquidate a portion of its portfolio securities without regard to their investment merits. Due to the limited liquidity of high-yield securities (discussed below) a Series may be forced to liquidate these securities at a substantial discount. Any such liquidation would reduce a Series' asset base over which expenses could be allocated and could result in a reduced rate of return for a Series. Low-rated and comparable unrated securities typically contain redemption, call, or prepayment provisions which permit the issuer of such securities containing such provisions to, at their discretion, redeem the securities. During periods of falling interest rates, issuers of high-yield securities are likely to redeem or prepay the securities and refinance them with debt securities with a lower interest rate. To the extent an issuer is able to refinance the securities or otherwise redeem them, a Series may have to replace the securities with a lower-yielding security, which would result in a lower return for a Series. Credit ratings issued by credit-rating agencies evaluate the safety of principal and interest payments of rated securities. They do not, however, evaluate the market value risk of low-rated and comparable unrated securities and, therefore, may not fully reflect the true risks of an investment. In addition, credit-rating agencies may or may not make timely changes in a rating to reflect changes in the economy or in the condition of the issuer that affect the market value of the security. Consequently, credit ratings are used only as a preliminary indicator of investment quality. Investments in low-rated and comparable unrated securities will be more dependent on the Investment Manager or relevant Sub-Adviser's credit analysis than would be the case with investments in investment-grade debt securities. The Investment Manager or relevant Sub-Adviser employs its own credit research and analysis, which includes a study of existing debt, capital structure, ability to service debt and to pay dividends, the issuer's sensitivity to economic conditions, its operating history, and the current trend of earnings. The Investment Manager or relevant Sub-Adviser continually monitors the investments in a Series' portfolio and carefully evaluates whether to dispose of or to retain low-rated and comparable unrated securities whose credit ratings or credit quality may have changed. A Series may have difficulty disposing of certain low-rated and comparable unrated securities because there may be a thin trading market for such securities. Because not all dealers maintain markets in all low-rated and comparable unrated securities, there is no established retail secondary market for many of these securities. A Series anticipates that such securities could be sold only to a limited number of dealers or institutional investors. To the extent a secondary trading market does exist, it is generally not as liquid as the secondary market for higher-rated securities. The lack of a liquid secondary market may have an adverse impact on the market price of the security. As a result, a Series' asset value and a Series' ability to dispose of particular securities, when necessary to meet a Series' liquidity needs or in response to a specific economic event, may be impacted. The lack of a liquid secondary market for certain securities may also make it more difficult for the Fund to obtain accurate market quotations for purposes of valuing a Series. Market quotations are generally available on many 23 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) low-rated and comparable unrated issues only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. During periods of thin trading, the spread between bid and asked prices is likely to increase significantly. In addition, adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of low-rated and comparable unrated securities, especially in a thinly-traded market. Recent legislation has been adopted and from time to time, proposals have been discussed regarding new legislation designed to limit the use of certain low-rated and comparable unrated securities by certain issuers. An example of legislation is a recent law which requires federally insured savings and loan associations to divest their investment in these securities over time. New legislation could further reduce the market because such legislation, generally, could negatively affect the financial condition of the issuers of high-yield securities, and could adversely affect the market in general. It is not currently possible to determine the impact of the recent legislation on this market. However, it is anticipated that if additional legislation is enacted or proposed, it could have a material effect on the value of low-rated and comparable unrated securities and the existence of a secondary trading market for the securities. PUT AND CALL OPTIONS: WRITING (SELLING) COVERED CALL OPTIONS. A call option gives the holder (buyer) the "right to purchase" a security or currency at a specified price (the exercise price), at expiration of the option (European style) or at any time until a certain date (the expiration date) (American style). So long as the obligation of the writer of a call option continues, he may be assigned an exercise notice by the broker-dealer through whom such option was sold, requiring him to deliver the underlying security or currency against payment of the exercise price. This obligation terminates upon the expiration of the call option, or such earlier time at which the writer effects a closing purchase transaction by repurchasing an option identical to that previously sold. Certain Series may write (sell) "covered" call options and purchase options to close out options previously written by the Series. In writing covered call options, the Series expects to generate additional premium income which should serve to enhance the Series' total return and reduce the effect of any price decline of the security or currency involved in the option. Covered call options will generally be written on securities or currencies which, in the opinion of the Investment Manager or relevant Sub-Adviser, are not expected to have any major price increases or moves in the near future but which, over the long term, are deemed to be attractive investments for the Series. The Series will write only covered call options. This means that the Series will own the security or currency subject to the option or an option to purchase the same underlying security or currency, having an exercise price equal to or less than the exercise price of the "covered" option, or will establish and maintain with its custodian for the term of the option, an account consisting of cash, U.S. Government securities or other high grade, liquid debt obligations having a value equal to the fluctuating market value of the optioned securities or currencies. In order to comply with the requirements of several states, the Series will not write a covered call option if, as a result, the aggregate market value of all Series securities or currencies covering call or put options exceeds 25% of the market value of the Series' net assets. Should these state laws change or should the Series obtain a waiver of their application, the Series reserves the right to increase this percentage. In calculating the 25% limit, the Series will offset, against the value of assets covering written calls and puts, the value of purchased calls and puts on identical securities or currencies with identical maturity dates. Series securities or currencies on which call options may be written will be purchased solely on the basis of investment considerations consistent with the Series' investment objectives. The writing of covered call options is a conservative investment technique believed to involve relatively little risk (in contrast to the writing of naked or uncovered options, which the Series will not do), but capable of enhancing the Series' total return. When writing a covered call option, the Series, in return for the premium, gives up the opportunity for profit from a price increase in the underlying security or currency above the exercise price, but conversely, retains the risk of loss should the price of the security or currency decline. Unlike one who owns securities or currencies not subject to an option, the Series has no control over when it may be required to sell the underlying securities or currencies, since it may be assigned an exercise notice at any time prior to the expiration of its obligations as a writer. If a call option which the Series has written expires, the Series will realize a gain in the amount of the premium; however, such gain may be offset by a decline in the market value of the underlying security or currency during the option period. 24 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) If the call option is exercised, the Series will realize a gain or loss from the sale of the underlying security or currency. Call options written by the Series will normally have expiration dates of less than nine months from the date written. The exercise price of the options may be below, equal to, or above the current market values of the underlying securities or currencies at the time the options are written. From time to time, the Series may purchase an underlying security or currency for delivery in accordance with an exercise notice of a call option assigned to it, rather than delivering such security or currency from its portfolio. In such cases, additional costs may be incurred. The premium received is the market value of an option. The premium the Series will receive from writing a call option will reflect, among other things, the current market price of the underlying security or currency, the relationship of the exercise price to such market price, the historical price volatility of the underlying security or currency, and the length of the option period. Once the decision to write a call option has been made, the Investment Manager or relevant Sub-Adviser, in determining whether a particular call option should be written on a particular security or currency, will consider the reasonableness of the anticipated premium and the likelihood that a liquid secondary market will exist for those options. The premium received by the Series for writing covered call options will be recorded as a liability of the Series. This liability will be adjusted daily to the option's current market value, which will be the latest sale price at the time at which the net asset value per share of the Series is computed (close of the New York Stock Exchange), or, in the absence of such sale, the latest asked price. The option will be terminated upon expiration of the option, the purchase of an identical option in a closing transaction, or delivery of the underlying security or currency upon the exercise of the option. The Series will realize a profit or loss from a closing purchase transaction if the cost of the transaction is less or more than the premium received from the writing of the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security or currency, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security or currency owned by the Series. WRITING (SELLING) COVERED PUT OPTIONS. A put option gives the purchaser of the option the right to sell, and the writer (seller) has the obligation to buy, the underlying security or currency at the exercise price during the option period (American style) or at the expiration of the option (European style). So long as the obligation of the writer continues, he may be assigned an exercise notice by the broker-dealer through whom such option was sold, requiring him to make payment of the exercise price against delivery of the underlying security or currency. The operation of put options in other respects, including their related risks and rewards, is substantially identical to that of call options. Certain Series may write American or European style covered put options and purchase options to close out options previously written by the Series. Certain Series may write put options on a covered basis, which means that the Series would either (i) maintain in a segregated account cash, cash equivalents, U.S. Government securities or other high grade, liquid debt obligations in an amount not less than the exercise price at all times while the put option is outstanding; (ii) sell short the security or currency underlying the put option at the same or higher price than the exercise price of the put option; or (iii) purchase an option to sell the underlying security or currency subject to the option having an exercise price equal to or greater than the exercise price of the "covered" option at all times while the put option is outstanding. (The rules of a clearing corporation currently require that such assets be deposited in escrow to secure payment of the exercise price.) The Series would generally write covered put options in circumstances where the Investment Manager or relevant Sub-Adviser wishes to purchase the underlying security or currency for the Series' portfolio at a price lower than the current market price of the security or currency. In such event the Series would write a put option at an exercise price which, reduced by the premium received on the option, reflects the lower price it is willing to pay. Since the Series would also receive interest on debt securities or currencies maintained to cover the exercise price of the option, this technique could be used to enhance current return during periods of market uncertainty. The risk in such a transaction would be that the market price of the underlying security or currency would decline below the exercise price less the premiums received. Such a decline could be substantial and result in a significant loss to the Series. In addition, the Series, because it does not own the specific securities or currencies which it may be required to purchase in the exercise of the put, can not benefit from appreciation, if any, with respect to such specific securities or currencies. In order to comply with the requirements of several states, the Series will not write a covered put option if, as a result, the aggregate market 25 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) value of all portfolio securities or currencies covering put or call options exceeds 25% of the market value of the Series' net assets. Should these state laws change or should the Series obtain a waiver of their application, the Series reserves the right to increase this percentage. In calculating the 25% limit, the Series will offset against the value of assets covering written puts and calls, the value of purchased puts and calls on identical securities or currencies. PREMIUM RECEIVED FROM WRITING CALL OR PUT OPTIONS. A Series will receive a premium from writing a put or call option, which increases such Series' return in the event the option expires unexercised or is closed out at a profit. The amount of the premium will reflect, among other things, the relationship of the market price of the underlying security to the exercise price of the option, the term of the option and the volatility of the market price of the underlying security. By writing a call option, a Series limits its opportunity to profit from any increase in the market value of the underlying security above the exercise price of the option. By writing a put option, a Series assumes the risk that it may be required to purchase the underlying security for an exercise price higher than its then current market value, resulting in a potential capital loss if the purchase price exceeds the market value plus the amount of the premium received, unless the security subsequently appreciates in value. CLOSING TRANSACTIONS. Closing transactions may be effected in order to realize a profit on an outstanding call option, to prevent an underlying security or currency from being called, or to permit the sale of the underlying security or currency. A Series may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written. A Series will realize a profit or loss from such transaction if the cost of such transaction is less or more than the premium received from the writing of the option. In the case of a put option, any loss so incurred may be partially or entirely offset by the premium received from a simultaneous or subsequent sale of a different put option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from the purchase of a call option is likely to be offset in whole or in part by unrealized appreciation of the underlying security owned by such Series. Furthermore, effecting a closing transaction will permit the Series to write another call option on the underlying security or currency with either a different exercise price or expiration date or both. If the Series desires to sell a particular security or currency from its portfolio on which it has written a call option, or purchased a put option, it will seek to effect a closing transaction prior to, or concurrently with, the sale of the security or currency. There is, of course, no assurance that the Series will be able to effect such closing transactions at a favorable price. If the Series cannot enter into such a transaction, it may be required to hold a security or currency that it might otherwise have sold. When the Series writes a covered call option, it runs the risk of not being able to participate in the appreciation of the underlying securities or currencies above the exercise price, as well as the risk of being required to hold on to securities or currencies that are depreciating in value. This could result in higher transaction costs. The Series will pay transaction costs in connection with the writing of options to close out previously written options. Such transaction costs are normally higher than those applicable to purchases and sales of portfolio securities. PURCHASING CALL OPTIONS. Certain Series may purchase American or European call options. The Series may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. The Series may purchase call options for the purpose of increasing its current return. Call options may also be purchased by a Series for the purpose of acquiring the underlying securities or currencies for its portfolio. Utilized in this fashion, the purchase of call options enables the Series to acquire the securities or currencies at the exercise price of the call option plus the premium paid. At times the net cost of acquiring securities or currencies in this manner may be less than the cost of acquiring the securities or currencies directly. This technique may also be useful to a Series in purchasing a large block of securities or currencies that would be more difficult to acquire by direct market purchases. So long as it holds such a call option rather than the underlying security or currency itself, the Series is partially protected from any unexpected decline in the market price of the underlying security or currency and in such event could allow the call option to expire, incurring a loss only to the extent of the premium paid for the option. To the extent required by the laws of certain states, the Series may not be permitted to commit more than 5% of its assets to premiums when purchasing call and put options. Should these state laws change or should the Series obtain a waiver of their application, the Series may commit more than 5% of its assets to premiums when 26 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) purchasing call and put options. The Series may also purchase call options on underlying securities or currencies it owns in order to protect unrealized gains on call options previously written by it. Call options may also be purchased at times to avoid realizing losses. For example, where the Series has written a call option on an underlying security or currency having a current market value below the price at which such security or currency was purchased by the Series, an increase in the market price could result in the exercise of the call option written by the Series and the realization of a loss on the underlying security or currency with the same exercise price and expiration date as the option previously written. PURCHASING PUT OPTIONS. Certain Series may purchase American or European style put options. The Series may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. A Series may purchase a put option on an underlying security or currency (a "protective put") owned by the Series as a defensive technique in order to protect against an anticipated decline in the value of the security or currency. Such hedge protection is provided only during the life of the put option when the Series, as the holder of the put option, is able to sell the underlying security or currency at the put exercise price regardless of any decline in the underlying security's market price or currency's exchange value. The premium paid for the put option and any transaction costs would reduce any capital gain otherwise available for distribution when the security or currency is eventually sold. A Series may purchase put options at a time when the Series does not own the underlying security or currency. By purchasing put options on a security or currency it does not own, the Series seeks to benefit from a decline in the market price of the underlying security or currency. If the put option is not sold when it has remaining value, and if the market price of the underlying security or currency remains equal to or greater than the exercise price during the life of the put option, the Series will lose its entire investment in the put option. In order for the purchase of a put option to be profitable, the market price of the underlying security or currency must decline sufficiently below the exercise price to cover the premium and transaction costs, unless the put option is sold in a closing sale transaction. DEALER OPTIONS. Certain Series may engage in transactions involving dealer options. Certain risks are specific to dealer options. While the Series would look to a clearing corporation to exercise exchange-traded options, if the Series were to purchase a dealer option, it would rely on the dealer from whom it purchased the option to perform if the option were exercised. Exchange-traded options generally have a continuous liquid market while dealer options have none. Consequently, the Series will generally be able to realize the value of a dealer option it has purchased only by exercising it or reselling it to the dealer who issued it. Similarly, when the Series writes a dealer option, it generally will be able to close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer to which the Series originally wrote the option. While the Series will seek to enter into dealer options only with dealers who will agree to and which are expected to be capable of entering into closing transactions with the Series, there can be no assurance that the Series will be able to liquidate a dealer option at a favorable price at any time prior to expiration. Failure by the dealer to do so would result in the loss of the premium paid by the Series as well as loss of the expected benefit of the transaction. Until the Series, as a covered dealer call option writer, is able to effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) used as cover until the option expires or is exercised. In the event of insolvency of the contra party, the Series may be unable to liquidate a dealer option. With respect to options written by the Series, the inability to enter into a closing transaction may result in material losses to the Series. For example, since the Series must maintain a secured position with respect to any call option on a security it writes, the Series may not sell the assets which it has segregated to secure the position while it is obligated under the option. This requirement may impair the Series' ability to sell portfolio securities at a time when such sale might be advantageous. The Staff of the SEC has taken the position that purchased dealer options and the assets used to secure the written dealer options are illiquid securities. The Series may treat the cover used for written OTC options as liquid if the dealer agrees that the Series may repurchase the OTC option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the OTC option would be considered illiquid only to the extent the maximum repurchase price under the formula exceeds the intrinsic value of the option. To this extent, the Series will treat dealer options as subject to the Series' limitation on illiquid securities. If the SEC changes its position on the liquidity of dealer options, the Series will change its treatment of such instruments accordingly. 27 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) CERTAIN RISK FACTORS IN WRITING CALL OPTIONS AND IN PURCHASING CALL AND PUT OPTIONS: During the option period, a Series, as writer of a call option has, in return for the premium received on the option, given up the opportunity for capital appreciation above the exercise price should the market price of the underlying security increase, but has retained the risk of loss should the price of the underlying security decline. The writer has no control over the time when it may be required to fulfill its obligation as a writer of the option. The risk of purchasing a call or put option is that the Series may lose the premium it paid plus transaction costs. If the Series does not exercise the option and is unable to close out the position prior to expiration of the option, it will lose its entire investment. An option position may be closed out only on an exchange which provides a secondary market. There can be no assurance that a liquid secondary market will exist for a particular option at a particular time and that the Series can close out its position by effecting a closing transaction. If the Series is unable to effect a closing purchase transaction, it cannot sell the underlying security until the option expires or the option is exercised. Accordingly, the Series may not be able to sell the underlying security at a time when it might otherwise be advantageous to do so. Possible reasons for the absence of a liquid secondary market include the following: (i) insufficient trading interest in certain options; (ii) restrictions on transactions imposed by an exchange; (iii) trading halts, suspensions or other restrictions imposed with respect to particular classes or series of options or underlying securities; (iv) inadequacy of the facilities of an exchange or the clearing corporation to handle trading volume; and (v) a decision by one or more exchanges to discontinue the trading of options or impose restrictions on orders. In addition, the hours of trading for options may not conform to the hours during which the underlying securities are traded. To the extent that the options markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the options markets. The purchase of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary Series securities transactions. Each exchange has established limitations governing the maximum number of call options, whether or not covered, which may be written by a single investor acting alone or in concert with others (regardless of whether such options are written on the same or different exchanges or are held or written on one or more accounts or through one or more brokers). An exchange may order the liquidation of positions found to be in violation of these limits and it may impose other sanctions or restrictions. OPTIONS ON STOCK INDICES. Options on stock indices are similar to options on specific securities except that, rather than the right to take or make delivery of the specific security at a specific price, an option on a stock index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of that stock index is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. This amount of cash is equal to such difference between the closing price of the index and the exercise price of the option expressed in dollars multiplied by a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. Unlike options on specific securities, all settlements of options on stock indices are in cash and gain or loss depends on general movements in the stocks included in the index rather than price movements in particular stocks. A stock index futures contract is an agreement in which one party agrees to deliver to the other an amount of cash equal to a specific amount multiplied by the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. No physical delivery of securities is made. RISK FACTORS IN OPTIONS ON INDICES. Because the value of an index option depends upon the movements in the level of the index rather than upon movements in the price of a particular security, whether the Series will realize a gain or a loss on the purchase or sale of an option on an index depends upon the movements in the level of prices in the market generally or in an industry or market segment rather than upon movements in the price of the individual security. Accordingly, successful use of positions will depend upon the ability of the Investment Manager or relevant Sub-Adviser to predict correctly movements in the direction of the market generally or in the direction of a particular industry. This requires different skills and techniques than predicting changes in the prices of individual securities. Index prices may be distorted if trading of securities included in the index is interrupted. Trading in index options also may be interrupted in certain circumstances, such as if trading were halted in a substantial number of securities in the index. If this occurred, a Series would not be able to close out options which it had written or 28 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) purchased and, if restrictions on exercise were imposed, might be unable to exercise an option it purchased, which would result in substantial losses. Price movements in Series securities will not correlate perfectly with movements in the level of the index and therefore, a Series bears the risk that the price of the securities may not increase as much as the level of the index. In this event, the Series would bear a loss on the call which would not be completely offset by movements in the prices of the securities. It is also possible that the index may rise when the value of the Series' securities does not. If this occurred, a Series would experience a loss on the call which would not be offset by an increase in the value of its securities and might also experience a loss in the market value of its securities. Unless a Series has other liquid assets which are sufficient to satisfy the exercise of a call on the index, the Series will be required to liquidate securities in order to satisfy the exercise. When a Series has written a call on an index, there is also the risk that the market may decline between the time the Series has the call exercised against it, at a price which is fixed as of the closing level of the index on the date of exercise, and the time the Series is able to sell securities. As with options on securities, the Investment Manager or relevant Sub-Adviser will not learn that a call has been exercised until the day following the exercise date, but, unlike a call on securities where the Series would be able to deliver the underlying security in settlement, the Series may have to sell part of its securities in order to make settlement in cash, and the price of such securities might decline before they could be sold. If a Series exercises a put option on an index which it has purchased before final determination of the closing index value for the day, it runs the risk that the level of the underlying index may change before closing. If this change causes the exercised option to fall "out-of-the-money" the Series will be required to pay the difference between the closing index value and the exercise price of the option (multiplied by the applicable multiplier) to the assigned writer. Although the Series may be able to minimize this risk by withholding exercise instructions until just before the daily cutoff time or by selling rather than exercising an option when the index level is close to the exercise price, it may not be possible to eliminate this risk entirely because the cutoff time for index options may be earlier than those fixed for other types of options and may occur before definitive closing index values are announced. TRADING IN FUTURES. Certain Series may enter into financial futures contracts, including stock index, interest rate and currency futures ("futures or futures contracts"). A futures contract provides for the future sale by one party and purchase by another party of a specified amount of a specific financial instrument (e.g., units of a stock index) for a specified price, date, time and place designated at the time the contract is made. Brokerage fees are incurred when a futures contract is bought or sold and margin deposits must be maintained. Entering into a contract to buy is commonly referred to as buying or purchasing a contract or holding a long position. Entering into a contract to sell is commonly referred to as selling a contract or holding a short position. Unlike when the Series purchases or sells a security, no price would be paid or received by the Series upon the purchase or sale of a futures contract. Upon entering into a futures contract, and to maintain the Series' open positions in futures contracts, the Series would be required to deposit with its custodian in a segregated account in the name of the futures broker an amount of cash, cash equivalents, U.S. Government securities, or other high grade, liquid debt obligations, known as "initial margin." The margin required for a particular futures contract is set by the exchange on which the contract is traded, and may be significantly modified from time to time by the exchange during the term of the contract. Futures contracts are customarily purchased and sold on margins that may range upward from less than 5% of the value of the contract being traded. Margin is the amount of funds that must be deposited by the Series with its custodian in a segregated account in the name of the futures commission merchant in order to initiate futures trading and to maintain the Series' open position in futures contracts. A margin deposit is intended to ensure the Series' performance of the futures contract. The margin required for a particular futures contract is set by the exchange on which the futures contract is traded, and may be significantly modified from time to time by the exchange during the term of the futures contract. If the price of an open futures contract changes (by increase in the case of a sale or by decrease in the case of a purchase) so that the loss on the futures contract reaches a point at which the margin on deposit does not satisfy margin requirements, the broker will require an increase in the margin. However, if the value of a position 29 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) increases because of favorable price changes in the futures contract so that the margin deposit exceeds the required margin, the broker will pay the excess to the Series. These subsequent payments, called "variation margin," to and from the futures broker, are made on a daily basis as the price of the underlying assets fluctuate making the long and short positions in the futures contract more or less valuable, a process known as "marking to the market." The Series expects to earn interest income on its margin deposits. Although certain futures contracts, by their terms, require actual future delivery of and payment for the underlying instruments, in practice most futures contracts are usually closed out before the delivery date. Closing out an open futures contract purchase or sale is effected by entering into an offsetting futures contract purchase or sale, respectively, for the same aggregate amount of the identical securities and the same delivery date. If the offsetting purchase price is less than the original sale price, the Series realizes a gain; if it is more, the Series realizes a loss. Conversely, if the offsetting sale price is more than the original purchase price, the Series realizes a gain; if it is less, the Series realizes a loss. The transaction costs must also be included in these calculations. There can be no assurance, however, that the Series will be able to enter into an offsetting transaction with respect to a particular futures contract at a particular time. If the Series is not able to enter into an offsetting transaction, the Series will continue to be required to maintain the margin deposits on the futures contract. For example, the Standard & Poor's 500 Stock Index is composed of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The S&P 500 Index assigns relative weightings to the common stocks included in the Index, and the Index fluctuates with changes in the market values of those common stocks. In the case of the S&P 500 Index, contracts are to buy or sell 500 units. Thus, if the value of the S&P 500 Index were $150, one contract would be worth $75,000 (500 units x $150). The stock index futures contract specifies that no delivery of the actual stock making up the index will take place. Instead, settlement in cash occurs. Over the life of the contract, the gain or loss realized by the Fund will equal the difference between the purchase (or sale) price of the contract and the price at which the contract is terminated. For example, if the Fund enters into a futures contract to buy 500 units of the S&P 500 Index at a specified future date at a contract price of $150 and the S&P 500 Index is at $154 on that future date, the Fund will gain $2,000 (500 units x gain of $4). If the Fund enters into a futures contract to sell 500 units of the stock index at a specified future date at a contract price of $150 and the S&P 500 Index is at $152 on that future date, the Fund will lose $1,000 (500 units x loss of $2). Options on futures are similar to options on underlying instruments except that options on futures give the purchaser the right, in return for the premium paid, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put), rather than to purchase or sell the futures contract, at a specified exercise price at any time during the period of the option. Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by the delivery of the accumulated balance in the writer's futures margin account which represents the amount by which the market price of the futures contract, at exercise, exceeds (in the case of a call) or is less than (in the case of a put) the exercise price of the option on the futures contract. Alternatively, settlement may be made totally in cash. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid. The writer of an option on a futures contract is required to deposit margin pursuant to requirements similar to those applicable to futures contracts. Upon exercise of an option on a futures contract, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's margin account. This amount will be equal to the amount by which the market price of the futures contract at the time of exercise exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. Commissions on financial futures contracts and related options transactions may be higher than those which would apply to purchases and sales of securities directly. From time to time, a single order to purchase or sell futures contracts (or options thereon) may be made on behalf of the Series and other mutual funds or portfolios of mutual funds for which the Investment Manager or relevant Sub-Adviser serves as adviser or sub-adviser. Such aggregated orders would be allocated among the Series and such other mutual funds or series of mutual funds in a fair and non-discriminatory manner. A public market exists in interest rate futures contracts covering primarily the following financial instruments: U.S. Treasury bonds; U.S. Treasury notes; Government National Mortgage Association ("GNMA") modified 30 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) pass-through mortgage-backed securities; three-month U.S. Treasury bills; 90-day commercial paper; bank certificates of deposit; and Eurodollar certificates of deposit. It is expected that Futures contracts trading in additional financial instruments will be authorized. The standard contract size is generally $100,000 for Futures contracts in U.S. Treasury bonds, U.S. Treasury notes, and GNMA pass through securities and $1,000,000 for the other designated Futures contracts. A public market exists in Futures contracts covering a number of indexes, including, but not limited to, the Standard & Poor's 500 Index, the Standard & Poor's 100 Index, the NASDAQ 100 Index, the Value Line Composite Index and the New York Stock Exchange Composite Index. Stock index futures contracts may be used to provide a hedge for a portion of the Series' portfolio, as a cash management tool, or as an efficient way for the Investment Manager or relevant Sub-Adviser to implement either an increase or decrease in portfolio market exposure in response to changing market conditions. Stock index futures contacts are currently traded with respect to the S&P 500 Index and other broad stock market indices, such as the New York Stock Exchange Composite Stock Index and the Value Line Composite Stock Index. The Series may, however, purchase or sell futures contracts with respect to any stock index. Nevertheless, to hedge the Series' portfolio successfully, the Series must sell futures contracts with respect to indexes or subindexes whose movements will have a significant correlation with movements in the prices of the Series' securities. Interest rate or currency futures contracts may be used as a hedge against changes in prevailing levels of interest rates or currency exchange rates in order to establish more definitely the effective return on securities or currencies held or intended to be acquired by the Series. In this regard, the Series could sell interest rate or currency futures as an offset against the effect of expected increases in interest rates or currency exchange rates and purchase such futures as an offset against the effect of expected declines in interest rates or currency exchange rates. The Series may enter into futures contracts which are traded on national or foreign futures exchanges and are standardized as to maturity date and underlying financial instrument. The principal financial futures exchanges in the United States are the Board of Trade of the City of Chicago, the Chicago Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of Trade. Futures exchanges and trading in the United States are regulated under the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"). Futures are traded in London at the London International Financial Futures Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange. Although techniques other than the sale and purchase of futures contracts could be used for the above-referenced purposes, futures contracts offer an effective and relatively low cost means of implementing the Series' objectives in these areas. CERTAIN RISKS RELATING TO FUTURES CONTRACTS AND RELATED OPTIONS. There are special risks involved in futures transactions. VOLATILITY AND LEVERAGE. The prices of futures contracts are volatile and are influenced, among other things, by actual and anticipated changes in the market and interest rates, which in turn are affected by fiscal and monetary policies and national and international policies and economic events. Most United States futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of futures contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses. Because of the low margin deposits required, futures trading involves an extremely high degree of leverage. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss, as well as gain, to the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit, if the contract were closed out. Thus, a purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. However, the Series would presumably have sustained comparable losses if, instead of the futures 31 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) contract, it had invested in the underlying instrument and sold it after the decline. Furthermore, in the case of a futures contract purchase, in order to be certain that the Series has sufficient assets to satisfy its obligations under a futures contract, the Series earmarks to the futures contract cash, cash equivalents, U.S. Government securities or other high grade, liquid debt securities equal in value to the current value of the underlying instrument less the margin deposit. LIQUIDITY. The Series may elect to close some or all of its futures positions at any time prior to their expiration. The Series would do so to reduce exposure represented by long futures positions or increase exposure represented by short futures positions. The Series may close its positions by taking opposite positions which would operate to terminate the Series' position in the futures contracts. Final determinations of variation margin would then be made, additional cash would be required to be paid by or released to the Series, and the Series would realize a loss or a gain. Futures contracts may be closed out only on the exchange or board of trade where the contracts were initially traded. Although the Series intends to purchase or sell futures contracts only on exchanges or boards of trade where there appears to be an active market, there is no assurance that a liquid market on an exchange or board of trade will exist for any particular contract at any particular time. In such event, it might not be possible to close a futures contract, and in the event of adverse price movements, the Series would continue to be required to make daily cash payments of variation margin. However, in the event futures contracts have been used to hedge the underlying instruments, the Series would continue to hold the underlying instruments subject to the hedge until the futures contracts could be terminated. In such circumstances, an increase in the price of the underlying instruments, if any, might partially or completely offset losses on the futures contract. However, as described below, there is no guarantee that the price of the underlying instruments will, in fact, correlate with the price movements in the futures contract and thus provide an offset to losses on a futures contract. HEDGING RISK. A decision of whether, when, and how to hedge involves skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of unexpected market behavior, market or interest rate trends. There are several risks in connection with the use by the Series of futures contracts as a hedging device. One risk arises because of the imperfect correlation between movements in the prices of the futures contracts and movements in the prices of the underlying instruments which are the subject of the hedge. The Investment Manager or relevant Sub-Adviser will, however, attempt to reduce this risk by entering into futures contracts whose movements, in its, judgment, will have a significant correlation with movements in the prices of the Series' underlying instruments sought to be hedged. Successful use of futures contracts by the Series for hedging purposes is also subject to the Investment Manager or relevant Sub-Adviser's ability to correctly predict movements in the direction of the market. It is possible that, when the Series has sold futures to hedge its portfolio against a decline in the market, the index, indices, or underlying instruments on which the futures are written might advance and the value of the underlying instruments held in the Series' portfolio might decline. If this were to occur, the Series would lose money on the futures and also would experience a decline in value in its underlying instruments. However, while this might occur to a certain degree, it is believed that over time the value of the Series' portfolio will tend to move in the same direction as the market indices which are intended to correlate to the price movements of the underlying instruments sought to be hedged. It is also possible that if the Series were to hedge against the possibility of a decline in the market (adversely affecting the underlying instruments held in its portfolio) and prices instead increased, the Series would lose part or all of the benefit of increased value of those underlying instruments that it has hedged, because it would have offsetting losses in its futures positions. In addition, in such situations, if the Series had insufficient cash, it might have to sell underlying instruments to meet daily variation margin requirements. Such sales of underlying instruments might be, but would not necessarily be, at increased prices (which would reflect the rising market). The Series might have to sell underlying instruments at a time when it would be disadvantageous to do so. In addition to the possibility that there might be an imperfect correlation, or no correlation at all, between price movements in the futures contracts and the portion of the portfolio being hedged, the price movements of futures contracts might not correlate perfectly with price movements in the underlying instruments due to certain market distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors might close futures 32 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) contracts through offsetting transactions which could distort the normal relationship between the underlying instruments and futures markets. Second, the margin requirements in the futures market are less onerous than margin requirements in the securities markets, and as a result the futures market might attract more speculators than the securities markets do. Increased participation by speculators in the futures market might also cause temporary price distortions. Due to the possibility of price distortion in the futures market and also because of the imperfect correlation between price movements in the underlying instruments and movements in the prices of futures contracts, even a correct forecast of general market trends by the Investment Manager or relevant Sub-Adviser might not result in a successful hedging transaction over a very short time period. CERTAIN RISKS OF OPTIONS ON FUTURES CONTRACTS: The Series may seek to close out an option position by writing or buying an offsetting option covering the same index, underlying instruments, or contract and having the same exercise price and expiration date. The ability to establish and close out positions on such options will be subject to the maintenance of a liquid secondary market. Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options, or underlying instruments; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or a clearing corporation may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in the class or series of options) would cease to exist, although outstanding options on the exchange that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. There is no assurance that higher than anticipated trading activity or other unforeseen events might not, at times, render certain of the facilities of any of the clearing corporations inadequate, and thereby result in the institution by an exchange of special procedures which may interfere with the timely execution of customers' orders. REGULATORY LIMITATIONS. The Series will engage in transactions in futures contracts and options thereon only for bona fide hedging, yield enhancement and risk management purposes, in each case in accordance with the rules and regulations of the CFTC. The Series may not enter into futures contracts or options thereon if, with respect to positions which do not qualify as bona fide hedging under applicable CFTC rules, the sum of the amounts of initial margin deposits on the Series' existing futures and premiums paid for options on futures would exceed 5% of the net asset value of the Series after taking into account unrealized profits and unrealized losses on any such contracts it has entered into; provided, however, that in the case of an option that is in-the-money at the time of purchase, the in-the-money amount may be excluded in calculating the 5% limitation. The Series' use of futures contracts will not result in leverage. Therefore, to the extent necessary, in instances involving the purchase of futures contracts or call options thereon or the writing of put options thereon by the Series, an amount of cash, cash equivalents, U.S. Government securities or other high grade, liquid debt obligations, equal to the market value of the futures contracts and options thereon (less any related margin deposits), will be identified in an account with the Series' custodian to cover the position, or alternative cover will be employed. In addition, CFTC regulations may impose limitations on the Series' ability to engage in certain yield enhancement and risk management strategies. If the CFTC or other regulatory authorities adopt different (including less stringent) or additional restrictions, the Series would comply with such new restrictions. FOREIGN FUTURES AND OPTIONS. Participation in foreign futures and foreign options transactions involves the execution and clearing of trades on or subject to the rules of a foreign board of trade. Neither the National Futures Association nor any domestic exchange regulates activities of any foreign boards of trade, including the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign board of trade or any applicable foreign law. This is true even if the exchange is formally linked to a domestic market so that a position taken on the market may be liquidated by a transaction on another market. Moreover, such laws or regulations will vary depending on the foreign country in which the foreign futures or foreign options transaction occurs. For these reasons, customers who trade foreign futures or foreign options contracts may not be afforded 33 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) certain of the protective measures provided by the Commodity Exchange Act, the CFTC's regulations and the rules of the National Futures Association and any domestic exchange, including the right to use reparations proceedings before the Commission and arbitration proceedings provided by the National Futures Association or any domestic futures exchange. In particular, funds received from the Series for foreign futures or foreign options transactions may not be provided the same protections as funds received in respect of transactions on United States futures exchanges. In addition, the price of any foreign futures or foreign options contract and, therefore, the potential profit and loss thereon may be affected by any variance in the foreign exchange rate between the time an order is placed and the time it is liquidated, offset or exercised. FORWARD CURRENCY CONTRACTS AND RELATED OPTIONS. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the Contract. These contracts are principally traded in the interbank market conducted directly between currency traders (usually large, commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. Depending on the investment policies and restrictions applicable to a Series, a Series will generally enter into forward foreign currency exchange contracts under two circumstances. First, when a Series 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. By entering into a forward contract for the purchase or sale, for a fixed amount of dollars, of the amount of foreign currency involved in the underlying security transactions, the Series will be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the subject foreign currency during the period between the date the security is purchased or sold and the date on which payment is made or received. Second, when the Investment Manager or relevant Sub-Adviser believes that the currency of a particular foreign country may suffer or enjoy a substantial movement against another currency, including the U.S. dollar, it may enter into a forward contract to sell or buy the amount of the former foreign currency, approximating the value of some or all of the Series' portfolio securities denominated in such foreign currency. Alternatively, where appropriate, the Series may hedge all or part of its foreign currency exposure through the use of a basket of currencies or a proxy currency where such currencies or currency act as an effective proxy for other currencies. In such a case, the Series may enter into a forward contract where the amount of the foreign currency to be sold exceeds the value of the securities denominated in such currency. The use of this basket hedging technique may be more efficient and economical than entering into separate forward contracts for each currency held in the Series. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movement is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. The Series will also not enter into such forward contracts or maintain a net exposure to such contracts where the consummation of the contracts would obligate the Series to deliver an amount of foreign currency in excess of the value of the Series' portfolio securities or other assets denominated in that currency. The Series, however, in order to avoid excess transactions and transaction costs, may maintain a net exposure to forward contracts in excess of the value of the Series' portfolio securities or other assets to which the forward contracts relate (including accrued interest to the maturity of the forward contract on such securities) provided the excess amount is "covered" by high grade, liquid debt securities, denominated in any currency, at least equal at all times to the amount of such excess. For these purposes "the securities or other assets to which the forward contracts relate may be securities or assets denominated in a single currency, or where proxy forwards are used, securities denominated in more than one currency. Under normal circumstances, consideration of the prospect for currency parities will be incorporated into the longer term investment decisions made with regard to overall diversification strategies. However, the Investment Manager and relevant Sub-Advisers believe that it is important to have the flexibility to enter into such forward contracts when it determines that the best interests of the Series will be served. 34 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) At the maturity of a forward contract, the Series may either sell the portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an "offsetting" contract obligating it to purchase, on the same maturity date, the same amount of the foreign currency. As indicated above, it is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of the forward contract. Accordingly, it may be necessary for a Series to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Series is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency the Series is obligated to deliver. However, as noted, in order to avoid excessive transactions and transaction costs, the Series may use high grade, liquid debt securities, denominated in any currency, to cover the amount by which the value of a forward contract exceeds the value of the securities to which it relates. If the Series retains the portfolio security and engages in an offsetting transaction, the Series will incur a gain or a loss (as described below) to the extent that there has been movement in forward contract prices. If the Series engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline during the period between the Series entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Series will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Series will suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. The Series' dealing in forward foreign currency exchange contracts will generally be limited to the transactions described above. However, the Series reserve the right to enter into forward foreign currency contracts for different purposes and under different circumstances. Of course, the Series are not required to enter into forward contracts with regard to their foreign currency-denominated securities and will not do so unless deemed appropriate by the Investment Manager or relevant Sub-Adviser. It also should be realized that this method of hedging against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange at a future date. Additionally, although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time, they tend to limit any potential gain which might result from an increase in the value of that currency. Although the Series value their assets daily in terms of U.S. dollars, they do not intend to convert their holdings of foreign currencies into U.S. dollars on a daily basis. They will do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the "spread") between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to a Series at one rate, while offering a lesser rate of exchange should the Series desire to resell that currency to the dealer. PURCHASE AND SALE OF CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS. As noted above, a currency futures contract sale creates an obligation by a Series, as seller, to deliver the amount of currency called for in the contract at a specified future time for a specified price. A currency futures contract purchase creates an obligation by a Series, as purchaser, to take delivery of an amount of currency at a specified future time at a specified price. Although the terms of currency futures contracts specify actual delivery or receipt, in most instances the contracts are closed out before the settlement date without the making or taking of delivery of the currency. Closing out of a currency futures contract is effected by entering into an offsetting purchase or sale transaction. Unlike a currency futures contract, which requires the parties to buy and sell currency on a set date, an option on a currency futures contract entitles its holder to decide on or before a future date whether to enter into such a contract. If the holder decides not to enter into the contract, the premium paid for the option is fixed at the point of sale. INTEREST RATE SWAPS AND INTEREST RATE CAPS AND FLOORS. Interest rate swaps involve the exchange by the Series with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments. The exchange commitments can involve payments to be made in the same currency or in different currencies. The purchase of an interest rate cap entitles the purchaser, to the extent 35 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) that a specified index exceeds a predetermined interest rate, to receive payments of interest on a contractually based principal amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a contractually based principal amount from the party selling the interest rate floor. HYBRID INSTRUMENTS. Hybrid instruments combine the elements of futures contracts or options with those of debt, preferred equity or a depository instrument ("Hybrid Instruments"). Often these Hybrid Instruments are indexed to the price of a commodity or particular currency or a domestic or foreign debt or equity securities index. Hybrid Instruments may take a variety of forms, including, but not limited to, debt instruments with interest or principal payments or redemption terms determined by reference to the value of a currency or commodity at a future point in time, preferred stock with dividend rates determined by reference to the value of a currency, or convertible securities with the conversion terms related to a particular commodity. The risks of investing in Hybrid Instruments reflect a combination of the risks from investing in securities, futures and currencies, including volatility and lack of liquidity. Reference is made to the discussion of futures and forward contracts in this Statement of Additional Information for a discussion of these risks. Further, the prices of the Hybrid Instrument and the related commodity or currency may not move in the same direction or at the same time. Hybrid Instruments may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. In addition, because the purchase and sale of Hybrid Instruments could take place in an over-the-counter market or in a private transaction between the Series and the seller of the Hybrid Instrument, the creditworthiness of the contract party to the transaction would be a risk factor which the Series would have to consider. Hybrid Instruments also may not be subject to regulation of the CFTC, which generally regulates the trading of commodity futures by U.S. persons, the SEC, which regulates the offer and sale of securities by and to U.S. persons, or any other governmental regulatory authority. LENDING OF PORTFOLIO SECURITIES. For the purpose of realizing additional income, certain of the Series may make secured loans of Series securities amounting to not more than 33 1/3% of its total assets. Securities loans are made to broker/dealers, institutional investors, or other persons pursuant to agreements requiring that the loans be continuously secured by collateral at least equal at all times to the value of the securities lent marked to market on a daily basis. The collateral received will consist of cash, U.S. Government securities, letters of credit or such other collateral as may be permitted under its investment program. While the securities are being lent, the Series will continue to receive the equivalent of the interest or dividends paid by the issuer on the securities, as well as interest on the investment of the collateral or a fee from the borrower. The Series has a right to call each loan and obtain the securities on five business days' notice or, in connection with securities trading on foreign markets, within such longer period of time which coincides with the normal settlement period for purchases and sales of such securities in such foreign markets. The Series will not have the right to vote securities while they are being lent, but it will call a loan in anticipation of any important vote. The risks in lending portfolio securities, as with other extensions of secured credit, consist of possible delay in receiving additional collateral or in the recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Loans will only be made to persons deemed by the Investment Manager or relevant Sub-Adviser to be of good standing and will not be made unless, in the judgment of the Investment Manager or relevant Sub-Adviser, the consideration to be earned from such loans would justify the risk. OTHER LENDING/BORROWING. Subject to approval by the Securities and Exchange Commission, Series N and O may make loans to, or borrow funds from, other mutual funds or portfolios of mutual funds sponsored or advised by T. Rowe Price or Rowe Price-Fleming International, Inc. The Series have no intention of engaging in these practices at this time. ZERO COUPON SECURITIES. Zero coupon securities pay no cash income and are sold at substantial discounts from their value at maturity. When held to maturity, their entire income, which consists of accretion of discount, comes from the difference between the issue price and their value at maturity. Zero coupon securities are subject to greater market value fluctuations from changing interest rates than debt obligations of comparable maturities which make current distributions of interest (cash). Zero coupon securities which are convertible into common stock offer the opportunity for capital appreciation as increases (or decreases) in market value, of such securities closely follows the movements in the market value of the underlying common stock. Zero coupon convertible securities generally are expected to be less volatile than the underlying common stocks, as they usually are issued 36 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) with maturities of 15 years or less and are issued with options and/or redemption features exercisable by the holder of the obligation entitling the holder to redeem the obligation and receive a defined cash payment. Zero coupon securities include securities issued directly by the U.S. Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons and receipts for their underlying principal ("coupons") which have been separated by their holder, typically a custodian bank or investment brokerage firm. A holder will separate the interest coupons from the underlying principal (the "corpus") of the U.S. Treasury security. A number of securities firms and banks have stripped the interest coupons and receipts and then resold them in custodial receipt programs with a number of different names, including "Treasury Income Growth Receipts" (TIGRSTM) and Certificate of Accrual on Treasuries (CATSTM). The underlying U.S. Treasury bonds and notes themselves are held in book-entry form at the Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered securities which are owned ostensibly by the bearer or holder thereof), in trust on behalf of the owners thereof. Counsel to the underwriters of these certificates or other evidences of ownership of the U.S. Treasury securities have stated that, for federal tax and securities purposes, in their opinion purchasers of such certificates, such as the Series, most likely will be deemed the beneficial holder of the underlying U.S. Government securities. The U. S. Treasury has facilitated transfers of ownership of zero coupon securities by accounting separately for the beneficial ownership of particular interest coupon and corpus payments on Treasury securities through the Federal Reserve book-entry record keeping system. The Federal Reserve program as established by the Treasury Department is known as "STRIPS" or "Separate Trading of Registered Interest and Principal of Securities." Under the STRIPS program, the Series will be able to have its beneficial ownership of zero coupon securities recorded directly in the book-entry recordkeeping system in lieu of having to hold certificates or other evidences of ownership of the underlying U.S. Treasury securities. When U.S. Treasury obligations have been stripped of their unmatured interest coupons by the holder, the principal or corpus is sold at a deep discount because the buyer receives only the right to receive a future fixed payment in the security and does not receive any rights to periodic interest (cash) payments. Once stripped or separated, the corpus and coupons may be sold separately. Typically, the coupons are sold separately or grouped with other coupons with like maturity dates and sold bundled in such form. Purchasers of stripped obligations acquire, in effect, discount obligations that are economically identical to the zero coupon securities that the Treasury sells itself. WHEN-ISSUED SECURITIES. Certain Series may from time to time purchase securities on a "when-issued" basis. At the time the Series makes the commitment to purchase a security on a when-issued basis, it will record the transaction and reflect the value of the security in determining its net asset value. The Series do not believe that net asset value or income will be adversely affected by purchase of securities on a when-issued basis. The Series will maintain cash and marketable securities equal in value to commitments for when-issued securities. The price of when-issued securities, which may be expressed in yield terms, is fixed at the time the commitment to purchase is made, but delivery and payment for the when-issued securities take place at a later date. Normally, the settlement date occurs within 90 days of the purchase. During the period between purchase and settlement no payment is made by the Series to the issuer and no interest accrues to the Series. Forward commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in value of the Series' other assets. While when-issued securities may be sold prior to the settlement date, the Series intends to purchase such securities for the purpose of actually acquiring them unless a sale appears desirable for investment reasons. MORTGAGE-BACKED SECURITIES. Mortgage-backed securities (MBSs), including mortgage pass-through securities and collateralized mortgage obligations (CMOs), include certain securities issued or guaranteed by the United States Government or one of its agencies or instrumentalities, such as the Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), or Federal Home Loan Mortgage Corporation (FHLMC); securities issued by private issuers that represent an interest in or are collateralized by mortgage-backed securities issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities; and securities issued by private issuers that represent an interest in or are collateralized by mortgage loans. A mortgage pass-through security is a pro rata interest in a pool of mortgages where the cash flow generated from the mortgage collateral is passed through to the security holder. CMOs are obligations fully collateralized by a portfolio of mortgages or mortgage-related securities. 37 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) Series E and N may invest in securities known as "inverse floating obligations," "residual interest bonds," or "interest-only" (IO) and "principal-only" (PO) bonds, the market values of which will generally be more volatile than the market values of most MBSs. IOs and POs are created by separating the interest and principal payments generated by a pool of mortgage-backed bonds to create two classes of securities. Generally, one class receives interest only payments (IO) and the other class principal only payments (PO). MBSs have been referred to as "derivatives" because the performance of MBSs is dependent upon and derived from underlying securities. Investment in MBSs poses several risks, including prepayment, market and credit risks. Prepayment risk reflects the chance that borrowers may prepay their mortgages faster than expected, thereby affecting the investment's average life and perhaps its yield. Borrowers are most likely to exercise their prepayment options at a time when it is least advantageous to investors, generally prepaying mortgages as interest rates fall, and slowing payments as interest rates rise. Certain classes of CMOs may have priority over others with respect to the receipt of prepayments on the mortgages and the Series may invest in CMOs which are subject to greater risk of prepayment. Market risk reflects the chance that the price of the security may fluctuate over time. The price of MBSs may be particularly sensitive to prevailing interest rates, the length of time the security is expected to be outstanding and the liquidity of the issue. In a period of unstable interest rates, there may be decreased demand for certain types of MBSs, and a Series invested in such securities wishing to sell them may find it difficult to find a buyer, which may in turn decrease the price at which they may be sold. IOs and POs are acutely sensitive to interest rate changes and to the rate of principal prepayments. They are very volatile in price and may have lower liquidity than most mortgage-backed securities. Certain CMOs may also exhibit these qualities, especially those which pay variable rates of interest which adjust inversely with and more rapidly than short-term interest rates. Credit risk reflects the chance that the Fund may not receive all or part of its principal because the issuer or credit enhancer has defaulted on its obligations. Obligations issued by U.S. Government-related entities are guaranteed by the agency or instrumentality, and some, such as GNMA certificates, are supported by the full faith and credit of the U.S. Treasury; others are supported by the right of the issuer to borrow from the Treasury; others, such as those of the FNMA, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; still others, are supported only by the credit of the instrumentality. Although securities issued by U.S. Government-related agencies are guaranteed by the U.S. Government, its agencies or instrumentalities, shares of the Series are not so guaranteed in any way. The performance of private label MBSs, issued by private institutions, is based on the financial health of those institutions. There is no guarantee the Series' investment in MBSs will be successful, and the Series' total return could be adversely affected as a result. ASSET-BACKED SECURITIES: Asset-backed securities directly or indirectly represent a participation interest in, or are secured by and payable from, a stream of payments generated by particular assets such as motor vehicle or credit card receivables. Payments of principal and interest may be guaranteed up to certain amounts and for a certain time period by a letter of credit issued by a financial institution unaffiliated with the entities issuing the securities. Asset-backed securities may be classified as pass-through certificates or collateralized obligations. Pass-through certificates are asset-backed securities which represent an undivided fractional ownership interest in an underlying pool of assets. Pass-through certificates usually provide for payments of principal and interest received to be passed through to their holders, usually after deduction for certain costs and expenses incurred in administering the pool. Because pass-through certificates represent an ownership interest in the underlying assets, the holders thereof bear directly the risk of any defaults by the obligors on the underlying assets not covered by any credit support. See "Types of Credit Support." Asset-backed securities issued in the form of debt instruments, also known as collateralized obligations, are generally issued as the debt of a special purpose entity organized solely for the purpose of owning such assets and issuing such debt. Such assets are most often trade, credit card or automobile receivables. The assets collateralizing such asset-backed securities are pledged to a trustee or custodian for the benefit of the holders thereof. Such issuers generally hold no assets other than those underlying the asset-backed securities and any credit support provided. As a result, although payments on such asset-backed securities are obligations of the issuers, in the event of defaults on the underlying assets not covered by any credit support (see "Types of Credit Support"), the issuing entities are unlikely to have sufficient assets to satisfy their obligations on the related asset-backed securities. 38 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) METHODS OF ALLOCATING CASH FLOWS. While many asset-backed securities are issued with only one class of security, many asset-backed securities are issued in more than one class, each with different payment terms. Multiple class asset-backed securities are issued for two main reasons. First, multiple classes may be used as a method of providing credit support. This is accomplished typically through creation of one or more classes whose right to payments on the asset-backed security is made subordinate to the right to such payments of the remaining class or classes. See "Types of Credit Support". Second, multiple classes may permit the issuance of securities with payment terms, interest rates or other characteristics differing both from those of each other and from those of the underlying assets. Examples include so-called "strips" (asset-backed securities entitling the holder to disproportionate interests with respect to the allocation of interest and principal of the assets backing the security), and securities with a class or classes having characteristics which mimic the characteristics of non-asset-backed securities, such as floating interest rates (i.e., interest rates which adjust as a specified benchmark changes) or scheduled amortization of principal. Asset-backed securities in which the payment streams on the underlying assets are allocated in a manner different than those described above may be issued in the future. The Series may invest in such asset-backed securities if such investment is otherwise consistent with its investment objectives and policies and with the investment restrictions of the Series. TYPES OF CREDIT SUPPORT. Asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. To lessen the effect of failures by obligors on underlying assets to make payments, such securities may contain elements of credit support. Such credit support falls into two classes: liquidity protection and protection against ultimate default by an obligor on the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to ensure that scheduled payments on the underlying pool are made in a timely fashion. Protection against ultimate default ensures ultimate payment of the obligations on at least a portion of the assets in the pool. Such protection may be provided through guarantees, insurance policies or letters of credit obtained from third parties, through various means of structuring the transaction or through a combination of such approaches. Examples of asset-backed securities with credit support arising out of the structure of the transaction include "senior-subordinated securities" (multiple class asset-backed securities with certain classes subordinate to other classes as to the payment of principal thereon, with the result that defaults on the underlying assets are borne first by the holders of the subordinated class) and asset-backed securities that have "reserve Portfolios" (where cash or investments, sometimes funded from a portion of the initial payments on the underlying assets, are held in reserve against future losses) or that have been "over collateralized" (where the scheduled payments on, or the principal amount of, the underlying assets substantially exceeds that required to make payment of the asset-backed securities and pay any servicing or other fees). The degree of credit support provided on each issue is based generally on historical information respecting the level of credit risk associated with such payments. Delinquency or loss in excess of that anticipated could adversely affect the return on an investment in an asset-backed security. Additionally, if the letter of credit is exhausted, holders of asset-backed securities may also experience delays in payments or losses if the full amounts due on underlying sales contracts are not realized. AUTOMOBILE RECEIVABLE SECURITIES. Asset-Backed Securities may be backed by receivables from motor vehicle installment sales contracts or installment loans secured by motor vehicles ("Automobile Receivable Securities"). Since installment sales contracts for motor vehicles or installment loans related thereto ("Automobile Contracts") typically have shorter durations and lower incidences of prepayment, Automobile Receivable Securities generally will exhibit a shorter average life and are less susceptible to prepayment risk. Most entities that issue Automobile Receivable Securities create an enforceable interest in their respective Automobile Contracts only by filing a financing statement and by having the servicer of the Automobile contracts, which is usually the originator of the Automobile Contracts, take custody thereof. In such circumstances, if the servicer of the Automobile Contracts were to sell the same Automobile Contracts to another party, in violation of its obligation not to do so, there is a risk that such party could acquire an interest in the Automobile Contracts superior to that of the holders of Automobile Receivable Securities. Also although most Automobile Contracts grant a security interest in the motor vehicle being financed, in most states the security interest in a motor vehicle must be noted on the certificate of title to create an enforceable security interest against competing claims of other parties. Due to the large number of vehicles involved, however, the certificate of title to each vehicle financed, 39 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) pursuant to the Automobile Contracts underlying the Automobile Receivable Security, usually is not amended to reflect the assignment of the seller's security interest for the benefit of the holders of the Automobile Receivable Securities. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on the securities. In addition, various state and federal securities laws give the motor vehicle owner the right to assert against the holder of the owner's Automobile Contract certain defenses such owner would have against the seller of the motor vehicle. The assertion of such defenses could reduce payments on the Automobile Receivable Securities. CREDIT CARD RECEIVABLE SECURITIES. Asset-Backed Securities may be backed by receivables from revolving credit card agreements ("Credit Card Receivable Securities"). Credit balances on revolving credit card agreements ("Accounts") are generally paid down more rapidly than are Automobile Contracts. Most of the Credit Card Receivable Securities issued publicly to date have been Pass-Through Certificates. In order to lengthen the maturity of Credit Card Receivable Securities, most such securities provide for a fixed period during which only interest payments on the underlying Accounts are passed through to the security holder and principal payments received on such Accounts are used to fund the transfer to the pool of assets supporting the related Credit Card Receivable Securities of additional credit card charges made on an Account. The initial fixed period usually may be shortened upon the occurrence of specified events which signal a potential deterioration in the quality of the assets backing the security, such as the imposition of a cap on interest rates. The ability of the issuer to extend the life of an issue of Credit Card Receivable Securities thus depends upon the continued generation of additional principal amounts in the underlying accounts during the initial period and the non-occurrence of specified events. An acceleration in cardholders' payment rates or any other event which shortens the period during which additional credit card charges on an Account may be transferred to the pool of assets supporting the related Credit Card Receivable Security could shorten the weighted average life and yield of the Credit Card Receivable Security. Credit cardholders are entitled to the protection of a number of state and federal consumer credit laws, many of which give such holders the right to set off certain amounts against balances owed on the credit card, thereby reducing amounts paid on Accounts. In addition, unlike most other Asset Backed Securities, Accounts are unsecured obligations of the cardholder. RESTRICTED SECURITIES. Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where registration is required, the Series may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Series may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Series might obtain a less favorable price than prevailed when it decided to sell. Restricted securities will be priced at fair value as determined in accordance with procedures prescribed by the Board of Directors. If through the appreciation of restricted securities or the depreciation of unrestricted securities or the depreciation of liquid securities, the Series should be in a position where more than the percentage of its net assets permitted under the respective Series operating policy are invested in illiquid assets, including restricted securities, the Series will take appropriate steps to protect liquidity. The Series may purchase securities which while privately placed, are eligible for purchase and sale under Rule 144A under the 1933 Act. This rule permits certain qualified institutional buyers, such as the Series, to trade in privately placed securities even though such securities are not registered under the 1933 Act. The Investment Manager or relevant Sub-Adviser, under the supervision of the Fund's Board of Directors, will consider whether securities purchased under Rule 144A are illiquid and thus subject to the Series' restriction on investment of its assets in illiquid securities. A determination of whether a Rule 144A security is liquid or not is a question of fact. In making this determination, the Investment Manager or relevant Sub-Adviser will consider the trading markets for the specific security taking into account the unregistered nature of a Rule 144A security. In addition the Investment Manager or relevant Sub-Adviser could consider the (1) frequency of trades and quotes, (2) number of dealers and potential purchasers, (3) dealer undertakings to make a market, and (4) the nature of the security and of marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). The liquidity of Rule 144A securities would be monitored, and if as a result of changed conditions it is determined that a Rule 144A security is no longer liquid, the Series' holdings of illiquid securities 40 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) would be reviewed to determine what, if any, steps are required to assure that the Series does not invest more than permitted in illiquid securities. Investing in Rule 144A securities could have the effect of increasing the amount of the Series' assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase such securities. WARRANTS. Investment in warrants is pure speculation in that they have no voting rights, pay no dividends, and have no rights with respect to the assets of the corporation issuing them. Warrants basically are options to purchase equity securities at a specific price valid for a specific period of time. They do not represent ownership of the securities but only the right to buy them. Warrants differ from call options in that warrants are issued by the issuer of the security which may be purchased on their exercise, whereas call options may be written or issued by anyone. The prices of warrants do not necessarily move parallel to the prices of the underlying securities. CERTAIN RISKS OF FOREIGN INVESTING BRADY BONDS. Certain Series may invest in "Brady Bonds," which are debt restructurings that provide for the exchange of cash and loans for newly issued bonds. Brady Bonds are securities created through the exchange of existing commercial bank loans to public and private entities in certain emerging markets for new bonds in connection with debt restructuring under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady. Brady Bonds recently have been issued by the governments of Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic, Jordan, Mexico, Nigeria, The Philippines, Uruguay and Venezuela, and are expected to be issued by Ecuador and Poland and other emerging market countries. Approximately $150 billion in principal amount of Brady Bonds has been issued to date, the largest proportion having been issued by Mexico and Venezuela. Investors should recognize that Brady Bonds have been issued only recently and, accordingly, do not have a long payment history. Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (primarily the U.S. dollar) and are actively traded in the secondary market for Latin American debt. The Salomon Brothers Brady Bond Index provides a benchmark that can be used to compare returns of emerging market Brady Bonds with returns in other bond markets, e.g., the U.S. bond market. Series K may invest in either collateralized or uncollateralized Brady Bonds denominated in various currencies, while Series B may invest only in collateralized bonds denominated in U.S. dollars. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds, are collateralized in full as to principal by U.S. Treasury zero coupon bonds having the same maturity as the bonds. Interest payments on such bonds generally are collateralized by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of rolling interest payments or, in the case of floating rate bonds, initially is equal to at least one year's rolling interest payments based on the applicable interest rate at the time and is adjusted at regular intervals thereafter. EMERGING COUNTRIES. Certain Series may invest in debt securities in emerging markets. Investing in securities in emerging countries may entail greater risks than investing in debt securities in developed countries. These risks include (i) less social, political and economic stability; (ii) the small current size of the markets for such securities and the currently low or nonexistent volume of trading, which result in a lack of liquidity and in greater price volatility; (iii) certain national policies which may restrict a Series' investment opportunities, including restrictions on investment in issuers or industries deemed sensitive to national interests; (iv) foreign taxation; and (v) the absence of developed structures governing private or foreign investment or allowing for judicial redress for injury to private property. POLITICAL AND ECONOMIC RISKS. Investing in securities of non-U.S. companies may entail additional risks due to the potential political and economic instability of certain countries and the risks of expropriation, nationalization, confiscation or the imposition of restrictions on foreign investment and on repatriation of capital invested. In the event of such expropriation, nationalization or other confiscation by any country, a Series could lose its entire investment in any such country. An investment in a Series which invests in non-U.S. companies is subject to the political and economic risks associated with investments in emerging markets. Even though opportunities for investment may exist in emerging markets, any change in the leadership or policies of the governments of those countries or in the leadership or policies of any other government which exercises a significant influence over those countries, may 41 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) halt the expansion of or reverse the liberalization of foreign investment policies now occurring and thereby eliminate any investment opportunities which may currently exist. Investors should note that upon the accession to power of authoritarian regimes, the governments of a number of emerging market countries previously expropriated large quantities of real and personal property similar to the property which will be represented by the securities purchased by the Series. The claims of property owners against those governments were never finally settled. There can be no assurance that any property represented by securities purchased by a Series will not also be expropriated, nationalized, or otherwise confiscated. If such confiscation were to occur, the Series could lose a substantial portion of its investments in such countries. The Series' investments would similarly be adversely affected by exchange control regulation in any of those countries. RELIGIOUS AND ETHNIC INSTABILITY. Certain countries in which a Series may invest may have vocal minorities that advocate radical religious or revolutionary philosophies or support ethnic independence. Any disturbance on the part of such individuals could carry the potential for wide-spread destruction or confiscation of property owned by individuals and entities foreign to such country and could cause the loss of the Series' investment in those countries. FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities such as the Series. As illustrations, certain countries require governmental approval prior to investments by foreign persons, or limit the amount of investment by foreign persons in a particular company, or limit the investments by foreign persons to only a specific class of securities of a company that may have less advantageous terms than securities of the company available for purchase by nationals. Moreover, the national policies of certain countries may restrict investment opportunities in issuers or industries deemed sensitive to national interests. In addition, some countries require governmental approval for the repatriation of investment income, capital or the proceeds of securities sales by foreign investors. A Series could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation, as well as by the application to it of other restrictions on investments. NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION. Foreign companies are subject to accounting, auditing and financial standards and requirements that differ, in some cases significantly, from those applicable to U.S. companies. In particular, the assets, liabilities and profits appearing on the financial statements of such a company may not reflect its financial position or results of operations in the way they would be reflected had such financial statements been prepared in accordance with U.S. generally accepted accounting principles. Most of the securities held by the Series will not be registered with the SEC or regulators of any foreign country, nor will the issuers thereof be subject to the SEC's reporting requirements. Thus, there will be less available information concerning foreign issuers of securities held by the Series than is available concerning U.S. issuers. In instances where the financial statements of an issuer are not deemed to reflect accurately the financial situation of the issuer, the Investment Manager and relevant Sub-Adviser will take appropriate steps to evaluate the proposed investment, which may include on-site inspection of the issuer, interviews with its management and consultations with accountants, bankers and other specialists. There is substantially less publicly available information about foreign companies than there are reports and ratings published about U.S. companies and the U.S. Government. In addition, where public information is available, it may be less reliable than such information regarding U.S. issuers. CURRENCY FLUCTUATIONS. Because a Series, under normal circumstances, may invest substantial portions of its total assets in the securities of foreign issuers which are denominated in foreign currencies, the strength or weakness of the U.S. dollar against such foreign currencies will account for part of the Series' investment performance. A decline in the value of any particular currency against the U.S. dollar will cause a decline in the U.S. dollar value of the Series' holdings of securities denominated in such currency and, therefore, will cause an overall decline in the Series' net asset value and any net investment income and capital gains to be distributed in U.S. dollars to shareholders of the Series. The rate of exchange between the U.S. dollar and other currencies is determined by several factors including the supply and demand for particular currencies, central bank efforts to support particular currencies, the 42 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) movement of interest rates, the pace of business activity in certain other countries and the U.S., and other economic and financial conditions affecting the world economy. Although the Series values its assets daily in terms of U.S. dollars, the Series does not intend to convert holdings of foreign currencies into U.S. dollars on a daily basis. The Series will do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference ("spread") between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Series at one rate, while offering a lesser rate of exchange should the Series desire to sell that currency to the dealer. ADVERSE MARKET CHARACTERISTICS. Securities of many foreign issuers may be less liquid and their prices more volatile than securities of comparable U.S. issuers. In addition, foreign securities exchanges and brokers generally are subject to less governmental supervision and regulation than in the U.S., and foreign securities exchange transactions usually are subject to fixed commissions, which generally are higher than negotiated commissions on U.S. transactions. In addition, foreign securities exchange transactions may be subject to difficulties associated with the settlement of such transactions. Delays in settlement could result in temporary periods when assets of the Series are uninvested and no return is earned thereon. The inability of the Series to make intended security purchases due to settlement problems could cause it to miss attractive opportunities. Inability to dispose of a portfolio security due to settlement problems either could result in losses to the Series due to subsequent declines in value of the portfolio security or, if the Series has entered into a contract to sell the security, could result in possible liability to the purchaser. The Investment Manager or relevant Sub-Adviser will consider such difficulties when determining the allocation of the Series' assets. NON-U.S. WITHHOLDING TAXES. A Series' investment income and gains from foreign issuers may be subject to non-U.S. withholding and other taxes, thereby reducing the Series' investment income and gains. INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the securities markets of certain foreign countries is restricted or controlled in varying degrees. These restrictions may at times limit or preclude investment in certain of such countries and may increase the costs and expenses of a Series. Investments by foreign investors are subject to a variety of restrictions in many developing countries. These restrictions may take the form of prior governmental approval, limits on the amount or type of securities held by foreigners, and limits on the types of companies in which foreigners may invest. Additional or different restrictions may be imposed at any time by these or other countries in which a Series invests. In addition, the repatriation of both investment income and capital from several foreign countries is restricted and controlled under certain regulations, including in some cases the need for certain government consents. These restrictions may in the future make it undesirable to invest in these countries. MARKET CHARACTERISTICS. Foreign securities may be purchased in over-the-counter markets or on stock exchanges located in the countries in which the respective principal offices of the issuers of the various securities are located, if that is the best available market. Foreign stock markets are generally not as developed or efficient as, and may be more volatile than, those in the United States. While growing in volume, they usually have substantially less volume than U.S. markets and a Series' portfolio securities may be less liquid and more volatile than securities of comparable U.S. companies. Equity securities may trade at price/earnings multiples higher than comparable United States securities and such levels may not be sustainable. Fixed commissions on foreign stock exchanges are generally higher than negotiated commissions on United States exchanges, although a Series will endeavor to achieve the most favorable net results on its portfolio transactions. There is generally less government supervision and regulation of foreign stock exchanges, brokers and listed companies than in the United States. Moreover, settlement practices for transactions in foreign markets may differ from those in United States markets, and may include delays beyond periods customary in the United States. INFORMATION AND SUPERVISION. There is generally less publicly available information about foreign companies comparable to reports and ratings that are published about companies in the United States. Foreign companies are also generally not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to United States companies. COSTS. Investors should understand that the expense ratio of the Series that invest in foreign securities can be expected to be higher than investment companies investing in domestic securities since the cost of maintaining the custody of foreign securities and the rate of advisory fees paid by the Series are higher. 43 INVESTMENT METHODS AND RISK FACTORS (CONTINUED) OTHER. With respect to certain foreign countries, especially developing and emerging ones, there is the possibility of adverse changes in investment or exchange control regulations, expropriation or confiscatory taxation, limitations on the removal of funds or other assets of the Series, political or social instability, or diplomatic developments which could affect investments by U.S. persons in those countries. EASTERN EUROPE. Changes occurring in Eastern Europe and Russia today could have long-term potential consequences. As restrictions fail, this could result in rising standards of living, lower manufacturing costs, growing consumer spending, and substantial economic growth. However, investment in the countries of Eastern Europe and Russia is highly speculative at this time. Political and economic reforms are too recent to establish a definite trend away from centrally-planned economies and state owned industries. In many of the countries of Eastern Europe and Russia, there is no stock exchange or formal market for securities. Such countries may also have government exchange controls, currencies with no recognizable market value relative to the established currencies of western market economies, little or no experience in trading in securities, no financial reporting standards, a lack of a banking and securities infrastructure to handle such trading, and a legal tradition which does not recognize rights in private property. In addition, these countries may have national policies which restrict investments in companies deemed sensitive to the country's national interest. Further, the governments in such countries may require governmental or quasi-governmental authorities to act as custodian of the Series' assets invested in such countries and these authorities may not qualify as a foreign custodian under the Investment Company Act of 1940 and exemptive relief from such Act may be required. All of these considerations are among the factors which could cause significant risks and uncertainties to investment in Eastern Europe and Russia. REGULATORY MATTERS. Currently, the Fund either has or will make a commitment regarding each Series to the State of California Department of Insurance to limit its borrowings to 10% of the Series' net asset value when borrowing for any general purpose and to an additional 15% (for a total of 25%) when borrowing as a temporary measure to facilitate redemptions. For purposes of the foregoing commitment, net asset value is the market value of all investments or assets owned by a Series, less its outstanding liabilities, at the time that any new or additional borrowing is undertaken. Additionally, the Fund either has made or will make a commitment regarding each Series to the State of California Department of Insurance with respect to diversification of its foreign investments. Such commitment generally requires that a Series (i) (consistent with the Series' investment policies) invest in a minimum of five different foreign countries and (ii) have no more than 20% of its net asset value invested in securities of issuers located in any one foreign country; except that, a Series may have an additional 15% of its net asset value invested in securities of issuers located in any one of the following countries: Australia, Canada, France, Japan, the United Kingdom or West Germany. (Investments in U.S. issuers are not subject to any of the foregoing restrictions.) INVESTMENT POLICY LIMITATIONS The Series operate within certain investment limitations which cannot be changed without the approval of the holders of a majority of the outstanding shares of the respective Series. Pursuant thereto, none of the Series will: 1. Purchase a security if, as a result, with respect to 75% of the value of its total assets, more than 5% of the value of its total assets would be invested in the securities of any one issuer (other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities). 2. Purchase more than 10% of the outstanding voting securities of any one issuer. 3. Purchase securities for the purpose of exercising control over the issuers thereof. 4. Underwrite securities of other issuers. 5. Borrow money or securities for any purposes except that borrowing up to 5% of the Fund's total assets from commercial banks is permitted for emergency or temporary purposes; provided, however, that this investment limitation does not apply to Series K, M, N and O, which may borrow up to 33 1/3% of total assets. The Fund may also obtain such short-term credits as are necessary for the clearance of portfolio transactions. 44 6. Make loans to other persons, except by entry into repurchase agreements or by the purchase, upon original issuance or otherwise, of a portion of an issue of publicly distributed bonds, notes, debentures or other securities; provided, however, that this investment limitation does not apply to Series K, M, N or O. 7. Effect short sales of securities or buy securities on margin (except such short-term credits as are necessary for the clearance of portfolio transactions); provided, however, that this limitation does not apply to Series K, M, N and O. 8. Invest in the securities of other investment companies; provided, however, that this investment limitation does not apply to Series K, M, N or O. 9. Concentrate investments in particular industries or make an investment in any one industry if, when added to its other investments, total investments in the same industry then held by the Fund would exceed 25% of the value of its assets. 10. Purchase or sell interests in real estate except as are represented by securities of companies, including real estate trusts whose assets consist substantially of interests in real estate, including obligations secured by real estate or interests therein and which therefore may represent indirect interest in real estate. 11. Own, buy, sell or otherwise deal in commodities or commodities contracts; provided, however, that Series K, M, N and O may enter into forward currency contracts and other forward commitments and transactions in futures, options and options on futures. The following notes should be read in connection with the above-described fundamental policies. The notes are not fundamental policies. With respect to investment restrictions 7 and 11, the Fund does not interpret these restrictions as prohibiting transactions in currency contracts, hybrid instruments, options, financial futures contracts or options on financial futures contracts. For purposes of investment restriction 9, U.S., state or local governments, or related agencies or instrumentalities, are not considered an industry. Industries are determined by reference to the classifications of industries set forth in the Series' semiannual and annual reports. For purposes of investment restriction 6, the Series will consider the acquisition of a debt security to include the execution of a note or other evidence of an extension of credit with a term of more than nine months. The following investment policies of Series K are not fundamental policies and may be changed by a vote of a majority of the Series' Board of Directors without shareholder approval. Series K may purchase and sell futures contracts and related options under the following conditions: (a) the then current aggregate futures market prices of financial instruments required to be delivered and purchased under open futures contracts shall not exceed 30% of the Series' total assets, at market value; and (b) no more than 5% of the Series' total assets, at market value at the time of entering into a contract, shall be committed to margin deposits in relation to futures contracts. Series K may borrow money from banks for emergency or temporary purposes or to meet redemptions in an amount not to exceed 5% of the Series' total assets. As a matter of operating policy, Series O may not: 1. Purchase additional securities when money borrowed exceeds 5% of its total assets; 2. Purchase a futures contract or an option thereon if, with respect to positions in futures or options on futures which do not represent bona fide hedging, the aggregate initial margin and premiums on such options would exceed 5% of the Series' net asset value; 3. Purchase illiquid securities and securities of unseasoned issuers if, as a result, more than 15% of its net assets would be invested in such securities, provided that the Series will not invest more than 10% of its total assets in restricted securities and not more than 5% in securities of unseasoned issuers. Securities eligible for resale under Rule 144A of the Securities Act of 1933 are not included in the 10% limitation but are subject to the 15% limitation; 4. Purchase securities of open-end or closed-end investment companies except in compliance with the Investment Company Act of 1940 and applicable state law. Duplicate fees may result from such purchases; 5. Purchase securities on margin except (i) for use of short-term credit necessary for clearance of purchases of portfolio securities and (ii) it may make margin deposits in connection with futures contracts or other permissible investments; 45 6. Mortgage, pledge, hypothecate or, in any manner, transfer any security owned by the Series as security for indebtedness except as may be necessary in connection with permissible borrowings or investments and then such mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Series' total assets at the time of borrowing or investment; 7. Purchase participations or other direct interests in or enter into leases with respect to, oil, gas, or other mineral exploration or development programs; 8. Invest in puts, calls, straddles, spreads, or any combination thereof, except to the extent permitted by the Prospectus and Statement of Additional Information; 9. Purchase or retain the securities of any issuer if those officers and directors of the Series, and of its investment manager, who each owns beneficially more than .5% of the outstanding securities of such issuer, together own beneficially more than 5% of such securities; 10. Effect short sales of securities; 11. Purchase a security (other than obligations issued or guaranteed by the U.S., any foreign, state or local government, their agencies or instrumentalities) if, as a result, more than 5% of the value of the Series' total assets would be invested in the securities of issuers which at the time of purchase had been in operation for less than three years (for this purpose, the period of operation of any issuer shall include the period of operation of any predecessor or unconditional guarantor of such issuer). This restriction does not apply to securities of pooled investment vehicles or mortgage or asset-backed securities; or 12. Invest in warrants if, as a result thereof, more than 2% of the value of the net assets of the Series would be invested in warrants which are not listed on the New York Stock Exchange, the American Stock Exchange, or a recognized foreign exchange, or more than 5% of the value of the net assets of the Series would be invested in warrants whether or not so listed. For purposes of these percentage limitations, the warrants will be valued at the lower of cost or market and warrants acquired by the Series in units or attached to securities may be deemed to be without value. OFFICERS AND DIRECTORS The directors and officers of the Fund and their principal occupations for at least the last five years are as follows. Unless otherwise noted, the address of each officer and director is 700 Harrison Street, Topeka, Kansas 66636-0001.
- ------------------------------------------------------------------------------------------------------------------------------------ NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY B. PANTAGES,* Director President, Chief Investment Officer and Director, Security Management Company; Senior Vice President and Chief Investment Officer, Security Benefit Life Insurance Company. Prior to April 1992, Managing Director, Capital Management Group of The Prudential. WILLIS A. ANTON, JR., Director Partner, Classic Awning & Design. Prior to October 1991, President, 3616 Yorkway Classic Awning & Design. Prior to July 1989, Vice President, Kansas Topeka, Kansas 66604 Canvas Products. JOHN D. CLELAND,* President and Director Senior Vice President and Director, Security Management Company PENNY A. LUMPKIN,** Director Vice President, Palmer News, Inc. Prior to October 1991, Secretary 3616 Canterbury Town Road and Director, Palmer Companies, Inc. (Wholesale Periodicals) Topeka, Kansas 66610 MARK L. MORRIS, JR.,** Director President, Mark Morris Associates (Veterinary Research and 5500 SW 7th Street Education) Topeka, Kansas 66606 DONALD L. HARDESTY, Director President, Central Research Corporation 900 Bank IV Tower Topeka, Kansas 66603 - ------------------------------------------------------------------------------------------------------------------------------------
46
- ------------------------------------------------------------------------------------------------------------------------------------ NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------------------------------------------------ DONALD A. CHUBB, JR.,** Director President, Neon Tube Light Company, Inc. 605 SE 8th Street Topeka, Kansas 66607 JAMES R. SCHMANK, Vice President and Treasurer Senior Vice President, Treasurer, Chief Fiscal Officer and Director, Security Management Company; Vice President, Security Benefit Group, Inc. MARK E. YOUNG, Vice President Vice President - Operations, Security Management Company. JANE A. TEDDER, Vice President Vice President and Senior Portfolio Manager, Security Management Company. TERRY A. MILBERGER, Vice President Vice President and Senior Portfolio Manager, Security Management Company AMY J. LEE, Secretary Associate Counsel, Security Benefit Group, Inc. BRENDA M. LUTHI, Assistant Treasurer and Assistant Secretary Assistant Vice President, Assistant Treasurer and Assistant Secretary, Security Management Company. CINDY L. SHIELDS, Assistant Vice President Assistant Vice President and Portfolio Manager, Security Management Company. Prior to August 1994, Junior Portfolio Manager, Research Analyst, Junior Research Analyst and Portfolio Assistant, Security Management Company. GREGORY A. HAMILTON, Assistant Vice President Second Vice President and Portfolio Manager, Security Management Company. Prior to December 1992, First Vice President and Manager of Investments Division, Mercentile National Bank. - ------------------------------------------------------------------------------------------------------------------------------------ *These directors are deemed to be "interested persons" of the Fund under the Investment Company Act of 1940, as amended. **These directors serve on the Fund's audit committee, the purpose of which is to meet with the independent auditors, to review the work of the auditors, and to oversee the handling by Security Management Company of the accounting functions for the Fund. - ------------------------------------------------------------------------------------------------------------------------------------
The officers of the Fund hold identical offices in the other Funds in the Security Group of Funds, except Ms. Tedder and Mr. Milberger. Ms. Tedder is also Vice President of Security Tax-Exempt Fund, Security Income Fund and Security Cash Fund; and Mr. Milberger is also Vice President of Security Equity Fund. The directors of the Fund are also directors of each of the other Funds in the Security Group of Funds. See the table under "Investment Management," page 48, for positions held by such persons with the Investment Manager. Mr. Young and Ms. Lee hold identical offices with Security Distributors, Inc. ("SDI"). Messrs. Cleland and Schmank are also director and Vice President, and Ms. Luthi is Treasurer of SDI. REMUNERATION OF DIRECTORS AND OTHERS The Fund pays each of its directors, except those directors who are "interested persons" of the Fund, an annual retainer of $6,250 and a fee of $600 per meeting, plus reasonable travel costs, for each meeting of the board attended. The Fund pays a fee of $100 per hour with a minimum fee of $200 and reasonable travel costs for each meeting of the Fund's audit committee attended by those directors who serve on the committee. Such fees and travel costs are paid by the Fund pursuant to the Fund's Administrative Services Agreement dated April 1, 1987, as amended. The Fund does not pay any fees to, or reimburse expenses of, its Directors who are considered "interested persons" of the Fund. The aggregate compensation paid by the Fund to each of the Directors during its fiscal year ended December 31, 1994, and the aggregate compensation paid to each of the Directors during calendar year 1994 by all seven of the registered investment companies to which the Adviser provides investment advisory 47 services (collectively, the "Security Fund Complex"), are set forth below. Each of the Directors is a director of each of the other registered investment companies in the Security Fund Complex.
- ------------------------------------------------------------------------------------------------------------------------------------ PENSION OR TOTAL COMPENSATION AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL FROM THE SECURITY NAME OF DIRECTOR COMPENSATION ACCRUED AS PART OF BENEFITS UPON FUND COMPLEX, OF THE FUND FROM SBL FUND FUND EXPENSES RETIREMENT INCLUDING THE FUND - ------------------------------------------------------------------------------------------------------------------------------------ Willis A. Anton $8,588 $0 $0 $17,175 Donald A. Chubb, Jr. 6,488 0 0 12,975 John D. Cleland 0 0 0 0 Jack H. Hamilton 8,738 0 0 17,474 Donald L. Hardesty 6,488 0 0 12,975 Penny A. Lumpkin 8,738 0 0 17,474 Mark L. Morris, Jr. 6,362 0 0 12,725 Jeffrey B. Pantages 0 0 0 0 Harold G. Worswick* 0 0 0 17,422 John Schaff 2,100 0 0 4,200 - ------------------------------------------------------------------------------------------------------------------------------------ *The Fund has accrued deferred compensation in the amount of $6,611 for Mr. Worswick as of December 31, 1994. - ------------------------------------------------------------------------------------------------------------------------------------
Security Management Company compensates its officers and directors who may also serve as officers or directors of the Fund. On January 31, 1995, the Fund's officers and directors (as a group) beneficially owned less than 1% of the outstanding shares of the Fund. SALE AND REDEMPTION OF SHARES Shares of the Fund are sold and redeemed at their net asset value next determined after receipt of a purchase or redemption order. No sales or redemption charge is made. The value of shares redeemed may be more or less than the shareholder's cost, depending upon the market value of the portfolio securities at the time of redemption. Payment for shares redeemed will be made as soon as practicable after receipt, but in no event later than seven days after tender, except that the Fund may suspend the right of redemption during any period when trading on the New York Stock Exchange is restricted or such Exchange is closed for other than weekends or holidays, or any emergency is deemed to exist by the Securities and Exchange Commission. INVESTMENT MANAGEMENT Security Management Company (the "Investment Manager"), 700 Harrison Street, Topeka, Kansas, serves as investment adviser to the Fund. The Investment Manager also acts as investment adviser to the following mutual funds: Security Equity Fund, Security Growth and Income Fund, Security Ultra Fund, Security Income Fund, Security Cash Fund, and Security Tax-Exempt Fund. The Investment Manager is a wholly-owned subsidiary of Security Benefit Group, Inc. ("SBG"). SBG is an insurance and financial services holding company wholly-owned by Security Benefit Life Insurance Company, 700 Harrison Street, Topeka, Kansas 66636-0001. Security Benefit Life, a mutual life insurance company with over $15 billion of insurance in force, is incorporated under the laws of Kansas. The Investment Manager serves as investment adviser to the Fund under an Investment Advisory Contract dated June 20, 1977, which was renewed by the board of directors of the Fund at a regular meeting held on February 3, 1995. The contract may be terminated without penalty at any time by either party on 60 days' written notice and is automatically terminated in the event of its assignment. Pursuant to the Investment Advisory Contract, the Investment Manager furnishes investment advisory, statistical and research facilities, supervises and arranges for the purchase and sale of securities on behalf of the Fund, and provides for the compilation and maintenance of records pertaining to the investment advisory function. For such services, the Investment Manager is entitled to receive compensation on an annual basis equal to .75% of the average net assets of Series A, Series B, Series E, Series S, Series J and Series K; .5% of the average net assets of Series C; and 1.00% of the average net assets of Series D, Series M, Series N and Series O, computed on a daily basis and payable monthly. The investment advisory fees set out above for the Series except Series C are higher than those paid by many other investment companies with similar investment objectives. During the last three fiscal years, SBL Fund paid the following amounts to the Investment Manager for its services: 1994 - $10,141,578; 1993 - $8,297,437; and 1992 - $6,099,186. 48 The Investment Manager has retained Lexington Management Corporation ("Lexington"), Park 80 West, Plaza Two, Saddle Brook, New Jersey 07662, to furnish certain investment advisory services to Series D and K of the Fund pursuant to Sub-Advisory Agreements, dated April 26, 1991, and May 1, 1995, respectively. Pursuant to the agreements, Lexington furnishes investment advisory, statistical and research facilities, supervises and arranges for the purchase and sale of securities on behalf of Series D and K and provides for the compilation and maintenance of records pertaining to such investment advisory services, subject to the control and supervision of the Board of Directors of the Fund and the Investment Manager. For such services, the Investment Manager pays Lexington an amount equal to .50% of the average net assets of Series D, and .35% of the average net assets of Series K, computed on a daily basis and payable monthly. The Lexington Sub-Advisory Agreements may be terminated without penalty at any time by either party on 60 days' written notice and are automatically terminated in the event of assignment or in the event that the Investment Advisory Contract between the Investment Manager and the Fund is terminated, assigned or not renewed. Lexington is a wholly-owned subsidiary of Lexington Global Asset Managers, Inc., a Delaware corporation with offices at Park 80 West Plaza Two, Saddle Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their spouses, trusts and other related entities have a majority voting control of the outstanding shares of Lexington Global Asset Managers, Inc. Lexington was established in 1938 and currently manages over $3.8 billion in assets. Lexington has entered into a sub-advisory contract with MFR Advisors, Inc. ("MFR"), One World Financial Center, 200 Liberty Street, New York, New York 10281, to provide investment and economic research services to Series K, subject to the control and supervision of the Board of Directors of SBL Fund For such services, Lexington pays MFR an amount equal to .15% of the average net assets of Series K, computed on a daily basis and payable monthly. MFR is a subsidiary of Maria Fiorini Ramirez, Inc. ("Ramirez") which was established in August of 1992 to provide global economic consulting, investment advisory and broker/dealer services. Ramirez is the successor firm to Maria Ramirez Capital Consultants, Inc. ("MRCC"). MRCC was formed in April 1990 as a subsidiary of John Hancock Freedom Securities Corporation and offered in-depth economic consulting services to clients. MFR currently acts as sub-adviser to the Lexington Ramirez Global Income Fund and also serves as an institutional manager for private clients. The Investment Manager has entered into a quantitative research agreement with Meridian Investment Management Corporation ("Meridian"), 12835 East Arapahoe Road, Tower II, 7th Floor, Englewood, Colorado 80112. Meridian provides research which the Investment Manager uses in strategically allocating the assets of Series M among investment categories and market sectors. For the services provided to Series M, the Investment Manager pays Meridian an amount equal to .20% of the average net assets of Series M, computed on a daily basis and payable quarterly. Meridian is a wholly-owned subsidiary of Meridian Management & Research Corporation. The Investment Manager has entered into an agreement with Templeton/Franklin Investment Services, Inc. ("Templeton"), 777 Mariners Island Boulevard, San Mateo, California 94404, to provide analytical research used by the Investment Manager in the selection of equity securities for Series M. The Investment Manager pays Templeton an annual fee equal to .30% of the first $50,000,000 of average net assets of Series M invested in equity securities and .25% of such average net assets in excess of $50,000,000 computed daily and payable monthly. Templeton is an indirect wholly-owned subsidiary of Templeton Worldwide, Inc. which in turn is a direct wholly-owned subsidiary of Franklin Resources, Inc. The Investment Manager has engaged T. Rowe Price Associates, Inc. ("T. Rowe Price"), 100 East Pratt Street, Baltimore, Maryland 21202, organized in 1937 under the laws of the State of Maryland by the late Thomas Rowe Price, Jr., to provide certain investment advisory services to Series N and O. T. Rowe Price is presently a publicly held company which with its affiliates manages over $60 billion in assets. The Investment Manager pays T. Rowe Price, on an annual basis, an amount equal to .50% of the average net assets of Series N which are less than $50,000,000, and .40% of the average net assets of Series N of $50,000,000 and over, for management services provided to Series N, provided, however, that the Investment Manager has agreed to pay T. Rowe Price a minimum fee of $100,000 for the 12 months ended June 30, 1996. The Investment Manager pays T. Rowe Price, on an annual basis, an amount equal to .50% of the first $20,000,000 of average daily net assets of Series O and .40% of such assets in excess of $20,000,000 for management services provided to Series O. 49 For any month in which the average daily net assets of Series O exceed $50,000,000, T. Rowe Price will waive .10% of its fee on the first $20,000,000 of Series O's average daily net assets. T. Rowe Price's fees for investment management services are calculated daily and payable monthly. The Investment Manager has agreed that the total annual expenses of any Series, including its compensation from such Series, but excluding brokerage commissions, interest, taxes, and extraordinary expenses, will not exceed the level of expenses which the Fund is permitted to bear under the most restrictive expense limitation imposed by any state in which shares of the Fund are then offered for sale. The most restrictive expense limitation currently imposed by state securities regulation, of which the Investment Manager is aware, provides that the aggregate annual expenses of an investment company shall not exceed 2 1/2% of the first $30 million of the average net assets, 2% of the next $70 million of the average net assets, and 1 1/2% of the remaining average net assets of the investment company for any fiscal year, determined at least monthly. The Investment Manager will, on a monthly basis, contribute such funds or waive such portion of its management fee as may be necessary to insure that the aggregate expenses of any Series will not exceed any such limitation. Pursuant to an Administrative Services Agreement, dated April 1, 1987, as amended, the Investment Manager also acts as the administrative agent for the Fund and as such performs administrative functions and the bookkeeping, accounting and pricing functions for the Fund. For this service the Investment Manager receives, on an annual basis, a fee of .045% of the average net assets of the Fund. In addition, the Investment Manager receives the greater of .10% of the average net assets of Series D or $60,000, calculated daily and payable monthly. With respect to Series K, M and N, the Investment Manager receives an additional annual fee equal to the greater of .10% of its average net assets or (i) $30,000 in the year ending April 29, 1996; (ii) $45,000 in the year ending April 29, 1997; or (iii) $60,000 thereafter. The administrative fees paid by the Fund during its fiscal years ended December 31, 1994, 1993, and 1992, were $605,515, $503,080 and $417,763, respectively. Under the same Agreement, the Investment Manager acts as the transfer agent for the Fund. As such, it processes purchase and redemption transactions and acts as the dividend disbursing agent for the separate accounts of Security Benefit Life Insurance Company to which shares of the Fund are sold. For this service, the Investment Manager receives an annual maintenance fee of $8.00 per account, and a transaction fee of $1.00 per transaction. The transfer agency fees paid by the Fund during its fiscal years ended December 31, 1994, 1993, and 1992, were $13,242, $12,283 and $10,634, respectively. The Investment Manager has arranged for Lexington to provide certain administrative services to Series D and Series K of the Fund, pursuant to a Sub-Administrative Agreement, dated September 1993, as amended effective May 1, 1995. Pursuant to this agreement, Lexington provides certain accounting functions, the pricing function and related recordkeeping for Series D, Series K and certain other mutual funds for which the Investment Manager acts as fund administrator. For such services, the Investment Manager pays Lexington the following amounts: (i) an annual base fee of $9,000 per series per contract year, and (ii) the greater of a minimum fund fee of $47,000 per series per contract year, or, an amount equal to the following percentages of the aggregate assets of all of the series: AGGREGATE ASSET FEE Average Daily Net Assets Compensation Less than $500 million............................ .07%, plus $500 million but less than $1 billion............. .045%, plus $1 billion or more................................ .025% The Fund's total expenses for the fiscal year ended December 31, 1994, were $2,689,746, $4,945,552, $673,270, $1,745,672, $953,695, $200,599, and $553,311 for Series A, B, C, D, E, S, and J, respectively. Such expenses represent .84%, .84%, .61%, 1.34%, .85%, .90%, and .88% of the average net assets of these Series, respectively. The annualized expense ratio of Series K, M, N and O after expense reimbursements for Series M and N, for the period June 1, 1995 (date of inception) to September 30, 1995 was as follows: Series K - 1.94%; Series M - 2.00%; Series N - 2.00%; and Series O - 1.49%. The Fund will pay all its expenses not assumed by the Investment Manager including directors' fees; fees and expenses of custodian; taxes and governmental fees; interest charges; any membership dues; brokerage commissions; reports, proxy statements, and notices to stockholders; costs of stockholder and other meetings; and legal, auditing and accounting expenses. The Fund 50 will also pay all expenses in connection with the Fund's registration under the Investment Company Act of 1940 and the registration of its capital stock under the Securities Act of 1933. The following persons are affiliated with the Fund and also with the Investment Manager in the capacities indicated:
- ------------------------------------------------------------------------------------------------------------------------------------ NAME POSITION WITH SBL FUND POSITIONS WITH SECURITY MANAGEMENT COMPANY - ------------------------------------------------------------------------------------------------------------------------------------ Jeffrey B. Pantages Director President, Chief Investment Officer and Director John D. Cleland President and Director Senior Vice President and Director James R. Schmank Vice President and Treasurer Senior Vice President, Treasurer, Chief Fiscal Officer and Director Jane A. Tedder Vice President Vice President and Senior Portfolio Manager Terry A. Milberger Vice President Vice President and Senior Portfolio Manager Gregory A. Hamilton Assistant Vice President Second Vice President Mark E. Young Vice President Vice President-Operations Amy J. Lee Secretary Secretary Brenda M. Luthi Assistant Treasurer and Assistant Secretary Assistant Vice President, Assistant Treasurer and Assistant Secretary - ------------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT SERIES A (GROWTH SERIES) is managed by the Large Capitalization Team of the Investment Manager consisting of John Cleland, Chief Investment Strategist, Terry Milberger and Chuck Lauber. Terry Milberger, Senior Portfolio Manager, has day-to-day responsibility for managing Series A and has managed the Series since 1981. John Cleland directs the allocation of SERIES B'S (GROWTH-INCOME SERIES) investments among common stocks and fixed income securities. The common stock portion of the Series B portfolio is managed by the Investment Manager's Large Capitalization Team described above. Mr. Milberger has day-to-day responsibility for managing the common stock portion of the Series B portfolio and has managed this portion of the Series' portfolio since 1995. The fixed income portion of the Series B portfolio is managed by the Fixed Income Team of the Investment Manager consisting of John Cleland, Greg Hamilton, Jane Tedder, Tom Swank, Steve Bowser, Barb Davison and Elaine Miller. Tom Swank, Portfolio Manager, has day-to-day responsibility for managing the fixed income portion of Series B's portfolio and has managed this portion of the portfolio since 1994. SERIES D (WORLDWIDE EQUITY SERIES) is managed by an investment management team of Lexington. Alan Wapnick and Richard T. Saler have the day-to-day responsibility for managing the investments of Series D and have managed the Series since 1994. SERIES E (HIGH GRADE INCOME SERIES) is managed by the Fixed Income Team described above. Greg Hamilton has day-to-day responsibility for managing Series E and has managed the Series since January 1996. SERIES J (EMERGING GROWTH SERIES) and SERIES S (SOCIAL AWARENESS SERIES) are managed by the Investment Manager's Small Capitalization Team and Social Responsibility Team, respectively, each of which consists of John Cleland, Chief Investment Strategist, Cindy Shields, Larry Valencia and Frank Whitsell. Cindy Shields, Portfolio Manager, has day-to-day responsibility for managing Series J and Series S and has managed the Series since 1994. SERIES K (GLOBAL AGGRESSIVE BOND SERIES) is managed by an investment management team of Lexington and MFR. Denis P. Jamison and Maria Fiorini Ramirez have day-to-day responsibility for managing Series K and have managed the Series since its inception in 1995. SERIES M (SPECIALIZED ASSET ALLOCATION SERIES) is managed by an investment management team of portfolio managers and research analysts of the Investment Manager. Jane Tedder, Senior Portfolio Manager, has day-to-day responsibility for managing the fixed-income portion of the Series' portfolio and for supervising the services provided by Meridian and Templeton and has had responsibility for the Series since January 1996. SERIES N (MANAGED ASSET ALLOCATION SERIES) is managed by an Investment Advisory Committee of T. Rowe Price consisting of Edmund M. Notzon, Chairman, Heather R. Landon, James M. McDonald, Jerome Clark, Peter Van Dyke, M. David Testa and Richard T. Whitney. Mr. Notzon has had day-to-day responsibility for managing the Series since its inception in 1995. SERIES O (EQUITY INCOME SERIES) is managed by an Investment Advisory Committee of T. Rowe Price consisting of Brian C. Rogers, Chairman, Thomas H. Broadus, Jr., Richard P. Howard and William J. Stromberg. Mr. Rogers has had day-to-day responsibility for managing the Series since its inception in 1995. 51 John Cleland has been involved in the securities industry for more than 30 years. Before joining the Investment Manager in 1968, he was involved in the investment business in securities and residential and commercial real estate for approximately ten years. Mr. Cleland earned a Bachelor of Science degree from the University of Kansas and an M.B.A. from Wharton School of Finance, University of Pennsylvania. He is active in securities industry affairs, having served as Vice Chairman of the NASD's National Board of Governors and as District Chairman for the Association's Business Conduct Committee in District No. 4. Greg Hamilton has been in the investment field since 1983. He received his Bachelor of Arts degree in Business from Washburn University in 1984. Prior to joining Security Management Company in January of 1993, he was First Vice President, Treasurer and Portfolio Manager with Mercantile National Bank, Los Angeles, California, from 1990 to 1993. From 1986 to 1990, he was Managing Director of Consulting Services for Sendero Corporation, Scottsdale, Arizona. Prior to Sendero Corporation, he was employed as Fixed Income Research Analyst at Peoples Heritage Savings and Loan from 1983-1986. Denis P. Jamison, CFA, Senior Vice President, Director Fixed Income Strategy, is responsible for fixed-income portfolio management for Lexington. He is a member of the New York Society of Security Analysts. Mr. Jamison has more than 20 years investment experience. Prior to joining Lexington in 1981, Mr. Jamison had spent nine years at Arnold Bernhard and Company, an investment counseling and financial services organization. At Bernhard, he was a Vice President supervising the security analyst staff and managing investment portfolios. He is a specialist in government, corporate and municipal bonds. Mr. Jamison is a graduate of the City College of New York with a B.A. in Economics. Terry A. Milberger is a Vice President and Senior Portfolio Manager of the Investment Manager. Mr. Milberger has more than 19 years of investment experience. He began his career as an investment analyst in the insurance industry and from 1974 through 1978 he served as an assistant portfolio manager for the Investment Manager. He was then employed as Vice President of Texas Commerce Bank and managed its pension fund assets until he returned to the Investment Manager in 1981. Mr. Milberger holds a Bachelor's degree in Business and an M.B.A. from the University of Kansas and is a Chartered Financial Analyst. Edmund M. Notzon joined T. Rowe Price in 1989 and has been managing investments since 1991. Prior to joining T. Rowe Price, Mr. Notzon was Director of the Analysis and Evaluation Division at the U.S. Environmental Protection Agency. Maria Fiorini Ramirez, President and Chief Executive Officer of MFR, began her career as a credit analyst with American Express International Banking Corporation in 1968. In 1972, she moved to Banco Nazionale De Lavoro in New York. The following year, she started a ten year association with Merrill Lynch, serving as Vice President and Senior Money Market Economist. She joined Becker Paribas in 1984 as Vice President and Senior Money Market Economist before joining Drexel Burnham Lambert that same year as First Vice President and Money Market Economist. She was promoted to Managing Director of Drexel in 1986. From April 1990 to August 1992, Ms. Ramirez was the President and Chief Executive Officer of Maria Ramirez Capital Consultants, Inc., a subsidiary of John Hancock Freedom Securities Corporation. Ms. Ramirez established MFR in August, 1992. She is known in international financial, banking and economic circles for her assessment of the interaction between global economic policy and political trends and their effect on investments. Ms. Ramirez holds a B.A. in Business Administration/Economics from Pace University. Brian C. Rogers joined T. Rowe Price in 1982 and has been managing investments since 1983. Richard T. Saler is a Senior Vice President of Lexington and is responsible for international investment analysis and portfolio management. He has eight years of investment experience. Mr. Saler has focused on international markets since first joining Lexington in 1986. Most recently he was a strategist with Nomura Securities and rejoined Lexington in 1992. Mr. Saler is a graduate of New York University with a B.S. degree in Marketing and an M.B.A. in Finance from New York University's Graduate School of Business Administration. Cindy L. Shields is a Portfolio Manager of the Investment Manager. Ms. Shields has six years experience in the securities field and joined the Investment Manager in 1989. Ms. Shields graduated from Washburn University with a Bachelor of Business Administration degree, majoring in finance and economics. She is a Chartered Financial Analyst. Tom Swank, Portfolio Manager of the Investment Manager, has over ten years of experience in the investment field. He is a Chartered Financial Analyst. Prior to joining the Investment Manager in 1992, he was an Investment Underwriter and Portfolio Manager for U.S. West Financial Services, Inc. from 1986 to 1992. From 1984 to 1986, 52 he was a Commercial Credit Officer for United Bank of Denver. From 1982 to 1984, he was employed as a Bank Holding Company examiner for the Federal Reserve Bank of Kansas City - Denver Branch. Mr. Swank graduated from Miami University in Ohio with a Bachelor of Science degree in finance in 1982 and earned a Master of Business Administration degree from the University of Colorado. Jane Tedder, Vice President and Senior Portfolio Manager of the Investment Manager, has 20 years of experience in the investment field. Prior to joining the Investment Manager in 1983, she served as Vice President and Trust Officer of Douglas County Bank in Kansas. Ms. Tedder earned a bachelor's degree in education from Oklahoma State University and advanced diplomas from National Graduate Trust School, Northwestern University, and Stonier Graduate School of Banking, Rutgers University. She is a Chartered Financial Analyst. Alan Wapnick is a Senior Vice President of Lexington and is responsible for portfolio management. He has 25 years of investment experience. Prior to joining Lexington in 1986, Mr. Wapnick was an equity analyst with Merrill Lynch, J. & W. Seligman, Dean Witter and most recently Union Carbide Corporation. Mr. Wapnick is a graduate of Dartmouth College and received a Master's degree in Business Administration from Columbia University. CODE OF ETHICS The Fund, the Investment Manager and the Distributor have a written Code of Ethics which requires all access persons to obtain prior clearance before engaging in any personal securities transactions. Access persons include officers and directors of the Fund and Investment Manager and employees that participate in, or obtain information regarding, the purchase or sale of securities by the fund or whose job relates to the making of any recommendations with respect to such purchases or sales. All access persons must report their personal securities transactions within ten days of the end of each calendar quarter. Access persons will not be permitted to effect transactions in a security if it: (a) is being considered for purchase or sale by the Fund; (b) is being purchased or sold by the Fund; or (c) is being offered in an initial public offering. In addition, portfolio managers are prohibited from purchasing or selling a security within seven calendar days before or after a Fund that he or she manages trades in that security. Any material violation of the Code of Ethics is reported to the Board of the Fund. The Board also reviews the administration of the Code of Ethics on an annual basis. PORTFOLIO TURNOVER Generally, long-term rather than short-term investments will be made by the Fund for Series A, B, D, E, S, and J. Series J, however, reserves the right during certain periods to trade to a substantial degree for the short term. Although portfolio securities generally will be purchased with a view to long-term potential, subsequent changes in the circumstances of a particular company or industry, or in general economic conditions, may indicate that sale of a portfolio security is desirable without regard to the length of time it has been held or to the tax consequences thereof. The annual portfolio turnover rate of Series A, S, J and M may exceed 100% and at times may exceed 150%. The annual turnover rate of Series E and K may exceed 100%. The annual turnover rate of Series B, D, N and O are not generally expected to exceed 100%. Since Series C's investment policies require a maturity shorter than 13 months, its portfolio turnover rate will generally be 0%, although the portfolio will turn over many times during a year as a result of security maturities. Portfolio turnover is defined as the lesser of purchases or sales of portfolio securities divided by the average market value of portfolio securities owned during the year, determined monthly. The annual portfolio turnover rates for Series A, B, D, E, J and S for the fiscal years ending December 31, 1994, 1993, and 1992, are as follows: - -------------------------------------------------------------------------------- YEAR SERIES A SERIES B SERIES D SERIES E SERIES S SERIES J - -------------------------------------------------------------------------------- 1994 90% 43% 82% 185% 67% 91% 1993 108 95 70 151 105 117 1992 77 56 81 76 110 4* - -------------------------------------------------------------------------------- *Annualized portfolio turnover rate for the three month period ending December 31, 1992. - -------------------------------------------------------------------------------- For this purpose the term "securities" does not include government securities or debt securities maturing within one year after acquisition. Since Series C's investment policies require a maturity shorter than 13 months, the portfolio turnover rate will generally be 0%, although the portfolio will turn over many times during a year. Portfolio turnover rates for Series K, M, N and O are not yet available as these Series did not begin operations until June 1, 1995. 53 DETERMINATION OF NET ASSET VALUE As discussed in the Prospectus for the Fund, the net asset value per share of each Series is determined as of the close of regular trading hours on the New York Stock Exchange (normally 3:00 p.m. Central time) on each day that the Exchange is open for trading, which is Monday through Friday except when closed in observance of the following holidays: New Year's Day, President's Day, Good Friday, Memorial Day, July Fourth, Labor Day, Thanksgiving Day and Christmas. The determination is made by dividing the value of the portfolio securities of each Series, plus any cash or other assets (including dividends accrued but not collected), less all liabilities (including accrued expenses but excluding capital and surplus), by the number of shares of each Series outstanding. In determining asset value, securities listed or traded on a recognized securities exchange are valued on the basis of the last sale price. If there are no sales on a particular day, then the securities shall be valued at the last bid price. All other securities for which market quotations are available are valued on the basis of the last current bid price. If there is no bid price, or if the bid price is deemed to be unsatisfactory by the board of directors or the Fund's Investment Manager, then the securities shall be valued in good faith by such method as the board of directors determines will reflect their fair market value. As stated in the Prospectus, the Fund's short-term debt securities may be valued by the amortized cost method. As a result of using this method, during periods of declining interest rates, the yield on shares of these Series (computed by dividing the annualized income of the Fund by the net asset value computed as described above) may tend to be higher than a like computation made by a fund with identical investments utilizing a method of valuation based upon market prices and estimates of market prices for all of its portfolio instruments. Thus, if the use of amortized cost by the Fund for instruments with remaining maturities of 60 days or less resulted in a lower aggregate portfolio value on a particular day, a prospective investor would be able to obtain a somewhat higher yield than would result from investment in a fund utilizing solely market values and existing investors in these Series would receive less investment income. The converse would apply in a period of rising interest rates. To the extent that, in the opinion of the board of directors, the amortized cost value of a portfolio instrument or instruments does not represent fair value thereof as determined in good faith, the board of directors will take appropriate action which would include a revaluation of all or an appropriate portion of the portfolio based upon current market factors. Generally, trading in foreign securities markets is substantially completed each day at various times prior to the close of the New York Stock Exchange. The values of foreign securities used in computing the net asset value of the shares of certain Series of the Fund generally are determined as of the close of such foreign markets or the close of the New York Stock Exchange if earlier. Foreign currency exchange rates are generally determined prior to the close of the New York Stock Exchange. Trading on foreign exchanges and in foreign currencies may not take place on every day the New York Stock Exchange is open. Conversely trading in various foreign markets may take place on days when the New York Stock Exchange is not open and on other days when the Fund's net asset values are not calculated. Consequently, the calculation of the net asset value for Series D may not occur contemporaneously with the determination of the most current market prices for the securities included in such calculation, and events affecting the value of such securities and such exchange rates that occur between the times at which they are determined and the close of the New York Stock Exchange will not be reflected in the computation of net asset value. If during such periods, events occur that materially affect the value of such securities, the securities will be valued at their fair market value as determined in good faith by the directors. For purposes of determining the net asset value per share of the Fund, all assets and liabilities initially expressed in foreign currencies will be converted into United States dollars at the mean between the bid and offer prices of such currencies against United States dollars quoted by any major U.S. bank. PORTFOLIO TRANSACTIONS Transactions in portfolio securities shall be effected in such manner as deemed to be in the best interests of the Fund and the respective Series. In reaching a judgment relative to the qualifications of a broker-dealer ("broker") to obtain the best execution of a particular transaction, all relevant factors and circumstances will be taken into account by the Investment Manager or relevant Sub-Adviser, including the overall reasonableness of commissions paid to the broker, the firm's general execution and operational capabilities and its reliability and financial condition. The execution of portfolio transactions may be directed to brokers who furnish investment information or research services to the Investment Manager or relevant Sub-Adviser. Such information and 54 research services include advice as to the value of securities, the advisability of investing in, purchasing, or selling securities, the availability of securities or purchasers or sellers of securities, and furnishing analyses and reports concerning issues, industries, securities, economic factors and trends, portfolio strategy, and performance of accounts. Such investment information and research services may be furnished by brokers in many ways, including: (1) on-line data base systems, the equipment for which is provided by the broker, that enable registrant to have real-time access to market information, including quotations; (2) economic research services, such as publications, chart services and advice from economists concerning macroeconomic information; and (3) analytical investment information concerning particular corporations. If a transaction is directed to a broker supplying such information or services, the commission paid for such transaction may be in excess of the commission another broker would have charged for effecting that transaction, provided that the Investment Manager shall have determined in good faith that the commission is reasonable in relation to the value of the investment information or research services provided, viewed in terms of either that particular transaction or the overall responsibilities of the Investment Manager with respect to all accounts as to which it exercises investment discretion. The Investment Manager may use all, none or some of such information and services in providing investment advisory services to the mutual funds under its management, including the Fund. In addition, brokerage transactions may be placed with brokers who sell variable contracts offered by SBL or shares of the Funds managed by the Investment Manager and who may or may not also provide investment information and research services. The Investment Manager may, consistent with the NASD Rules of Fair Practice, consider sales of shares of the Fund in the selection of a broker. The Fund may also buy securities from, or sell securities to, dealers acting as principals or market makers. Securities held by the Series may also be held by other investment advisory clients of the Investment Manager or relevant Sub-Adviser, including other investment companies. In addition, the Investment Manager's parent company, Security Benefit Life Insurance Company ("SBL"), may also hold some of the same securities as the Series. When selecting securities for purchase or sale for a Series, the Investment Manager may at the same time be purchasing or selling the same securities for one or more of such other accounts. Subject to the Investment Manager's obligation to seek best execution, such purchases or sales may be executed simultaneously or "bunched." It is the policy of the Investment Manager not to favor one account over the other. Any purchase or sale orders executed simultaneously (which may also include orders from SBL) are allocated at the average price and as nearly as practicable on a pro rata basis (transaction costs will also generally be shared on a pro rata basis) in proportion to the amounts desired to be purchased or sold by each account. In those instances where it is not practical to allocate purchase or sale orders on a pro rata basis, then the allocation will be made on a rotating or other equitable basis. While it is conceivable that in certain instances this procedure could adversely affect the price or number of shares involved in a Series' transaction, it is believed that the procedure generally contributes to better overall execution of the Series' portfolio transactions. The Board of Directors of the Fund has adopted guidelines governing this procedure and will monitor the procedure to determine that the guidelines are being followed and that the procedure continues to be in the best interest of the Fund and its stockholders. With respect to the allocation of initial public offerings ("IPOs"), the Investment Manager may determine not to purchase such offerings for certain of its clients (including investment company clients) due to the limited number of shares typically available to the Investment Manager in an IPO.
- ------------------------------------------------------------------------------------------------------------------------------------ TRANSACTIONS DIRECTED TO AND COMMISSIONS PAID TO BROKERAGE BROKER-DEALERS WHO ALSO TOTAL COMMISSIONS PAID PERFORMED SERVICES BROKERAGE TO SECURITY ------------------------------- COMMISSIONS DISTRIBUTORS INC., BROKERAGE YEAR ANNUAL PORTFOLIO TURNOVER RATE PAID THE UNDERWRITER TRANSACTIONS COMMISSIONS - ------------------------------------------------------------------------------------------------------------------------------------ Series A B D E S J - ------------------------------------------------------------------------------------------------------------------------------------ 1994 90% 43% 82% 185% 67% 91% $2,962,073 0 $281,022,190 $588,781 1993 108% 95% 70% 151% 105% 117% 3,149,263 0 268,428,090 635,512 1992 77% 56% 81% 76% 110% 4%* 1,769,793 0 131,530,797 255,467 - ------------------------------------------------------------------------------------------------------------------------------------ *Annualized portfolio turnover for the three month period ended December 31, 1992. - ------------------------------------------------------------------------------------------------------------------------------------
55 DISTRIBUTIONS AND FEDERAL INCOME TAX CONSIDERATIONS Each Series intends to qualify annually and to elect to be treated as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"). To qualify as a regulated investment company, each Series must, among other things: (i) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income derived with respect to its business of investing in such stock, securities, or currencies ("Qualifying Income Test"); (ii) derive in each taxable year less than 30% of its gross income from the sale or other disposition of certain assets held less than three months (namely (a) stock or securities, (b) options, futures and forward contracts (other than those on foreign currencies), and (c) foreign currencies (including options, futures, and forward contracts on such currencies) not directly related to a Series' principal business of investing in stocks or securities (or options and futures with respect to stocks and securities)); (iii) diversify its holdings so that, at the end of each quarter of the taxable year, (a) at least 50% of the market value of the Series' assets is represented by cash, cash items, U.S. Government securities, the securities of other regulated investment companies, and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of the Series' total assets and 10% of the outstanding voting securities of such issuer, and (b) not more than 25% of the value of its total assets is invested in the securities of any one issuer (other than U.S. Government securities or the securities of other regulated investment companies), or of two or more issuers which the Series controls (as that term is defined in the relevant provisions of the Code) and which are determined to be engaged in the same or similar trades or businesses or related trades or businesses; and (iv) distribute at least 90% of the sum of its investment company taxable income (which includes, among other items, dividends, interest, and net short-term capital gains in excess of any net long-term capital losses) and its net tax-exempt interest each taxable year. The Treasury Department is authorized to promulgate regulations under which foreign currency gains would constitute qualifying income for purposes of the Qualifying Income Test only if such gains are directly related to investing in securities (or options and futures with respect to securities). To date, no such regulations have been issued. A Series qualifying as a regulated investment company generally will not be subject to U.S. federal income tax on its investment company taxable income and net capital gains (any net long-term capital gains in excess of the net short-term capital losses), if any, that it distributes to shareholders. Each Series intends to distribute to its shareholders, at least annually, substantially all of its investment company taxable income and any net capital gains. Generally, regulated investment companies, like the Series, must distribute amounts on a timely basis in accordance with a calendar year distribution requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid the tax, a regulated investment company must distribute during each calendar year, (i) at least 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year, (ii) at least 98% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses) for the 12-month period ending on October 31 of the calendar year, and (iii) all ordinary income and capital gains for previous years that were not distributed during such years. To avoid application of the excise tax, each Series intends to make its distributions in accordance with the calendar year distribution requirement. A distribution is treated as paid on December 31 of the calendar year if it is declared by a Series in October, November or December of that year to shareholders of record on a date in such a month and paid by the Series during January of the following calendar year. Such distributions are taxable to shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received. The excise tax provisions described above do not apply to a regulated investment company, like a Series, all of whose shareholders at all times during the calendar year are segregated asset accounts of life insurance companies where the shares are held in connection with variable contracts. (For this purpose, any shares of a Series attributable to an investment in the Series not exceeding $250,000 made in connection with the organization of the Series shall not be taken into account.) Accordingly, if this condition regarding the ownership of shares of a Series is met, the excise tax will be inapplicable to that Series. If, as a result of exchange controls or other foreign laws or restrictions regarding repatriation of capital, a Series were unable to distribute an amount equal to substantially all of its investment company taxable income (as determined for U.S. tax purposes) within applicable time periods, the Series would not qualify for the favorable 56 federal income tax treatment afforded regulated investment companies, or, even if it did so qualify, it might become liable for federal taxes on undistributed income. In addition, the ability of a Series to obtain timely and accurate information relating to its investments is a significant factor in complying with the requirements applicable to regulated investment companies, in making tax-related computations, and in complying with the Code Section 817(h) diversification requirements. Thus, if a Series were unable to obtain accurate information on a timely basis, it might be unable to qualify as a regulated investment company, its tax computations might be subject to revisions (which could result in the imposition of taxes, interest and penalties), or it might be unable to satisfy the Code Section 817(h) diversification requirements. CODE SECTION 817(H) DIVERSIFICATION. To comply with regulations under Section 817(h) of the Code, each Series will be required to diversify its investments so that on the last day of each quarter of a calendar year, no more than 55% of the value of its assets is represented by any one investment, no more than 70% is represented by any two investments, no more than 80% is represented by any three investments, and no more than 90% is represented by any four investments. Generally, securities of a single issuer are treated as one investment and obligations of each U.S. Government agency and instrumentality are treated for purposes of Section 817(h) as issued by separate issuers. In connection with the issuance of the diversification regulations, the Treasury Department announced that it would issue future regulations or rulings addressing the circumstances in which a variable contractowner's control of the investments of a separate account may cause the contractowner, rather than the insurance company, to be treated as the owner of the assets held by the separate account. If the variable contractowner is considered the owner of the securities underlying the separate account, income and gains produced by those securities would be included currently in the contractowner's gross income. These future rules and regulations proscribing investment control may adversely affect the ability of certain Series of the Fund to operate as described herein. There is, however, no certainty as to what standards, if any, Treasury will ultimately adopt. In the event that unfavorable rules or regulations are adopted, there can be no assurance that the Series will be able to operate as currently described in the Prospectus, or that a Series will not have to change its investment objective or objectives, investment policies, or investment restrictions. PASSIVE FOREIGN INVESTMENT COMPANIES. Some of the Series may invest in stocks of foreign companies that are classified under the Code as passive foreign investment companies ("PFICs"). In general, a foreign company is classified as a PFIC if at least one half of its assets constitutes investment-type assets or 75% or more of its gross income is investment-type income. Under the PFIC rules, an "excess distribution" received with respect to PFIC stock is treated as having been realized ratably over a period during which the Series held the PFIC stock. The Series itself will be subject to tax on the portion, if any, of the excess distribution that is allocated to the Series' holding period in prior taxable years (an interest factor will be added to the tax, as if the tax had actually been payable in such prior taxable years) even though the Series distributes the corresponding income to shareholders. Excess distributions include any gain from the sale of PFIC stock as well as certain distributions from a PFIC. All excess distributions are taxable as ordinary income. A Series may be able to elect alternative tax treatment with respect to PFIC stock. Under an election that currently may be available, a Series generally would be required to include in its gross income its share of the earnings of a PFIC on a current basis, regardless of whether any distributions are received from the PFIC. If this election is made, the special rules, discussed above, relating to the taxation of excess distributions, would not apply. In addition, another election may be available that would involve marking to market a Series' PFIC stock at the end of each taxable year (and on certain other dates prescribed in the Code), with the result that unrealized gains are treated as though they were realized. If this election were made, tax at the Series level under the PFIC rules would be eliminated, but a Series could, in limited circumstances, incur nondeductible interest charges. A Series' intention to qualify annually as a regulated investment company may limit the Series' elections with respect to PFIC stock. Because the application of the PFIC rules may affect, among other things, the character of gains, the amount of gain or loss and the timing of the recognition of income with respect to PFIC stock, as well as subject a Series itself to tax on certain income from PFIC stock, the amount that must be distributed to shareholders, and which will be taxed to shareholders as ordinary income or long-term capital gain, may be increased or decreased substantially as compared to a fund that did not invest in PFIC stock. 57 OPTIONS, FUTURES AND FORWARD CONTRACTS AND SWAP AGREEMENTS. Certain options, futures contracts, and forward contracts in which a Series may invest may be "Section 1256 contracts." Gains or losses on Section 1256 contracts generally are considered 60% long-term and 40% short-term capital gains or losses; however, foreign currency gains or losses arising from certain Section 1256 contracts may be treated as ordinary income or loss. Also, Section 1256 contracts held by a Series at the end of each taxable year (and at certain other times as prescribed pursuant to the Code) are "marked to market" with the result that unrealized gains or losses are treated as though they were realized. Generally, the hedging transactions undertaken by a Series may result in "straddles" for U.S. federal income tax purposes. The straddle rules may affect the character of gains (or losses) realized by a Series. In addition, losses realized by a Series on positions that are part of a straddle may be deferred under the straddle rules, rather than being taken into account in calculating the taxable income for the taxable year in which such losses are realized. Because only a few regulations implementing the straddle rules have been promulgated, the tax consequences of transactions in options, futures, forward contracts, swap agreements and other financial contracts to a Series are not entirely clear. The transactions may increase the amount of short-term capital gain realized by a Series which is taxed as ordinary income when distributed to shareholders. A Series may make one or more of the elections available under the Code which are applicable to straddles. If a Series makes any of the elections, the amount, character and timing of the recognition of gains or losses from the affected straddle positions will be determined under rules that vary according to the election(s) made. The rules applicable under certain of the elections may operate to accelerate the recognition of gains or losses from the affected straddle positions. Because application of the straddle rules may affect the character of gains or losses, defer losses and/or accelerate the recognition of gains or losses from the affected straddle positions, the amount which must be distributed to shareholders, and which will be taxed to shareholders as ordinary income or long-term capital gain, may be increased or decreased as compared to a fund that did not engage in such hedging transactions. Because only a few regulations regarding the treatment of swap agreements, and related caps, floors and collars, have been implemented, the tax consequences of such transactions are not entirely clear. The Series intend to account for such transactions in a manner deemed by them to be appropriate, but the Internal Revenue Service might not necessarily accept such treatment. If it did not, the status of a Series as a regulated investment company, and the Series' ability to satisfy the Code Section 817(h) diversification requirements, might be affected. The requirements applicable to a Series' qualification as a regulated investment company may limit the extent to which a Series will be able to engage in transactions in options, futures contracts, forward contracts, swap agreements and other financial contracts. FOREIGN TAXATION. Income received by a Series from sources within a foreign country may be subject to withholding and other taxes imposed by that country. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes. FOREIGN CURRENCY TRANSACTIONS. Under the Code, gains or losses attributable to fluctuations in exchange rates which occur between the time a Series accrues income or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time that Series actually collects such receivables or pays such liabilities generally are treated as ordinary income or ordinary loss. Similarly, on disposition of debt securities denominated in a foreign currency and on disposition of certain futures contracts, forward contracts and options, gains or losses attributable to fluctuations in the value of foreign currency between the date of acquisition of the security or contract and the date of disposition also are treated as ordinary gain or loss. These gains or losses, referred to under the Code as "Section 988" gains or losses, may increase or decrease the amount of a Series' investment company taxable income to be distributed to its shareholders as ordinary income. ORIGINAL ISSUE DISCOUNT. Debt securities purchased by a Series (such as zero coupon bonds) may be treated for U.S. federal income tax purposes as having original issue discount. Original issue discount is treated as interest for federal income tax purposes and can generally be defined as the excess of the stated redemption price at maturity over the issue price. Original issue discount, whether or not cash payments actually are received by a Series, is treated for federal income tax purposes as income earned by the Series, and therefore is subject to the distribution requirements of the Code. Generally, the amount of original issue discount included in the income of the Series each year is determined on the basis of a constant yield to maturity which takes into account the compounding of accrued interest. 58 In addition, debt securities may be purchased by a Series at a discount which exceeds the original issue discount remaining on the securities, if any, at the time the Series purchased the securities. This additional discount represents market discount for income tax purposes. Treatment of market discount varies depending upon the maturity of the debt security. Generally, in the case of any debt security having a fixed maturity date of more than one year from the date of issue and having market discount, the gain realized on disposition will be treated as ordinary income to the extent it does not exceed the accrued market discount on the security (unless the Series elects for all its debt securities having a fixed maturity date of more than one year from the date of issue to include market discount in income in tax years to which it is attributable). Generally, market discount accrues on a daily basis. For any debt security having a fixed maturity date of not more than one year from the date of issue, special rules apply which may require in some circumstances the ratable inclusion of income attributable to discount at which the bond was acquired as calculated under the Code. A Series may be required to capitalize, rather than deduct currently, part or all of any net direct interest expense on indebtedness incurred or continued to purchase or carry any debt security having market discount (unless the Series makes the election to include market discount currently). DISTRIBUTIONS. Distributions of any investment company taxable income by a Series are taxable to the shareholders as ordinary income. Net capital gains designated by a Series as capital gain dividends will be treated, to the extent distributed, as long-term capital gains in the hands of the shareholders, regardless of the length of time the shareholders may have held the shares. Any distributions that are not from a Series' investment company taxable income or net capital gains may be characterized as a return of capital to shareholders or, in some cases, as capital gain. A distribution will be treated as paid on December 31 of the calendar year if it is declared by a Series in October, November or December of that year to shareholders of record on a date in such a month and paid by the Series during January of the following calendar year. Such distributions will be taxable to shareholders in the calendar year in which they are declared, rather than the calendar year in which they are received. OTHER TAXES. The foregoing discussion is general in nature and is not intended to provide an exhaustive presentation of the tax consequences of investing in a Series. Distributions may also be subject to additional state, local and foreign taxes, depending on each shareholder's particular situation. Depending upon the nature and extent of a Series' contacts with a state or local jurisdiction, the Series may be subject to the tax laws of such jurisdiction if it is regarded under applicable law as doing business in, or as having income derived from, the jurisdiction. Shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in a Series. OWNERSHIP AND MANAGEMENT As of January 31, 1995, SBL controls the Fund by virtue of its indirect ownership of 100% of the outstanding shares of the Fund as custodian of SBL Variable Annuity Account III, SBL Variable Annuity Account IV, Variflex, Variflex LS, Security Elite Benefit and Varilife. CAPITAL STOCK AND VOTING The Fund has authorized the issuance of an indefinite number of shares of capital stock of $1.00 par value. Its shares are currently issued in eleven Series: Series A, Series B, Series C, Series D, Series E, Series S, Series J, Series K, Series M, Series N and Series O. The shares of each Series represent pro rata beneficial interest in that Series' assets and in the earnings and profits or losses derived from the investment of such assets. Upon issuance and sale, such shares will be fully paid and nonassessable. They are fully transferable and redeemable. These shares have no preemptive rights, but the stockholders of each Series are entitled to receive dividends as declared for that Series by the board of directors of the Fund. The shares of each Series have cumulative voting rights for the election of directors. Within each respective Series, each share has equal voting rights with each other share and there are no preferences as to conversion, exchange, retirement or liquidation. On other matters, all shares, (irrespective of Series) are entitled to one vote each. Pursuant to the rules and regulations of the Securities and Exchange Commission, in certain instances, a vote of the outstanding shares of the combined Series may not modify the rights of holders of a particular Series without the approval of a majority of the shares of that Series. 59 CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri, acts as the custodian for the portfolio securities of each Series of the Fund, except Series D, K, M, N and O. Chase Manhattan Bank, N.A., 4 Chase MetroTech Center, Brooklyn, New York 11245 acts as custodian for the portfolio securities of Series D, K, M, N and O, including those held by foreign banks and foreign securities depositories which qualify as eligible foreign custodians under the rules adopted by the SEC. Security Management Company is the Fund's transfer and dividend-paying agent. INDEPENDENT AUDITORS The firm of Ernst & Young LLP, One Kansas City Place, 1200 Main Street, Kansas City, Missouri, has been approved by the Fund's stockholders to serve as the Fund's independent auditors, and as such, the firm will perform the annual audit of the Fund's financial statements. PERFORMANCE INFORMATION The Fund may, from time to time, include the average annual total return and the total return of the Series in advertisements or reports to shareholders or prospective investors. Quotations of average annual total return for a Series will be expressed in terms of the average annual compounded rate of return of a hypothetical investment in the Series over certain periods that will include periods of 1, 5 and 10 years (up to the life of the Series), 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 a proportional share of Series expenses on an annual basis, and assume that all dividends and distributions are reinvested when paid. For the 1- ,5- and 10-year periods ended December 31, 1994, respectively, the average annual total return was -1.65%, 8.81%, and 12.19% for Series A; - -2.99%, 8.26%, and 13.42% for Series B; and 3.71%, 3.95%, and 6.67% for Series C. For the 1- and 5-year periods ended December 31, 1994, and the period of April 1, 1984 (date of inception of Series D) to December 31, 1994, respectively, the average annual total return was 2.73%, -2.59%, and 2.25% for Series D. For the 1- and 5-year periods ended December 31, 1994 and the period of April 26, 1985 (date of inception of Series E) to December 31, 1994, respectively, the average annual total return was -6.93%, 7.04%, and 8.07% for Series E. For the 1-year period ended December 31, 1994 and the period of May 1, 1991 (date of inception of Series S) to December 31, 1994, respectively, the average annual total return was -3.77% and 7.89% for Series S. For the 1-year period ended December 31, 1994 and the period of October 1, 1992 (date of inception of Series J) to December 31, 1994, respectively, the average annual total return was -5.10% and 14.06% for Series J. Total return figures for Series K, M, N, O are not yet available as these Series did not begin operations until May 1, 1995. Quotations of total return for any Series will also be based on a hypothetical investment in the Series for a certain period, will reflect the deduction of a proportional share of Series expenses (on an annual basis), and will assume that all dividends and distributions are reinvested when paid. The total return is calculated by subtracting the value of the investment at the beginning of the period from the ending value and dividing the remainder by the beginning value. The total return on an investment made in shares of Series B calculated as described above for the period from January 1, 1983 to December 31, 1994 was 247.64%. Performance information for a Series 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"), or other unmanaged indices so that investors may compare a Series' results with those of a group of unmanaged securities widely regarded by investors as representative of the securities markets in general; (ii) other groups of mutual funds 60 tracked by Lipper Analytical Services, a widely used independent research firm which ranks mutual funds by overall performance, investment objectives, and assets, or tracked by other services, companies, publications, or persons who rank mutual funds 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 Series. Unmanaged indices may assume the reinvestment of dividends but generally do not reflect deductions for administrative and management costs and expenses. Such mutual fund rating services include the following: Lipper Analytical Services; Morningstar, Inc.; Investment Company Data; Schabacker Investment Management; Wiesenberger Investment Companies Service; Computer Directions Advisory (CDA); and Johnson's Charts. Quotations of average annual total return or total return for the Fund will not take into account charges and deductions against the Separate Accounts to which the Fund shares are sold or charges and deductions against the Contracts issued by Security Benefit Life Insurance Company. Performance information for any Series reflects only the performance of a hypothetical investment in the Series during the particular time period on which the calculations are based. Performance information should be considered in light of the Series' investment objectives and policies, characteristics and quality of the portfolios 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. FINANCIAL STATEMENTS The audited financial statements of the Fund for the fiscal year ended December 31, 1995 which are contained in the Annual Report of SBL Fund are incorporated herein by reference. A copy of the Annual Report for the year ended December 31, 1995, is provided to every person requesting a copy of the Statement of Additional Information. 61 APPENDIX DESCRIPTION OF SHORT-TERM INSTRUMENTS U.S. GOVERNMENT SECURITIES. Federal agency securities are debt obligations which principally result from lending programs of the U.S. Government. Housing and agriculture have traditionally been the principal beneficiaries of federal credit programs, and agencies involved in providing credit to agriculture and housing account for the bulk of the outstanding agency securities. Some U.S. Government securities, such as treasury bills and bonds, are supported by the full faith and credit of the U.S. Treasury, others are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; still others such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality. U.S. Treasury bills are issued with maturities of any period up to one year. Three-month bills are currently offered by the Treasury on a 13-week cycle and are auctioned each week by the Treasury. Bills are issued in bearer form only and are sold only on a discount basis, and the difference between the purchase price and the maturity value (or the resale price if they are sold before maturity) constitutes the interest income for the investor. CERTIFICATES OF DEPOSIT. A certificate of deposit is a negotiable receipt issued by a bank or savings and loan association in exchange for the deposit of funds. The issuer agrees to pay the amount deposited plus interest to the bearer of the receipt on the date specified on the certificate. COMMERCIAL PAPER. Commercial paper is generally defined as unsecured short-term notes issued in bearer form by large well-known corporations and finance companies. Maturities on commercial paper range from a few days to nine months. Commercial paper is also sold on a discount basis. BANKERS' ACCEPTANCES. A banker's acceptance generally arises from a short-term credit arrangement designed to enable businesses to obtain funds to finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then "accepted" by a bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. DESCRIPTION OF COMMERCIAL PAPER RATINGS A Prime rating is the highest commercial paper rating assigned by Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime are further referred to by use of numbers 1, 2 and 3 to denote relative strength within this highest classification. Among the factors considered by Moody's in assigning ratings are the following: (1) evaluation of the management of the issuer; (2) economic evaluation of the issuer's industry or industries and an appraisal of speculative type risks which may be inherent in certain areas; (3) evaluation of the issuer's products in relation to competition and customer acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over a period of 10 years; (7) financial strength of a parent company and the relationships which exist with the issuer; and (8) recognition by management of obligations which may be present or may arise as a result of public interest questions and preparations to meet such obligations. Commercial paper rated "A" by Standard & Poor's Corporation ("S&P") has the highest rating and is regarded as having the greatest capacity for timely payment. Commercial paper rated A-1 by S&P has the following characteristics. Liquidity ratios are adequate to meet cash requirements. Long-term senior debt is rated "A" or better. The issuer has access to at least two additional channels of borrowing. Basic earnings and cash flow have an upward trend with allowance made for unusual circumstances. Typically, the issuer's industry is well established and the issuer has a strong position within the industry. The reliability and quality of management are unquestioned. Relative strength or weakness of the above factors determine whether the issuer's commercial paper is rated A-1, A-2 or A-3. 62 DESCRIPTION OF CORPORATE BOND RATINGS MOODY'S INVESTORS SERVICE, INC. Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa - Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A - Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa - Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba - Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B - Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa - Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca - Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C - Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. STANDARD & POOR'S CORPORATION AAA - Bonds rated AAA have the highest rating assigned by Standard & Poor's to debt obligation. Capacity to pay interest and repay principal is extremely strong. AA - Bonds rated AA have a very strong capacity to pay interest and repay principal and differ from the highest rated issues only in small degree. A - Bonds rated A have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in higher rated categories. BBB - Bonds rated BBB are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for bonds in this category than for bonds in higher rated categories. BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of obligation. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. C - The rating C is reserved for income bonds on which no interest is being paid. D - Debt rated D is in default and payment of interest and/or repayment of principal is in arrears. 63 [CLOCK PHOTOGRAPH] SBL FUND SEMI-ANNUAL REPORT DECEMBER 31, 1995 * SERIES A (GROWTH SERIES) * SERIES B (GROWTH-INCOME SERIES) * SERIES C (MONEY MARKET SERIES) * SERIES D (WORLDWIDE EQUITY SERIES) * SERIES E (HIGH GRADE INCOME SERIES) * SERIES J (EMERGING GROWTH SERIES) * SERIES K (GLOBAL AGGRESSIVE BOND SERIES) * SERIES M (SPECIALIZED ASSET ALLOCATION SERIES) * SERIES N (MANAGED ASSET ALLOCATION SERIES) * SERIES O (EQUITY INCOME SERIES) * SERIES S (SOCIAL AWARENESS SERIES) [SDI LOGO] [CLOCK LOGO] PRESIDENT'S LETTER February 15, 1996 To Our Contractholders: We have just completed one of the best years in history for the combined equity and fixed income markets. The Standard and Poor's 500 Index rose an amazing 37.58%, and the bellwether thirty-year bond declined almost two full percentage points from 7.87% to 5.94% over the course of the year. These gains are evidence of the rewards reaped by patient investors who stood pat and even continued to invest during the distressing markets of 1994.* REASONS BEHIND THE OUTSTANDING PERFORMANCE IN 1995 The Federal Reserve Board deserves much of the credit for the success of the markets during the year. The board's chairman, Alan Greenspan, has done a commendable job of assessing the condition of the nation's economy and deftly applying the brakes in the form of restrictive monetary policy as needed to keep inflation in check. The resulting slow, steady economic growth and stable prices were an unbeatable combination. Bond market investors' fears of surging inflation dissipated, and long-term bond rates fell to levels not seen in several years. Technology was the year's primary equity market theme, reflective of an increased focus on productivity in our nation's factories and offices. We have seen extraordinary technological gains attributable to rapid development of computer applications in every field from word processing to assembly line production. These gains have led to more rapid decision making processes and substitutions for labor which have in turn reduced costs, contributing to diminished inflation pressures. CAN THE EUPHORIA CONTINUE? At the close of 1995, the nation's politicians were locked in combat over an attempt to agree on a balanced budget, bringing the federal government to an abrupt halt and creating immeasurable noise in the financial markets. Investors must keep their eyes focused on the big picture--the economic fundamentals which continue to augur well for the long-term outlook. Inflation remains well under control, the economy continues to move at a slow, sustainable rate of growth, and the Federal Reserve Open Market Committee is likely to recognize that additional cuts in short-term interest rates are justified. We believe that earnings comparisons for the fourth quarter of 1995 will on balance be sufficient to support current market valuations. Earnings in 1996 are not likely to be as robust as they were during the year; however, they should be strong enough to sustain the markets at their present levels. There will be some earnings disappointments, as there always are, generating daily volatility in individual stock prices which we have come to consider routine. As we move through the first half of 1996, the focus will be on the extended slow growth of the economy and the ability of corporations to continue productivity improvement in order to generate earnings gains in that slow-growth climate. [UPPER RIGHT HAND CORNER, PHOTO OF JOHN CLELAND] JOHN CLELAND THE LONGER TERM GLOBAL VIEW In the United States, we see an opportunity for the economy to benefit from the national movement toward less government involvement in all aspects of our lives. It is clearly possible that in the future the government will get a smaller share of our total resources, with the greater part going toward economic growth. The implications of this are enormously positive for financial markets--lower interest rates due to a smaller government hand in our pocketbook. Having a greater share of available resources dedicated to economic growth bodes well for sustained rises in stock and bond prices. Globally the same trends are at work. European countries are beginning to recognize that their social welfare systems have grown beyond the capacity of the people to support them. Growth of the free market system and the elimination of communism as a viable political structure are strong pluses for global economic growth. Reallocation of resources to the free market system improves the lives of citizens and further enhances economic growth and positive financial markets. In the following pages our portfolio managers review the factors influencing the performance of their respective funds in 1995. They also present their management philosophies and outlooks for the year ahead. Our goal is to provide you with positive investment results over time and the highest quality service in the industry. We invite your questions and comments at any time. Sincerely, /s/ John D. Cleland John D. Cleland President - Security Funds *Although we have just experienced a very rewarding year, investors should remember that past performance is no guarantee of future results, and that you may have a gain or a loss at redemption. 1 [CLOCK LOGO] SERIES A (GROWTH SERIES) February 15, 1996 Dear Contractholder, Strong financial markets in 1995 led the Growth Series of SBL Fund to a rewarding 36.76% total return for its investors.* Signs of a slowing economy led us to seek out higher quality companies with historically consistent growth records through such periods. With the cyclicals' earnings expansion at its peak, profits at these top-caliber firms looked much better on a relative basis. Because of these holdings we enjoyed excellent returns, particularly in the fourth quarter of the year. EMPHASIS ON QUALITY SERVED US WELL IN 1995 The consumer nondurables sector was our main emphasis as we sought out high quality food and health care stocks. Among these were familiar names such as PepsiCo Inc., McDonald's Corporation, Procter & Gamble Company, Merck Company, Inc. and Bristol-Myers Squibb Company. In an economic environment of moderate growth and low inflation, these kinds of companies have shown an ability to maintain consistent earnings increases. Technology was perhaps the most newsworthy sector in 1995. We chose to invest in the technology-related computer services area, represented by companies such as Computer Sciences Corporation, a computer outsourcing company. We also selected nonhardware companies such as Microsoft Corporation. We moved out of many of our technology holdings in the fourth quarter, avoiding losses when the sector's attractiveness diminished in the eyes of some major institutional investors. [UPPER RIGHT HAND CORNER, PHOTO OF THE SECURITY MANAGEMENT LARGE CAP TEAM: JOHN CLELAND, TERRY MILBERGER, CHUCK LAUBER] THE SECURITY MANAGEMENT LARGE CAP TEAM: JOHN CLELAND, TERRY MILBERGER, CHUCK LAUBER A third area in which we were overweighted versus our benchmark index is the aerospace-defense industry. Many of these corporations are reaping the benefits of mergers and/or corporate restructurings, both of which lead to strengthened financial position when well managed. These stocks are a good fit in the value side of our "growth and value" mix, which is currently about 85% growth and 15% value. Exposure to financial company stocks has also proven rewarding this year. Companies such as Federal National Mortgage Association profit from an environment of declining interest rates. Lower rates not only contribute to larger profit margins, but to increased business activity through mortgage refinancings and new home purchases as well. 2 [CLOCK LOGO] SERIES A (GROWTH SERIES) February 15, 1996 LOOKING AHEAD TO 1996 Going forward, we will continue the same game plan for the forseeable future. The equity teams at Security Management Company expect economic conditions to remain much the same at least through the first half of 1996, with slow but steady growth and stable or declining interest rates. Although we expect favorable markets, we aren't likely to see the gains that we experienced in 1995. Stock selection will be the key--the market winds will be in our faces rather than at our backs. Terry Milberger Senior Portfolio Manager - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1995* 1 Year 5 Years 10 Years Series A 36.8% 18.3% 13.4% * Performance figures do not reflect fees and expenses associated with an investment in variable insurance products offered by Security Benefit Life Insurance Company. Shares of a Series of SBL Fund are available only through the purchase of such products. The performance data quoted above represents past performance. Past performance is not predictive of future performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. - -------------------------------------------------------------------------------- [LINE GRAPH WITH FOLLOWING INFORMATION CHARTED] SERIES A VS. S&P 500 SBL FUND SERIES A S&P 500 ----------------- ------- $10,000 $10,000 March 1986 $11,040 $11,407 June 1986 $11,651 $12,081 September 1986 $10,296 $11,240 December 1986 $10,639 $11,847 March 1987 $13,315 $14,374 June 1987 $14,034 $15,112 September 1987 $15,033 $16,113 December 1987 $11,310 $12,467 March 1988 $11,967 $13,199 June 1988 $12,694 $14,070 September 1988 $12,300 $14,124 December 1988 $12,458 $14,562 March 1989 $13,661 $15,586 June 1989 $15,117 $16,957 September 1989 $17,498 $18,763 December 1989 $16,805 $19,148 March 1990 $16,154 $18,570 June 1990 $17,105 $19,738 September 1990 $14,058 $17,017 December 1990 $15,151 $18,541 March 1991 $17,817 $21,240 June 1991 $17,817 $21,196 September 1991 $18,877 $22,337 December 1991 $20,621 $24,205 March 1992 $20,872 $23,587 June 1992 $20,597 $24,051 September 1992 $20,640 $24,796 December 1992 $22,916 $26,061 March 1993 $24,078 $27,178 June 1993 $23,816 $27,318 September 1993 $25,269 $28,016 December 1993 $26,058 $28,665 March 1994 $25,164 $27,571 June 1994 $24,743 $27,684 September 1994 $25,963 $29,047 December 1994 $25,627 $29,039 March 1995 $27,981 $31,867 June 1995 $30,640 $34,890 September 1995 $33,015 $37,664 December 1995 $35,049 $39,909 $10,000 OVER TEN YEARS The chart above assumes a hypothetical $10,000 investment in Series A (Growth Series) on December 31, 1985, and reflects the fees and expenses of Series A. On December 31, 1995, the value of the investment (assuming reinvestment of all dividends and distributions) would have been $35,049. By comparison, the same $10,000 investment would have grown to $39,909 based on the S&P 500 Index's performance. 3 [CLOCK LOGO] SERIES B (GROWTH-INCOME SERIES) February 15, 1996 Dear Contractholder: The Growth-Income Series of the SBL Fund provided an outstanding total return in excess of 30% to its shareholders in 1995.* The portfolio's three-pronged strategy of growth, value, and income amply rewarded investors with long-term time horizons who were not frightened away by the difficult market period experienced in 1994. GROWTH STOCKS OUTPERFORMED VALUE IN 1995 The greater part of total return in the year just completed was provided by our growth stock holdings. We focused on higher quality companies with historically consistent growth records, knowing that this type of company generally outperforms in periods of slow economic growth and declining interest rates. Consumer service firms such as Gillette Company (The) and Procter & Gamble Company, as well as drug and health care companies like Merck Company, Inc. and Bristol-Myers Squibb Company, are examples of consistent earners in the growth category. In the Growth-lncome Series we maintain an orientation toward both growth and value types of stocks. The value sector was represented by holdings in aerospace-defense companies which are reaping the benefits of mergers and/or corporate restructurings, and by issues such as Dial Corporation which we perceived as mispriced in the markets. Because of this dual emphasis as well as an allocation of part of the assets to bonds, we devoted a smaller percentage of assets to the stronger-performing growth sector. This resulted in a slightly lower total return for the year than in the Growth Series (Series A), but met the needs of a different type of investor. Allocation during the year was approximately 60% to growth stocks, 20% to value stocks, and 20% to bonds. [UPPER RIGHT HAND CORNER, PHOTO OF THE SECURITY MANAGEMENT GROWTH-INCOME TEAM: CHUCK LAUBER, TERRY MILBERGER, TOM SWANK, JOHN CLELAND] THE SECURITY MANAGEMENT GROWTH-INCOME TEAM: CHUCK LAUBER, TERRY MILBERGER, TOM SWANK, JOHN CLELAND CONTRIBUTION FROM THE BOND MARKETS IN 1995 The high yield bond portion of the Series benefited from a large decline in interest rates and from being overweighted in defensive issues. Defensive bonds are ones issued by higher quality companies in the high-yield universe. They normally outperform lower rated issues when the economy is growing slowly. We held fewer bonds in basic industries such as paper and steel, while emphasizing financial firms and consumer noncyclicals such as hospital management companies. 4 [CLOCK LOGO] SERIES B (GROWTH-INCOME SERIES) February 15, 1996 Consumer-oriented companies were represented in the portfolio by names such as Carrol's Corporation, the largest owner of Burger King franchises, as well as by Continental Cablevision, Inc. (the third largest cable company in the United States), Rogers Communication (the largest media company in Canada), and Tenet Healthcare. In the finance sector, our First Nationwide Bank preferred stock holding was one which provided substantial gains for the portfolio. LOOKING AHEAD TO 1996 The portfolio management teams at Security Management Company expect economic conditions to remain about the same through at least the first half of 1996, with slow, steady growth and stable or declining interest rates. Stock and bond selection will be the key. Diversification throughout the portfolio will play an important role as well. Although gains may not be as outstanding as in 1995, we still expect 1996 to be a rewarding year for investors. Terry Milberger Senior Portfolio Manager Tom Swank Portfolio Manager--High Yield Bonds [LINE GRAPH WITH FOLLOWING INFORMATION CHARTED] SERIES B VS. S&P 500 SBL FUND SERIES B S&P 500 ----------------- ------- $10,000 $10,000 March 1986 $11,381 $11,407 June 1986 $12,135 $12,081 September 1986 $11,431 $11,240 December 1986 $11,917 $11,847 March 1987 $13,925 $14,374 June 1987 $14,476 $15,112 September 1987 $15,234 $16,113 December 1987 $12,355 $12,467 March 1988 $13,425 $13,199 June 1988 $14,439 $14,070 September 1988 $14,352 $14,124 December 1988 $14,736 $14,562 March 1989 $15,814 $15,586 June 1989 $17,120 $16,957 September 1989 $18,502 $18,763 December 1989 $18,923 $19,148 March 1990 $18,586 $18,570 June 1990 $19,041 $19,738 September 1990 $17,555 $17,017 December 1990 $18,083 $18,541 March 1991 $20,499 $21,240 June 1991 $20,928 $21,196 September 1991 $23,088 $22,337 December 1991 $24,906 $24,205 March 1992 $24,702 $23,587 June 1992 $23,737 $24,051 September 1992 $24,928 $24,796 December 1992 $26,472 $26,061 March 1993 $27,579 $27,178 June 1993 $27,865 $27,318 September 1993 $28,954 $28,016 December 1993 $29,012 $28,665 March 1994 $28,154 $27,571 June 1994 $27,148 $27,684 September 1994 $28,145 $29,047 December 1994 $28,145 $29,039 March 1995 $29,969 $31,867 June 1995 $32,567 $34,890 September 1995 $34,925 $37,664 December 1995 $36,607 $39,909 $10,000 OVER TEN YEARS The chart above assumes a hypothetical $10,000 investment in Series B (Growth-Income Series) on December 31, 1985, and reflects the fees and expenses of Series B. On December 31, 1995, the value of the investment (assuming reinvestment of all dividends and distributions) would have been $36,607. By comparison, the same $10,000 investment would have grown to $39,909 based on the S&P 500 Index's performance. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1995* 1 Year 5 Years 10 Years Series B 30.1% 15.1% 13.9% * Performance figures do not reflect fees and expenses associated with an investment in variable insurance products offered by Security Benefit Life Insurance Company. Shares of a Series of SBL Fund are available only through the purchase of such products. The performance data quoted above represents past performance. Past performance is not predictive of future performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. - -------------------------------------------------------------------------------- 5 [CLOCK LOGO] SERIES C (MONEY MARKET SERIES) February 15, 1996 Dear Contractholder: Money market funds in 1995 provided interest rates that were competitive with those of many intermediate-term bonds. The Money Market Series of SBL Fund returned 5.4% for the year on a high quality portfolio that invested only in top-tier commercial paper and government agency securities.* INFLUENCES ON SHORT-TERM FIXED INCOME MARKETS The Federal Reserve Open Market Committee continued its fight against inflation throughout 1995 by keeping the target rate on Federal Funds, the excess funds banks loan each other overnight, between 5.50% and 5.75% throughout the year. This proved to be good for the economy in general as prices remained stable in a slow-growth atmosphere. It also kept interest rates on short-term investments used in money market funds at very attractive levels, considering that inflation remained around 3% throughout the year. The Money Market Series, like other money market funds, must invest its assets in accordance with strict regulatory requirements. These regulations require that we invest at least 95% of the Series' assets in commercial paper that is rated in the highest bracket by standard rating agencies. These include names such as Coca-Cola, General Electric, Wal-Mart, McGraw Hill, and other major corporations. Additionally we purchase short-term paper issued by agencies of the Federal government, considered to be of the highest credit quality. As with other money market funds, safety of principal is our utmost concern. LOOKING AHEAD TO 1996 We expect that the Federal Reserve will see that it has accomplished its goal of containing inflation and will begin to lower short-term interest rates in the early part of 1996. We will continue to search out assets with competitive yields in order to maximize returns to investors without sacrificing credit quality. Jane Tedder Senior Portfolio Manager - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1995* 1 Year 5 Years 10 Years Series C 5.4% 3.4% 5.4% * Performance figures do not reflect fees and expenses associated with an investment in variable insurance products offered by Security Benefit Life Insurance Company. Shares of a Series of SBL Fund are available only through the purchase of such products. The performance data quoted above represents past performance. Past performance is not predictive of future performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. - -------------------------------------------------------------------------------- 6 [CLOCK LOGO] SERIES D (WORLDWIDE EQUITY SERIES) February 15, 1996 [LEXINGTON MANAGEMENT CORPORATION LOGO] Subadvisor, Lexington Management Corporation Portfolio Managers, Richard Sayler and Alan Wapnik Dear Contractholder: Worldwide Equity Series enjoyed a strong fourth quarter but still fell short of the averages due to weak first half performance. The Morgan Stanley Capital International (MSCI) World Index advanced 4.8% during the fourth quarter and a strong 20.7% for all of 1995. The average global fund appreciated 1.3% during the fourth quarter and 16.1% for 1995, according to Lipper Analytical Services, Inc. Series D gained 3.35% during the fourth quarter and 10.86% for the year.* GLOBAL STOCK PERFORMANCE IN 1995 The MSCI World Index has a 40% weighting in U.S. equities, which strongly outperformed international equities in 1995. Since most global funds seek greater diversification, they tend to underperform the MSCI World Index when U. S. equities greatly outperform international stocks. The Worldwide Equity Series underperformed its peers in the first half because of a light weighting in U. S. equities, particularly in the technology sector. The European equity market, particularly the United Kingdom, was another strong performer which was underweighted in the portfolio. The Series enjoyed a strong fourth quarter because of an overweighting of Japanese stocks, an underweighting of poorly performing Scandinavian equities, and an underweighting in certain U.S. technology stocks. We benefited as well from declining interest rates, particularly in Europe, where a large concentration of interest sensitive stocks performed well. European equities had a good year in 1995, although returns could not match those of the strong United States markets. The MSCI European Index appreciated 21.6% for the year, as European equities were stimulated by falling interest rates. Ten year German bonds began the year yielding 7.3% and ended 1995 at 5.99%. Growth in Europe slowed throughout the year. Consumer spending remained weak on the European continent due to structurally high unemployment, at 10% in Germany, 12% in France, and 23% in Spain. Unemployment remained a problem due to high labor costs which flourished under restrictive labor laws. Governments are trying to ease these practices, but it is politically difficult. European companies are cutting costs by closing or moving production to lower cost countries. Japanese stocks performed poorly in the first six months of 1995. The first half of the year was marked by a terrible earthquake in Kobe (an important industrial city in Japan) and by the strong yen. Sensing the urgency of a Japanese economy facing accelerating deflation and possibly depression, Japanese authorities finally addressed their economic problems. The Bank of Japan aggressively added liquidity to the system and intervened in currency markets. The Ministry of Finance announced measures to encourage investment of capital abroad, and the Japanese government passed a $130 billion fiscal stimulative package. Japanese equities recovered 7 [CLOCK LOGO] SERIES D (WORLDWIDE EQUITY SERIES) February 15, 1996 during the second half of the year as the yen weakened back to 100 yen to the dollar and short-term interest rates fell below 1/2%. LOOKING AHEAD TO 1996 The outlook for 1996 is still constructive. Corporate profits in Japan are set to surge from depressed levels if Japanese Gross Domestic Product can achieve even a modest recovery. The Worldwide Equity Series has hedged positions on most of its Japanese holdings to protect returns in the event of a weak yen. We believe European equities will also perform well as economic activity remains subdued; interest rates will help support equities as they continue downward. U.S. equities are likely to underperform international stocks in 1996 because it will be difficult for margins to expand further from their current lofty levels. In our view, the outlook for emerging markets is greatly improved after two years of negative returns. Valuation levels are reasonable and in places like Eastern Europe are outstanding. The Series begins 1996 with an overweight position in Japan, 80% of which is hedged back into U. S. dollars. Japanese equities offer strong earnings prospects, and will enjoy the monetary stimulus from the Bank of Japan. The Series continues to hold approximately 30% in European equities, as interest sensitive stocks will continue to perform well in a climate of falling interest rates. Emerging markets will become a bigger focus as prospects have greatly improved after two years of negative returns. Finally, U.S. stocks comprise 20% of the Series. We remain underweighted in U.S. issues due to unattractive valuations when viewed in light of single digit earnings growth forecasts for 1996. Richard T. Saler and Alan H. Wapnick Portfolio Managers Investing in foreign countries may involve risks, such as currency fluctuations and political instability, not associated with investing exclusively in the U.S. [LINE GRAPH WITH FOLLOWING INFORMATION CHARTED] SERIES D VS. MSCI WORLD INDEX AND LEHMAN BROTHERS HIGH-YIELD INDEX LEHMAN BROTHERS SBL FUND SERIES D MSCI WORLD INDEX HIGH-YIELD INDEX ----------------- ---------------- ---------------- $10,000 $10,000 $10,000 March 1986 $10,511 $12,156 $10,901 June 1986 $10,817 $12,965 $11,315 September 1986 $10,664 $13,657 $11,512 December 1986 $10,448 $14,280 $11,715 March 1987 $10,970 $17,515 $12,529 June 1987 $10,493 $18,567 $12,343 September 1987 $10,191 $19,718 $12,065 December 1987 $9,832 $16,674 $12,308 March 1988 $10,364 $18,628 $12,990 June 1988 $10,315 $18,470 $13,298 September 1988 $10,303 $18,548 $13,533 December 1988 $10,315 $20,667 $13,841 March 1989 $10,279 $21,154 $14,007 June 1989 $10,327 $20,884 $14,511 September 1989 $10,090 $23,333 $14,298 December 1989 $9,399 $24,221 $13,953 March 1990 $8,579 $20,775 $13,731 June 1990 $8,651 $22,483 $14,305 September 1990 $7,995 $18,407 $12,832 December 1990 $7,263 $20,219 $12,630 March 1991 $7,848 $22,236 $15,103 June 1991 $7,610 $21,513 $16,197 September 1991 $8,042 $23,060 $17,313 December 1991 $8,188 $24,056 $18,230 March 1992 $7,979 $22,121 $19,548 June 1992 $8,105 $22,551 $20,082 September 1992 $7,725 $22,960 $20,853 December 1992 $7,979 $22,934 $21,060 March 1993 $8,828 $24,935 $22,315 June 1993 $9,274 $26,481 $23,243 September 1993 $9,923 $27,756 $23,724 December 1993 $10,497 $28,238 $24,611 March 1994 $10,582 $28,444 $24,127 June 1994 $10,773 $29,332 $24,047 September 1994 $11,166 $29,997 $24,424 December 1994 $10,783 $29,814 $24,351 March 1995 $31,249 $25,802 June 1995 $32,623 $27,384 September 1995 $34,487 $28,159 December 1995 $11,955 $36,170 $29,032 $10,000 OVER TEN YEARS The chart above assumes a hypothetical $10,000 investment in Series D (Worldwide Equity Series) on December 31, 1985, and reflects the fees and expenses of Series D. On December 31, 1995, the value of the investment (assuming reinvestment of all dividends and distributions) would have been $11,955. By comparison, the same $10,000 investment would have grown to $36,170 based on the MSCI Index's performance. For the period of December 31, 1985 through April 30, 1991, the investment objective of Series D was to seek high current income by investing primarily in higher yielding, higher risk debt securities. For this period the Lehman Brother High yield index was the appropriate benchmark index. Effective May 1, 1991, the investment objective of Series D was changed to seek long-term growth of capital primarily through investment in common stocks and equivalents of companies domiciled in foreign countries and the United States. The appropriate benchmark index from that date is the Morgan Stanley Capital International World Index. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1995* 1 Year 5 Years 10 Years Series D 10.9% 10.5% 1.8% * Performance figures do not reflect fees and expenses associated with an investment in variable insurance products offered by Security Benefit Life Insurance Company. Shares of a Series of SBL Fund are available only through the purchase of such products. The performance data quoted above represents past performance. Past performance is not predictive of future performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. - -------------------------------------------------------------------------------- 8 [CLOCK LOGO] SERIES E (HIGH GRADE INCOME SERIES) February 15, 1996 Dear Contractholder: What a difference a year makes! In 1994 bonds took the worst beating since the Depression years, but investors who kept their long term goals in mind rode out the storm. By the end of May 1995, those patient investors had recouped all of their 1994 losses and then reaped additional gains throughout the balance of the year. The brave individuals who continued to make regular monthly purchases through the "dark year" of 1994 can now attest to the benefits of dollar cost averaging.* At year's end, 1995 had turned out to be an extremely rewarding year for fixed income investors. FACTORS DRIVING BOND PERFORMANCE IN 1995 Perhaps the single most important factor behind the 1995 bond market rally was the realization on the part of investors that inflation was indeed under control. The Federal Reserve's Open Market Committee remained steadfast in their fight, holding short term interest rates at or above 5-1/2% throughout the year. Long term bonds once again became attractive, and investor demand drove their prices higher. The High Grade Income Series with its long-term orientation made the most of rising bond prices, returning 18.60% to its investors in 1995.** The assets were invested primarily in corporate issues, which tend to outperform government bonds in rising markets. At year end the portfolio consisted of about 25% government and Federal agency issues, 1% in cash, and the remaining 74% in corporates. Within the corporate sector emphasis was placed on single-A rated issues, which generally gain more than their higher rated counterparts when the market moves up. [UPPER RIGHT HAND CORNER, PHOTO OF THE SECURITY MANAGEMENT FIXED-INCOME TEAM: ELAINE MILLER, JANE TEDDER, GREG HAMILTON, JOHN CLELAND, TOM SWANK, STEVE BOWSER] THE SECURITY MANAGEMENT FIXED-INCOME TEAM: ELAINE MILLER, JANE TEDDER, GREG HAMILTON, JOHN CLELAND, TOM SWANK, STEVE BOWSER MARKET SECTOR DETAILS The highest-performing sector of the corporate bond market was industrials, represented in our portfolio by such names as Eli Lilly, Lockheed Martin, and Ralston Purina. Industrials as a group were up nearly 23% in 1995. Financial issues were excellent as well, rising over 20% during the year. This sector of our portfolio includes banks such as NBD Bancorp and Bank of Montreal, finance companies like International Lease Finance and General Motors Acceptance Corporation, and brokerage firms including Morgan Stanley Group and Lehman Brothers. The utility sector of the corporate bond market also did very well, increasing over 22% in value. Our portfolio was underweighted in this area because of my fear of the impact of changing regulatory restrictions. International issues were strong performers in the index, but 9 [CLOCK LOGO] SERIES E (HIGH GRADE INCOME SERIES) February 15, 1996 again were underrepresented in our portfolio because of prospectus limitations which allowed us to invest outside of the United States only in Canadian issues. LOOKING AHEAD TO 1996 The fixed income portfolio team at Security Management Company is optimistic about bonds in the months ahead. Although we don't expect the stellar returns achieved in 1995, we believe that there is still room for interest rates to decline further, resulting in an increase in bond prices. At this writing, the debate over a balanced Federal budget is unresolved, and short term interest rates still remain at historically high levels. Once uncertainty over these two issues is removed, we think that bonds will stage another rally that could take long-term interest rates again below 6%. It is possible that rates could go another 50 basis points lower to 5-1/2%. Combining this upward price movement with a steady coupon interest stream, we feel that total returns for 1996 will once again reward patient long-term investors. Jane Tedder Senior Portfolio Manager *Dollar cost averaging does not assure a profit or protect against loss in a declining market. [LINE GRAPH WITH FOLLOWING INFORMATION CHARTED] SERIES E VS. LEHMAN BROTHERS GOVERNMENT/CORPORATE INDEX SBL FUND SERIES E LEHMAN BROTHERS GOVT./CORP. INDEX ----------------- --------------------------------- $10,000 $10,000 March 1986 $10,353 $10,853 June 1986 $10,362 $10,996 September 1986 $10,768 $11,217 December 1986 $10,962 $11,560 March 1987 $11,175 $11,732 June 1987 $11,027 $11,510 September 1987 $10,646 $11,174 December 1987 $11,221 $11,826 March 1988 $11,510 $12,250 June 1988 $11,649 $12,371 September 1988 $11,874 $12,602 December 1988 $12,034 $12,724 March 1989 $12,120 $12,864 June 1989 $13,105 $13,899 September 1989 $13,143 $14,029 December 1989 $13,466 $14,535 March 1990 $13,328 $14,369 June 1990 $13,883 $14,887 September 1990 $13,777 $14,977 December 1990 $14,368 $15,741 March 1991 $14,848 $16,165 June 1991 $15,107 $16,409 September 1991 $15,953 $17,354 December 1991 $16,805 $18,279 March 1992 $16,595 $18,004 June 1992 $17,224 $18,735 September 1992 $17,931 $19,650 December 1992 $18,056 $19,664 March 1993 $19,123 $20,580 June 1993 $19,789 $21,199 September 1993 $20,660 $21,902 December 1993 $20,335 $21,839 March 1994 $19,406 $21,152 June 1994 $18,830 $20,890 September 1994 $18,827 $20,995 December 1994 $18,925 $21,072 March 1995 $19,829 $22,122 June 1995 $20,831 $23,556 September 1995 $21,294 $24,007 December 1995 $22,446 $25,126 $10,000 OVER TEN YEARS The chart above assumes a hypothetical $10,000 investment in Series E (High Grade Income Series) on December 31, 1985, and reflects the fees and expenses of Series E. On December 31, 1995, the value of the investment (assuming reinvestment of all dividends and distributions) would have been $22,446. By comparison, the same $10,000 investment would have grown to $25,126 based on the Lehman Brothers Government/Corporate Index's performance. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1995** 1 Year 5 Years 10 Years Series E 18.6% 9.3% 8.4% **Performance figures do not reflect fees and expenses associated with an investment in variable insurance products offered by Security Benefit Life Insurance Company. Shares of a Series of SBL Fund are available only through the purchase of such products. The performance data quoted above represents past performance. Past performance is not predictive of future performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. - -------------------------------------------------------------------------------- 10 [CLOCK LOGO] SERIES J (EMERGING GROWTH SERIES) February 15, 1996 Dear Contractholder: The Emerging Growth Series of the SBL Fund provided its investors with a generous 19.49% return in the year just completed.* Although 1995 was a wonderful year for the stock markets overall, the larger capitalization companies outperformed the smaller ones in three of the four quarters. Because this Series invests primarily in those smaller firms, it lagged the general stock markets despite its strong performance. FACTORS WHICH AFFECTED PERFORMANCE IN 1995 An overweighting in health care stocks during the year helped our results. In this area we focused particularly on medical device manufacturing companies. St. Jude Medical, a maker of items such as heart valves and pacemakers, increased 62% for the year. Guidant, a company spun off from the large drug manufacturer Eli Lilly, has received FDA approval for its pectoral implantable defibrillator and is now selling the product. Guidant was up an astounding 164% in 1995. Most of the year the portfolio was intentionally underweighted in the retail sector compared with its benchmark index. We recognized that the retail industry had a problem of simply too many stores serving consumers--a condition known as capacity oversupply. Consumer credit has increased to historically very high levels, curtailing individuals' ability to spend. This, coupled with uncertainty about job security as layoffs continued throughout the economy, kept shoppers out of stores. Retail stocks as a group performed poorly much of the year. [UPPER RIGHT HAND CORNER, PHOTO OF THE SECURITY MANAGEMENT SMALL CAP TEAM: LARRY VALENCIA, FRANK WHITSELL, CINDY SHIELDS, JOHN CLELAND] THE SECURITY MANAGEMENT SMALL CAP TEAM: LARRY VALENCIA, FRANK WHITSELL, CINDY SHIELDS, JOHN CLELAND The Series was also underweighted in the technology sector during the first half of the year, which limited our total return compared with the market in general. As we moved into the second half of 1995, we added technology names to the portfolio. For example, Bay Networks is the final product of a combination of two tech firms, and is benefiting from cost-cutting measures put in place after the consolidation. Many major corporations are in the process of installing networking systems or upgrading those currently owned; Bay Networks manufactures the routers and hubs needed to accomplish this. LOOKING AHEAD TO 1996 It will be hard to match 1995's stock market performance in 1996. Although such large returns may not be in the cards, we do think that 1996 will be a good year for equity investors. We believe there are three factors which could lead small capitalization stocks to outperform the general market: a cut in the 11 [CLOCK LOGO] SERIES J (EMERGING GROWTH SERIES) February 15, 1996 capital gains tax, a rising U.S. dollar versus foreign currencies, and an expanding domestic economy. We will watch for these events and monitor other conditions in order to position the portfolio to best benefit our investors. Cindy Shields Portfolio Manager - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1995* 1 Year Since Inception (10-1-92) Series J 19.5% 15.7% * Performance figures do not reflect fees and expenses associated with an investment in variable insurance products offered by Security Benefit Life Insurance Company. Shares of a Series of SBL Fund are available only through the purchase of such products. The performance data quoted above represents past performance. Past performance is not predictive of future performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. - -------------------------------------------------------------------------------- [LINE GRAPH WITH FOLLOWING INFORMATION CHARTED] SERIES J VS. S&P MIDCAP AND S&P 500 SBL FUND SERIES J S&P MIDCAP S&P 500 ----------------- ---------- ------- $10,000 $10,000 $10,000 December 1992 $12,470 $11,175 $10,510 March 1993 $13,040 $11,541 $10,960 June 1993 $12,980 $11,810 $11,017 September 1993 $13,811 $12,405 $11,299 December 1993 $14,171 $12,735 $11,560 March 1994 $13,191 $12,252 $11,119 June 1994 $12,111 $11,806 $11,164 September 1994 $13,268 $12,605 $11,714 December 1994 $13,448 $12,280 $11,711 March 1995 $13,858 $13,285 $12,851 June 1995 $14,709 $14,444 $14,071 September 1995 $16,490 $15,853 $15,189 December 1995 $16,070 $16,080 $16,095 $10,000 SINCE INCEPTION This chart references a change in Series J's benchmark index. Series J's new benchmark index is the Standard & Poor's Midcap stock index. We believe the capitalization of the stocks in the S&P Midcap more closely reflect the securities Series J purchases. The chart above assumes a hypothetical $10,000 investment in Series J (Emerging Growth Series) on October 1, 1992, and reflects the fees and expenses of Series J. On December 31, 1995, the value of the investment (assuming reinvestment of all dividends and distributions) would have been $16,070. By comparison, the same $10,000 investment would have grown to $16,080 based on the S&P Midcap Index's performance and $16,095 based on the S&P500. 12 [CLOCK LOGO] SERIES K (GLOBAL AGGRESSIVE BOND SERIES) February 15, 1996 [LEXINGTON MANAGEMENT CORPORATION AND MFR ADVISORS, INC. LOGOS] SUBADVISORS, MFR ADVISORS, INC., AND LEXINGTON MANAGEMENT CORPORATION PORTFOLIO MANAGERS, MARIA FIORINI RAMIREZ AND DENIS JAMISON Dear Contractholder: The Global Aggressive Bond Series enjoyed an excellent first seven months. The Series boasts a 7.6% total return from June 1 through December 31, 1995.* The Series is off to a fast start in the new year and we are optimistic about the prospects for all of 1996. Investors in the Series haven't seen a decline in its income despite a drop in U.S. interest rates. Yields overseas, particularly in certain transitional economies, are much higher than those at home. The Series ended 1995 with a standardized yield well in excess of 9%. We believe this level will be maintained in the quarters ahead. THE GLOBAL VIEW Global bond investing often requires taking some less traveled roads. Over the years, money managers have sold global and international bond funds as a way of diversifying investment portfolios and reducing overall risk. They reasoned that bond price movements in one country--the United States, for example--would move independently of those in another country, such as Germany. Unfortunately, the ongoing globalization of the world's economies, the ease with which capital moves, and the flow of readily accessible financial information help to ensure greater correlation of returns among the world's developed bond markets. Therefore, we think investors need to expand their investment parameters and seek out markets that offer the possibility of noncorrelated returns. Fortunately, many of these markets offer high current income and profit potential as well. Of course, many of these markets also present additional risks. PORTFOLIO POSITIONING IN 1995 The Global Aggressive Bond Series currently stresses bonds in certain transitional markets, particularly in Eastern Europe and South Africa. We think the U. S. bond market, and by extension most of the world's developed markets, are fully priced. Meanwhile the economies of Eastern Europe and South Africa need to attract capital and are offering yields and investor incentives to assure that the capital keeps flowing. We closed 1995 with major positions in Portugal, Poland, and South Africa. Together they totaled 26% of the Series' assets. All three economies have strong growth potential, relatively stable currencies, and governments committed to fiscal restraint as well as proinvestor economic policies. Moreover, their bond markets currently provide huge income advantages over those of the traditional developed markets. EMPHASIS ON DIVERSIFICATION Aside from our concentration on transitional 13 [CLOCK LOGO] SERIES K (GLOBAL AGGRESSIVE BOND SERIES) February 15, 1996 economies, the Series seeks to strike a balance between developed market and LDC (less developed country) debt. This diversification tends to mitigate volatility. Although the past volatility of the Series is not necessarily indicative of future volatility, over the last seven months the price volatility of the Series has been comparable to that of ten-year U.S. Treasury Notes. We thank our investors for their continued loyalty and support. Maria Fiorini Ramirez Portfolio Manager Denis P. Jamison Portfolio Manager Investing in foreign countries may involve risks, such as currency fluctuations and political instability, not associated with investing exclusively in the U.S. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1995* Since Inception (6-1-95) Series K 7.6%** *Performance figures do not reflect fees and expenses associated with an investment in variable insurance products offered by Security Benefit Life Insurance Company. Shares of a Series of SBL Fund are available only through the purchase of such products. The performance data quoted above represents past performance. Past performance is not predictive of future performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. **The return has not been annualized - -------------------------------------------------------------------------------- [LINE GRAPH WITH FOLLOWING INFORMATION CHARTED] SERIES K VS. LEHMAN BROTHERS GLOBAL BOND INDEX SBL FUND SERIES K LEHMAN BROTHERS GLOBAL BOND INDEX ----------------- --------------------------------- $10,000 $10,000 June 1995 $9,960 $10,069 July 1995 $10,100 $10,140 August 1995 $10,110 $9,907 September 1995 $10,360 $10,131 October 1995 $10,450 $10,245 November 1995 $10,500 $10,355 December 1995 $10,761 $10,508 $10,000 SINCE INCEPTION The chart above assumes a hypothetical $10,000 investment in Series K (Global Aggressive Bond Series) on June 1, 1995, and reflects the fees and expenses of Series K. On December 31, 1995, the value of the investment (assuming reinvestment of all dividends and distributions) would have been $10,761. By comparison, the same $10,000 investment would have grown to $10,508 based on the Lehman Brothers Global Bond Index's performance. 14 [CLOCK LOGO] SERIES M (SPECIALIZED ASSET ALLOCATION SERIES) February 15, 1996 [MERIDIAN INVESTMENT MANAGEMENT LOGO] MANAGED BY SECURITY MANAGEMENT COMPANY RESEARCH PROVIDED BY MERIDIAN INVESTMENT MANAGEMENT CORPORATION AND TEMPLETON QUANTITATIVE ADVISORS, INC. Dear Contractholder: The Specialized Asset Allocation Series for the period from its inception on June 1 through December 31 returned 7.10%.* Because of the nature of this Series, it is difficult to compare its performance to a single market index. The U.S. stock market was the top performing market globally this year--during the seven month period since June 1 the S&P 500 returned 17.08% including reinvested dividends. In contrast, the Financial Times Actuarial World Index excluding the U.S., a proxy for the performance of international markets as a group, returned 5.02% in U.S. dollars over the same time period. SECTOR ALLOCATION DURING 1995 The Series ended the year with only slight allocation shifts from its position at inception. At year end the allocation was 40% to U.S. stocks, 35% to international stocks, 15% to U.S. bonds, and 10% to real estate (through real estate investment trusts). During the third quarter 5% of the assets were reallocated from the U. S. bond category to real estate. The portfolio currently has no allocation to the other available asset classes (international bonds, gold, and cash.) A small cash position (usually less than 3%) is maintained for liquidity purposes, but a deliberately large allocation is not included unless the portfolio is taking a defensive posture. The benchmark asset allocation of the Series is 40% U.S. stocks, 25% international stocks, 20% U.S. bonds, 10% real estate, and 5% cash. At year end relative to its benchmark allocation the Series is overweighted in international stocks, moderately underweighted in the U.S. bond market, and has no cash position. In years such as 1995 when the U.S. stock market vastly outperforms other sectors, total return of a portfolio diversified among broad sectors will be less than that of a portfolio invested 100% in the outperforming sector. Over time, however, a diversified portfolio is expected to reduce risk while providing competitive returns. The U.S. stock allocation is divided among thirteen sectors. Included is a modest technology weighting with 4.3% in computer stocks such as Dell, IBM, and Sun Microsystems. The most recent sector additions have been Telecommunications (.9%), Recreation and Leisure (3.7%), and Metals and Mining (2.6%). Holdings in these groups include Ameritech, GTE and Sprint in Telecommunications; Walt Disney, Harley Davidson, and Callaway Golf in the Recreation and Entertainment sectors; and Phelps Dodge, Alcoa, and Magma Copper in the Metals and Mining category. LOOKING AHEAD TO 1996 The strategists at Meridian Investment Management Corporation, the provider of asset 15 [CLOCK LOGO] SERIES M (SPECIALIZED ASSET ALLOCATION SERIES) February 15, 1996 allocation research services to the Series, believe there are still pockets of value within the U. S. market. Several of the sectors within the U. S. allocation underperformed in 1995. Dr. Craig Callahan, Chief Investment Officer at Meridian, looks for these areas to play "catch-up" in 1996. The international equity portion of the Series is currently invested in Japan, Germany, Hong Kong, Belgium, and the United Kingdom. The Japanese market has experienced stellar performance recently with the benchmark Nikkei 225 index jumping from 18,000 in the early part of November to just under 20,000 at the end of the year. The German and United Kingdom markets also reached new highs in the fourth quarter of 1995. While these markets have been good performers lately, they still lag the performance of the U. S. market. We look for our international equity holdings to perform well in 1996 compared with the domestic market. Greg A. Hamilton Portfolio Manager Investing in foreign countries may involve risks, such as currency fluctuations and political instability, not associated with investing exclusively in the U.S. [LINE GRAPH WITH FOLLOWING INFORMATION CHARTED] SERIES M VS. BLENDED INDEX AND S&P 500 SBL FUND SERIES M BLENDED INDEX S&P 500 ----------------- ------------- ------- $10,000 $10,000 $10,000 June 1995 $10,080 $10,100 $10,200 July 1995 $10,390 $10,400 $10,600 August 1995 $10,390 $10,300 $10,600 September 1995 $10,490 $10,600 $11,100 October 1995 $10,340 $10,500 $11,100 November 1995 $10,610 $10,800 $11,500 December 1995 $10,710 $11,100 $11,700 $10,000 SINCE INCEPTION The chart above assumes a hypothetical $10,000 investment in Series M (Specialized Asset Allocation Series) on June 1, 1995, and reflects the fees and expenses of Series M. On December 31, 1995, the value of the investment (assuming reinvestment of all dividends and distributions) would have been $10,710. By comparison, the same $10,000 investment would have grown to $11,700 based on the S&P 500 Index's performance. By comparison, the same $10,000 investment would have grown to $11,100 based the blended index of 40% S&P 500, 25% Financial Times World Index, 20% Lehman Brothers Aggregate Bond Index, 10% Wilshire Real Estate Securities Index and 5% 91-Day Treasury Bill Yield. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1995* Since Inception (6-1-95) Series M 7.1%** *Performance figures do not reflect fees and expenses associated with an investment in variable insurance products offered by Security Benefit Life Insurance Company. Shares of a Series of SBL Fund are available only through the purchase of such products. The performance data quoted above represents past performance. Past performance is not predictive of future performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. **The return has not been annualized. - -------------------------------------------------------------------------------- 16 [CLOCK LOGO] SERIES N (MANAGED ASSET ALLOCATION SERIES) February 15, 1996 [T. ROWE PRICE LOGO] SUBADVISOR, T. ROWE PRICE ASSOCIATES, INC. PORTFOLIO MANAGER, NED NORTON Dear Contractholder: The investment committee for the Managed Asset Allocation Series meets monthly to adjust the weightings of stocks, bonds, and money market securities within the appropriate ranges of the portfolio, based on market conditions and economic fundamentals. The committee has maintained a strategy of overweighting bonds because of relatively high stock valuations, while keeping cash equivalents close to minimum levels. Actual allocations on December 31 are shown in the Strategy Review section of this letter. MARKET REVIEW The economy slowed from 1994's robust pace to an annualized rate of 1.3% in the second quarter of 1995. Although GDP growth increased to 4.2% in the third quarter, we view this as something of a rebound from the slow second quarter. We expect economic growth to be closer to its historical trend between 2.0% and 2.5% in the final quarter of the year. The slowing economy along with relatively benign inflation resulted in falling interest rates over the year. Stocks generated exceptional returns during the year. The unmanaged Standard & Poor's 500 Stock Index registered a total return of 17.08% from June 1 (the date of inception of the Managed Asset Allocation Series) through the end of the year. The NASDAQ Composite Index, which tracks smaller company stocks primarily, posted a return of 21.24% for the same period. International stocks fared worse overall, as most foreign markets trailed the U. S. Bonds also enjoyed powerful returns, as the thirty-year Treasury bond fell from 6.64% at the beginning of June to 5.94% at December 31. During the same period the Lehman Aggregate Bond Index increased 7.84%. Short-term rates declined, as well, although not to the same extent. The U.S. dollar gained ground against most major currencies, diminishing returns for U. S. investors in foreign bonds. STRATEGY REVIEW The objective of the Managed Asset Allocation Series is to provide the highest total return consistent with an emphasis on both income and capital appreciation. The typical asset mix is 60% stocks and 40% bonds, with 10% variations permitted for each asset class. On December 31, the Series had 50% of its assets in stocks and 50% in bonds. We were overweighted in bonds since stock valuations appeared high. However, this bond concentration held back performance as the stock market continued to register stunning returns during the latter part of the year, extending their earlier gains. We continued to favor growth over value stocks, since slowing economic growth usually favors companies able to sustain earnings momentum even during an economic slowdown. 17 [CLOCK LOGO] SERIES N (MANAGED ASSET ALLOCATION SERIES) February 15, 1996 Our model's current 44% allocation to fixed income securities is broken down to include 74% investment grade domestic bonds, 18% high yield bonds, and 8% foreign bonds. Within our model's 56% equity exposure, we have allocated 54% to large cap stocks, 18% to small cap issues, and 28% to foreign stocks. We continue to overweight small cap stocks due to their undervaluations relative to large capitalization stocks. We also feel that foreign stocks have attractive growth opportunities. OUTLOOK We anticipate a relatively stable interest rate environment in the months ahead. Should the growth of corporate earnings slow from the current pace, the stock market could experience the correction that has been long anticipated for some quarters. We would increase our exposure to stocks in that event. Meanwhile, any further decline in interest rates in the months ahead will also benefit fixed income investors. It is unlikely that the impressive returns of the past year can be sustained indefinitely, but the present economic environment bodes well for both stocks and bonds. Ned Notson Portfolio Manager Investing in foreign countries involves risks, such as currency fluctuations and political instability, not associated with investing exclusively in the U.S. [LINE GRAPH WITH FOLLOWING INFORMATION CHARTED] SERIES N VS. S&P 500 AND LEHMAN BROTHERS AGGREGATE BOND INDEX LEHMAN BROTHERS SBL FUND SERIES N S&P 500 AGGREGATE BOND INDEX ----------------- ------- -------------------- $10,000 $10,000 $10,000 June 1995 $10,070 $10,200 $10,100 July 1995 $10,310 $10,600 $10,100 August 1995 $10,230 $10,600 $10,200 September 1995 $10,440 $11,100 $10,300 October 1995 $10,410 $11,100 $10,400 November 1995 $11,360 $11,500 $10,600 December 1995 $10,730 $11,700 $10,700 $10,000 SINCE INCEPTION The chart above assumes a hypothetical $10,000 investment in Series N (Managed Asset Allocation Series) on June 1, 1995, and reflects the fees and expenses of Series N. On December 31, 1995, the value of the investment (assuming reinvestment of all dividends and distributions) would have been $10,730. By comparison, the same $10,000 investment would have grown to $10,700 based on the Lehman Brothers Aggregate Bond Index's performance and $11,708 based on the S&P 500 Index's performance. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1995* Since Inception (6-1-95) Series N 7.3%** *Performance figures do not reflect fees and expenses associated with an investment in variable insurance products offered by Security Benefit Life Insurance Company. Shares of a Series of SBL Fund are available only through the purchase of such products. The performance data quoted above represents past performance. Past performance is not predictive of future performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. **The return has not been annualized. - -------------------------------------------------------------------------------- 18 [CLOCK LOGO] SERIES O (EQUITY INCOME SERIES) February 15, 1996 [T. ROWE PRICE LOGO] SUBADVISOR, T. ROWE PRICE ASSOCIATES, INC. PORTFOLIO MANAGER, BRIAN ROGERS Dear Contractholder. The equity market performed extremely well in 1995 reflecting strong corporate earnings, low inflation, a benign interest rate environment, and strong investor demand. The unmanaged Standard & Poor's 500 Stock Index, which was up 37.58%, concluded its best year since 1958 and posted one of the strongest 12-month returns in history. The Equity Income Series did particularly well over the seven months since its inception June 1, 1995, with a total return of 17% versus the S&P 500's 17.08% for the same time period.* Since our conservative investment approach sometimes lags the broad index in unusually robust markets, we were pleased with the year's results. Keep in mind that the generally conservative nature of your Series' investments is also tailored to minimize loss in a declining market. Of course investors should also remember that this is an equity investment. As such, its share price is subject to fluctuation. PORTFOLIO REVIEW The strong performance of many financial stocks, the positive contribution of our holdings in the health care sector, and gains generated by large-capitalization consumer products stocks were among the most important influences on 1995 results. Our investments in companies such as J.P. Morgan, First Interstate Bank, Sallie Mae, and Travelers were particularly profitable. Pharmaceutical stocks also performed extremely well. Some of the successful investments we made in this sector were trimmed later in the year. After stocks such as Eli Lilly and Schering Plough appreciated in value, our valuation discipline encouraged us to reinvest some of the assets into more undervalued stocks with attractive dividend yields. We also eliminated Halliburton, an oil well services and engineering firm, following a runup in its share price. Over the past six months, the prices of many cyclical stocks fell as investors worried about the durability of corporate earnings in 1996. The decline in the value of such stocks as Union Camp, Betz Laboratories, International Paper, and DuPont rendered them exceedingly attractive, in our view. SUMMARY AND OUTLOOK We anticipate positive but slowing economic growth along with a more challenging stock market environment in 1996. Instead of making more detailed economic and market forecasts, we would like to reiterate our primary emphasis which is on sound, conservatively based investments. This has been the hallmark of our approach, in almost any market environment, we believe there will be intriguing opportunities on which to capitalize profitably. As always, we appreciate your continued confidence and support. Brian C. Rogers Portfolio Manager Investing in foreign countries involves risks, such as currency fluctuations and political instability, not associated with investing exclusively in the U.S. 19 [CLOCK LOGO] SERIES O (EQUITY INCOME SERIES) February 15, 1996 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1995* Since Inception (6-1-95) Series O 17.0%** *Performance figures do not reflect fees and expenses associated with an investment in variable insurance products offered by Security Benefit Life Insurance Company. Shares of a Series of SBL Fund are available only through the purchase of such products. The performance data quoted above represents past performance. Past performance is not predictive of future performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. **The return has not been annualized. - -------------------------------------------------------------------------------- [LINE GRAPH WITH FOLLOWING INFORMATION CHARTED] SERIES O VS. S&P 500 SBL FUND SERIES O S&P 500 ----------------- ------- $10,000 $10,000 June 1995 $10,060 $10,200 July 1995 $10,250 $10,600 August 1995 $10,400 $10,600 September 1995 $10,790 $11,100 October 1995 $10,910 $11,100 November 1995 $11,360 $11,500 December 1995 $11,700 $11,700 $10,000 SINCE INCEPTION The chart above assumes a hypothetical $10,000 investment in Series O (Equity Income Series) on June 1, 1995, and reflects the fees and expenses of Series O. On December 31, 1995, the value of the investment (assuming reinvestment of all dividends and distributions) would have been $11,700. By comparison, the same $10,000 investment would have grown to $11,708 based on the S&P 500 Index's performance. 20 [CLOCK LOGO] SERIES S (SOCIAL AWARENESS SERIES) February 15, 1996 Dear Contractholders: The primary goal of the Social Awareness Series is to provide competitive returns through investment in socially responsible companies. Although many investors select funds of this nature because of their personal convictions, they are able to achieve attractive investment results at the same time. In 1995 the Social Awareness Series returned 27.7% to its investors.* PERFORMANCE OF THE SOCIAL AWARENESS SERIES IN 1995 The orientation of the Social Awareness Series toward larger-capitalization companies in the year just completed helped its performance, reflecting the trend in the broader markets. Throughout the year we owned a number of high quality, consistent growth firms. The portfolio was underweighted in technology stocks during the first half of the year, which hindered results during that period. However, we adjusted in midyear and participated in the strong performance of that market sector. Other industries represented in the portfolio which made strong contributions to total return were health care and financial companies. The socially-aware screening requirements of the Series frequently draw us to smaller capitalization companies as well, because many younger, smaller firms from the outset have pursued high standards with respect to human resources issues and the environment. In times when small-cap companies outperform the general markets, the Series will do better also. In years such as the one just completed, when the larger-cap stocks were leaders, we have tended to underperform the indexes. In 1995 about one-third of the portfolio was invested in small-cap stocks. Over time, though, we believe the mixture in the Series will provide competitive returns for our investors. EXAMPLES OF OUTSTANDING SOCIAL AWARENESS IN CORPORATE AMERICA One of our holdings, Boston Market (formerly Boston Chicken), is a rapidly-expanding restaurant chain. The company sets high quality standards for the food it serves to customers, requiring it to be made fresh each day. In addition, the company's policy also calls for keeping food trays in the hot and cold cases at least half full. At the end of the day, there can be as much as 50 to 100 pounds of food remaining which other stores might discard. Boston Market franchisers instead donate the leftovers to local food banks to be served to the hungry. Among our large-cap holdings, Procter & Gamble Company is an excellent example of a company known for generous giving, diversity in employment, and finally benefits. In 1994, P&G won the Labor Department's annual EVE award given to federal contractors for programs that increase equal employment opportunity. In 1995, Working Mother magazine honored Procter & Gamble Company for the ninth year in its list of 100 best workplaces for working mothers. The company donates cash and in-kind contributions, as well as funding grants for groups such as Special Olympics, Children's Defense Fund, National Council of Negro Women and Students Against Drunk Driving. 21 [CLOCK LOGO] SERIES S (SOCIAL AWARENESS SERIES) February 15, 1996 LOOKING AHEAD TO 1996 The equity portfolio managers at Security Management Company expect large-cap stocks to outperform in the first part of the year. During this time investors will continue to move to high quality securities until the uncertainty about the federal budget and interest rates is resolved. If the Federal Reserve Bank lowers short-term interest rates and politicians settle on a budget reduction package, we believe investors will become more confident and small stocks will rise. Cindy Shields Portfolio Manager - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1995* 1 Year Since Inception (4-23-91) Series S 27.7% 11.9% * Performance figures do not reflect fees and expenses associated with an investment in variable insurance products offered by Security Benefit Life Insurance Company. Shares of a Series of SBL Fund are available only through the purchase of such products. The performance data quoted above represents past performance. Past performance is not predictive of future performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. - -------------------------------------------------------------------------------- [LINE GRAPH WITH FOLLOWING INFORMATION CHARTED] SERIES S VS. S&P 500 AND DOMINI SOCIAL INDEX SBL FUND SERIES S S&P500 DOMINI SOCIAL INDEX ----------------- ------ ------------------- $10,000 $10,000 $10,000 June 1991 $9,560 $9,979 $9,907 September 1991 $10,330 $10,516 $10,570 December 1991 $10,550 $11,396 S11,697 March 1992 $11,130 $11,105 $11,474 June 1992 $10,050 $11,323 $11,463 September 1992 $10,231 $11,674 $12,078 December 1992 $12,275 $12,270 $13,111 March 1993 $12,185 $12,796 $13,706 June 1993 $12,526 $12,861 $13,508 September 1993 $13,480 $13,190 $13,982 December 1993 $13,731 $13,496 $14,231 March 1994 $13,319 $12,981 $13,696 June 1994 $12,808 $13,034 $13,678 September 1994 $13,295 $13,675 $14,308 December 1994 $13,213 $13,672 $14,256 March 1995 $13,998 $15,003 $15,723 June 1995 $15,027 $16,427 $17,274 September 1995 $16,572 $17,733 $18,649 December 1995 $16,879 $18,789 $19,699 $10,000 SINCE INCEPTION The chart above assumes a hypothetical $10,000 investment in Series S (Social Awareness Series) on May 1, 1991, and reflects the fees and expenses of Series S. On December 31, 1995, the value of the investment (assuming reinvestment of all dividends and distributions) would have been $16,879. By comparison, the same $10,000 investment would have grown to $18,789 based on the S&P 500 Index's performance and $19,699 based on the Domini Social Index. 22 STATEMENTS OF NET ASSETS December 31, 1995 SERIES A (GROWTH) NUMBER MARKET OF SHARES COMMON STOCKS VALUE - -------------------------------------------------------------------------------- ADVERTISING - 1.4% 200,000 Omnicom Group, Inc.............. $ 7,450,000 AEROSPACE & DEFENSE - 7.6% 160,000 Allied-Signal, Inc. ............ 7,600,000 100,000 Lockheed Martin Corporation..... 7,900,000 265,000 Loral Corporation............... 9,374,375 100,000 McDonnell Douglas Corporation................... 9,200,000 120,000 Raytheon Company................ 5,670,000 ------------ 39,744,375 AGRICULTURE - 0.7% 65,000 Pioneer Hi-Bred International, Inc. ......................... 3,615,625 AMUSEMENT & RECREATIONAL SERVICES - 2.0% 240,000 Carnival Cruise Lines, Inc. .... 5,850,000 80,000 Disney (Walt) Company........... 4,720,000 ------------ 10,570,000 BANKING & FINANCE - 2.6% 100,000 Bankamerica Corporation......... 6,475,000 120,000 Chemical Banking Corporation.... 7,050,000 ------------ 13,525,000 BROADCASTING - 1.1% 120,000 Viacom, Inc. (Cl.B)............. 5,685,000 CASINOS - 1.0% 150,000 Mirage Resorts, Inc.*........... 5,175,000 CHEMICALS - 9.7% 100,000 Cabot Corporation............... 5,387,500 110,500 Great Lakes Chemical Corporation................... 7,956,000 120,000 Hercules, Inc. ................. 6,765,000 90,000 Minerals Technologies, Inc. .... 3,285,000 65,000 Monsanto Company................ 7,962,500 35,000 Morton International, Inc. ..... 1,255,625 200,000 Praxair, Inc. .................. 6,725,000 80,000 Sigma Aldrich Corporation....... 3,960,000 400,000 U.S. Industries, Inc.*.......... 7,350,000 ------------ 50,646,625 COMMUNICATIONS - 1.2% 100,000 AT & T Corporation.............. 6,475,000 COMPUTER SERVICES - 4.2% 150,000 Ceridian Corporation*........... 6,187,500 80,000 Cerner Corporation*............. 1,640,000 100,000 Computer Sciences Corporation*.. 7,025,000 130,000 General Motors Corporation (Cl.E)........................ 6,760,000 ------------ 21,612,500 NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- COMPUTER SOFTWARE - 1.5% 55,000 Microsoft Corporation*.......... $ 4,826,250 75,000 Oracle Systems Corporation*..... 3,178,125 ------------ 8,004,375 COMPUTER SYSTEMS - 1.2% 70,000 International Business Machines Corporation.......... 6,422,500 CONSUMER GOODS & SERVICES - 1.0% 100,000 Duracell International, Inc. ... 5,175,000 DRUG DELIVERY - 0.5% 50,000 Elan Corporation PLC ADR*....... 2,431,250 ELECTRIC MACHINERY & ELECTRONIC COMPONENTS - 3.2% 100,000 General Electric Company........ 7,200,000 90,000 Molex, Inc. .................... 2,857,500 140,000 Varian Associates, Inc. ........ 6,685,000 ------------ 16,742,500 FERTILIZER - 1.1% 80,000 Potash Corporation of Saskatchewan, Inc. ......................... 5,670,000 FINANCE - 1.0% 40,000 Federal National Mortgage Association................... 4,965,000 FOOD & BEVERAGES - 7.6% 100,000 Anheuser-Busch Companies, Inc... 6,687,500 120,000 CPC International, Inc. ........ 8,235,000 150,000 Heinz (H.J.) Company............ 4,968,750 150,000 PepsiCo, Inc. .................. 8,381,250 200,000 Ralcorp Holdings, Inc.* ........ 4,850,000 200,000 Sara Lee Corporation............ 6,375,000 ------------ 39,497,500 HOSPITAL MANAGEMENT -1.7% 115,000 Columbia Healthcare Corporation .................. 5,836,250 100,000 Vencor, Inc.*................... 3,250,000 ------------ 9,086,250 HOUSEHOLD PRODUCTS - 1.2% 75,000 Procter & Gamble Company........ 6,225,000 INSURANCE - 3.9% 75,000 American International Groups, Inc........................... 6,937,500 127,500 Jefferson Pilot Corporation..... 5,928,750 100,000 MBIA, Inc....................... 7,500,000 ------------ 20,366,250 MACHINERY - 1.4% 210,000 Deere & Company ................ 7,402,500 See accompanying notes. 23 STATEMENTS OF NET ASSETS December 31, 1995 SERIES A (GROWTH) (CONTINUED) NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- MANUFACTURING - 1.3% 250,000 Pall Corporation ............... $ 6,718,750 MEDICAL INSTRUMENTS & SUPPLIES - 1.2% 155,000 Baxter International, Inc. ..... 6,490,625 NATURAL GAS - 1.2% 170,000 Coastal Corporation (The) ...... 6,332,500 PAINT & ALLIED PRODUCTS - 1.1% 140,000 Sherwin-Williams Company........ 5,705,000 PERSONAL SERVICES - 0.8% 140,000 Dial Corporation (The).......... 4,147,500 PETROLEUM REFINING - 2.9% 70,000 Mobil Corporation............... 7,840,000 50,000 Royal Dutch Petroleum Company ADR........................... 7,056,250 ------------ 14,896,250 PHARMACEUTICALS - 8.2% 75,000 American Home Products Corporation................... 7,275,000 75,000 Bristol-Myers Squibb Company.... 6,440,625 130,000 Merck & Company, Inc. .......... 8,547,500 200,000 Pharmacia & Upjohn, Inc.*....... 7,750,000 130,000 Schering-Plough Corporation..... 7,117,500 100,000 Smithkline Beecham ADR PLC...... 5,550,000 ------------ 42,680,625 PHOTOGRAPHIC EQUIPMENT & SUPPLIES - 2.6% 100,000 Eastman Kodak Company........... 6,700,000 50,000 Xerox Corporation............... 6,850,000 ------------ 13,550,000 PUBLISHING & PRINTING - 1.0% 250,000 News Corporation, Ltd. (The).... 5,343,750 RESTAURANTS & FOOD SERVICE - 2.9% 180,000 McDonald's Corporation.......... 8,122,500 325,000 Wendy's International, Inc. .... 6,906,250 ------------ 15,028,750 RETAIL TRADE - 6.1% 250,000 Federated Department Stores, Inc.* ........................ 6,875,000 220,000 Leggett & Platt, Inc. .......... 5,335,000 30,000 Nike, Inc. (Cl.B)............... 2,088,750 105,000 Safeway, Inc.* ................. 5,407,500 190,000 Vons Companies, Inc.* .......... 5,367,500 220,000 Walgreen Company................ 6,572,500 ------------ 31,646,250 PRINCIPAL AMOUNT OR NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- TOYS & SPORTING GOODS - 1.3% 175,000 Mattel, Inc. ................... $ 5,381,250 TRANSPORTATION - 3.6% 85,000 Burlington Northern, Inc. ...... 6,630,000 75,000 Conrail Corporation............. 5,250,000 100,000 Union Pacific Corporation....... 6,600,000 ------------ 18,480,000 UTILITIES--TELEPHONE - 2.0% 350,000 Frontier Corporation ........... 10,500,000 WHOLESALE TRADE - 0.8% 130,000 Sysco Corporation .............. 4,225,000 ------------ Total common stocks- Series A (cost $368,502,550) - 93.8% . 487,613,500 COMMERCIAL PAPER ---------------- $ 500,000 AIG Funding, Inc., 5.82%, 1-03-96................ 499,676 $1,500,000 Alabama Power Company, 5.585%, 2-08-96............... 1,490,085 $1,500,000 Allegheny Generating Company, 5.635%, 1-16-96............... 1,496,008 $4,500,000 Bell Atlantic Network Funding, 5.65%, 1-29-96................ 4,478,812 $3,500,000 General Electric Company, 5.77%, 1-05-96................ 3,496,634 $3,400,000 GTE Northwest, Inc., 5.74%, 1-09-96................ 3,394,579 $1,500,000 Harper Group, Inc. (The), 5.665%, 1-19-96............... 1,494,915 $5,200,000 International Lease Finance Corporation, 5.73%, 1-03-96................ 1,998,726 5.785%, 1-03-96............... 1,199,228 5.90%, 1-04-96................ 1,998,361 $7,500,000 Progress Capital Holdings, Inc., 5.78%, 1-10-96................ 2,495,585 5.70%, 1-24-96................ 4,980,208 $1,000,000 TDK U.S.A. Corporation, 5.65%, 1-30-96................ 995,135 $1,500,000 Toyota Motor Credit Corporation, 5.725%, 1-17-96............... 1,495,706 ------------ Total commercial paper - Series A - (cost $31,514,629) - 6.1%... 31,513,658 ------------ Total investments - Series A - (cost $400,017,179) - 99.9% 519,127,158 ------------ Cash and other assets, less liabilities - Series A - 0.1% 763,942 ------------ Total net assets applicable to 24,721,185 shares outstanding - Series A - 100.0%........... $519,891,100 ============ See accompanying notes. 24 STATEMENTS OF NET ASSETS December 31, 1995 SERIES B (GROWTH-INCOME) PRINCIPAL AMOUNT OR NUMBER MARKET OF SHARES PREFERRED STOCK VALUE - -------------------------------------------------------------------------------- BANKING & CREDIT - 0.8% 60,000 First Nationwide Bank, $8.176... $ 6,735,000 ----------- Total preferred stock -Series B (cost $5,978,750) - 0.8% 6,735,000 CORPORATE BONDS --------------- ALUMINUM - 0.7% $5,000,000 Kaiser Aluminum & Chemical Corporation, 12.75% - 2003.... 5,500,000 AMUSEMENT & RECREATION SERVICES - 0.6% $3,000,000 Showboat Inc., 9.25% - 2008..... 3,015,000 $2,000,000 Harrah's Entertainment, 10.875% - 2002................ 2,160,000 ------------ 5,175,000 COMMUNICATIONS - 3.4% $5,300,000 Allbritton Communications Company, 11.50% - 2004................. 5,578,250 $3,000,000 Century Communications, 9.50% - 2005.................. 3,082,500 $3,500,000 Comcast Corporation, 9.125% - 2006................. 3,631,250 $4,000,000 Continental Cablevision, Inc., 11.00% - 2007................. 4,475,000 $2,000,000 Granite Broadcasting Corporation, 12.75% - 2002................. 2,180,000 $2,100,000 Rogers Cable System, 9.625% - 2002................. 2,202,375 $6,000,000 SCI Television, Inc., 11.00% - 2005................. 6,405,000 ------------ 27,554,375 CONSUMER GOODS & SERVICES - 0.8% $3,000,000 International Semi-Tech, 0% - 2003(1).................. 1,627,500 $5,000,000 Westpoint Stevens, 9.375% - 2005.......................... 4,962,500 ------------ 6,590,000 DIVERSIFIED - 0.6% $5,000,000 Sequa Corporation, 9.375% - 2003................. 4,600,000 FERTILIZER - 0.7% $5,000,000 Sherritt Gordon Ltd., 9.75% - 2003.................. 5,262,500 FINANCE - 1.7% $4,000,000 Dime Bancorp, Inc., 10.50% - 2005................. 4,435,000 $4,000,000 Home Holdings, 7.75% - 1998..... 3,600,000 $5,350,000 Keystone Group, Inc., 9.75% - 2003.................. 5,209,563 ------------ 13,244,563 PRINCIPAL MARKET AMOUNT CORPORATE BONDS (CONTINUED) VALUE - -------------------------------------------------------------------------------- FOOD & BEVERAGE TRADE - 1.1% $2,500,000 Cott Corporation, 9.375% - 2005. $ 2,500,000 Southland Corporation, 4,000,000 5.00% - 2003.................. 3,345,000 1,000,000 4.50% - 2004.................. 777,500 2,250,000 TLC Beatrice, 11.50% - 2005..... 2,221,875 ------------ 8,844,375 GROCERY STORES - 1.3% 5,000,000 Pathmark Stores, 9.625% -2003... 4,831,250 6,000,000 Penn Traffic Company, 8.625% - 2003.......................... 5,295,000 ------------ 10,126,250 HOSPITAL MANAGEMENT - 0.4% Tenet Healthcare, 1,000,000 9.625% - 2002................. 1,100,000 2,000,000 10.125% - 2005................ 2,215,000 ------------ 3,315,000 MANUFACTURING - 0.6% 4,000,000 Schuller International Group, Inc., 10.875% - 2004................ 4,490,000 OIL & GAS COMPANIES - 1.4% 4,000,000 Plains Resources, 12% - 1999.... 4,185,000 6,950,000 Seagull Energy Corporation, 8.625% - 2005................. 6,672,000 ------------ 10,857,000 PAPER & PACKAGING - 0.3% 2,000,000 Riverwood International Corporation, 10.375% - 2004................ 2,220,000 PLASTIC PRODUCTS - 0.4% 3,000,000 Carlisle Plastics, 10.25% - 1997 3,033,750 PUBLISHING & PRINTING - 1.5% K-III Communications Corporation, 4,500,000 10.625% - 2002................ 4,781,250 1,000,000 10.25% - 2004................. 1,081,250 5,500,000 Marvel Holdings, 0% - 1998...... 3,960,000 3,000,000 Western Publishing, 7.65% - 2002.......................... 2,122,500 ------------ 11,945,000 RESTAURANTS - 0.5% 4,000,000 Carrols Corporation, 11.50% - 2003.......................... 4,040,000 STEEL & METAL PRODUCTS - 0.3% 2,500,000 Weirton Steel Corporation, 11.50% - 1998................. 2,575,000 ----------- Total corporate bonds - Series B (cost $123,843,905) - 16.3%. 129,372,813 See accompanying notes. 25 STATEMENTS OF NET ASSETS December 31, 1995 SERIES B (GROWTH-INCOME) (CONTINUED) NUMBER MARKET OF SHARES COMMON STOCKS VALUE - -------------------------------------------------------------------------------- ADVERTISING - 1.4% 300,000 Omnicom Group................... $ 11,175,000 AEROSPACE & DEFENSE - 6.8% 200,000 Allied-Signal, Inc. ............ 9,500,000 150,000 Lockheed Martin Corporation..... 11,850,000 370,000 Loral Corporation............... 13,088,750 120,000 McDonnell Douglas Corporation... 11,040,000 180,000 Raytheon Company................ 8,505,000 ------------ 53,983,750 AMUSEMENT & RECREATIONAL SERVICES - 1.3% 180,000 Disney (Walt) Company........... 10,620,000 APPAREL - 0.4% 80,000 Nine West Group, Inc.*.......... 3,000,000 BANKING - 3.0% 130,000 Bankamerica Corporation ........ 8,417,500 150,000 Chemical Banking Corporation ... 8,812,500 30,000 Wells Fargo & Company .......... 6,480,000 ------------ 23,710,000 BROADCASTING - 1.2% 200,000 Viacom, Inc. (Cl.B)*............ 9,475,000 CASINOS - 0.9% 200,000 Mirage Resorts, Inc.*........... 6,900,000 CHEMICALS - 4.5% 90,500 Great Lakes Chemical Corporation 6,516,000 100,000 Hercules, Inc. ................. 5,637,500 100,000 Monsanto Company................ 12,250,000 35,000 Morton International, Inc. ..... 1,255,625 300,000 Praxair, Inc. .................. 10,087,500 ------------ 35,746,625 COMMUNICATIONS - 1.1% 135,000 AT & T Corporation.............. 8,741,250 COMPUTER SERVICES - 2.7% 210,000 Ceridian Corporation*........... 8,662,500 250,000 General Motors Corporation (Cl.E)........................ 13,000,000 ----------- 21,662,500 COMPUTER SOFTWARE - 1.5% 100,000 Microsoft Corporation .......... 8,775,000 65,000 Oracle Systems Corporation...... 2,754,375 ------------ 11,529,375 COMPUTER SYSTEMS - 1.2% 100,000 International Business Machines Corporation................... 9,175,000 CONSUMER GOODS & SERVICES - 0.8% 120,000 Duracell International, Inc. ... 6,210,000 NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- DRUG DELIVERY - 0.3% 50,000 Elan Corporation PLC ADR*....... $ 2,431,250 ELECTRICAL MACHINERY & ELECTRONIC COMPONENTS - 2.9% 100,000 Cooper Industries, Inc. ........ 3,675,000 140,000 General Electric Company........ 10,080,000 200,000 Varian Associates, Inc. ........ 9,550,000 ------------ 23,305,000 FERTILIZER - 0.9% 100,000 Potash Corporation of Saskatchewan, Inc............. 7,087,500 FINANCE - 1.9% 70,000 Federal National Mortgage Association................... 8,688,750 115,000 Household International, Inc. .. 6,799,375 ------------ 15,488,125 FOOD & BEVERAGES - 5.8% 130,000 Anheuser-Busch Companies, Inc. ......................... 8,693,750 150,000 Coca Cola Company (The) ........ 11,137,500 150,000 CPC International, Inc. ........ 10,293,750 187,500 Heinz (H.J.) Company............ 6,210,938 300,000 Sara Lee Corporation............ 9,562,500 ------------ 45,898,438 HOSPITAL MANAGEMENT & SERVICES - 1.6% 200,000 Columbia Healthcare Corporation. 10,150,000 70,000 Vencor, Inc.* .................. 2,275,000 ------------ 12,425,000 HOUSEHOLD PRODUCTS - 2.9% 200,000 Gillette Company (The) ......... 10,425,000 150,000 Procter & Gamble Company........ 12,450,000 ------------ 22,875,000 INSURANCE - 2.0% 105,000 Jefferson Pilot Corporation .... 4,882,500 150,000 MBIA, Inc. ..................... 11,250,000 ------------ 16,132,500 MACHINERY - 1.5% 150,000 American Standard Companies*.... 4,200,000 225,000 Deere & Company................. 7,931,250 ------------ 12,131,250 MANUFACTURING - 0.8% 250,000 Pall Corporation................ 6,718,750 MEDICAL INSTRUMENTS & SUPPLIES - 1.2% 220,000 Baxter International, Inc. ..... 9,212,500 OFFICE, COMPUTING & ELECTRONIC MACHINERY - 1.4% 130,000 Hewlett Packard Company......... 10,887,500 See accompanying notes. 26 STATEMENTS OF NET ASSETS December 31, 1995 SERIES B (GROWTH-INCOME) (CONTINUED) NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- PERSONAL SERVICES - 0.7% 200,000 Dial Corporation (The) ......... $ 5,925,000 PETROLEUM REFINING - 2.3% 225,000 Coastal Corporation (The) ...... 8,381,250 90,000 Mobil Corporation .............. 10,080,000 ------------ 18,461,250 PHARMACEUTICALS - 7.2% 100,000 American Home Products Corporation .................. 9,700,000 120,000 Bristol-Myers SquibbCompany..... 10,305,000 175,000 Merck & Company, Inc. .......... 11,506,250 230,000 Pharmacia & Upjohn, Inc.*....... 8,912,500 150,000 Schering Plough Corporation..... 8,212,500 150,000 Smithkline Beecham ADRPLC....... 8,325,000 ------------ 56,961,250 PHOTOGRAPHIC EQUIPMENT & SUPPLIES - 2.1% 125,000 Eastman Kodak Company........... 8,375,000 60,000 Xerox Corporation............... 8,220,000 ------------ 16,595,000 PUBLISHING & PRINTING - 1.9% 400,000 News Corporation (The).......... 8,550,000 170,000 Time-Warner, Inc. .............. 6,438,750 ------------ 14,988,750 REAL ESTATE - 1.3% 500,000 Macerich Company................ 10,000,000 RESTAURANTS & FOOD SERVICE - 2.8% 280,000 McDonald's Corporation.......... 12,635,000 450,000 Wendy's International, Inc. .... 9,562,500 ------------ 22,197,500 RETAIL TRADE - 2.4% 220,000 Albertsons, Inc. ............... 7,232,500 350,000 Federated Department Stores, Inc.*......................... 9,625,000 30,000 Nike, Inc. (Cl.B)............... 2,088,750 ------------ 18,946,250 TOYS & SPORTING GOODS - 0.4% 100,000 Mattel, Inc. ................... 3,075,000 TRANSPORTATION - 2.8% 125,000 Burlington Northern, Inc. ...... 9,750,000 90,000 Conrail Corporation ............ 6,300,000 100,000 Union Pacific Corporation....... 6,600,000 ---------- 22,650,000 UTILITIES--TELEPHONE - 1.6% 450,000 Frontier Corporation ........... 13,500,000 PRINCIPAL AMOUNT OR NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- WHOLESALE TRADE - 0.5% 130,000 Sysco Corporation............... $ 4,225,000 ---------- Total common stocks - Series B (cost $466,382,415) - 76.0%... 604,046,313 COMMERCIAL PAPER ---------------- $1,500,000 Avnet, Inc., 5.685%, 1-16-96.... 1,495,973 $4,800,000 Consolidated Natural Gas Company, 5.63%, 1-08-96................ 4,793,244 $3,400,000 Duke Power Company, 5.72%, 1-12-96....................... 3,392,977 $7,500,000 GTE California, Inc., 5.62%, 1-09-96................ 2,995,317 5.66%, 1-09-96................ 4,492,925 $3,300,000 General Electric Capital Corporation, 5.77%, 1-05-96................ 3,296,826 $4,000,000 International Business Machines Corporation, 5.805%, 1-11-96.. 3,992,260 $6,000,000 International Lease Finance Corporation, 5.73%, 1-03-96................ 4,996,817 5.90%, 1-04-96................ 999,181 $9,500,000 P.H.H. Corporation, 5.75%, 1-11-96................ 3,998,083 5.74%, 1-16-96................ 5,485,092 $7,200,000 Progress Capital Holdings, Inc., 5.685%, 1-24-96............... 4,183,419 5.70%, 1-24-96................ 2,988,125 $4,500,000 TDK U.S.A. Corporation, 5.65%, 1-30-96................ 4,478,106 $1,800,000 Toyota Motor Credit Corporation, 5.715%, 1-04-96............... 1,798,571 ------------ Total commercial paper - Series B (cost $53,386,916) - 6.7%..... 53,386,916 ------------ Total investments - Series B (cost $649,591,986) - 99.8% 793,541,042 Other assets, less liabilities - Series B - 0.2%............... 1,571,660 ------------ Total net assets applicable to 23,421,450 shares outstanding - Series B - 100.0%........... $795,112,702 ============ SERIES C (MONEY MARKET) COMMERCIAL PAPER ---------------- AIR TRANSPORTATION - 3.4% $3,600,000 Harper Group, Inc., 5.71%, 1-19-96................ $ 797,288 5.66%, 3-14-96................ 2,765,700 ------------ 3,562,988 See accompanying notes. 27 STATEMENTS OF NET ASSETS December 31, 1995 SERIES C (MONEY MARKET) (CONTINUED) PRINCIPAL MARKET AMOUNT COMMERCIAL PAPER (CONTINUED) VALUE - -------------------------------------------------------------------------------- AUTOMOBILES - 3.8% $4,000,000 Toyota Motor Credit Corporation, 5.65%, 1-04-96................ $ 1,998,431 5.69%, 1-12-96................ 1,995,891 ------------ 3,994,322 BUSINESS SERVICES - 6.1% 2,000,000 AI Credit Corporation, 5.63%, 2-02-96....................... 1,988,720 2,500,000 General Electric Capital Corporation, 5.67%, 1-26-96................ 2,488,700 2,000,000 Penney (J.C.) Funding Corporation, 5.65%, 2-15-96 ............... 1,984,853 ------------ 6,462,273 COMPUTERS - 5.1% 5,400,000 Hewlett Packard Company, 5.65%, 1-04-96................ 1,998,431 5.65%, 1-11-96................ 2,395,017 5.63%, 1-16-96................ 997,100 ------------ 5,390,548 CONSTRUCTION - 2.8% 3,000,000 Stanley Works, 5.54%, 3-11-96... 2,966,298 DRUGS & TOILETRIES - 8.0% 5,000,000 Allergan, Inc., 5.725%, 1-17-96............... 996,978 5.67%, 2-06-96................ 3,974,840 3,500,000 Schering Corporation, 5.65%, 1-31-96................ 3,481,713 ------------ 8,453,531 ELECTRIC COMPANIES & SYSTEMS - 18.6% 4,000,000 Alabama Power Company, 5.62%, 2-08-96................ 993,390 5.65%, 2-13-96................ 992,580 5.57%, 2-15-96................ 1,985,456 4,800,000 Allegheny Generating Company, 5.55%, 1-31-96................ 4,776,320 3,000,000 Allegheny Power System, Inc., 5.59%, 2-28-96................ 2,970,510 3,500,000 Georgia Power Company, 5.61%, 3-06-96................ 2,472,600 5.60%, 3-14-96................ 987,750 2,000,000 Interstate Power Company, 5.75%, 1-31-96................ 1,989,778 2,500,000 Southern California Edison Company, 5.705%, 1-19-96............... 2,474,644 ------------ 19,643,028 PRINCIPAL MARKET AMOUNT COMMERCIAL PAPER (CONTINUED) VALUE - -------------------------------------------------------------------------------- ELECTRONICS - 8.8% $5,000,000 Avnet, Inc., 5.70%, 1-16-96................ $ 1,495,963 5.70%, 1-17-96................ 3,489,375 4,300,000 TDK U.S.A. Corporation, 5.65%, 1-22-96................ 996,130 5.70%, 1-22-96................ 3,287,229 ------------ 9,268,697 GAS COMPANIES & SYSTEMS - 10.5% 2,000,000 Bay State Gas Company, 5.73%, 1-10-96................ 1,996,499 5,000,000 Michigan Consolidated Gas Company, 5.65%, 1-24-96................ 1,484,698 5.65%, 2-07-96................ 3,477,425 1,600,000 Nicor, Inc., 5.66%, 2-09-96................ 1,589,687 2,500,000 Northern Illinois Gas Company, 5.65%, 1-12-96................ 2,494,350 ------------ 11,042,659 GROCERY STORES - 2.8% 3,000,000 Winn Dixie Stores, Inc., 5.58%, 1-10-96................ 1,996,120 5.66%, 2-08-96................ 993,590 ------------ 2,989,710 LEASING COMPANIES - 5.7% 3,700,000 International Lease Finance Corporation, 5.67%, 1-02-96................ 2,698,245 5.64%, 2-20-96................ 991,460 2,300,000 P.H.H. Corporation, 5.69%, 1-03-96................ 1,998,380 5.745%, 1-16-96............... 299,186 ------------ 5,987,271 PRINTING - 3.8% 4,000,000 McGraw Hill, Inc., 5.65%, 1-09-96................ 3,992,880 TELEPHONE & TELEGRAPH - 6.9% 5,000,000 Bell South Telecommunications, 5.50%, 2-08-96................ 993,889 5.65%, 2-12-96................ 3,972,378 2,300,000 GTE Northwest, Inc., 5.80%, 1-18-96................ 2,292,960 ------------ 7,259,227 TOBACCO PRODUCTS - 2.8% 3,000,000 B.A.T. Capital Corporation, 5.68%, 1-23-96................ 2,987,910 ------------ Total commercial paper - Series C (cost $94,018,629) - 89.1%.... 94,001,342 See accompanying notes. 28 STATEMENTS OF NET ASSETS December 31, 1995 SERIES C (MONEY MARKET) (CONTINUED) PRINCIPAL AMOUNT OR NUMBER U.S. GOVERNMENT AND MARKET OF SHARES GOV'T AGENCY SECURITIES VALUE - -------------------------------------------------------------------------------- FEDERAL FARM CREDIT BANKS - 9.5% $2,000,000 5.70%, 1-02-96................ $ 2,000,000 $2,000,000 5.73%, 3-01-96................ 2,000,560 $2,000,000 5.70%, 4-01-96................ 2,001,480 $2,000,000 5.58%, 5-01-96................ 2,001,820 $2,000,000 5.52%, 6-03-96................ 2,001,680 ------------ 10,005,540 SBA POOL - 1.1% $1,161,771 SBA Pool GCS #36523, 6.75%, 12-25-12(4)................... 1,161,771 ------------ Total U.S. government and government agency securities - Series C (cost $11,161,771) - 10.6%..................... 11,167,311 ------------ Total investments - Series C (cost $105,180,400) - 99.7% 105,168,653 ------------ Cash and other assets, less liabilities - Series C - 0.3% 267,027 ------------ Total net assets applicable to 8,541,095 shares outstanding - Series C - 100.0%........... $105,435,680 ============ SERIES D (WORLDWIDE EQUITY) PREFERRED STOCKS ---------------- GERMANY - 1.9% 18,300 Fielman AG...................... $ 942,052 8,800 SAP AG Preferred................ 1,328,417 2,140 Sto AG.......................... 1,071,861 ------------ Total preferred stocks - Series D (cost $3,422,556) - 1.9%...... 3,342,330 COMMON STOCKS ------------- AUSTRALIA - 2.0% 401,800 QBE Insurance Group, Ltd........ 1,855,653 493,300 TABCorp Holdings, Ltd........... 1,391,846 10,900 TABCorp Holdings, Ltd. ADR*..... 307,925 ------------ 3,555,424 AUSTRIA - 1.6% 16,500 Bank Austria AG................. 787,036 31,300 Creditanstalt-Bankverein........ 1,731,489 2,200 Wolford AG...................... 346,165 ------------ 2,864,690 CANADA - 0.5% 57,100 Jetform Corporation............. 824,381 SERIES D (WORLDWIDE EQUITY) (CONTINUED) NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- CHILE - 0.9% 122,500 Banco Osorno y La Union ADR..... $1,699,688 DENMARK - 1.4% 18,630 Novo-Nordisk A.S................ 2,544,259 FRANCE - 3.5% 12,074 Cetelem......................... 2,261,952 540 Grand Optical Photoservice...... 52,618 31,100 SGS-Thomson Microelectronics N.V.*......................... 1,188,717 3,880 Sidel S.A....................... 1,206,988 12,210 Societe Generale de Paris Holding S.A. "B".............. 1,505,871 ------------ 6,216,146 GERMANY - 2.2% 155,100 Continental AG.................. 2,157,913 18,800 Deutsche Bank AG................ 888,929 13,730 G.M. Pfaff AG*.................. 959,906 ------------ 4,006,748 HONG KONG - 1.5% 1,308,000 National Mutuals Asia, Ltd...... 1,184,170 918,000 Semi-Tech (Global), Ltd......... 1,478,156 ------------ 2,662,326 INDONESIA - 0.7% 731,000 PT Kawasan Industri Jababeka.... 1,184,194 IRELAND - 1.6% 263,900 Allied Irish Banks Plc.......... 1,422,833 594,300 Jefferson Smurfit Group......... 1,395,610 ------------ 2,818,443 ISRAEL - 1.4% 650 Africa-Israel Investments, Ltd.* 783,777 146,700 Clal Industries, Ltd............ 787,237 9,390 Koor Industries, Ltd............ 932,300 ------------ 2,503,314 ITALY - 1.8% 105,100 Alleanza Assicurazioni.......... 999,162 36,900 Assicurazioni Generali.......... 892,782 144,000 Bulgari Spa*.................... 1,228,649 ------------ 3,120,593 JAPAN - 22.6% 83,000 Amada Company, Ltd.............. 819,158 50,000 Amway Japan, Ltd................ 2,109,337 32,000 CSK Corporation................. 1,000,097 65,000 Hino Motors, Ltd................ 546,541 93,000 Joshin Denki Company, Ltd. ..... 1,214,804 571,000 Kawasaki Kisen Kaisha, Ltd.*.... 1,812,172 431,000 Kawasaki Steel Corporation...... 1,501,306 52,000 Komatsu Forklift Company, Ltd... 344,654 56,000 Makino Milling Machine Company, Ltd. ......................... 478,994 See accompanying notes. 29 STATEMENTS OF NET ASSETS December 31, 1995 SERIES D (WORLDWIDE EQUITY) (CONTINUED) NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- JAPAN, CONTINUED 165,000 Matsushita Electric Industrial Company, Ltd.................. $ 2,682,148 149,000 Matsushita Refrigeration Company, Ltd.................. 1,081,277 126,000 Matsuzakaya Company, Ltd. ...... 1,597,097 460,000 Mitsui Engineering & Shipbuilding*................. 1,277,407 56,000 Mori Seiki Company, Ltd......... 1,262,505 75,000 National House Industrial Corporation................... 1,371,553 187,000 Nippon Chemi-Con Corporation*... 1,244,857 67,000 Nippon Electric Glass Company, Ltd........................... 1,270,634 443,000 Nippon Steel Corporation........ 1,517,388 2,900 Nissen Company, Ltd............. 67,905 79,000 Nitto Denko Corporation......... 1,223,029 65 NTT Data Communications Systems Corporation................... 2,182,390 62,900 Paris Miki, Inc................. 2,257,949 17,000 Ryohin Keikaku Company, Ltd..... 1,414,611 84,000 Sharp Corporation............... 1,341,074 298,000 Shinmaywa Industries, Ltd....... 2,456,662 24,100 Sony Corporation................ 1,443,435 85,000 Sumitomo Forestry Company....... 1,315,917 314,000 Sumitomo Reality & Development Company....................... 2,217,900 17,000 Tosoh Corporation............... 81,751 100,000 Yamato Kogyo Company, Ltd....... 967,586 ------------ 40,102,138 MALAYSIA - 0.4% 332,000 Land & General Holdings Bhd..... 719,322 MEXICO - 1.3% 317,600 Tubos De Acero De Mexico S.A. ADR...................... 2,223,200 NETHERLANDS - 2.8% 67,200 ABN AMRO Holdings NV............ 3,056,827 14,200 Baan Company, N.V.*............. 642,550 91,300 Elsevier N.V.................... 1,215,818 ------------ 4,915,195 NEW ZEALAND - 2.2% 1,367,900 Brierley Investments, Ltd....... 1,080,819 670,200 Fisher & Paykel Industries, Ltd. 2,035,029 256,400 Independent Newspapers, Ltd..... 778,546 ------------ 3,894,394 NORWAY - 1.5% 258,200 Fokus Banken A.S.*.............. 1,391,102 97,700 Saga Petroleum A.S.............. 1,300,553 ------------ 2,691,655 NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- PHILIPPINES - 2.2% 2,018,700 C & P Homes, Inc.*.............. $1,482,639 2,865,000 Filinvest Land, Inc.*........... 918,199 3,214,000 Universal Robina Corporation.... 1,594,125 ------------ 3,994,963 POLAND - 0.9% 50,100 Bank Rozwoju Eksportu S.A....... 762,480 61,800 Debica S.A...................... 933,019 ------------ 1,695,499 PORTUGAL - 0.8% 77,100 Portugal Telecom S.A. ADR*...... 1,448,842 SINGAPORE - 1.3% 823,000 Comfort Group, Ltd.............. 698,543 168,000 United Overseas Bank, Ltd....... 1,616,070 ------------ 2,314,613 SOUTH AFRICA - 0.3% 34,386 Rustenburg Platinum Holdings, Ltd. ADR...................... 565,956 SPAIN - 1.5% 41,100 Repsol S.A...................... 1,343,303 99,000 Telefonica de Espana............ 1,367,538 ------------ 2,710,841 SWEDEN - 2.0% 33,500 Astra AB........................ 1,336,410 141,700 Atlas Copco AB.................. 2,175,799 ------------ 3,512,209 SWITZERLAND - 3.2% 1,060 Nestle S.A...................... 1,172,570 170 Roche Holding AG................ 1,344,820 1,560 Union Bank of Switzerland....... 1,690,507 2,020 Winterrthur Schweizerische Versicherungs - Gesellschaft.. 1,428,973 ------------ 5,636,870 THAILAND - 2.2% 211,900 Bangkok Bank, Ltd............... 2,575,115 205,200 Total Access Communication Plc*.......................... 1,333,800 ------------ 3,908,915 UNITED KINGDOM - 5.4% 1,316,700 Aegis Group Plc*................ 770,435 219,000 Antofagasta Holdings Plc........ 992,891 260,500 B.A.T. Industries Plc........... 2,291,423 273,000 D.F.S. Furniture Company Plc.... 1,679,906 91,300 RTZ Corporation Plc............. 1,324,580 199,200 Takare Plc...................... 552,680 459,200 Tomkins Plc..................... 2,007,163 ------------ 9,619,078 See accompanying notes. 30 STATEMENTS OF NET ASSETS December 31, 1995 SERIES D (WORLDWIDE EQUITY) (CONTINUED) PRINCIPAL AMOUNT OR NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- UNITED STATES - 23.2% 21,300 Aluminum Company of America..... $ 1,126,238 13,400 American Home Products Corporation................... 1,299,800 13,500 American International Group.... 1,248,750 25,000 Bank of New York Company, Inc. . 1,218,750 22,000 Beneficial Corporation.......... 1,025,750 66,000 Borders Group, Inc.*............ 1,221,000 24,800 Ceridian Corporation*........... 1,023,000 12,300 Chubb Corporation............... 1,190,025 48,600 Diamond Offshore Drilling, Inc. 1,640,250 29,000 Dover Corporation............... 1,069,375 42,900 Ecolab, Inc. ................... 1,287,000 25,200 Eli Lilly & Company............. 1,417,500 7,900 General Re Corporation.......... 1,224,500 26,900 Halliburton Company............. 1,361,813 21,600 Hercules, Inc. ................. 1,217,700 18,100 Hershey Foods Corporation....... 1,176,500 13,100 Hewlett-Packard Company......... 1,097,125 15,200 Johnson & Johnson............... 1,301,500 17,200 Lockheed Martin Corporation..... 1,358,800 40,500 Loral Corporation............... 1,432,688 30,500 Meredith Corporation............ 1,277,188 30,800 Millipore Corporation........... 1,266,650 11,800 Mobil Corporation............... 1,321,600 16,400 NationsBank Corporation......... 1,141,850 23,000 PepsiCo, Inc. .................. 1,285,125 23,700 Pioneer Hi-Bred International, Inc. 1,318,313 14,700 Procter & Gamble Company........ 1,220,100 29,700 Service Corporation International 1,306,800 16,400 Union Pacific Corporation....... 1,082,400 34,100 US Bancorp...................... 1,144,480 29,500 Williams Companies, Inc. ....... 1,294,313 38,600 Winn-Dixie Stores, Inc. ........ 1,423,375 8,700 Xerox Corporation............... 1,191,900 ------------ 41,212,158 ------------ Total common stocks - Series D (cost $156,580,657) - 92.9% 165,166,054 FOREIGN BONDS ------------- GERMANY - 1.8% $4,853,000 Bundesbank Deutschland Republic Bond, 6.50%, 10-14-05......... 3,294,978 ------------ Total foreign bonds - Series D (cost $3,254,594) - 1.8% 3,294,978 ------------ Total investments - Series D (cost $163,257,807) - 96.6% 171,803,362 Cash and other assets, less liabilities - Series D - 3.4% 5,977,737 ------------ Total net assets applicable to 31,951,961 shares outstanding - Series D - 100.0% $177,781,099 ============ - -------------------------------------------------------------------------------- At December 31, 1995, Series D's investment concentration by industry was as follows: Banking................................ 12.2% Capital Equipment...................... 11.3 Construction & Housing................. 1.6 Consumer Durables...................... 8.6 Consumer Nondurables................... 5.6 Electrical and Electronics............. 4.8 Energy................................. 4.7 Environmental Technology............... 0.7 Financial Services..................... 8.1 Foreign Government Issues.............. 1.8 Health Care............................ 5.5 Materials.............................. 7.0 Merchandising.......................... 6.7 Multi-Industry......................... 5.8 Real Estate............................ 2.4 Services............................... 5.9 Telecommunications..................... 2.3 Transportation......................... 1.6 Cash and other assets, less liabilities........................ 3.4 ------ Total net assets....................... 100.0% ====== SERIES E (HIGH GRADE INCOME) PRINCIPAL GOVERNMENT AND MARKET AMOUNT GOVERNMENT AGENCY SECURITIES VALUE - -------------------------------------------------------------------------------- CANADIAN GOVERNMENT AGENCIES - 4.2% $5,000,000 Ontario Province, CDA, 7.00% - 2005.................. $5,325,000 U.S. GOVERNMENT AGENCIES - 7.3% 3,000,000 Federal Home Loan Mortgage Corporation, 8.82% - 2004..... 3,141,870 4,000,000 Federal National Mortgage Association, 5.65%, 1997................... 4,024,040 Government National Mortgage Association, 252,095 9% - 2021..................... 266,143 389,580 9% - 2021..................... 411,432 665,800 9.50% - 2009.................. 710,600 525,105 9.50% - 2020.................. 558,058 ------------ 9,112,143 31 STATEMENTS OF NET ASSETS December 31, 1995 SERIES E (HIGH GRADE INCOME) (CONTINUED) PRINCIPAL GOVERNMENT AND GOV'T MARKET AMOUNT AGENCY SECURITIES (CONTINUED) VALUE - -------------------------------------------------------------------------------- U.S. GOVERNMENT SECURITIES - 13.3% U.S. Treasury Notes, $5,000,000 6.125% - 1998................. $ 5,100,350 6,500,000 6.25% - 2000.................. 6,720,219 U.S. Treasury Bonds, 4,800,000 6.25% - 2023.................. 4,937,712 ------------ 16,758,281 ------------ Total government and government agency securities - Series E - (cost $30,459,614 )- 24.8% 31,195,424 CORPORATE BONDS --------------- AEROSPACE & DEFENSE - 4.5% 5,100,000 Lockheed Corporation, 7.875% - 2023.......................... 5,616,375 BANKS - 11.8% 4,000,000 Bank of Montreal, 7.80% - 2007.. 4,450,000 5,000,000 Bank of New York, 6.50% - 2003.......................... 5,106,250 5,000,000 NBD Bancorp, 7.125% - 2007...... 5,331,250 ------------ 14,887,500 BROKERS, DEALERS & SERVICES - 4.0% 5,000,000 Morgan Stanley Group, Inc., 7.25% - 2023.................. 5,012,500 COMMUNICATIONS - 5.9% 5,000,000 Southern New England Telecomm., 7.00% - 2005.................. 5,306,250 2,000,000 U.S. West Capital Funding, 6.75% - 2005.................. 2,065,000 ------------ 7,371,250 DRUGS - 9.0% 5,500,000 Eli Lilly & Company, 7.25% - 2025.......................... 5,898,750 5,000,000 Rite Aid Corporation, 7.625% - 2005.......................... 5,443,750 ------------ 11,342,500 ELECTRIC COMPANIES & SYSTEMS - 4.0% 5,000,000 Pacific Gas & Electric Company, 6.25% - 2003.................. 5,018,750 FINANCE - 12.3% 5,000,000 General Motors Acceptance Corporation, 6.625% - 2005................. 5,118,750 5,000,000 International Lease Finance Company, 7.00% - 2000.................. 5,187,500 5,000,000 Norwest Financial, Inc., 6.75% - 2005.................. 5,200,000 ------------ 15,506,250 PRINCIPAL AMOUNT OR NUMBER MARKET OF SHARES CORPORATE BONDS (CONTINUED) VALUE - -------------------------------------------------------------------------------- FOOD & BEVERAGES - 4.3% $5,000,000 Ralston Purina Company, 7.875% - 2025................. $ 5,468,750 PAPER & LUMBER PRODUCTS - 4.5% $5,000,000 International Paper Company, 7.875% - 2006................. 5,643,750 RAILROAD - 4.4% $5,000,000 Union Pacific Company, 7.60% - 2005.................. 5,500,000 SANITARY SERVICES - 4.2% $5,000,000 Waste Management, 7.00% - 2005.................. 5,325,000 TELEPHONE COMPANIES - 4.3% $5,000,000 GTE South, Inc., 7.25% - 2002.................. 5,350,000 UTILITY COMPANIES - 1.0% $1,000,000 Old Dominion Electric Cooperative, 8.76% - 2022.................. 1,218,750 ----------- Total corporate bonds - Series E - (cost $87,094,277) - 74.2% 93,261,375 ------------ Total investments - Series E - (cost $117,553,891) - 99.0% 124,456,799 Cash and other assets, less liabilities - Series E - 1.0% 1,194,986 ------------ Total net assets applicable to 9,769,468 shares outstanding - Series E - 100.0%........... $125,651,785 ============ SERIES J (EMERGING GROWTH) COMMON STOCKS ------------- ADVERTISING - 0.3% 6,900 Omnicom Group .................. $ 257,025 AIRLINES - 1.1% 45,500 Southwest Airlines Company ..... 1,057,875 BUILDING MATERIALS - 0.3% 5,200 Vulcan Materials ............... 299,650 BUSINESS SERVICES - 5.0% 47,500 Alternative Resources Corporation*.................. 1,436,875 6,200 Cintas Corporation.............. 275,900 19,500 HBO & Company................... 1,494,188 28,500 Paychex......................... 1,421,438 ------------ 4,628,401 32 STATEMENTS OF NET ASSETS December 31, 1995 SERIES J (EMERGING GROWTH) (CONTINUED) NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- CHEMICALS--BASIC - 4.3% 15,500 Air Products & Chemicals, Inc. . $ 817,625 13,000 Cabot Corporation............... 700,375 20,000 IMC Global, Inc. ............... 817,500 51,000 Praxair......................... 1,714,875 ------------ 4,050,375 CHEMICALS--SPECIALTY - 3.2% 28,500 Sigma Aldrich Corporation ...... 1,410,750 25,500 Vigoro Corporation (The)........ 1,574,625 ------------ 2,985,375 COMMUNICATIONS EQUIPMENT - 2.8% 37,500 General Instrument*............. 876,563 22,000 Tellabs, Inc.* ................. 814,000 10,300 U.S. Robotics Corporation*...... 903,825 ------------ 2,594,388 COMPUTER SOFTWARE - 11.7% 17,000 Adobe Systems, Inc. ............ 1,054,000 42,700 Aspect Telecommunications*...... 1,430,450 51,500 Bisys Group, Inc.* ............. 1,583,625 25,500 Cadence Design System, Inc.* ... 1,071,000 22,500 Cognos, Inc.*................... 1,004,063 22,960 First Data Corporation.......... 1,535,450 31,500 Informix*....................... 945,000 22,000 McAffee Associates, Inc.*....... 965,250 13,500 Parametric Technology Company*.. 897,750 18,200 Symantec Corporation*........... 423,150 ------------ 10,909,738 COMPUTER SYSTEMS - 8.1% 21,750 Bay Networks, Inc.*............. 894,469 14,500 Cisco Systems, Inc.*............ 1,082,063 29,000 Dell Computer Corporation* ..... 1,004,125 48,000 EMC Corporation*................ 738,000 18,500 Micro Warehouse*................ 800,125 29,500 SCI Systems, Inc.*.............. 914,500 17,000 Seagate Technology*............. 807,500 28,000 3Com Corporation*............... 1,305,500 ------------ 7,546,282 CONSUMER CYCLICALS - 1.9% 17,500 Flightsafety International, Inc. 879,375 20,500 Snap-On Tools Corporation....... 927,625 ------------ 1,807,000 CONSUMER SERVICES - 1.6% 44,250 CUC International*.............. 1,510,031 DRUG DELIVERY - 0.8% 14,500 Elan Corporation PLC ADR*....... 705,063 ELECTRONICS--INSTRUMENTS - 1.5% 18,000 Thermo Electron Corporation*.... 936,000 10,000 Varian Associates, Inc. ........ 477,500 ------------ 1,413,500 NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- ELECTRONICS--SEMI-CONDUCTORS - 5.3% 18,500 Applied Materials, Inc.* ....... $ 728,438 34,500 Atmel Corporation*.............. 771,938 48,000 Cypress Semiconductors*......... 612,000 16,500 LSI Logic Corporation*.......... 540,375 21,000 Linear Technology Corporation... 824,250 13,000 Novellus Systems, Inc.* ........ 702,000 23,310 Vishay Intertechnology, Inc.* .. 734,265 ------------ 4,913,266 ENTERTAINMENT - 1.0% 27,500 Mirage Resorts, Inc.*........... 948,750 FERTILIZER - 1.2% 16,000 Potash Corporation Saskatchewan, Inc........................... 1,134,000 FINANCIAL SERVICES - 3.8% 49,000 Credit Acceptance Corporation*.. 1,016,750 27,500 Finova Group.................... 1,326,875 26,500 First U.S.A., Inc. ............. 1,175,938 ------------ 3,519,563 GENERAL MERCHANDISE - 1.4% 59,000 Casey's General Stores, Inc. ... 1,290,625 HMOS - 1.0% 21,500 Foundation Health Corporation*.. 924,500 HEALTH CARE - 2.5% 25,000 Cardinal Health, Inc. .......... 1,368,750 32,500 Healthsouth Corporation*........ 946,563 ------------ 2,315,313 HOSPITAL MANAGEMENT - 1.3% 33,500 Community Health Systems*....... 1,193,438 HOTEL/MOTEL - 2.6% 16,000 HFS, Inc.*...................... 1,308,000 42,500 La Quinta Inns.................. 1,163,438 ------------ 2,471,438 HOUSEHOLD FURNISHINGS/APPLIANCES - 1.6% 63,000 Leggett & Platt, Inc. .......... 1,527,750 INSURANCE - 3.0% 30,000 Jefferson-Pilot Corporation..... 1,395,000 19,000 MBIA, Inc. ..................... 1,425,000 ------------ 2,820,000 MANUFACTURING - 3.2% 23,000 Illinois Tool Works, Inc........ 1,357,000 40,000 Millipore ...................... 1,645,000 ------------ 3,002,000 MEDICAL - 3.4% 10,000 Cordis Corporation*............. 1,005,000 27,500 Guidant Corporation............. 1,140,750 19,000 Stryker Corporation............. 997,500 ------------ 3,143,250 See accompanying notes. 33 STATEMENTS OF NET ASSETS December 31, 1995 SERIES J (EMERGING GROWTH) (CONTINUED) PRINCIPAL AMOUNT OR NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- OFFICE EQUIPMENT & SUPPLIES - 1.4% 6,900 Diebold, Inc. .................. $ 382,088 23,500 Reynolds & Reynolds (Cl.A)...... 913,563 ------------ 1,295,651 OIL & GAS EXPLORATION- 2.8% 20,000 Anadarko Petroleum Corporation.. 1,082,500 42,000 Sonat, Inc. .................... 1,496,250 ------------ 2,578,750 PHARMACEUTICALS - 5.1% 18,500 Amgen, Inc.*.................... 1,098,438 10,000 Chiron Corporation*............. 1,105,000 48,500 Dura Pharmaceuticals, Inc.*..... 1,685,375 14,500 Genzyme Corporation*............ 904,438 ------------ 4,793,251 PUBLISHING - 0.1% 1,600 Scholastic Corporation*......... 124,400 RAILROADS - 1.0% 24,000 Illinois Central Corporation.... 921,000 RESTAURANTS - 2.4% 41,500 Boston Chicken*................. 1,333,188 26,000 Outback Steakhouse, Inc.* ...... 932,750 ------------ 2,265,938 RETAIL--DRUG STORES - 0.4% 16,500 General Nutrition*.............. 379,500 RETAIL--SPECIALTY - 3.1% 53,500 Staples, Inc.* ................. 1,304,063 68,500 Sunglass Hut International, Inc.* 1,626,875 ------------ 2,930,938 TELECOMMUNICATIONS - 0.5% 21,500 Vanguard Cellular Systems, Inc.* 435,375 TELEPHONE - 1.0% 28,500 Century Telephone Entertainment, Inc........................... 904,875 TEXTILES - 1.0% 22,000 Tommy Hilfiger Corporation*..... 932,250 ------------ Total common stocks - Series J (cost $74,918,788) - 92.7% 86,530,524 COMMERCIAL PAPER ---------------- $ 700,000 Allegheny Generating Company, 5.635%, 1-16-96............... 698,137 $1,000,000 Baltimore Gas & Electric Company, 5.80%, 1-04-96................ 999,195 $ 500,000 Duke Power Company, 5.72%, 1-12-96................ 498,967 $2,000,000 General Electric Capital Corporation, 5.77%, 1-05-96................ 1,998,077 PRINCIPAL MARKET AMOUNT COMMERCIAL PAPER (CONTINUED) VALUE - -------------------------------------------------------------------------------- $2,000,000 International Lease Finance Corporation, 5.73%, 1-03-96................ $ 999,363 5.90%, 1-04-96................ 999,181 1,200,000 P.H.H. Corporation, 5.74%, 1-16-96................ 1,196,747 1,500,000 Progress Capital Holdings, Inc., 5.78%, 1-10-96................ 998,234 5.675%, 1-18-96............... 498,502 ------------ Total commercial paper - Series J (cost $8,886,403) - 9.5%.... 8,886,403 ------------ Total investments - Series J (cost $83,805,191) - 102.2% 95,416,927 Liabilities, less cash and other assets - Series J - (2.2%) (2,037,486) ------------ Total net assets applicable to 5,813,574 shares outstanding - Series J - 100.0%........... $93,379,441 ============ SERIES K (GLOBAL AGGRESSIVE BOND) GOVERNMENT OBLIGATIONS ---------------------- ARGENTINA - 3.5% $ 350,000 Republic of Argentina, 5.00%, 2023................... $200,156 AUSTRALIA - 4.4% 300,000 Treasury Corporation of Victoria, 10.25%, 2006(3)............... 249,827 BRAZIL - 3.8% 350,000 Republic of Brazil, 7.25%, 2024................... 215,250 CANADA - 2.8% 200,000 Stelco, Inc., 10.40%, 2009(3)... 157,682 ECUADOR - 4.2% 650,000 Republic of Ecuador, 3.00%, 2025.......................... 236,437 GERMANY - 5.1% 400,000 Bendesrepublic Deutschland, 6.50%, 2005(3)................ 287,582 ITALY - 4.4% 410,000,000 Buoni Poliennali Del Tes, 8.50%, 1999(3)....................... 248,711 PHILIPPINES - 3.3% 250,000 Central Bank of Philippines, 5.75%, 2017.......................... 186,250 See accompanying notes. 34 STATEMENTS OF NET ASSETS December 31, 1995 SERIES K (GLOBAL AGGRESSIVE BOND) (CONTINUED) PRINCIPAL MARKET AMOUNT GOVERNMENT OBLIGATIONS (CONTINUED) VALUE - -------------------------------------------------------------------------------- PORTUGAL - 9.7% 32,500,000 Obrig Do Tes Medio Prazo, 8.875%, 1997(3)....................... $ 216,912 45,000,000 Obrig Do Tes Medio Prazo, 11.875%, 2005(3)....................... 336,538 ------------ 553,450 SPAIN - 2.7% 20,000,000 Bonos Y Obig Del Estado, 7.40%, 1999(3)....................... 155,418 SOUTH AFRICA - 8.2% 1,000,000 Electricity Supply Commission, 11.0%, 2008(3)....................... 223,595 1,000,000 Republic of South Africa, 12.00%, 2005(3)....................... 243,682 ------------ 467,277 ------------ Total government obligations - Series K - (cost $2,881,468) - 52.1%....................... 2,958,040 CORPORATE BONDS --------------- BRAZIL - 6.6% $ 150,000 Aracruz Celulose S.A., 10.375%, 2002.......................... 143,625 250,000 Centrais Electricas Bras, 8.875%, 2002.......................... 233,750 ------------ 377,375 COSTA RICA - 3.2% 300,000 Banco Costa Rica, 6.25%, 2010... 183,750 CZECH REPUBLIC - 4.0% 6,000,000 CEz, a.s., 11.30%, 2005(3)...... 225,047 DENMARK - 5.3% 898,000 Nykredit, 8.00%, 2026(3)........ 156,605 950,000 Realkredit Danmark, 6.00%, 2026(3)....................... 142,201 ------------ 298,806 MEXICO - 2.5% 150,000 Cemex S.A., 8.875%, 1998........ 144,375 UNITED STATES - 2.8% 150,000 Chiquita Brands International, Inc., 11.50%, 2001.................. 156,750 ------------ Total corporate bonds - Series K (cost $1,363,294) - 24.4% 1,386,103 SHORT-TERM INVESTMENTS ---------------------- GREECE - 4.6% 70,000,000 Hellenic Treasury Bills, 0%, 12-18-96(3)................... 260,000 PRINCIPAL MARKET AMOUNT SHORT-TERM INVESTMENTS (CONTINUED) VALUE - -------------------------------------------------------------------------------- HUNGARY - 4.0% 40,000,000 Government of Hungary Treasury Bills, 0%, 12-20-96(3)........ $ 226,071 MEXICO - 1.6% 712,010 Cetes, 0%, 1-25-96(3)........... 90,792 POLAND - 8.2% 600,000 Government of Poland Treasury Bill, 0%, 2-28-96(3)................ 235,043 700,000 Government of Poland Treasury Bill, 0%, 1-15-96(3)................ 234,431 ------------ 469,474 UNITED STATES - 1.8% $100,000 U.S. Treasury Bill, 5.20%, 1-04-96....................... 99,957 ------------ Total short-term investments - Series K (cost $1,161,215) - 20.2%..................... 1,146,294 ------------ Total investments - Series K (cost $5,405,977) - 96.7% 5,490,437 Cash and other assets, less liabilities - Series K - 3.3% 187,924 ------------ Total net assets applicable to 555,341 shares outstanding - Series K - 100.0%......... $5,678,361 ============ SERIES M (SPECIALIZED ASSET ALLOCATION) CORPORATE BONDS --------------- BANKS & CREDIT - 0.8% $125,000 Nationsbank Corporation, 7.625%, 2005.................. $135,781 COMMUNICATIONS - 0.5% 40,000 News America Holdings, 8.625%, 2003.................. 44,750 40,000 TCI Communications, Inc., 8.0%, 2005.................... 42,750 ------------ 87,500 PETROLEUM - 0.7% 110,000 Occidental Petroleum, 6.24%, 2000................... 110,825 ------------ Total corporate bonds - Series M (cost $326,983) - 2.0% 334,106 See accompanying notes. 35 STATEMENTS OF NET ASSETS December 31, 1995 SERIES M (SPECIALIZED ASSET ALLOCATION) (CONTINUED) NUMBER MARKET OF SHARES COMMON STOCKS VALUE - -------------------------------------------------------------------------------- APPLIANCES - 2.4% 3,200 Black & Decker Corporation...... $112,800 2,700 Maytag Corporation.............. 54,675 2,500 National Presto Industries...... 99,375 3,500 Toro Company.................... 115,063 ------------ 381,913 AUTO PARTS & SUPPLIES - 2.8% 4,100 Dana Corporation................ 119,925 2,500 Eaton Corporation............... 134,063 3,000 Modine Manufacturing Company.... 72,000 6,100 Simpson Industries.............. 54,900 3,200 Walbro Corporation.............. 57,600 ------------ 438,488 BUILDING MATERIALS - 3.6% 2,200 Ameron, Inc. ................... 82,775 4,800 Apogee Enterprises, Inc. ....... 81,600 1,600 Armstrong World Industries, Inc. 99,200 2,050 Butler Manufacturing Company.... 80,463 2,700 Crane Company................... 99,562 2,200 Owens-Corning Fiberglass Corporation*.................. 98,725 1,800 Ply Gem Industries.............. 29,250 ------------ 571,575 CHEMICALS (BASIC) - 2.8% 1,100 Arco Chemicals Company.......... 53,488 1,400 Dow Chemicals................... 98,525 500 Du Pont (E.I.) de Nemours & Company..................... 34,938 3,200 Lyondell Petrochemical Company.. 73,200 1,300 Olin Corporation................ 96,524 2,300 Union Carbide Corporation....... 86,250 ------------ 442,925 COMPUTER SYSTEMS - 4.3% 2,700 Amdahl Corporation*............. 22,950 1,100 Apple Computer, Inc. ........... 35,062 2,400 Compaq Computer Corporation*.... 115,200 2,300 Dell Computer Corporation*...... 79,637 800 Hewlett Packard Company......... 67,000 1,100 International Business Machines Corporation................... 100,925 1,500 Quantum Corporation*............ 24,188 2,000 SCI Systems, Inc.*.............. 62,000 2,900 Sequent Computer Systems, Inc.*. 42,050 2,600 Sun Microsystems, Inc.*......... 118,625 2,100 Tandem Computers, Inc.*......... 22,313 ------------ 689,950 NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- ELECTRICAL EQUIPMENT - 1.3% 600 Baldor Electric Company......... $ 12,075 489 Cooper Cameron Corporation*..... 17,360 716 Cooper Industries, Inc. ........ 26,313 500 General Electric Company........ 36,000 1,300 General Signal Corporation...... 42,087 700 Johnson Controls, Inc........... 48,125 800 Measurex Corporation............ 22,600 ------------ 204,560 ELECTRONICS - 4.0% 600 AMP, Inc. ...................... 23,025 3,100 Arrow Electronics, Inc.*........ 133,688 1,200 Augat, Inc. .................... 20,550 2,500 Avnet, Inc. .................... 111,875 2,600 Core Industries, Inc............ 33,475 1,200 Fluke (John)Manufacturing Company....................... 45,300 2,100 Harris Corporation.............. 114,712 3,150 Pioneer Standard Electronics, Inc. ............ 41,737 900 Varian Associates, Inc.......... 42,975 2,100 Wyle Electronics................ 73,763 ------------ 641,100 ENTERTAINMENT - 0.3% 800 Disney (Walt) Company........... 47,200 HOUSING--HOME BUILDING - 2.8% 1,375 Clayton Homes, Inc.............. 29,391 2,300 Fleetwood Enterprises, Inc. .... 59,225 5,200 Hechinger Company............... 22,750 1,900 Hughes Supply, Inc. ............ 53,675 400 Lowes Companies, Inc. .......... 13,400 1,700 Oakwood Homes Corporation....... 65,237 1,300 PPG Industries, Inc. ........... 59,475 2,200 Pulte Corporation............... 73,975 300 Sherwin Williams Company........ 12,225 2,500 Del Webb Corporation............ 50,313 ------------ 439,666 MACHINERY - 4.0% 3,000 Baldwin Technology, Inc.*....... 15,188 3,000 Bearings, Inc. ................. 87,750 800 Briggs & Stratton Corporation... 34,700 2,500 Commercial Intertech Corporation................... 45,312 2,800 Dover Corporation............... 103,250 1,900 GATX Corporation................ 92,387 2,100 Graco, Inc...................... 64,050 4,300 Parker-Hannifin Corporation..... 147,275 1,500 Trinova Corporation............. 42,938 ------------ 632,850 36 STATEMENTS OF NET ASSETS December 31, 1995 SERIES M (SPECIALIZED ASSET ALLOCATION) (CONTINUED) NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- MINING & METALS - 2.6% 700 Alcan Aluminum, Ltd. ........... $ 21,787 1,400 Aluminum Company of America....................... 74,025 1,200 Asarco, Inc. ................... 38,400 900 Ashland Coal, Inc............... 19,238 2,800 Magma Copper Company*........... 78,050 2,000 Phelps Dodge Corporation........ 124,500 900 Reynolds Metals Company......... 50,963 ------------ 406,963 RECREATION - 3.7% 5,200 Brunswick Corporation........... 124,800 4,200 CPI Corporation................. 67,200 5,100 Callaway Golf Company........... 115,388 4,500 Handleman Company............... 25,875 3,200 Harcourt General, Inc. ......... 134,000 900 Harley Davidson, Inc. .......... 25,874 2,700 King World Productions, Inc.*... 104,963 ------------ 598,100 SHOES - 2.4% 7,900 J. Baker, Inc................... 45,425 1,900 Brown Group, Inc. .............. 27,075 1,800 Nike, Inc. ..................... 125,325 3,800 Reebok International, Ltd....... 107,350 2,400 Wolverine Worldwide, Inc. ...... 75,600 ------------ 380,775 STEEL - 2.2% 2,700 Birmingham Steel Corporation.... 40,163 2,100 Carpenter Technology............ 86,363 1,800 Cleveland Cliffs, Inc. ......... 73,800 1,300 Commercial Metals Company....... 32,175 1,800 Lukens Steel Company............ 51,750 200 Nucor Corporation............... 11,425 2,200 Quanex Corporation.............. 42,624 2,200 Steel Technologies, Inc. ....... 18,975 ------------ 357,275 TELECOMMUNICATIONS - 0.9% 400 Ameritech Corporation........... 23,600 900 GTE Corporation................. 39,600 1,200 Pacific Telesis Group........... 40,350 1,100 Sprint Corporation ............. 43,862 ------------ 147,412 Total common stocks - Series M (cost $6,472,338) - 40.1% 6,380,752 PRINCIPAL AMOUNT OR NUMBER U.S. GOVERNMENT & GOVERNMENT MARKET OF SHARES AGENCY SECURITIES VALUE - -------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCIES - 28.0% Federal Home Loan Mortgage Corporation, $3,000,000 5.41%, 3-7-96(2).............. $ 2,969,460 $ 68,238 6.0%, 2006.................... 68,461 $ 250,000 7.0%, 2020.................... 254,465 $ 100,000 7.0%, 2021.................... 100,547 Financing Corporation, $ 90,000 0%, 2010...................... 35,350 Federal National Mortgage Association, $ 177,345 6.5%, 2008.................... 167,011 $ 140,000 6.5%, 2018.................... 139,964 $ 236,890 6.5%, 2018.................... 231,491 $ 160,000 7.5%, 2020.................... 165,366 $ 170,000 6.95%, 2020................... 171,709 $ 150,000 8.8%, 2025.................... 163,688 ------------ 4,467,512 U.S. GOVERNMENT SECURITIES - 6.0% U.S. Treasury Bills, $ 425,000 4.87%, 4-4-96................. 419,352 U.S. Treasury Notes, $ 375,000 6.38%, 2002................... 393,577 $ 100,000 5.875%, 2005.................. 102,222 $ 50,000 6.5%, 2005.................... 53,210 ------------ 968,361 ------------ Total U.S. government & government agency securities - Series M (cost $5,384,050) - 34.0%... 5,435,873 REAL ESTATE INVESTMENT TRUSTS ----------------------------- 3,500 BRE Properties, Inc. ........... 124,688 5,900 Cambridge Shopping Centres, Ltd. 51,371 5,000 Federal Realty Investment Trust. 113,750 17,400 First Union Real Estate Investment Trust.............. 121,800 9,400 HRE Properties.................. 124,550 7,300 MGI Properties, Inc. ........... 122,275 6,600 New Plan Realty Trust........... 144,375 5,900 Pennsylvania Real Estate Investment Trust.............. 122,425 10,000 Santa Anita Realty Enterprises, Inc. ......................... 118,750 6,700 Security Capital Pacific Trust.. 132,325 7,900 United Realty Trust Dominion.... 118,500 9,300 Washington Real Estate Investment Trust.............. 147,637 3,700 Weingarten Realty Investors..... 140,600 ------------ Total real estate investment trusts - Series M (cost $1,553,401) - 9.9%........................ 1,583,046 See accompanying notes. 37 STATEMENTS OF NET ASSETS December 31, 1995 SERIES M (SPECIALIZED ASSET ALLOCATION) (CONTINUED) NUMBER MARKET OF SHARES FOREIGN STOCKS VALUE - -------------------------------------------------------------------------------- BELGIUM - 6.3% 500 Fortis AG....................... $ 60,824 400 Union Miniere*.................. 26,776 50 Bekaert SA...................... 41,201 100 Cementbedrijven Cimenteries..... 40,351 1,000 Delhaize-LeLion................. 41,456 950 Electrabel...................... 225,967 750 Gevaert Photo Productions....... 46,128 350 Groupe Bruxelles Lambert........ 48,583 500 Kredietbank..................... 136,769 400 Petrofina SA.................... 122,464 250 Royale Belgium.................. 49,951 150 Solvay SA....................... 81,042 200 Tractebel Investment International 82,571 ------------ 1,004,083 HONG KONG - 6.6% 23,000 Bank of East Asia............... 82,547 12,000 Cathay Pacific Airways ......... 18,314 5,000 Cheung Kong Holdings............ 30,458 20,000 China Light & Power Company..... 92,086 68,000 Chinese Estates................. 44,413 10,000 Dicksons Concept International.. 9,312 10,000 Elec &Eltek International Holdings...................... 2,018 20,000 Hong Kong & Shanghai Hotels .... 28,971 71,250 Hong Kong Telecommunications.... 127,167 35,000 Hutchinson Whampoa Limited...... 213,207 5,000 Kumagai Gumi.................... 3,621 5,000 Lai-sun Garment International... 4,850 57,000 Oriental Press Group............ 17,324 5,000 Peregrine Investments Holdings.. 6,467 20,000 Sun Hung Kai Properties......... 163,607 180,000 Tai Cheung Holdings ............ 138,516 13,000 Wing Lung Bank.................. 72,802 ------------ 1,055,680 ------------ Total foreign stocks - Series M (cost $2,022,862) - 12.9% 2,059,763 TEMPORARY CASH INVESTMENTS -------------------------- 431,000 Vista Federal Money Market Fund.......................... 431,000 ------------ Total temporary cash investments - Series M (cost $431,000) - 2.7% 431,000 ------------ Total investments - (cost $16,190,634) - Series M - 101.6%...................... 16,224,540 Liabilities, less cash and other assets - Series M - (1.6%) (248,117) ------------ Total net assets applicable to 1,491,500 shares outstanding - Series M - 100.0%......... $15,976,423 ============ SERIES N (MANAGED ASSET ALLOCATION) PRINCIPAL MARKET AMOUNT CORPORATE BONDS VALUE - -------------------------------------------------------------------------------- AUTOMOBILES - 0.5% $ 50,000 Exide Corporation, 10.00%, 2005.......................... $ 53,875 BANKS & CREDIT - 1.0% 100,000 Bankers Trust - NY, 7.25%, 2003.......................... 105,000 BROADCAST MEDIA - 1.0% 50,000 Sinclair Broadcasting, 10.00%, 2005.......................... 51,125 50,000 Young Broadcasting Corporation, 10.125%, 2005................. 52,875 ------------ 104,000 CHEMICALS--SPECIALTY - 1.0% 50,000 Agricultural Minerals & Chemicals, 10.75%, 2003.................. 55,000 50,000 IMC Fertilizer Group, Inc., 9.45%, 2011................... 53,313 ------------ 108,313 ELECTRIC UTILITIES - 4.0% 100,000 Florida Power & Light Company, 5.7%, 1998.................... 100,500 100,000 Monongahela Power, 8.5%, 2022.......................... 106,625 50,000 Southern California Edison, 6.5%, 2001.......................... 51,125 110,000 Texas Utilities, 5.875%, 1998... 110,000 50,000 Wisconsin Electric Power, 5.875%, 1997.................. 50,313 ------------ 418,563 ENTERTAINMENT - 0.5% 50,000 United Artists, 9.30%, 2015..... 50,125 HEALTH CARE--SERVICES - 0.3% 35,000 Tenet Healthcare Corporation, 8.625%, 2003.................. 36,706 HOTEL/MOTEL - 0.7% 50,000 Bally Park Place Funding, 9.25%, 2004................... 50,500 30,000 Grand Casinos, 10.125%, 2003.... 31,275 ------------ 81,775 INDUSTRIAL SERVICES - 4.6% 50,000 Coinmach Corporation, 11.75%, 2005.................. 50,500 50,000 Consol Cigar, 10.50%, 2003...... 51,125 50,000 Gulf Canada, 9.625%, 2005....... 52,375 50,000 HMC Acquisition Properties 9.00%, 2007................... 50,500 50,000 Lenfest Communications, 8.375%, 2005.................. 50,188 See accompanying notes. 38 STATEMENTS OF NET ASSETS December 31, 1995 SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED) PRINCIPAL AMOUNT OR NUMBER MARKET OF SHARES CORPORATE BONDS (CONTINUED) VALUE - -------------------------------------------------------------------------------- INDUSTRIAL SERVICES - (CONTINUED) $ 25,000 Portola Packaging, Inc., 10.75%, 2005.......................... $ 25,750 $100,000 Price/Costco, Inc., 7.125%, 2005.......................... 104,375 $100,000 Raytheon Company, 6.5%, 2005.......................... 102,875 ------------ 487,688 MANUFACTURING - 0.5% $ 50,000 Coltec Industries, 10.25%, 2002. 51,625 MISCELLANEOUS - 0.5% $ 50,000 McDonald's Corporation, 6.625%, 2005.......................... 51,750 PAPER & FOREST PRODUCTS - 0.5% $ 50,000 Repap Wisconsin, Inc., 9.25%, 2002.......................... 47,625 SUPERMARKETS - 0.3% $ 50,000 Pathmark Stores, 0%, 2003(1).... 30,500 TEXTILES - 0.4% $ 50,000 Dan River, Inc., 10.125%, 2003.. 46,125 ------------ Total corporate bonds - Series N (cost $1,636,881) - 15.8% 1,673,670 PREFERRED STOCKS ---------------- AUTOMOBILES - 0.1% 200 Superior Industries International 5,275 ------------ Total preferred stocks - Series N (cost $6,445) - 0.1% 5,275 COMMON STOCKS ------------- AEROSPACE & DEFENSE - 0.4% 300 Boeing Company.................. 23,512 300 Northrop Grumman Corporation.... 19,200 ------------ 42,712 AUTO PARTS & SUPPLIES - 0.1% 200 TRW, Inc. ...................... 15,500 AUTOMOBILES - 1.2% 900 Echlin, Inc. ................... 32,850 300 General Motors Corporation...... 15,863 2,000 Honda Motor Company, Ltd. ADR... 83,500 ------------ 132,213 BANKS & TRUSTS - 2.3% 200 Baybanks, Inc. ................. 19,650 300 Chase Manhattan Corporation..... 18,188 700 Chemical Banking Corporation.... 41,125 400 Corestates Financial Corporation 15,150 400 First American Corporation...... 18,950 NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- BANKS & TRUSTS, CONTINUED 400 First Union Corporation......... $ 22,250 400 J.P. Morgan & Company, Inc. .... 32,100 600 Keycorp......................... 21,750 300 Mellon Bank Corporation......... 16,125 300 Midlantic Corporation........... 19,688 300 Nationsbank Corporation......... 20,887 ------------ 245,863 BEVERAGES - 1.4% 600 Anheuser-Busch Company, Inc. ... 40,125 800 Coca Cola Company............... 59,400 800 PepsiCo, Inc. .................. 44,700 ------------ 144,225 BROADCAST MEDIA - 0.6% 300 Capital Cities/ABC, Inc. ....... 37,013 800 Comcast Corporation (Cl.A) Special....................... 14,550 300 Infinity Broadcasting Corporation*.................. 11,175 ------------ 62,738 BUILDING & REAL ESTATE - 0.1% 500 Masco Corporation............... 15,687 CHEMICALS--BASIC - 2.1% 1,300 Akzo Nobel NV-ADR............... 75,400 500 Du Pont (E.I.) De Nemours & Company..................... 34,938 200 FMC Corporation*................ 13,525 700 Great Lakes Chemical Corporation 50,400 400 Lyondell Petrochemical Company.. 9,150 800 Morton International, Inc. ..... 28,700 200 Olin Corporation................ 14,850 ------------ 226,963 CHEMICALS--DIVERSIFIED - 0.2% 200 Monsanto Company................ 24,500 CHEMICALS--SPECIALITY - 0.4% 300 Minnesota Mining & Manufacturing Company....................... 19,875 300 Rohm & Haas Company............. 19,313 300 Wellman, Inc.................... 6,825 ------------ 46,013 COMMUNICATION EQUIPMENT - 0.1% 200 Tellabs, Inc.*.................. 7,400 COMPUTER SOFTWARE - 0.5% 400 Aspect Telecommunications Corporation*.................. 13,400 400 Autodesk, Inc. ................. 13,700 200 Parametric Technology*.......... 13,300 200 General Motors (Cl.E)........... 10,400 ------------ 50,800 See accompanying notes. 39 STATEMENTS OF NET ASSETS December 31, 1995 SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED) NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- COMPUTER SYSTEMS - 1.2% 900 Compaq Computer Corporation*.... $ 43,200 400 Hewlett Packard Company......... 33,500 200 International Business Machines Corporation................... 18,350 600 Sun Miscrosystems, Inc.*........ 27,375 ------------ 122,425 COSMETICS - 0.1% 400 Maybelline, Inc................. 14,500 DRUGS - 0.4% 700 Amgen, Inc.*.................... 41,563 ELECTRIC UTILITIES - 1.7% 5,200 Centerior Energy Corporation.... 46,150 300 Duke Power Company.............. 14,212 600 Empresa Nacional De Electricidad SA Sponsored ADR.............. 34,350 600 Entergy Corporation............. 17,550 1,200 Niagara Mohawk Power Corporation................... 11,550 600 Public Service Company of New Mexico*................... 10,575 1,200 SCE Corporation................. 21,300 400 Texas Utilities Company......... 16,450 400 Unicom Corporation.............. 13,100 ------------ 185,237 ELECTRICAL EQUIPMENT - 1.7% 300 American Power Conversion Corporation*.................. 2,850 600 Emerson Electric Company........ 49,050 1,200 General Electric Company........ 86,400 700 Hubbell Inc., (Cl.B)............ 46,025 ------------ 184,325 ELECTRONIC SYSTEMS - 0.2% 300 Honeywell, Inc.................. 14,587 200 Teradyne, Inc.*................. 5,000 ------------ 19,587 ELECTRONICS - 2.6% 900 Advanced Micro Devices, Inc.*... 14,850 300 Analog Devices, Inc.*........... 10,612 200 Arrow Electronics, Inc.*........ 8,625 1,200 Hitachi, Ltd. ADR............... 120,600 400 KLA Instruments Corporation*.... 10,425 200 LAM Research Corporation*....... 9,150 200 Motorola, Inc. ................. 11,400 2,000 Phillips Electronics N.V. ADR... 71,750 200 Varian Associates, Inc.......... 9,550 300 Xilinx, Inc.*................... 9,150 ------------ 276,112 NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- ENTERTAINMENT - 0.8% 600 Cracker Barrel Old Country Store, Inc. .................. $10,350 400 Disney (Walt) Company........... 23,600 400 Mirage Resorts, Inc.*........... 13,800 800 Time Warner, Inc................ 30,300 200 Viacom, Inc. (Cl.A)*............ 9,175 ------------ 87,225 ENVIRONMENTAL - 0.3% 1,000 WMX Technologies, Inc. ......... 29,875 FINANCIAL--BANKS, COMMERCIAL - 0.5% 300 First Bank System, Inc. ........ 14,887 1,000 Norwest Corporation............. 33,000 ------------ 47,887 FINANCIAL SERVICES - 1.9% 400 American Express Company........ 16,550 1,000 Banco Bilbao Viz SPADR.......... 35,750 1,100 Countrywide Credit Industries, Inc........................... 23,925 200 Federal National Mortgage Association................... 24,825 400 Franklin Resources, Inc......... 20,150 500 H & R Block, Inc. .............. 20,250 500 Household International, Inc. .. 29,563 2 Transport Holdings, Inc. (Cl.A)* 81 400 Travelers Group, Inc. .......... 25,150 ------------ 196,244 FOOD PROCESSING - 1.8% 735 Archer-Daniels-Midland Company.. 13,230 500 Conagra, Inc. .................. 20,625 1,000 Heinz (H.J.) Company............ 33,126 300 Ralston Purina Group............ 18,712 700 Sara Lee Corporation............ 22,313 500 Tyson Foods, Inc. (Cl.A)........ 13,062 800 Unilever PLC - ADR.............. 67,600 ------------ 188,668 FURNITURE - 0.1% 400 Helig Meyers Company............ 7,349 GENERAL MERCHANDISERS - 0.2% 700 Price/Costco, Inc.*............. 10,675 600 Wal-Mart Stores, Inc. .......... 13,425 ------------ 24,100 HOUSEHOLD PRODUCTS - 0.7% 500 Colgate Palmolive Company....... 35,125 500 Procter & Gamble Company........ 41,500 ------------ 76,625 See accompanying notes. 40 STATEMENTS OF NET ASSETS December 31, 1995 SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED) NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- HOUSEHOLD FURNISHINGS & APPLIANCES - 0.1% 200 Leggett & Platt, Inc. .......... $ 4,850 HOUSING--HOME BUILDING - 0.1% 200 Oakwood Homes Corporation....... 7,675 INSURANCE - 2.2% 300 AMBAC, Inc. .................... 14,063 500 American General Corporation.... 17,437 900 American International Group, Inc. 83,250 300 MGIC Investment Corporation..... 16,275 200 Mutual Risk Management, Ltd..... 9,150 400 National Re Corporation......... 15,200 200 Pacificare Health System*....... 17,400 500 Torchmark Corporation........... 22,625 500 United Healthcare Corporation... 32,750 ------------ 228,150 INTEGRATED PETROLEUM DOMESTIC - 0.7% 400 Atlantic-Richfield Company...... 44,300 1,600 USX Marathon Group.............. 31,200 ------------ 75,500 INTEGRATED PETROLEUM INTERNATIONAL - 2.7% 600 Exxon Corporation............... 48,075 700 Mobil Corporation............... 78,400 800 Royal Dutch Petroleum Company ADR................... 112,900 400 Shell Transport & Trading Company....................... 32,550 300 Texaco, Inc. ................... 23,550 ------------ 295,475 MACHINERY - 0.2% 200 GATX Corporation................ 9,725 300 Watts Industries, Inc.(Cl.A).... 6,975 ------------ 16,700 MANUFACTURING - 0.1% 300 Allied-Signal, Inc. ............ 14,250 MEDICAL - 0.3% 600 Columbia/HCA Healthcare Corporation................... 30,450 METAL FABRICATE/HARDWARE - 0.1% 600 Trimas Corporation.............. 11,325 MINING & METALS - 0.2% 300 Aluminum Company of America*...................... 15,862 200 Alumas, Inc. ................... 6,125 ------------ 21,987 NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- MISCELLANEOUS - 0.3% 600 Atlanta Gas Light Company....... $ 11,850 300 Coeur d'Alene Mines Corporation. 5,137 200 Komag, Inc.*.................... 9,225 100 York International Corporation*. 4,700 ------------ 30,912 MISCELLANEOUS CONSUMER SERVICES - 0.2% 400 Service Corporation International................. 17,600 MISCELLANEOUS CONSUMER DURABLES - 0.4% 500 Corning, Inc.................... 16,000 300 Eastman Kodak Company........... 20,100 200 Tandy Corporation............... 8,300 ------------ 44,400 MISCELLANEOUS CONSUMER PRODUCTS - 0.5% 500 Jones Apparel Group, Inc.*...... 19,687 200 Philip Morris Companies, Inc. .. 18,100 400 Springs Industries, Inc. (Cl.A). 16,550 ------------ 54,337 OFFICE EQUIPMENT & SUPPLIES - 0.1% 300 Reynolds & Reynolds Company (Cl.A)........................ 11,662 OIL - 0.9% 500 Amerada Hess Corporation........ 26,500 400 Helmerich &Payne, Inc. ......... 11,900 400 Schlunberger, Ltd. ............. 27,700 700 Smith International, Inc.*...... 16,450 600 Union Texas Petroleum Holdings, Inc........................... 11,625 ------------ 94,175 PACKAGING & CONTAINERS - 0.2% 1,700 Jefferson Smurfit Corporation*.. 16,150 PAPER - 0.2% 500 International Paper Company..... 18,938 PAPER & FOREST PRODUCTS - 0.3% 300 Georgia-Pacific Corporation..... 20,588 200 Weyerhaeuser Company............ 8,650 ------------ 29,238 PETROLEUM - 0.1% 400 Phillips Petroleum Company...... 13,650 PHARMACEUTICALS - 2.4% 500 Abbott Laboratories............. 20,875 400 American Home Products Corporation................... 38,800 500 Bristol Myers Squibb Company.... 42,938 600 Merck & Company, Inc. .......... 39,450 900 Perrigo Company*................ 10,687 800 Pfizer, Inc. ................... 50,400 1,100 Smithkline Beecham PLC ADR...... 61,050 ------------ 264,200 See accompanying notes. 41 STATEMENTS OF NET ASSETS December 31, 1995 SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED) NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- PUBLISHING - 0.3% 300 Gannett Company, Inc. .......... $ 18,413 200 McGraw-Hill Companies, Inc...... 17,425 ------------ 35,838 RAILROADS - 0.5% 500 Burlington Northern Santa Fe Corporation................... 39,000 200 Union Pacific Corporation....... 13,200 ------------ 52,200 RETAIL--APPAREL - 0.3% 700 Gap, Inc. ...................... 29,400 RETAIL--DEPARTMENT STORES - 0.2% 600 May Department Stores Company....................... 25,350 RETAIL--FOOD CHAINS - 0.2% 400 McDonald's Corporation.......... 18,050 RETAIL--GENERAL MERCHANDISE - 0.3% 400 Dayton Hudson Corporation....... 30,000 RETAIL--GROCERY - 0.6% 1,000 Albertsons, Inc. ............... 32,875 700 Kroger Company*................. 26,250 ------------ 59,125 RETAIL--SPECIALTY - 0.5% 1,100 Circuit City Stores, Inc. ...... 30,387 800 Toys "R" Us, Inc.*.............. 17,400 ------------ 47,787 SEMI-CONDUCTORS - 0.3% 400 Cypress Semiconductor Corporation*.................. 5,100 400 Intel Corporation............... 22,700 ------------ 27,800 SPECIALTY MERCHANDISERS - 0.9% 200 Eckerd Corporation*............. 8,925 2,000 LVMH Moet Hennessy Lou ADR...... 83,750 ------------ 92,675 STEEL - 0.2% 400 Nucor Corporation............... 22,850 TELECOMMUNICATIONS - 3.3% 1,100 AT&T Corporation................ 71,225 300 Ameritech Corporation........... 17,700 300 Bell Atlantic Corporation....... 20,063 900 Bellsouth Corporation........... 39,150 1,000 British Telecom PLC ADR......... 56,500 1,000 GTE Corporation................. 44,000 200 Glenayre Technologies, Inc.*.... 12,450 800 SBC Communications, Inc. ....... 46,000 200 Southern New England Telecommunications............ 7,950 500 Telecom New Zealand ADR......... 34,687 ------------ 349,725 PRINCIPAL AMOUNT OR NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- TELEPHONE - 0.2% 400 U.S. West, Inc. ................ $ 14,300 400 U.S. West Media Group*.......... 7,600 ------------ 21,900 TRANSPORTATION - 0.1% 200 P.H.H. Corporation.............. 9,350 ------------ Total common stocks - Series N (cost $4,323,116) - 43.8%... 4,640,010 U.S. GOVERNMENT & GOVERNMENT ---------------------------- AGENCY SECURITIES ----------------- U.S. GOVERNMENT AGENCIES - 19.9% $1,524,000 Federal Home Loan Mortgage Corporation, 5.58%, 1-02-96... 1,523,767 Government National Mortgage Association, $ 51,873 11.50%, 2013.................. 58,123 $ 59,486 8.00%, 2025................... 61,530 $ 122,501 7.00%, 2025................... 123,993 $ 234,136 8.50%, 2025................... 245,585 $ 95,299 7.50%, 2025................... 98,378 ------------ 2,111,376 U.S. GOVERNMENT SECURITIES - 12.0% $ 35,000 U.S. Treasury Bond, 6.875%, 2025.......................... 39,458 U.S. Treasury Notes, $ 225,000 5.75%, 1997................... 227,014 $ 325,000 6.125%, 1997.................. 329,024 $ 75,000 5.625%, 2000.................. 75,699 $ 100,000 6.25%, 2000................... 103,387 $ 75,000 5.875%, 2005.................. 76,667 $ 100,000 6.5%, 2005.................... 106,419 $ 250,000 7.625%, 2025.................. 305,420 ------------ 1,263,088 ------------ Total U.S. government & government agenccy securities - Series N (cost $3,331,777) - 31.9%......... 3,374,464 MISCELLANEOUS ASSETS -------------------- ASSET-BACKED SECURITIES - 0.2% $ 15,788 Hyundai Auto Receivable Trust, 4.30%, 1998................... 15,621 CLOSED-END FUND - 2.8% 7,000 S&P Midcap 400 Depository Receipts...................... 304,172 ------------ Total miscellaneous assets - Series N (cost $320,623) - 3.0%.... 319,793 See accompanying notes. 42 STATEMENTS OF NET ASSETS December 31, 1995 SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED) PRINCIPAL AMOUNT OR NUMBER MARKET OF SHARES FOREIGN CORPORATE BONDS VALUE - -------------------------------------------------------------------------------- JAPAN - 0.9% 5,000,000 Interamer Development Bank, 6.00%, 2001(3)................ $ 57,803 3,000,000 KFW International Finance, 6.00%, 1999(3)................ 33,846 ------------ Total foreign bonds - Series N (cost $112,686) - 0.9% 91,649 FOREIGN GOVERNMENT ISSUES ------------------------- CANADA - 0.4% 60,000 Government Bond, 6.50%, 2004(3). 42,512 GERMANY - 0.9% 125,000 Bundesrepub Deutschland, 7.375%, 2005(3)............... 95,439 ------------ Total foreign government issues Series N (cost $133,118) - 1.3% 137,951 FOREIGN STOCKS -------------- FRANCE - 0.5% 500 Genril Eaux..................... 49,986 GERMANY - 1.5% 200 Bankgesellschaft Berlin......... 51,145 200 Bayer, AG....................... 53,211 200 M.A.N. AG....................... 55,475 ------------ 159,829 HONG KONG - 1.1% 11,000 Whampoa Limited................. 67,008 6,000 Swire Pacific Ltd............... 46,560 ------------ 113,568 JAPAN - 1.0% 7,000 Bridgestone Corporation......... 111,292 MALAYSIA - 0.4% 16,000 Sime Darby Berhad............... 42,537 SWITZERLAND - 1.4% 80 Union Bank of Switzerland....... 86,907 30 SIG Schweizland................. 62,834 ------------ 149,741 UNITED KINGDOM - 1.3% 15,000 BTR PLC......................... 76,621 22,000 Lonrho Ltd...................... 60,117 ------------ 136,738 ------------ Total foreign stocks - Series N (cost $755,992) - 7.2%...... 763,691 PRINCIPAL AMOUNT OR NUMBER TEMPORARY MARKET OF SHARES CASH INVESTMENTS VALUE - -------------------------------------------------------------------------------- 4,347 Vista Treasury Plus International Fund, ........................ $ 4,347 ------------ Total temporary cash investments - Series N (cost $4,347) - 0.0% 4,347 ------------ Total investments - Series N (cost $10,624,985) - 104.0% 11,010,850 ------------ Liabilities, less cash and other assets - Series N - (4.0%) (430,711) ------------ Total net assets applicable to 985,979 shares outstanding Series N - 100.0%........... $10,580,139 ============ SERIES O (EQUITY INCOME) CORPORATE BONDS --------------- REAL ESTATE - 0.8% $100,000 B.F. Saul Reit, 11.625%, 2002... $103,500 ------------ Total corporate bonds - Series O (cost $103,500) - 0.8% 103,500 CONVERTIBLE BONDS ----------------- FINANCIAL SERVICES - 0.8% $100,000 Liberty Property Trust, 8.00%, 2001.......................... 102,625 ------------ Total convertible bonds - Series O (cost $98,875) - 0.8% 102,625 COMMON STOCKS ------------- AUTO PARTS & SUPPLIES - 0.9% 1,400 Eaton Corporation .............. 75,075 600 TRW, Inc. ...................... 46,500 ------------ 121,575 AUTOMOBILES - 0.1% 300 Genuine Parts Company........... 12,300 BANKS & TRUSTS - 8.1% 2,700 Banc One Corporation............ 101,925 1,100 Bankers Trust New York Corporation................... 73,150 1,900 Chase Manhattan Corporation..... 115,187 1,500 Chemical Banking Corporation.... 88,125 1,100 1st Interstate Bancorp.......... 150,150 2,000 J.P. Morgan & Company, Inc. .... 160,500 3,800 Mellon Bank Corporation......... 204,250 1,700 National City Corporation....... 56,313 See accompanying notes. 43 STATEMENTS OF NET ASSETS December 31, 1995 SERIES O (EQUITY INCOME) (CONTINUED) NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- BANKS & TRUSTS, CONTINUED 1,600 PNC Bank Corporation............ $ 51,600 2,700 S E Banken...................... 22,407 1,700 U.S. Bancorp Oregon............. 57,163 ------------ 1,080,770 BEVERAGES - 1.6% 2,000 Anheuser-Busch Company, Inc. ... 133,750 2,200 Brown-Forman Corporation (Cl.B)........................ 80,300 ------------ 214,050 CHEMICALS (BASIC) - 1.3% 2,500 Du Pont (E.I.) de Nemours & Company..................... 174,687 CHEMICALS (DIVERSIFIED) - 0.8% 900 Monsanto Company............... 110,250 CHEMICALS (SPECIALTY) - 2.6% 2,400 Betz Laboratories, Inc. ........ 98,400 2,400 Crompton & Knowles Corporation................... 31,800 2,900 Lubrizol Corporation............ 80,838 2,100 Minnesota Mining & Manufacturing Company....................... 139,125 ------------ 350,163 ELECTRIC UTILITIES - 6.1% 1,800 Baltimore Gas & Electric Company 51,300 8,600 Centerior Energy Corporation.... 76,325 1,100 DQE, Inc. ...................... 33,825 1,500 Dominion Res, Inc. ............. 61,875 4,000 Entergy Corporation............. 117,000 1,800 Florida Progress Corporation.... 63,675 2,000 General Public Utilities Corporation 68,000 2,300 Pacific Gas & Electric Company.. 65,263 5,300 Pacificorp...................... 112,625 3,200 SCE Corporation................. 56,800 2,200 Southern Company................ 54,175 1,800 Unicom Corporation.............. 58,950 ------------ 819,813 ELECTRICAL EQUIPMENT - 3.1% 1,152 Cooper Cameron Corporation*..... 40,896 1,688 Cooper Industries, Inc. ........ 62,034 3,000 General Electric Company........ 216,000 1,500 Hubbell, Inc. (Cl.B)............ 98,625 ------------ 417,555 ELECTRONIC SYSTEMS - 1.3% 1,000 E G & G, Inc. .................. 24,250 3,200 Honeywell, Inc. ................ 155,600 ------------ 179,850 NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- FINANCIAL SERVICES - 4.5% 3,700 American Express Company........ $153,087 900 Federal National Mortgage Association................... 111,713 1,700 H & R Block, Inc. .............. 68,850 500 Household International, Inc. .. 29,563 1,900 Student Loan Marketing New VTG.. 125,162 1,900 Travelers Group, Inc. .......... 119,463 ------------ 607,838 FOOD PROCESSING - 3.1% 800 CPC International, Inc.......... 54,900 1,800 General Mills................... 103,950 2,250 Heinz (H.J.) Company............ 74,531 2,300 Quaker Oats Company............. 79,350 1,900 Sara Lee Corporation............ 60,563 300 Unilever NY ADR................. 42,225 ------------ 415,519 FOOD WHOLESALERS - 0.1% 900 Fleming Companies, Inc. ........ 18,562 HOSPITAL SUPPLIES/HOSPITAL MANAGEMENT - 0.4% 1,300 Bausch & Lomb, Inc. ............ 51,512 INSURANCE - 2.2% 1,000 American General Corporation.... 34,875 4,000 Allmerica Financial Corporation* 108,000 1,200 Loews Corporation............... 94,050 1,500 Provident Companies, Inc.*...... 50,812 300 Unum Corporation................ 16,500 ------------ 304,237 INTEGRATED PETROLEUM--DOMESTIC - 3.7% 2,300 Atlantic-Richfield Company...... 254,725 1,300 British Petroleum PLC ADR....... 132,762 500 Pennzoil Company................ 21,125 746 Sun Company, Inc. .............. 20,422 3,500 USX Marathon Group.............. 68,250 ------------ 497,284 INTEGRATED PETROLEUM--INTERNATIONAL - 6.2% 1,400 Chevron Corporation............. 73,500 2,600 Exxon Corporation............... 208,325 1,300 Mobil Corporation............... 145,600 1,300 Royal Dutch Petroleum Company ADR........................... 183,463 2,900 Texaco, Inc. ................... 227,650 ------------ 838,538 MACHINERY - 0.6% 800 GATX Corporation................ 38,900 2,100 McDermott International, Inc. .. 46,200 ------------ 85,100 See accompanying notes. 44 STATEMENTS OF NET ASSETS December 31, 1995 SERIES O (EQUITY INCOME) (CONTINUED) NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- MEDICAL SUPPLIES - 0.7% 2,400 Baxter International............ $100,500 MINING & METALS - 0.7% 2,200 Newmont Mining Corporation...... 99,550 MISCELLANEOUS CONSUMER DURABLES - 1.6% 3,100 Corning, Inc.................... 99,200 1,800 Eastman Kodak Company........... 120,600 ------------ 219,800 MISCELLANEOUS CONSUMER PRODUCTS - 2.7% 700 Clorox Company Del.............. 50,138 1,100 Hanson PLC Sponsored ADR........ 16,775 2,400 Philip Morris Companies, Inc.... 217,200 1,800 Tambrand, Inc. ................. 85,950 ------------ 370,063 OFFICE EQUIPMENT & SUPPLIES - 0.1% 300 Pitney-Bowes, Inc. ............. 14,100 PAPER - 0.9% 3,100 International Paper Company..... 117,412 PAPER & FOREST PRODUCTS - 2.4% 800 Georgia-Pacific Corporation..... 54,900 1,500 Kimberly Clark.................. 124,125 3,100 Union Camp Corporation.......... 147,638 ------------ 326,663 PHARMACEUTICALS - 7.4% 1,700 American Home Products Corporation................... 164,900 2,800 Eli Lilly & Company............. 157,500 5,395 Pharmacia & Upjohn, Inc.*....... 209,056 1,100 Schering-Plough Corporation..... 60,225 4,300 Smithkline Beecham PLC-ADR...... 238,650 1,700 Warner Lambert.................. 165,113 ------------ 995,444 PUBLISHING - 2.6% 600 Deluxe Corporation.............. 17,400 2,300 Dun and Bradstreet.............. 148,925 1,500 Gannett Company, Inc. .......... 92,062 1,100 McGraw-Hill Companies, Inc. .... 95,838 ------------ 354,225 RAILROADS - 0.8% 1,600 Union Pacific Corporation....... 105,600 RETAIL--DEPARTMENT STORES - 1.8% 2,700 J C Penney...................... 128,587 1,500 May Department Stores Company... 63,375 1,300 Sears Roebuck................... 50,700 ------------ 242,662 RETAIL--GENERAL MERCHANDISING - 0.3% 600 Dayton Hudson Corporation....... 45,000 PRINCIPAL AMOUNT OR NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- SAVINGS & LOANS - 0.2% 500 Brooklyn Bancorp, Inc.*......... $ 20,374 TELECOMMUNICATIONS - 3.9% 3,700 Alltel Corporation.............. 109,150 1,400 BCE, Inc. ...................... 48,300 900 Bell Atlantic Corporation....... 60,187 1,700 Bellsouth Corporation........... 73,950 3,700 GTE Corporation................. 162,800 1,900 Southern New England Telecommunications............ 75,525 ------------ 529,912 TELEPHONE - 1.0% 700 Pacific Telesis Group........... 23,538 2,400 U.S. West, Inc. ................ 85,800 1,600 U.S. West Media Group........... 30,400 ------------ 139,738 TOBACCO - 2.2% 3,700 American Brands................. 165,112 800 RJR Nabisco Holdings ........... 24,700 3,100 UST, Inc. ...................... 103,463 ------------ 293,275 TRANSPORTATION--MISCELLANEOUS - 0.5% 800 Alexander & Baldwin, Inc. ...... 18,400 1,000 P.H.H.Corporation............... 46,750 ------------ 65,150 TRANSPORTATION--RAIL - 0.4% 800 Conrail, Inc. .................. 56,000 ------------ Total common stocks - Series O (cost $9,401,313) - 76.9% 10,395,071 U.S. GOVERNMENT & GOVERNMENT ---------------------------- AGENCY SECURITIES ----------------- U.S. GOVERNMENT AGENCIES - 10.0% $1,360,000 Federal Home Loan Mortgage Corporation, 5.50%, 1-05-96... 1,359,169 U.S. GOVERNMENT SECURITIES - 1.5% U.S. Treasury Notes, $ 100,000 6.125%, 1998.................. 102,006 $ 100,000 6.25%, 2000................... 103,387 ------------ 205,393 ------------ Total U.S. government & government agency securities - Series O - (cost $1,561,996) - 11.5%... 1,564,562 See accompanying notes. 45 STATEMENTS OF NET ASSETS December 31, 1995 SERIES O (EQUITY INCOME) (CONTINUED) PRINCIPAL AMOUNT OR NUMBER MARKET OF SHARES REAL ESTATE INVESTMENT TRUSTS VALUE - -------------------------------------------------------------------------------- 4,400 DeBartolo Realty Corporation.... $ 57,200 2,200 General Growth Property, Inc. .. 45,650 4,000 Simon Property Group............ 97,500 2,200 Weingarten Realty Investors..... 83,600 ------------ Total real estate investment trusts - Series O (cost $281,712) - 2.1%............ 283,950 FOREIGN STOCKS -------------- UNITED KINGDOM - 0.5% 25,200 Lonrho Ltd...................... 68,861 ------------ Total foreign stocks - Series O (cost $65,051) - 0.5% 68,861 TEMPORARY CASH INVESTMENTS -------------------------- 483,127 Vista Treasury Institutional Money Market Fund............. 483,127 ------------ Total temporary cash investments - Series O (cost $483,127) - 3.6% 483,127 COMMERCIAL PAPER ---------------- ELECTRONICS - 0.7% $100,000 Hewlett-Packard Company, 5.65%, 1-19-96................ 99,718 FINANCIAL SERVICES - 4.4% $600,000 Corporate Asset Funding, 5.90%, 1-02-96................ 599,902 ------------ Total commercial paper - Series O (cost $699,620) - 5.1% 699,620 ------------ Total investments - Series O (cost $12,695,194) - 101.3% 13,701,316 Liabilities, less cash and other assets - Series O - (1.3%) (173,694) ------------ Total net assets applicable to 1,156,219 shares outstanding- Series O - 100.0%........... $13,527,622 ============ SERIES S (SOCIAL AWARENESS) COMMON STOCKS ------------- ADVERTISING - 1.6% 16,000 Omnicom Group................... $596,000 AIRLINES - 1.3% 20,000 Southwest Airlines Company...... 465,000 SERIES S (SOCIAL AWARENESS) (CONTINUED) NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- AMUSEMENT & RECREATIONAL SERVICES - 1.3% 8,000 Disney (Walt) Company........... $ 472,000 BANKING & FINANCE - 2.9% 11,500 Boatmen's Bancshares, Inc. ..... 470,063 14,500 Comerica, Inc. ................. 581,813 ------------ 1,051,876 BEVERAGES - 1.5% 10,000 PepsiCo, Inc. .................. 558,750 BROADCAST MEDIA - 2.1% 17,312 Clear Channel Communications*... 763,892 BUSINESS SERVICES - 6.6% 18,400 Alternative Resources Corporation*.................. 556,600 25,000 DeVry, Inc.*.................... 675,000 7,000 HBO & Company................... 536,375 13,500 Paychex......................... 673,313 ------------ 2,441,288 CHEMICALS--BASIC - 1.8% 19,500 Praxair......................... 655,688 CHEMICALS--SPECIALTY - 1.5% 11,000 Sigma Aldrich Corporation....... 544,500 COMMUNICATIONS EQUIPMENT - 0.8% 3,500 U.S. Robotics Corporation*...... 307,125 COMPUTER SOFTWARE - 6.8% 6,500 Aspect Telecommunications*...... 217,750 4,500 Automatic Data Processing, Inc. 334,125 8,500 Bisys Group, Inc.*.............. 261,375 6,000 Computer Associates International, Inc........................... 341,250 8,722 First Data Corporation.......... 583,284 7,000 McAffee Associates, Inc.*....... 307,125 3,500 Microsoft Corporation*.......... 307,125 7,000 Symantec Corporation*........... 162,750 ------------ 2,514,784 COMPUTER SYSTEMS - 3.2% 12,000 Bay Networks, Inc.*............. 493,500 4,000 Sun Microsystems, Inc.* ........ 182,500 11,000 3Com Corporation*............... 512,875 ------------ 1,188,875 CONSUMER CYCLICALS - 1.0% 12,000 Mattel, Inc. ................... 369,000 CONSUMER SERVICES - 2.2% 14,250 CUC International, Inc.*........ 486,281 10,500 Comnet Cellular*................ 303,188 ------------ 789,469 COSMETICS - 1.9% 30,000 Guest Supply Company*........... 678,750 See accompanying notes. 46 STATEMENTS OF NET ASSETS December 31, 1995 SERIES S (SOCIAL AWARENESS) NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- DRUG DELIVERY - 0.8% 6,000 Elan Corporation PLC ADR*....... $ 291,750 ELECTRONICS--SEMI-CONDUCTORS - 3.4% 6,500 Applied Materials, Inc.* ....... 255,938 13,500 Atmel Corporation*.............. 302,063 5,000 Intel Coporation*............... 283,750 13,500 Merix Corporation*.............. 405,000 ------------ 1,246,751 FINANCIAL SERVICES - 4.5% 5,000 Federal National Mortgage Association................... 620,625 12,500 Finova Group.................... 603,125 9,500 First USA, Inc. ................ 421,563 ------------ 1,645,313 FOOD--PROCESSING - 1.4% 7,500 CPC International, Inc.......... 514,688 FOOD--WHOLESALERS - 2.6% 22,500 Richfood Holdings, Inc. ........ 601,875 11,500 Sysco Corporation............... 373,750 ------------ 975,625 HEALTH CARE - 2.3% 8,000 Cardinal Health, Inc. .......... 438,000 9,000 U.S. Healthcare, Inc. .......... 418,500 ------------ 856,500 HOSPITAL SUPPLIES/MANAGEMENT - 2.2% 13,000 Community Health Systems, Inc.*. 463,125 12,500 Healthsouth Corporation*........ 364,063 ------------ 827,188 HOUSEHOLD FURNISHINGS/APPLIANCES - 1.3% 19,600 Leggett & Platt, Inc. .......... 475,300 HOUSEHOLD PRODUCTS - 1.5% 6,500 Procter &Gamble Company......... 539,500 INSURANCE - 5.5% 6,000 American General Group, Inc. ... 555,000 5,500 Chubb Corporation............... 532,125 10,500 Jefferson-Pilot Corporation..... 488,250 6,000 MBIA, Inc. ..................... 450,000 ------------ 2,025,375 MANUFACTURING - 3.0% 8,000 Illinois Tool Works, Inc. ...... 472,000 15,000 Millipore....................... 616,875 ------------ 1,088,875 MEDICAL - 3.4% 4,000 Cordis Corporation*............. 402,000 10,500 Guidant Corporation............. 443,625 7,500 Stryker Corporation............. 393,750 ------------ 1,239,375 PRINCIPAL AMOUNT OR NUMBER MARKET OF SHARES COMMON STOCKS (CONTINUED) VALUE - -------------------------------------------------------------------------------- OIL & GAS EXPLORATION - 4.3% 12,000 Anadarko Petroleum.............. $ 649,500 15,500 Apache Corporation.............. 457,250 13,500 Sonat, Inc. .................... 480,938 ------------ 1,587,688 PHARMACEUTICALS - 2.1% 7,500 Amgen, Inc. .................... 445,313 5,500 Genzyme Corporation............. 343,063 ------------ 788,376 POLLUTION CONTROL - 1.4% 26,000 Osmonics, Inc.*................. 529,750 RAILROADS - 1.1% 11,000 Illinois Central Corporation.... 422,125 RESTAURANTS - 3.9% 16,500 Boston Chicken*................. 530,063 12,000 McDonald's Corporation.......... 541,500 10,500 Outback Steakhouse, Inc.*....... 376,688 ------------ 1,448,251 RETAIL--DRUG STORES - 2.5% 17,500 Rexall Sundown, Inc.*........... 385,000 18,000 Walgreen Company................ 537,750 ------------ 922,750 RETAIL--GROCERY - 0.9% 10,000 Albertsons, Inc. ............... 328,750 RETAIL--SPECIALTY - 3.1% 20,250 Staples, Inc.*.................. 493,594 28,000 Sunglass Hut International, Inc.* 665,000 ------------ 1,158,594 TELECOMMUNICATIONS - 2.0% 12,500 Frontier Corporation............ 375,000 9,000 Sprint Corporation.............. 358,875 ------------ 733,875 TELEPHONE - 1.6% 11,000 U.S. West, Inc. ................ 393,250 11,000 U.S. West Media Group*.......... 209,000 ------------ 602,250 TEXTILES - 1.0% 8,500 Tommy Hilfiger Corporation*..... 360,188 ------------ Total common stock - Series S (cost $26,362,256) - 92.3% 34,005,834 CERTIFICATES OF DEPOSIT ----------------------- BANKING - 0.3% $100,000 South Shore, 5.40%, 3-04-96..... 100,000 ------------ Total certificates of deposit - Series S (cost $100,000) - 0.3%...... 100,000 See accompanying notes. 47 STATEMENTS OF NET ASSETS December 31, 1995 SERIES S (SOCIAL AWARENESS) (CONTINUED) PRINCIPAL MARKET AMOUNT COMMERCIAL PAPER VALUE - -------------------------------------------------------------------------------- $ 500,000 AIG Funding, Inc., 5.82%, 1-03-96................ $ 499,677 1,300,000 International Lease Finance Corporation, 5.65%, 1-02-96................ 299,805 5.82%, 1-04-96................ 999,181 ------------ Total commercial paper - Series S - (cost $1,798,712) - 4.9%.... 1,798,663 ------------ Total investments - Series S (cost $28,260,968) - 97.5%.. 35,904,497 Cash &other assets, less liabilities - 2.5%.......... 925,761 ------------ Total net assets applicable to 2,233,884 shares outstanding - Series S - 100.0%......... $36,830,258 ============ The identified cost of investments owned at December 31, 1995 was the same for federal income tax and financial statement purposes, except for Series D for which the identified cost of investments for federal tax purposes was $164,082,318. *Securities on which no cash dividend was paid during the preceding twelve months. ADR (American Depository Receipt) (1) Deferred interest obligation; currently zero coupon under terms of initial offering. (2) For Series M, this security has been segregated with the custodian to cover margin requirements for the following open long financial futures contracts traded on foreign exchanges as indicated below: Unrealized Type Contracts Gain ------------ ---------- Financial Index - DAX (3/96) 7 $ 3,668 Financial Index - TOPIX (3/96) 9 69,219 Financial Index - FTSE (3/96) 6 3,668 ---------- $76,555 ========== (3) Principal amount on foreign bond is reflected in local currency (e.g., Japanese yen) while market value is reflected in U.S. dollars. (4) Variable rate security which may be reset the first of each month. See accompanying notes. 48 BALANCE SHEET December 31, 1995
SERIES C SERIES D SERIES E SERIES A SERIES B (MONEY (WORLDWIDE (HIGH GRADE (GROWTH) (GROWTH-INCOME) MARKET) EQUITY) INCOME) -------- --------------- ------- ------- ------- ASSETS Investments, at value (identified cost $368,502,550, $596,205,070, $11,161,771, $163,257,807 and $117,553,891, respectively).................. $487,613,500 $740,154,126 $ 11,167,311 $171,803,362 $124,456,799 Short-term commercial paper, at market or at amortized cost which approximates market value (identified cost $31,514,629, $53,386,916, $94,018,629, $0 and $0, respectively)......... 31,513,658 53,386,916 94,001,342 -- -- Cash............................................. 211,500 -- 276,823 4,403,773 308,045 Receivables: Fund shares sold.............................. 1,106,254 575,222 815,580 325,609 132,586 Securities sold............................... -- -- 6,106 2,170,174 -- Forward foreign exchange contracts............ -- -- -- 1,643,310 -- Interest...................................... 1,225 2,867,367 171,531 54,851 1,660,509 Dividends..................................... 750,349 1,064,615 -- 140,942 -- Miscellaneous................................. 25,331 -- -- -- -- Foreign taxes recoverable..................... -- -- -- 108,705 -- ------------ ------------ ------------ ------------ ------------ Total assets.............................. $521,221,817 $798,048,246 $106,438,693 $180,650,726 $126,557,939 ============ ============ ============ ============ ============ LIABILITIES AND NET ASSETS Liabilities: Payable for: Securities purchased.......................... $ -- $ -- $ -- $ 2,164,057 $ -- Fund shares redeemed.......................... 978,827 2,389,758 941,362 482,066 795,822 Other liabilities: Management fees............................... 304,141 469,690 42,574 136,947 74,331 Custodian fees................................ -- -- -- 43,300 -- Transfer and administration fees.............. 18,522 28,432 4,095 6,238 4,695 Professional fees............................. -- 24,302 6,312 3,225 11,574 Miscellaneous................................. 29,227 23,362 8,670 33,794 19,732 ------------ ------------ ------------ ------------ ------------ Total liabilities......................... 1,330,717 2,935,544 1,003,013 2,869,627 906,154 Net Assets: Paid in capital.................................. 366,060,115 543,860,283 100,593,169 156,694,497 121,146,176 Undistributed net investment income ............. 4,755,987 18,308,191 4,854,258 4,447,615 7,651,413 Accumulated undistributed net realized gain (loss) on sale of investments, futures and foreign currency transactions......................... 29,965,019 88,995,172 -- 6,453,920 (10,048,712) Net unrealized appreciation (depreciation) in value of investments, futures and translation of assets and liabilities in foreign currency 119,109,979 143,949,056 (11,747) 10,185,067 6,902,908 ------------ ------------ ------------ ------------ ------------ Net assets................................ 519,891,100 795,112,702 105,435,680 177,781,099 125,651,785 ------------ ------------ ------------ ------------ ------------ Total liabilities and net assets....... $521,221,817 $798,048,246 $106,438,693 $180,650,726 $126,557,939 ============ ============ ============ ============ ============ Capital shares authorized.......................... 1,000,000,000 1,000,000,000 1,000,000,000 1,000,000,000 250,000,000 Capital shares outstanding......................... 24,721,185 23,421,450 8,541,095 31,951,961 9,769,468 Net asset value per share (net assets divided by shares outstanding).............................. $21.03 $33.95 $12.34 $5.56 $12.86 ============ ============ ============ ============ ============
See accompanying notes. 49 BALANCE SHEET (CONTINUED) December 31, 1995
SERIES K SERIES M SERIES N SERIES J (GLOBAL (SPECIALIZED (MANAGED SERIES O SERIES S (EMERGING AGGRESSIVE ASSET ASSET (EQUITY (SOCIAL (GROWTH) BOND) ALLOCATION ALLOCATION) INCOME) AWARENESS -------- ----- ---------- ----------- ------- --------- ASSETS Investments at value (identified cost $74,918,788, $5,405,977, $16,190,634, $10,624,985, $11,995,574 and $26,462,256, respectively).............. $86,530,524 $ 5,490,437 $16,224,540 $11,010,850 $13,001,696 $34,105,834 Short-term commercial paper, at market or at amortized cost which approximates market value (identified cost $8,886,403, $0, $0, $0, $699,620 and $1,798,712, respectively)... 8,886,403 -- -- -- 699,620 1,798,663 Cash........................................ 199,997 56,386 899 -- -- 832,645 Receivables: Fund shares sold......................... 185,353 21,485 120,438 32,463 184,837 119,416 Securities sold.......................... 1,080,234 1,644,862 -- -- -- -- Interest................................. 1,275 135,908 39,608 58,430 12,304 1,979 Dividends................................ 56,959 -- 7,534 9,378 23,325 40,552 Prepaid expenses......................... 4,051 -- 74 805 605 1,177 Forward foreign exchange contracts....... -- -- 412 -- -- -- Foreign taxes recoverable................ -- -- -- 36 -- -- ------------ ----------- ----------- ----------- ----------- ----------- Total assets......................... $96,944,796 $7,349,078 $16,393,505 $11,111,962 $13,922,387 $36,900,266 ============ =========== =========== =========== =========== =========== LIABILITIES AND NET ASSETS Liabilities: Payable for Securities purchased................... $ 3,409,853 $ 1,629,874 $ 355,533 $ 504,442 $ 356,455 $ -- Fund shares redeemed................... 94,757 27,732 20,365 2,487 18,882 45,762 Forward foreign exchange contracts..... -- -- -- 643 -- -- Other liabilities: Management fees........................ 53,990 1,469 13,115 8,375 10,074 21,425 Custodian fees......................... -- 6,298 13,108 9,216 5,336 -- Transfer and administration fees....... 3,459 233 3,262 3,009 593 1,460 Professional fees...................... 902 920 3,800 1,644 1,565 569 Miscellaneous.......................... 2,394 4,191 2,370 2,007 1,860 792 Variation margin....................... -- -- 5,529 -- -- -- ------------ ----------- ----------- ----------- ----------- ----------- Total liabilities ................. 3,565,355 1,670,717 417,082 531,823 394,765 70,008 Net Assets: Paid in capital.......................... 76,088,638 5,594,000 15,402,483 10,063,481 12,408,974 27,851,216 Undistributed net investment income...... 218,141 -- 310,231 108,503 106,787 212,751 Accumulated undistributed net realized gain (loss) on sale of investments, futures and foreign currency transactions.......... 5,460,926 -- 153,135 22,671 5,739 1,122,762 Net unrealized appreciation in value of investments, futures and translation of assets and liabilities in foreign currency....................... 11,611,736 84,361 110,574 385,484 1,006,122 7,643,529 ------------ ----------- ----------- ----------- ----------- ----------- Net assets........................... 93,379,441 5,678,361 15,976,423 10,580,139 13,527,622 36,830,258 ------------ ----------- ----------- ----------- ----------- ----------- Total liabilities and net assets... $96,944,796 $7,349,078 $16,393,505 $11,111,962 $13,922,387 $36,900,266 ============ =========== =========== =========== =========== =========== Capital shares authorized................... 250,000,000 50,000,000 50,000,000 50,000,000 50,000,000 250,000,000 Capital shares outstanding.................. 5,813,574 555,341 1,491,500 985,979 1,156,219 2,233,884 Net asset value per share (net assets divided by shares outstanding)........... $16.06 $10.22 $10.71 $10.73 $11.70 $16.49 ============ =========== =========== =========== =========== ===========
See accompanying notes. 50 STATEMENT OF OPERATIONS For the Year Ended December 31, 1995
SERIES C SERIES D SERIES E SERIES A SERIES B (MONEY (WORLDWIDE (HIGH GRADE (GROWTH) (GROWTH-INCOME) MARKET) EQUITY) INCOME) -------- --------------- ------- ------- ------- INVESTMENT INCOME: Dividends ....................................... $ 6,692,953 $ 9,939,268 $ -- $ 3,386,174 $ -- Interest......................................... 1,763,958 14,521,341 5,576,937 517,713 8,776,778 ------------ ------------ ------------ ------------ ------------ 8,456,911 24,460,609 5,576,937 3,903,887 8,776,778 Less foreign tax expense......................... -- -- -- (293,887) -- ------------ ------------ ------------ ------------ ------------ Total investment income................... 8,456,911 24,460,609 5,576,937 3,610,000 8,776,778 EXPENSES: Management fees............................... 3,235,523 5,198,738 474,730 1,634,991 883,723 Custodian fees................................ 20,507 25,790 8,817 164,184 4,712 Transfer/maintenance fees..................... 2,713 2,549 2,482 2,214 2,214 Administration fees........................... 194,131 311,924 42,726 73,574 53,023 Directors' fees............................... 15,684 25,485 3,882 6,540 7,073 Professional fees............................. 14,697 26,097 6,198 183,555 8,105 Reports to shareholders....................... 86,494 128,918 24,749 43,422 28,513 Registration fees............................. 658 1,149 252 11,381 232 Other expenses................................ 29,070 49,787 9,656 14,653 15,520 ------------ ------------ ------------ ------------ ------------ Total expenses............................ 3,599,477 5,770,437 573,492 2,134,514 1,003,115 Less earnings credits......................... (9,176) (13,593) (4,917) -- (3,318) ------------ ------------ ------------ ------------ ------------ Net expenses.................................. 3,590,301 5,756,844 568,575 2,134,514 999,797 ------------ ------------ ------------ ------------ ------------ Net investment income ................. 4,866,610 18,703,765 5,008,362 1,475,486 7,776,981 NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain during the period on: Investments.................................... 30,112,684 99,034,666 -- 6,503,025 3,043,977 Foreign currency transactions.................. -- -- -- 3,695,084 -- ------------ ------------ ------------ ------------ ------------ Net realized gain ........................ 30,112,684 99,034,666 -- 10,198,109 3,043,977 Net change in unrealized appreciation (depreciation) during the period on: Investments................................... 97,759,964 63,506,371 16,141 5,872,052 9,249,705 Translation of assets and liabilities in foreign currencies..................... -- -- -- 1,008,002 -- ------------ ------------ ------------ ------------ ------------ Net unrealized appreciation.................. 97,759,964 63,506,371 16,141 6,880,054 9,249,705 ------------ ------------ ------------ ------------ ------------ Net gain.................................. 127,872,648 162,541,037 16,141 17,078,163 12,293,682 ------------ ------------ ------------ ------------ ------------ Net increase in net assets resulting from operations...................... $132,739,258 $181,244,802 $5,024,503 $18,553,649 $20,070,663 ============ ============ ============ ============ ============
See accompanying notes. 51 STATEMENT OF OPERATIONS (CONTINUED) For the Year Ended December 31, 1995
SERIES K SERIES M SERIES N SERIES J (GLOBAL (SPECIALIZED (MANAGED SERIES O SERIES S (EMERGING AGGRESSIVE ASSET ASSET (EQUITY (SOCIAL (GROWTH) BOND)* ALLOCATION* ALLOCATION)* INCOME)* AWARENESS -------- ------ ----------- ------------ -------- --------- INVESTMENT INCOME: Dividends................................ $ 460,543 $ -- $70,639 $47,815 $ 98,551 $ 276,333 Interest................................. 463,257 330,826 179,681 140,789 57,248 199,468 ------------ ----------- ----------- ----------- ----------- ----------- 923,800 330,826 250,320 188,604 155,799 475,801 Less foreign tax expense................. -- (2,775) -- (713) -- -- ------------ ----------- ----------- ----------- ----------- ----------- Total investment income............ 923,800 328,051 250,320 187,891 155,799 475,801 EXPENSES: Management fees.......................... 638,386 19,237 49,640 40,824 36,274 224,261 Custodian fees........................... 9,718 9,224 13,108 9,216 5,337 5,651 Transfer/maintenance fees................ 2,150 525 864 661 740 1,638 Administration fees...................... 38,303 18,585 19,734 19,337 1,632 13,456 Directors' fees.......................... 2,956 30 154 30 30 1,199 Professional fees........................ 2,496 2,033 5,203 3,046 2,579 1,092 Reports to shareholders.................. 13,425 568 1,270 996 826 5,556 Registration fees........................ 174 1,452 1,460 1,460 1,460 78 Other expenses........................... 5,650 839 2,808 150 134 2,838 Interest................................. -- -- 482 -- -- -- ------------ ----------- ----------- ----------- ----------- ----------- Total expenses....................... 713,258 52,493 94,723 75,720 49,012 255,769 ------------ ----------- ----------- ----------- ----------- ----------- Less: Reimbursement of expenses.......... -- (10,260) -- -- -- -- Earnings credits................... (7,599) -- -- -- -- (4,053) ------------ ----------- ----------- ----------- ----------- ----------- Net expenses........................... 705,659 42,233 94,723 75,720 49,012 251,716 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income ............... 218,141 285,818 155,597 112,171 106,787 224,085 NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) during the period on: Investments............................ 11,201,462 26,652 153,135 22,671 5,739 1,728,460 Foreign currency transactions.......... -- (43,375) (6,777) (3,668) -- -- Futures contracts...................... -- -- 161,411 -- -- -- ------------ ----------- ----------- ----------- ----------- ----------- Net realized gain (loss)............. 11,201,462 (16,723) 307,769 19,003 5,739 1,728,460 Net change in unrealized appreciation (depreciation) during the period on: Investments............................ 3,419,768 84,460 33,906 385,865 1,006,122 5,304,983 Translation of assets and liabilities in foreign currencies................ -- (99) 113 (381) -- -- Futures contracts...................... -- -- 76,555 -- -- -- ------------ ----------- ----------- ----------- ----------- ----------- Net unrealized appreciation ......... 3,419,768 84,361 110,574 385,484 1,006,122 5,304,983 ------------ ----------- ----------- ----------- ----------- ----------- Net gain .......................... 14,621,230 67,638 418,343 404,487 1,011,861 7,033,443 ------------ ----------- ----------- ----------- ----------- ----------- Net increase in net assets resulting from operations..... $14,839,371 $353,456 $573,940 $516,658 $1,118,648 $7,257,528 ============ =========== =========== =========== =========== ===========
*Period June 1, 1995 (inception) through December 31, 1995. See accompanying notes. 52 STATEMENT OF CHANGES IN NET ASSETS For the Year Ended December 31, 1995
SERIES C SERIES D SERIES E SERIES A SERIES B (MONEY (WORLDWIDE (HIGH GRADE (GROWTH) (GROWTH-INCOME) MARKET) EQUITY) INCOME) -------- --------------- ------- ------- ------- INCREASE IN NET ASSETS FROM OPERATIONS: Net investment income ........................... $ 4,866,610 $ 18,703,765 $ 5,008,362 $ 1,475,486 $ 7,776,981 Net realized gain................................ 30,112,684 99,034,666 -- 10,198,109 3,043,977 Unrealized appreciation during the period........ 97,759,964 63,506,371 16,141 6,880,054 9,249,705 ------------ ------------ ------------ ----------- ----------- Net increase in net assets resulting from operations ......................... 132,739,258 181,244,802 5,024,503 18,553,649 20,070,663 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income............................ (3,560,363) (12,339,763) (4,193,295) (28,486) (7,575,652) Net realized gain................................ (15,009,374) -- -- (1,835,762) -- ------------ ------------ ------------ ----------- ----------- Total distributions to shareholders .......... (18,569,737) (12,339,763) (4,193,295) (1,864,248) (7,575,652) CAPITAL SHARE TRANSACTIONS (A): Proceeds from sale of shares .................... 178,841,720 149,198,824 162,965,890 81,864,579 56,773,129 Dividends reinvested ............................ 18,569,737 12,339,763 4,193,295 1,864,248 7,575,652 Shares redeemed.................................. (123,978,278) (130,485,002) (181,223,040) (69,669,706) (58,270,162) ------------ ------------ ------------ ----------- ----------- Net increase (decrease) from capital share transactions.............................. 73,433,179 31,053,585 (14,063,855) 14,059,121 6,078,619 ------------ ------------ ------------ ----------- ----------- Total increase (decrease) in net assets 187,602,700 199,958,624 (13,232,647) 30,748,522 18,573,630 NET ASSETS: Beginning of period.............................. 332,288,400 595,154,078 118,668,327 147,032,577 107,078,155 ------------ ------------ ------------ ----------- ----------- End of period.................................... $519,891,100 $795,112,702 $105,435,680 $177,781,099 $125,651,785 ============ ============ ============ ============ ============ Undistributed net investment income at end of period................................ $4,755,987 $18,308,191 $4,854,258 $4,447,615 $7,651,413 ============ ============ ============ =========== =========== (a) Shares issued and redeemed Shares sold .............................. 9,705,386 4,927,872 13,110,725 15,967,670 4,585,694 Dividends reinvested...................... 943,105 383,461 344,843 345,872 622,486 Shares redeemed ..................... (6,692,130) (4,314,590) (14,585,481) (13,363,236) (4,736,924) ------------ ------------ ------------ ----------- ----------- Net increase (decrease)............... 3,956,361 996,743 (1,129,913) 2,950,306 471,256 ============ ============ ============ =========== ===========
See accompanying notes. 53 STATEMENT OF CHANGES IN NET ASSETS (CONTINUED) For the Year Ended December 31, 1995
SERIES K SERIES M SERIES N SERIES J (GLOBAL (SPECIALIZED (MANAGED SERIES O SERIES S (EMERGING AGGRESSIVE ASSET ASSET (EQUITY (SOCIAL (GROWTH) BOND)* ALLOCATION* ALLOCATION)* INCOME)* AWARENESS -------- ------ ----------- ------------ -------- --------- INCREASE IN NET ASSETS FROM OPERATIONS: Net investment income .................... $ 218,141 $ 285,818 $ 155,597 $ 112,171 $ 106,787 $ 224,085 Net realized gain (loss).................. 11,201,462 (16,723) 307,769 19,003 5,739 1,728,460 Unrealized appreciation during the period. 3,419,768 84,361 110,574 385,484 1,006,122 5,304,983 ................................... ------------ ----------- ----------- ----------- ----------- ----------- Net increase in net assets resulting from operations ........ 14,839,371 353,456 573,940 516,658 1,118,648 7,257,528 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income.................... -- (245,889) -- -- -- (158,603) Distribution in excess of capital gains.. -- (23,205) -- -- -- -- Tax return of capital distribution....... -- (15,693) -- -- -- -- ................................... ------------ ----------- ----------- ----------- ----------- ----------- Total distribution to shareholders..... -- (284,787) -- -- -- (158,603) CAPITAL SHARE TRANSACTIONS (A): Proceeds from sale of shares ............ 44,371,374 8,894,552 20,292,459 10,904,285 13,390,619 10,381,340 Dividends reinvested .................... -- 284,787 -- -- -- 158,603 Shares redeemed.......................... (42,770,961) (3,569,647) (4,889,976) (840,804) (981,645) (5,347,822) ................................... ------------ ----------- ----------- ----------- ----------- ----------- Net increase from capital share transactions................... 1,600,413 5,609,692 15,402,483 10,063,481 12,408,974 5,192,121 ................................... ------------ ----------- ----------- ----------- ----------- ----------- Total increase in net assets........... 16,439,784 5,678,361 15,976,423 10,580,139 13,527,622 12,291,046 NET ASSETS: Beginning of period...................... 76,939,657 -- -- -- -- 24,539,212 ------------ ----------- ----------- ----------- ----------- ----------- End of period............................ $93,379,441 $5,678,361 $15,976,423 $10,580,139 $13,527,622 $36,830,258 ============ =========== =========== =========== =========== =========== Undistributed net investment income at end of period........................ $218,141 $-- $310,231 $108,503 $106,787 $212,751 ============ =========== =========== =========== =========== =========== (a) Shares issued and redeemed Shares sold ....................... 2,964,051 875,221 1,952,323 1,067,140 1,243,531 698,002 Dividends reinvested............... -- 27,920 -- -- -- 9,760 Shares redeemed ................... (2,875,387) (347,800) (460,823) (81,161) (87,312) (366,291) ------------ ----------- ----------- ----------- ----------- ----------- Net increase .................... 88,664 555,341 1,491,500 985,979 1,156,219 341,471 ============ =========== =========== =========== =========== ===========
*Period June 1, 1995 (inception) through December 31, 1995. See accompanying notes. 54 STATEMENT OF CHANGES IN NET ASSETS For the Year Ended December 31, 1995
SERIES C SERIES D SERIES A SERIES B (MONEY (WORLDWIDE (GROWTH) (GROWTH-INCOME) MARKET) EQUITY) -------- --------------- ------- ------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment income ............................ $ 3,594,852 $ 12,199,007 $ 4,088,336 $ 651,559 Net realized gain (loss).......................... 14,936,574 (10,039,494) -- 8,056,618 Unrealized depreciation during the year .......... (23,898,664) (19,893,458) (24,293) (6,906,319) -------------- -------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations ........................... (5,367,238) (17,733,945) 4,064,043 1,801,858 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income............................. (6,345,955) (13,997,580) (2,285,848) (142,013) Net realized gain .................................. (53,406,224) (34,582,256) -- -- -------------- -------------- ------------- ------------- Total distributions to shareholders ............ (59,752,179) (48,579,836) (2,285,848) (142,013) CAPITAL SHARE TRANSACTIONS (A): Proceeds from sale of shares ..................... 137,670,243 151,207,666 159,237,311 105,002,631 Dividends reinvested ............................. 59,752,179 48,579,836 2,285,848 142,013 Shares redeemed................................... (117,421,291) (121,918,064) (143,724,959) (58,023,788) -------------- ------------- ------------- ------------- Net increase from capital share transactions................................ 80,001,131 77,869,438 17,798,200 47,120,856 -------------- ------------- ------------- ------------- Total increase in net assets......... 14,881,714 11,555,657 19,576,395 48,780,701 NET ASSETS: Beginning of year................................. 317,406,686 583,598,421 99,091,932 98,251,875 -------------- ------------- ------------- ------------- End of year ...................................... $332,288,400 $595,154,078 $118,668,327 $147,032,576 ============== ============= ============= ============= Undistributed net investment income at end of year $3,449,740 $11,944,189 $4,039,191 $ -- ============== ============= ============= ============= (a) Shares issued and redeemed Shares sold.................................. 7,557,600 5,322,055 13,052,239 20,369,289 Dividends reinvested......................... 3,645,204 1,784,711 188,835 26,669 Shares redeemed ............................. (6,452,290) (4,309,917) (11,766,086) (11,298,899) -------------- ------------- ------------- ------------- Net increase............................. 4,750,514 2,796,849 1,474,988 9,097,059 ============== ============= ============= =============
See accompanying notes. 55 STATEMENT OF CHANGES IN NET ASSETS (CONTINUED) For the Year Ended December 31, 1995
SERIES E SERIES J SERIES S (HIGH GRADE (EMERGING (SOCIAL INCOME) GROWTH) AWARENESS) ------- ------- --------- DECREASE IN NET ASSETS FROM OPERATIONS: Net investment income (loss) ........................... $ 7,549,504 $ (72,234) $ 168,168 Net realized loss....................................... (13,092,689) (5,682,556) (605,968) Unrealized appreciation (depreciation) during the year.. (3,021,227) 4,040,585 (373,839) ------------ ------------- ------------ Net decrease in net assets resulting from operations ................................. (8,564,412) (1,714,205) (811,639) DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income................................... (6,132,050) -- (36,291) Net realized gain on sale of investments................ (5,483,296) (38,061) (335,692) ------------ ------------- ------------ Total distribution to shareholders.................... (11,615,346) (38,061) (371,983) CAPITAL SHARE TRANSACTIONS (A): Proceeds from sale of shares ........................... 73,273,613 59,569,183 10,619,583 Dividends reinvested ................................... 11,615,346 38,061 371,983 Shares redeemed......................................... (70,531,168) (23,011,638) (4,758,892) ------------ ------------- ------------- Net increase from capital share transactions......... 14,357,791 36,595,606 6,232,674 ------------ ------------- ------------- Total increase (decrease) in net assets............ (5,821,967) 34,843,340 5,049,052 NET ASSETS: Beginning of year....................................... 112,900,122 42,096,317 19,490,160 ------------ ------------- ------------- End of year ............................................ $107,078,155 $ 76,939,657 $24,539,912 ============ ============= ============= Undistributed net investment income at end of year..... $7,450,084 $-- $147,269 ============ ============= ============= (a) Shares issued and redeemed Shares sold....................................... 5,794,969 4,497,042 801,009 Dividends reinvested.............................. 1,006,267 2,848 28,559 Shares redeemed .................................. (5,695,284) (1,746,406) (360,752) ------------ ------------- ------------- Net increase.................................... 1,105,952 2,753,484 468,816 ============ ============= =============
See accompanying notes. 56 FINANCIAL HIGHLIGHTS
RATIO OF FISCAL NET ASSET NET NET GAIN DIVIDENDS DISTRIBUTIONS NET ASSET NET ASSETS RATIO OF NET INCOME PERIOD VALUE INVESTMENT (LOSS) TOTAL FROM (FROM NET (FROM VALUE END OF EXPENSES (LOSS) PORTFOLIO ENDED BEGINNING INCOME (REALIZED& INVESTMENT INVESTMENT CAPITAL TOTAL END OF TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER DEC. 31 OF PERIOD (LOSS) UNREALIZED)OPERATIONS INCOME) GAINS)DISTRIBUTIONS PERIOD RETURN(D)(THOUSANDS)NET ASSETS NET ASSETS RATE SERIES A (GROWTH) 1991 $12.90 $0.29 $4.34 $4.63 $(0.27) $ --- $(0.27) $17.26 36.1% $235,115 0.87% 1.97% 95% 1992 17.26 0.23 1.615 1.845 (0.242) (0.533) (0.775) 18.33 11.1% 296,548 0.86% 1.46% 77% 1993 18.33 0.39 2.076 2.466 (0.224) (0.752) (0.976) 19.82 13.7% 317,407 0.86% 2.01% 108% 1994 19.82 0.20 (0.442) (0.242) (0.38) (3.198) (3.578) 16.00 (1.7%) 332,288 0.84% 1.13% 90% 1995(g) 16.00 0.18 5.648 5.828 (0.153) (0.645) (0.798) 21.03 36.8% 519,891 0.83% 1.13% 83% SERIES B (GROWTH-INCOME) 1991 $20.21 $0.58 $6.953 $7.533 $(0.66) $(0.233) $(0.893) $26.85 37.7% $348,969 0.86% 3.39% 62% 1992 26.85 0.65 .999 1.649 (0.583) (0.156) (0.739) 27.76 6.3% 467,208 0.86% 3.22% 56% 1993 27.76 0.64 2.009 2.649 (0.679) --- (0.679) 29.73 9.6% 583,599 0.86% 2.63% 95% 1994 29.73 0.51 (1.34) (0.83) (0.680) (1.68) ( 2.36) 26.54 (3.0%) 595,154 0.84% 2.07% 43% 1995(g) 26.54 0.79 7.16 7.95 (0.540) --- (0.540) 33.95 30.1% 795,113 0.83% 2.70% 94% SERIES C (MONEY MARKET) 1991(a) $12.74 $0.69 $0.01 $0.70 $(0.92) $ --- $(0.92) $12.52 5.6% $86,610 0.61% 5.42% --- 1992 12.52 0.43 (0.03) 0.40 (0.71) --- (0.71) 12.21 3.2% 87,246 0.61% 3.19% --- 1993 12.21 0.29 0.027 0.317 (0.437) --- (0.437) 12.09 2.6% 99,092 0.61% 2.65% --- 1994 12.09 0.41 0.035 0.445 (0.265) --- (0.265) 12.27 3.7% 118,668 0.61% 3.70% --- 1995(g) 12.27 0.74 (0.085) 0.655 (0.585) --- (0.585) 12.34 5.4% 105,436 0.60% 5.27% --- SERIES D (WORLDWIDE EQUITY) 1991(a)(b) $3.97 $0.15 $0.34 $0.49 $(0.55) $ --- $(0.55) $3.91 12.7% $11,688 1.58% 3.95% 113% 1992(a) 3.91 0.02 (0.122) (0.102) (0.048) --- (0.048) 3.76 (2.6%) 25,183 1.62% 0.50% 81% 1993(a) 3.76 0.02 1.17 1.19 (0.006) --- (0.006) 4.94 31.6% 98,252 1.42% 0.38% 70% 1994(a) 4.94 0.02 0.115 0.135 (0.005) --- (0.005) 5.07 2.7% 147,033 1.34% 0.50% 82% 1995 5.07 0.05 0.4989 0.5489 (0.0009) (0.058) (0.0589) 5.56 10.9% 177,781 1.31% 0.90% 169% SERIES E (HIGH GRADE INCOME) 1991 $11.67 $0.76 $1.17 $1.93 $(0.78) $ --- $(0.78) $12.82 17.0% $63,602 0.86% 8.24% 24% 1992 12.82 0.78 0.168 0.948 (0.748) --- (0.748) 13.02 7.4% 81,440 0.86% 7.41% 76% 1993 13.02 0.64 1.02 1.66 (0.79) (0.11) (0.90) 13.78 12.6% 112,900 0.86% 6.21% 151% 1994 13.78 0.76 (1.713) (0.953) (0.69) (0.617) (1.307) 11.52 (6.9%) 107,078 0.85% 6.74% 185% 1995(g) 11.52 0.74 1.36 2.10 (0.76) --- (0.76) 12.86 18.6% 125,652 0.85% 6.60% 180%
57 FINANCIAL HIGHLIGHTS (CONTINUED) NET GAIN FISCAL NET ASSET NET (LOSS) ON DIVIDENDS DISTRIBUTIONS PERIOD VALUE INVESTMENT SECURITIES TOTAL FROM (FROM NET (FROM ENDED BEGINNING INCOME (REALIZED & INVESTMENT INVESTMENT CAPITAL RETURN OF DEC. 31 OF PERIOD (LOSS) UNREALIZED) OPERATIONS INCOME) GAINS) CAPITAL SERIES J (EMERGING GROWTH) 1992(c) $10.00 $0.01 $2.46 $2.47 $ --- $ --- $ --- 1993 12.47 (0.01) 1.711 1.701 (0.001) --- --- 1994 14.17 (0.01) (0.713) (0.723) --- (0.007) --- 1995(g) 13.44 0.04 2.58 2.62 --- --- ---
RATIO OF NET FISCAL NET ASSETS RATIO OF INCOME PERIOD NET ASSET END OF EXPENSES TO (LOSS) TO PORTFOLIO ENDED TOTAL VALUE END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER DEC. 31 DISTRIBUTIONS PERIOD RETURN(D)(THOUSANDS) ASSETS ASSETS RATE SERIES J (EMERGING GROWTH) (CONTINUED) 1992(c) $ --- $12.47 24.7% $ 7,113 1.06% 0.22% 4% 1993 (0.001) 14.17 13.6% 42,096 0.91% (0.14%) 117% 1994 (0.007) 13.44 (5.1%) 76,940 0.88% (0.11%) 91% 1995(g) --- 16.06 19.5% 93,379 0.84% 0.26% 202%
NET GAIN FISCAL NET ASSET NET (LOSS) ON DIVIDENDS DISTRIBUTIONS PERIOD VALUE INVESTMENT SECURITIES TOTAL FROM (FROM NET (FROM ENDED BEGINNING INCOME (REALIZED & INVESTMENT INVESTMENT CAPITAL RETURN OF DEC. 31 OF PERIOD (LOSS) UNREALIZED) OPERATIONS INCOME) GAINS) CAPITAL SERIES K (GLOBAL AGGRESSIVE) 1995(a)(e)(f)$10.00 $ 0.54 $ 0.22 $ 0.76 $(0.466) $(0.044) $(0.03)
RATIO OF NET FISCAL NET ASSETS RATIO OF INCOME PERIOD NET ASSET END OF EXPENSES TO (LOSS) TO PORTFOLIO ENDED TOTAL VALUE END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER DEC. 31 DISTRIBUTIONS PERIOD RETURN(D)(THOUSANDS) ASSETS ASSETS RATE SERIES K (GLOBAL AGGRESSIVE) (CONTINUED) 1995(a)(e)$(0.540) $ 10.22 7.6% $ 5,678 1.63% 11.03% 127%
NET GAIN FISCAL NET ASSET NET (LOSS) ON DIVIDENDS DISTRIBUTIONS PERIOD VALUE INVESTMENT SECURITIES TOTAL FROM (FROM NET (FROM ENDED BEGINNING INCOME (REALIZED & INVESTMENT INVESTMENT CAPITAL RETURN OF DEC. 31 OF PERIOD (LOSS) UNREALIZED) OPERATIONS INCOME) GAINS) CAPITAL SERIES M (SPECIALIZED ASSET ALLOCATION) 1995(a)(e)$10.00 $0.169 $0.541 $0.71 $ --- $ --- $ ---
RATIO OF NET FISCAL NET ASSETS RATIO OF INCOME PERIOD NET ASSET END OF EXPENSES TO (LOSS) TO PORTFOLIO ENDED TOTAL VALUE END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER DEC. 31 DISTRIBUTIONS PERIOD RETURN(D)(THOUSANDS) ASSETS ASSETS RATE SERIES M (SPECIALIZED ASSET ALLOCATION) (CONTINUED) 1995(a)(e)$ --- $10.71 7.1% $15,976 1.94% 3.2% 181%
NET GAIN FISCAL NET ASSET NET (LOSS) ON DIVIDENDS DISTRIBUTIONS PERIOD VALUE INVESTMENT SECURITIES TOTAL FROM (FROM NET (FROM ENDED BEGINNING INCOME (REALIZED & INVESTMENT INVESTMENT CAPITAL RETURN OF DEC. 31 OF PERIOD (LOSS) UNREALIZED) OPERATIONS INCOME) GAINS) CAPITAL SERIES N (MANAGED ASSET ALLOCATION) 1995(a)(e)$10.00 $0.156 $0.574 $0.73 $ --- $ --- $ ---
RATIO OF NET FISCAL NET ASSETS RATIO OF INCOME PERIOD NET ASSET END OF EXPENSES TO (LOSS) TO PORTFOLIO ENDED TOTAL VALUE END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER DEC. 31 DISTRIBUTIONS PERIOD RETURN(D)(THOUSANDS) ASSETS ASSETS RATE SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED) 1995(a)(e)$ --- $10.73 7.3% $10,580 1.90% 2.8% 26%
NET GAIN FISCAL NET ASSET NET (LOSS) ON DIVIDENDS DISTRIBUTIONS PERIOD VALUE INVESTMENT SECURITIES TOTAL FROM (FROM NET (FROM ENDED BEGINNING INCOME (REALIZED & INVESTMENT INVESTMENT CAPITAL RETURN OF DEC. 31 OF PERIOD (LOSS) UNREALIZED) OPERATIONS INCOME) GAINS) CAPITAL SERIES O (EQUITY INCOME) 1995(a)(e)$10.00 $0.166 $1.534 $1.70 $ --- $ --- $ ---
RATIO OF NET FISCAL NET ASSETS RATIO OF INCOME PERIOD NET ASSET END OF EXPENSES TO (LOSS) TO PORTFOLIO ENDED TOTAL VALUE END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER DEC. 31 DISTRIBUTIONS PERIOD RETURN(D)(THOUSANDS) ASSETS ASSETS RATE SERIES O (EQUITY INCOME) (CONTINUED) 1995(a)(e)$ --- $11.70 17.0% $13,528 1.40% 3.0% 3%
NET GAIN FISCAL NET ASSET NET (LOSS) ON DIVIDENDS DISTRIBUTIONS PERIOD VALUE INVESTMENT SECURITIES TOTAL FROM (FROM NET (FROM ENDED BEGINNING INCOME (REALIZED & INVESTMENT INVESTMENT CAPITAL RETURN OF DEC. 31 OF PERIOD (LOSS) UNREALIZED) OPERATIONS INCOME) GAINS) CAPITAL SERIES S (SOCIAL AWARENESS) 1991(c) $10.00 $0.05 $0.50 $0.55 $ --- $ --- $ --- 1992(a) 10.55 0.03 1.691 1.721 (0.021) --- --- 1993 12.25 0.02 1.432 1.452 (0.012) --- --- 1994 13.69 0.08 (0.595) (0.515) (0.02) (0.185) --- 1995(g) 12.97 0.09 3.507 3.597 (0.077) --- ---
RATIO OF NET FISCAL NET ASSETS RATIO OF INCOME PERIOD NET ASSET END OF EXPENSES TO (LOSS) TO PORTFOLIO ENDED TOTAL VALUE END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER DEC. 31 DISTRIBUTIONS PERIOD RETURN(D)(THOUSANDS) ASSETS ASSETS RATE SERIES S (SOCIAL AWARENESS) (CONTINUED) 1991(c) $ --- $10.55 5.5% $ 2,711 1.00% 1.49% 162% 1992(a) (0.021) 12.25 16.4% 9,653 0.92% 0.24% 110% 1993 (0.012) 13.69 11.9% 19,490 0.90% 0.23% 105% 1994 (0.205) 12.97 (3.7%) 24,539 0.90% 0.75% 67% 1995(g) (0.077) 16.49 27.7% 36,830 0.86% 0.75% 122%
(a) Net investment income per share has been calculated using the weighted monthly average number of capital shares outstanding. (b) Effective May 1, 1991, the investment objective of Series D was changed from high current income to long-term capital growth through investment in common stocks and equivalents of companies domiciled in foreign countries and the United States. (c) Series J and Series S were initially capitalized on October 1, 1992 and April 23, 1991, respectively, with net asset values of $10.00 per share. Percentage amounts for the period have been annualized, except for total return. (d) Total return information does not take into account any charges paid at the time of purchase. (e) Series K, M, N and O were initially capitalized on June 1, 1995 with net asset values of $10.00 per share. Percentage amounts for the period have been annualized, except for total return. (f) Fund expenses were reduced by the Investment Manager during the period, and expense ratios absent such reimbursement would have been 2.03% for Series K (g) Expense ratios were calculated without the reduction for custodian fees earnings credits. Expense ratios with such reductions would have been as follows: 1995 ---- Series A 0.83% Series B 0.83% Series C 0.60% Series E 0.85% Series J 0.83% Series S 0.84% 58 NOTES TO FINANCIAL STATEMENTS December 31, 1995 1. SIGNIFICANT ACCOUNTING POLICIES The Fund is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company of the series type. Its shares are currently issued in eleven series with each series, in effect, representing a separate fund. The Fund is required to account for the assets of each series separately and to allocate general liabilities of the Fund to each series based upon the net asset value of each series. Shares of the Fund will be sold only to Security Benefit Life Insurance Company (SBL) separate accounts. The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. SECURITIES VALUATION--Valuations of the Fund's securities are supplied by pricing services approved by the Board of Directors. Securities listed or traded on a recognized securities exchange are valued on the basis of the last sales price. If a security is traded on multiple exchanges, its value will be based on the price from the principal exchange where it is traded. If there are no sales on a particular day, then the securities are valued at the mean between the bid and the asked prices. If a mean cannot be determined, the securities are valued at the best available current bid price. All other securities for which market quotations are available are valued on the basis of the last current bid price. If there is no bid price or if the bid price is deemed to be unsatisfactory by the Board of Directors or by the Fund's investment manager, then the securities are valued in good faith by such method as the Board of Directors determines will reflect the fair value. The Fund generally will value short-term debt securities at prices based on market quotations for such securities or securities of similar type, yield, quality and duration, except that securities purchased with 60 days or less to maturity are valued at amortized cost. Generally, trading in foreign securities markets is substantially completed each day at various times prior to the close of the New York Stock Exchange. The values of foreign securities are determined as of the close of such foreign markets or the close of the New York Stock Exchange, if earlier. All investments quoted in foreign currency are valued in U.S. dollars on the basis of the foreign currency exchange rates prevailing at the close of business. Investment in foreign securities may involve risks not present in domestic investments. Since foreign securities may be denominated in a foreign currency and involve settlement and pay interest or dividends in foreign currencies, changes in the relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Series. Foreign investments may also subject Series D, K, M and N to foreign government exchange restrictions, expropriation, taxation or other political, social or economic developments, all of which could affect the market and/or credit risk of the investments. B. FOREIGN CURRENCY TRANSACTIONS - The accounting records of the Fund are maintained in U.S. dollars. All assets and liabilities initially expressed in foreign currencies are converted into U.S. dollars at prevailing exchange rates. Purchases and sales of investment securities, dividend and interest income, and certain expenses are translated at the rates of exchange prevailing on the respective dates of such transactions. Series D does not isolate that portion of the results of operations resulting from changes in the foreign exchange rates on investments from the fluctutation arising from changes in the market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments. Series K isolates their portion of the results of operations resulting in foreign exchange rates on investments from the fluctuation arising from changes in the market prices of securities held. Net realized foreign exchange gains or losses arise from sales of portfolio securities, sales of foreign currencies, and the difference between asset and liability amounts initially stated in foreign currencies and the U.S. dollar value of the amounts actually received or paid. Net unrealized foreign exchange gains or losses arise from changes in the value of portfolio securities and other assets and liabilities at the end of the reporting period, resulting from changes in the exchange rates. C. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - Series D, K, M and N may enter into forward foreign exchange contracts in connection with foreign currency risk from purchase or sale of securities denominated in foreign currency. These Series may also enter into such contracts to manage changes in foreign currency exchange rates on portfolio positions. These contracts are marked to market daily, by recognizing the difference between the contract exchange rate and the current market rate as unrealized gains or losses. Realized gains or losses are recognized when contracts are settled and are reflected in the Statement of Operations. These contracts involve market risk in excess of the amount reflected in the Balance Sheet. The face or contract amount in U.S. dollars reflects the total exposure the Series have in that particular currency contract. Losses may arise due to changes in the value of the foreign currency or if the counterparty does not perform under the contract. D. FUTURES - Series M utilizes futures contracts to a limited extent, with the objectives of maintaining full exposure to the underlying stock markets, enhancing returns, maintaining liquidity, and minimizing transaction costs. Series M may purchase futures contracts to immediately position incoming cash in the market, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. In the event of redemptions, Series M may pay departing shareholders from cash balances and reduce futures positions accordingly. Returns may be enhanced by purchasing futures contracts instead of the underlying securitites when futures are believed to be priced more attractively than the underlying securities. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks contained in the indices and the prices of futures contracts, and the possibility of an illiquid market. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Series is required to deposit either cash or securities, representing the initial margin, equal to a certain percentage of the contract value. Subsequent changes in the value of the contract, or variation margin, are recorded as unrealized gains or losses. The variation margin is paid or received in cash daily by the Series. The Series realizes a gain or loss when the contract is closed or expires. 59 NOTES TO FINANCIAL STATEMENTS December 31, 1995 E. SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are accounted for on the date the securities are purchased or sold. Realized gains and losses are reported on an identified cost basis. Dividend income less foreign taxes withheld (if any) are recorded on the ex-dividend date. Interest income is recognized on the accrual basis. Premium and discounts (except original issue discounts) on debt securities are not amortized. F. DISTRIBUTIONS TO SHAREHOLDERS - Distributions to shareholders are recorded on the ex-dividend date. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. These differences are primarily due to differing treatments for expiration of net operating losses and recharacterization of foreign currency gains and losses. G. TAXES - The Fund complied with the requirements of the Internal Revenue Code applicable to regulated investment companies and distributed all of its taxable net income and net realized gains sufficient to relieve it from all, or substantially all, federal income, excise and state income taxes. Therefore, no provision for federal or state income tax is required. H. EARNINGS CREDITS - Under the fee schedule with the custodian, the Fund earns credits based on overnight custody cash balances. These credits are utilized to reduce related custodial expenses. The custodian expense disclosed in the Statement of Operations does not reflect the reduction in expense from the related earnings credits. 2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES Management fees are payable to Security Management Company (SMC) (the Investment Manager) under an investment advisory contract at an annual rate of .50% of the average daily net assets for Series C, .75% for Series A, B, E, J, K and S and 1.00% for Series D, M, N and O. SMC pays Lexington Management Corporation (LMC), an amount equal to .50% of the average daily net assets of Series D and .35% of the average net assets for Series K, for management services. The Investment Manager pays T. Rowe Price Associates, Inc. an annual fee equal to .50% of the first $50,000,000 of average net assets of Series N and .40% of the average net assets of Series N in excess of $50,000,000 for management services provided to that Series. The Investment Manager pays T. Rowe Price Associates, Inc. an annual fee equal to .50% of the first $20,000,000 of average net assets of Series O and .40% of the average net assets in excess of $20,000,000 for management services provided to Series O. The Investment Manager pays Templeton Quantitative Advisors, Inc., for research provided to Series M, an annual fee equal to .30% of the first $50,000,000 of the average net assets of Series M invested in equity securities and .25% of the average net assets invested in equity securities in excess of $50,000,000. The Investment Manager also pays Meridian Investment Management Corporation, for research provided to Series M, an annual fee equal to .20% of the average net assets of that Series. The investment advisory contract provides that the total annual expenses of each Series (including management fees, but excluding interest, taxes, brokerage commissions and extraordinary expenses) will not exceed the level of expenses which the Series is permitted to bear under the most restrictive expense limitation imposed by any state in which shares of the Fund are then offered for sale. For the year ended December 31, 1995, SMC agreed to limit the total expenses for Series K, M, N and O to an annual rate of 2% of the average daily net asset value of each respective Series. As a result, SMC reimbursed Series K $10,260. The Fund has entered into a contract with SMC for transfer agent services and administrative services which SMC provides to the Fund. The charges paid by the Fund under the contract for transfer agent services are insignificant. The administrative services provided by SMC principally include all fund and portfolio accounting and regulatory filings. For providing these services, SMC receives a fee at the annual rate of .045% of the average daily net assets of the Fund, plus the greater of .10% of the average net assets of Series D or $60,000, and with respect to Series K, M, and N, an annual fee equal to the greater of .10% of each Series average net assets or (i) $30,000 in the year ending April 29, 1996, (ii) $45,000 in the year ending April 29, 1997, and (iii) $60,000 thereafter. SMC has arranged for LMC to provide certain administrative services relating to Series D and K, including performing certain accounting and pricing functions. LMC is compensated directly by SMC for providing these services. Certain officers and directors of the Fund are also officers and/or directors of SBL and its subsidiaries, which include Security Management Company. 3. FEDERAL INCOME TAX MATTERS The amounts of unrealized appreciation (depreciation) for income tax purposes at December 31, 1995, for all securities and foreign currency holdings (including foreign currency receivables and payables) were as follows: SERIES B SERIES C SERIES D SERIES E SERIES A (Growth (Money (Worldwide (High Grade (Growth) Income) Market) Equity) Income) -------- ------- ------- ------- ------- Aggregate gross unrealized appreciation...$119,999,053 $145,071,364 $5,540 $12,077,884 $6,920,235 Aggregate gross unrealized depreciation.. (889,074) (1,122,308) (17,287) (4,360,638) (17,327) ------------ ------------ --------- ----------- ---------- Net unrealized appreciation (depreciation).$119,109,979 $143,949,056 $(11,747) $7,717,246 $6,902,908 ============ ============ ========= ========== ========== SERIES M SERIES N SERIES J SERIES K (Specialized (Managed SERIES O SERIES S (Emerging (Global Asset Asset (Equity (Social) Growth) Aggressive) Allocation) Allocation) Income) Awareness ------- ----------- ----------- ----------- ------- --------- Aggregate gross unrealized appreciation...$14,009,058 $116,398 $535,407 $512,236 $1,013,116 $8,073,962 Aggregate gross unrealized depreciation...(2,397,322) (32,037) (424,833) (126,752) (6,994) (430,433) ----------- -------- --------- --------- ---------- ---------- Net unrealized appreciation (depreciation).$11,611,736 $84,361 $110,574 $385,484 $1,006,122 $7,643,529 =========== ======== ========= ========= ========== ========== 60 NOTES TO FINANCIAL STATEMENTS December 31, 1995 Realized gains and losses are determined on an identified cost basis for federal income tax purposes. Series A and D hereby designate $14,936,574 and $1,767,208, respectively as capital gains dividends attributable to the year ended December 31, 1995, for the purpose of the dividends paid deduction on the Series' federal income tax return. At December 31, 1995, Series E has a capital loss carryforward of $10,048,772 which is available to offset future taxable gains and expires in 2002. 4. INVESTMENT TRANSACTIONS Investment transactions for the year ended December 31, 1995, (excluding overnight investments and short-term debt securities) are as follows:
SERIES M SERIES N SERIES B SERIES D SERIES E SERIES J SERIES K (Specialized (Managed SERIES O SERIES S SERIES A (Growth (Worldwide (High Grade (Emerging (Global Asset Asset (Equity (Social (Growth) Income) Equity) Income) Growth) Aggressive)Allocation) Allocation) Income) Awareness) Purchases$393,830,712 $628,045,592 $288,646,471 $212,141,293 $161,676,352 $6,866,260 $23,169,751 $11,547,147 $10,251,212 $37,612,078 Proceeds from sales $335,823,381 $606,571,375 $255,501,436 $204,716,876 $155,644,178 $2,667,810 $10,950,767 $ 2,468,781 $ 103,432 $32,358,868
5. FORWARD FOREIGN EXCHANGE CONTRACTS At December 31, 1995, Series D had the following open forward foreign exchange contracts to sell currency (excluding foreign currency contracts used for purchase and sale settlements):
UNREALIZED GAIN CURRENCY SETTLEMENT DATE CONTRACT AMOUNT CONTRACT RATE CURRENT RATE AT 12-31-95 -------- --------------- --------------- ------------- ------------ ----------- Deutsche Mark 05/06/96 $ 3,525,203 1.4064 1.4287 $ 55,023 Japanese Yen 01/31/96 591,547 86.1500 102.8915 96,251 Japanese Yen 02/14/96 3,168,826 90.4200 102.6844 378,478 Japanese Yen 02/20/96 3,390,166 94.2900 102.5956 274,450 Japanese Yen 02/20/96 847,587 95.3600 102.5956 59,776 Japanese Yen 02/20/96 4,129,226 95.3300 102.5956 292,423 Japanese Yen 03/06/96 10,191,843 98.3200 102.3453 400,851 Japanese Yen 06/28/96 8,468,122 99.8450 100.8701 86,058 ---------- ---------- $34,312,520 $1,643,310 ========== ==========
6. FEDERAL TAX STATUS OF DIVIDENDS The income dividends paid by the Funds are taxable as ordinary income on the shareholder's tax return. The portion of ordinary income of dividends (including net short-term capital gains) attributed to fiscal year ended December 31, 1995, that qualified for the dividends received deduction for corporate shareholders was 28%, 29%, 0%, 11%, 0%, 100%, 0%, 7%, 31%, 8% and 100%, of the amount taxable as ordinary income for Series A, B, C, D, E, J, K, M, N, O and S, respectively, in accordance with the provisions of the Internal Revenue Code. 61 REPORT OF INDEPENDENT AUDITORS THE CONTRACT OWNERS AND BOARD OF DIRECTORS SBL FUND We have audited the accompanying balance sheet and statement of net assets of SBL Fund (comprised of the Series A, B, C, D, E, J, K, M, N, O and S portfolios) (the Fund) as of December 31, 1995, and the related statements of operations for the year then ended, statements of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended of the Series A, B, C, D, E, J and S portfolios and the related statements of operations and changes in net assets and financial highlights for the period from June 1, 1995 (commencement of operations) to December 31, 1995 of the Series K, M, N and O. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights 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 and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of December 31, 1995, by correspondence with the custodian. As to securities relating to uncompleted transactions, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the respective portfolios comprising SBL Fund at December 31, 1995, and the results of their operations, changes in their net assets and the financial highlights for the periods indicated above in conformity with generally accepted accounting principles. Kansas City, Missouri January 26, 1996 62 SECURITY FUNDS OFFICERS AND DIRECTORS - ---------------------- DIRECTORS - --------- Willis A. Anton Donald A. Chubb, Jr. John D. Cleland Donald L. Hardesty Penny A. Lumpkin Mark L. Morris, Jr., D.V.M. Jeffrey B. Pantages Harold G. Worswick OFFICERS - -------- John D. Cleland, President James R. Schmank, Vice President and Treasurer Terry Milberger, Vice President Jane A. Tedder, Vice President Mark E. Young, Vice President Greg A. Hamilton, Assistant Vice President Cindy L. Shields, Assistant Vice President Amy J. Lee, Secretary Brenda M. Luthi, Assistant Treasurer and Assistant Secretary This report is submitted for the general information of the shareholders of the Funds. The report is not authorized for distribution to prospective investors in the Funds unless preceded or accompanied by an effective prospectus which contains details concerning the sales charges and other pertinent information. [SDI LOGO} 700 SW Harrison St. BULK RATE Topeka, KS 66636-0001 U.S. POSTAGE PAID (913) 295-3112 TOPEKA, KS (800) 888-2461 PERMIT NO. 385 SBL FUND PART C. OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS a. Financial Statements Included in Part A of this Registration Statement: Per Share Income and Capital Changes To be included in Part B of this Registration Statement: The audited financial statements contained in the most recent Annual Report of SBL Fund for fiscal year ended December 31, 1995, are incorporated by reference in Part B of this Registration Statement. b. Exhibits: (1) Articles of Incorporation.(a) (2) Corporate Bylaws of Registrant.(a) (3) Not applicable. (4) Not applicable. (5) (a) Investment Advisory Contract(a) (b) Sub-Advisory Contract -- Lexington (Series D)(a) (c) Sub-Advisory Contract -- Lexington (Series K)(a) (d) Sub-Advisory Contract -- T. Rowe Price (Series N)(a) (e) Sub-Advisory Contract -- T. Rowe Price (Series O)(a) (f) Quantitative Research Agreement -- Meridian(a) (6) Not applicable. (7) Form of Non-Qualified Deferred Compensation Plan.(a) (8) (a) Custodian Agreement -- UMB(a) (b) Global Custodian Agreement -- Chase Manhattan Bank (Series D)(a) (c) Global Custodian Agreement -- Chase Manhattan Bank (Series K)(a) (d) Global Custodian Agreement -- Chase Manhattan Bank (Series M)(a) (e) Global Custodian Agreement -- Chase Manhattan Bank (Series N)(a) (f) Global Custodian Agreement -- Chase Manhattan Bank (Series O)(a) (9) (a) Administrative Services and Transfer Agency Agreement (b) Sub-Administrative Agreement.(a) (c) Analytical Research Agreement--Templeton (10) Opinion of counsel as to the legality of the securities offered.(a) (11) Consent of Independent Auditors. (12) Not applicable. (13) Not applicable. (14) Not applicable. (15) Not applicable. (16) Schedule of Computation of Performance. (17) Financial Data Schedules. (18) Not applicable. (a) Incorporated herein by reference to the Exhibits filed with the Registrant's Post Effective Amendment No. 26 to Registration Statement No. 2-59353 (November 1, 1995). ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT Not applicable. ITEM 26. NUMBER OF HOLDERS OF SECURITIES AS OF DECEMBER 31, 1995 (1) (2) Number of Record TITLE OF CLASS SHAREHOLDERS Series A 11 Series B 12 Series C 13 Series D 11 Series E 11 Series S 7 Series J 10 Series K 7 Series M 7 Series N 6 Series O 6 ITEM 27. INDEMNIFICATION A policy of insurance covering Security Management Company, its subsidiaries, including Security Distributors, Inc., and all of the registered investment companies advised by Security Management Company insures the Registrant's directors and officers and others against liability arising by reason of an alleged breach of duty caused by any negligent act, error or accidental omission in the scope of their duties. Paragraph 30 of Registrant's Bylaws, dated February 3, 1995, provides in relevant part as follows: 30. INDEMNIFICATION AND LIABILITY OF DIRECTORS AND OFFICERS. Each person who is or was a Director or officer of the Corporation or is or was serving at the request of the Corporation as a Director or officer of another corporation (including the heirs, executors, administrators and estate of such person) shall be indemnified by the Corporation as of right to the full extent permitted or authorized by the laws of the State of Kansas, as now in effect and as hereafter amended, against any liability, judgment, fine, amount paid in settlement, cost and expense (including attorneys' fees) asserted or threatened against and incurred by such person in his/her capacity as or arising out of his/her status as a Director or officer of the Corporation or, if serving at the request of the Corporation, as a Director or officer of another corporation. The indemnification provided by this bylaw provision shall not be exclusive of any other rights to which those indemnified may be entitled under the Articles of Incorporation, under any other bylaw or under any agreement, vote of stockholders or disinterested directors or otherwise, and shall not limit in any way any right which the Corporation may have to make different or further indemnification with respect to the same or different persons or classes of persons. No person shall be liable to the Corporation for any loss, damage, liability or expense suffered by it on account of any action taken or omitted to be taken by him/her as a Director or officer of the Corporation or of any other corporation which he/she serves as a Director or officer at the request of the Corporation, if such person (a) exercised the same degree of care and skill as a prudent man would have exercised under the circumstances in the conduct of his/her own affairs, or (b) took or omitted to take such action in reliance upon advice of counsel for the Corporation, or for such other corporation, or upon statement made or information furnished by Directors, officers, employees or agents of the Corporation, or of such other corporation, which he/she had no reasonable grounds to disbelieve. In the event any provision of this Section 30 shall be in violation of the Investment Company Act of 1940, as amended or of the rules and regulations promulgated thereunder, such provisions shall be void to the extent of such violations. On March 25, 1988, the shareholders approved the Board of Directors' recommendation that the Articles of Incorporation be amended by adopting the following Article Fifteenth: "A director shall not be personally liable to the corporation or to its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this sentence shall not eliminate nor limit the liability of a director: A. for any breach of his or her duty of loyalty to the corporation or to its stockholders; B. for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; C. for any unlawful dividend, stock purchase or redemption under the provisions of Kansas Statutes Annotated (K.S.A.) 17-6424 and amendments thereto; or D. for any transaction from which the director derived an improper personal benefit." Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 28. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISER SECURITY MANAGEMENT COMPANY: Security Management Company also acts as Investment Manager to Security Cash Fund, Security Equity Fund, Security Income Fund, Security Growth and Income Fund, Security Tax-Exempt Fund and Security Ultra Fund and as administrator to The Parkstone Advantage Fund. BUSINESS* AND OTHER CONNECTIONS OF THE EXECUTIVE OFFICERS AND NAME DIRECTORS OF REGISTRANT'S ADVISER --------------------- -------------------------------------------- Jeffrey B. Pantages President, Chief Investment Officer and Director Security Management Company Director Security Cash Fund, Security Income Fund, Security Tax-Exempt Fund, SBL Fund, Security Growth and Income Fund, Security Equity Fund, Security Ultra Fund Senior Vice President and Chief Investment Officer Security Benefit Life Insurance Company, Security Benefit Group, Inc. Director Mulvane Art Center Mulvane Art Museum Washburn University 17th & Jewell Topeka, Kansas United Way of Greater Topeka P.O. Box 4188 Topeka, Kansas BUSINESS* AND OTHER CONNECTIONS OF THE EXECUTIVE OFFICERS AND NAME DIRECTORS OF REGISTRANT'S ADVISER --------------------- -------------------------------------------- John D. Cleland Senior Vice President and Director Security Management Company President and Director Security Cash Fund, Security Income Fund, Security Tax-Exempt Fund, SBL Fund, Security Growth and Income Fund, Security Equity Fund, Security Ultra Fund Vice President and Director Security Distributors, Inc. Trustee and Treasurer Mount Hope Cemetery Corporation 4700 SW 17th Topeka, Kansas Past President Top of the Tower Club 1 Townsite Plaza Topeka, Kansas Trustee Topeka Community Foundation 5100 SW 10th Topeka, Kansas James W. Lammers Senior Vice President and Director Security Management Company National Sales Manager, Senior Vice President and Director Security Distributors, Inc. James R. Schmank Senior Vice President, Treasurer, Chief Fiscal Officer and Director Security Management Company Chairman of the Board, President and Trustee The Parkstone Advantage Fund Vice President and Director Security Distributors, Inc. Vice President Security Benefit Life Insurance Company, Security Benefit Group, Inc. Vice President and Treasurer Security Growth and Income Fund, Security Income Fund, Security Cash Fund, Security Tax-Exempt Fund, Security Ultra Fund, Security Equity Fund, SBL Fund BUSINESS* AND OTHER CONNECTIONS OF THE EXECUTIVE OFFICERS AND NAME DIRECTORS OF REGISTRANT'S ADVISER --------------------- -------------------------------------------- Donald E. Caum Director Security Management Company Senior Vice President Security Benefit Life Insurance Company, Security Benefit Group, Inc. Director YMCA Metro 421 Van Buren Topeka, Kansas Executive Director Boy Scouts of America 1020 SE Monroe Topeka, Kansas Jayhawk Area Council BSA 1020 SE Monroe Topeka, Kansas Metropolitan Ballet Topeka, Kansas James L. Woods Senior Vice President Security Management Company, Security Benefit Life Insurance Company, Security Benefit Group, Inc. Director Midwest Superconductivity 1315 Wakarusa Drive Lawrence, Kansas Mark E. Young Vice President - Operations Security Management Company Vice President Security Growth and Income Fund, Security Income Fund, Security Cash Fund, Security Tax-Exempt Fund, Security Ultra Fund, Security Equity Fund, SBL Fund, Security Distributors, Inc., Security Benefit Group, Inc. Trustee Topeka Zoological Foundation 635 Gage Boulevard Topeka, Kansas BUSINESS* AND OTHER CONNECTIONS OF THE EXECUTIVE OFFICERS AND NAME DIRECTORS OF REGISTRANT'S ADVISER --------------------- -------------------------------------------- Terry A. Milberger Senior Portfolio Manager and Vice President Security Management Company Vice President Security Equity Fund, SBL Fund Jane A. Tedder Vice President and Senior Portfolio Manager Security Management Company Vice President Security Cash Fund, Security Income Fund, Security Tax-Exempt Fund, SBL Fund Gregory A. Hamilton Second Vice President Security Management Company Assistant Vice President Security Equity Fund, Security Income Fund, SBL Fund Director Downtown Topeka, Inc. 906 South Kansas Avenue Topeka, Kansas Trustee Kansas State University Foundation Manhattan, Kansas Amy J. Lee Second Vice President and Associate Counsel Security Benefit Life Insurance Company, Security Benefit Group, Inc. Secretary Security Management Company, Security Distributors, Inc., Security Cash Fund, Security Equity Fund, Security Tax Exempt Fund, Security Ultra Fund, SBL Fund, Security Growth and Income Fund, Security Income Fund Vice President, Assistant Secretary and Assistant Treasurer The Parkstone Advantage Fund Director Everywoman's Resource Center 1002 SW Garfield Avenue Topeka, Kansas BUSINESS* AND OTHER CONNECTIONS OF THE EXECUTIVE OFFICERS AND NAME DIRECTORS OF REGISTRANT'S ADVISER --------------------- -------------------------------------------- Brenda M. Luthi Assistant Vice President, Assistant Treasurer and Assistant Secretary Security Management Company Assistant Treasurer and Assistant Secretary Security Equity Fund, Security Ultra Fund, Security Growth and Income Fund, Security Income Fund, Security Cash Fund, SBL Fund, Security Tax-Exempt Fund Treasurer Security Distributors, Inc. Trustee, Vice President, Treasurer and Secretary The Parkstone Advantage Fund Steven M. Bowser Assistant Vice President and Portfolio Manager Security Management Company Assistant Vice President Security Benefit Life Insurance Company, Security Benefit Group, Inc. Thomas A. Swank Second Vice President and Portfolio Manager Security Management Company Second Vice President Security Benefit Life Insurance Company, Security Benefit Group, Inc. Barbara J. Davison Assistant Vice President and Portfolio Manager Security Management Company Assistant Vice President Security Benefit Life Insurance Company, Security Benefit Group, Inc. President Topeka Chapter International Institute of Internal Auditors Topeka, Kansas Executive Mentor ASSIST Catholic Social Services Topeka, Kansas Cindy L. Shields Assistant Vice President and Portfolio Manager Security Management Company Assistant Vice President Security Ultra Fund, SBL Fund BUSINESS* AND OTHER CONNECTIONS OF THE EXECUTIVE OFFICERS AND NAME DIRECTORS OF REGISTRANT'S ADVISER --------------------- -------------------------------------------- Larry L. Valencia Assistant Vice President and Senior Research Analyst Security Management Company James P. Schier Assistant Vice President and Senior Research Analyst Security Management Company *Located at 700 Harrison, Topeka, Kansas 66636-0001 LEXINGTON MANAGEMENT CORPORATION: Lexington Management Corporation, sub-adviser to Series K (Global Aggressive Bond Series), acts as investment adviser, sub-adviser and/or sponsor to 21 investment companies other than Registrant. BUSINESS* AND OTHER CONNECTIONS OF THE EXECUTIVE OFFICERS AND NAME DIRECTORS OF REGISTRANT'S ADVISER --------------------- -------------------------------------------- Robert M. DeMichele President, Chief Executive Officer and Director Lexington Global Asset Managers, Inc. Chairman and Chief Executive Officer Lexington Management Corporation, Lexington Funds Distributor, Inc. Director Chartwell Recorporation, Navigator's Insurance Group, Vanguard Cellular Systems, Inc. Chairman of the Board Lexington Group of Investment Companies, Market Systems Research, Inc., Market Systems Research Advisors, Inc., Lexington Capital Management, Inc. Richard M. Hisey Executive Vice President and Chief Financial Officer Lexington Global Asset Managers, Inc. Chief Financial Officer, Managing Director and Director Lexington Management Corporation Chief Financial Officer, Vice President and Director Lexington Funds Distributor, Inc. Vice President and Treasurer Market Systems Research Advisors, Inc. Chief Financial Officer and Vice President Lexington Group of Investment Companies Lawrence Kantor Executive Vice President and General Manager-Mutual Funds Lexington Global Asset Managers, Inc. Executive Vice President, Managing Director and Director Lexington Management Corporation Executive Vice President and Director Lexington Funds Distributor, Inc. Vice President and Director Lexington Group of Investment Companies BUSINESS* AND OTHER CONNECTIONS OF THE EXECUTIVE OFFICERS AND NAME DIRECTORS OF REGISTRANT'S ADVISER --------------------- -------------------------------------------- Stuart S. Richardson Chairman of the Board Lexington Global Asset Managers, Inc. Director Lexington Management Corporation John B. Waymire Vice President and Director Lexington Management Corporation President and Director Lexington Capital Management, Inc. *Located at P.O. Box 1515, Saddle Brook, New Jersey 07662, except for Mr. Waymire whose address is 2339 Gold Meadow Way, Gold River, California 95670. MFR ADVISORS, INC. Lexington Management Corporation contracts with MFR Advisors, Inc. to provide advisory services for Series K (Global Aggressive Bond Series). MFR Advisors, Inc. serves as adviser to no investment companies other than Registrant. BUSINESS* AND OTHER CONNECTIONS OF THE EXECUTIVE OFFICERS AND NAME DIRECTORS OF REGISTRANT'S ADVISER --------------------- -------------------------------------------- Maria Fiorini Ramirez Chief Executive Officer and President MFR Advisors, Inc. Director Statewide Savings Bank S.L.A. of New Jersey Pace University Medic Alert Foundation Money Marketeers Women's Economic Roundtable Bruce Jensen Executive Vice President MFR Advisors, Inc. Timothy F. Downing Chief Financial Officer MFR Advisors, Inc. *Located at One World Financial Center, 200 Liberty Street, New York, New York 10281 T. ROWE PRICE ASSOCIATES, INC. T. Rowe Price Associates, Inc., sub-adviser to Series N and O, was founded in 1937 by the late Thomas Rowe Price, Jr. As of December 31, 1995, the firm and its affiliates managed over $70 billion for over 4 million individual and institutional investor accounts. Listed below are the Directors of T. Rowe Price who have other substantial businesses, professions, vocations, or employment aside from that of Director of T. Rowe Price: James E. Halbkat, Jr., President of U.S. Monitor Corporation, a provider of public response systems. Mr. Halbkat's address is P.O. Box 23109, Hilton Head Island, South Carolina 29925. John W. Rosenblum, Tayloe Murphy Professor at the University of Virginia, and a Director of: Chesapeake Corporation, a manufacturer of paper products, Camdus Communications Corp., a provider of printing and communication services, Comdial Corporation, a manufacturer of telephone systems for businesses, and Cone Mills Corporation, a textiles producer. Mr. Rosenblum's address is P.O. Box 6550, Charlottesville, Virginia 22906. Robert L. Strickland, Chairman of Loew's Companies, Inc., a retailer of specialty home supplies, and a Director of Hannaford Bros. Co., a food retailer. Mr. Strickland's address is 604 Two Piedmont Plaza Building, Winston-Salem, North Carolina 27104. Philip C. Walsh, Consultant to Cyprus Amax Minerals Company, Englewood, Colorado, and a Director of Piedmont Mining Company, Inc., Charlotte, North Carolina. Mr. Walsh's address is 200 East 66th Street, Apt. A-1005, New York, New York 10021 With the exception of Messrs. Halbkat, Rosenblum, Strickland, and Walsh (listed above), all Directors of T. Rowe Price are employees of T. Rowe Price. Listed below are the additional Directors and the principal executive officer of T. Rowe Price: James S. Riepe, Thomas H. Broadus, Carter O. Hoffman, George A. Roche, M. David Testa and Henry H. Hopkins - Directors of T. Rowe Price. George J. Collins, Chief Executive Officer and President of T. Rowe Price. The address of each of the above individuals is 100 East Pratt Street, Baltimore, Maryland 21202. ITEM 29. PRINCIPAL UNDERWRITERS (a) Security Equity Fund Security Ultra Fund Security Income Fund Security Growth & Income Fund Security Tax-Exempt Fund Variflex Variable Annuity Account Varilife Variable Annuity Account Parkstone Variable Annuity Account The Parkstone Advantage Fund Security Varilife Separate Account Variflex LS Variable Annuity Account T. Rowe Price Variable Annuity Account T. Rowe Price Variable Annuity Account of First Security Benefit Life Insurance and Annuity Company of New York ITEM 30. LOCATION OF ACCOUNTS AND RECORDS Certain accounts, books and other documents required to be maintained by Section 31(a) of the 1940 Act and the Rules promulgated thereunder are maintained by Security Management Company, 700 Harrison, Topeka, Kansas 66636-0001. Records relating to the duties of the Registrant's custodian are maintained by UMB, n.a., 928 Grand Avenue, Kansas City, Missouri 64106 and Chase Manhattan Bank, N.A., 4 Chase MetroTech Center, 18th Floor, Brooklyn, New York 11245. ITEM 31. MANAGEMENT SERVICES Not applicable. ITEM 32. UNDERTAKINGS (a) Not applicable. (b) Not applicable. (c) Registrant hereby undertakes to furnish each person, to whom a prospectus is delivered, a copy of the Registrant's latest report to shareholders upon request and without charge. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Topeka, and State of Kansas on the 2nd day of February, 1996. SBL FUND (The Registrant) By: John D. Cleland ------------------------------------------ John D. Cleland, President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated: Date: February 2, 1996 ---------------------------------------- Willis A. Anton, Jr. Director - ----------------------------------------- Willis A. Anton, Jr. Donald A. Chubb, Jr. Director - ----------------------------------------- Donald A. Chubb, Jr. John D. Cleland President and Director - ----------------------------------------- John D. Cleland Donald L. Hardesty Director - ----------------------------------------- Donald L. Hardesty Penny A. Lumpkin Director - ----------------------------------------- Penny A. Lumpkin Mark L. Morris, Jr. Director - ----------------------------------------- Mark L. Morris, Jr. Jeffrey B. Pantages Director - ----------------------------------------- Jeffrey B. Pantages EXHIBIT INDEX (1) None (2) None (3) None (4) None (5) (a) None (b) None (c) None (d) None (e) None (f) None (6) None (7) None (8) (a) None (b) None (c) None (d) None (e) None (f) None (9) (a) Administrative Services and Transfer Agency Agreement (b) None (c) Analytical Research Agreement -- Templeton (10) None (11) Consent of Independent Auditors (12) None (13) None (14) None (15) None (16) Schedule of Computation of Performance (17) Financial Data Schedules (18) Not applicable EX-99.B9A 2 ADMINISTRATIVE SERVICES AGREEMENT ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT This Agreement, made and entered into this 1st day of April, 1987, by and between SBL Fund, a Kansas corporation ("Fund"), and Security Management Company, a Kansas corporation, ("SMC"). WHEREAS, the Fund is engaged in business as an open-end management investment company registered under the Investment Company Act of 1940; and WHEREAS, Security Management Company is willing to provide general administrative, fund accounting, transfer agency, and dividend disbursing services to the Fund under the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and mutual agreements made herein, the parties agree as follows: 1. EMPLOYMENT OF SECURITY MANAGEMENT COMPANY SMC will provide the Fund with general administrative, fund accounting, transfer agency, and dividend disbursing services described and set forth in Schedule A attached hereto and made a part of this agreement by reference. SMC agrees to maintain sufficient trained personnel and equipment and supplies to perform such services in conformity with the current prospectus of the Fund and such other reasonable standards of performance as the Fund may from time to time specify, and otherwise in an accurate, timely, and efficient manner. 2. COMPENSATION As consideration for the services described in Section I, the Fund agrees to pay SMC a fee as described and set forth in Schedule B attached hereto and made a part of this agreement by reference, as it may be amended from time to time, such fee to be calculated and accrued daily and payable monthly. 3. EXPENSES A. EXPENSES OF SMC. SMC shall pay all of the expenses incurred in providing Fund the services and facilities described in this agreement, whether or not such expenses are billed to SMC or the fund, except as otherwise provided herein. B. DIRECT EXPENSES. Anything in this agreement to the contrary notwithstanding, the Fund shall pay, or reimburse SMC for the payment of, the following described expenses of the Fund (hereinafter called "direct expenses") whether or not billed to the Fund, SMC or any related entity: 1. Fees and expenses of its independent directors and the meetings thereof; 2. Fees and costs of investment advisory services; 3. Fees and costs of independent auditors and income tax preparation; 4. Fees and costs of outside legal counsel and any legal counsel directly employed by the Fund or its Board of Directors; 5. Custodian and banking services, fees and costs; 6. Costs of printing and mailing prospectuses to existing shareholders, proxy statements and other reports to shareholders, where such costs are incurred through the use of unaffiliated vendors or mail services. 7. Fees and costs for the registration of its securities with the Securities and Exchange Commission and the jurisdictions in which it qualifies its share for sale, including the fees and costs of registering and bonding brokers, dealers and salesmen as required; 8. Dues and expenses associated with membership in the Investment Company Institute; 9. Expenses of fidelity and liability insurance and bonding covering Fund; 10. Organizational costs. 4. INSURANCE The Fund and SMC agree to procure and maintain, separately or as joint insureds with themselves, their directors, employees, agents and others, and other investment companies for which SMC acts as investment advisor and transfer agent, a policy or policies of insurance against loss arising from breaches of trust, errors and omissions, and a fidelity bond meeting the requirements of the Investment Company Act of 1940, in the amounts and with such deductibles as may be agreed upon from time to time, and to pay such portions of the premiums therefor as amount of the coverage attributable to each party is to the aggregate amount of the coverage for all parties. 5. REGISTRATION AND COMPLIANCE A. SMC represents that as of the date of this agreement it is registered as a transfer agent with the Securities and Exchange Commission ("SEC") pursuant to Subsection 17A of the Securities and Exchange Act of 1934 and the rules and regulations thereunder, and agrees to maintain said registration and comply with all of the requirements of said Act, rules and regulations so long as this agreement remains in force. B. The Fund represents that it is a diversified management investment company registered with the SEC in accordance with the Investment Company Act of 1940 and the rules and regulations thereunder, and authorized to sell its shares pursuant to said Act, the Securities Act of 1933 and the rules and regulations thereunder. 6. LIABILITIES AND INDEMNIFICATION SMC shall be liable for any actual losses, claims, damages or expenses (including any reasonable counsel fees and expenses) resulting from SMC's bad faith, willful misfeasance, reckless disregard of its obligations and duties, negligence or failure to properly perform any of its responsibilities or duties under this agreement. SMC shall not be liable and shall be indemnified and held harmless by the Fund, for any claim, demand or action brought against it arising out of, or in connection with: A. Bad faith, willful misfeasance, reckless disregard of its duties or negligence of the Board of Directors of the Fund, or SMC's acting upon any instructions properly executed and authorized by the Board of Directors of the Fund; B. SMC acting in reliance upon advice given by independent counsel retained by the Board of Directors of the Fund. In the event that SMC requests the Fund to indemnify or hold it harmless hereunder, SMC shall use its best efforts to inform the Fund of the relevant facts concerning the matter in question. SMC shall use reasonable care to identify and promptly notify the Fund concerning any matter which presents, or appears likely to present, a claim for indemnification against the Fund. The Fund shall have the election of defending SMC against any claim which may be the subject of indemnification hereunder. In the event the Fund so elects, it will so notify SMC and thereupon the Fund shall take over defenses of the claim, and (if so requested by the Fund, SMC shall incur no further legal or other claims related thereto for which it would be entitled to indemnity hereunder provided, however, that nothing herein contained shall prevent SMC from retaining, at its own expense, counsel to defend any claim. Except with the Fund's prior consent, SMC shall in no event confess any claim or make any compromise in any matter in which the Fund will be asked to indemnify or hold SMC harmless hereunder. PUNITIVE DAMAGES. SMC shall not be liable to the Fund, or any third party, for punitive, exemplary, indirect, special or consequential damages (even if SMC has been advised of the possibility of such damages) arising from its obligations and the services provided under this agreement, including but not limited to loss of profits, loss of use of the shareholder accounting system, cost of capital and expenses of substitute facilities, programs or services. FORCE MAJEURE. Anything in this agreement to the contrary notwithstanding, SMC shall not be liable for delays or errors occurring by reason of circumstances beyond its control, including but not limited to acts of civil or military authority, national emergencies, work stoppages, fire, flood, catastrophe, earthquake, acts of God, insurrection, war, riot, failure of communication or interruption. 7. DELEGATION OF DUTIES SMC may, at its discretion, delegate, assign or subcontract any of the duties, responsibilities and services governed by this agreement, to its parent company, Security Benefit Group, Inc., whether or not by formal written agreement. SMC shall, however, retain ultimate responsibility to the Fund, and shall implement such reasonable procedures as may be necessary, for assuring that any duties, responsibilities or services so assigned, subcontracted or delegated are performed in conformity with the terms and conditions of this agreement. 8. AMENDMENT This agreement and the schedules forming a part hereof may be amended at any time, without shareholder approval, by a writing signed by each of the parties hereto. Any change in the Fund's registration statements or other documents of compliance or in the forms relating to any plan, program or service offered by its current prospectus which would require a change in SMC's obligations hereunder shall be subject to SMC's approval, which shall not be unreasonably withheld. 9. TERMINATION This agreement may be terminated by either party without cause upon 120 days' written notice to the other, and at any time for cause in the event that such cause remains unremedied for more than 30 days after receipt by the other party of written specification of such cause. In the event Fund designates a successor to any of SMC's obligations hereunder, SMC shall, at the expense and pursuant to the direction of the Fund, transfer to such successor all relevant books, records and other data of Fund in the possession or under the control of SMC. 10. SEVERABILITY If any clause or provision of this agreement is determined to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, then such clause or provision shall be considered severed herefrom and the remainder of this agreement shall continue in full force and effect. 11. TERM This agreement initially shall become effective upon its approval by a majority vote of the Board of Directors of the Fund, including a majority vote of the Directors who are not "interested persons" of Fund or SMC, as defined in the Investment Company Act of 1940, and shall continue until terminated pursuant to its provisions. 12. APPLICABLE LAW This agreement shall be subject to and construed in accordance with the laws of the State of Kansas. SECURITY MANAGEMENT COMPANY BY: Everett S. Gille, President ATTEST: Barbara W. Rankin, Secretary SBL FUND BY: Everett S. Gille, President ATTEST: Barbara W. Rankin, Secretary SCHEDULE A ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT Schedule of Administrative and Fund Accounting Facilities and Services Security Management Company agrees to provide the Fund the following Administrative facilities and services: 1. FUND AND PORTFOLIO ACCOUNTING A. Maintenance of Fund General Ledger and Journal. B. Preparing and recording disbursements for direct fund expenses. C. Preparing daily money transfers. D. Reconciliation of all Fund bank and custodian accounts. E. Assisting Fund independent auditors as appropriate. F. Prepare daily projection of available cash balances. G. Record trading activity for purposes of determining net asset values and daily dividend. H. Prepare daily portfolio evaluation report to value portfolio securities and determine daily accrued income. I. Determine the daily net asset value per share. J. Determine the daily, monthly, quarterly, semiannual or annual dividend per share. K. Prepare monthly, quarterly, semiannual and annual financial statements. L. Provide financial information for reports to the securities and exchange commission in compliance with the provisions of the Investment Company Act of 1940 and the Securities Act of 1933, the Internal Revenue Service and other regulatory agencies as required. M. Provide financial, yield, net asset value, etc. information to NASD and other survey and statistical agencies as instructed by the Fund. N. Report to the Audit Committee of the Board of Directors, if applicable. 2. LEGAL A. Provide registration and other administrative services necessary to qualify the shares of the Fund for sale in those jurisdictions determined from time to time by the Fund's Board of Directors (commonly known as "Blue Sky Registration"). B. Provide registration with and reports to the Securities and Exchange Commission in compliance with the provisions of the Investment Company Act of 1940 and the Securities Act of 1933. C. Prepare and review Fund prospectus and Statement of Additional Information. D. Prepare proxy statements and oversee proxy tabulation for annual meetings. E. Prepare Board materials and maintain minutes of Board meetings. F. Draft, review and maintain contractual agreements between Fund and Investment Advisor, Custodian, Distributor and Transfer Agent. G. Oversee printing of proxy statements, financial reports to shareholders, prospectuses and Statements of Additional Information. H. Provide legal advice and oversight regarding shareholder transactions, administrative services, compliance with contractual agreements and the provisions of the 1940 and 1933 Acts. (Notwithstanding the above, outside counsel for the Funds may provide the services listed above as a direct Fund expense or at the option of the Funds, the Funds may employ their own counsel to perform any of these services.) SCHEDULE OF SHARE TRANSFER AND DIVIDEND DISBURSING SERVICES Security Management Company agrees to provide the Fund the following transfer agency and dividend disbursing services: 1. Maintenance of shareholder accounts, including processing of new accounts. 2. Posting address changes and other file maintenance for shareholder accounts. 3. Posting all transactions to the shareholder file, including: A. Direct purchases B. Wire order purchases C. Direct redemptions D. Wire order redemptions E. Draft redemptions F. Direct exchanges G. Transfers H. Certificate issuances I. Certificate deposits 4. Monitor fiduciary processing, insuring accuracy and deduction of fees. 5. Prepare daily reconciliations of shareholder processing to money movement instructions. 6. Handle bounced check collections. Immediately liquidate shares purchased and return to the shareholder the check and confirmation of the transaction. 7. Issuing all checks and stopping and replacing lost checks. 8. Draft clearing services. A. Maintenance of signature cards and appropriate corporate resolutions. B. Comparison of the signature on the check to the signatures on the signature card for the purpose of paying the face amount of the check only. C. Receiving checks presented for payment and liquidating shares after verifying account balance. D. Ordering checks in quantity specified by the Fund for the shareholder. 9. Mailing confirmations, checks and/or certificates resulting from transaction requests to shareholders. 10. Performing all of the Fund's other mailings, including: A. Dividend and capital gain distributions. B. Semiannual and annual reports. C. 1099/year-end shareholder reporting. D. Systematic withdrawal plan payments. E. Daily confirmations. 11. Answering all service related telephone inquiries from shareholders and others, including: A. General and policy inquiries (research and resolve problems). B. Fund yield inquiries. C. Taking shareholder processing requests and account maintenance changes by telephone as described above. D. Submit pending requests to correspondence. E. Monitor online statistical performance of unit. F. Develop reports on telephone activity. 12. Respond to written inquiries (research and resolve problems); including: A. Initiate shareholder account reconciliation proceeding when appropriate. B. Notify shareholder of bounced investment checks. C. Respond to financial institutions regarding verification of deposit. D. Initiate proceedings regarding lost certificates. E. Respond to complaints and log activities. F. Correspondence control. 13. Maintaining and retrieving all required past history for shareholders and provide research capabilities as follows: A. Daily monitoring of all processing activity to verify back-up documentation. B. Provide exception reports. C. Microfilming. D. Storage, retrieval and archive. 14. Prepare materials for annual meetings. A. Address and mail annual proxy and related material. B. Prepare and submit to Fund and affidavit of mailing. C. Furnish certified list of shareholders (hard copy or microfilm) and inspectors of election. 15. Report and remit as necessary for state escheat requirements. Approved: Fund _________________________________________SMC Everette S. Gille MODEL: SBL FUNDS --------- MAINTENANCE FEE.................................. $8.00 TRANSACTIONS..................................... $1.00 DIVIDENDS........................................ $1.00 ADMINISTRATION FEE............................... 0.00045 (BASED ON DAILY NET ASSET VALUE)
MASTER WORKSHEET A B C D E ------------------------------------------------------------------------------ 1986: TRANSACTIONS - 82 76 62 71 56 DIVIDENDS - 1 1 1 1 1 SHAREHOLDER ACCTS - 8 8 6 7 5 AVERAGE NET ASSETS - 104,150,857.26 50,141,894.67 36,603,758.20 17,678,037.53 17,393,190.51 INCOME - 2,893,670.06 2,372,681.65 2,258,629.91 2,137,524.29 1,514,339.94 EXPENSES - 670,252.11 301,247.65 227,930.13 121,890.09 113,546.44 SERVICE FEES - 78,494.06 30,063.43 23,589.25 10,053.93 9,232.24
1986 1986 SERVICE TRANSFER & EXPENSE EXPENSE FEES ADMINISTRATION PERCENT RATIO RATIO ACTUAL MODEL INCREASE ACTUAL MODEL ----------------------------------------------------------------------- SBLA 78,494.06 47,014.89 -40.10% 0.644% 0.613% SBLB 30,063.43 22,704.85 -24.48% 0.601% 0.586% SBLC 23,589.25 16,582.69 -29.70% 0.623% 0.604% SBLD 10,053.93 8,083.12 -19.60% 0.690% 0.678% SBLE 9,232.24 7,923.94 -14.17% 0.653% 0.641% AMENDMENT TO ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT WHEREAS, SBL Fund (hereinafter referred to as the "Fund") and Security Management Company (hereinafter referred to as "SMC") are parties to an Administrative Services and Transfer Agency Agreement dated April 1, 1987, (the "Administrative Services Agreement") under which SMC agrees to provide general administrative, fund accounting, transfer agency, and dividend disbursing services to the Fund in return for the compensation specified in the Administrative Services Agreement; and WHEREAS, on May 5, 1989, the Board of Directors of the Fund voted to amend the Administrative Services Agreement to provide for payment by the Fund of the fees of all directors; NOW THEREFORE, the Fund and the Management Company hereby amend the Administrative Services Agreement, dated April 1, 1987, effective May 5, 1989, as follows: Paragraph 3.B.1. shall be deleted in its entirety and the following paragraph inserted in lieu thereof: 3. EXPENSES B. DIRECT EXPENSES 1. Fees and expenses of its directors (including the fees of those directors who are deemed to be "interested persons" of the Fund as that term is defined in the Investment Company Act of 1940) and the meetings thereof; IN WITNESS WHEREOF, the parties hereto have made this Amendment to the Administrative Services Agreement this 5th day of May, 1989. SBL FUND By: Michael J. Provines, President ---------------------------------- Attest: Amy J. Lee, Secretary SECURITY MANAGEMENT COMPANY By: Michael J. Provines, President ---------------------------------- Attest: Amy J. Lee, Secretary AMENDMENT TO ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT WHEREAS, SBL Fund (hereinafter referred to as the "Fund") and Security Management Company (hereinafter referred to as "SMC") are parties to an Administrative Services and Transfer Agency Agreement dated April 1, 1987, as amended May 5, 1989, (the "Administrative Services Agreement") under which SMC agrees to provide general administrative, fund accounting, transfer agency, and dividend disbursing services to the Fund in return for the compensation specified in the Administrative Services Agreement; and WHEREAS, on July 27, 1990, the Board of Directors of the Fund voted to amend the Administrative Services Agreement to provide for payment by the Fund of the fees of only those directors who are not "interested persons" of the Fund; NOW THEREFORE, the Fund and SMC hereby amend the Administrative Services Agreement, dated April 1, 1987, effective July 27, 1990, as follows: Paragraph 3.B.1. shall be deleted in its entirety and the following paragraph inserted in lieu thereof: 3. EXPENSES B. DIRECT EXPENSES 1. Fees and expenses of its directors (except the fees of those directors who are deemed to be "interested persons" of the Fund as that term is defined in the Investment Company Act of 1940) and the meetings thereof; IN WITNESS WHEREOF, the parties hereto have made this Amendment to the Administrative Services Agreement this 27th day of July, 1990. SBL FUND By: Michael J. Provines, President ----------------------------------- Attest: Amy J. Lee, Secretary SECURITY MANAGEMENT COMPANY By: Michael J. Provines, President ----------------------------------- Attest: Amy J. Lee, Secretary AMENDMENT TO ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT WHEREAS, SBL Fund (the "Fund"), and Security Management Company (the "Management Company") are parties to an Administrative Services and Transfer Agency Agreement dated April 1, 1987 (the "Administrative Agreement"), under which the Management Company provides general administrative, fund accounting, transfer agency and dividend disbursing services to the Fund in return for the compensation specified in the Administrative Agreement; WHEREAS, on February 15, 1991, the Board of Directors of the Fund voted to amend the Administrative Agreement to provide for an increase in the compensation payable to the Management Company with respect to Series D of the Fund; and WHEREAS, on February 15, 1991, the Board of Directors of the Fund authorized the Fund to offer Series S common stock and approved amendment of the Administrative Agreement to provide that the Management Company would provide general administrative, fund accounting, transfer agency, and dividend disbursing services to Series S under the terms and conditions of the Agreement; NOW, THEREFORE, the Fund and Management Company hereby amend the Administrative Agreement dated April 1, 1987, as follows, effective April 30, 1991: 1. Schedule B shall be deleted in its entirety and the attached Schedule B inserted in lieu thereof. 2. Paragraph 7 shall be deleted in its entirety and the following paragraph inserted in lieu thereof: DELEGATION OF DUTIES SMC may, at its discretion, delegate, assign or subcontract any of the duties, responsibilities and services governed by this agreement, to its parent company, Security Benefit Group, Inc., whether or not by formal written agreement, or to any third party, provided that such arrangement with a third party has been approved by the Board of Directors of the Fund. SMC shall, however, retain ultimate responsibility to the Fund and shall implement such reasonable procedures as may be necessary for assuring that any duties, responsibilities or services so assigned, subcontracted or delegated are performed in conformity with the terms and conditions of this agreement. 3. The Administrative Agreement is hereby amended to cover Series S of the Fund. IN WITNESS WHEREOF, the parties hereto have made this Amendment to the Administrative Agreement this 26th day of April, 1991. SBL FUND By: James R. Schmank ------------------------------------ James R. Schmank, Vice President ATTEST: Amy J. Lee - ------------------------------------ Amy J. Lee, Secretary SECURITY MANAGEMENT COMPANY By: James R. Schmank ------------------------------------ James R. Schmank, Vice President ATTEST: Amy J. Lee - ------------------------------------- Amy J. Lee, Secretary SBL FUND ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT SCHEDULE B The following charges apply to all Series of SBL Fund: Maintenance Fee: $8.00 per account Transaction Fee: $1.00 Dividend Fee: $1.00 Administration Fee: .00045 (based on daily net asset value) The following charges apply only to Series D of SBL Fund: Global Administration Fee: In addition to the above fees, Series D shall pay the greater of .10 percent of its average net assets or $30,000 in the year beginning April 30, 1991, and ending April 29, 1992; the greater of .10 percent of its average net assets or $45,000 in the year beginning April 30, 1992, and ending April 29, 1993; and the greater of .10 percent of its average net assets or $60,000 thereafter. If this Agreement shall terminate before the last day of a month, compensation for that part of the month this Agreement is in effect shall be prorated in a manner consistent with the calculation of the fees set forth above. AMENDMENT TO ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT WHEREAS, SBL Fund (the "Fund"), and Security Management Company (the "Management Company") are parties to an Administrative Services and Transfer Agency Agreement dated April 1, 1987, as amended (the "Administrative Agreement"), under which the Management Company provides general administrative, fund accounting, transfer agency and dividend disbursing services to the Fund in return for the compensation specified in the Administrative Agreement; WHEREAS, on July 24, 1992, the Board of Directors of the Fund authorized the Fund to offer Series J common stock and approved amendment of the Administrative Agreement to provide that the Management Company would provide general administrative, fund accounting, transfer agency, and dividend disbursing services to Series J under the terms and conditions of the Agreement. NOW, THEREFORE, the Fund and Management Company hereby amend the Administrative Agreement dated April 1, 1987, effective October 1, 1992, to cover Series J of the Fund. IN WITNESS WHEREOF, the parties hereto have made this Amendment to the Administrative Agreement this 1st day of October, 1992. SBL FUND By: James R. Schmank ------------------------------------ James R. Schmank, Vice President ATTEST: Amy J. Lee - ------------------------------------ Amy J. Lee, Secretary SECURITY MANAGEMENT COMPANY By: James R. Schmank ------------------------------------ James R. Schmank, Sr. Vice President ATTEST: Amy J. Lee - ------------------------------------ Amy J. Lee, Secretary AMENDMENT TO ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT WHEREAS, SBL Fund (the "Fund"), and Security Management Company (the "Management Company") are parties to an Administrative Services and Transfer Agency Agreement dated April 1, 1987, as amended (the "Administrative Agreement"), under which the Management Company provides general administrative, fund accounting, transfer agency and dividend disbursing services to the Fund in return for the compensation specified in the Administrative Agreement; and WHEREAS, on February 3, 1995, the Board of Directors of the Fund authorized the Fund to offer a new series of common stock, Series K, and approved amendment of the Administrative Agreement to provide that the Management Company would provide general administrative, fund accounting, transfer agency, and dividend disbursing services to Series K under the terms and conditions of the Agreement. WHEREAS, on April 3, 1995, the Board of Directors of the Fund authorized the Fund to offer three additional new series of common stock, Series M, N and O, and approved amendment of the Administrative Agreement to provide that the Management Company would provide general administrative, fund accounting, transfer agency and dividend disbursing services to Series M, N, and O under the terms and conditions of the Agreement. NOW, THEREFORE, the Fund and the Management Company hereby amend the Administrative Agreement dated April 1, 1987, as follows, effective May 1, 1995: 1. Schedule B shall be deleted in its entirety and the attached Schedule B inserted in lieu thereof. 2. The Administrative Agreement is hereby amended to cover Series K, M, N and O of the Fund. IN WITNESS WHEREOF, the parties hereto have made this Amendment to the Administrative Agreement this 28th day of April, 1995. SBL FUND By: John D. Cleland ------------------------------------ John D. Cleland, President ATTEST: Amy J. Lee - ------------------------------------ Amy J. Lee, Secretary SECURITY MANAGEMENT COMPANY By: Jeffrey B. Pantages ------------------------------------ Jeffrey B. Pantages, President ATTEST: Amy J. Lee - ------------------------------------ Amy J. Lee, Secretary SBL FUND ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT SCHEDULE B The following charges apply to all Series of SBL Fund: Maintenance Fee: $8.00 per account Transaction Fee: $1.00 Dividend Fee: $1.00 Annual Administration Fee: .045% (based on average daily net asset values) The following charges apply only to Series K, M and N of SBL Fund. Global Administration Fee: In addition to the above fees, each of Series K, M and N shall pay an annual fee equal to the greater of .10 percent of its average net assets or (i) $30,000 in the year ending April 29, 1996; (ii) $45,000 in the year ending April 29, 1997; and (iii) $60,000 thereafter. The following charges apply only to Series D of SBL Fund. Global Administration Fee. In addition to the above fees, Series D shall pay an annual fee equal to the greater of .10 percent of its average net assets or $60,000. If this Agreement shall terminate before the last day of a month, compensation for that part of the month this Agreement is in effect shall be prorated in a manner consistent with the calculation of the fees set forth above. AMENDMENT TO ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT WHEREAS, SBL Fund (hereinafter referred to as the "Fund") and Security Management Company (hereinafter referred to as "SMC") are parties to an Administrative Services and Transfer Agency Agreement dated April 1, 1987, as amended, (the "Administrative Agreement"), under which SMC provides general administrative, fund accounting, transfer agency and dividend disbursing services to the Fund in return for the compensation specified in the Administrative Agreement; WHEREAS, on February 2, 1996, the Board of Directors of the Fund voted to amend the Administrative Agreement to provide for payment by the Fund for costs associated with preparing and transmitting electronic filings to the Securities and Exchange Commission or any other regulating authority; NOW THEREFORE, the Fund and SMC hereby amend paragraph 3B of the Administrative Agreement, effective February 2, 1996, by adding the following language at the end of paragraph 3B: 11. Costs associated with the preparation and transmission of any electronic filings to the Securities and Exchange Commission or any other regulating authority. IN WITNESS WHEREOF, the parties hereto have made this Amendment to the Administrative Agreement this 2nd day of February, 1996. SBL FUND By: John D. Cleland ------------------------------------ John D. Cleland, President ATTEST: Amy J. Lee - ------------------------------------ Amy J. Lee, Secretary SECURITY MANAGEMENT COMPANY By: Jeffrey B. Pantages ------------------------------------ Jeffrey B. Pantages, President ATTEST: Amy J. Lee - ------------------------------------ Amy J. Lee, Secretary EX-99.B9C 3 ANALYTICAL RESEARCH AGREEMENT - TEMPLETON ANALYTICAL RESEARCH AGREEMENT AGREEMENT, made as of the second day of January 1996 between Templeton/Franklin Investment Services, Inc. ("TFIS") and Security Management Company ("SMC"). WHEREAS, Templeton/Franklin Investment Services, Inc. is an indirectly wholly-owned subsidiary of Templeton Worldwide, Inc., which in turn is a wholly-owned subsidiary of Franklin Resources, Inc.; WHEREAS, TFIS is an investment advisory firm which specializes in U.S. and international equity markets; WHEREAS, SMC is a registered investment adviser under the Investment Advisers Act of 1940, as amended, and engages in the business of acting as an investment adviser; WHEREAS, SMC desires to retain the services of TFIS to provide certain analytical research services to SMC with respect to its responsibilities to certain of its clients; NOW THEREFORE, in consideration of the mutual agreements herein contained, TFIS and SMC agree as follows: 1. TFIS agrees to provide SMC with such research and data on domestic and international equity securities as specified in paragraph 6, and which SMC determines is relevant in providing investment advisory services to its clients. SMC, or its designee, will identify for TFIS (i) the sectors of the domestic equity market for which it seeks research and (ii) the countries in the international equity market for which it seeks research. With respect to each particular sector or country identified by SMC or its designee, TFIS will provide a daily list of securities which meet its research analytics selection criteria as specified in paragraph 6. SMC, pursuant to its investment management discretion on behalf of its clients, will independently evaluate the investment characteristics of such securities and consider other factors it deems relevant before ultimately deciding on which securities to purchase or sell on behalf of its clients. 2. As compensation for the analytical research services to be provided to SMC pursuant to this Agreement, SMC agrees to pay TFIS an analytical research fee of .30% on an annual basis of the first $50 million of the average daily net equity securities assets, and .25% on an annual basis of the average daily net equity securities assets in excess of $50 million of those clients for which the research provided hereunder is used. Such fee shall be calculated daily and payable monthly. 3. It is understood that the services provided by TFIS are not to be deemed exclusive and nothing in this Agreement shall preclude TFIS from providing similar services to other clients, including clients which may invest in the same type of securities as set forth in the data transmitted hereunder, so long as its services under this Agreement are not impaired thereby. Nothing in this Agreement shall be deemed to impose upon TFIS any obligations in the course of providing analytic research services hereunder to identify securities which TFIS or affiliated entities may purchase for itself for its own accounts or the accounts or any client. 4. During the term of this Agreement, TFIS will pay all expenses incurred by it, its staff and their activities, in connection with the services to be provided by it under this Agreement. 5. Nothing herein shall be construed as constituting TFIS or SMC as agent of the other. 6. It is understood that TFIS will contract with TQA Research, Inc. ("TQA") and the analytical research provided hereunder will be derived from information supplied TFIS by TQA. Research data will not be originated by TFIS. In addition to relaying information supplied by TQA, TFIS will monitor such information and provide the following additional services in connection therewith: (i) review any fundamental analysis and support the security selection process for any REIT positions among TQA's recommended securities; (ii) review long-term growth rate assumptions used in TQA's stock valuation model; (iii) review country asset allocation decisions and relative weightings; (iv) review domestic industry/sector weightings on a fundamental basis; (v) review First Call/Zachs earnings estimate revisions to capture sentiment not yet captured or reflected in TQA's Estimate Revision Model (ERM) and Forecast Risk Factor (FRF) Model; (vi) review non-US securities generated from TQA stock selection models for liquidity constraints; and (vii) review cost analysis of using foreign index futures (roll premiums, commissions, etc.) for individual country exposure versus cost of constructing baskets of stocks (opportunity cost, market impact, etc.). 7. During the term of this Agreement, SMC (or any of its subsidiaries or affiliates) shall be entitled to refer to TFIS as a provider of research services to any client on whose behalf SMC is using the data provided hereunder. SMC agrees not to characterize the nature of services provided hereunder as investment advisory services as described under the Investment Company Act of 1940 (the "1940 Act"). SMC also agrees to submit to TFIS copies of any material prepared for distribution to SMC clients or other members of the public which refer to TFIS by name and/or the research services provided pursuant to this Agreement within 10 days of first use. 8. TFIS represents and warrants to SMC that (i) it is a validly existing corporation under the laws of the State of Delaware; (ii) no provisions of any contract, agreement or understanding to which TFIS, or any of its subsidiaries or affiliates, is a party prevents it from providing the services contemplated by this Agreement; and (iii) it will meet (and will continue to meet for the duration of this Agreement) all applicable federal or state requirements, or the applicable requirements of any self regulatory organization, necessary to be met in order to perform the services contemplated by this Agreement. SMC represents and warrants to TFIS that (i) it is a validly existing corporation under the laws of the State of Kansas; (ii) no provisions of any contract, agreement or understanding to which SMC or any of its subsidiaries or affiliates, is a party prevents it from providing the services contemplated by this Agreement; and (iii) it will meet (and continue to meet for the duration of this Agreement) all applicable federal and state requirements, or the applicable requirements of any self regulatory organization, necessary to be met in order to perform the services contemplated by this Agreement. 9. TFIS agrees to maintain records of its activities and of the information forwarded by it to SMC pursuant to Section 6 of this Agreement for a period of time on which the parties may reasonably agree. TFIS further agrees to release copies of such records upon reasonable advance notice. 10. This Agreement shall become effective as of January 2, 1996 and shall continue in effect for one year from that date. If not sooner terminated, this Agreement shall continue in effect for successive periods of 12 months each thereafter. 11. Notwithstanding the foregoing, this Agreement may be terminated by either party at any time, without the payment of any penalty, on sixty (60) days' written notice to the other party. TFIS and SMC also agree that this Agreement shall automatically terminate in the event that the investment advisory contract between SMC and the Fund is terminated, or TFIS's related analytical research agreement with TQA is terminated for any reason. 12. This Agreement will terminate automatically in the event of its assignment. 13. This Agreement shall be construed in accordance with the laws of the State of New York without regard to principles of conflicts of laws. 14. SMC agrees not to hold TFIS accountable or liable with respect to the nature of TFIS's services unless TFIS acts with reckless disregard of its duties hereunder or violates applicable federal or state law in the performance of its duties. In addition, SMC agrees to indemnify TFIS, each of TFIS's affiliated companies, and all of the divisions, subsidiaries, directors, officers, agents, employees and assigns of each of the foregoing (collectively, "Indemnified Parties"), against and from any and all demands, damages, liabilities, and losses, or any pending or completed actions, claims, suits, complaints, proceedings, or investigations (including all expenses of litigation or arbitration, judgments, fines or amounts paid in any settlement consented to by TFIS) ("Actions") to which TFIS may be or become subject as a result or arising our of (a) any negligent act or omission by SMC or its agents relating to the performance of its obligations under this Agreement; (b) any breach of SMC's representations or warranties contained in this Agreement; or (c) SMC's failure to comply with any of the terms of this Agreement. This indemnification is understood to apply in the case of, among other things, any Actions brought by shareholders or beneficial holders of interests in investment companies or other investment vehicles advised by SMC or any SMC affiliates, and to administrative or other legal actions brought by federal or state regulatory organizations with respect in any way whatsoever to any of the services to be provided by TFIS hereunder or the way in which such services are represented or described to any client of SMC or prospective client of SMC. SMC agrees further to hold TFIS harmless from any Actions resulting from any allegation by any party that TQA, or the information TQA provides to TFIS and thereby to SMC, infringes in any way upon the patents, copyright or trademark belonging to any third party. 15. Notice required to be given under this Agreement by either party shall be in writing by personal delivery or certified mail, return receipt requested or by confirmed telecopy. Notice shall be to the addresses set forth on the signature page hereto. 16. This Agreement sets forth the entire Agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements between the parties concerning such subject matter. This Agreement may not be amended except by a writing signed by the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized corporate officers as of the day and year first above written. TEMPLETON/FRANKLIN INVESTMENT SERVICES INC. By Deborah R. Gatzek ----------------------------------- Deborah R. Gatzek Senior Vice President Address: 777 Mariners Island Blvd. San Mateo, CA 94404 SECURITY MANAGEMENT COMPANY By James R. Schmank ----------------------------------- James R. Schmank Senior Vice President Address: 700 Harrison Street Topeka, Kansas 66636 EX-99.B11 4 CONSENT OF INDEPENDENT AUDITORS Consent of Independent Auditors We consent to the reference to our firm under the captions "Financial Highlights" and "Independent Auditors" in the Registration Statement (Form N-1A) and related prospectus of SBL Fund and to the incorporation by reference of our report dated January 26, 1996, with respect to the financial statements of SBL Fund included in its Annual Report to Shareholders for the year ended December 31, 1995. Ernst & Young LLP Ernst & Young LLP Kansas City, Missouri February 29, 1996 EX-99.B16 5 SCHEDULE OF COMPUTATION OF PERFORMANCE Item 24.b. Exhibit (16) TOTAL RETURN SBL FUND, SERIES A Total Return from December 31, 1985, to December 31, 1995. Assuming initial investment of $1,000 at offering price at beginning of period 1,000 / 12.30 = 81.300 shares. Ending value of initial investment at December 31, 1995, NAV price = 81.300 shares x 21.03 = 1,709.73. Ending value of shares received from reinvestment of all dividends at NAV = 85.358 shares x 21.03 = 1,795.07. Total ending redeemable value: 1,709.73 1,795.07 -------- 3,504.80 Total Return: 3,504.80 - 1,000 = 2,504.80 2,504.80 -------- 1,000 = 250.48% Item 24.b. Exhibit (16) SBL FUNDS' 1, 5 AND 10-YEAR AVERAGE ANNUAL RETURN AS OF DECEMBER 31, 1995 Series A 1 Year +36.76% ------ 1000 (1+T) 1 = 1367.64 (1+T) 1 = 1.3676 1+T = 1.3676 T = .3676 5 Year +18.26% ------ 1000 (1+T) 5 = 2313.35 ((1+T) 5)1/5 = (2.31335)1/5 1+T = 1.1826 T = .1826 10 Year +13.36% ------ 1000 (1+T) 10 = 3504.27 ((1+T) 10)1/10 = (3.50427)1/10 1+T = 1.1336 T = .1336 Item 24.b. Exhibit (16) Series B 1 Year +30.07% ------ 1000 (1+T) 1 = 1300.67 (1+T) 1 = 1.30067 1+T = 1.30067 T = .30067 5 Year +15.15% ------ 1000 (1+T) 5 = 2024.42 ((1+T) 5)1/5 = (2.02442)1/5 1+T = 1.1515 T = .1515 10 Year +13.85% ------ 1000 (1+T) 10 = 3660.17 ((1+T) 10)1/10 = (3.66017)1/10 1+T = 1.385 T = .1385 Item 24.b. Exhibit (16) Series C 1 Year +5.41% ----- 1000 (1+T) 1 = 1054.08 (1+T) 1 = 1.05408 1+T = 1.05408 T = .0541 5 Year +3.44% ----- 1000 (1+T) 5 = 1184.43 ((1+T) 5)1/5 = (1.18443)1/5 1+T = 1.0344 T = .0344 10 Year +5.40% ----- 1000 (1+T) 10 = 1693.49 ((1+T) 10)1/10 = (1.69349)1/10 1+T = 1.0540 T = .0540 Item 24.b. Exhibit (16) Series D 1 Year +10.86% ------ 1000 (1+T) 1 = 1108.63 (1+T) 1 = 1.10863 T = .1086 5 Year +10.48% ------ 1000 (1+T) 5 = 1646.02 (1+T) 5 = 1.64602 ((1+T) 5)1/5 = (1.64602)1/5 1+T = 1.1048 T = .1048 10 Years +1.80% ----- 1000 (1+T) 10 = 1195.48 (1+T) 10 = 1.19548 ((1+T) 10)1/10 = (1.19548)1/10 1+T = 1.018 T = .018 Item 24.b. Exhibit (16) Series E 1 Year +18.60% ------ 1000 (1+T) 1 = 1186.03 (1+T) 1 = 1.18603 1+T = 1.18603 T = .1860 5 Year +9.33% ----- 1000 (1+T) 5 = 1562.21 (1+T) 5 = 1.56221 ((1+T) 5)1/5 = (1.56221)1/5 1+T = 1.0933 T = .0933 10 Years +8.42% ----- 1000 (1+T) 10 = 2244.59 (1+T) 10 = 2.24459 ((1+T) 10)1/10 = (2.24459)1/10 1+T = 1.0842 T = .0842 Item 24.b. Exhibit (16) Series J 1 Year +19.49% ------ 1000 (1+T) 1 = 1194.94 (1+T) 1 = 1.19494 1+T = 1.19494 T = .1949 (Since Inception) 3.25 Years +15.71% ------ 1000 (1+T) 3.25 = 1606.96 (1+T) 3.25 = 1.60696 ((1+T) 3.25)1/3.25 = (1.60696)1/3.25 1+T = 1.1571 T = .1571 Item 24.b. Exhibit (16) Series S 1 Year +27.74% ------ 1000 (1+T) 1 = 1277.42 (1+T) 1 = 1.27742 1+T = 1.27742 T = .2774 (Since Inception) 4.67 Years +11.86% ------ 1000 (1+T) 4.67 = 1687.87 (1+T) 4.67 = 1.68787 ((1+T) 4.67)1/4.67 = (1.68787)1/4.67 1+T = 1.1186 T = .1186 Item 24.b. Exhibit (16) Series K 1 Year +13.48% ------ (Since Inception) 1000 (1+T) .58 = 1076.10 ((1+T) .58)1/.58 = (1.07610)1/.58 1+T = 1.1348 T = .1348 Series M 1 Year +12.55% ------ (Since Inception) 1000 (1+T) .58 = 1071.00 ((1+T) .58)1/.58 = (1.07100)1/.58 1+T = 1.1255 T = .1255 Series N 1 Year +12.92% ------ (Since Inception) 1000 (1+T) .58 = 1073.00 ((1+T) .58)1/.58 = (1.073)1/.58 1+T = 1.1292 T = .1292 Series O 1 Year +31.09% ------ (Since Inception) 1000 (1+T) .58 = 1170.00 ((1+T) .58)1/.58 = (1.170)1/.58 1+T = 1.3109 T = .3109 EX-27.A 6 FDS -- SBL FUND SERIES A WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000217087 SBL FUND 1 SERIES A 1,000 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 400,017 519,127 1,883 212 0 521,222 0 0 1,331 1,331 0 366,060 24,721 20,765 4,756 0 29,965 0 119,110 519,891 6,693 1,764 0 3,590 4,867 30,112 97,760 132,739 0 3,560 15,009 0 9,705 6,692 943 187,603 3,450 14,862 0 0 3,236 0 3,599 431,403 16.00 .18 5.648 .153 .645 0 21.03 .008 0 0
EX-27.B 7 FDS -- SBL FUND SERIES B WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000217087 SBL FUND 2 SERIES B 1,000 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 649,592 793,541 4,507 0 0 798,048 0 0 2,936 2,936 0 543,860 23,421 22,425 18,308 0 88,995 0 143,949 795,112 9,939 14,522 0 5,757 18,704 99,035 63,506 181,245 0 12,340 0 0 4,928 4,315 383 199,959 11,944 (10,039) 0 0 5,199 2 5,770 693,165 26.54 .79 7.16 .54 0 0 33.95 .008 0 0
EX-27.C 8 FDS -- SBL FUND SERIES C WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000217087 SBL FUND 3 SERIES C 1,000 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 105,181 105,169 993 277 0 106,439 0 0 1,003 1,003 0 100,593 8,541 9,671 4,854 0 0 0 (12) 105,435 0 5,577 0 569 5,008 0 16 5,024 0 4,193 0 0 13,111 14,586 345 (13,233) 4,039 0 0 0 475 0 573 94,946 12.27 .74 (0.085) .585 0 0 12.34 .006 0 0
EX-27.D 9 FDS -- SBL FUND SERIES D WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000217087 SBL FUND 4 SERIES D 1,000 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 163,258 171,803 4,444 4,404 0 180,651 2,164 0 706 2,870 0 156,694 31,952 29,002 4,448 0 6,454 0 10,185 177,781 3,092 518 0 2,134 1,476 10,198 6,880 18,554 0 28 1,836 0 15,967 13,363 346 30,749 (640) 0 0 1,733 1,635 0 2,134 164,044 5.07 .05 .499 .001 .058 0 5.56 .009 0 0
EX-27.E 10 FDS -- SBL FUND SERIES E WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000217087 SBL FUND 5 SERIES E 1,000 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 117,554 124,457 1,793 308 0 126,558 0 0 906 906 0 121,146 9,769 9,298 0 7,652 (10,049) 0 6,903 125,652 0 8,777 0 1,000 7,777 3,044 9,250 20,071 0 7,576 0 0 4,586 4,737 622 18,574 7,450 (13,093) 0 0 884 0 1,003 117,830 11.52 .74 1.36 .76 0 0 12.86 .009 0 0
EX-27.J 11 FDS -- SBL FUND SERIES J WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000217087 SBL FUND 7 SERIES J 1,000 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 83,805 95,417 1,328 200 0 96,945 3,410 0 155 3,565 0 76,089 5,814 5,725 218 0 5,461 0 11,612 93,380 461 463 0 706 218 11,201 3,420 14,839 0 0 0 0 2,964 2,875 0 16,440 0 (5,736) 0 0 638 0 713 85,118 13.44 .04 2.58 0 0 0 16.06 .008 0 0
EX-27.K 12 FDS -- SBL FUND SERIES K WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000217087 SBL FUND 8 SERIES K 1,000 U.S. DOLLARS 7-MOS DEC-31-1995 JUN-01-1995 DEC-31-1995 1 5,406 5,490 1,803 56 0 7,349 1,630 0 41 1,671 0 5,594 555 0 0 0 0 0 84 5,678 0 328 0 42 286 (17) 84 353 0 246 23 16 875 348 28 5,678 0 0 0 0 19 0 52 4,458 10.00 .54 .22 .466 .044 .03 10.22 .016 0 0
EX-27.M 13 FDS -- SBL FUND SERIES M WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000217087 SBL FUND 9 SERIES M 1,000 U.S. DOLLARS 7-MOS DEC-31-1995 JUN-01-1995 DEC-31-1995 1 16,191 16,225 168 1 0 16,394 356 0 61 417 0 15,402 1,492 0 310 0 153 0 111 15,976 71 180 0 95 156 308 111 354 0 0 0 0 1,953 461 0 5,678 0 0 0 0 49 0 95 0 10.00 .169 .541 0 0 0 10.71 .019 0 0
EX-27.N 14 FDS -- SBL FUND SERIES N WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000217087 SBL FUND 10 SERIES N 1,000 U.S. DOLLARS 7-MOS DEC-31-1995 JUN-01-1995 DEC-31-1995 1 10,625 11,011 101 0 0 11,112 504 0 28 532 0 10,063 986 0 109 0 23 0 385 10,580 47 141 0 76 112 19 386 517 0 0 0 0 1,067 81 0 10,580 0 0 0 0 41 0 76 6,995 10.00 .156 .574 0 0 0 10.73 .019 0 0
EX-27.O 15 FDS -- SBL FUND SERIES O WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000217087 SBL FUND 11 SERIES O 1,000 U.S. DOLLARS 7-MOS DEC-31-1995 JUN-01-1995 DEC-31-1995 1 12,695 13,701 221 0 0 221 356 0 39 39 0 12,409 1,156 0 107 0 6 0 1,006 13,528 99 57 0 49 107 6 1,006 1,119 0 0 0 0 1,243 87 0 13,528 0 0 0 0 36 0 49 6,178 10.00 .166 1.534 0 0 0 11.70 .014 0 0
EX-27.S 16 FDS -- SBL FUND SERIES S WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000217087 SBL FUND 6 SERIES S 1,000 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 28,261 35,904 0 833 163 36,900 0 0 70 70 0 27,851 2,234 1,892 213 0 1,123 0 7,643 36,830 276 199 0 251 224 1,729 5,305 7,258 0 159 0 0 698 366 10 24,539 147 (606) 0 0 224 0 256 29,901 12.97 .09 3.507 0 .077 0 16.49 .009 0 0
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