-----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, Bf8c86Vx0CcvvlsdWg9iGWxNa2/ITLFDw6/WxykCpisqoYLO8jvOiohe6yTaVSax Qq1ED6VAMBHwJAJH49dCfw== 0001047469-99-007963.txt : 19990302 0001047469-99-007963.hdr.sgml : 19990302 ACCESSION NUMBER: 0001047469-99-007963 CONFORMED SUBMISSION TYPE: N-14/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19990301 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN LIFE VARIABLE ANNUITY FUND A CENTRAL INDEX KEY: 0000038748 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 370281650 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-14/A SEC ACT: SEC FILE NUMBER: 333-70813 FILM NUMBER: 99554613 BUSINESS ADDRESS: STREET 1: FRANKLIN SQ CITY: SPRINGFIELD STATE: IL ZIP: 62713 BUSINESS PHONE: 2175282011 MAIL ADDRESS: STREET 1: FRANKLIN SQUARE CITY: SPRINGFIELD STATE: IL ZIP: 62713-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN GENERAL SERIES PORTFOLIO CO /TX CENTRAL INDEX KEY: 0000719423 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 720029692 STATE OF INCORPORATION: TX FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: N-14/A SEC ACT: SEC FILE NUMBER: 333-70813-01 FILM NUMBER: 99554614 BUSINESS ADDRESS: STREET 1: 2929 ALLEN PARKWAY L7-01 STREET 2: C/O VARIABLE ANNUITY LIFE INSURANCE CO CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7138315016 FORMER COMPANY: FORMER CONFORMED NAME: VALIC TIMED OPPORTUNITY FUND INC DATE OF NAME CHANGE: 19920329 N-14/A 1 N-14/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 1999 File No. 333-70813 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/ Pre-Effective Amendment No. 1 / / Post-Effective Amendment No.__ (CHECK APPROPRIATE BOX OR BOXES.) EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER: FRANKLIN LIFE VARIABLE ANNUITY FUND A AMERICAN GENERAL SERIES PORTFOLIO COMPANY AREA CODE AND TELEPHONE NUMBER: (800) 528-2011, Ext. 2591 (713) 526-5251 ADDRESS OF PRINCIPAL EXECUTIVE OFFICES: c/o The Franklin Life Insurance Company 2929 Allen Parkway #1 Franklin Square Houston, Texas 77019 Springfield, Illinois 62713 NAME AND ADDRESS OF AGENT FOR SERVICE: Elizabeth E. Arthur, Esquire Nori L. Gabert, Esquire The Franklin Life Insurance Company The Variable Annuity Life Insurance #1 Franklin Square Company Springfield, Illinois 62713 2929 Allen Parkway Houston, Texas 77019 COPIES OF ALL COMMUNICATIONS TO: Stephen E. Roth, Esquire John A. Dudley, Esquire Sutherland Asbill & Brennan LLP Sullivan & Worcester LLP 1275 Pennsylvania Avenue, N.W. 1025 Connecticut Avenue, N.W. Washington, D.C. 20004-2415 Washington, D.C. 20036 TITLE OF SECURITIES BEING REGISTERED: Units of interest in variable annuity contracts; and shares of common stock APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as possible after effectiveness of this registration statement It is proposed that this filing will become effective on March 1, 1999, pursuant to Rule 488(a) under the Securities Act of 1933. - -------------------------------------------------------------------------------- IMPORTANT NOTICE: Please complete the enclosed Proxy and return it as soon as possible. For your convenience you may vote by faxing your Proxy to Shareholder Communications Corporation at 1-800-733-1885 - -------------------------------------------------------------------------------- Dear Contract Owner: Enclosed you will find a Notice and Proxy Statement/Prospectus for special meetings of contract owners of Franklin Life Variable Annuity Fund A ("Fund A"), Franklin Life Variable Annuity Fund B ("Fund B"), and Franklin Life Money Market Variable Annuity Fund C ("Fund C") (collectively, the "Funds"), to be held on April 8, 1999. There is an important matter on which you, as a contract owner of Fund A, Fund B, or Fund C, are being asked to vote -- approval of a reorganization of the Funds into a unit investment trust which would invest in shares of specified portfolios of American General Series Portfolio Company. After reviewing this matter carefully, the Board of Managers of each of the Funds unanimously recommends that you vote FOR the proposal. YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF VOTES YOU HOLD. PLEASE TAKE A FEW MINUTES TO REVIEW THIS MATERIAL, CAST YOUR VOTE ON THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED POSTAGE-PAID ENVELOPE OR, IF MORE CONVENIENT, PLEASE FAX YOUR VOTE, FOLLOWING THE INSTRUCTIONS IN THE BOX AT THE TOP OF THIS PAGE. YOUR PROMPT RESPONSE IS NEEDED SO THAT THE NECESSARY QUORUM AND VOTE WILL BE OBTAINED. The Funds have retained Shareholder Communications Corporation, a professional proxy solicitation firm, to assist contract owners in the voting process. As the date of the meetings approaches, if we have not already heard from you, you may receive a telephone call from Shareholder Communications Corporation reminding you to exercise your right to vote. Elizabeth E. Arthur Secretary Springfield, Illinois March 1, 1999 FRANKLIN LIFE VARIABLE ANNUITY FUND A FRANKLIN LIFE VARIABLE ANNUITY FUND B FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C c/o The Franklin Life Insurance Company #1 Franklin Square Springfield, Illinois 62713 _________________________________ NOTICE OF SPECIAL MEETINGS OF CONTRACT OWNERS To owners of variable annuity contracts issued by The Franklin Life Insurance Company eligible to vote in connection with certain separate accounts established by The Franklin Life Insurance Company. The Board of Managers of each of Franklin Life Variable Annuity Fund A, Franklin Life Variable Annuity Fund B, and Franklin Life Money Market Variable Annuity Fund C (each, a "Fund" and collectively, the "Funds") hereby gives notice that they intend to hold special meetings of owners of the variable annuity contracts eligible to vote in connection with the Funds on April 8, 1999 at 1:00 p.m., Central Standard Time, at The Franklin Life Insurance Company's home office at #1 Franklin Square, Springfield, Illinois 62713. The special meetings are for the purposes of considering and acting on the following matters, as set forth in the accompanying Proxy Statement/Prospectus: 1. To approve or to disapprove an Agreement and Plan of Reorganization and related transactions whereby: - Franklin Life Variable Annuity Fund A will be renamed and restructured into a single unit investment trust comprising three investment divisions (the "Continuing Fund"); - each Fund's assets will be transferred to one of the three investment divisions in the Continuing Fund such that contract owners' interests will continue as interests in the Continuing Fund; and - each investment division will invest exclusively in shares of either the Stock Index Fund or the Money Market Fund of American General Series Portfolio Company. 2. To consider and act upon such other business as may properly come before the special meetings or any adjournment(s) or postponement(s) thereof. The Proxy Statement/Prospectus dated March 1, 1999 that accompanies this notice discusses the proposed Agreement and Plan of Reorganization and related transactions in detail. As a contract owner of record at the close of business on February 1, 1999, you have the right to vote at the special meetings or any adjournment(s) or postponement(s) thereof. If you do not expect to attend the special meetings in person, please complete, sign and date the accompanying proxy, and return it immediately in the enclosed postage-paid envelope so that you may be represented at the special meetings. RETURNING THE PROXY WILL NOT RESTRICT OR IMPAIR YOUR RIGHT TO REVOKE THE PROXY OR TO ATTEND AND VOTE PERSONALLY AT THE SPECIAL MEETINGS. If you later decide to attend the special meetings in person, you may vote at the special meetings even though you previously submitted a proxy. The Board of Managers of each of the Funds is soliciting the proxy. SPECIAL NOTICE: To take action on the proposed Agreement and Plan of Reorganization and related transactions, it is necessary that contract owners entitled to cast at least 50% of all votes eligible to be cast with respect to each of the Funds, voting separately, be present in person or represented by proxy at the special meetings. To be implemented, each Fund must approve the Agreement and Plan of Reorganization by the requisite vote of persons eligible to vote with respect to that Fund. THEREFORE, THE BOARD OF MANAGERS OF EACH FUND URGENTLY REQUESTS THAT CONTRACT OWNERS COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY SO THAT THE NECESSARY QUORUM AND VOTE WILL BE OBTAINED. By Order of the Board of Managers of each of Franklin Life Variable Annuity Fund A Franklin Life Variable Annuity Fund B Franklin Life Money Market Variable Annuity Fund C /s/ Elizabeth E. Arthur ----------------------- Elizabeth E. Arthur Secretary Springfield, Illinois March 1, 1999 2 PART A INFORMATION REQUIRED IN THE PROXY STATEMENT/PROSPECTUS March 1, 1999 PROXY STATEMENT of FRANKLIN LIFE VARIABLE ANNUITY FUND A FRANKLIN LIFE VARIABLE ANNUITY FUND B FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C PROSPECTUS of FRANKLIN LIFE VARIABLE ANNUITY FUND A AMERICAN GENERAL SERIES PORTFOLIO c/o The Franklin Life Insurance COMPANY Company 2929 Allen Parkway #1 Franklin Square Houston, Texas 77019 Springfield, Illinois 62713 (800) 633-8960 (800) 528-2011 The Boards of Managers of Franklin Life Variable Annuity Fund A, Franklin Life Variable Annuity Fund B, and Franklin Life Money Market Variable Annuity Fund C (each, a "Fund" and collectively, the "Funds") are furnishing this Proxy Statement/Prospectus to owners of certain individual variable annuity contracts (the "Contracts") issued by The Franklin Life Insurance Company through the Funds, to solicit the enclosed proxies for use at the special meetings (the "Meetings") of such owners to be held on April 8, 1999 at 1:00 p.m., Central Standard Time, at The Franklin Life Insurance Company's home office at #1 Franklin Square, Springfield, Illinois 62713. The Meetings are being held for the purposes set forth below and in the accompanying Notice of the Special Meetings. Owners of the variable annuity contracts ("Contract Owners") are being asked to approve or to disapprove an Agreement and Plan of Reorganization (the "Agreement") and related transactions (together, the Agreement and related transactions are the "Reorganization") whereby: - Franklin Life Variable Annuity Fund A will be restructured into a single unit investment trust comprising three investment divisions ("Subaccount A," "Subaccount B," and "Subaccount C") and renamed as Franklin Life Variable Annuity Fund (the "Continuing Fund"); - each Fund's assets will be liquidated and transferred to one of the three Subaccounts such that Contract Owners' interests will continue as interests in the Continuing Fund; and - each Subaccount will invest exclusively in shares of a specified portfolio of American General Series Portfolio Company as follows: Subaccount A and Subaccount B will invest exclusively in shares of the Stock Index Fund, and Subaccount C will invest exclusively in shares of the Money Market Fund. - -------------------------------------------------------------------------------- THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, AND HAS NOT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- 1 American General Series Portfolio Company (the "Series Company") is a mutual fund that currently consists of several investment portfolios including the Stock Index Fund and the Money Market Fund (together, the Stock Index Fund and the Money Market Fund are referred to herein as the "Series Company Funds"). If Contract Owners approve the Reorganization, then immediately following the consummation of the Reorganization, each Contract Owner will have an interest in the number of units in a Subaccount of the Continuing Fund having a value equal to the value of that Contract Owner's interest in Franklin Life Variable Annuity Fund A, Franklin Life Variable Annuity Fund B, or Franklin Life Money Market Variable Annuity Fund C, respectively, immediately prior to the Reorganization. This combination Proxy Statement/Prospectus concisely sets forth information about the Reorganization, the proposed future operation of the Continuing Fund, and the Series Company Funds that the persons entitled to vote in respect of each of the Funds (the "Fund Voters") should know before casting their votes. Please retain this Proxy Statement/Prospectus for future reference. Copies of the current prospectus for each of the Funds, and the current prospectus for the Series Company are attached as appendices to this Proxy Statement/Prospectus and are incorporated herein by reference. The Boards of Managers have filed a Statement of Additional Information relating to matters discussed in this Proxy Statement/Prospectus with the Securities and Exchange Commission. The Statement of Additional Information is dated the same date as this Proxy Statement/Prospectus and is incorporated herein by reference. The Statement of Additional Information is available upon oral or written request and without charge. The Franklin Life Insurance Company ("The Franklin") will also furnish, without charge, a copy of a Fund's Annual Report dated December 31, 1998 to a Fund Voter upon request. Please direct such a request (for the Statement and/or Annual Report) to The Franklin Life Insurance Company, #1 Franklin Square, Springfield, Illinois 62713, Attention: Box 1018 (telephone 800-528-2011, Extension 2591). Direct other inquiries about the Funds to The Franklin at the same address or telephone number. 2 TABLE OF CONTENTS DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 General Information Regarding Proxy Solicitation . . . . . . . . . . . . . . 5 SYNOPSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Comparative Fee Table -- Fund A and Stock Index Fund . . . . . . . . . . 10 Comparative Fee Table -- Fund B and Stock Index Fund . . . . . . . . . . 11 Comparative Fee Table -- Fund C and Money Market Fund . . . . . . . . . 12 Comparing Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . 14 PRINCIPAL RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 THE PROPOSED REORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . 16 Description of the Reorganization . . . . . . . . . . . . . . . . . . . 16 Reasons for the Transactions . . . . . . . . . . . . . . . . . . . . . . 18 Actual and Pro Forma Capitalization . . . . . . . . . . . . . . . . . . 20 Comparing Investment Objectives, Policies and Restrictions . . . . . . . 20 Comparative Performance . . . . . . . . . . . . . . . . . . . . . . . . 26 INFORMATION ON THE FUNDS AND THE SERIES COMPANY . . . . . . . . . . . . . . . 27 Management of the Funds and the Series Company . . . . . . . . . . . . . 28 Organization and Operation of the Series Company Funds . . . . . . . . . 29 Characteristics of Series Company Shares . . . . . . . . . . . . . 29 Dividends, Distributions, and Taxes . . . . . . . . . . . . . . . . 29 Voting of Shares . . . . . . . . . . . . . . . . . . . . . . . . . 30 Certain Ownership Interests . . . . . . . . . . . . . . . . . . . . 31 Sale of the Contracts and Series Company Shares . . . . . . . . . . . . 31 Deductions, Charges, Fees, and Expenses . . . . . . . . . . . . . . . . 31 Deductions and Charges Under the Contracts . . . . . . . . . . . . 31 Contracts Issued Through Fund A . . . . . . . . . . . . . . . . . . 32 Contracts Issued Through Fund B . . . . . . . . . . . . . . . . . . 32 Contracts Issued Through Fund C . . . . . . . . . . . . . . . . . . 32 Fees and Expenses of the Series Company Funds . . . . . . . . . . . 33 Supplementary Financial Information . . . . . . . . . . . . . . . . . . 33 Financial Highlights for the Funds . . . . . . . . . . . . . . . . 33 Financial Highlights for the Series Company Funds . . . . . . . . . 34 AVAILABILITY OF CERTAIN OTHER INFORMATION . . . . . . . . . . . . . . . . . . 35 OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Appendix A - Agreement and Plan of Reorganization Appendix B - Prospectus for Franklin Life Variable Annuity Fund A Appendix C - Prospectus for Franklin Life Variable Annuity Fund B Appendix D - Prospectus for Franklin Life Money Market Variable Annuity Fund C Appendix E - Prospectus for American General Series Portfolio Company 3 DEFINITIONS Agreement - The Agreement and Plan of Reorganization among each of the Funds and The Franklin. Continuing Fund - Franklin Life Variable Annuity Fund. This is the successor to Franklin Life Variable Annuity Fund A, after it is restructured into a unit investment trust and combined with Fund B and Fund C. Contracts - One of the variable annuity contracts issued by The Franklin Life Insurance Company through the Funds. Contract Owner - An owner of a variable annuity contract issued by The Franklin through the Funds. The Franklin - The Franklin Life Insurance Company Funds (Fund A, Fund B, Fund C) - Franklin Life Variable Annuity Fund A, Franklin Life Variable Annuity Fund B; and Franklin Life Money Market Variable Annuity Fund C Fund Voters - Persons eligible to vote in respect to any of the Funds Reorganization - The Agreement and related transactions whereby Fund A will be restructured into a unit investment trust (the Continuing Fund), each Fund's assets will be liquidated and transferred to the Continuing Fund, and the Continuing Fund will purchase shares of the Series Company Funds. Series Company - American General Series Portfolio Company Series Company Funds - The Stock Index Fund and the Money Market Fund of American General Series Portfolio Company. Subaccount - One of the three investment divisions of the Continuing Fund. VALIC - The Variable Annuity Life Insurance Company, the investment adviser to the Series Company Funds. 4 GENERAL INFORMATION REGARDING PROXY SOLICITATION The Board of Managers of each of Fund A, Fund B, and Fund C is furnishing this Proxy Statement/Prospectus in connection with the Boards' solicitation of proxies for use at Meetings of Fund Voters eligible to vote in respect of the Contracts issued by The Franklin through the Funds. If you complete, sign, date, and return the enclosed proxy, you may nevertheless revoke it at any time before it is exercised by providing written notice to The Franklin or by voting in person at the Meetings. Any later-dated proxy The Franklin receives will revoke a prior proxy. The proxy solicitation will be done by mail but may also be done by telephone, telegram, facsimile, or personal interview conducted by The Franklin's personnel or outside contractors employed to assist in the solicitation. The Franklin will pay the expenses of the proxy solicitation, and these expenses will not be passed on to the Funds. The Franklin expects such expenses to be approximately $40,000. The Franklin has entered into an agreement with Shareholder Communications Corporation ("SCC"), a professional proxy solicitation firm, to assist in the proxy solicitation. SCC will provide services including telephone calls to Contract Owners who have not returned proxies and remailing of proxy materials to Contract Owners who have discarded or misplaced the originally mailed materials. In return for providing these services, SCC will receive a fee and reimbursement of its expenses incurred in the proxy solicitation. The separate rules and regulations governing each of the Funds provide that the number of accumulation units credited to Contract Owners will determine the number of votes that may be cast with respect to a Contract before annuity payments begin. After annuity payments begin, the number of votes that may be cast is based on the amount of assets supporting the Contract and held in the respective Fund to meet the obligations related to the Contract, divided by the accumulation unit value for the particular Fund. Fractional votes will be counted. As of December 31, 1998, there were 109,896.4574 votes entitled to be cast at the Meetings with respect to Fund A, 13,838.5872 votes entitled to be cast with respect to Fund B, and 62,851.2220 votes entitled to be cast with respect to Fund C. As of that date, the following persons were entitled to cast 5% or more of the total votes of each of the respective Funds. The Franklin and the Funds do not anticipate that the information provided in the table below will vary materially by the record date of the Meetings: 5
- -------------------------------------------------------------------------------- Name and Address of Contract Percent of Owner Number of Votes Voting Power - -------------------------------------------------------------------------------- Fund A: None - -------------------------------------------------------------------------------- Fund B: Mr. Gonzalo R. Reynoso (1) 856.6460 6.19% Mrs. Juanita S. Reynoso 877.1990 6.34% 553 Hackney Hill Street Globe, Arizona 85501 - -------------------------------------------------------------------------------- Fund C: Beverly A. DeBlase 5,628.7411 8.96% 209 Yorkshire Pl. Bellevue, Ohio 44811 - --------------------------------------------------------------------------------
Following the Reorganization, the persons in the table above will own units of interest in the Continuing Fund that represent less than 1% of the shares of the Stock Index Fund and the Money Market Fund. Before annuity payments begin, Contract Owners have the right to vote at the Meetings. After annuity payments begin under a Contract, if the annuitant is not the Contract Owner, the annuitant has the right to instruct the Contract Owner as to voting matters, but the Contract Owner retains the right to vote at the Meetings. The Boards of Managers will vote all proxies executed, dated and returned to The Franklin prior to the beginning of the Meetings on April 8, 1999 in accordance with instructions marked thereon. If instructions are not marked thereon, the Boards of Managers will vote proxies "FOR" the proposal to be voted on at the Meetings. Abstentions will not count as votes "FOR" or "AGAINST" the proposal; however, abstentions will be counted to determine whether a quorum is present at the Meetings. To take action on the proposed Reorganization, it is necessary that Contract Owners entitled to cast at least 50% of all votes eligible to be cast with respect to each of the Funds, voting separately, be present in person or represented by proxy at the Meetings. Approval of the Agreement and the Reorganization requires, with respect to each of the Funds, the affirmative vote of the lesser of: - 67% of the votes cast at the Meetings; or - more than 50% of the total eligible votes. The requisite vote of the Fund Voters of each Fund must approve the Reorganization before the Reorganization will be implemented. The Boards of Managers may adjourn the Meetings for the purpose of further proxy solicitation, or for any other purpose, if 50% of the total eligible votes for any Fund are not represented at the - ---------------------- (1) In accordance with interpretations of the Securities and Exchange Commission of the concept of "beneficial ownership," G. Reynoso and J. Reynoso might each be deemed to be the beneficial owner of the contract owned by the other. 6 Meetings. The Boards of Managers will vote proxies in favor of any adjournment unless you provide other instructions. At any subsequent reconvening of the meetings, the Boards of Managers will vote proxies in the same manner as the proxies would have been voted at the original meetings, unless you revoke the proxies before the subsequent meetings. SYNOPSIS The Board of Managers of each Fund (which consists of the same individuals for each Fund) has authorized the Reorganization. During the five business days prior to the closing date of the Reorganization (currently scheduled for April 30, 1999), each Fund will convert its assets into cash. For much of this period, Contract Owners would be "out of the market" and would not be affected by any positive or negative investment experience of securities that were converted into cash. On the closing date: - the cash accumulated with respect to Fund A will be allocated to and used by Subaccount A to purchase shares of the Stock Index Fund of the Series Company; - the cash accumulated with respect to Fund B will be allocated to and used by Subaccount B to purchase shares of the Stock Index Fund of the Series Company; and - the cash accumulated with respect to Fund C will be allocated to and used by Subaccount C to purchase shares of the Money Market Fund of the Series Company. Immediately after the Reorganization, interests in Subaccount A, Subaccount B, and Subaccount C, respectively, having a value identical to the Contract Owners' interests in the Funds immediately before the Reorganization will represent Fund A, Fund B, and Fund C Contract Owners' interests. The Series Company is a management investment company (commonly known as a "mutual fund") managed by The Variable Annuity Life Insurance Company ("VALIC"), which is an affiliate of The Franklin. VALIC is responsible for each of the Series Company Funds' day to day operations and makes the investment decisions for the Money Market Fund. VALIC has engaged an investment sub-adviser, Bankers Trust Company ("Bankers Trust") to make investment decisions for the Stock Index Fund. The Contracts are no longer being sold, however, The Franklin continues to accept additional payments in accordance with contractual provisions. Shares in each Series Company Fund are offered only to separate accounts of VALIC and its affiliates, or employee thrift plans maintained by VALIC or American General Corporation. See "Sale of the Contracts and Series Company Shares" below. There will be no change in the value of your Contract and no change in a your benefits under the Contract as a result of the Reorganization. The Reorganization also will not affect exchange rights, redemption procedures, and other features of the Contracts. The Franklin believes that the Reorganization will not result in adverse tax consequences to Contract Owners. The following paragraphs describe each Fund's investment objective and the investment objective of the relevant Series Company Funds: 7 - The investment objective of each of Franklin Life Variable Annuity Fund A ("Fund A") and Franklin Life Variable Annuity Fund B ("Fund B") is long-term appreciation of capital through investment appreciation and the retention and reinvestment of income. The Stock Index Fund seeks long-term capital growth through investment in common stocks that, as a group, are expected to provide investment results closely corresponding to the performance of the Standard & Poor's 500 Stock Index-Registered Trademark- ("S&P 500")(2) - The investment objective of Franklin Life Money Market Variable Annuity Fund C ("Fund C") is long-term compounding of income through retention and reinvestment of income from investments in a diversified portfolio of short-term money market securities yielding a high level of current income to the extent consistent with the preservation of capital and the maintenance of liquidity. The Money Market Fund of the Series Company seeks liquidity, protection of capital and current income through investments in short-term money market instruments. The Franklin will pay all costs and expenses associated with effecting the Reorganization. The Franklin will not pay any costs or expenses associated with unrealized positive investment experience during the time when Contract Owners are "out of the market" as described above. The charges provided for in the Contracts will not increase as a result of the Reorganization, and in certain cases will be reduced. For example, in anticipation of the approval of the Reorganization, beginning in October 1998 The Franklin began waiving the imposition and receipt of all sales loads, surrender or deferred sales charges, and administration fees specified in each Contract. Mortality and expense risk fees deducted under the Contracts will remain unchanged. Because each of the Funds will no longer be a management investment company, The Franklin will no longer serve as the investment manager to each Fund and, consequently, The Franklin will not receive an investment management fee from assets of the Funds after the Reorganization. However, an investment advisory fee and a charge for "other expenses" is deducted from the assets of each Series Company Fund. Based on the current levels of these fees and charges, the investment advisory fee and the charge for "other expenses" for the Stock Index Fund may be lower than the investment management fee for Funds A and B; and the investment advisory fee and the charge for "other expenses" for the Money Market Fund may be higher than the investment management fee for Fund C. However, if the Reorganization is approved, The Franklin will place a limit on each Subaccount's expenses to ensure that Contract Owners do not incur post-Reorganization expenses that are higher than the pre-Reorganization expenses. The Franklin will effect this expense limitation by making any necessary adjustments so that a Subaccount's total annual expenses (as a percentage of average net assets) will never exceed the corresponding Fund's total annual expenses (as a percentage of average net assets) for the year ended December 31, 1998. See "Comparing Fees and Expenses," and "Supplementary Financial Information" below. The following comparative fee tables for the 12-month period ended December 31, 1998 illustrate: - the charges and deductions under the Contract for each Fund during that period; - the fees and expenses of the corresponding Series Company Fund; and - ------------------ (2) Standard & Poor's-Registered Trademark-, S&P-Registered Trademark-, S&P 500-Registered Trademark-, and Standard & Poor's 500-Registered Trademark- are trademarks of The McGraw-Hill Companies, Inc. The Stock Index Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the Stock Index Fund. 8 - the charges and deductions under the Contract for each Subaccount (including the fees and expenses of the Series Company Funds) restated as if the Reorganization had been in effect during that period. 9 COMPARATIVE FEE TABLE -- FUND A AND STOCK INDEX FUND
STOCK SUBACCOUNT A OF (For the 12-month period ended December 31, 1998) INDEX CONTINUING FUND FUND A FUND (pro forma) CONTRACT OWNER TRANSACTIONS EXPENSES (WAIVED SINCE OCTOBER 1998) Maximum Sales Load Imposed on Purchases (as a percentage of 5.00% (A) purchase payments) 6.00% (B) --- --- Maximum Administration Fee (as a percentage of purchase 4.00% (A) payments) 3.00% (B) --- --- FUND A ANNUAL EXPENSES (as a percentage of average net assets) Management Fees 0.44% --- --- Mortality Fees 0.90% --- 0.90% Expense Risk Fees 0.10% --- 0.10% Other Expenses --- Total Fund A (or Subaccount A) Annual Expenses 1.44% --- 1.00% STOCK INDEX FUND ANNUAL EXPENSES (as a percentage of average net assets) Management Fees --- 0.27% 0.27% Other Expenses --- 0.04% 0.04% Total Stock Index Fund Annual Expenses --- 0.31% --- TOTAL SUBACCOUNT A (PRO FORMA) ANNUAL EXPENSES (C) --- --- 1.31%
(A) Single Stipulated Payment Contract (B) Periodic Stipulated Payment Contract (C) If the Reorganization is approved, The Franklin will implement an expense limitation whereby Subaccount A's total annual expenses (as a percentage of average net assets) after the Reorganization, will not exceed Fund A's total annual expenses (as a percentage of average net assets) for the year ended December 31,1998. 10 COMPARATIVE FEE TABLE -- FUND B AND STOCK INDEX FUND
STOCK SUBACCOUNT B OF (For the 12-month period ended December 31, 1998) INDEX CONTINUING FUND FUND B FUND (pro forma) CONTRACT OWNER TRANSACTIONS EXPENSES (WAIVED SINCE OCTOBER 1998) Maximum Sales Load Imposed on Purchases (as a 5.00% (A); percentage of purchase payments) 15.00% to 1.00%, 10.00% to 3.00%, 6.00% to 3.00%, 4.00% to 3.00% (B) --- --- Maximum Administration Fee (as a percentage of purchase $100 (A); payments, for Periodic Stipulated Payment Contracts) 0.00% to 10.00%, 3.00% to 10.00%, 3.00% to 6.00%, 3.00% to 5.00% (C) --- --- FUND B ANNUAL EXPENSES (as a percentage of average net assets) Management Fees 0.44% --- --- Mortality Fees 0.90% --- 0.90% Expense Risk Fees 0.10% --- 0.10% Other Expenses --- Total Fund B (or Subaccount B) Annual Expenses 1.44% --- 1.00% STOCK INDEX FUND ANNUAL EXPENSES (as a percentage of average net assets) Management Fees --- 0.27% 0.27% Other Expenses --- 0.04% 0.04% Total Stock Index Fund Annual Expenses --- 0.31% --- TOTAL SUBACCOUNT B (PRO FORMA) ANNUAL EXPENSES (D) --- --- 1.31%
(A) Single Stipulated Payment Contract (B) Periodic Stipulated Payment Contract. 15.00% to 1.00% (for a Contract with a stipulated payment period of 12 or more years; 4.33% aggregate over all years for a 12-year Contract); 10.00% to 3.00% (for a Contract with a stipulated payment period of 9 to 11 years; 4.44% aggregate over all years for a 9-year Contract); 6.00% to 3.00% (for a Contract with a stipulated payment period of 6 to 8 years; 4.50% aggregate over all years for a 6-year Contract); and 4.00% to 3.00% (for a Contract with a stipulated payment period of 2 to 5 years; 4.00% aggregate over all years for a 2-year Contract). (C) Periodic Stipulated Payment Contract. 0.00% to 10.00% (for a Contract with a stipulated payment period of 12 or more years; 4.67% aggregate over all years for a 12-year Contract); 3.00% to 10.00% (for a Contract with a stipulated payment period of 9 to 11 years; 4.44% aggregate over all years for a 9-year Contract); 3.00% to 6.00% (for a Contract with a stipulated payment period of 6 to 8 years; 4.50% aggregate over all years for a 6-year Contract); and 3.00% to 5.00% (for a Contract with a stipulated payment period of 2 to 5 years; 5.00% aggregate over all years for a 2-year Contract). (D) If the Reorganization is approved, The Franklin will implement an expense limitation whereby Subaccount B's total annual expenses (as a percentage of average net assets) after the Reorganization, will not exceed Fund B's total annual expenses (as a percentage of average net assets) for the year ended December 31,1998. 11 COMPARATIVE FEE TABLE -- FUND C AND MONEY MARKET FUND
MONEY SUBACCOUNT C OF (For the 12-month period ended December 31, 1998) MARKET CONTINUING FUND FUND C FUND (pro forma) CONTRACT OWNER TRANSACTIONS EXPENSES (WAIVED SINCE OCTOBER 1998) 6.00% (B) Maximum Deferred Sales Load (A) 8.00% (C) --- --- $100 (D) Maximum Administration Fee (E) --- --- FUND C ANNUAL EXPENSES (as a percentage of average net assets) Management Fees 0.375% --- --- Mortality Fees 0.90% --- 0.90% Expense Risk Fees 0.165% --- 0.165% Other Expenses --- --- Total Fund C (or Subaccount C) Annual Expenses 1.44% --- 1.065% MONEY MARKET FUND ANNUAL EXPENSES (as a percentage of average net assets) Management Fees --- 0.50% 0.50% Other Expenses --- 0.05% 0.05% Total Money Market Fund Annual Expenses --- 0.55% --- TOTAL SUBACCOUNT C (PRO FORMA) ANNUAL EXPENSES (after expense limitation) (F) --- --- 1.44%
(A) Expressed as a percentage of the lesser of: (1) the Cash Value of the part of the Contract surrendered, or (2) the Stipulated Payments made during the immediately preceding 72 months represented by the part of the Contract surrendered (or the Stipulated Payment in the case of a Single Stipulated Payment Contract). (B) Single Stipulated Payment Contract. For total redemptions, percentage decreases each Contract Year after the second until reaching zero for Contract Year 5 and thereafter; for partial redemptions, percentage decreases to 4.00% for Contract Year 3 and thereafter. (C) Periodic Stipulated Payment Contract. For total redemptions, percentage decreases each Contract Year after the third until reaching zero for Contract Year 7 and thereafter; for partial redemptions, percentage decreases to 4.00% for Contract Year 5 and thereafter. (D) Single Stipulated Payment Contract. (E) Periodic Stipulated Payment Contract. $20 per Contract Year plus $1 per Stipulated Payment ($.50 if by bank draft or by employer or military preauthorized automatic deduction). (F) If the Reorganization is approved, The Franklin will implement an expense limitation whereby Subaccount C's total annual expenses (as a percentage of average net assets) after the Reorganization, will not exceed Fund C's total annual expenses (as a percentage of average net assets) for the year ended December 31,1998. Without this expense limitation, Total Subaccount C (ProForma) Annual Expenses would be 1.615%. 12 EXAMPLES The following examples show expenses that reflect application of the sales charges, surrender and deferred sales charges, and administrative fees that The Franklin began waiving under the Contracts in October 1998. The waiver will only affect Fund A and Fund B Contract Owners to the extent they make future payments under the Contracts. The waiver will only affect Fund C Contract Owners to the extent that they make withdrawals that would be subject to the deferred sales load. The pro forma information for Subaccount C reflects application of the expense limitation that The Franklin will implement if the Reorganization is approved. The first row of figures is for Single Stipulated Payment Contracts, and the second row of figures is for Periodic Stipulated Payment Contracts. A. You would pay the following expenses (based on expenses for the 12-month period ended December 31, 1998) on a $10,000 investment in your Contract, assuming a 5% annual return on assets, if you surrender your Contract at the end of the applicable time period.
- ------------------------------------------------------- ---------------------------------------------------------- Fund A (actual) Subaccount A of the Continuing Fund (pro forma) - ------------------------------------------------------- ---------------------------------------------------------- 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years - ------------------------------------------------------- ---------------------------------------------------------- $1,032 $1,312 $1,611 $2,458 $133 $412 $713 $1,569 - ------------------------------------------------------- ---------------------------------------------------------- $1,032 $1,312 $1,611 $2,458 $133 $412 $713 $1,569 - ------------------------------------------------------- ----------------------------------------------------------
- ------------------------------------------------------- ---------------------------------------------------------- Fund B (actual) Subaccount B of the Continuing Fund (pro forma) - ------------------------------------------------------- ---------------------------------------------------------- 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years - ------------------------------------------------------- ---------------------------------------------------------- $1,624 $1,884 $2,164 $2,955 $133 $412 $713 $1,569 - ------------------------------------------------------- ---------------------------------------------------------- $1,624 $1,884 $2,164 $2,955 $133 $412 $713 $1,569 - ------------------------------------------------------- ----------------------------------------------------------
- ------------------------------------------------------- ---------------------------------------------------------- Fund C (actual) Subaccount C of the Continuing Fund (pro forma) - ------------------------------------------------------- ---------------------------------------------------------- 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years - ------------------------------------------------------- ---------------------------------------------------------- $244 $548 $873 $1,795 $145 $452 $781 $1,712 - ------------------------------------------------------- ---------------------------------------------------------- $145 $491 $858 $1,878 $145 $452 $781 $1,712 - ------------------------------------------------------- ----------------------------------------------------------
B. You would pay the following expenses (based on expenses for the 12-month period ended December 31, 1998) on a $10,000 investment in your Contract, assuming a 5% annual return on assets, if you do not surrender your Contract at the end of the applicable time period: 13
- ------------------------------------------------------- ---------------------------------------------------------- Fund A (actual) Subaccount A of the Continuing Fund (pro forma) - ------------------------------------------------------- ---------------------------------------------------------- 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years - ------------------------------------------------------- ---------------------------------------------------------- $1,032 $1,312 $1,611 $2,458 $133 $412 $713 $1,569 - ------------------------------------------------------- ---------------------------------------------------------- $1,032 $1,312 $1,611 $2,458 $133 $412 $713 $1,569 - ------------------------------------------------------- ----------------------------------------------------------
- ------------------------------------------------------- ---------------------------------------------------------- Fund B (actual) Subaccount B of the Continuing Fund (pro forma) - ------------------------------------------------------- ---------------------------------------------------------- 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years - ------------------------------------------------------- ---------------------------------------------------------- $1,624 $1,884 $2,164 $2,955 $133 $412 $713 $1,569 - ------------------------------------------------------- ---------------------------------------------------------- $1,624 $1,884 $2,164 $2,955 $133 $412 $713 $1,569 - ------------------------------------------------------- ----------------------------------------------------------
- ------------------------------------------------------- ---------------------------------------------------------- Fund C (actual) Subaccount C of the Continuing Fund (pro forma) - ------------------------------------------------------- ---------------------------------------------------------- - ------------------------------------------------------- ---------------------------------------------------------- 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years - ------------------------------------------------------- ---------------------------------------------------------- $244 $548 $873 $1,795 $145 $452 $781 $1,712 - ------------------------------------------------------- ---------------------------------------------------------- $145 $491 $858 $1,878 $145 $452 $781 $1,712 - ------------------------------------------------------- ----------------------------------------------------------
- -------------------------------------------------------------------------------- PLEASE DO NOT CONSIDER THESE EXAMPLES AS A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES PAID MAY BE GREATER OR LESS THAN THOSE SHOWN. - -------------------------------------------------------------------------------- COMPARING FEES AND EXPENSES The overall costs to Contract Owners after the Reorganization will not be higher, and may be lower than they were before the Boards of Managers proposed the Reorganization. For example, in anticipation of the approval of the Reorganization, beginning in October 1998 The Franklin began waiving the imposition and receipt of all sales loads, surrender or deferred sales charges, and administration fees specified in each Contract. This waiver will continue whether or not the Fund Voters in each Fund approve the Reorganization. Therefore, Contract Owners in the Continuing Fund may make additional purchases without incurring any sales load on such purchases, and also may make surrenders without having deductions made for surrender or deferred sales charges. Further, purchase payments made in the Continuing Fund will not be subject to any administration fees, and the Contracts will not be subject to any annual administration fee. In addition, after the Reorganization is approved, The Franklin will implement an expense limitation whereby each Subaccount's total annual expenses (as a percentage of average net assets) after the Reorganization, will not exceed the corresponding Fund's total annual expenses (as a percentage of average net assets) for the year ended December 31,1998. Under the Contracts, the Franklin currently imposes three charges specified as annual percentages of each Fund's average net assets: - a mortality risk fee equal to 0.90% for each of the Funds; 14 - an expense risk fee equal to 0.10% for Fund A and Fund B, and 0.165% for Fund C; and - an investment management fee equal to 0.44% for Fund A and Fund B, and 0.375% for Fund C. The Franklin guarantees that the charges for the mortality risk fee for all Funds and the expense risk fee for Fund A and Fund B will not increase. The total annual expenses for each Fund include the investment management fee, mortality risk fee, and expense risk fee. There is no charge imposed against the assets of the Funds for "other expenses." After the Reorganization, The Franklin will continue to impose the 0.90% mortality risk fee and the 0.10% (or 0.165%) expense risk fee against the assets of each of the Subaccounts of the Continuing Fund. However, The Franklin will no longer impose the 0.44% (or 0.375%) investment management fee against the assets of the Subaccounts of the Continuing Fund. Instead, the Stock Index Fund's investment advisory fee (out of which VALIC pays the investment sub-advisory fee) will be charged indirectly against the assets of Subaccounts A and B of the Continuing Fund; and the Money Market Fund's investment advisory fee will be charged indirectly against the assets of Subaccount C of the Continuing Fund. Therefore, the total annual expenses for each Subaccount of the Continuing Fund will include an indirect charge for the investment advisory fees of the corresponding Series Company Fund, plus the mortality risk fee and the expense risk fee for that Subaccount. However, as previously stated, The Franklin will implement an expense limitation whereby each Subaccount's total annual expenses (as a percentage of average net assets) after the Reorganization, will not exceed the corresponding Fund's total annual expenses (as a percentage of average net assets) for the year ended December 31,1998. VALIC calculates the investment advisory fee charged to the Stock Index Fund and the Money Market Fund as a percentage of these Funds' average daily net asset value. For the 12-month period ended December 31, 1998, the investment advisory fee (as a percentage of average net assets) was 0.27% for the Stock Index Fund, and 0.50% for the Money Market Fund. Pursuant to the Investment Sub-Advisory Agreement between VALIC and Bankers Trust on behalf of the Stock Index Fund, VALIC pays Bankers Trust a monthly fee computed at the annual rate of 0.02% of the first $2 billion in Stock Index Fund assets and 0.01% on assets over $2 billion. The Series Company does not pay a separate fee to Bankers Trust. Total annual expenses for the Series Company Funds include the investment advisory fee plus a fee for "other expenses." For the Series Company Funds, the fee for "other expenses" during the 12-month period ended December 31, 1998 were 0.04% of the average net assets of the Stock Index Fund, and 0.05% of average net assets of the Money Market Fund. Using the percentages for the 12-month period ended December 31, 1998 (and including The Franklin's post-Reorganization expense limitation for Subaccount C), the total annual expenses after the Reorganization would be 1.31% for Subaccount A, 1.31% for Subaccount B, and 1.44% for Subaccount C. In sum, the total annual expenses after the Reorganization for Subaccount A and Subaccount B would be lower than the total annual expenses for Fund A and Fund B: 1.31% for Subaccount A vs. 1.44% for Fund A; and 1.31% for Subaccount B vs. 1.44% for Fund B. Total annual expenses after the Reorganization for Subaccount C (including the post-Reorganization expense limitaion) would be the same as the total annual expenses for Fund C: 1.44% for Subaccount C vs. 1.44% for Fund C. See the "Comparative Fee Tables" above. 15 PRINCIPAL RISK FACTORS The principal risk factors involved in investing in a Subaccount of the Continuing Fund and, therefore, indirectly in a Series Company Fund will be similar to the principal risk factors currently associated with investing in a Fund. Those risk factors are that the investments made by each Series Company Fund's investment manager may not appreciate in value or will, in fact, lose value. Specifically, the investments are subject to three general types of investment risks: - FINANCIAL RISK, which refers to the ability of the issuer of a security to pay principal and interest when due or to maintain or increase dividends; - MARKET RISK, which refers to the degree to which the price of a security will react to changes in conditions in the securities markets and to changes in the overall level of interest rates; and - CURRENT INCOME VOLATILITY, which refers to the degree to which and the timing by which changes in the overall level of interest rates or, in the case of certain derivative instruments, other underlying economic variables or indices affect the current income from an investment. In addition, by investing in a Subaccount of the Continuing Fund and, therefore, indirectly in a Series Company Fund, Contract Owners will continue to be exposed to certain risk factors that are currently associated with investing in a Fund. For example, although unlikely, one or more of the Series Company Funds may fail to qualify as a regulated investment company in any particular year and may thereby incur federal tax liability on income and capital gains distributed to shareholders. In that case, the Contracts would also fail to qualify as annuity contracts for federal income tax purposes resulting in the loss of their tax-favored status. See, "Organization and Operation of the Series Company Funds -- Dividends, Distributions and Taxes," below. This would adversely affect the investment performance of the disqualified Series Company Fund(s) and therefore the investment performance of the corresponding Subaccounts of the Continuing Fund. Also, Series Company Fund shares currently are, and will continue to be, owned by separate accounts of other insurance companies to fund variable annuity contracts and variable life insurance policies. While it is conceivable that, in the future, it may be disadvantageous to the Continuing Fund to be invested in the Series Company Funds simultaneously with such other separate accounts, The Franklin currently does not see any such disadvantages. THE PROPOSED REORGANIZATION DESCRIPTION OF THE REORGANIZATION The Reorganization involves converting the net assets of each Fund into cash, designating the cash associated with each Fund as the initial assets of a Subaccount of the Continuing Fund, and purchasing shares of a specified Series Company Fund in return for a Subaccount's cash. If the Fund Voters of each Fund approve the Reorganization, the Funds will no longer hold securities and other instruments directly but rather will hold similar investments indirectly through the intermediate vehicle of the Series Company Funds. Those investments will be managed by VALIC (and Bankers Trust for the Stock Index Fund), instead of The Franklin, the current investment manager for each of the Funds. At present, each Fund: 16 - is a diversified management investment company, as such companies are defined in the Investment Company Act of 1940, as amended (the "1940 Act"); - is supervised by a Board of Managers having a majority of members who are not "interested persons" (I.E., who are drawn from outside) of The Franklin; and - invests in securities and other instruments in accordance with objectives outlined in a prospectus. Please refer to the separate prospectuses for Fund A, Fund B, and Fund C, respectively, which accompany this Proxy Statement/Prospectus as Appendices B, C, and D, respectively, and are incorporated herein by reference. If the Fund Voters of each Fund approve the Reorganization, Fund A would be renamed as Franklin Life Variable Annuity Fund and restructured as a unit investment trust that will be subdivided into three Subaccounts, each corresponding to and investing solely in shares of a particular Series Company Fund. Please refer to the prospectus for the Series Company Fund which accompanies this Proxy Statement/Prospectus as Appendix E and is incorporated herein by reference. The net asset value per share of the corresponding Series Company Fund will determine the value of a unit in each Subaccount of the Continuing Fund. The total value of the accumulation units a Contract Owner has in each Fund immediately prior to the Reorganization will be no different than the total value of the accumulation units the same Contract Owner will have in the appropriate Subaccount of the Continuing Fund immediately after the Reorganization. The total value of the annuity units a Contract Owner has in each Fund immediately prior to the Reorganization will be no different than the total value of the annuity units the same Contract Owner will have in the appropriate Subaccount of the Continuing Fund immediately after the Reorganization. As of 3:00 p.m. Central Standard Time on the closing date, all of the assets of each Fund will have been liquidated into cash and the cash will be transferred to the Subaccounts of the Continuing Fund and used to purchase the number of shares of the Stock Index Fund or the Money Market Fund having an aggregate net asset value equal to the cash contributed. The Franklin will pay any brokerage commissions related to the liquidation of the Funds' assets. More information on the Reorganization is contained in a document entitled "Agreement and Plan of Reorganization," which has been approved and adopted by the Board of Managers of each of the Funds and entered into by The Franklin (in its capacity as the insurance company of which the Funds are a part under state insurance law) and the Funds. The Agreement is attached to this Proxy Statement/Prospectus as Appendix A. Approval of the Agreement and the Reorganization by the Fund Voters of each Fund is a prerequisite to the implementation of the Reorganization. The Reorganization may be postponed from time to time or canceled for any reason with the consent of the parties thereto. Federal Tax Consequences of the Reorganization The Franklin does not believe that the proposed Reorganization will result in the realization of taxable income or loss to The Franklin, the Funds, the Continuing Fund, or the Series Company. Neither The Franklin, as the legal owner of the assets held in the Funds, nor the Funds themselves, which are not taxed as entities separate from The Franklin, should realize gain or loss on the liquidation of the assets held in the Funds by virtue of section 817(b) of the Internal Revenue Code. Under that section, the tax basis to The Franklin of each asset held by the Funds is always equal to its fair market value, so that when such asset is liquidated, no gain or loss is realized. The use of the cash proceeds derived from the liquidation of the assets of the Funds to purchase shares of the Series Company should not give rise to taxable gain or loss to The Franklin or the Continuing Fund, and should not give rise to taxable gain or loss to the Series Company because under section 1032(a) of the Internal Revenue Code the issuance of shares of a corporation in exchange for money or other property does not give rise to gain or loss. If, contrary to The Franklin's expectations, the proposed Reorganization were to result in taxable income to The Franklin, the Funds, or the Continuing Fund, The Franklin would not make any charge to the Funds, the Continuing Fund or to Contract Owners for Federal income taxes resulting from the proposed Reorganization. The Franklin also does not believe that the proposed Reorganization will result in tax consequences to Contract Owners. The proposed Reorganization itself will not result in a distribution from Contracts currently supported by the Funds that would give rise to taxable income to Contract Owners. If, following an affirmative vote of the Contract Owners, an Owner wished to redeem such Contract Owner's interests rather than be invested in the Series Company Funds, such Contract Owner could either surrender the Contract or exchange the Contract for another policy issued by a different insurance company. In general, the surrender of a Contract would result in taxation of any gain accumulated under the Contract and, in certain cases, in the imposition of an additional 10-percent tax on such gain. If, however, a Policy were to be exchanged for another policy, the Contract Owner might not incur current tax with respect to the transaction if the transaction qualified as a tax-exempt exchange under section 1035(a) of the Internal Revenue Code. Contract Owners considering such a transaction should consult a tax adviser. 17 REASONS FOR THE TRANSACTIONS The following combination of circumstances led the Board of Managers of each Fund to propose the Reorganization: - The asset base of the Funds will not increase substantially in the foreseeable future because no new Contracts are being sold (although continuing payments are accepted on existing Contracts). - The portfolio manager primarily responsible for making investment management decisions for the Funds has indicated a desire to discontinue serving in this capacity. - Since the Funds are separate entities, administration costs for the Funds cannot benefit from economies of scale. Based on these circumstances, the Board of Managers of each of the Funds decided to reevaluate how each Fund should be managed. The respective Boards of Managers determined that, rather than continuing to operate each Fund as an actively managed portfolio, it would be more effective to restructure the Funds into a single unit investment trust containing subaccounts that invest in actively or passively managed investment portfolios. If the Fund Voters in each Fund approve the Reorganization, each Subaccount of the Continuing Fund will invest its assets indirectly in securities through a Series Company Fund rather than directly in securities, as each Fund currently does. The Reorganization should benefit Contract Owners by enabling them to participate in investment portfolios with a substantially larger asset base than that currently held by each of the Funds. As of December 31, 1998 the net assets in Fund A, Fund B, and Fund C were $13,541,500, $2,036,706 and $1,545,779 respectively; while the net assets of the Stock Index Fund and the Money Market Fund as of that date were $4,100,922,683, and $273,628,208, respectively. The Board of Managers of each Fund anticipates that the larger asset base available through investments in the Series Company Funds will increase investment opportunities for and broaden diversification of the funding medium for the Contracts. The larger asset base would be especially advantageous with respect to Fund C. The amount of assets that Fund C may invest in the securities of any one issuer is restricted by Fund C's fundamental investment restrictions and the regulations of the Securities and Exchange Commission and the Internal Revenue Service. Under the most restrictive of these provisions, Fund C generally may not invest more than 5% of its assets in the securities of any issuer, except that it may invest up to 55% of its assets in securities issued or guaranteed as to principal by the United States government. As of December 31, 1998, Fund C's total assets were $1,554,073, and the maximum amount that Fund C was permitted to invest in commercial paper of any one issuer was approximately $77,700. Due to market conditions, it is more difficult to purchase an issue of commercial paper in an amount less than $100,000. It is possible that the shrinking pool of commercial paper investments available to Fund C due to its size may impair the future investment performance of Fund C. Various practical difficulties make it infeasible to use any of the Funds, as they are currently structured, as the funding vehicle for insurance products other than variable annuity contracts issued by 18 The Franklin. The Series Company Funds, however, currently are and will continue to be used for variable annuity contracts and variable life insurance policies issued by other insurance companies affiliated with The Franklin. Therefore, more assets currently are available to be invested in the Series Company Funds than are available to be invested in the current Funds alone. The Franklin and the Board of Managers of each Fund believe that this will result in economies of scale (particularly in view of the declining assets of the Funds under the current circumstances in which no new Contracts are being sold). As managers of portfolios significantly larger than each Fund, VALIC (and Bankers Trust with respect to the Stock Index Fund) may be able to expend larger resources cost-effectively to attain higher performance for the Series Company Funds than for the Funds, although there is no guarantee that higher performance will be achieved. The Boards of Managers of the respective Funds also considered the favorable investment performance of the Series Company Funds compared to the investment performance of the respective Funds over the past several years. See, "Comparative Performance," below. The Fund C Board of Managers chose the Money Market Fund as the investment vehicle for Fund C Contract Owners' interests because the Money Market Fund and Fund C's investment objectives and policies are reasonably consistent with each other. The respective Boards of Managers for Fund A and Fund B selected the Stock Index Fund as the investment vehicle for interests of Contract Owners of Fund A and Fund B because the Stock Index Fund has somewhat similar investment objectives and policies to Fund A and Fund B, and because it is the respective Boards' belief that shareholders find S&P 500 index funds attractive since these funds are designed for investors who want to pursue growth of capital through a portfolio of securities that broadly represents the U.S. stock market, as measured by the S&P 500. In addition, index funds generally have lower portfolio transaction costs (brokerage and other trading costs), and a lower expense ratio (including advisory fees, distribution charges and operating expenses), than actively managed funds. Using the Series Company Funds as the investment vehicles for the Continuing Fund would facilitate the addition of new investment options, if the Board of Directors of The Franklin should choose to do so in the future. Although the Board of Directors does not intend to pursue this avenue at this time, it would be administratively simpler and less costly to add (and maintain) new investment options in the form of new unmanaged subaccounts of the Continuing Fund investing in additional portfolios of the Series Company, or portfolios of other mutual funds, than to add new investment options in the form of new managed funds (structured as management investment companies). In summary, The Franklin and the Board of Managers of each Fund expect the Reorganization to result in increased investment opportunities, economies and efficiencies which will benefit Contract Owners. The Franklin and the Board of Managers of each Fund believe that the interests of Contract Owners immediately following the Reorganization will not materially differ from their interests immediately prior to the Reorganization. Contract Owners will still have an interest in a diverse portfolio of investments with respect to each Subaccount of the Continuing Fund. The value of Contract Owners' interests will not be changed by the Reorganization. In the opinion of The Franklin, the Reorganization will not have any direct or indirect adverse tax consequences for Contract Owners. Furthermore, the overall level of fees and expenses borne, directly or indirectly, by each of the Contract Owners will not be higher (and may be lower) after the Reorganization than before the Reorganization was proposed. 19 ACTUAL AND PRO FORMA CAPITALIZATION The following tables show the actual capitalization of the Funds, the Stock Index Fund, and the Money Market Fund on December 31, 1998, as well as the pro forma capitalization of the Subaccounts, the Stock Index Fund and the Money Market Fund on that date after giving effect to the Reorganization:
CAPITALIZATION FUND A FUND B FUND C SUBACCOUNT A SUBACCOUNT B SUBACCOUNT C (as of Dec. 31, 1998)(3) (actual) (actual) (actual) (pro forma) (pro forma) (pro forma) Net Assets $13,541,500 $2,036,706 $1,545,779 $13,541,500 $2,036,706 $1,545,779 Net Asset Value $ 123.03 $ 147.18 $ 24.59 $ 37.54 $ 37.54 $ 1.00 Units or Shares Outstanding 109,896 13,839 62,851 360,722 54,254 1,545,779 STOCK INDEX STOCK INDEX MONEY MARKET MONEY MARKET CAPITALIZATION FUND FUND FUND FUND (as of Dec. 31, 1998) (actual) (pro forma) (actual) (pro forma) Net Assets $4,100,922,683 $4,116,500,889 $273,628,208 $ 275,173,987 Net Asset Value $ 37.54 $ 37.54 $ 1.00 $ 1.00 Units or Shares Outstanding 109,229,305 109,644,281 273,628,208 275,173,987
COMPARING INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS The investment objective of both Fund A and Fund B is long-term appreciation of capital through investment appreciation and the retention and reinvestment of income. Fund A and Fund B seek to achieve their investment objective by investing in equity securities, mainly common stocks. The Stock Index Fund of the Series Company seeks long-term capital growth through investment in common stocks that, as a group, are expected to provide investment results closely corresponding to the performance of the S&P 500. The respective Boards of Managers of Fund A and Fund B believe that although the investment objective and policies of Fund A and Fund B are similar but not identical to those of the Stock Index Fund, Contract Owners of Fund A and Fund B should find the Stock Index Fund attractive because: (1) the Stock Index Fund is designed for investors who want to keep expenses low while seeking long-term growth of capital through a portfolio of securities that, as a group, are expected to provide investment results closely corresponding to the performance of the S&P 500 Index; and (2) the fundamental investment restrictions of the Stock Index Fund are not materially different from those of Fund A and Fund B. - ----------------------- (3) Net assets of Fund A include annuity reserves, therefore the number of units outstanding multiplied by the net asset value does not equal the net assets. For the other Funds and Subaccounts, the number of units or shares outstanding multiplied by the net asset value does not equal the net assets due to rounding. 20 Fund C's investment objective is long-term compounding of income through retention and reinvestment of income from investments in a diversified portfolio of short-term money market securities yielding a high level of current income to the extent consistent with the preservation of capital and the maintenance of liquidity. The Money Market Fund of the Series Company seeks liquidity, protection of capital and current income through investments in short-term money market instruments. The Board of Managers of Fund C believes that the investment objective, policies, and restrictions of the Money Market Fund are not materially different from the investment objective, policies, and restrictions of Fund C. Currently, each Fund's investment policy is to invest directly in individual securities selected by The Franklin, the investment manager to each Fund. It is currently a fundamental investment restriction of each Fund that the Fund may not invest more than 5% of its assets in any one issuer, except that up to 25% of each Fund's total assets may be invested without regard to such 5% limitation.(4) In addition, each Fund currently has a non-fundamental investment restriction that the Fund will not invest in the securities of other investment companies.(5) The Boards of Managers of the Funds may deem approval of the Reorganization by Fund Voters of each Fund as an approval of a change in the investment policies and restrictions of the Funds to require investment entirely and solely in specific mutual fund portfolios. The following table compares the fundamental investment restrictions of Fund A and Fund B to the fundamental investment restrictions of the Stock Index Fund.
- -------------------------------------------------------------------------------- FUND A AND FUND B STOCK INDEX FUND - -------------------------------------------------------------------------------- Fund will not concentrate its Stock Index Fund may not invest more investments in any one industry or than 25% of the value of its total group of related industries, and no assets in the securities of issuers more than 25% of the value of the primarily engaged in any one industry. Fund's assets will be invested in any one industry or group of related industries. - -------------------------------------------------------------------------------- Fund will not issue senior securities, Stock Index Fund may not issue senior except that the Fund may borrow money securities, except in connection with as set forth in the paragraph investments in options and futures immediately below. contracts. - -------------------------------------------------------------------------------- Fund will not borrow money except for Stock Index Fund may not borrow money temporary or emergency purposes from except as a temporary measure for banks, and any such borrowings will extraordinary or emergency purposes not be used to purchase investment (such as to meet redemption requests securities and will not exceed 5% of which might otherwise require the the value of the Fund's assets. disadvantageous sale of portfolio securities) and then not in excess of 5% of the Stock Index Fund's total assets. - --------------------------------------------------------------------------------
- ----------------------- (4) A fundamental investment restriction is one that cannot be changed without the affirmative vote of the holders of a majority of the outstanding voting shares of the respective Fund. For this purpose, a "majority" of shares means the lesser of: (a) 67% or more of the voting shares present at a meeting, if the holders of more than 50% of such votes are present or represented by proxy; or (b) more than 50% of the voting shares. (5) A non-fundamental investment restriction may be changed by action of the Board of Managers of the Fund. 21
- -------------------------------------------------------------------------------- FUND A AND FUND B STOCK INDEX FUND - -------------------------------------------------------------------------------- Fund will not underwrite securities of Stock Index Fund may not underwrite other issuers, except that the Fund securities of other issuers except may acquire portfolio securities under where the sale of restricted portfolio circumstances where, if sold, it might securities constitutes an underwriting be deemed to be an underwriter for under the federal securities laws. purposes of the Securities Act of 1933. No such securities will be acquired except where parties other than the Fund shall have agreed to bear any and all costs of registration under the Securities Act of 1933. No more than 10% of the value of the Fund's assets will at any time be invested in such securities. - -------------------------------------------------------------------------------- Fund will not engage in the purchase Stock Index Fund may not acquire real and sale of interests in real estate, estate or real estate contracts, except that the Fund may engage in the although the Stock Index Fund may purchase and sale of readily acquire obligations that are secured marketable interests in real estate by real estate or securities issued by investment trusts or similar companies investing in real estate, securities, which may be deemed to such as real estate investment trusts. represent indirect interests in real estate. - -------------------------------------------------------------------------------- Fund will not engage in the making of Stock Index Fund may not lend money, loans to other persons, except that except by purchasing debt obligations the Fund may acquire privately placed in which the Fund may invest corporate debt securities of a type consistent with its investment customarily purchased by institutional objective and policies or by investors. The foregoing does not purchasing securities subject to restrict the purchase by the Fund of a repurchase agreements. Stock Index portion of an issue of publicly Fund may not make loans to other distributed bonds, debentures or other persons, except than it may lend its securities, whether or not the portfolio securities to broker-dealers purchase is made upon the original and other financial institutions in an issuance of such securities. amount up to 30% of the value of its total assets. - -------------------------------------------------------------------------------- Fund will not engage in the purchase Stock Index Fund may not purchase or or sale of commodities or commodity sell commodities (except in connection contracts. with investments in options and futures contracts) or invest in oil, gas or mineral exploration programs. - -------------------------------------------------------------------------------- With respect to 75% of its assets, Stock Index Fund may not invest more Fund will not purchase the securities than 5% of the value of its total of any one issuer, other than assets in the securities of any one obligations issued or guaranteed by issuer. This does not include the U.S. Government and its agencies obligations issued or guaranteed by and instrumentalities, if such the U.S. Government or any of its purchase would cause more than 5% of agencies or instrumentalities. the Fund's assets to be invested in the securities of such issuer. - -------------------------------------------------------------------------------- With respect to 75% of its assets, Stock Index Fund may not purchase more Fund will not acquire more than 10% of than 10% of the outstanding voting the outstanding voting securities of securities, or any other class of any one issuer, other than obligations securities, of any one issuer. This issued or guaranteed by the U.S. does not include obligations issued or Government and its agencies and guaranteed by the U.S. Government or instrumentalities. any of its agencies or instrumentalities. - --------------------------------------------------------------------------------
22 In addition to the fundamental investment restrictions cited above, the Stock Index Fund has fundamental investment restrictions which provide that the Stock Index Fund may not: - mortgage, pledge or hypothecate more than 5% of the value of its total assets, and then only to secure borrowings made under this restriction; - acquire more than 3% of the voting securities of any single other investment company or invest more than 10% of the value of the Stock Index Fund's assets in the securities of other investment companies (5% in the case of each such other company); - acquire securities for the purpose of influencing the management of, or exercising control over, the issuer; - effect short sales of securities or purchase securities on margin, except in connection with investment in options and futures contracts; or - enter into a financial futures contract (by exercise of any option or otherwise) or acquire any options thereon, if, immediately thereafter, the total of the initial margin deposits required with respect to open futures positions, at the time such positions were established, plus the sum of the premiums paid for all unexpired options on futures contracts would exceed 5% of the value of its total assets. The following table compares the fundamental investment restrictions of Fund C to the fundamental investment restrictions of the Money Market Fund. - -------------------------------------------------------------------------------- FUND C MONEY MARKET FUND - -------------------------------------------------------------------------------- Fund C will not concentrate its Money Market Fund may not invest investments in any one industry or group more than 25% of the value of its of related industries, and no more than total assets in the securities of 25% of the value of Fund C's assets will issuers primarily engaged in any one be invested in any one industry or group industry, except investments in of related industries, except that there obligations issued or guaranteed by is no limitation with respect to the U.S. Government, its agencies, investments in obligations issued or or instrumentalities. guaranteed by the U.S. Government or its agencies or instrumentalities, or in bankers' acceptances, repurchase agreements or certificates of deposit of domestic banks. For purposes of this restriction, telephone, gas and electric utilities, banks, savings associations, personal credit institutions, business credit institutions, and insurance companies shall each be considered a separate industry. - -------------------------------------------------------------------------------- Fund C will not issue senior securities, Money Market Fund may not issue except that Fund C may borrow money as senior securities. set forth in the paragraph immediately below. - -------------------------------------------------------------------------------- 23 - -------------------------------------------------------------------------------- FUND C MONEY MARKET FUND - -------------------------------------------------------------------------------- Fund C will not borrow money except for Money Market Fund may not borrow temporary or emergency purposes, and any money except as a temporary measure such borrowings will not be used to for extraordinary or emergency purchase investment securities and will purposes (such as to meet redemption not exceed 5% of the value of Fund C's requests which might otherwise assets; provided, however, that Fund C require the disadvantageous sale of may borrow money up to one-third of its portfolio securities) and then not assets, not to increase its income but in excess of 5% of its total assets. to meet redemption requests which might otherwise require untimely dispositions of portfolio securities. So long as such borrowings exceed 5% of the value of Fund C's assets, Fund C will not make any new investments. In addition, to the extent such borrowings exceed the 5% limit and cause a subsequent reduction of the required asset coverage, Fund C will reduce the amount of its borrowings to comply with the appropriate asset coverage required under the 1940 Act. - -------------------------------------------------------------------------------- Fund C will not pledge, hypothecate, Money Market Fund may not mortgage, mortgage or otherwise encumber its pledge or hypothecate more than 5% assets except in an amount not in excess of the value of its total assets, of 15% of the value of its assets to and then only to secure borrowings secure borrowings made in accordance made under this restriction. with the borrowing restrictions described above. - -------------------------------------------------------------------------------- Fund C will not underwrite securities of Money Market Fund may not underwrite other issuers, except that Fund C may securities of other issuers except acquire portfolio securities under where the sale of restricted circumstances where, if sold, it might portfolio securities constitutes an be deemed to be an underwriter for underwriting under the federal purposes of the Securities Act of 1933. securities laws. No such securities will be acquired except where parties other than Fund C shall have agreed to bear any and all costs of registration under the Securities Act of 1933. No more than 10% of the value of Fund C's assets will at any time be invested in such securities. - -------------------------------------------------------------------------------- Fund C will not engage in the purchase Money Market Fund may not acquire and sale of interests in real estate, real estate or real estate except that Fund C may engage in the contracts, although the Fund may purchase and sale of money market acquire obligations that are secured securities secured by real estate or by real estate or securities issued interests therein or securities issued by companies investing in real by companies that invest in real estate estate, such as real estate or interests therein. investment trusts. - -------------------------------------------------------------------------------- Fund C will not engage in the making of Money Market Fund may not lend loans to other persons, except that Fund money, except by purchasing debt C may acquire qualified debt obligations obligations in which the Fund may or other money market securities and invest consistent with its enter into repurchase agreements investment objective and policies or (provided that the aggregate value of by purchasing securities subject to repurchase agreements maturing in more repurchase agreements. Money Market than seven days will not exceed 10% of Fund may not make loans to other Fund C's total assets), and may lend its persons, except than it may lend its portfolio securities (provided that such portfolio securities to broker- loans do not in the aggregate exceed 20% dealers and other financial of the value of Fund C's assets) if such institutions in an amount up to 30% loans are made according to the of the value of its total assets. guidelines of the Securities and Exchange Commission and the Board of Managers of the Fund, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. - -------------------------------------------------------------------------------- 24 - -------------------------------------------------------------------------------- FUND C MONEY MARKET FUND - -------------------------------------------------------------------------------- Fund C will not engage in the purchase Money Market Fund may not purchase or sale of commodities or commodity or sell commodities or commodity contracts or invest in oil, gas or other contracts or invest in oil, gas or mineral exploration or development mineral exploration programs. programs. - -------------------------------------------------------------------------------- Fund C will not purchase securities No comparable fundamental investment (other than repurchase agreements of not restriction. more than seven days' duration) for which there exists no readily available market, or for which there are legal or contractual restrictions on resale, if as a result of any such purchase, more than 10% of the value of Fund C's assets would be invested in such securities. - -------------------------------------------------------------------------------- Fund C will not purchase securities on Money Market Fund may not purchase margin, except for such short-term securities on margin. credits as are necessary for the clearance of transactions. - -------------------------------------------------------------------------------- Fund C will not make short sales of Money Market Fund may not effect securities or write, purchase or sell short sales of securities. Money puts, calls, straddles, spreads or Market Fund may not invest in combinations thereof. warrants, or write, purchase or sell puts, calls, straddles, spreads or combinations thereof. - -------------------------------------------------------------------------------- Fund C will not purchase the securities Money Market Fund may not invest of any one issuer, other than more than 5% of the value of its obligations issued or guaranteed by the total assets in the securities of U.S. Government and its agencies and any one issuer. This does not instrumentalities, if such purchase include obligations issued or would cause more than 5% of Fund C's guaranteed by the U.S. Government or assets to be invested in the securities any of its agencies or of such issuer, except that up to 25% of instrumentalities. Fund C's total assets taken at current value may be invested without regard to such 5% limitation. - -------------------------------------------------------------------------------- Fund C will not acquire more than 10% of Money Market Fund may not purchase the outstanding voting securities of any more than 10% of the outstanding one issuer, other than obligations voting securities, or any other issued or guaranteed by the U.S. class of securities, of any one Government and its agencies and issuer. This does not include instrumentalities, except that up to 25% obligations issued or guaranteed by of Fund C's total assets taken at the U.S. Government or any of its current value may be invested without agencies or instrumentalities. regard to such 10% limitation. - -------------------------------------------------------------------------------- In addition to the fundamental investment restrictions cited above, the Money Market Fund has fundamental investment restrictions which provide that the Money Market Fund may not: - purchase any security which matures more than 13 months from the date of purchase; - acquire securities for the purpose of influencing the management of, or exercising control over, the issuer; or - acquire more than 3% of the voting securities of any single other investment company or invest more than 10% of the value of the Money Market Fund's assets in the securities of other investment companies (5% in the case of each such other company). If the Fund Voters of each Fund approve the Reorganization, Contract Owners may lose the protections of certain fundamental policies and restrictions of the respective Fund (and become subject to 25 additional investment risk) to the extent that the corresponding policies and restrictions of the Series Company Funds impose less severe limitations than those of the Funds. However, as stated above, the Series Company Funds also have certain fundamental restrictions not included among the fundamental restrictions of the Funds. The prospectuses and statements of additional information for the Funds and the Series Company Funds located in Appendices B, C, D, and E contain more complete descriptions of the investment objectives, policies, and restrictions of each of the Funds and the corresponding Series Company Funds. COMPARATIVE PERFORMANCE The following tables show the actual and pro forma historic performance of the Funds, for 12-month periods ended December 31, 1998, using various measures appropriate for the Series Company Funds in which each Subaccount of the Continuing Fund will solely invest if the Reorganization is approved. The pro forma performance figures (shown in the right column) are derived from the actual performance of each of the Series Company Funds as adjusted to reflect the mortality and expense risk fees of the Continuing Fund, but do not reflect sales charges, surrender or deferred sales loads and administration fees under the Contracts since these charges and fees would not be imposed on the Continuing Fund. In other words, the pro forma performance figures show how the Reorganization might have affected historic performance if it had been consummated at an earlier time. Although past performance is no guarantee of future results, Fund Voters may wish to compare this pro forma performance of the Continuing Fund with the actual performance of the Funds (shown in the left column of performance figures)(6):
FUND C SUBACCOUNT C (actual) (pro forma) YIELD AND EFFECTIVE YIELD (for periods ended December 31, 1998) Yield (7-day period) 3.30% 3.64% Effective Yield (7-day period) 3.35% 3.71%
- ------------------------ (6) Average annual total return for Funds A and B was impacted by the necessity of holding an amount of assets in cash in order to handle redemptions, and by the inability of these Funds to reinvest dividends and capital gains in the stock market due to these Funds' cash outflow. 26
AVERAGE ANNUAL TOTAL RETURN (for periods ended December 31, 1998) FUND A SUBACCOUNT A (actual) (pro forma) One Year 24.99% 28.43% Five Years 18.08% 23.74% Ten Years 14.48% 18.47% FUND B SUBACCOUNT B (actual) (pro forma) One Year 33.08% 28.43% Five Years 20.53% 23.74% Ten Years 16.33% 18.47%
- -------------------------------------------------------------------------------- PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. - -------------------------------------------------------------------------------- INFORMATION ON THE FUNDS AND THE SERIES COMPANY The Board of Directors of The Franklin established each of the Funds as a "separate account" by resolutions pursuant to the provisions of the Illinois Insurance Code. The Franklin established Fund A on November 5, 1969, Fund B on April 1, 1970, and Fund C on July 23, 1981. Under the provisions of the Illinois Insurance Code: (1) the income, gains and losses of each Fund are credited to or charged against the amounts allocated to the Fund in accordance with the terms of the respective Contracts, without regard to The Franklin's other income, gains or losses; and (2) the assets of each Fund are not chargeable with liabilities arising out of The Franklin's other business activities. Each Fund is registered with the Securities and Exchange Commission under the 1940 Act as an open-end, diversified management investment company -- a type of separate account known as a "managed account." (Securities and Exchange Commission registration does not involve supervision of the management or the investment practices or policies of the investment company.) The Franklin no longer offers new Contracts through the Funds. Additional information about each Fund is contained in the Fund's prospectus (which accompanies this Proxy Statement/Prospectus as either Appendix B, C, or D and is incorporated herein by reference), and in the Fund's statement of additional information referred to in the Fund's prospectus. VALIC incorporated the Series Company in Maryland on December 7, 1984. The Series Company is registered with the Securities and Exchange Commission as an open-end management investment company. The Series Company offers its shares of common stock exclusively to variable annuity and variable life insurance separate accounts of VALIC and its affiliated insurance companies. As a "series" type of investment company, the Series Company issues distinct series of shares, each of which represents an interest in a separate diversified portfolio or "pool" of investments. Additional 27 information is contained in the prospectus for the Series Company (which accompanies this Proxy Statement/Prospectus as Appendix E and is incorporated herein by reference), and in the statement of additional information referred to in the prospectus. MANAGEMENT OF THE FUNDS AND THE SERIES COMPANY Each Fund is managed by a Board of Managers. The Franklin acts as investment manager for each Fund under an investment management agreement between each Fund and The Franklin. For a complete discussion of each Fund's investment advisory arrangements, see the respective prospectuses of the Funds which accompany this Proxy Statement/Prospectus as Appendices B, C and D. The Series Company is managed by a Board of Directors. VALIC serves as investment adviser for all of the portfolios currently offered by the Series Company. Bankers Trust serves as investment sub-adviser to the Stock Index Fund. For a more complete discussion of the Series Company Funds' investment advisory arrangements, see the Series Company prospectus which accompanies this Proxy Statement/Prospectus as Appendix E. At such time as the Reorganization takes effect, The Franklin's investment management agreement with each Fund will end, since the Subaccounts of the Continuing Fund will then invest only in shares of the specified Series Company Funds. Because each Subaccount of the Continuing Fund will invest in either the Stock Index Fund or the Money Market Fund and the Continuing Fund will not make any direct investments in securities, the Continuing Fund will have no discretion in investment decisions and no need for investment management or advice. Pursuant to Investment Advisory Agreements dated September 30, 1987 and May 1, 1992, respectively, VALIC serves as investment adviser for the Money Market Fund and the Stock Index Fund. VALIC is a stock life insurance company organized on May 1, 1969 under the Texas Insurance Code. VALIC's primary business consists of offering fixed and variable (and combinations thereof) retirement annuity contracts. VALIC is an indirect wholly owned subsidiary of American General Corporation, and an affiliate of The Franklin. VALIC's principal business address is 2929 Allen Parkway, Houston, Texas 77019. VALIC is a registered investment adviser under the Investment Advisers Act of 1940, as amended. The Series Company's Investment Advisory Agreements terminate automatically in the event of assignment. The Investment Advisory Agreements also may be terminated as to any Series Company Fund at any time without the payment of any penalty by the Series Company's Board of Directors, by vote of a majority of a Series Company Fund's outstanding voting securities, or by VALIC, on not more than 60 days' written notice, nor less than 30 days' written notice, or upon such shorter notice as may be mutually agreed upon. Otherwise, the Investment Advisory Agreements will continue in force with respect to any Series Company Fund so long as its continuance is approved at least annually by - the Series Company's Board of Directors, OR a majority of that Series Company Fund's outstanding voting securities (as defined in the 1940 Act), AND - the affirmative vote of a majority of the members of the Series Company's Board of Directors who are not parties to the agreement or "interested persons" of any such party (as defined in the 1940 Act). 28 In general, Bankers Trust, the investment sub-adviser to the Stock Index Fund, performs similar investment advisory services for the Stock Index Fund as The Franklin currently does for the Funds. Bankers Trust has day-to-day responsibility for making investment decisions and placing investment orders for the Stock Index Fund. Bankers Trust is also responsible for making sure that purchases and sales of Stock Index Fund investments are made in a manner consistent with the current investment objective and policies of the Stock Index Fund. Bankers Trust uses its best efforts to seek to execute portfolio transactions at prices that are advantageous to the Stock Index Fund and at commission rates that are reasonable in relation to the benefits received. Bankers Trust will attempt to achieve this result by selecting broker-dealers to execute transactions on the basis of: the size and type of the transaction; the nature and character of the markets for the security to be purchased or sold; the execution efficiency, settlement capability, and financial condition of the broker-dealer; the broker-dealer's execution services rendered on a continuing basis; and the reasonableness of any commissions. The availability of research or other services or payment of Stock Index Fund expenses may also be considered in selecting broker-dealers. ORGANIZATION AND OPERATION OF THE SERIES COMPANY FUNDS CHARACTERISTICS OF SERIES COMPANY SHARES. Shares issued by the Series Company are divided into separate series representing interests in separate portfolios. Each issued and outstanding share of a series is entitled to participate equally in dividends and distributions from such series and in the net assets of such series (I.E., the assets remaining after satisfaction of outstanding liabilities) upon a liquidation or dissolution. For these purposes, and for purposes of determining the purchase and redemption prices of shares, any assets which are not clearly allocable to a particular series will be allocated in the manner determined by the Series Company's Board of Directors. Accrued liabilities that are not allocable to one or more series will generally be allocated among the portfolios in proportion to their relative net assets before adjustment for such unallocated liability. In the event that any series incurred liabilities in excess of its assets, the other series could be liable for such excess. Similarly, each Subaccount of the Continuing Fund could perhaps be liable for claims arising out of another Subaccount's operations. The Series Company's authorized capital consists of 13,000,000,000 shares of capital stock. The Series Company has authorized the issuance of 1,000,000,000 shares by each of the Stock Index Fund and the Money Market Fund. Shares currently entitle their holders to one vote per share; however, separate votes will be taken by each series on matters affecting an individual series. The Series Company is not required to hold shareholder meetings annually, although shareholder meetings may be called for purposes such as electing or removing Directors, changing fundamental investment policies, or approving certain agreements. DIVIDENDS, DISTRIBUTIONS, AND TAXES. Each series of the Series Company intends to qualify each year as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") so that it will not be liable for federal tax on income and capital gains distributed to shareholders. In order to qualify as a regulated investment company and avoid being subject to federal income or excise taxes, each series intends to distribute substantially all of its net investment income and net realized capital gains within each calendar year as well as on a fiscal year basis, and intends to comply with other tax rules applicable to regulated investment companies. Income and capital gains distributions are reinvested in additional shares of the series. This is done to preserve the tax-advantaged status of the variable contracts that invest in the particular series. The Money Market Fund may distribute any net realized short-term capital gains once a year or more often as necessary, to maintain its net asset value at 29 $1.00. The Money Market Fund does not anticipate distributing long-term capital gains. Such distributions to The Franklin in respect of the Subaccounts of the Continuing Fund will be reinvested in additional full and fractional shares of the Series Company Fund to which they relate. Shares of each Series Company Fund which are purchased with reinvested distributions paid by such Fund will be held in the corresponding Subaccount of the Continuing Fund, and will be appropriately credited to the investment performance of that Subaccount for the benefit of Contract Owners. To qualify for treatment as a regulated investment company, each Series Company Fund must, among other things, derive in each taxable year at least 90% of its gross income from certain categories of income, including dividends, interest, and gains from the sale or other disposition of "securities"; diversify its portfolio assets; and distribute substantially all of its earnings to shareholders. Each series will be treated as a separate entity for federal income tax purposes. Therefore, the investments and results of the Series Company Funds will not be aggregated for purposes of determining whether they meet the foregoing requirements. Although each Series Company Fund intends to operate in such a way that it will have no federal income tax liability, if any such liability is nevertheless incurred, the investment performance of such Fund would be adversely affected, to the detriment of Contract Owners. This risk does not currently exist for Contract Owners, since the Funds, unlike the Series Company Funds, need not qualify as a regulated investment company. Indeed, the Funds are not treated for tax purposes as an entity separate from The Franklin, which is taxed as an insurance company under different provisions of the Code. VOTING OF SHARES. The current voting procedures with respect to the Funds are set forth under "General Information Regarding Proxy Solicitation," above. Each share of each series of the Series Company is currently entitled to one vote, and the votes of all series are cast on an aggregate basis except on matters where the interests of the series differ. Where the interests of the series differ, the voting is on a series-by-series basis. Approval or disapproval by the shareholders in one Series Company Fund on such a matter would not generally be a prerequisite of approval or disapproval by shareholders in another Series Company Fund; and shareholders in a Series Company Fund not affected by a matter generally would not be entitled to vote on that matter. Examples of matters which would require a series-by-series vote are changes in a fundamental investment policy of a particular Series Company Fund and approval of an investment advisory agreement for a particular Series Company Fund. If the Fund Voters in each Fund approve the Reorganization, The Franklin will offer Contract Owners the opportunity to instruct The Franklin as to how the Series Company Funds' shares allocable to their Contracts and held by The Franklin in the Continuing Fund will be voted. The number of shares held in each Subaccount of the Continuing Fund deemed attributable to each Contract Owner for this purpose will be determined by dividing the total value of the Contract's accumulation units (or, after annuity payments commence, the amount of Contract reserves) allocable to that Subaccount by the net asset value of one share of the corresponding Series Company Fund as of the record date. Fractional votes will be counted. Shares of the Series Company Funds in any Subaccount that are not attributable to the Contracts or for which no voting instructions are timely received by The Franklin will be voted in the same proportion as the shares for which voting instructions are timely received under the Contracts. Thus, although voting instructions will be reflected somewhat differently after the Reorganization than before, The Franklin believes that this will not result in any significant diminution of Contract Owners' voting privileges. 30 Notwithstanding the foregoing, The Franklin anticipates that the Reorganization will result in dilution of the voting influence which Contract Owners have with respect to the funding medium for their Contracts. This dilution is attributable to the fact that other separate accounts have voting interests in the Series Company Funds, and shares of the Series Company Funds which are held in separate accounts of insurance companies other than The Franklin will be voted in accordance with instructions of the owners of policies or contracts issued by such other companies. CERTAIN OWNERSHIP INTERESTS. As of December 31, 1998, The Franklin owned no Contract participating in the investment experience of Fund A, Fund B, or Fund C, respectively. As of December 31, 1998, no member of the Board of Managers nor any officer of any Fund owned any Contract participating in the investment experience of Fund A, Fund B, or Fund C. SALE OF THE CONTRACTS AND SERIES COMPANY SHARES The Contracts were sold by The Franklin's agents, who were licensed to sell variable annuities and were registered representatives of Franklin Financial Services Corporation ("Franklin Financial"). Franklin Financial is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended (the "1934 Act"), is a member of the National Association of Securities Dealers, Inc. ("NASD"), and was the principal underwriter of the Funds. The Contracts are no longer being sold; however, The Franklin continues to accept additional Stipulated Payments in accordance with contractual provisions. The Franklin currently does not intend to issue new Contracts following the consummation of the Reorganization. Shares in each Series Company Fund are offered only to registered and unregistered separate accounts of VALIC and its affiliates, or employee thrift plans maintained by VALIC or American General Corporation. The Variable Annuity Marketing Company ("VAMCO") serves as the Series Company's distributor. VAMCO is registered as a broker-dealer under the 1934 Act, and is a member of the NASD. VAMCO accepts orders for shares at their net asset value, as no sales commission or load is charged. DEDUCTIONS, CHARGES, FEES, AND EXPENSES DEDUCTIONS AND CHARGES UNDER THE CONTRACTS. If the Fund Voters for each Fund approve the Reorganization, certain Fund annual expenses, such as the investment management fee, will not be incurred directly by the Continuing Fund but, in effect, will be replaced by the Series Company Funds' fees and expenses.(7) Other deductions and charges, such as the mortality and expense risk fees, will continue to apply after the Reorganization. In addition, the Contracts' sales loads, surrender or deferred sales charges, and administration fees were waived beginning in October 1998. The deductions and charges that remain applicable after the Reorganization are described below. The Franklin offered two types of Contracts through each Fund: - Contracts under which annuity payments to the annuitant commence immediately ("immediate variable annuities"). Contract Owners could only purchase immediate variable annuities with a single payment to The Franklin. - ----------------------- (7) The Franklin will implement an expense limitation whereby each Subaccount's total annual expenses (as a percentage of average net assets) after the Reorganization, will not exceed the corresponding Fund's total annual expenses (as a percentage of average net assets) for the year ended December 31,1998. 31 - Contracts under which annuity payments to the annuitant commence in the future ("deferred variable annuities"). Contract Owners could purchase deferred variable annuities with either periodic payments or single payments to The Franklin. CONTRACTS ISSUED THROUGH FUND A. The Contracts offered through Fund A ("Fund A Contracts") were sold for use in connection with certain qualified plans and trusts accorded special tax treatment or as individual retirement annuities under the Internal Revenue Code (the "Code") as follows: - in connection with qualified employee pension and profit-sharing trusts described in Section 401(a) and tax-exempt under Section 501(a) of the Code, and qualified annuity plans described in Section 403(a) of the Code; - in connection with qualified pension, profit-sharing and annuity plans established by self-employed persons; - in connection with annuity purchase plans adopted by public school systems and certain tax-exempt organizations pursuant to Section 403(b) of the Code; or - as Individual Retirement Annuities described in Section 408(b) of the Code, including Simplified Employee Pensions described in Section 408(k) of the Code. CONTRACTS ISSUED THROUGH FUND B. The Contracts offered through Fund B ("Fund B Contracts") were designed primarily to assist in retirement planning for individuals. Fund B Contracts were not designed for use in connection with employer-related plans or qualified plans and trusts accorded special tax treatment under the Code. CONTRACTS ISSUED THROUGH FUND C. The Contracts offered through Fund C ("Fund C Contracts") were designed primarily to assist in retirement planning for individuals. Fund C Contracts were sold for use as individual retirement annuities or in connection with trusts and retirement or deferred compensation plans which may or may not qualify for favorable tax treatment under the Code. Tax-Qualified Fund C Contracts were sold for use in the same markets that were available under Fund A Contracts. PREMIUM TAXES. At the time any premium taxes are payable by The Franklin on the consideration received from the sale of the Contracts, the amount thereof will be deducted from the Stipulated Payments. Premium taxes ranging up to 5% of each payment are charged by various jurisdictions in which The Franklin is transacting business and in which it has offered Fund A Contracts, Fund B Contracts, and Fund C Contracts. MORTALITY AND EXPENSE RISK FEES. The Franklin assumes the risk that annuity payments will continue for a longer period than anticipated because the annuitant lives longer than expected, and also assumes the risk that the administration deduction may be insufficient to cover the actual administration expenses under the Contracts. For assuming these risks, The Franklin imposes a daily charge against the value of the accumulation unit and the annuity unit. For Fund A Contracts and Fund B Contracts, this charge is at the combined annual rate of 1.002% (.002745% on a daily basis). The Franklin will not increase this charge regardless of the actual mortality and expense experience. For assuming the mortality and expense risks under Fund C Contracts, The Franklin imposes a daily charge against the value of the accumulation unit and the annuity unit at the current combined annual rate of 1.065% 32 (.002918% on a daily basis). The Franklin may increase this charge under Fund C Contracts at any time up to a maximum of 1.750%. FEES AND EXPENSES OF THE SERIES COMPANY FUNDS INVESTMENT ADVISORY FEE. Just as each Fund (prior to the Reorganization) is responsible for paying an investment management fee, each Series Company Fund is responsible for paying an investment advisory fee. Under the Investment Advisory Agreements, the Series Company retains VALIC: - to manage the investment of the assets of the Series Company Funds; - to maintain a trading desk; and - to place orders for the purchase and sale of portfolio securities. VALIC also provides other services including furnishing the services of personnel the Series Company requires; preparing any reports and statements required by law; and conducting any other activity that the Series Company may need to continue operations. OTHER EXPENSES. The Series Company pays all expenses not specifically assumed by VALIC under the Investment Advisory Agreements. Examples of the expenses that the Series Company pays include: transfer agency fees; custodial fees; fees of outside legal and auditing firms; the costs of shareholder reports; and the expenses of servicing shareholder accounts. The Series Company allocates investment advisory fees, Securities and Exchange Commission filing fees, interest expenses and state filing fees to the series of the Series Company that incurs such charges, and allocates all other expenses among the separate series based on the net assets of each series in relation to the Series Company's net assets. SUPPLEMENTARY FINANCIAL INFORMATION FINANCIAL HIGHLIGHTS FOR THE FUNDS. As a supplement to the condensed financial information for each Fund contained in the respective Fund's prospectus (accompanying this Proxy Statement/Prospectus as Appendices B, C, and D), the following data are presented for the year ended December 31, 1998: 33 SELECTED DATA PER ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD (for the year ended December 31, 1998)
FUND A FUND B FUND C PER ACCUMULATION UNIT DATA: Investment income ($) 1.72 1.78 1.20 Expenses ($) 1.54 1.78 0.34 ----- ------ ----- Net investment income ($) 0.18 0.00 0.86 Net realized and unrealized gain on investments($) 24.42 36.59 -- ----- ------ ----- Net increase in accumulation unit value ($) 24.60 36.59 0.86 Accumulation unit value at beginning of period($) 98.43 110.59 23.73 ----- ------ ----- Accumulation unit value at end of period ($) 123.03 147.18 24.59 RATIOS: Ratio of expenses to average net assets (%) 1.44 1.44 1.44 Ratio of net investment income to average net assets (%) 0.17 -- 3.57 Portfolio turnover rate (%) 1.42 0.87 -- Number of accumulation units outstanding at end of period 109,896 13,839 62,851
FINANCIAL HIGHLIGHTS FOR THE SERIES COMPANY FUNDS. The following data are presented for the year ended December 31, 1998 and supplement the complete fiscal years of financial highlights for the Series Company Funds contained in the prospectus accompanying this Proxy Statement/Prospectus as Appendix E: STOCK INDEX FUND AND MONEY MARKET FUND SELECTED DATA PER SHARE OUTSTANDING THROUGHOUT THE PERIOD (for the year ended December 31, 1998)
STOCK INDEX MONEY FUND MARKET FUND PER SHARE DATA Net asset value, beginning of period ($) 29.70 1.00 Income from investment operations: Net investment income ($) 0.19 0.04 Net realized and unrealized gain on investment transactions ($) 7.99 -- 34 STOCK INDEX MONEY FUND MARKET FUND Total from investment operations ($) 8.18 0.04 Less distributions from: Net investment income (0.19) (0.04) Net realized gains on investment transactions (0.15) -- --------- ------- Total distributions (0.34) (0.04) --------- ------- Net asset value, end of period ($) 37.54 1.00 TOTAL RETURN (%) 28.43 5.15 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period ($ thousands) 4,100,923 273,628 Ratio of operating expenses, to average net assets (%) 0.31 0.55 Ratio of net investment income to average net assets (%) 1.22 5.07 Portfolio turnover rate (%) 6 --
AVAILABILITY OF CERTAIN OTHER INFORMATION The Funds and the Series Company are subject to various reporting and filing requirements pursuant to statutes administered by the Securities and Exchange Commission. You can inspect and copy the balance of this registration statement, of which this Proxy Statement/Prospectus forms a part, as well as reports, proxy statements, and other information filed with the Securities and Exchange Commission by the Funds or the Series Company at the public reference facilities maintained by the Securities and Exchange Commission at: 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain copies of such material from the Securities and Exchange Commission at prescribed rates by writing to the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. THE BOARD OF MANAGERS OF EACH OF THE FUNDS RECOMMENDS A VOTE FOR THE REORGANIZATION. OTHER MATTERS The Board of Managers of each Fund knows of no other matters which are likely to be brought before the Special Meetings. In the event any other matters do properly come before the Special Meetings, however, the persons named in the enclosed proxy will vote the proxies in accordance with their best judgment. 35 PROXY OF CONTRACT OWNER FRANKLIN LIFE VARIABLE ANNUITY FUND A PROXY SOLICITED BY THE BOARD OF MANAGERS FOR A SPECIAL MEETING OF CONTRACT OWNERS OF FRANKLIN LIFE VARIABLE ANNUITY FUND A TO BE HELD ON April 8, 1999 [Contract Owner] Proxy Number: [Address] ---------------------- [City, State, Zip Code] Contract Number: -------------------- Units: ---------------- The undersigned Contract Owner of Franklin Life Variable Annuity Fund A (the "Fund"), having received Notice of the Special Meeting of Contract Owners of the Fund and the Proxy Statement/Prospectus accompanying such Notice, each dated March 1, 1999, hereby constitutes and appoints Robert G. Spencer and Elizabeth E. Arthur, and each of them, true and lawful attorneys or attorney of the undersigned, with power of substitution, to attend and to cast all votes entitled to be cast by the undersigned, for and in the name, place and stead of the undersigned, at the Special Meeting of Contract Owners of the Fund to be held on April 8, 1999 at 1:00 p.m., Central Standard Time, at The Franklin Life Insurance Company's home office at #1 Franklin Square, Springfield, Illinois 62713, and at any and all adjournments thereof, with all powers the undersigned would possess if personally present. All previous proxies given with respect to all votes entitled to be cast by the undersigned at the Special Meeting are hereby revoked. THE PROXIES WILL VOTE IN THE MANNER DIRECTED HEREIN, OR, IF NO DIRECTION HAS BEEN INDICATED, FOR EACH PROPOSAL. The Board of Managers of the Fund recommends that this proxy be marked FOR each proposal. This proxy may be revoked at any time prior to the Special Meeting by executing a subsequent proxy, or by notifying the Secretary of the Fund in writing, or by voting in person at the Special Meeting. Please mark, sign, date, and return all proxy forms promptly in the enclosed envelope. Please sign exactly as your name appears on this form. To vote on the proposal, using blue or black ink, indicate your choice by marking an "X" in the appropriate box as follows: /X/ THE PROXY FORM MUST BE SIGNED AND DATED FOR YOUR VOTE TO BE COUNTED. - -------------------------------------------------------------------------------- For Against Abstain - -------------------------------------------------------------------------------- 1. Proposal to approve an Agreement and Plan of Reorganization and related transactions whereby: / / / / / / (1) Franklin Life Variable Annuity Fund A, presently a management investment company, will be renamed and restructured as a single unit investment trust comprising three investment divisions and will be combined with Franklin Life Variable Annuity Fund B and Franklin Life Money Market Variable Annuity Fund C; and (2) each investment division will invest exclusively in shares of either the Stock Index Fund or the Money Market Fund of the American General Series Portfolio Company. - -------------------------------------------------------------------------------- Signature: Signature: ------------------------ --------------------------- Dated: ---------------------- PROXY OF CONTRACT OWNER FRANKLIN LIFE VARIABLE ANNUITY FUND B PROXY SOLICITED BY THE BOARD OF MANAGERS FOR A SPECIAL MEETING OF CONTRACT OWNERS OF FRANKLIN LIFE VARIABLE ANNUITY FUND B TO BE HELD ON April 8, 1999. [Contract Owner] Proxy Number: [Address] ---------------------- [City, State, Zip Code] Contract Number: -------------------- Units: ---------------- The undersigned Contract Owner of Franklin Life Variable Annuity Fund B (the "Fund"), having received Notice of the Special Meeting of Contract Owners of the Fund and the Proxy Statement/Prospectus accompanying such Notice, each dated March 1, 1999, hereby constitutes and appoints Robert G. Spencer and Elizabeth E. Arthur, and each of them, true and lawful attorneys or attorney of the undersigned, with power of substitution, to attend and to cast all votes entitled to be cast by the undersigned, for and in the name, place and stead of the undersigned, at the Special Meeting of Contract Owners of the Fund to be held on April 8, 1999 at 1:00 p.m., Central Standard Time, at The Franklin Life Insurance Company's home office at #1 Franklin Square, Springfield, Illinois 62713, and at any and all adjournments thereof, with all powers the undersigned would possess if personally present. All previous proxies given with respect to all votes entitled to be cast by the undersigned at the Special Meeting are hereby revoked. THE PROXIES WILL VOTE IN THE MANNER DIRECTED HEREIN, OR, IF NO DIRECTION HAS BEEN INDICATED, FOR EACH PROPOSAL. The Board of Managers of the Fund recommends that this proxy be marked FOR each proposal. This proxy may be revoked at any time prior to the Special Meeting by executing a subsequent proxy, or by notifying the Secretary of the Fund in writing, or by voting in person at the Special Meeting. Please mark, sign, date, and return all proxy forms promptly in the enclosed envelope. Please sign exactly as your name appears on this form. To vote on the proposal, using blue or black ink, indicate your choice by marking an "X" in the appropriate box as follows: /X/ THE PROXY FORM MUST BE SIGNED AND DATED FOR YOUR VOTE TO BE COUNTED. - -------------------------------------------------------------------------------- For Against Abstain - -------------------------------------------------------------------------------- 1. Proposal to approve an Agreement and Plan of Reorganization and related transactions whereby: / / / / / / (1) Franklin Life Variable Annuity Fund A, presently a management investment company, will be renamed and restructured as a single unit investment trust comprising three investment divisions and will be combined with Franklin Life Variable Annuity Fund B and Franklin Life Money Market Variable Annuity Fund C; and (2) each investment division will invest exclusively in shares of either the Stock Index Fund or the Money Market Fund of the American General Series Portfolio Company. - -------------------------------------------------------------------------------- Signature: Signature: ------------------------ --------------------------- Dated: ---------------------- PROXY OF CONTRACT OWNER FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C PROXY SOLICITED BY THE BOARD OF MANAGERS FOR A SPECIAL MEETING OF CONTRACT OWNERS OF FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C TO BE HELD ON April 8, 1999. [Contract Owner] Proxy Number: [Address] ---------------------- [City, State, Zip Code] Contract Number: -------------------- Units: ---------------- The undersigned Contract Owner of Franklin Life Money Market Variable Annuity Fund C (the "Fund"), having received Notice of the Special Meeting of Contract Owners of the Fund and the Proxy Statement/Prospectus accompanying such Notice, each dated March 1, 1999, hereby constitutes and appoints Robert G. Spencer and Elizabeth E. Arthur, and each of them, true and lawful attorneys or attorney of the undersigned, with power of substitution, to attend and to cast all votes entitled to be cast by the undersigned, for and in the name, place and stead of the undersigned, at the Special Meeting of Contract Owners of the Fund to be held on April 8, 1999 at 1:00 p.m., Central Standard Time, at The Franklin Life Insurance Company's home office at #1 Franklin Square, Springfield, Illinois 62713, and at any and all adjournments thereof, with all powers the undersigned would possess if personally present. All previous proxies given with respect to all votes entitled to be cast by the undersigned at the Special Meeting are hereby revoked. THE PROXIES WILL VOTE IN THE MANNER DIRECTED HEREIN, OR, IF NO DIRECTION HAS BEEN INDICATED, FOR EACH PROPOSAL. The Board of Managers of the Fund recommends that this proxy be marked FOR each proposal. This proxy may be revoked at any time prior to the Special Meeting by executing a subsequent proxy, or by notifying the Secretary of the Fund in writing, or by voting in person at the Special Meeting. Please mark, sign, date, and return all proxy forms promptly in the enclosed envelope. Please sign exactly as your name appears on this form. To vote on the proposal, using blue or black ink, indicate your choice by marking an "X" in the appropriate box as follows: /X/ THE PROXY FORM MUST BE SIGNED AND DATED FOR YOUR VOTE TO BE COUNTED. - -------------------------------------------------------------------------------- For Against Abstain - -------------------------------------------------------------------------------- 1. Proposal to approve an Agreement and Plan of Reorganization and related transactions whereby: / / / / / / (1) Franklin Life Variable Annuity Fund A, presently a management investment company, will be renamed and restructured as a single unit investment trust comprising three investment divisions and will be combined with Franklin Life Variable Annuity Fund B and Franklin Life Money Market Variable Annuity Fund C; and (2) each investment division will invest exclusively in shares of either the Stock Index Fund or the Money Market Fund of the American General Series Portfolio Company. - -------------------------------------------------------------------------------- Signature: Signature: ------------------------ --------------------------- Dated: ---------------------- APPENDIX A AGREEMENT AND PLAN OF REORGANIZATION APPENDIX A AGREEMENT AND PLAN OF REORGANIZATION FOR FRANKLIN LIFE VARIABLE ANNUITY FUND A FRANKLIN LIFE VARIABLE ANNUITY FUND B FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C OF THE FRANKLIN LIFE INSURANCE COMPANY This Agreement and Plan of Reorganization (the "Agreement"), is entered into as of the 5th day of January, 1999, by and among The Franklin Life Insurance Company ("The Franklin"), a stock life insurance company organized and existing under the laws of the State of Illinois, Franklin Life Variable Annuity Fund A ("Fund A"), Franklin Life Variable Annuity Fund B ("Fund B"), and Franklin Life Money Market Variable Annuity Fund C ("Fund C"). WHEREAS, each of Fund A, Fund B, and Fund C (collectively, the "Funds") is a managed separate account established and existing under the insurance laws of the State of Illinois, is registered with the Securities and Exchange Commission (the "Commission") as an open-end, diversified management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and is the funding vehicle for certain variable annuity contracts issued by The Franklin (the "Contracts"); and WHEREAS, Fund A and Fund B each invest primarily in common stocks to achieve the investment objective of long-term appreciation of capital through investment appreciation and the retention and reinvestment of income, and Fund C invests in short-term money market securities to achieve the investment objective of long-term compounding of income through retention and reinvestment of income from investments in a diversified portfolio of short-term money market securities yielding a high level of current income to the extent consistent with the preservation of capital and the maintenance of liquidity; and WHEREAS, the American General Series Portfolio Company (the "Series Company") is a mutual fund that is currently comprised of several investment portfolios, including the Stock Index Fund and the Money Market Fund (each, a "Portfolio"), and is registered with the Commission as an open-end management investment company under the 1940 Act; and WHEREAS, the Stock Index Fund tracks the Standard & Poor's 500 Index-Registered Trademark- ("S&P 500") to achieve the investment objective of long-term capital growth through investment in common stocks that, as a group, are expected to provide investment results closely corresponding to the performance of the S&P 500; and the Money Market Fund seeks liquidity, protection of capital and current income through investments in short-term money market instruments; and WHEREAS, the Series Company serves as an investment vehicle for variable annuity contracts or variable life insurance policies issued by The Variable Annuity Life Insurance 1 Company ("VALIC") or one of its affiliates, or employee thrift plans maintained by VALIC or American General Corporation; and WHEREAS the Boards of Managers of each Fund has considered and approved the actions contemplated by this Agreement and has authorized that Fund to enter into this Agreement; and WHEREAS, the Board of Directors of The Franklin has considered and approved the actions contemplated by this Agreement and has authorized The Franklin to enter into this Agreement; NOW THEREFORE, in consideration of the mutual promises made herein, the parties hereto agree as follows: ARTICLE I: CLOSING DATE SECTION 1.01. The reorganization contemplated by this Agreement shall be effective on such date as may be mutually agreed upon in writing by all parties to this Agreement (the "Closing Date"). The time on the Closing Date as of which the reorganization is consummated is referred to hereinafter as the "Effective Time." SECTION 1.02. The parties agree to use their best efforts to obtain all regulatory approvals and approvals of persons entitled to vote with respect to each Fund ("Fund Voters"), and to perform all other acts necessary or desirable to complete the reorganization as of the Closing Date. ARTICLE II: TRANSACTIONS SECTION 2.01. Prior to the Effective Time, Fund A will be renamed as "Franklin Life Variable Annuity Fund" or such other name specified by the Board of Managers of Fund A (hereafter, the "Continuing Fund"), and will be reorganized into a single unit investment trust separate account comprising three investment divisions ("Subaccount A," "Subaccount B," and "Subaccount C"). SECTION 2.02. Prior to the Effective Time: (1) all of the assets (including securities and other investments held or in transit, receivables for sold investments, dividends, interest receivables and any other assets) of Fund A will be converted into cash and transferred to Subaccount A of the Continuing Fund; (2) all of the assets (including securities and other investments held or in transit, receivables for sold investments, dividends, interest receivables and any other assets) of Fund B will be converted into cash and transferred to Subaccount B of the Continuing Fund; and (3) all of the assets (including securities and other investments held or in transit, receivables for sold investments, dividends, interest receivables and any other assets) of Fund C will be converted into cash and transferred to Subaccount C of the Continuing Fund. 2 SECTION 2.03. As of the Effective Time, The Franklin, on behalf of the Continuing Fund, will transfer all cash (except for a minimal amount needed to keep bank accounts open) of: (1) Subaccount A to the Stock Index Fund; (2) Subaccount B to the Stock Index Fund; and (3) Subaccount C to the Money Market Fund. SECTION 2.04. In return for the cash received on behalf of Subaccount A and Subaccount B of the Continuing Fund, The Franklin will receive from the Series Company, on behalf of each such Subaccount, shares in the Stock Index Fund. In return for the cash received on behalf of Subaccount C, The Franklin will receive from the Series Company, on behalf of such Subaccount, shares in the Money Market Fund. The number of shares in each Portfolio of the Series Company to be received shall be determined by dividing (1) the amount of cash transferred on behalf of each Subaccount of the Continuing Fund, by (2) the per share value of the corresponding Portfolio of the Series Company's shares (computed in the manner set forth in the currently effective registration statement for the Series Company) as of the Closing Date or such other date required by law. SECTION 2.05. As of the Effective Time, The Franklin shall cause the shares of the Series Company it receives pursuant to Section 2.04 of this Agreement to be duly and validly recorded and held on its records as assets of the Continuing Fund, such that the interest of each owner of a Contract ("Contract Owner") in each Subaccount of the Continuing Fund after the Closing Date will then be equivalent in value to that Contract Owner's former interest in each Fund. The Franklin shall take all action necessary to ensure that such interests in the Continuing Fund, immediately following the Effective Time, are duly and validly recorded on the Contract Owner's individual account records. SECTION 2.06. The Series Company's shares to be issued hereunder may, upon instructions from The Franklin, be issued in open account form by book entry without the issuance of certificates or may be represented by certificates. SECTION 2.07. If, at any time after the Closing Date, the Continuing Fund or The Franklin shall determine that any further action is necessary or desirable to complete the reorganization contemplated by this Agreement, the appropriate entity or entities shall take all such actions which are considered reasonable and necessary to complete the reorganization. SECTION 2.08. Following the Closing Date: (1) The Franklin will not provide investment advisory services to the Continuing Fund and, therefore, will not charge the Continuing Fund for investment advisory services; and (2) The Franklin will continue to charge the Continuing Fund for mortality and expense risks assumed by The Franklin and for any premium taxes with respect to the Contracts. 3 ARTICLE III: WARRANTIES AND CONDITIONS SECTION 3.01. The Franklin and the Funds, as appropriate, make the following representations and warranties, which shall survive the Closing Date and bind their respective successors and assigns (I.E., the Continuing Fund): (a) The Franklin and the Funds are validly organized and established, and in good standing under the laws of the State of Illinois, and are fully empowered and qualified to carry out their business in all jurisdictions where they do so, including to enter into this Agreement and to effect the reorganization contemplated hereby (provided that all necessary approvals referred to in Section 3.02 of this Agreement are obtained). (b) Each Fund is duly registered and in good standing as an investment company under the 1940 Act. (c) The Contracts are validly issued and non-assessable, and all of the Contracts issued through each Fund have been offered and sold in material compliance with applicable requirements of the federal securities laws. (d) All corporate and other proceedings necessary and required to be taken by or on the part of The Franklin and the Funds to authorize and carry out this Agreement and to effect the reorganization have been duly and properly taken. (e) There are no suits, actions, or proceedings pending or threatened against any party to this Agreement which, to its knowledge, if adversely determined, would materially and adversely affect its financial condition, the conduct of its business, or its ability to carry out its obligations hereunder. (f) There are no investigations or administrative proceedings by the Commission or by any insurance or securities regulatory body of any state or territory or of the District of Columbia pending against any party to this Agreement which, to its knowledge, would lead to any suit, action, or proceeding that, if adversely determined, would materially and adversely affect its financial condition, the conduct of its business, or its ability to carry out its obligations hereunder. (g) If any party to this Agreement becomes aware, prior to the Effective Time, of any suit, action, or proceeding, of the types described in paragraphs (e) or (f) above, instituted or commenced against it, such party shall immediately notify and advise all other parties to this Agreement. (h) Each party shall make available all information concerning itself which may be required in any application, registration statement, or other filing with a governmental body to be made by the parties to this Agreement, in connection with any of the transactions contemplated by 4 this Agreement and shall join in all such applications or filings, subject to reasonable approval by its counsel. Each party represents and warrants that to its knowledge all of such information so furnished shall be correct in all material respects and that it shall not omit any material fact required to be stated therein or necessary in order to make the statements therein not misleading. (i) From the date of this Agreement through the Closing Date, each of the Funds will conduct its business in accordance with such Fund's governing Rules and Regulations and in substantial compliance with the Illinois Insurance Laws and the terms of the Contracts issued through each Fund, and The Franklin will conduct its business in accordance with its Bylaws and in substantial compliance with the Illinois Insurance Laws. (j) Except with respect to contracts entered into in connection with the investment advisory services of the Funds which shall terminate on or prior to the Closing Date, no party is engaged currently, and the execution, delivery and performance of this Agreement by each party will not result, in a material violation of any such party's charter, by-laws, or any material agreement, indenture, instrument, contract, lease or other undertaking to which such party is bound, and to such party's knowledge, the execution, delivery and performance of this Agreement will not result in the acceleration of any obligation, or the imposition of any penalty, under any material agreement, indenture, instrument, contract, lease, judgment or decree to which any such party may be a party or to which it is bound. (k) This Agreement is a valid obligation of The Franklin and the Funds and is legally binding upon them in accordance with its terms. SECTION 3.02. The obligations of the parties hereunder shall be subject to satisfaction of each of the following conditions: (a) The representations contained herein shall be true as of and at the Effective Time with the same effect as though made at such time, and such parties shall have performed all obligations required by this Agreement to be performed by each of them prior to such time. (b) The Commission shall not have issued an unfavorable advisory report under Section 25(b) of the 1940 Act nor instituted any proceeding seeking to enjoin consummation of the reorganization contemplated hereby. (c) The appropriate parties shall have received orders from the Commission providing such exemptions and approvals as they and their counsel reasonably deem necessary, including exemptions from Section 17(a) of the 1940 Act, and shall have made all necessary filings, if any, with, and received all necessary approvals from, state securities or insurance authorities. (d) Fund A shall have filed with the Commission a registration statement on Form N-14 under the Securities Act of 1933, as amended (the "1933 Act"), and such pre-effective amendments thereto as may be necessary or desirable to effect the purposes of the reorganization; 5 and the appropriate parties shall have taken all actions necessary for such filings to become effective; and no reason shall be known by the parties which would prevent the filings from becoming effective in a timely manner. (e) At a meeting of Fund Voters called for such purpose (or any adjournments thereof), a majority of the outstanding voting securities (as defined in the 1940 Act and the rules thereunder) of each of the Funds, voting separately, shall have voted in favor of approving this Agreement and the reorganization contemplated hereby. (f) Each party shall have furnished, as reasonably requested by any other party, legal opinions, officers' certificates, certified copies of board and committee resolutions, certificates of good standing or "all fees paid" or similar certificates, and other closing documentation as may be appropriate for a transaction of this type. ARTICLE IV: COSTS SECTION 4.01. The Franklin shall bear all expenses incurred by it and by each of the Funds in connection with effecting the reorganization contemplated by this Agreement (including, without limitation, any expenses incurred by it and each of the Funds in connection with: actions taken pursuant to Section 2.07 of this Agreement; preparation and filing of registration statements, applications, and amendments thereto on behalf of any and all parties hereto; all legal, accounting, and data processing services for The Franklin and each of the Funds necessary to effect the reorganization; and all expenses incurred in connection with liquidating the Funds' assets as described in Section 2.02). ARTICLE V: TERMINATION SECTION 5.01. This Agreement may be terminated and the reorganization abandoned at any time prior to the Effective Time, notwithstanding approval by Fund Voters: (a) by mutual consent of the parties hereto; or (b) by any of the parties if any condition set forth in Section 3.02 of this Agreement has not been fulfilled by the other parties. SECTION 5.02. At any time prior to the Effective Time, any of the terms or conditions of this Agreement may be waived by the party or parties entitled to the benefit thereof if such waiver will not have a material adverse effect on the interests of Contract Owners. 6 ARTICLE VI: GENERAL SECTION 6.01. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. SECTION 6.02. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of Illinois, without regard to its principles of conflicts of law. * * * 7 IN WITNESS WHEREOF, as of the day and year first above written, each of the parties has caused this Agreement to be executed on its behalf by its Chairman, President, or Vice President and attested by its Secretary or Assistant Secretary, all thereunto duly authorized. THE FRANKLIN LIFE INSURANCE COMPANY Attest: /s/ Elizabeth E. Arthur By: /s/ William A. Simpson - ------------------------------- ---------------------------------------- Title: Assistant Secretary Title: Chairman and Chief Executive Officer FRANKLIN LIFE VARIABLE ANNUITY FUND A Attest: /s/ Elizabeth E. Arthur By: /s/ Robert G. Spencer - ------------------------------- ---------------------------------------- Title: Secretary, Title: Chairman, Board of Managers Board of Managers FRANKLIN LIFE VARIABLE ANNUITY FUND B Attest: /s/ Elizabeth E. Arthur By: /s/ Robert G. Spencer - ------------------------------- ---------------------------------------- Title: Secretary, Title: Chairman, Board of Managers Board of Managers FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C Attest: /s/ Elizabeth E. Arthur By: /s/ Robert G. Spencer - ------------------------------- ---------------------------------------- Title: Secretary, Title: Chairman, Board of Managers Board of Managers 8 APPENDIX B FRANKLIN LIFE VARIABLE ANNUITY FUND A PROSPECTUS FRANKLIN LIFE VARIABLE ANNUITY FUND A PROSPECTUS INDIVIDUAL VARIABLE ANNUITY CONTRACTS (USED IN CONNECTION WITH QUALIFIED TRUSTS OR PLANS OR AS INDIVIDUAL RETIREMENT ANNUITIES) ISSUED BY #1 Franklin Square Springfield, Illlinois 62713 Telephone (800) 528-2011 THIS PROSPECTUS DESCRIBES INDIVIDUAL IMMEDIATE AND DEFERRED VARIABLE ANNUITY CONTRACTS FOR USE IN CONNECTION WITH CERTAIN QUALIFIED PLANS AND TRUSTS ACCORDED SPECIAL TAX TREATMENT OR AS INDIVIDUAL RETIREMENT ANNUITIES UNDER THE INTERNAL REVENUE CODE (SEE "FEDERAL INCOME TAX STATUS", BELOW FOR MORE INFORMATION). THE BASIC PURPOSE OF THE VARIABLE CONTRACTS IS TO PROVIDE ANNUITY PAYMENTS WHICH WILL VARY WITH THE INVESTMENT PERFORMANCE OF FRANKLIN LIFE VARIABLE ANNUITY FUND A (THE "FUND"). THE FUND NO LONGER OFFERS NEW CONTRACTS. THE PRIMARY INVESTMENT OBJECTIVE OF THE FUND IS LONG-TERM APPRECIATION OF CAPITAL THROUGH INVESTMENT APPRECIATION AND THE RETENTION AND REINVESTMENT OF INCOME. THERE IS NO ASSURANCE THAT THIS OBJECTIVE WILL BE ATTAINED. GENERALLY, THE FUND'S INVESTMENTS WILL CONSIST OF EQUITY SECURITIES, MAINLY COMMON STOCKS. - ------------------------------------------------------------------------------- THIS PROSPECTUS SETS FORTH INFORMATION ABOUT THE FUND THAT A PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING AND SHOULD BE KEPT FOR FUTURE REFERENCE. ADDITIONAL INFORMATION ABOUT THE FUND AND THE FRANKLIN IS CONTAINED IN A STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 30, 1998, WHICH HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST. A STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED FROM THE FRANKLIN BY WRITING TO THE ADDRESS (ATTENTION: BOX 1018) OR CALLING THE TELEPHONE NUMBER (EXTENSION 2591) SET FORTH ABOVE OR BY RETURNING THE REQUEST FORM ON THE BACK COVER OF THIS PROSPECTUS. CERTAIN INFORMATION CONTAINED IN THE STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED HEREIN BY REFERENCE. THE TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION IS SET FORTH ON PAGE 37 OF THIS PROSPECTUS. - ------------------------------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------- THE DATE OF THIS PROSPECTUS IS APRIL 30, 1998. TABLE OF CONTENTS
PAGE Special Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Table of Deductions and Charges. . . . . . . . . . . . . . . . . . . . 5 Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Per-Unit Income and Changes in Accumulation Unit Value . . . . . . . . 8 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Description of the Separate Account. . . . . . . . . . . . . . . . . . 10 Deductions and Charges Under the Contracts . . . . . . . . . . . . . . 11 A. Sales and Administration Deductions. . . . . . . . . . . . . 11 B. Premium Taxes. . . . . . . . . . . . . . . . . . . . . . . . 11 C. Mortality and Expense Risk Charge. . . . . . . . . . . . . . 12 D. Investment Management Service Charge . . . . . . . . . . . . 12 E. Transfers to Other Contracts . . . . . . . . . . . . . . . . 12 F. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . 13 The Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 A. General. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 B. Deferred Variable Annuity Accumulation Period. . . . . . . . 15 C. Annuity Period . . . . . . . . . . . . . . . . . . . . . . . 22 Investment Policies and Restrictions of the Fund . . . . . . . . . . . 25 Federal Income Tax Status. . . . . . . . . . . . . . . . . . . . . . . 27 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . 28 The Franklin. . . . . . . . . . . . . . . . . . . . . . . . . . . 28 The Contracts: Qualified Plans. . . . . . . . . . . . . . . . . . 28 A. Qualified Pension, Profit-Sharing and Annuity Plans. . . . . 29 B. H. R. 10 Plans (Self-Employed Individuals) . . . . . . . . . 29 C. Section 403(b) Annuities . . . . . . . . . . . . . . . . . . 29 D. Individual Retirement Annuities. . . . . . . . . . . . . . . 30 Income Tax Withholding. . . . . . . . . . . . . . . . . . . . . . 31 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Distribution of the Contracts. . . . . . . . . . . . . . . . . . . . . 34 State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Reports to Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Fundamental Changes. . . . . . . . . . . . . . . . . . . . . . . . . . 34 Year 2000 Transition . . . . . . . . . . . . . . . . . . . . . . . . . 35 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . 35 Other Variable Annuity Contracts; Effect of Non-Qualification. . . . . 36 Table of Contents of Statement of Additional Information . . . . . . . 37
- ------------------------------------------------------------------------------ THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON HAS BEEN AUTHORIZED BY THE FRANKLIN LIFE INSURANCE COMPANY, FRANKLIN FINANCIAL SERVICES CORPORATION OR FRANKLIN LIFE VARIABLE ANNUITY FUND A TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN ANY AUTHORIZED SUPPLEMENTAL SALES MATERIAL. 2 SPECIAL TERMS The following is a glossary of certain terms used in this Prospectus: ACCUMULATION UNIT--A measure used to determine the value of a Contract Owner's interest in the Fund prior to the initial Annuity Payment Date. ANNUITY PAYMENT DATE--The date the first monthly Annuity Payment is to be made to the Variable Annuitant, and the same day of each month thereafter so long as the annuity is due. Depending on the Settlement Option elected, Annuity Payment Dates may occur on a periodic basis other than monthly. ANNUITY PAYMENTS--Periodic payments made to a Variable Annuitant pursuant to a Contract. In certain circumstances, Annuity Payments may be paid to a Beneficiary after the death of a Variable Annuitant. ANNUITY UNIT--A measure used to determine the value of Annuity Payments after the first. BENEFICIARY--The person or persons designated by the Contract Owner to whom any payment due on death is payable. CASH VALUE--The value of all Accumulation Units or Annuity Units attributable to a Contract. CODE--The Internal Revenue Code of 1986, as amended. CONTRACT--An individual variable annuity contract issued by Franklin Life Variable Annuity Fund A that is offered by this Prospectus. CONTRACT ANNIVERSARY--An anniversary of the Effective Date of the Contract. CONTRACT OWNER--Except in cases where the Contract is issued to a trustee of a qualified employees' trust or pursuant to a qualified annuity plan, the Contract Owner is the individual Variable Annuitant to whom the Contract is issued. In cases where the Contract is issued to a trustee of a qualified employees' trust or pursuant to a qualified annuity plan, the Contract Owner will be respectively the trustee or the employer establishing such trust or plan, and the employee named as the Variable Annuitant of such Contract is referred to herein as the employee. When the term "Contract Owner" is used in the context of voting rights, it includes the owners of all contracts which depend in whole or in part on the investment performance of the Fund. CONTRACT YEAR--Each year starting with the Effective Date and each Contract Anniversary thereafter. DEFERRED VARIABLE ANNUITY--An annuity contract which provides for Annuity Payments to commence at some future date. Included are periodic payment deferred contracts and single payment deferred contracts. EFFECTIVE DATE--The date shown on the Schedule Page of the Contract as the date the first Contract Year begins. FIXED-DOLLAR ANNUITY--An annuity contract which provides for Annuity Payments which remain fixed as to dollar amount throughout the Annuity Payment period. HOME OFFICE--The Home Office of The Franklin located at #1 Franklin Square, Springfield, Illinois 62713. IMMEDIATE VARIABLE ANNUITY--An annuity contract which provides for Annuity Payments to commence immediately rather than at some future date. 3 INDIVIDUAL RETIREMENT ANNUITY--An annuity contract described in Section 408(b) of the Code. Individual Retirement Annuities may also qualify as Simplified Employee Pensions. PERIODIC STIPULATED PAYMENT CONTRACT--An annuity contract which provides that payments made to purchase the contract will be made in periodic instalments rather than in a single sum. QUALIFIED CONTRACTS--Contracts issued under Qualified Plans. QUALIFIED PLANS--Retirement plans which receive favorable tax treatment under the Code and which are described on page 9, below. ROLLOVER CONTRIBUTION--A transfer pursuant to Sections 402(c), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code. SETTLEMENT OPTION OR OPTIONS--Alternative terms under which payment of the amounts due in settlement of the Contracts may be received. SIMPLIFIED EMPLOYEE PENSION--An Individual Retirement Annuity which meets the additional requirements of Section 408(k) of the Code. SINGLE STIPULATED PAYMENT CONTRACT--An annuity contract which provides that the total payment to purchase the contract will be made in a single sum rather than in periodic instalments. Included are single payment immediate contracts and single payment deferred contracts. STIPULATED PAYMENTS--The payment or payments provided to be made to The Franklin under a Contract. THE FRANKLIN--The Franklin Life Insurance Company, an Illinois legal reserve stock life insurance company. VALUATION DATE--Each date as of which the Accumulation Unit value is determined. This value is determined on each day (other than a day during which no Contract or portion thereof is tendered for redemption and no order to purchase or transfer a Contract is received by the Fund) in which there is a sufficient degree of trading in the securities in which the Fund invests that the value of an Accumulation Unit might be materially affected by changes in the value of the Fund's investments, as of the close of trading on that day. VALUATION PERIOD--The period commencing on a Valuation Date and ending on the next Valuation Date. VARIABLE ANNUITANT--Any natural person with respect to whom a Contract has been issued and a Variable Annuity has been, will be or (but for death) would have been effected thereunder. In certain circumstances, a Variable Annuitant may elect to receive Annuity Payments on a fixed-basis or a combination of a fixed and variable basis. VARIABLE ANNUITY--An annuity contract which provides for a series of periodic annuity payments, the amounts of which may increase or decrease as a result of the investment experience of a separate account. 4 TABLE OF DEDUCTIONS AND CHARGES Contract Owner Transaction Expenses Sales Load Imposed on Purchases (as a percentage of purchase payments) Single Stipulated Payment Contract 5.00% Periodic Stipulated Payment Contract 6.00% Administration Fee (as a percentage of purchase payments) Single Stipulated Payment Contract 4.00% ($100 maximum) Periodic Stipulated Payment Contract 3.00% Annual Expenses (as a percentage of average net assets) Management Fees 0.44% Mortality and Expense Risk Fees Mortality Fees 0.90% Expense Risk Fees 0.10% ---- Total Annual Expenses 1.44%
Example
If you surrender your contract at the end of the applicable time period: 1 year 3 years 5 years 10 years You would pay the following expenses on a $1,000 investment, assuming 5% annual return on assets: Single Stipulated Payment Contract $ 103 $ 131 $ 162 $ 247 Periodic Stipulated Payment Contract $ 103 $ 131 $ 162 $ 247
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The Table of Deductions and Charges is intended to assist Contract Owners in understanding the various fees and expenses that they bear directly or indirectly. Additional deductions may be made from Stipulated Payments for any premium taxes payable by The Franklin on the consideration received from the sale of the Contracts. See "Premium Taxes," below. For a more detailed description of such fees and expenses, see "Deductions and Charges under the Contracts," below. The example assumes that a single Stipulated Payment of $1,000 is made at the beginning of the periods shown. (It should be noted that The Franklin will not actually issue a Single Stipulated Payment Contract unless the single payment is at least $2,500.) This assumption applies even with respect to Periodic Stipulated Payment Contracts, which would normally require additional payments. The example also assumes a constant investment return of 5% and the expenses might be different if the return of the Fund averaged 5% over the periods shown but fluctuated during such periods. The amounts shown in the example represent the aggregate amounts that would be paid over the life of a Contract if the Contract were surrendered at the end of the applicable time periods. 5 - ------------------------------------------------------------------------------- SUMMARY THE CONTRACTS The individual variable annuity contracts (the "Contracts") being offered by this Prospectus are for use in connection with certain qualified plans and trusts accorded special tax treatment under the Code or as Individual Retirement Annuities. See "Federal Income Tax Status," below. The basic purpose of the Contracts is to provide Annuity Payments which will vary with the investment performance of Franklin Life Variable Annuity Fund A (the "Fund"). The Contracts provide Annuity Payments for life commencing on an initial Annuity Payment Date selected by the Contract Owner; other Settlement Options are provided. See "Introduction," and "The Contracts," below. At any time within 10 days after receipt of a Contract, the Contract Owner may return the Contract and receive a refund of any premium paid on the Contract. See "Right to Revocation of Contract," below. THE FUND AND ITS INVESTMENT OBJECTIVES The Fund is an open-end diversified management investment company. The primary investment objective of the Fund is long-term appreciation of capital through investment appreciation and retention and reinvestment of income. Generally, the Fund's investments will consist of equity securities, mainly common stocks. The value of investments held in the Fund is subject to the risk of changing economic conditions as well as the risk inherent in management's ability to anticipate such changes. See "Investment Policies and Restrictions of the Fund," below. INVESTMENT ADVISER; PRINCIPAL UNDERWRITER The Franklin Life Insurance Company ("The Franklin"), an Illinois legal reserve stock life insurance company, acts as investment adviser to the Fund. The Franklin is engaged in the writing of ordinary life policies, annuities and income protection policies. Franklin Financial Services Corporation, a wholly-owned subsidiary of The Franklin, is the principal underwriter for the Fund. The Franklin is an indirect wholly-owned subsidiary of American General Corporation. See "Investment Management Service Charge," and "Distribution of the Contracts," below. DEDUCTIONS AND CHARGES The deductions and charges applicable to a Contract are illustrated in the Table of Deductions and Charges that appears immediately before this Summary. In the case of Periodic Stipulated Payment Contracts, a deduction equal to 6% of each periodic payment is made for sales expenses and a deduction equal to 3% of each such payment is made for administrative expenses. The combined deductions amount to 9.89% of the net amount invested assuming no premium taxes are applicable (6.59% for sales expenses and 3.30% for administrative expenses). In the case of a Single Stipulated Payment Contract, a deduction equal to 5% of the total single payment is made for sales expenses and a deduction equal to 4% (with a maximum of $100) of such payment is made for administrative expenses (for a combined total of 9%). In the case of the minimum Single Stipulated Payment Contract sold, the combined deductions amount to 9.89% of the net amount invested assuming no premium taxes are applicable (5.49% for sales expenses and 4.40% for administrative expenses). Any applicable state or local taxes on the Stipulated Payments (currently, up to 5%) also are deducted from the single or periodic Stipulated Payments. The amount remaining after deductions is allocated to the Fund. See "Sales and Administration Deductions," "Transfers to Other Contracts," and "Premium Taxes," below. - ------------------------------------------------------------------------------- 6 - ------------------------------------------------------------------------------- The Contracts include The Franklin's undertaking that deductions for sales and administrative expenses will not be increased regardless of the actual expenses incurred, and that the Annuity Payments will be paid for the lifetime of the Variable Annuitant (and, in the case of a joint and last survivor annuity, for the joint lives of the persons specified) commencing on the selected initial Annuity Payment Date based on the mortality assumptions contained in the Contract, regardless of the actual mortality experience among the Variable Annuitants. In exchange for these undertakings, a charge of 1.002% of net asset value on an annual basis is made daily against the Fund (consisting of 0.900% for The Franklin's assurances of annuity rates or mortality factors and 0.102% for The Franklin's assurances of expense factors). A charge of 0.438% of net asset value on an annual basis is also made daily against the Fund for investment management services by The Franklin. The charges for annuity rate assurances, expense assurances and investment management services thus aggregate 1.440% of net asset value on an annual basis. See "Mortality and Expense Risk Charge," and "Investment Management Service Charge," below. MINIMUM PERMITTED INVESTMENT Subject to limited exceptions, the minimum single Stipulated Payment is $2,500. The minimum Periodic Stipulated Payment Contract sold is one under which the periodic Stipulated Payment is currently $10 ($120 on an annual basis). See "Purchase Limits," below. NEW CONTRACTS NO LONGER BEING ISSUED The Fund no longer issues new Contracts. REDEMPTION A Contract Owner under a Deferred Variable Annuity Contract, prior to the death of the Variable Annuitant and prior to the Contract's initial Annuity Payment Date, may, subject to any limitations on early settlement contained in an applicable Qualified Plan and subject to limitations on early withdrawals imposed in connection with Section 403(b) annuity purchase plans (see "Federal Income Tax Status," below), redeem all or part of the Contract and receive the Cash Value (equal to the number of Accumulation Units credited to the part of the Contract redeemed times the value of an Accumulation Unit at the end of the Valuation Period in which the request for redemption is received) less federal income tax withholding, if applicable. For information as to Accumulation Units, see "Value of the Accumulation Unit," below. Subject to certain limitations, the Contract Owner may elect to have all or a portion of the amount due upon a total redemption of a Contract applied under certain Settlement Options or applied toward the purchase of other annuity or insurance products offered by The Franklin. Federal tax penalties may apply to certain redemptions. See "Redemption," "Transfers to and from Other Contracts," "Settlement Options," and "Federal Income Tax Status," below. TERMINATION BY THE FRANKLIN The Franklin currently reserves the right to terminate Contracts if Stipulated Payments are less than $120 in each of three consecutive Contract Years (excluding the first Contract Year) and if the Cash Value is less than $500 at the end of such three-year period. Different termination provisions apply in the case of Individual Retirement Annuities. See "Termination by The Franklin," below. - ------------------------------------------------------------------------------- 7 FRANKLIN LIFE VARIABLE ANNUITY FUND A SUPPLEMENTARY INFORMATION PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE (SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH YEAR) The financial information in this table for each of the three years in the period ended December 31, 1997 has been audited by Ernst & Young LLP, independent auditors. The financial information in this table for each of the two years in the period ended December 31, 1994 was audited by Coopers & Lybrand L.L.P., independent accountants. This table should be read in conjunction with the financial statements and notes thereto included in the Statement of Additional Information.
YEAR ENDED DECEMBER 31 --------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 --------------------------------------------------------------------------------------------------- Investment Income $1.910 $ 1.685 $ 1.948 $ 1.408 $ 1.231 $ 1.064 $ 1.194 $ 1.326 $ 1.343 $ .235 Expenses 1.312 1.090 .875 .773 .773 .723 .654 .569 .528 .454 --------------------------------------------------------------------------------------------------- Net Investment income .598 .595 1.073 .635 .458 .341 .540 .757 .815 .781 Net realized and unrealized gain (loss) on securities 16.346 11.690 14.139 (.240) .112 .770 14.238 (3.287) 7.021 .043 --------------------------------------------------------------------------------------------------- Net change in accumulation unit value 16.944 12.285 15.212 .395 .570 1.111 14.778 (2.530) 7.836 .824 Accumulation unit value: Beginning of year 81.485 69.200 53.988 53.593 53.023 51.912 37.134 39.664 31.828 31.004 --------------------------------------------------------------------------------------------------- End of year $98.429 $81.485 $69.200 $53.988 $53.593 $53.023 $51.912 $37.134 $39.664 $31.828 --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% Ratio of net investment income to average net assets .66% .79% 1.76% 1.18% .85% .68% 1.19% 1.91% 2.22% 2.47% Portfolio turnover rate .70% 4.77% 14.66% 88.99% 68.62% 59.84% 28.47% 24.01% 64.55% 104.96% Number of accumulation units outstanding at end of year 124,714 139,945 150,474 172,507 198,763 217,948 229,368 256,831 277,735 305,265 --------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------
------------------------------------ FINANCIAL STATEMENTS The financial statements for the Fund and The Franklin and the reports of the independent auditors and accountants for the Fund and The Franklin are included in the Statement of Additional Information. 8 INTRODUCTION FRANKLIN LIFE VARIABLE ANNUITY FUND A INDIVIDUAL VARIABLE ANNUITY CONTRACTS ISSUED BY THE FRANKLIN LIFE INSURANCE COMPANY The Contracts offered by this Prospectus are designed primarily to assist in retirement planning for individuals. The Contracts provide Annuity Payments for life commencing on a selected Annuity Payment Date; other Settlement Options are available. The amount of the Annuity Payments will vary with the investment performance of the assets of the Fund, a separate account which has been established by The Franklin under Illinois insurance law. For the primary investment objective of the Fund, see "Investment Policies and Restrictions of the Fund," below. The Qualified Contracts described in this Prospectus will not knowingly be sold other than for use: (1) in connection with qualified employee pension and profit-sharing trusts described in Section 401(a) and tax-exempt under Section 501(a) of the Code, and qualified annuity plans described in Section 403(a) of the Code; (2) in connection with qualified pension, profit-sharing and annuity plans established by self-employed persons ("H.R. 10 Plans"); (3) in connection with annuity purchase plans adopted by public school systems and certain tax-exempt organizations pursuant to Section 403(b) of the Code; or (4) as Individual Retirement Annuities described in Section 408(b) of the Code, including Simplified Employee Pensions described in Section 408(k) of the Code. Pursuant to this Prospectus, The Franklin offers two types of Contracts: those under which Annuity Payments to the Variable Annuitant commence immediately-"Immediate Variable Annuities"-and those under which Annuity Payments to the Variable Annuitant commence in the future-"Deferred Variable Annuities." Deferred Variable Annuities may be purchased either with periodic Stipulated Payments or with a single Stipulated Payment, while Immediate Variable Annuities may only be purchased with a single Stipulated Payment. The Franklin is a legal reserve stock life insurance company organized under the laws of the State of Illinois in 1884. The Franklin issues individual life insurance, annuity and accident and health insurance policies, group annuities and group life insurance and offers a variety of whole life, life, retirement income and level and decreasing term insurance plans. Its Home Office is located at #1 Franklin Square, Springfield, Illinois 62713. American General Corporation ("American General") through its wholly-owned subsidiary, AGC Life Insurance Company ("AGC Life"), owns all of the outstanding shares of common stock of The Franklin. The address of AGC Life is American General Center, Nashville, Tennessee 37250-0001. The address of American General is 2929 Allen Parkway, Houston, Texas 77019-2155. American General is one of the largest diversified financial services organizations in the United States. American General's operating subsidiaries are leading providers of retirement services, consumer loans, and life insurance. The company was incorporated as a general business corporation in Texas in 1980 and is the successor to American General Insurance Company, an insurance company incorporated in Texas in 1926. 9 Subject to the terms of any plan pursuant to which a Contract is issued, the Contract Owner may elect to have a portion of the Stipulated Payment or Payments applied by The Franklin for the purchase of a Fixed-Dollar Annuity. Fixed-Dollar Annuity contracts do not, however, participate in the Fund and the contracts are transferred to the general account of The Franklin. In cases where both a Fixed-Dollar and a Variable Annuity are provided under the same contract, either annuity may be terminated and the Cash Value attributable thereto obtained or other Settlement Option elected by the Contract Owner, at any time prior to commencement of Annuity Payments by The Franklin; under these circumstances, the other annuity may be continued in effect, provided that the annual stipulated payment allocated to the other annuity satisfies The Franklin's usual underwriting practices. These practices presently require that each periodic Stipulated Payment which purchases the Variable Annuity be at least $10. See generally "Redemption," "Settlement Options," and "Federal Income Tax Status-Individual Retirement Annuities," below. Unless otherwise indicated in this Prospectus, the discussion of the Contracts herein refers to Variable Annuity Contracts, or to the Variable Annuity portion in cases where both a variable and a Fixed-Dollar Annuity are provided in the same contract, and not to any Fixed-Dollar Annuity. Provisions relating to a Fixed-Dollar Annuity and a Variable Annuity are separate, and neither is dependent upon the other in its operation. The discussion of Contract terms herein in many cases summarizes those terms. Reference is made to the full text of the Contract forms, which are filed with the Securities and Exchange Commission as exhibits to the Registration Statement under the Securities Act of 1933 and the Investment Company Act of 1940 of which this Prospectus is a part. The exercise of certain of the Contract rights herein described may be subject to the terms and conditions of any Qualified Plan under which such Contract may be purchased. This Prospectus contains no information concerning any such Qualified Plan. Further information relating to some Qualified Plans may be obtained from the disclosure documents required to be distributed to employees under the Employee Retirement Income Security Act of 1974. DESCRIPTION OF THE SEPARATE ACCOUNT The Fund was established as a separate account on November 5, 1969 by resolution of the Board of Directors of The Franklin pursuant to the provisions of the Illinois Insurance Code. The Fund is an open-end diversified management investment company registered with the Securities and Exchange Commission under the Investment Company Act of 1940. Such registration does not involve supervision of the management or investment practices or policies of the Fund or of The Franklin by the Commission. The Board of Managers of the Fund must be elected annually by Contract Owners. A majority of the members of the Board of Managers are persons who are not otherwise affiliated with The Franklin. See "Management," below. The Fund meets the definition of a "Separate Account'' under the federal securities laws. Under the provisions of the Illinois Insurance Code: (i) the income, gains or losses of the Fund are credited to or charged against the amounts allocated to the Fund in accordance with the terms of the Contracts, without regard to the other income, gains or losses of The Franklin; and (ii) the assets of the Fund are not chargeable with liabilities arising out of The Franklin's other business activities, including liabilities of any other separate account which may be established. These assets are held with relation to the Contracts described in this Prospectus and such other Variable Annuity contracts as may be issued by The Franklin and designated by it as participating in the Fund. All obligations arising under the Contracts, including the promise to make Annuity Payments, are general corporate obligations of The Franklin. Accordingly, all of The Franklin's assets (except those allocated to other separate accounts which have been or may be established) are available to meet its obligations and expenses under the Contracts participating in the Fund. The Franklin is taxed as a "life insurance company" under the Code. The Fund is subject to tax as part of The Franklin for federal income tax purposes. However, the operations of the Fund are 10 considered separately from the other operations of The Franklin in computing The Franklin's tax liability and the Fund is not affected by federal income taxes paid by The Franklin with respect to its other operations. The operations of the Fund are treated separately from the other operations of The Franklin for accounting and financial statement purposes. Under existing law, no federal income tax is payable by The Franklin on investment income and realized capital gains of the Fund. See "Federal Income Tax Status," below. DEDUCTIONS AND CHARGES UNDER THE CONTRACTS The Franklin deducts the charges described below to cover costs and expenses, services provided, and risks assumed under the Contracts. The amount of a charge may not necessarily correspond to the costs associated with providing the services or benefits indicated by the designation of the charge or associated with the particular contract. For example, the sales deductions may not fully cover all of the sales and distribution expenses actually incurred by The Franklin, and proceeds from other charges, including the mortality and expense risk charge, may be used in part to cover such expenses. A. SALES AND ADMINISTRATION DEDUCTIONS Deductions will be made as follows for sales expenses with respect to the Contracts and for administrative expenses with respect to Contracts and the Fund: (1) Under Single Stipulated Payment Contracts, a deduction of 4% (with a maximum of $100) is made from the single payment for administrative expenses. In addition, a sales expense deduction of 5% of the total payment is made from the payment. In the case of the minimum Single Stipulated Payment Contract sold, the combined deductions for administrative expenses and sales expenses amount to 9.89% of the net amount invested (5.49% for sales expenses and 4.40% for administrative expenses) assuming no premium taxes are applicable. (2) Under Periodic Payment Contracts, a deduction of 6% is made from each payment for sales expenses and 3% for administrative expenses. The combined deductions for sales and administrative expenses amount to 9.89% of the net amount invested (6.59% for sales expenses and 3.30% for administrative expenses) assuming no premium taxes are applicable. Deductions for sales expenses are made pursuant to a Sales Agreement with Franklin Financial Services Corporation ("Franklin Financial"), a wholly-owned subsidiary of The Franklin and the principal underwriter of the Fund. See "Distribution of the Contracts," below, and in the Statement of Additional Information. The above deductions for administrative expenses, and charges for mortality and expense risk assurances discussed under "Mortality and Expense Risk Charge," below, are made pursuant to an Administration Agreement dated June 30, 1971 between the Fund and The Franklin. The Administration Agreement is described under "Investment Advisory and Other Services" in the Statement of Additional Information. The total deductions made in respect of sales expenses of Franklin Financial in 1995, 1996 and 1997 were $20,566, $14,575 and $11,286, respectively, and all such amounts were retained on behalf of Franklin Financial. The administration deductions are designed to cover the actual expenses of administering the Contracts and the Fund. The aggregate dollar amounts of the administration deductions for the fiscal years ended December 31, 1995, 1996 and 1997 were $10,279, $7,285 and $5,640, respectively. B. PREMIUM TAXES At the time any premium taxes are payable by The Franklin on the consideration received from the sale of the Contracts, the amount thereof will be deducted from the Stipulated Payments. Premium 11 taxes ranging up to 5% are charged by various jurisdictions in which The Franklin is transacting business and in which it may, after appropriate qualification, offer Contracts. C. MORTALITY AND EXPENSE RISK CHARGE While Annuity Payments will reflect the investment performance of the Fund, they will not be affected by adverse mortality experience or by any excess in the actual expenses of the Contracts and the Fund over the maximum administration deductions provided for in the Contracts. The Franklin assumes the risk that Annuity Payments will continue for a longer period than anticipated because the Variable Annuitant lives longer than expected (or the Variable Annuitants as a class do so) and also assumes the risk that the administration deductions may be insufficient to cover the actual expenses of the administration of the Contracts and of the Fund (except those expenses listed under "Investment Management Service Charge," below, which the Fund will bear). The Franklin assumes these risks for the duration of the Contract and the annuity rate, mortality and expense risk deductions and charges set forth herein will not be increased regardless of the actual mortality and expense experience. The mortality risk charge is imposed regardless of whether or not the payment option selected involves a life contingency. For assuming these risks, The Franklin imposes a daily charge against the value of the Accumulation Unit and the Annuity Unit. (For further information as to the Accumulation Unit and the Annuity Unit, see "Deferred Variable Annuity Accumulation Period" and "Annuity Period," below.) These charges are at the current combined annual rate of 1.002% (.002745% on a daily basis), of which .900% is for annuity rate and mortality assurances and .102% is for expense assurances. If the money collected from this charge is not needed, it will be to The Franklin's gain and may be used to cover contract distribution expenses. During 1995, 1996 and 1997, The Franklin earned and was paid $97,809, $108,769 and $119,981, respectively, by reason of these charges. Such charges during 1997 were equal to 1.002% of average net assets. D. INVESTMENT MANAGEMENT SERVICE CHARGE The Franklin acts as investment manager of the Fund. For acting as such, The Franklin makes a charge against the Fund at the annual rate of 0.438% of the Fund's assets, computed by imposing a daily charge of 0.0012% against the value of the Accumulation Unit and of the Annuity Unit, in determining those values. The investment management services are rendered and the charge is made pursuant to an Investment Management Agreement executed and dated January 31, 1995, pursuant to approval by the Contract Owners at their annual meeting held on April 17, 1995, and renewal to January 31, 1999 by the Board of Managers of the Fund at its meeting on January 19, 1998. The Investment Management Agreement is described under "Investment Advisory and Other Services" in the Statement of Additional Information. During 1995, 1996 and 1997, The Franklin earned and was paid $42,758, $47,550 and $52,451, respectively, under the Investment Management Agreement then in effect. E. TRANSFERS TO OTHER CONTRACTS Subject to any limitations in a Qualified Plan, Contracts may be redeemed prior to the death of the Variable Annuitant and the initial Annuity Payment Date and the Cash Value (less the required amount of federal income tax withholding, if any) may be applied to the purchase of certain other Variable Annuities, Fixed-Dollar Annuities or life insurance contracts issued by The Franklin. Franklin Life Money Market Variable Annuity Fund C and Franklin Life Variable Annuity Fund B, other separate accounts of The Franklin funding Variable Annuity contracts, no longer issue new contracts. 12 It is not clear whether gain or loss will be recognized for federal income tax purposes upon the redemption of a Contract, another annuity contract or a life insurance contract issued by The Franklin for purposes of applying the redemption proceeds to the purchase of another contract issued by The Franklin. Federal tax penalties may also apply to such redemptions. Since the income and withholding tax consequences of such redemption and purchase depend on many factors, any person contemplating redemption of a Contract or another contract issued by The Franklin for purposes of purchasing a different contract issued by The Franklin (or any other contract) is advised to consult a qualified tax advisor prior to the time of redemption. F. MISCELLANEOUS The Fund's total expenses for 1997 were $172,432, or 1.440% of average net assets during 1997. THE CONTRACTS A. GENERAL Certain significant provisions of the Contracts and administrative practices of The Franklin with respect thereto are discussed in the following paragraphs. Contract Owner inquiries may be directed to the Equity Administration Department of The Franklin at the address or telephone number set forth on the cover of this Prospectus. 1. ANNUITY PAYMENTS Variable Annuity Payments are determined on the basis of (i) an annuity rate table specified in the Contract, and (ii) the investment performance of the Fund. In the case of Deferred Variable Annuity Contracts, the annuity rate table is set forth in the Contract (but see below). In the case of Immediate Variable Annuities, the table is that used by The Franklin on the date of issue of the Contract. The amount of the Annuity Payments will not be affected by mortality experience adverse to The Franklin or by an increase in The Franklin's expenses related to the Fund or the Contracts in excess of the expense deductions provided for in the Contracts. The Variable Annuitant under an annuity with a life contingency or one providing for a number of Annuity Payments certain will receive the value of a fixed number of Annuity Units each month, determined as of the initial Annuity Payment Date on the basis of the applicable annuity rate table and the then value of his or her account. The value of Annuity Units, and thus the amounts of the monthly Annuity Payments, will, however, reflect investment gains and losses and investment income occurring after the initial Annuity Payment Date, and thus the amount of the Annuity Payments will vary with the investment experience of the Fund. See "Annuity Period," below. Court decisions, particularly ARIZONA GOVERNING COMMITTEE v. NORRIS, have held that the use of gender-based mortality tables to determine benefits under an employer-related retirement or benefit plan may violate Title VII of the Civil Rights Act of 1964 ("Title VII"). These cases indicate that plans sponsored by employers subject to Title VII generally may not provide different benefits for similarly-situated men and women. The Contracts described in this Prospectus incorporate annuity rate tables which reflect the age and sex of the Variable Annuitant and the Settlement Option selected. Such sex-distinct tables continue to be appropriate for use, for example, under Contracts which are not purchased in connection with an "employer-related" plan subject to NORRIS (such as individual retirement annuities not sponsored by an employer). However, in order to enable subject employers to comply with NORRIS, The Franklin will provide "unisex" annuity rate tables for use under Contracts purchased in connection with "employer-related" plans. Persons contemplating purchase of a Contract, as well as current Contract Owners, 13 should consult a legal advisor regarding the applicability and implications of NORRIS in connection with their purchase and ownership of a Contract. 2. INCREASE OR DECREASE BY CONTRACT OWNER IN AMOUNT OR NUMBER OF PERIODIC STIPULATED PAYMENTS Stipulated Payments can be paid on an annual, semi-annual or quarterly schedule or, with The Franklin's consent, monthly. The first Stipulated Payment is due as of the date of issue and each subsequent Stipulated Payment is due on the first day following the interval covered by the next preceding Stipulated Payment and on the same date each month as the date of issue. The Contract Owner may increase the amount of a Stipulated Payment on an annualized basis under a Periodic Stipulated Payment Contract (except in the case of an Individual Retirement Annuity, which cannot be increased above the amounts described under "Purchase Limits," immediately below) up to an amount on an annualized basis equal to twice the amount of the first Stipulated Payment on an annualized basis. Similarly, subject to the limitations described under "Purchase Limits," immediately, below, the amount of a Periodic Stipulated Payment may be decreased by the Contract Owner on any date a Stipulated Payment is due. Unless otherwise agreed to by The Franklin, the mode of Stipulated Payment may be changed only on a Contract Anniversary. The Contract Owner may continue making Stipulated Payments after the agreed number of Stipulated Payments has been made, but The Franklin will not accept Stipulated Payments after age 75. Submission of a Stipulated Payment in an amount different from that of the previous payment, subject to the aforesaid limits, will constitute notice of the election of the Contract Owner to make such change. 3. ASSIGNMENT OR PLEDGE A Contract may not be assigned by the Contract Owner except when issued to a trustee in connection with certain types of plans designed to qualify under Section 401 of the Code or when made pursuant to a qualified domestic relations order rendered by a state court in satisfaction of family support obligations. In general, a pledge or assignment made with respect to certain Contracts may, depending on such factors as the amount pledged or assigned, be treated as a taxable distribution. See "Individual Retirement Annuities," below, for special rules applicable thereto. Moreover, in certain instances, pledges or assignments of a Qualified Contract may result in the imposition of certain tax penalties. See generally "The Contracts: Qualified Plans," below. Persons contemplating the assignment or pledge of a Contract are advised to consult a qualified tax advisor concerning the federal income tax consequences thereof. 4. PURCHASE LIMITS Currently, no periodic Stipulated Payment may be less than $10 ($120 on an annual basis). Under the terms of the Contract, The Franklin may increase the minimum periodic Stipulated Payment to $20 ($240 on an annual basis). No single Stipulated Payment may be less than $2,500, except that in the case of a deferred Single Stipulated Payment Contract to be used as an Individual Retirement Annuity funded with a Rollover Contribution, the total Stipulated Payment applicable to the Variable Annuity, prior to administration and sales deductions, must be at least $1,000 unless, with consent of The Franklin, a smaller single Stipulated Payment is permitted. In the case of a Contract issued for use as an Individual Retirement Annuity, annual premium payments may not, in general, exceed $2,000. However, if the Individual Retirement Annuity is a Simplified Employee Pension, annual premium payments may not exceed $30,000. Single Stipulated Payment Contracts are not available as Individual Retirement Annuities except for those funded with Rollover Contributions and except for those to be used as Simplified Employee Pensions. 14 5. TERMINATION BY THE FRANKLIN The Franklin currently reserves the right to terminate any Contract, other than a Contract issued for use as an Individual Retirement Annuity, if total Stipulated Payments paid are less than $120 in each of three consecutive Contract Years (excluding the first Contract Year) and if the Cash Value is less than $500 at the end of such three-year period. Under the terms of the Contract, The Franklin may terminate such Contract if total Stipulated Payments paid are less than $240 in each of such three consecutive Contract Years and if the Cash Value is less than $500 at the end of such three-year period. The Franklin must give 31 days' notice by mail to the Contract Owner of such termination. The Franklin will not exercise any right to terminate such Contract if the value of the Contract declines to less than $500 as a result of a decline in the market value of the securities held by the Fund. The Franklin reserves the right to terminate any Contract issued for use as an Individual Retirement Annuity if no Stipulated Payments have been received for any two Contract Years and if the first monthly Annuity Payment, determined at the initial Annuity Payment Date, arising from the Stipulated Payments received prior to such two-year period would be less than $20. Upon termination as described above, The Franklin will pay to the Contract Owner the Cash Value of the Contract, less federal income tax withholding, if applicable. For certain tax consequences upon such payment, see "Federal Income Tax Status," below. 6. RIGHT TO REVOCATION OF CONTRACT A Contract Owner has the right to revoke the purchase of a Contract within 10 days after receipt of the Contract, and upon such revocation will be entitled to a return of the entire amount paid. The request for revocation must be made by mailing or hand-delivering the Contract and a written request for its revocation within such 10-day period either to The Franklin Life Insurance Company, Cashiers Department, #1 Franklin Square, Springfield, Illinois 62713, or to the agent from whom the Contract was purchased. In general, notice of revocation given by mail is deemed to be given on the date of the postmark, or, if sent by certified or registered mail, the date of certification or registration. 7. New Contracts No Longer Being Issued The Fund no longer issues new Contracts. B. DEFERRED VARIABLE ANNUITY ACCUMULATION PERIOD 1. CREDITING ACCUMULATION UNITS; DEDUCTIONS FOR SALES AND ADMINISTRATIVE EXPENSES During the accumulation period--the period before the initial Annuity Payment Date--deductions from Stipulated Payments for sales and administrative expenses are made as specified under "Deductions and Charges Under the Contracts," above. In addition, any applicable premium taxes, also as specified above under that caption, are deducted from the Stipulated Payments. The balance of each Stipulated Payment is credited to the Contract Owner in the form of Accumulation Units. The number of a Contract Owner's Accumulation Units is determined by dividing the net amount of Stipulated Payments credited to his or her Contract by the value of an Accumulation Unit at the end of the Valuation Period during which the Stipulated Payment is received, except that, in the case of the original application for a Variable Annuity Contract, the value of an Accumulation Unit within two business days after receipt of the application will be used if the application and all information necessary to process the application are complete upon receipt. If the application and such information are not complete upon receipt, The Franklin, within five days after the receipt of an original application and initial payment at the Home Office of The Franklin, will attempt to complete the application and will either accept the application or reject the application and return the initial payment. 15 The number of Accumulation Units so determined will not be changed by any subsequent change in the dollar value of an Accumulation Unit, but the dollar value of an Accumulation Unit may vary from day to day depending upon the investment experience of the Fund. 2. VALUATION OF A CONTRACT OWNER'S CONTRACT The Cash Value of a Contract at any time prior to the initial Annuity Payment Date can be determined by multiplying the total number of Accumulation Units credited to the account by the current Accumulation Unit value. The Contract Owner bears the investment risk, that is, the risk that market values may decline. There is no assurance that the Cash Value of the Contract will equal or exceed the Stipulated Payments made. A Contract Owner may obtain from the Home Office of The Franklin information as to the current value of an Accumulation Unit and the number of Accumulation Units credited to his or her Contract. 3. VALUE OF THE ACCUMULATION UNIT The value of an Accumulation Unit was set at $10 effective July 1, 1971. Accumulation Units currently are valued each Valuation Date (each day in which there is a sufficient degree of trading in the securities in which the Fund invests that the value of an Accumulation Unit might be materially affected by changes in the value of the Fund's investments, other than a day during which no Contract or portion thereof is tendered for redemption and no order to purchase or transfer a Contract is received by the Fund, as of the close of trading on that day). After the close of trading on a Valuation Date, or on a day when Accumulation Units are not valued, the value of an Accumulation Unit is equal to its value as of the immediately following Valuation Date. The value of an Accumulation Unit on the last day of any Valuation Period is determined by multiplying the value of an Accumulation Unit on the last day of the immediately preceding Valuation Period by the Net Investment Factor (defined below) for the current Valuation Period. At each Valuation Date a gross investment rate for the Valuation Period then ended is determined from the investment performance of the Fund for the Valuation Period. Such rate is equal to (i) accrued investment income for the Valuation Period, plus capital gains and minus capital losses for the period, whether realized or unrealized, on the assets of the Fund (adjusted by a deduction for the payment of any applicable state or local taxes as to the income or capital gains of the Fund) divided by (ii) the value of the assets of the Fund at the beginning of the Valuation Period. The gross investment rate may be positive or negative. The net investment rate for the Valuation Period is then determined by deducting, currently, .003945% (1.440% on an annual basis) for each day of the Valuation Period as a charge against the gross investment rate. This charge is made by The Franklin for providing investment management services, annuity rate or mortality assurances and expense assurances. See "Deductions and Charges Under the Contracts," above. The net investment factor for the Valuation Period is the sum of 1.00000000 plus the net investment rate for the Valuation Period ("Net Investment Factor"). The net investment rate may be negative if the combined capital losses, Valuation Period deductions and increase in the tax reserve exceed investment income and capital gains. Thus, the Net Investment Factor may be less than 1.00000000, and the value of an Accumulation Unit at the end of a Valuation Period may be less than the value for the previous Valuation Period. 16 4. VALUATION OF FUND ASSETS In determining the value of the assets of the Fund, each security traded on a national securities exchange is valued at the last reported sale price on the Valuation Date. If there has been no sale on such day, then the value of such security is taken to be the current bid price at the time as of which the value is being ascertained. Any security not traded on a securities exchange but traded in the over-the-counter market is valued at the current bid price on the Valuation Date. Any securities or other assets for which market quotations are not readily available are valued at fair value as determined in good faith by the Board of Managers. 5. REDEMPTION A Contract Owner under a Deferred Variable Annuity Contract, prior to the death of the Variable Annuitant and prior to the initial Annuity Payment Date, may, subject to any limitations on early settlement contained in an applicable Qualified Plan, redeem the Contract, in whole or in part, by submission of the Contract and a written request for its redemption to The Franklin's Home Office, and will receive the Cash Value of the part of the Contract redeemed. Early withdrawal of certain amounts attributable to Contracts issued pursuant to an annuity purchase plan meeting the requirements of Code Section 403(b) may be prohibited. See "Federal Income Tax Status," below. The Cash Value of a Contract or part thereof redeemed prior to the initial Annuity Payment Date is the number of Accumulation Units credited to the Contract (or that part so redeemed) times the value of an Accumulation Unit at the end of the Valuation Period in which the request for redemption is received. Except in limited circumstances discussed below, the payment of the Cash Value will be made within seven days after the date a properly completed and documented request for redemption is received by The Franklin at its Home Office. The right of redemption may be suspended or the date of payment postponed during any periods when the New York Stock Exchange is closed (other than customary weekend and holiday closings); when trading in the markets the Fund normally utilizes is restricted, or an emergency exists as determined by the Securities and Exchange Commission so that disposal of the Fund's investments or determination of its net asset value is not reasonably practicable; or for such other periods as the Securities and Exchange Commission by order may permit to protect Contract Owners. Where the Contract Owner has both a Variable Annuity and a Fixed-Dollar Annuity, a request for partial redemption, if no other indication is obtained from the Contract Owner, will be treated as a pro rata request for partial redemption of the Variable Annuity and the Fixed-Dollar Annuity. In lieu of a single payment of the amount due upon redemption of a Contract, the Contract Owner may elect, at any time prior to the initial Annuity Payment Date and during the lifetime of the Variable Annuitant, to have all or any portion of the amount due applied under any available Settlement Option. See "Settlement Options," below. However, no Settlement Option may be elected upon redemption without surrender of the entire Contract. The payment of the Cash Value of a redeemed Contract either in a single payment or under an available Settlement Option may be subject to federal income tax withholding and federal tax penalties. See "Federal Income Tax Status," below. 6. PAYMENT OF ACCUMULATED VALUE AT TIME OF DEATH In the event of the death of the Variable Annuitant prior to the initial Annuity Payment Date, death benefits payable to the surviving beneficiary will be paid by The Franklin within seven days of receipt by The Franklin of written notice of such death. The death proceeds payable will be the Cash Value of the Contract determined as of the date on which written notice of death is received by The Franklin by mail if such date is a Valuation Date; if such date is not a Valuation Date, the determination will be made on the next following Valuation Date. There is no assurance that the Cash Value of a Contract will equal or exceed the Stipulated Payments made. For payment of death proceeds in the event no Beneficiary is 17 surviving at the death of the Variable Annuitant, see "Change of Beneficiary or Mode of Payment of Proceeds; Death of Beneficiaries," below. The Code imposes certain requirements concerning payment of death benefits payable before the initial Annuity Payment Date in the case of Qualified Contracts. Under those Contracts, death benefits will be paid as required by the Code and as specified in the governing plan documents. The terms of such documents should be consulted to determine the death benefits and any limitations the plan may impose. You should consult your legal counsel and tax advisor regarding these requirements. Subject to the foregoing, the Contract Owner may, at any time prior to the initial Annuity Payment Date, elect that all or any portion of such death proceeds be paid to the Beneficiary under any one of the available Settlement Options. See "Settlement Options," below. If the Contract Owner has not made such an election, the Beneficiary may do so after the death of the Variable Annuitant. The Contract Owner or the Beneficiary, whichever selects the method of settlement, may designate contingent Beneficiaries to receive any other amounts due should the first Beneficiary die before completion of the specified payments. If neither the Contract Owner nor the Beneficiary elects payment of death proceeds under an available Settlement Option, payment will be made to the Beneficiary in a single sum. Death proceeds may be applied to provide variable payments, fixed-dollar payments or a combination of both. The payment of death proceeds may be subject to federal income tax withholding. See "Income Tax Withholding," below. In the event of the death of the Variable Annuitant after the initial Annuity Payment Date, payments under a Contract will be made as described in "Settlement Options," below. 7. OPTIONS UPON FAILURE TO MAKE STIPULATED PAYMENTS Upon a failure to make a Stipulated Payment under a Periodic Stipulated Payment Contract, subject to The Franklin's power of termination described under "Termination by The Franklin," above, and subject to the right of The Franklin to pay the value of the Contract Owner's account in a single sum at the initial Annuity Payment Date if the value on such date is less than $2,000, the Contract Owner may elect, prior to the death of the Variable Annuitant and prior to the initial Annuity Payment Date, either of the following options: (a) to exercise any of the available Settlement Options described under "Settlement Options," below, or redeem the Contract as described under "Redemption," above; or (b) to have the Contract continued from the date of failure to make a Stipulated Payment as a paid-up annuity to commence on the initial Annuity Payment Date stated in the Contract. If no option is elected by the Contract Owner within 31 days after failure to make a Stipulated Payment, the Contract will automatically be continued under the paid-up annuity option. 8. REINSTATEMENT (AS TO PERIODIC STIPULATED PAYMENT CONTRACTS) A Contract Owner, by making one Stipulated Payment, may reinstate a Periodic Stipulated Payment Contract as to which there has been a failure to make a Stipulated Payment, if the Contract at the time of the payment is being continued as a paid-up annuity. However, such reinstatement does not automatically reinstate the benefits provided by any riders to the Contract providing life insurance or disability benefits. 18 9. CHANGE OF BENEFICIARY OR MODE OF PAYMENT OF PROCEEDS; DEATH OF BENEFICIARIES While the Contract is in force the Contract Owner may (by filing a written request at the Home Office of The Franklin) change the Beneficiary or Settlement Option, or, if agreed to by The Franklin, change to a mode of payment different from one of the Settlement Options, subject to applicable limitations under the Code and any governing Qualified Plan. If any Beneficiary predeceases the Variable Annuitant, the interest of such Beneficiary will pass to the surviving Beneficiaries, if any, unless otherwise provided by endorsement. If no Beneficiary survives the Variable Annuitant and no other provision has been made, then, upon the death of the Variable Annuitant, the proceeds will be paid in a single sum to the Contract Owner or, if the Variable Annuitant was the Contract Owner, to the executors or administrators of the Contract Owner's estate. 10. SETTLEMENT OPTIONS At any time prior to the initial Annuity Payment Date and during the lifetime of the Variable Annuitant, the Contract Owner may elect to have all or a portion of the amount due in settlement of the Contract applied under any of the available Settlement Options described below. If the Contract Owner fails to elect a Settlement Option, payment automatically will be made in the form of a life annuity. See "First Option," below, and "Deferred Variable Annuity Contracts," below. Annuity Payments under a Settlement Option are made to the Variable Annuitant during his or her lifetime, or for such shorter period that may apply under the particular Settlement Option. Upon the death of the original Variable Annuitant after the initial Annuity Payment Date, any remaining Annuity Payments that are due under the Settlement Option elected will be continued to the Beneficiary or, if elected by the Contract Owner (or, if so designated by the Contract Owner, by the Beneficiary), the Cash Value of the Contract, as described under such Settlement Option below, will be paid to the Beneficiary in one lump sum. Upon the death of any Beneficiary to whom payments are being made under a Settlement Option, a single payment equal to the then remaining Cash Value of the Contract, if any, will be paid to the executors or administrators of the Beneficiary, unless other provision has been specified and accepted by The Franklin. For a discussion of payments if no Beneficiary is surviving at the death of the Variable Annuitant, see "Change of Beneficiary or Mode of Payment of Proceeds; Death of Beneficiaries," immediately above. Payment to a Contract Owner upon redemption of a Contract, and payment of death proceeds to a Beneficiary upon the death of the Variable Annuitant prior to the initial Annuity Payment Date, may also be made under an available Settlement Option in certain circumstances. See "Redemption," above, and "Payment of Accumulated Value at Time of Death," above. Available Settlement Options may be selected on a fixed or variable basis or a combination thereof, except that Settlement Options may be selected only on a fixed basis under a Contract issued for use as an Individual Retirement Annuity. Under an Option which is paid on a fixed basis, there is no sharing in the investment experience of the Fund and, upon commencement of payments, participation in the Fund terminates (the subject Contract will be transferred to the general account of The Franklin). Settlement under the First, Second, Third, Fourth or Fifth Option below is subject to satisfactory proof of age of the person or persons to whom the Annuity Payments are to be made. The minimum amount of proceeds which may be applied under any Settlement Option for any person is $2,000 and proceeds of a smaller amount may be paid in a single sum in the discretion of The Franklin, except in the case of a deferred Single Stipulated Payment Contract funded with a Rollover Contribution not in excess of $2,000. See "Purchase Limits," above. Further, if at any time payments under a Settlement Option become less than $25 per payment, The Franklin has the right to change the frequency of payment to such intervals as will result in payments of at least $25. 19 In the case of Immediate Variable Annuity Contracts, the only Settlement Options offered are the life annuity, the life annuity with 120, 180 or 240 monthly payments certain, or the joint and last survivor life annuity. See "First Option," "Second Option" and "Fourth Option," below, and "Immediate Variable Annuity Contracts," below. The distribution rules which Qualified Plans must satisfy in order to be tax-qualified under the Code may limit the utilization of certain Settlement Options, or may make certain Settlement Options unavailable, in the case of Contracts issued in connection therewith. These distribution rules could affect such factors as the commencement of distributions and the period of time over which distributions may be made. All Settlement Options are offered subject to the limitations of the distribution rules. The Statement of Additional Information describes certain limitations on Settlement Options based on The Franklin's current understanding of the distribution rules generally applicable to Contracts purchased under this Prospectus for use as Individual Retirement Annuities or issued in connection with Section 403(b) annuity purchase plans. See "Limitations on Settlement Options" in the Statement of Additional Information. Persons considering the purchase of a Contract and Contract Owners contemplating election of a Settlement Option are urged to obtain and read the Statement of Additional Information. Various questions exist, however, about the application of the distribution rules to distributions from the Contracts and their effect on Settlement Option availability thereunder. Persons contemplating the purchase of a Contract are advised to consult a qualified tax advisor concerning the effect of the distribution rules on the Settlement Option or Options he or she is contemplating. Neither this Prospectus nor the Statement of Additional Information, however, describes limitations on Settlement Options based on applicable distribution rules in the case of Contracts issued in connection with qualified pension and profit-sharing plans under Section 401(a) of the Code and annuity plans under Section 403(a) of the Code. Under those Contracts, available Settlement Options are limited to those Options specified in the governing plan documents. The terms of such documents should be consulted to determine Settlement Option availability and any other limitations the plan may impose on early redemption of the Contract, payment in settlement thereof, or similar matters. Generally, limitations comparable to those described in the Statement of Additional Information for Individual Retirement Annuities and Section 403(b) annuity purchase plans also apply with respect to such qualified pension, profit-sharing and annuity plans (including H.R. 10 Plans). Persons contemplating election of the Fifth or Sixth Option should consult a qualified tax advisor to determine whether the continuing right of redemption under any such Option might be deemed for tax purposes to result in the "constructive receipt" of the Cash Value of the Contract. FIRST OPTION-LIFE ANNUITY. An annuity payable monthly during the lifetime of the Variable Annuitant, ceasing with the last Annuity Payment due prior to the death of the Variable Annuitant. This Option offers the maximum level of monthly Annuity Payments since there is no guarantee of a minimum number of Annuity Payments or provision for any continued payments to a Beneficiary upon the death of the Variable Annuitant. It would be possible under this Option for the Variable Annuitant to receive only one Annuity Payment if he or she died before the second Annuity Payment Date, or to receive only two Annuity Payments if he or she died after the second Annuity Payment Date but before the third Annuity Payment Date, and so forth. SECOND OPTION-LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN. An annuity payable monthly during the lifetime of the Variable Annuitant including the commitment that if, at the death of the Variable Annuitant, Annuity Payments have been made for less than 120 months, 180 months or 240 months (as selected by the Contract Owner in electing this Option), Annuity Payments shall be continued during the remainder of the selected period to the Beneficiary. The cash value under this Settlement Option is the present value of the current dollar amount of any unpaid Annuity Payments certain. 20 THIRD OPTION-UNIT REFUND LIFE ANNUITY. An annuity payable monthly during the lifetime of the Variable Annuitant, ceasing with the last Annuity Payment due prior to the death of the Variable Annuitant, provided that, at the death of the Variable Annuitant, the Beneficiary will receive a payment of the then dollar value of the number of Annuity Units equal to the excess, if any, of (a) over (b) where (a) is the total amount applied under this Option divided by the Annuity Unit value at the initial Annuity Payment Date and (b) is the number of Annuity Units represented by each Annuity Payment multiplied by the number of Annuity Payments made. For example, if $10,000 were applied on the first Annuity Payment Date to the purchase of an annuity under this Option, the Annuity Unit value at the initial Annuity Payment Date were $2.00, the number of Annuity Units represented by each Annuity Payment were 30.55, 10 Annuity Payments were paid prior to the date of the Variable Annuitant's death and the value of an Annuity Unit on the Valuation Date following the Variable Annuitant's death were $2.05, the amount paid to the Beneficiary would be $9,623.73, computed as follows: ($10.000 - (30.55 x 10)) X 2.05 = (5,000 - 305.5) X $2.05 = 4,694.5 X $2.05 = $9,623.73 ------ $2.00
FOURTH OPTION-JOINT AND LAST SURVIVOR LIFE ANNUITY. An annuity payable monthly during the joint lifetime of the Variable Annuitant and a secondary variable annuitant, and thereafter during the remaining lifetime of the survivor, ceasing with the last Annuity Payment due prior to the death of the survivor. Since there is no minimum number of guaranteed payments under this Option, it would be possible under this Option to receive only one Annuity Payment if both the Variable Annuitant and the secondary variable annuitant died before the second Annuity Payment Date, or to receive only two Annuity Payments if both the Variable Annuitant and the secondary variable annuitant died after the second Annuity Payment Date but before the third Annuity Payment Date, and so forth. FIFTH OPTION-PAYMENTS FOR A DESIGNATED PERIOD. An amount payable monthly to the Variable Annuitant for a number of years which may be from one to 30 (as selected by the Contract Owner in electing this Option). At the death of the Variable Annuitant, payments will be continued to the Beneficiary for the remaining period. The cash value under this Settlement Option is the then present value of the current dollar amount of any unpaid Annuity Payments certain. A Contract under which Annuity Payments are being made under this Settlement Option may be redeemed in whole or in part at any time by the Contract Owner for the aforesaid cash value of the part of the Contract redeemed. See "Redemption," above. It should be noted that, while this Option does not involve a life contingency, charges for annuity rate assurances, which include a factor for mortality risks, are included in the computation of Annuity Payments due under this Option. Further, although not contractually required to do so, The Franklin currently follows a practice, which may be discontinued at any time, of permitting persons receiving Annuity Payments under this Option to elect to convert such payments to a Variable Annuity involving a life contingency under the First, Second, Third or Fourth Options above if, and to the extent, such other Options are otherwise available to such person. SIXTH OPTION-PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. The amount due will be paid to the Variable Annuitant in equal annual, semiannual, quarterly or monthly Annuity Payments of a designated dollar amount (not less than $75 a year per $1,000 of the original amount due) until the remaining balance (adjusted each Valuation Period by the Net Investment Factor for the period) is less than the amount of one Annuity Payment, at which time such balance will be paid and will be the final Annuity Payment under this Option. Upon the death of the Variable Annuitant, payments will be continued to the Beneficiary until such remaining balance is paid. The cash value under this Settlement Option is the amount of proceeds then remaining with The Franklin. A Contract under which Annuity Payments are being made under this Settlement Option may be redeemed at any time by the Contract Owner for the aforesaid cash value. 21 Annuity Payments made under the Sixth Option may, under certain circumstances, be converted into a Variable Annuity involving a life contingency. See the last paragraph under the Fifth Option, above, which applies in its entirety to the Sixth Option as well. SEVENTH OPTION-INVESTMENT INCOME. The amount due may be left on deposit with The Franklin in its general account and a sum will be paid annually, semiannually, quarterly or monthly, as selected by the Contract Owner in electing this Option, which shall be equal to the net investment rate of 3% stipulated as payable upon fixed-dollar amounts for the period multiplied by the amount remaining on deposit. Upon the death of the Variable Annuitant, the aforesaid payments will be continued to the Beneficiary. The sums left on deposit with The Franklin may be withdrawn at any time. Periodic payments received under this Option may be treated like interest for federal income tax purposes. Interest payments are fully taxable and are not subject to the general rules applicable to the taxation of annuities described in "Federal Income Tax Status," below. Persons contemplating election of this Seventh Option are advised to consult a qualified tax advisor concerning the availability and tax effect of this election. 11. TRANSFER OF FIXED-DOLLAR ANNUITY VALUES TO ACQUIRE VARIABLE ANNUITY ACCUMULATION UNITS Where a Deferred Variable Annuity and a Fixed-Dollar Annuity have been issued on the same Contract, on any Contract Anniversary during the accumulation period of the Contract, the Contract Owner may have the cash value of his Fixed-Dollar Annuity transferred in whole or in part to his Variable Annuity to purchase Variable Annuity Accumulation Units at net asset value, without any sales or administrative deductions. However, any such partial transfer of cash value must be at least $500. (A similar privilege, but available four times in one contract year, permits transfer of Variable Annuity Accumulation Unit values to establish values under a Fixed-Dollar Annuity issued on the same Contract.) C. ANNUITY PERIOD 1. ELECTING ANNUITY PAYMENTS AND SETTLEMENT OPTION; COMMENCEMENT OF ANNUITY PAYMENTS (a) DEFERRED VARIABLE ANNUITY CONTRACTS A Contract Owner selects a Settlement Option and an initial Annuity Payment Date prior to the issuance of the Deferred Variable Annuity Contract, except that Contracts issued in connection with qualified pension and profit-sharing plans (including H.R. 10 Plans) under Section 401(a) of the Code and annuity plans (including H.R. 10 Plans) under Section 403(a) of the Code provide for Annuity Payments to commence at the date and under the Settlement Option specified in the plan. The Contract Owner may defer the initial Annuity Payment Date and continue the Contract to a date not later than the Contract Anniversary on which the attained age of the Variable Annuitant is 75 unless the provisions of the Code or any governing Qualified Plan require Annuity Payments to commence at an earlier date. See "Limitations on Settlement Options" in the Statement of Additional Information. The Franklin will require satisfactory proof of age of the Variable Annuitant prior to the initial Annuity Payment Date. (b) IMMEDIATE VARIABLE ANNUITY CONTRACTS The Franklin offers three forms of Immediate Variable Annuity Contracts: the life annuity, the life annuity with 120, 180 or 240 monthly payments certain and the joint and last survivor life annuity. For a description of these forms of annuity, see the First, Second and Fourth Options under "Settlement Options," above. Under an Immediate Variable Annuity, the first Annuity Payment is made to the Variable Annuitant one month after the Effective Date of the Contract, unless the period selected by the Contract Owner for 22 the frequency of Annuity Payments is more than one month, in which case the first Annuity Payment will be made after a period equal to the period so selected from the Effective Date (subject in every case to the survival of the Variable Annuitant, except in cases where a guaranteed payment period is provided). 2. THE ANNUITY UNIT The Annuity Unit is a measure used to value the First Option (including the automatic life annuity) and the Second, Third, Fourth and Fifth Options, if elected on a variable basis. The value of the Annuity Unit as of July 1, 1971 was fixed at $1.00 and for each day thereafter is determined by multiplying the value of the Annuity Unit on the preceding day by the "Annuity Change Factor" for the Valuation Period ending on the tenth preceding day or by 1.0 if no Valuation Period ended on the tenth preceding day. The "Annuity Change Factor" for any Valuation Period is equal to the amount determined by dividing the Net Investment Factor for that Valuation Period by a number equal to 1.0 plus the interest rate for the number of calendar days in such Valuation Period at the effective annual rate of 3-1/2%. The division by 1.0 plus an interest factor of 3-1/2% in calculating the Annuity Change Factor is effected in order to cancel out the assumed net investment rate of 3-1/2% per year which is built into the annuity tables specified in the Contract. See "Determination of Amount of First Monthly Annuity Payment (Deferred Variable Annuity Contracts Only)," below, and "Assumed Net Investment Rate," below. Annuity Units are valued in respect of each Annuity Payment Date as of a Valuation Date not less than 10 days prior to the Annuity Payment Date in question in order to permit calculation of amounts of Annuity Payments and mailing of checks in advance of their due dates. 3. DETERMINATION OF AMOUNT OF FIRST MONTHLY ANNUITY PAYMENT (DEFERRED VARIABLE ANNUITY CONTRACTS ONLY) When Annuity Payments commence under a Deferred Variable Annuity Contract, the value of the Contract Owner's account is determined as the product of the value of an Accumulation Unit on the first Annuity Payment Date and the number of Accumulation Units credited to the Contract Owner's account as of such Annuity Payment Date. The Contract utilizes tables indicating the dollar amount of the first monthly Annuity Payment under each Settlement Option for each $1,000 of Cash Value of the Contract. The first monthly Annuity Payment varies according to the Settlement Option selected (see "Settlement Options," above) and the "adjusted age" of the Variable Annuitant. The first monthly Annuity Payment may also vary according to the sex of the Variable Annuitant. See "Annuity Payments," above. (The Contracts provide for age adjustment based on the year of birth of the Variable Annuitant and any joint Variable Annuitant; a person's actual age when Annuity Payments commence may not be the same as the "adjusted age" used in determining the amount of the first Annuity Payment.) For Contracts utilizing sex-distinct annuity tables, the tables for the First, Second, Third and Fourth Options are determined from the Progressive Annuity Table assuming births in the year 1900 and a net investment rate of 3-1/2% a year. The tables for the Fifth Option are based on a net investment rate of 3% for the General Account and 3-1/2% for the Separate Account. The total first monthly Annuity Payment is determined by multiplying the number of thousands of dollars of Cash Value of the Contract Owner's Contract by the amount of the first monthly Annuity Payment per $1,000 of value from the tables in the Contract. The amount of the first monthly Annuity Payment, determined as above, is divided as of the initial Annuity Payment Date by the value of an Annuity Unit to determine the number of Annuity Units represented by the first Annuity Payment. Annuity Units are valued as of a Valuation Date not less than 10 days prior to the initial Annuity Payment Date, pursuant to the procedure discussed under "The Annuity Unit," immediately, above. Thus, there will be a double effect of the investment experience of 23 the Fund during the 10-day period referred to in the preceding sentence, since that experience will be included (as part of the value of an Accumulation Unit) in valuing the Contract Owner's Contract on the initial Annuity Payment Date and (as part of the changes in value of an Annuity Unit) in determining the second monthly Annuity Payment. Also, the number of Annuity Units (and hence the amount of Annuity Payments) will be affected by the net asset values of the Fund approximately 10 days prior to the initial Annuity Payment Date even though changes in those net asset values have occurred during that 10-day period, and even though the value of the Accumulation Units used to determine the Cash Value of the Contract will reflect those changes. See "Amount of Second and Subsequent Monthly Annuity Payments (Deferred Variable Annuity Contracts Only)," below. Each Contract contains a provision that the first monthly Annuity Payment will not be less than 103% of the first monthly Annuity Payment available under a then currently issued Immediate Variable Annuity of The Franklin if a single Stipulated Payment were made equal to the value which is being applied under the Contract to provide annuity benefits. This provision assures the Variable Annuitant that if at the initial Annuity Payment Date the annuity rates then applicable to new Immediate Variable Annuity Contracts are significantly more favorable than the annuity rates provided in his or her Contract, the Variable Annuitant will be given the benefit of the new annuity rates. 4. AMOUNT OF SECOND AND SUBSEQUENT MONTHLY ANNUITY PAYMENTS (DEFERRED VARIABLE ANNUITY CONTRACTS ONLY) The number of Annuity Units credited to a Contract on the initial Annuity Payment Date remains fixed during the annuity period, and as of each subsequent Annuity Payment Date the dollar amount of the Annuity Payment is determined by multiplying this fixed number of Annuity Units by the then value of an Annuity Unit. 5. DETERMINATION OF AMOUNT OF ANNUITY PAYMENTS (IMMEDIATE VARIABLE ANNUITY CONTRACTS ONLY) In the case of Immediate Variable Annuities, the number of Annuity Units per month purchased is specified in the Contract. The number of such units is determined by: (1) multiplying the net single Stipulated Payment (after deductions for sales and administrative expenses and premium taxes) by the applicable annuity factor from the annuity tables then used by The Franklin for Immediate Variable Annuity Contracts, and (2) dividing such product by the value of the Annuity Unit as of the date of issue of the Contract. This number of Annuity Units remains fixed for each month during the annuity period, and the dollar amount of the Annuity Payment is determined as of each Annuity Payment Date by multiplying this fixed number of Annuity Units by the value of an Annuity Unit as of each such Annuity Payment Date. Annuity Units are valued as of a Valuation Date not less than 10 days prior to the Effective Date of the Contract, pursuant to the procedure discussed under "The Annuity Unit," above. Thus, the number of Annuity Units (and hence the amount of the Annuity Payments) will be affected by the net asset value of the Fund approximately 10 days prior to the Effective Date of the Contract, even though changes in those net asset values have occurred during that 10-day period. As of the date of this Prospectus, The Franklin was using, in connection with the determination of the number of Annuity Units per month purchased under Immediate Variable Annuity Contracts, the 1955 American Annuity Table with assumed 4-1/2% interest, the purchase rates in such table being increased by 0.5% (which percentage is decreased 0.2% for each year of age at the Effective Date in excess of 70 years for male Variable Annuitants and in excess of 75 years for female Variable Annuitants). However, in lieu of such table, The Franklin will provide "unisex" annuity rate tables for use under Contracts purchased in connection with employer-related plans subject to the decision of the Supreme Court in ARIZONA GOVERNING COMMITTEE v. NORRIS. See "Annuity Payments," above. The Annuity Change Factors used by The Franklin for Immediate Variable Annuity Contracts assume a net investment rate of 3-1/2%. 24 6. ASSUMED NET INVESTMENT RATE The objective of a Variable Annuity Contract is to provide level Annuity Payments during periods when the economy, price levels and investment returns are relatively stable and to reflect as increased Annuity Payments only the excess investment results flowing from inflation, increases in productivity or other factors increasing investment returns. The achievement of this objective will depend in part upon the validity of the assumption in the annuity factor that a 3-1/2% net investment rate would be realized in the periods of relative stability assumed. A higher rate assumption would mean a higher initial Annuity Payment but a more slowly rising series of subsequent Annuity Payments in the event of a rising actual investment rate (or a more rapidly falling series of subsequent Annuity Payments in the event of a lower actual investment rate). A lower assumption would have the opposite effect. If the actual net investment rate is at the annual rate of 3-1/2%, the Annuity Payments under Contracts whose Annuity Payments are measured by Annuity Units will be level. INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND The following are the fundamental investment policies of the Fund: (1) The primary objective of the Fund in making investments is long-term appreciation of capital. Occasional investments for the purpose of seeking short-term capital appreciation may also be made. (2) Realization of current investment return is a secondary objective, subordinate to the primary objective. (3) Any investment income and realized capital gains (net of any capital gains tax) will be retained and reinvested. (4) The Fund's policy is to be substantially fully invested. Generally, the Fund's investments will consist of equity securities, mainly common stocks. The purchase of common stock may be made both in rising and declining markets. When it is determined, however, that investments of other types may be advantageous in reaching the Fund's objectives, on the basis of combined considerations of risk, income and appreciation, investments may be made in bonds, debentures, notes or other evidences of indebtedness, issued publicly or placed privately, of a type customarily purchased for investment by institutional investors, including United States Government securities, in corporate preferred stock or in certificates of deposit, or funds may be retained in cash. Such debt securities may, or may not, be convertible into stock or be accompanied by stock purchase options or warrants. (5) Temporary investments may be made in United States Government securities, certificates of deposit, short-term corporate debt securities (subject to fundamental restriction (4), below) and other similar securities, pending investment in the above-mentioned securities. While The Franklin is obligated to make Annuity Payments in accordance with selected Settlement Options, the amount of the Annuity Payments is not guaranteed but is a variable amount. Since, historically, the value of a diversified portfolio of common stocks held for an extended period of time has tended to rise during periods of inflation and growth in the economy, the Annuity Payment under a Variable Annuity should tend to conform more closely to changes in the cost of living and the level of the economy than payments under a Fixed-Dollar Annuity would do. However, there is no assurance that this objective can be attained. There have been times when the cost of living has increased while securities prices have decreased and times when the cost of living and the level of the economy have gone up or down with no direct correlation to the value of securities in general or to any particular type or class of securities. The value of investments held in the Fund will fluctuate daily and is subject to the risk of changing economic conditions as well as the risks inherent in the ability of management to anticipate changes in those conditions. The value of investments in common stock has historically fluctuated more greatly than the value of investments in securities such as bonds, debentures, notes, other evidences of indebtedness, preferred stock and certificates of deposit, and hence investments in common stocks offer 25 greater opportunities for appreciation and greater risk of depreciation. There is no assurance that the Cash Value of the Contract during the years prior to the Variable Annuitant's retirement or the aggregate amount received during the years following the initial Annuity Payment Date will equal or exceed the Stipulated Payments on the Contract. The investment policies of the Fund include a provision that investments may be made in securities other than common stocks if they are advantageous in reaching the Fund's objectives, on the basis of combined considerations of risk, income and appreciation. No assurance can be given, however, that investment in such other securities will accomplish such objectives. Investments may be made in bonds, debentures, notes or other evidences of indebtedness, issued publicly or placed privately, of a type customarily purchased for investment by institutional investors, including United States Government securities, and may also be made in corporate preferred stock or in certificates of deposit, or funds may be retained in cash. Such debt securities may, or may not, be convertible into stock or be accompanied by stock purchase options or warrants. Funds may also be temporarily invested in United States Government securities, certificates of deposit, short-term corporate debt securities (subject to certain restrictions) and other similar securities, pending long-term investment. Although debt securities and preferred stocks of the type in which the Fund would invest are generally considered to present less risk than common stocks, the value of such securities is subject to market fluctuations as a result of money market rates, the demand for such securities and factors relating to the individual issuers of such securities. In the event the Fund invests in such securities, such factors may limit the ability of the Fund to convert such securities to cash and reinvest in other types of securities. Historically, the Fund has not invested significant amounts in debt securities or preferred stocks except for short-term investments in debt securities pending ultimate long-term application of funds for investment purposes. The following are the fundamental investment restrictions applicable to the Fund: (1) The Fund will not concentrate its investments in any one industry or group of related industries, and no more than 25% of the value of the Fund's assets will be invested in any one industry or group of related industries. (2) The Fund will not issue senior securities, except that the Fund may borrow money as set forth in paragraph (3) immediately below. (3) The Fund will not borrow money except for temporary or emergency purposes from banks, and any such borrowings will not be used to purchase investment securities and will not exceed 5% of the value of the Fund's assets. (4) The Fund will not underwrite securities of other issuers, except that the Fund may acquire portfolio securities under circumstances where, if sold, it might be deemed to be an underwriter for purposes of the Securities Act of 1933. No such securities will be acquired except where parties other than the Fund shall have agreed to bear any and all costs of registration under the Securities Act of 1933. (However, it should be noted that even though an agreement to register has been obtained, enforcement of such an agreement may prove unfeasible or may involve delays which could adversely affect the Fund's ability to resell such securities or the price at which such securities might be resold.) No more than 10% of the value of the Fund's assets will at any time be invested in such securities. (5) The Fund will not engage in the purchase and sale of interests in real estate, except that the Fund may engage in the purchase and sale of readily marketable interests in real estate investment trusts or similar securities, which may be deemed to represent indirect interests in real estate. (6) The Fund will not engage in the making of loans to other persons, except that the Fund may acquire privately placed corporate debt securities of a type customarily purchased by institutional investors. Such securities, if required to be registered under the Securities Act of 1933 prior to public distribution, will be included in the 10% limitation specified in fundamental restriction (4), above. The 26 foregoing does not restrict the purchase by the Fund of a portion of an issue of publicly distributed bonds, debentures or other securities, whether or not the purchase is made upon the original issuance of such securities. (7) The Fund will not engage in the purchase or sale of commodities or commodity contracts. (8) The Fund will not purchase the securities of any one issuer, other than obligations issued or guaranteed by the United States Government and its agencies or instrumentalities, if such purchase would cause more than 5% of the Fund's assets to be invested in the securities of such issuer, except that up to 25% of the Fund's total assets taken at current value may be invested without regard to such 5% limitation. (9) The Fund will not acquire more than 10% of the outstanding voting securities of any one issuer, other than obligations issued or guaranteed by the United States Government and its agencies or instrumentalities, except that up to 25% of the Fund's total assets taken at current value may be invested without regard to such 10% limitation. The fundamental investment policies and the fundamental investment restrictions stated above may not be changed without approval by a vote of a majority of the votes available to the Contract Owners. This means that the policies or restrictions in question may not be changed without the approval of the lesser of (a) the Contract Owners holding 67% or more of the voting power of the Contract Owners present or represented at a meeting if Contract Owners holding more than 50% of the total voting power of all Contract Owners in the Fund are present or represented by proxy, or (b) Contract Owners holding more than 50% of the total voting power of all Contract Owners in the Fund. The following investment restrictions are not fundamental and may be changed by action of the Board of Managers of the Fund: (10) All securities in which the Fund invests shall be permissible for the Fund under the Illinois Insurance Code. The Illinois Insurance Code provides that investments of a separate account, like the Fund, are free of the restrictions or provisions generally applicable to insurance companies under that Code, and does not currently provide any special investment restrictions applicable to separate accounts. However, no investment permitted under the Illinois Insurance Code is thereby exempted from the other investment restrictions specified under this caption. (11) The Fund will not invest in companies for the purpose of exercising control or management. (12) The Fund will not invest in the securities of other investment companies. (13) The Fund will not purchase securities on margin, except for such short-term credits as are necessary for the clearance of transactions. (14) The Fund will not make short sales of securities. (15) The Fund will not invest in corporate debt (other than commercial paper) or preferred stock that is rated lower than one of the three top grades by Moody's Investors Services, Inc. or Standard & Poor's Corporation and the Fund will not invest in commercial paper rated lower than one of the two top grades by such rating agencies. FEDERAL INCOME TAX STATUS 27 INTRODUCTION The Contracts are designed for use by individuals in connection with Qualified Plans under the Code. The federal income tax treatment of the Contracts and payments received thereunder depends on various factors, including, among other factors, the tax status of The Franklin, the type of retirement plan or program in connection with which the Contracts are used and the form in which payments are received. The discussion of federal income taxes contained in this Prospectus, which focuses on rules applicable to Contracts purchased under this Prospectus, is general in nature and is based on existing federal income tax law, which is subject to change. The tax discussion is not intended as tax advice. The applicable federal income tax law is complex and contains many special rules and exceptions in addition to the general rules summarized herein. For these reasons, various questions about the applicable rules exist. Accordingly, each person contemplating the purchase of a Contract is advised to consult with a qualified tax advisor concerning federal income taxes and any other federal, state or local taxes that may be applicable. THE FRANKLIN The Franklin is taxed as a "life insurance company" under the Code. Since the operations of the Fund are part of the overall operations of The Franklin, the Fund is subject to tax as part of The Franklin for federal income tax purposes. Thus, the Fund is not taxed separately as a "regulated investment company" under the Code. Under the Code a life insurance company like The Franklin is generally taxed at regular corporate rates, under a single-phase system, on its specially-computed life insurance company taxable income. Some special rules continue to apply, however, in the case of segregated asset accounts like the Fund. Investment income and realized capital gains on the assets of the Fund are reinvested by The Franklin for the benefit of the Fund and are taken into account in determining the value of Accumulation Units and Annuity Units. As a result, such income and gains are applied to increase reserves applicable to the Fund. Under the Code, no federal income tax is payable by The Franklin on such investment income or on realized capital gains of the Fund on assets held in the Fund. However, if changes in the federal tax laws or interpretations thereof result in The Franklin being taxed on income or gains attributable to the Fund, then The Franklin may impose a charge against the Fund (with respect to some or all Contracts) in order to set aside provisions to pay such taxes. THE CONTRACTS: QUALIFIED PLANS The manner in which payments received under a Contract are taxed for federal income tax purposes depends on the form of payment. If payments are received in the form of an annuity, then, in general, under Section 72 of the Code, such payment is taxable to the recipient as ordinary income to the extent that such payment exceeds the portion, if any, of the cost basis of the Contract that is allocable to that payment. A payment received on account of partial redemption of an annuity contract generally is taxable in whole or part. The taxation of a partial redemption is governed by complex rules and a qualified tax advisor should be consulted prior to a proposed partial redemption. If the Variable Annuitant's life span exceeds his or her life expectancy, the Variable Annuitant's cost basis will eventually be recovered, and any payments made after that point will be fully taxable. If, however, the Annuity Payments cease after the initial Annuity Payment Date by reason of the death of the Variable Annuitant, the amount of any unrecovered cost basis in the Qualified Contract will generally be allowed as a deduction to the Variable Annuitant for his or her last taxable year. Generally, payment of the proceeds of a Qualified Contract in a lump sum instead of in the form of an annuity, either at or before maturity, also is taxable as ordinary income to the extent the lump sum exceeds the cost basis of the Qualified Contract. Taxation may be deferred, however, to the extent, if any, that "rollover" treatment is available and elected for a particular distribution. 28 Under a provision of federal income tax law effective for Contracts entered into after October 21, 1988, distributions from a Contract are generally not subject to aggregation with distributions from other annuity contracts issued by The Franklin (or its affiliates) for the purpose of determining the taxability of distributions not in the form of an annuity. The Qualified Contracts are designed for use in connection with several types of Qualifed Plans, as described generally below. A. QUALIFIED PENSION, PROFIT-SHARING AND ANNUITY PLANS Under pension and profit-sharing plans that qualify under Section 401(a) of the Code and annuity purchase plans that qualify under Section 403(a) of the Code (collectively "Corporate Qualified Plans"), amounts contributed by an employer to the Corporate Qualified Plan on behalf of an employee and any gains thereon are not, in general, taxable to the employee until distribution. Generally, the cost basis of an employee under a Corporate Qualified Plan will equal the amount of non-deductible contributions, if any, that the employee made to the Corporate Qualified Plan. These retirement plans may permit the purchase of the Contracts to accumulate retirement savings under the plans. Adverse tax consequences to the plan, to the participant, or both may result if this Contract is assigned or transferred to any individual as a means to provide benefit payments. The Code imposes an additional tax of 10% on the taxable portion of any early withdrawal from a Corporate Qualified Plan made by a Variable Annuitant before age 59-1/2, death, or disability. The additional income tax on early withdrawals will not apply however to certain distributions including (a) distributions beginning after separation from service that are part of a series of substantially equal periodic payments made at least annually for the life of the Variable Annuitant or the joint lives of the Variable Annuitant and his or her Beneficiary, and (b) distributions made to Variable Annuitants after attaining age 55 and after separating from service. Further, additional penalties may apply to distributions made on behalf of a "5-percent owner" (as defined by Section 416(i)(1)(B) of the Code). If a lump sum payment of the proceeds of a Contract qualifies as a "lump sum distribution" under the Code, special tax rules (including limited capital gain and income averaging treatment in some circumstances) may apply. B. H.R. 10 PLANS (SELF-EMPLOYED INDIVIDUALS) Self-employed persons (including members of partnerships) are permitted to establish and participate in Corporate Qualified Plans under Sections 401(a) and 403(a) of the Code. Corporate Qualified Plans in which self-employed persons participate are commonly referred to as "H.R. 10 Plans." The tax treatment of annuity payments and lump sum payments received in connection with an H.R. 10 Plan is, in general, subject to the same rules described in "Qualified Pension, Profit-Sharing and Annuity Plans," immediately above. Some special rules apply, however, in the case of self-employed persons which, for example, affect certain "lump sum distribution" and "rollover" rules. C. SECTION 403(b) ANNUITIES Section 403(b) of the Code permits public schools and other tax-exempt organizations described in Section 501(c) (3) of the Code to purchase annuity contracts for their employees subject to special tax rules. If the requirements of Section 403(b) are satisfied, amounts contributed by the employer to purchase an annuity contract for an employee, and any gains thereon, are not, subject to certain limitations, taxable to the employee until distributed to the employee. However, these payments may be subject to 29 FICA (Social Security) taxes. Generally, the cost basis of an employee under a Section 403(b) annuity contract will equal the amount of any non-deductible contributions the employee made toward the contract plus any employer contributions that were taxable to the employee because they exceeded excludable amounts. Federal tax law imposes limitations on distributions from Section 403(b) annuity contracts. Withdrawals of amounts attributable to contributions made pursuant to a salary reduction agreement in connection with a Section 403(b) annuity contract will be permitted only (1) when an employee attains age 59-1/2, separates from service, dies or becomes totally and permanently disabled or (2) in the case of hardship. A withdrawal made in the case of hardship may not include income attributable to the contributions. However, these limitations generally do not apply to distributions which are attributable to assets held as of December 31, 1988. In general, therefore, contributions made prior to January 1, 1989, and earnings on such contributions through December 31, 1988, are not subject to these limitations. In addition, these limitations do not apply to contributions made other than by a salary reduction agreement. A number of questions exist concerning the application of these rules. Anyone considering a withdrawal from a Contract issued in connection with a Section 403(b) annuity plan should consult a qualified tax advisor. The 10% penalty tax on early withdrawals described under "Qualified Pension, Profit-Sharing and Annuity Plans," above, also applies to Section 403(b) annuity contracts. D. INDIVIDUAL RETIREMENT ANNUITIES 1. SECTION 408(b) INDIVIDUAL RETIREMENT ANNUITIES Under Sections 408(b) and 219 of the Code, special tax rules apply to Individual Retirement Annuities. As described below, certain contributions to such annuities (other than Rollover Contributions) are deductible within certain limits and the gains on contributions (including Rollover Contributions) are not taxable until distributed. Generally, the cost basis in an Individual Retirement Annuity will equal the amount of non-deductible contributions (other than rollovers), if any, made to the Individual Retirement Annuity. Under special rules, all individual retirement plans will be treated as one plan for purposes of these rules. Section 408(b) sets forth various requirements that an annuity contract must satisfy before it will be treated as an Individual Retirement Annuity. Although final regulations that interpret some of these requirements have been adopted, other regulations have been proposed that interpret the additional requirement that, under a Section 408(b) Individual Retirement Annuity, the premiums may not be fixed. These proposed regulations, which contain certain ambiguities, may, of course, be changed before they are issued in final form. ACCORDINGLY, WHILE THE FRANKLIN BELIEVES THAT THE CONTRACTS OFFERED BY THIS PROSPECTUS MEET THE REQUIREMENTS OF SECTION 408(b), THE FINAL REGULATIONS AND THE CURRENTLY PROPOSED REGULATIONS THEREUNDER, THERE CAN BE NO ASSURANCE THAT THE CONTRACTS QUALIFY AS INDIVIDUAL RETIREMENT ANNUITIES UNDER SECTION 408(b) PENDING THE ISSUANCE OF COMPLETE FINAL REGULATIONS UNDER THAT CODE SECTION. Individuals who are not "active participants" in an employer-related retirement plan described in Section 219(g) of the Code will, in general, be allowed to contribute to an Individual Retirement Annuity and to deduct a maximum of $2,000 annually (or 100% of the individual's compensation if less). This deduction is phased out at certain income levels for individuals who are active participants in employer-related retirement plans. These income levels vary depending on an individual's marital and tax filing status and are scheduled to gradually increase in the future. Individuals who may not make deductible contributions to an Individual Retirement Annuity may, instead, make non-deductible contributions (up to the applicable maximum described above) on which earnings will accumulate on a tax-deferred basis. If the Individual Retirement Annuity includes non-deductible contributions, distributions will be divided on a pro rata basis between taxable and non-taxable amounts. Special rules apply if, for example, an 30 individual contributes to an Individual Retirement Annuity for his or her own benefit and to another Individual Retirement Annuity for the benefit of his or her spouse. Individual Retirement Annuities are subject to limitations on the time when distributions must commence. In addition, the 10% penalty tax on early withdrawals described under "Qualified Pension, Profit-Sharing and Annuity Plans," above, also applies to Individual Retirement Annuities, except that the circumstances in which the penalty tax will not apply are different in certain respects. Further, for any year in which a Contract Owner borrows any money under or by use of the Individual Retirement Annuity, the Contract ceases to qualify under Section 408(b), and an amount equal to the fair market value of the Contract as of the first day of such year will be includible in the Contract Owner's gross income for such year. The sale of a Contract for use with an Individual Retirement Annuity may be subject to special disclosure requirements of the Internal Revenue Service. Purchasers of a Contract for use with Individual Retirement Annuities will be provided with supplemental information required by the Internal Revenue Service or other appropriate agency. Such purchasers will have the right to revoke their purchase within 7 days of the earlier of the establishment of the Individual Retirement Annuity or their purchase. A Qualified Contract issued in connection with an Individual Retirement Annuity will be amended as necessary to conform to the requirements of the Code. Purchasers should seek competent advice as to the suitability of the Contract for use with Individual Retirement Annuities. 2. SECTION 408(k) SIMPLIFIED EMPLOYEE PENSIONS An Individual Retirement Annuity described in Section 408(b) of the Code that also meets the special requirements of Section 408(k) qualifies as a Simplified Employee Pension. Under a Simplified Employee Pension, employers may contribute to the Individual Retirement Annuities of their employees subject to the limitations in Section 408(j). An employee may exclude the employer's contribution on his or her behalf to a Simplified Employee Pension from gross income subject to certain limitations. Elective deferrals under a Simplified Employee Pension are to be treated like elective deferrals under a cash or deferred arrangement under Section 401(k) of the Code and are subject to a $7,000 limitation, adjusted for inflation. In general, the employee may also contribute and deduct an additional amount not in excess of the lesser of (a) $2,000 or (b) 100% of compensation, subject to the phaseout discussed above, if the Simplified Employee Pension meets the qualifications for an Individual Retirement Annuity. In general, except as stated in this section, the rules discussed in "Section 408(b) Individual Retirement Annuities," immediately above, apply to a Simplified Employee Pension. INCOME TAX WITHHOLDING Withholding of federal income tax is generally required from distributions from Qualified Plans or Contracts issued in connection therewith, to the extent the distributions are taxable and are not otherwise subject to withholding as wages ("Distributions"). See "The Contracts: Qualified Plans," above, regarding the taxation of Distributions. Federal income tax is generally required to be withheld from all or any portion of a Distribution made on or after January 1, 1993 that constitutes an "eligible rollover distribution." An "eligible rollover distribution" generally includes any distribution from a qualified trust described in Section 401(a) of the Code, a qualified annuity plan described in Section 403(a) of the Code or a qualified annuity contract described in Section 403(b) of the Code except for (i) a distribution which is one of a series of substantially equal periodic instalments payable at least annually for the life (or over the life expectancy) of the Variable Annuitant or for the joint lives (or over the joint life expectancies) of the Variable Annuitant and his or her Beneficiary, or for a specified period of 10 years or more or (ii) a minimum distribution required pursuant to Section 401(a)(9) of the Code and (iii) an amount which is not includible in gross income (for example, the return of non-deductible contributions). Any eligible rollover distribution 31 which is not rolled over directly from a Section 401(a) qualified trust, a Section 403(a) qualified annuity plan or a Section 403(b) qualified annuity contract to an "eligible retirement plan" is subject to mandatory federal income tax withholding in an amount equal to 20% of the eligible rollover distribution. An "eligible retirement plan" generally includes a qualified trust described in Section 401(a) of the Code, a qualified annuity plan described in Section 403(a) of the Code, an individual retirement account described in Section 408(a) of the Code or an Individual Retirement Annuity described in Section 408(b) of the Code. Mandatory federal income tax withholding is required even if the Variable Annuitant receives an eligible rollover distribution and rolls it over within 60 days to an eligible retirement plan. Federal income tax is not required to be withheld from any eligible rollover distribution which is rolled over directly from a qualified trust described in Section 401(a) of the Code, a qualified annuity plan described in Section 403(a) of the Code or a qualified annuity contract described in Section 403(b) of the Code to an eligible retirement plan. Except with respect to certain payments delivered outside the United States or any possession of the United States, federal income tax is not required to be withheld from any Distribution which does not constitute an eligible rollover distribution, if the Variable Annuitant or Beneficiary properly elects in accordance with the prescribed procedures not to have withholding apply. In the absence of a proper election not to have withholding apply, the amount to be withheld from a Distribution which is not an eligible rollover distribution depends upon the type of payment being made. Generally, in the case of a periodic payment which is not an eligible rollover distribution, the amount to be withheld from such payment is the amount that would be withheld therefrom under specified wage withholding tables if the payment were a payment of wages for the appropriate payroll period. In the case of a nonperiodic payment which is not an eligible rollover distribution, the amount to be withheld is generally equal to 10% of the amount of the Distribution. The applicable federal law pertaining to income tax withholding from Distributions is complex and contains many special rules and exceptions in addition to the general rules summarized above. Special rules apply, for example, if the Distribution is made to the surviving spouse of a Variable Annuitant or if the Distribution is an eligible rollover distribution from a qualified annuity contract under Section 403(b) of the Code. Any Variable Annuitant or Beneficiary considering a Distribution should consult a qualified tax advisor. MANAGEMENT The Fund is managed by a Board of Managers elected annually by the Contract Owners. The Board of Managers currently has four members. The members of the Board of Managers also serve as the Board of Managers of Franklin Life Variable Annuity Fund B, a separate account of The Franklin having investment objectives similar to the Fund but the assets of which are not held with respect to Variable Annuity Contracts accorded special tax treatment, and of Franklin Life Money Market Variable Annuity Fund C, a separate account of The Franklin having investments in money market securities. The affairs of the Fund are conducted in accordance with Rules and Regulations adopted by the Board of Managers. Under the Rules and Regulations, the Board of Managers is authorized to take various actions on behalf of the Fund, including the entry into contracts for the purpose of services with respect to the Fund under circumstances where the approval of such contracts is not required to be submitted to the Contract Owners. Subject to the authority of the Board of Managers, officers and employees of The Franklin are responsible for overall management of the Fund's business affairs. VOTING RIGHTS All Contract Owners will have the right to vote upon: (1) The initial approval of any investment management agreement and any amendment thereto. (2) Ratification of an independent auditor for the Fund. 32 (3) Any change in the fundamental investment policies or fundamental investment restrictions of the Fund. (4) Election of members of the Board of Managers of the Fund (cumulative voting is not permitted). (5) Termination of the investment management agreement (such termination may also be effected by the Board of Managers). (6) Any other matter submitted to them by the Board of Managers. The number of votes which a Contract Owner may cast as to any Contract, except after the initial Annuity Payment Date, is equal to the number of Accumulation Units credited to the Contract. With respect to any Contract as to which Annuity Payments measured by Annuity Units have commenced, the Contract Owner may cast a number of votes equal to (i) the amount of the assets in the Fund to meet the Variable Annuity obligations related to such Contract, divided by (ii) the value of an Accumulation Unit. Accordingly, the voting rights of a Contract Owner will decline during the Annuity Payment period as the amount of assets in the Fund required to meet the Annuity Payments decreases and, in addition, will decline as the value of an Accumulation Unit increases. Fractional votes will be counted. An employee covered by an H.R. 10 Plan, if not the Contract Owner, will have the right to instruct the Contract Owner with respect to all votes attributable to the Contract. An employee covered by a Contract issued in connection with a qualified pension or profit-sharing plan described in Section 401 of the Code will have the right to instruct the Contract Owner with respect to votes attributable to his or her payments to the plan, if any, and, to the extent authorized by the terms of the plan, with respect to any additional votes under the Contract. If Annuity Payments are being made under an annuity to a person who is not a Contract Owner, that person will have the right to instruct the Contract Owner with respect to votes attributable to the amount of the assets in the Fund to meet the Annuity Payments related to the Contract. Contract Owners will cast votes with respect to which instructions have been received in accordance with such instructions. Votes with respect to which employees, Variable Annuitants or other persons to whom payments are being made under a Contract are entitled to instruct the Contract Owner, but for which the Contract Owner has received no instructions, shall be cast by the Contract Owner for or against each proposal to be voted on in the same proportion as votes for which instructions have been received by such Contract Owner. If no one is entitled to instruct the Contract Owner, or if the Contract Owner receives no instructions, all votes which the Contract Owner is entitled to cast may be cast at his or her sole discretion. Neither the Fund nor The Franklin has any duty to inquire as to the instructions received or the authority of the Contract Owner to cast such votes; except to the extent that the Fund or The Franklin has actual knowledge to the contrary, the votes cast by Contract Owners will be considered valid and effective as among the Fund, The Franklin and other persons having voting rights with respect to the Fund. Should assets be maintained in the Fund with respect to contracts other than those offered by this Prospectus, contract owners under such contracts would be entitled to vote, and their votes would be computed in a similar manner. Assets maintained by The Franklin in the Fund in excess of the amounts attributable to the Contracts or other contracts of The Franklin will entitle The Franklin to vote and its vote would be computed in a similar manner. The Franklin will cast its votes in the same proportion as the votes cast by Contract Owners and the owners of such other contracts. The number of votes which each Contract Owner may cast at a meeting shall be determined as of a record date to be chosen by the Board of Managers within 120 days of the date of the meeting. At least 20 days' written notice of the meeting will be given to Contract Owners of record. To be entitled to vote or to receive notice, a Contract Owner must have been such on the record date. 33 DISTRIBUTION OF THE CONTRACTS Franklin Financial Services Corporation ("Franklin Financial") serves as "principal underwriter" (as that term is defined in the Investment Company Act of 1940) for the Contracts pursuant to a Sales Agreement with the Fund. The Sales Agreement is described under "Distribution of The Contracts" in the Statement of Additional Information. Franklin Financial, located at #1 Franklin Square, Springfield, Illinois 62713, is organized under the laws of the State of Delaware and is a wholly-owned subsidiary of The Franklin. The Fund no longer offers new Contracts. Commissions are paid to registered representatives of Franklin Financial with respect to Stipulated Payments received by The Franklin under the Contracts to a maximum of 5% of such Stipulated Payments. STATE REGULATION As a life insurance company organized and operated under Illinois law, The Franklin is subject to statutory provisions governing such companies and to regulation by the Illinois Director of Insurance. An annual statement is filed with the Director on or before March 1 of each year covering the operations of The Franklin for the preceding year and its financial condition on December 31 of such year. The Franklin's books and accounts are subject to review and examination by the Illinois Insurance Department at all times, and a full examination of its operations is conducted by the National Association of Insurance Commissioners ("NAIC") periodically. The NAIC has divided the country into six geographic zones. A representative of each such zone may participate in the examination. In addition, The Franklin is subject to the insurance laws and regulations of the jurisdictions other than Illinois in which it is licensed to operate. Generally, the insurance departments of such jurisdictions apply the laws of Illinois in determining permissible investments for The Franklin. For certain provisions of Illinois law applicable to the Fund's investments, see "Investment Policies and Restrictions of the Fund," above. REPORTS TO OWNERS The Franklin will mail to the Contract Owner, at the last known address of record at the Home Office of The Franklin, at least annually, a report containing such information as may be required by any applicable law or regulation and a statement showing the then Cash Value of his or her Contract. FUNDAMENTAL CHANGES Upon compliance with applicable law, including obtaining any necessary affirmative vote of Contract Owners in each case: (a) the Fund may be operated in a form other than as a "management company" under the Investment Company Act of 1940 (including operation as a "unit investment trust"); (b) the Fund may be deregistered under the Investment Company Act of 1940 in the event such registration is no longer required; or (c) the provisions of the Contracts may be modified to assure qualification under the pertinent provisions of the Code or to comply with other applicable federal or state laws. In the event of any such fundamental change, The Franklin may make appropriate amendments to the Contracts to give effect to such change or take such other action as may be necessary in this respect. The Board of Managers of the Fund, and the respective Board of Managers of each of Franklin Life Variable Annuity Fund B ("Fund B") and Franklin Life Money Market Variable Annuity Fund C ("Fund C"), have approved resolutions whereby Contract Owners will be asked during 1998 to approve or to disapprove an Agreement and Plan of Reorganization (the "Agreement") and related transactions (together, the Agreement and related transactions are the "Reorganization") whereby: (i) the Fund will be 34 restructured into a single unit investment trust consisting of three subaccounts; (ii) the assets of each of the Fund, Fund B and Fund C will be liquidated and the proceeds transferred to one of the three subaccounts in the restructured Fund (so that the interests of Contract Owners and of Fund B and Fund C contract owners will continue as interests in the restructured Fund); and (iii) each subaccount will invest exclusively in shares of a specified mutual fund portfolio. Contract Owners will be provided with a proxy statement describing the Reorganization in detail. If the Reorganization is approved, then immediately following the consummation of the Reorganization, each Contract Owner will have an interest in a number of units in a subaccount of the restructured Fund having a value equal to the value of that Contract Owner's interest in a Fund immediately prior to the Reorganization. YEAR 2000 TRANSITION Like all financial services providers, The Franklin utilizes systems that may be affected by Year 2000 transition issues and it relies on service providers, including banks, custodians, and investment managers that also may be affected. The Franklin and its affiliates have developed, and are in the process of implementing, a Year 2000 transition plan, and are confirming that their service providers are also so engaged. The resources that are being devoted to this effort are substantial. It is difficult to predict with precision whether the amount of resources ultimately devoted, or the outcome of these efforts, will have any negative impact on The Franklin. However, as of the date of this prospectus, it is not anticipated that Contract Owners will experience negative effects on their investment, or on the services provided in connection therewith, as a result of the Year 2000 transition implementation. The Franklin currently anticipates that its systems will be Year 2000 compliant on or about December 31, 1998, but there can be no assurance that The Franklin will be successful, or that interaction with other service providers will not impair The Franklin's services at that time. LEGAL PROCEEDINGS In recent years, various life insurance companies have been named as defendants in class action lawsuits relating to life insurance pricing and sales practices, and a number of these lawsuits have resulted in substantial settlements. The Franklin is a defendant in certain purported class action lawsuits. These claims are being defended vigorously by The Franklin. Given the uncertain nature of litigation and the early stages of this litigation, the outcome of these actions cannot be predicted at this time. The Franklin nevertheless believes that the ultimate outcome of all such pending litigation should not have a material adverse effect on the Fund or on The Franklin's financial position; however, it is possible that settlements or adverse determinations in one or more of these actions or other future proceedings could have a material adverse effect on The Franklin's results of operations for a given period. No provision has been made in the consolidated financial statements related to this pending litigation because the amount of loss, if any, from these actions cannot be reasonably estimated at this time. The Franklin is a party to various other lawsuits and proceedings arising in the ordinary course of business. Many of these lawsuits and proceedings arise in jurisdictions, such as Alabama, that permit damage awards disproportionate to the actual economic damages incurred. Based upon information presently available, The Franklin believes that the total amounts that will ultimately be paid, if any, arising from these lawsuits and proceedings will not have a material adverse effect on the Fund or on The Franklin's results of operations and financial position. However, it should be noted that the frequency of large damage awards, including large punitive damage awards, that bear little or no relation to actual economic damages incurred by plaintiffs in jurisdictions like Alabama continues to increase and creates the potential for an unpredictable judgment in any given suit. REGISTRATION STATEMENT 35 A Registration Statement has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, with respect to the Contracts offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and amendments thereto and exhibits filed as a part thereof, to all of which reference is hereby made for further information concerning the Fund, The Franklin and the Contracts offered hereby. Statements contained in this Prospectus as to the content of Contracts and other legal instruments are summaries. For a complete statement of the terms thereof, reference is made to such instruments as filed. OTHER VARIABLE ANNUITY CONTRACTS; EFFECT OF NON-QUALIFICATION The Franklin may offer, under other prospectuses, other variable annuity contracts having interests in the Fund and containing different terms and conditions from those offered hereby. All such other contracts, however, will be designed for use in connection with certain Qualified Plans or as Individual Retirement Annuities. The Franklin will not knowingly permit moneys which are not "tax-benefited" to be allocated to the Fund. The Franklin will transfer any portion of a Contract allocated to the Fund to the general account of The Franklin, less a deduction for federal income taxes payable on the portion so transferred, if, at any time, the plan or arrangement with respect to which the Contract was sold fails to meet the requirements of the Code. The Franklin will promptly notify the Contract Owner of such transfer. The Contract Owner may elect to (1) leave the funds so transferred in the general account, (2) redeem his Contract, or (3) apply the funds so transferred to the purchase of a variable annuity contract offered by Franklin Life Variable Annuity Fund B. See "Redemption," and "Transfers to Other Contracts," above. 36 TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PAGE IN STATEMENT OF ADDITIONAL INFORMATION - ----------------------------------------------------------------------------- General Information . . . . . . . . . . . . . . . . . 2 Investment Objectives. . . . . . . . . . . . . . . . . 2 Limitations on Settlement Options. . . . . . . . . . . 2 Management . . . . . . . . . . . . . . . . . . . . . . 4 Investment Advisory and Other Services . . . . . . . . 6 Distribution of The Contracts. . . . . . . . . . . . . 7 Portfolio Turnover and Brokerage . . . . . . . . . . . 8 Safekeeper of Securities . . . . . . . . . . . . . . . 9 Legal Matters. . . . . . . . . . . . . . . . . . . . . 9 Experts. . . . . . . . . . . . . . . . . . . . . . . . 9 Index to Financial Statements. . . . . . . . . . . . . F-1
37 PROSPECTUS FRANKLIN LIFE VARIABLE ANNUITY FUND A INDIVIDUAL VARIABLE ANNUITY CONTRACTS FOR USE WITH CERTAIN QUALIFIED PLANS AND TRUSTS ACCORDED SPECIAL TAX TREATMENT AND AS INDIVIDUAL RETIREMENT ANNUITIES ISSUED BY THE FRANKLIN LIFE INSURANCE COMPANY #1 FRANKLIN SQUARE SPRINGFIELD, ILLINOIS 62713 - ------------------------------------------------------------------------------- Complete and return this form to: The Franklin Life Insurance Company #1 Franklin Square Springfield, Illinois 62713 Attention: Box 1018 (800) 528-2011, extension 2591 Please send me the Statement of Additional Information dated April 30, 1998 for Franklin Life Variable Annuity Fund A. - ------------------------------------------------------------------------------- (Name) - ------------------------------------------------------------------------------- (Street) - ------------------------------------------------------------------------------- (City) (State) (Zip Code) - ------------------------------------------------------------------------------- APPENDIX C FRANKLIN LIFE VARIABLE ANNUITY FUND B PROSPECTUS FRANKLIN LIFE VARIABLE ANNUITY FUND B PROSPECTUS INDIVIDUAL VARIABLE ANNUITY CONTRACTS (NOT USED IN CONNECTION WITH QUALIFIED TRUSTS OR PLANS) ISSUED BY #1 Franklin Square Springfield, Illinois 62713 Telephone (800) 528-2011 THIS PROSPECTUS DESCRIBES INDIVIDUAL IMMEDIATE AND DEFERRED VARIABLE ANNUITY CONTRACTS PROVIDING ANNUITY INSTALLMENTS FOR LIFE COMMENCING ON A MATURITY DATE SELECTED BY THE CONTRACT OWNER; OTHER SETTLEMENT OPTIONS ARE ALSO PROVIDED. THE BASIC PURPOSE OF THE VARIABLE CONTRACTS IS TO PROVIDE ANNUITY PAYMENTS WHICH WILL VARY WITH THE INVESTMENT PERFORMANCE OF FRANKLIN LIFE VARIABLE ANNUITY FUND B (THE "FUND"). THE FUND NO LONGER OFFERS NEW CONTRACTS. THE PRIMARY INVESTMENT OBJECTIVE OF THE FUND IS LONG-TERM APPRECIATION OF CAPITAL THROUGH INVESTMENT APPRECIATION AND THE RETENTION AND REINVESTMENT OF INCOME. THERE IS NO ASSURANCE THAT THIS OBJECTIVE WILL BE ATTAINED. GENERALLY, THE FUND'S INVESTMENTS WILL CONSIST OF EQUITY SECURITIES, MAINLY COMMON STOCKS. ---------------------------------- THIS PROSPECTUS SETS FORTH INFORMATION ABOUT THE FUND THAT A PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING AND SHOULD BE KEPT FOR FUTURE REFERENCE. ADDITIONAL INFORMATION ABOUT THE FUND AND THE FRANKLIN IS CONTAINED IN A STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 30, 1998, WHICH HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST. A STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED FROM THE FRANKLIN BY WRITING TO THE ADDRESS (ATTENTION: BOX 1018) OR CALLING THE TELEPHONE NUMBER (EXTENSION 2591) SET FORTH ABOVE OR BY RETURNING THE REQUEST FORM ON THE BACK COVER OF THIS PROSPECTUS. CERTAIN INFORMATION CONTAINED IN THE STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED HEREIN BY REFERENCE. THE TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION IS SET FORTH ON PAGE 37 OF THIS PROSPECTUS. ----------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------------------------------- THE DATE OF THIS PROSPECTUS IS APRIL 30, 1998. TABLE OF CONTENTS
Page Special Terms.............................................................. 3 Table of Deductions and Charges............................................ 5 Summary.................................................................... 7 Per-Unit Income and Changes in Accumulation Unit Value..................... 9 Introduction............................................................... 10 Description of the Separate Account........................................ 11 Deductions and Charges Under the Contracts................................. 11 A. Sales and Administration Deductions............................. 11 B. Premium Taxes................................................... 14 C. Mortality and Expense Risk Charge............................... 14 D. Investment Management Service Charge............................ 15 E. Transfers to Other Contracts.................................... 15 F. Miscellaneous................................................... 15 The Contracts.............................................................. 15 A. General......................................................... 15 B. Deferred Variable Annuity Accumulation Period................... 17 C. Annuity Period.................................................. 25 Investment Policies and Restrictions of the Fund........................... 27 Federal Income Tax Status.................................................. 30 Management................................................................. 33 Voting Rights.............................................................. 33 Distribution of the Contracts.............................................. 34 State Regulation........................................................... 34 Reports to Owners.......................................................... 34 Fundamental Changes........................................................ 34 Year 2000 Transition....................................................... 35 Legal Proceedings.......................................................... 35 Registration Statement..................................................... 36 Other Variable Annuity Contracts........................................... 36 Table of Contents of Statement of Additional Information................... 37
- -------------------------------------------------------------------------------- THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON HAS BEEN AUTHORIZED BY THE FRANKLIN LIFE INSURANCE COMPANY, FRANKLIN FINANCIAL SERVICES CORPORATION OR FRANKLIN LIFE VARIABLE ANNUITY FUND B TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN ANY AUTHORIZED SUPPLEMENTAL SALES MATERIAL. 2 SPECIAL TERMS The following is a glossary of certain terms used in this Prospectus: ACCUMULATION UNIT-A measure used to determine the value of a Contract Owner's interest in the Fund prior to the initial Annuity Payment Date. ANNUITY PAYMENT DATE-The date the first monthly Annuity Payment is to be made to the Variable Annuitant, and the same day of each month thereafter so long as the annuity is due. Depending on the Settlement Option elected, Annuity Payment Dates may occur on a periodic basis other than monthly. ANNUITY PAYMENTS-Periodic payments made to a Variable Annuitant pursuant to a Contract. In certain circumstances, Annuity Payments may be paid to a Beneficiary after the death of a Variable Annuitant. ANNUITY UNIT-A measure used to determine the value of Annuity Payments after the first. BENEFICIARY-The person or persons designated by the Contract Owner to whom any payment due on death is payable. CASH VALUE-The value of all Accumulation Units or Annuity Units attributable to a Contract. CODE-The Internal Revenue Code of 1986, as amended. CONTRACT-An individual variable annuity contract issued by Franklin Life Variable Annuity Fund B that is offered by this Prospectus. CONTRACT ANNIVERSARY-An anniversary of the Effective Date of the Contract. CONTRACT OWNER-The Contract Owner is the individual Variable Annuitant to whom the contract is issued or his or her assignee, or if an owner other than the Variable Annuitant is designated in the application for the Contract, such other person. When the term "Contract Owner" is used in the context of voting rights, it includes the owners of all Contracts which depend in whole or in part on the investment performance of the Fund. CONTRACT YEAR-Each year starting with the Effective Date and each Contract Anniversary thereafter. DEFERRED VARIABLE ANNUITY-An annuity contract which provides for Annuity Payments to commence at some future date. Included are periodic payment deferred contracts and single payment deferred contracts. EFFECTIVE DATE-The date shown on the Schedule Page of the Contract as the date the first Contract Year begins. FIXED-DOLLAR ANNUITY-An annuity contract which provides for Annuity Payments which remain fixed as to dollar amount throughout the Annuity Payment period. HOME OFFICE-The Home Office of The Franklin located at #1 Franklin Square, Springfield, Illinois 62713. IMMEDIATE VARIABLE ANNUITY-An annuity contract which provides for Annuity Payments to commence immediately rather than at some future date. INDIVIDUAL RETIREMENT ANNUITY-An annuity contract described in Section 408(b) of the Code. PERIODIC STIPULATED PAYMENT CONTRACT-An annuity contract which provides that payments made to purchase the contract will be made in periodic instalments rather than in a single sum. SETTLEMENT OPTION OR OPTIONS-Alternative terms under which payment of the amounts due in settlement of the Contracts may be received. 3 SINGLE STIPULATED PAYMENT CONTRACT-An annuity contract which provides that the total payment to purchase the contract will be made in a single sum rather than in periodic instalments. Included are single payment immediate contracts and single payment deferred contracts. STIPULATED PAYMENTS-The payment or payments provided to be made to The Franklin under a Contract. THE FRANKLIN-The Franklin Life Insurance Company, an Illinois legal reserve stock life insurance company. VALUATION DATE-Each date as of which the Accumulation Unit value is determined. This value is determined on each day (other than a day during which no Contract or portion thereof is tendered for redemption and no order to purchase or transfer a Contract is received by the Fund) in which there is a sufficient degree of trading in the securities in which the Fund invests that the value of an Accumulation Unit might be materially affected by changes in the value of the Fund's investments, as of the close of trading on that day. VALUATION PERIOD-The period commencing on a Valuation Date and ending on the next Valuation Date. VARIABLE ANNUITANT-Any natural person with respect to whom a Contract has been issued and a Variable Annuity has been, will be or (but for death) would have been effected thereunder. In certain circumstances, a Variable Annuitant may elect to receive Annuity Payments on a fixed-basis or a combination of a fixed and variable basis. VARIABLE ANNUITY-An annuity contract which provides for a series of periodic annuity payments, the amounts of which may increase or decrease as a result of the investment experience of a separate account. 4 TABLE OF DEDUCTIONS AND CHARGES Contract Owner Transaction Expenses Sales Load Imposed on Purchases (as a percentage of purchase payments) Single Stipulated Payment Contract 5.00% Periodic Stipulated Payment Contract 15.00% to 1.00% (for a Contract with a stipulated payment period of 12 or more years; 4.33% aggregate over all years for a 12-year Contract) 10.00% to 3.00% (for a Contract with a stipulated payment period of 9 to 11 years; 4.44% aggregate over all years for a 9-year Contract) 6.00% to 3.00% (for a Contract with a stipulated payment period of 6 to 8 years; 4.50% aggregate over all years for a 6-year Contract) 4.00% to 3.00% (for a Contract with a stipulated payment period of 2 to 5 years; 4.00% aggregate over all years for a 2-year Contract) Administration Fee (as a percentage of purchase payment) Single Stipulated Payment Contract $100 Periodic Stipulated Payment Contract 0.00% to 10.00% (for a Contract with a stipulated payment period of 12 or more years; 4.67% aggregate over all years for a 12-year Contract) 3.00% to 10.00% (for a Contract with a stipulated payment period of 9 to 11 years; 4.44% aggregate over all years for a 9-year Contract) 3.00% to 6.00% (for a Contract with a stipulated payment period of 6 to 8 years; 4.50% aggregate over all years for a 6-year Contract) 3.00% to 5.00% (for a Contract with a stipulated payment period of 2 to 5 years; 5.00% aggregate over all years for a 2-year Contract) 5 Annual Expenses (as a percentage of average net assets) Management Fees 0.44% Mortality and Expense Risk Fees Mortality Fees 0.90% Expense Risk Fees 0.10% ----- Total Annual Expenses 1.44%
Example
If you surrender your contract at the end of the applicable time period: 1 year 3 years 5 years 10 years You would pay the following expenses on a $1,000 investment, assuming 5% annual return on assets: Single Stipulated Payment Contract $ 162 $ 189 $ 217 $ 297 Periodic Stipulated Payment Contracts: Stipulated Payment Period: 12 years or more $ 162 $ 189 $ 217 $ 297 9 to 11 years $ 162 $ 189 $ 217 $ 297 6 to 8 years $ 123 $ 151 $ 180 $ 263 2 to 5 years $ 103 $ 131 $ 162 $ 247
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The Table of Deductions and Charges is intended to assist Contract Owners in understanding the various fees and expenses that they bear directly or indirectly. Additional deductions may be made from Stipulated Payments for any premium taxes payable by The Franklin on the consideration received from the sale of the Contracts. See "Premium Taxes," below. For a more detailed description of such fees and expenses, see "Deductions and Charges under the Contracts," below. The example assumes that a single Stipulated Payment of $1,000 is made at the beginning of the periods shown. (It should be noted that The Franklin will not actually issue a Single Stipulated Payment Contract unless the single payment is at least $2,500.) This assumption applies even with respect to Periodic Stipulated Payment Contracts, which would normally require additional payments. The example also assumes a constant investment return of 5% and the expenses might be different if the return of the Fund averaged 5% over the periods shown but fluctuated during such periods. The amounts shown in the example represent the aggregate amounts that would be paid over the life of a Contract if the Contract were surrendered at the end of the applicable time periods. 6 SUMMARY THE CONTRACTS The individual variable annuity contracts (the "Contracts") being offered by this Prospectus are designed for retirement planning for individuals. They are not designed for use in connection with employer-related plans or qualified plans and trusts (including Individual Retirement Annuities) accorded special tax treatment under the Code. The basic purpose of the Contracts is to provide Annuity Payments which will vary with the investment performance of Franklin Life Variable Annuity Fund B (the "Fund"). The Contracts provide Annuity Payments for life commencing on an initial Annuity Payment Date selected by the Contract Owner; other Settlement Options are provided. In the event of death prior to the initial Annuity Payment Date, the contract value is paid to the Beneficiary. Periodic Stipulated Payment Contracts and Single Stipulated Payment Contracts are offered. See "Introduction," and "The Contracts," below. At any time within 10 days after receipt of a Contract, the Contract Owner may return the Contract and receive a refund of any premium paid on the Contract. Additional refund rights apply to Periodic Stipulated Payment Contracts having a Stipulated Payment Period of more than five years. See "Withdrawal by the Contract Owner," below. Contracts held by a person (such as a corporation or partnership) who is not a natural person are subject to special federal income tax treatment and the income on such Contracts allocable to Stipulated Payments made after February 28, 1986 may, subject to certain exceptions, be taxable to the Contract Owner in the year earned. This special rule does not apply to Contracts held by natural persons. See "Federal Income Tax Status," below. THE FUND AND ITS INVESTMENT OBJECTIVES The Fund is an open-end diversified management investment company. The primary investment objective of the Fund is long-term appreciation of capital through investment appreciation and retention and reinvestment of income. Generally, the Fund's investments will consist of equity securities, mainly common stocks. The value of investments held in the Fund is subject to the risk of changing economic conditions as well as the risk inherent in management's ability to anticipate such changes. See "Investment Policies and Restrictions of the Fund," below. INVESTMENT ADVISER; PRINCIPAL UNDERWRITER The Franklin Life Insurance Company ("The Franklin"), an Illinois legal reserve stock life insurance company, acts as investment adviser to the Fund. The Franklin is engaged in the writing of ordinary life policies, annuities and income protection policies. Franklin Financial Services Corporation, a wholly-owned subsidiary of The Franklin, is the principal underwriter for the Fund. The Franklin is an indirect wholly-owned subsidiary of American General Corporation. See "Investment Management Service Charge," and "Distribution of the Contracts," below. DEDUCTIONS AND CHARGES The deductions and charges applicable to a Contract are illustrated in the Table of Deductions and Charges that appears immediately before this summary. In the case of Periodic Stipulated Payment Contracts, a deduction, which varies depending upon the length of the Stipulated Payment period agreed upon in the Contract and the Contract Year with respect to which the payment is scheduled to be made, is made for sales and administrative expenses. Over the entire life of a 12-year Periodic Stipulated Payment Contract, total deductions equal to 4.33% of all periodic payments are made for sales expenses and total deductions equal to 4.67% of all periodic payments are made for administrative expenses (for a combined total of 9%); the combined total deductions amount to 9.89% of the net amount invested assuming no premium taxes are applicable (4.76% for sales expenses and 5.13% for administrative expenses). During the first four years of a 12-year contract, however, combined total deductions amount to 17.65%. In the case of a Single Stipulated Payment Contract, a deduction equal to 5% of the total single payment is made for sales expenses and a deduction of $100 is made for 7 administrative expenses (for a combined total, in the case of a minimum Single Stipulated Payment Contract sold, of 9%). In the case of a minimum Single Stipulated Payment Contract sold, the combined deductions amount to 9.89% of the net amount invested assuming no premium taxes are applicable (5.49% for sales expenses and 4.40% for administrative expenses). Any applicable state or local taxes on the Stipulated Payments (currently, up to 5%) also are deducted from the Single or Periodic Stipulated Payments. The amount remaining after deductions is allocated to the Fund. See "Sales and Administration Deductions," "Transfers to Other Contracts," and "Premium Taxes," below. The Contracts include The Franklin's undertaking that deductions for sales and administrative expenses will not be increased regardless of the actual expenses incurred, and that the Variable Annuity Payments will be paid for the lifetime of the Variable Annuitant (and, in the case of a joint and last survivor annuity, for the joint lives of the persons specified) commencing on the selected initial Annuity Payment Date based on the mortality assumptions contained in the Contract, regardless of the actual mortality experience among the Variable Annuitants. In exchange for these undertakings, a charge of 1.002% of net asset value on an annual basis is made daily against the Fund (consisting of 0.900% for The Franklin's assurances of annuity rates or mortality factors and 0.102% for The Franklin's assurances of expense factors). A charge of 0.438% of net asset value on an annual basis is also made daily against the Fund for investment management services by The Franklin. The charges for annuity rate assurances, expense assurances and investment management services thus aggregate 1.440% of net asset value on an annual basis. See "Mortality and Expense Risk Charge," and "Investment Management Service Charge," below. MINIMUM PERMITTED INVESTMENT The minimum single Stipulated Payment is $2,500. The minimum Periodic Stipulated Payment Contract sold is one under which the periodic Stipulated Payment (after an initial $20 payment) is currently $10 ($120 on an annual basis). See "Purchase Limits," below. NEW CONTRACTS NO LONGER BEING ISSUED The Fund no longer issues new Contracts. REDEMPTION A Contract Owner under a Deferred Variable Annuity Contract, prior to the death of the Variable Annuitant and prior to the Contract's initial Annuity Payment Date, may redeem all or part of the Contract and receive the Cash Value (equal to the number of Accumulation Units credited to the part of the Contract redeemed) times the value of an Accumulation Unit at the end of the Valuation Period in which the request for redemption is received less federal income tax withholding, if applicable. For information as to Accumulation Units, see "Value of the Accumulation Unit," below. Subject to certain limitations, the Contract Owner may elect to have all or a portion of the amount due upon a total redemption of a Contract applied under certain Settlement Options or applied toward the purchase of other annuity or insurance products offered by The Franklin. Federal tax penalties may apply to certain redemptions. See "Redemption," "Transfers to and from Other Contracts," "Settlement Options, "The Contracts," and "Federal Income Tax Status," below. TERMINATION BY THE FRANKLIN The Franklin currently reserves the right to terminate Contracts the Cash Value of which has been less than $500 for three years if the Stipulated Payments in the amount of $120 have not been made in each of the three contract years of such period, but The Franklin has agreed not to exercise this right in certain cirumstances. See "Termination by The Franklin," below. 8 FRANKLIN LIFE VARIABLE ANNUITY FUND B SUPPLEMENTARY INFORMATION PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE (SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH YEAR) The financial information in this table for each of the three years in the period ended December 31, 1997 has been audited by Ernst & Young LLP, independent auditors. The financial information in this table for each of the two years in the period ended December 31, 1994 was audited by Coopers & Lybrand L.L.P., independent accountants. This table should be read in conjunction with the financial statements and notes thereto included in the Statement of Additional Information.
YEAR ENDED DECEMBER 31 ---------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 ---------------------------------------------------------------------------------------------------- Investment Income $2.025 $1.777 $2.043 $1.569 $1.305 $1.120 $1.197 $1.303 $1.271 $1.102 Expenses 1.447 1.169 .935 .850 .841 .766 .691 .595 .541 .463 ---------------------------------------------------------------------------------------------------- Net Investment income .578 .608 1.108 .719 .464 .354 .506 .708 .730 .639 Net realized and unrealized gain (loss) on securities 23.136 13.251 14.278 (.943) 1.697 1.236 13.776 (1.871) 7.822 .016 ---------------------------------------------------------------------------------------------------- Net change in accumulation unit value 23.714 13.859 15.386 (.224) 2.161 1.590 14.282 (1.163) 8.552 .655 Accumulation unit value: Beginning of year 86.875 73.016 57.630 57.854 55.693 54.103 39.821 40.984 32.432 31.777 ---------------------------------------------------------------------------------------------------- End of year $110.589 $86.875 $73.016 $57.630 $57.854 $55.693 $54.103 $39.821 $40.984 $32.432 ---------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% Ratio of net investment income to average net assets .58% .75% 1.71% 1.22% .80% .67% 1.05% 1.71% 1.94% 1.99% Portfolio turnover rate .67% 3.35% 22.26% 82.18% 61.50% 60.64% 24.18% 28.41% 64.08% 81.20% Number of accumulation units outstanding at end of year 16,323 18,648 21,059 23,165 26,542 29,973 31,205 48,192 53,877 61,038 ---------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS The Financial Statements for the Fund and The Franklin and the reports of the independent auditors and accountants for the Fund and The Franklin are included in the Statement of Additional Information. 9 INTRODUCTION FRANKLIN LIFE VARIABLE ANNUITY FUND B INDIVIDUAL VARIABLE ANNUITY CONTRACTS ISSUED BY THE FRANKLIN LIFE INSURANCE COMPANY The Contracts offered by this Prospectus are designed primarily to assist in retirement planning for individuals. They are not designed for use in connection with employer-related plans or qualified plans and trusts (including Individual Retirement Annuities) accorded special tax treatment under the Code. The Contracts provide Annuity Payments for life commencing on a selected Annuity Payment Date; other Settlement Options are available. The amount of the Annuity Payments will vary with the investment performance of the assets of the Fund, a separate account which has been established by The Franklin Life Insurance Company ("The Franklin") under Illinois insurance law. For the primary investment objective of the Fund, see "Investment Policies and Restrictions of the Fund," below. Pursuant to this Prospectus, The Franklin offers two types of Contracts: those under which Annuity Payments to the Variable Annuitant commence immediately-"Immediate Variable Annuities"-and those under which Annuity Payments to the Variable Annuitant commence in the future-"Deferred Variable Annuities." Deferred Variable Annuities may be purchased either with periodic Stipulated Payments or with a single Stipulated Payment, while Immediate Variable Annuities may only be purchased with a single Stipulated Payment. The Franklin is a legal reserve stock life insurance company organized under the laws of the State of Illinois in 1884. The Franklin issues individual life insurance, annuity and accident and health insurance policies, group annuities and group life insurance and offers a variety of whole life, life, retirement income and level and decreasing term insurance plans. Its Home Office is located at #1 Franklin Square, Springfield, Illinois 62713. American General Corporation ("American General") through its wholly-owned subsidiary, AGC Life Insurance Company ("AGC Life"), owns all of the outstanding shares of common stock of The Franklin. The address of AGC Life is American General Center, Nashville, Tennessee 37250-0001. The address of American General is 2929 Allen Parkway, Houston, Texas 77019-2155. American General is one of the largest diversified financial services organizations in the United States. American General's operating subsidiaries are leading providers of retirement services, consumer loans, and life insurance. The company was incorporated as a general business corporation in Texas in 1980 and is the successor to American General Insurance Company, an insurance company incorporated in Texas in 1926. The Contract Owner may elect to have a portion of the Stipulated Payment or Payments applied by The Franklin for the purchase of a Fixed-Dollar Annuity. Fixed-Dollar Annuity Contracts do not, however, participate in the Fund and the Contracts are transferred to the general account of The Franklin. In cases where both a Fixed-Dollar and a Variable Annuity are provided under the same Contract, either annuity may be terminated and the Cash Value obtained or other Settlement Option elected by the Contract Owner, at any time prior to commencement of annuity instalments by The Franklin; under these circumstances, the other annuity may be continued in effect, provided that the annual Stipulated Payment allocated to the other annuity satisfies The Franklin's usual underwriting practices. These practices presently require that each periodic Stipulated Payment (other than the first payment, which must be at least $20) which purchases the Variable Annuity be at least $10. See generally "Redemption," and "Settlement Options," below. Unless otherwise indicated in this Prospectus, the discussion of the Contracts herein refers to Variable Annuity Contracts, or to the Variable Annuity portion in cases where both a Variable and a Fixed-Dollar Annuity are provided in the same Contract, and not to any Fixed-Dollar Annuity. Provisions relating to a Fixed-Dollar Annuity and a Variable Annuity are separate, and neither is dependent upon the other in its operations. 10 The discussion of Contract terms herein in many cases summarizes those terms. Reference is made to the full text of the Contract forms, which are filed with the Securities and Exchange Commission as exhibits to the Registration Statement under the Securities Act of 1933 and the Investment Company Act of 1940 of which this Prospectus is a part. DESCRIPTION OF THE SEPARATE ACCOUNT The Fund was established as a separate account on April 1, 1970 by resolution of the Board of Directors of The Franklin pursuant to the provisions of the Illinois Insurance Code. The Fund is an open-end diversified management investment company registered with the Securities and Exchange Commission under the Investment Company Act of 1940. Such registration does not involve supervision of the management or investment practices or policies of the Fund or of The Franklin by the Commission. The Board of Managers of the Fund must be elected annually by Contract Owners. A majority of the members of the Board of Managers are persons who are not otherwise affiliated with The Franklin. See "Management," below. The Fund meets the definition of a "Separate Account" under the federal securities laws. Under the provisions of the Illinois Insurance Code: (i) the income, gains or losses of the Fund are credited to or charged against the amounts allocated to the Fund in accordance with the terms of the Contracts, without regard to the other income, gains or losses of The Franklin; and (ii) the assets of the Fund are not chargeable with liabilities arising out of The Franklin's other business activities, including liabilities of any other separate account which may be established. These assets are held with relation to the Contracts described in this Prospectus and such other Variable Annuity contracts as may be issued by The Franklin and designated by it as participating in the Fund. All obligations arising under the Contracts, including the promise to make Annuity Payments, are general corporate obligations of The Franklin. Accordingly, all of The Franklin's assets (except those allocated to other separate accounts which have been or may be established) are available to meet its obligations and expenses under the Contracts participating in the Fund. The Franklin is taxed as a "life insurance company" under the Code. The Fund is subject to tax as part of The Franklin for federal income tax purposes. However, the operations of the Fund are considered separately from the other operations of The Franklin in computing The Franklin's tax liability and the Fund is not affected by federal income taxes paid by The Franklin with respect to its other operations. The operations of the Fund are treated separately from the other operations of The Franklin for accounting and financial statement purposes. Under existing law, no federal income tax is payable by The Franklin on investment income and realized capital gains of the Fund. See "Federal Income Tax Status," below. DEDUCTIONS AND CHARGES UNDER THE CONTRACTS The Franklin deducts the charges described below to cover costs and expenses, services provided, and risks assumed under the Contracts. The amount of a charge may not necessarily correspond to the costs associated with providing the services or benefits indicated by the designation of the charge or associated with the particular Contract. For example, the sales deductions may not fully cover all of the sales and distribution expenses actually incurred by The Franklin, and proceeds from other charges, including the mortality and expense risk charge, may be used in part to cover such expenses. A. SALES AND ADMINISTRATION DEDUCTIONS Deductions will be made as follows for sales expenses with respect to the Contracts and administrative expenses with respect to the Contracts and the Fund: (1) Under Single Stipulated Payment Contracts, a deduction of $100 is made from the single payment for administrative expenses. In addition, a sales expense deduction of 5% of the total payment is made from the single Stipulated Payment. In the case of the minimum Single Stipulated Payment Contract sold (which is $2,500), the combined deductions for administrative expenses and sales expenses amount to 9.89% of the net amount invested (5.49% for sales expenses and 4.40% for administrative expenses) assuming no premium taxes are applicable. 11 (2) Under Periodic Stipulated Payment Contracts, a sales and administration deduction is made from each Stipulated Payment. The amount of the deduction varies depending upon the length of the stipulated payment period agreed upon in the Contract and the Contract Year with respect to which a payment is scheduled to be made. The deductions are applied whether the Stipulated Payment is made on time or in arrears. Prepayments will not be accepted. The following tables indicate the deductions made:
STIPULATED PAYMENT PERIOD OF 12 OR MORE YEARS - --------------------------------------------------------------------------------------------------------------- AS PERCENTAGE OF AS PERCENTAGE OF NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT: ---------------------------------------- ----------------------------------------- SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION - --------------------------------------------------------------------------------------------------------------- 1 17.65% 0.00% 17.65% 15% 0% 15% 2 to 4 5.88% 11.76% 17.65% 5% 10% 15% 5 5.56% 5.56% 11.11% 5% 5% 10% 6 to 10 3.19% 3.19% 6.38% 3% 3% 6% 11 or subsequent 1.04% 3.13% 4.17% 1% 3% 4% AGGREGATE OVER ALL YEARS FOR A 12-YEAR CONTRACT: 4.76% 5.13% 9.89% 4.33% 4.67% 9% STIPULATED PAYMENT PERIOD OF 9-11 YEARS - --------------------------------------------------------------------------------------------------------------- AS PERCENTAGE OF AS PERCENTAGE OF NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT: ---------------------------------------- ----------------------------------------- SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION - --------------------------------------------------------------------------------------------------------------- 1 11.78% 5.88% 17.65% 10% 5% 15% 2 5.88% 11.76% 17.65% 5% 10% 15% 3 to 4 5.56% 5.56% 11.11% 5% 5% 10% 5 to 11 3.19% 3.19% 6.38% 3% 3% 6% AGGREGATE OVER ALL YEARS FOR A 9-YEAR CONTRACT: 4.88% 4.88% 9.76% 4.44% 4.44% 8.89% STIPULATED PAYMENT PERIOD OF 6-8 YEARS - --------------------------------------------------------------------------------------------------------------- AS PERCENTAGE OF AS PERCENTAGE OF NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT: ---------------------------------------- ----------------------------------------- SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION - --------------------------------------------------------------------------------------------------------------- 1 6.74% 5.62% 12.36% 6% 5% 11% 2 5.62% 6.74% 12.36% 5% 6% 11% 3 to 4 5.56% 5.56% 11.11% 5% 5% 10% 5 or subsequent 3.19% 3.19% 6.38% 3% 3% 6% AGGREGATE OVER ALL YEARS FOR A 6-YEAR CONTRACT: 4.95% 4.95% 9.89% 4.50% 4.50% 9%
12
STIPULATED PAYMENT PERIOD OF 2-5 YEARS - --------------------------------------------------------------------------------------------------------------- AS PERCENTAGE OF AS PERCENTAGE OF NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT: ---------------------------------------- ----------------------------------------- SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION - --------------------------------------------------------------------------------------------------------------- 1 to 4 4.40% 5.49% 9.89% 4% 5% 9% 5 3.19% 3.19% 6.38% 3% 3% 6% AGGREGATE OVER ALL YEARS FOR A 2-YEAR CONTRACT: 4.40% 5.49% 9.89% 4% 5% 9%
NOTE: The foregoing tables assume that no premium taxes are payable in the jurisdiction in question. See discussion under "Premium Taxes," below. Percentage figures may not add due to rounding. Deductions for sales expenses are made pursuant to a Sales Agreement with Franklin Financial Services Corporation ("Franklin Financial"). See "Distribution of the Contracts," below, and in the Statement of Additional Information. Deductions for administrative expenses, and for mortality and expense risk assurances discussed under "Mortality and Expense Risk Charge," below, are made pursuant to an Administration Agreement dated March 23, 1972 between the Fund and The Franklin. The Administration Agreement is described under "Investment Advisory and Other Services" in the Statement of Additional Information. The Franklin will not accept more than the stipulated dollar amounts of payments on any Contract except in the case of a Contract having a Stipulated Payment period of 12 or more years. In the case of monthly Stipulated Payment Contracts, where the Stipulated Payment per month (subsequent to the initial payment) is less than $20, the initial monthly payment must be at least $20, and the total payments to be received during the first Contract Year will be twelve times the amount of the Stipulated Payment per month (subsequent to the initial payment). This will be done either by ending the first Contract Year earlier than twelve months after the receipt of the initial Stipulated Payment or by omitting certain monthly payments which otherwise would follow the initial payment. The purpose of this procedure is to prevent the imposition of total deductions over the life of the contract in an amount in excess of the amounts set forth in the tables above opposite the items "Aggregate over all years" for sample Contracts. The table below illustrates, in the case of assumed Contracts for 10 years and for 15 years providing for stipulated monthly payments amounting to $50 per month, the allocation of the cumulative payments and deductions at the end of certain specified periods of time. In Contracts for less than nine years, the amounts deducted from the earlier Stipulated Payments are less than those deducted from the Stipulated Payments in the earlier periods for the Contracts illustrated in the table, and, accordingly, in those Contracts proportionately more of the total Stipulated Payments would be invested at the end of one, two and five years than in the case of the illustrations given. 10 YEAR CONTRACT
AT THE END OF. . . . . . . . . 10 YEARS 1 YEAR 2 YEARS 5 YEARS (120 PAYMENTS) (13 PAYMENTS) (25 PAYMENTS) (61 PAYMENTS) - ----------------------------------------------------------------------------------------------------------------------------------- Amount % Amount % Amount % Amount % - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL PAYMENTS . . . . . . . . . $6,000.00 100.00% $650.00 100.00% $1,250.00 100.00% $3,050.00 100.00% DEDUCT: SALES EXPENSE DEDUCTION . . . . 258.00 4.30% 62.50 9.61% 92.50 7.40% 169.50 5.555% ADMINISTRATION DEDUCTION. . . . 258.00 4.30% 35.00 5.39% 92.50 7.40% 169.50 5.555% - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL DEDUCTIONS. . . . . . . . $ 516.00 8.60% $ 97.50 15.00% $ 185.00 14.80% $ 339.00 11.110% NET AMOUNT INVESTED. . . . . . . $5,484.00 91.40% $552.50 85.00% $1,065.00 85.20% $2,711.00 88.890%
13 15 YEAR CONTRACT
AT THE END OF . . . . . . . . . 15 YEARS 1 YEAR 2 YEARS 5 YEARS (180 PAYMENTS) (13 PAYMENTS) (25 PAYMENTS) (61 PAYMENTS) - ----------------------------------------------------------------------------------------------------------------------------------- Amount % Amount % Amount % Amount % - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL PAYMENTS . . . . . . . . . $9,000.00 100.00% $650.00 100.00% $1,250.00 100.00% $3,050.00 100.00% DEDUCT: SALES EXPENSE DEDUCTION . . . . 330.00 3.67% 92.50 14.23% 122.50 9.80% 211.50 6.935% ADMINISTRATION DEDUCTION. . . . 390.00 4.33% 5.00 0.77% 65.00 5.20% 211.50 6.935% - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL DEDUCTIONS. . . . . . . . $ 720.00 8.00% $ 97.50 15.00% $ 187.50 15.00% $ 423.00 13.870% NET AMOUNT INVESTED. . . . . . . $8,280.00 92.00% $552.50 85.00% $1,062.50 85.00% $2,627.00 86.130%
NOTE: The foregoing table assumes that no premium taxes are payable in the jurisdiction in question. See the discussion under "Premium Taxes," below. The percentages shown are percentages of the total payments made. The total deductions made in respect of sales expenses of Franklin Financial in 1995, 1996 and 1997 were $825, $370 and $402, respectively, and all such amounts were retained on behalf of Franklin Financial. The administration deductions are designed to cover the actual expenses of administering the Contracts and the Fund. The aggregate dollar amounts of the administration deductions for the fiscal years ended December 31, 1995, 1996 and 1997 were $1,316, $632 and $689, respectively. B. PREMIUM TAXES At the time any premium taxes are payable by The Franklin on the consideration received from the sale of the Contracts, the amount thereof will be deducted from the Stipulated Payments. Premium taxes ranging up to 5% are charged by various jurisdictions in which The Franklin is transacting business and in which it may, after appropriate qualification, offer Contracts. C. MORTALITY AND EXPENSE RISK CHARGE While Annuity Payments will reflect the investment performance of the Fund, they will not be affected by adverse mortality experience or by any excess in the actual expenses of the Contracts and the Fund over the maximum administration deductions provided for in the Contracts. The Franklin assumes the risk that Annuity Payments will continue for a longer period than anticipated because the Variable Annuitant lives longer than expected (or the Variable Annuitants as a class do so) and also assumes the risk that the administration deductions may be insufficient to cover the actual expenses of the administration of the Contracts and of the Fund (except those expenses listed under "Investment Management Service Charge," immediately below, which the Fund will bear). The Franklin assumes these risks for the duration of the Contract and the annuity rate, mortality and expense risk deductions and charges set forth herein will not be increased beyond the stated maximum with respect thereto regardless of the actual mortality and expense experience. The mortality risk charge is imposed regardless of whether or not the payment option selected involves a life contingency. For assuming these risks, The Franklin imposes a daily charge against the value of the Accumulation Unit and the Annuity Unit. (For further information as to the Accumulation Unit and the Annuity Unit, see "Deferred Variable Annuity Accumulation Period" and "Annuity Period," below.) These charges are at the combined annual rate of 1.002% (.002745% on a daily basis), of which .900% is for annuity rate and mortality assurances and .102% is for expense assurances. If the money collected from this charge is not needed, it will be to The Franklin's gain and may be used to cover contract distribution expenses. During 1995, 1996 and 1997, The Franklin earned and was paid $14,273, $15,752 and $17,759, respectively, by reason of these charges. Such charges during 1997 were equal to 1.002% of average net assets. 14 D. INVESTMENT MANAGEMENT SERVICE CHARGE The Franklin acts as investment manager of the Fund. For acting as such, The Franklin makes a charge against the Fund at the annual rate of 0.438% of the Fund's assets, computed by imposing a daily charge of 0.0012% against the value of the Accumulation Unit and of the Annuity Unit in determining those values. The investment management services are rendered and the charge is made pursuant to an Investment Management Agreement executed and dated January 31, 1995, pursuant to approval by the Contract Owners at their annual meeting held on April 17, 1995, and renewal to January 31, 1999 by the Board of Managers of the Fund at its meeting on January 19, 1998. The Investment Management Agreement is described under "Investment Advisory and Other Services" in the Statement of Additional Information. During 1995, 1996 and 1997, The Franklin earned and was paid $6,240, $6,886 and $7,765, respectively, under the Investment Management Agreement then in effect. E. TRANSFERS TO OTHER CONTRACTS Contracts may be redeemed prior to the death of the Variable Annuitant and the initial Annuity Payment Date and the Cash Value (less the required amount of federal income tax withholding, if any) may be applied to the purchase of certain other Variable Annuities, Fixed-Dollar Annuities or life insurance contracts issued by The Franklin. Franklin Life Variable Annuity Fund A and Franklin Life Money Market Variable Annuity Fund C, other separate accounts of The Franklin funding Variable Annuity contracts, no longer issue new Variable Annuity contracts. It is not clear whether gain or loss will be recognized for federal income tax purposes upon the redemption of a Contract, another annuity contract or life insurance contract issued by The Franklin for purposes of applying the redemption proceeds to the purchase of another contract issued by The Franklin. Federal tax penalties may also apply to such redemptions. Since the income and withholding tax consequences of such redemption and purchase depend on many factors, any person contemplating redemption of a Contract or another contract issued by The Franklin for purposes of purchasing a different contract issued by The Franklin (or any other contract) is advised to consult a qualified tax advisor prior to the time of redemption. Contract Owners who are not natural persons should also consider whether such a redemption would cause them to lose certain advantages applicable to stipulated payments made on or before February 28, 1986. See "Federal Income Tax Status-The Contracts," below. F. MISCELLANEOUS The Fund's total expenses for 1997 were $25,524, or 1.440% of average net assets during 1997. THE CONTRACTS A. GENERAL Certain significant provisions of the Contracts and administrative practices of The Franklin with respect thereto are discussed in the following paragraphs. Contract Owner inquiries may be directed to the Equity Administration Department of The Franklin at the address or telephone number set forth on the cover of this Prospectus. 1. ANNUITY PAYMENTS Variable Annuity Payments are determined on the basis of (i) an annuity rate table specified in the Contract, which reflects the age and sex of the Variable Annuitant and the type of Settlement Option selected, and (ii) the investment performance of the Fund. In the case of Deferred Variable Annuities, the annuity rate table is set forth in the Contract. In the case of Immediate Variable Annuities, the table is that used by The Franklin on the 15 date of issue of the Contract. The amount of the Annuity Payments will not be affected by mortality experience adverse to The Franklin or by an increase in The Franklin's expenses related to the Fund or the Contracts in excess of the expense deductions provided for in the Contracts. The Variable Annuitant under an annuity with a life contingency or one providing for a number of Annuity Payments certain will receive the value of a fixed number of Annuity Units each month, determined as of the initial Annuity Payment Date on the basis of the applicable annuity rate table and the then value of his or her account. The value of Annuity Units, and thus the amounts of the monthly Annuity Payments, will, however, reflect investment gains and losses and investment income occurring after the initial Annuity Payment Date, and thus the amount of the Annuity Payments will vary with the investment experience of the Fund. See "Annuity Period," below. 2. DECREASE BY CONTRACT OWNER IN AMOUNT OF PERIODIC STIPULATED PAYMENTS; INCREASE BY CONTRACT OWNER IN NUMBER OF PERIODIC STIPULATED PAYMENTS Stipulated Payments can be paid on an annual, semi-annual or quarterly schedule or, with The Franklin's consent, monthly. The first Stipulated Payment is due as of the date of issue and each subsequent Stipulated Payment is due on the first day following the interval covered by the next preceding Stipulated Payment and on the same date each month as the date of issue. Subject to the limitations described under "Purchase Limits," below, the amount of a periodic Stipulated Payment may be decreased by the Contract Owner on any date a Stipulated Payment is due. Submission of a Stipulated Payment in an amount less than that of the previous Stipulated Payment, subject to the aforesaid purchase limits, will constitute notice of the election of the Contract Owner to make such change. After such a decrease, the Contract Owner is permitted to increase his periodic Stipulated Payments up to, but not in excess of, the amount originally provided in the Contract. Unless otherwise agreed to by The Franklin, the mode of Stipulated Payment may be changed only on a Contract Anniversary. In the case of Contracts having a Stipulated Payment period of 12 years or more, the Contract Owner may continue making Stipulated Payments after the agreed amount of Stipulated Payments has been made, subject to the limitation that no more than twice the amount of Stipulated Payments specified in the Contract will be received by The Franklin, and The Franklin reserves the right not to accept the Stipulated Payments after age 75. The deductions for sales and administrative expenses from these additional Stipulated Payments will be that applicable to Stipulated Payments in the final agreed year for Stipulated Payments as set forth in the table as to Stipulated Payment periods of 12 or more years under "Sales and Administration Deductions," above. No similar privilege is available with respect to Contracts having a Stipulated Payment period of less than 12 years. 3. ASSIGNMENT OR PLEDGE A Contract may be assigned by the Contract Owner or pledged by him or her as collateral security as provided in the Contract. The Franklin will make Contract loans only as provided under "Contract Loans," below. Assignments or pledges of the Contract and Contract loans will be treated as distributions that may be taxable. Moreover, in certain instances, pledges or assignments of the Contract and Contract Loans may result in the imposition of certain tax penalties. See "Federal Income Tax Status-The Contracts," below. Persons contemplating the assignment or pledge of a Contract are advised to consult a qualified tax advisor concerning the federal income tax consequences thereof. 4. PURCHASE LIMITS No single Stipulated Payment may be less than $2,500. Currently, no periodic Stipulated Payment may be less than $120 on an annual basis, $60 on a semiannual basis, and $30 on a quarterly basis; and, in the case of monthly Stipulated Payment contracts, the initial payment must be at least $20 and each subsequent periodic payment at least $10. Under the terms of the Contract, The Franklin may increase the minimum periodic Stipulated Payment to $20 ($240 on an annual basis). 5. TERMINATION BY THE FRANKLIN The Franklin currently reserves the right to terminate any Contract if total Stipulated Payments paid are less 16 than $120 in each of three consecutive Contract Years (excluding the first Contract Year) and if the Cash Valueis less than $500 at the end of such three-year period. Under the terms of the Contract, The Franklin may terminate such Contract if total Stipulated Payments paid are less than $240 in each of such three consecutive Contract Years and if the Cash Value is less than $500 at the end of such three-year period. The Franklin must give 31 days' notice by mail to the Contract Owner of such termination. The Franklin will not exercise any right to terminate such Contract if the value of the Contract declines to less than $500 as a result of a decline in the market value of the securities held by the Fund. Upon termination as described above, The Franklin will pay to the Contract Owner the Cash Value of the Contract, less federal income tax withholding and any indebtedness, if applicable. For certain tax consequences upon such payment, see "Federal Income Tax Status," below. 6. WITHDRAWAL BY THE CONTRACT OWNER A Contract Owner has the right to revoke the purchase of a Contract within 10 days after receipt of the Contract, and upon such revocation will be entitled to a return of the entire amount paid. In addition, with respect to any Periodic Stipulated Payment Contract having a Stipulated Payment period of more than five years, The Franklin will send to the Contract Owner of such Contract, within 60 days after the Date of Issue, a statement of charges to be deducted from the Stipulated Payments and a notice of the right to withdraw from the Contract, which may be exercised by surrendering the Contract within 45 days after the mailing of the notice. In the case of such surrender, the Contract Owner will be entitled to the Cash Value of the Contract, plus an amount, payable by The Franklin or by Franklin Financial Services Corporation, distributor of the Contracts, equal to the difference between the gross payments made on the Contract and the net amount invested. The Franklin has guaranteed the obligations of Franklin Financial Services Corporation in this respect and accordingly, in connection with The Franklin's ability to meet these obligations, the financial statements of The Franklin contained herein should be considered. Payments upon such surrender may be subject to federal income tax withholding and federal tax penalties. See "Income Tax Withholding," below and "Federal Income Tax Status-The Contracts," below. Any request for revocation or withdrawal must be made by mailing or hand-delivering the Contract and a written request for revocation or withdrawal within the applicable time period either to The Franklin Life Insurance Company, Cashiers Department, #1 Franklin Square, Springfield, Illinois 62713, or to the agent from whom the Contract was purchased. In general, notice of revocation given by mail is deemed to be given on the date of the postmark, or, if sent by certified or registered mail, the date of certification or registration. 7. NEW CONTRACTS NO LONGER BEING ISSUED The Fund no longer issues new Contracts. B. DEFERRED VARIABLE ANNUITY ACCUMULATION PERIOD 1. CREDITING ACCUMULATION UNITS; DEDUCTIONS FOR SALES AND ADMINISTRATIVE EXPENSES During the accumulation period-the period before the initial Annuity Payment Date-deductions from Stipulated Payments for sales and administrative expenses are made as specified under "Deductions and Charges Under the Contracts," above. In addition, any applicable premium taxes, also as specified above under that caption, are deducted from the Stipulated Payments. The balance of each Stipulated Payment is credited to the Contract Owner in the form of Accumulation Units. The number of a Contract Owner's Accumulation Units is determined by dividing the net amount of Stipulated Payments credited to his or her Contract by the value of an Accumulation Unit at the end of the Valuation Period during which the Stipulated Payment is received, except that, in the case of the original application for a Variable Annuity Contract, the value of an Accumulation Unit within two business days after receipt of the application will be used if the application and all information necessary to process the application 17 are complete upon receipt. If the application and such information are not complete upon receipt, The Franklin, within five days after the receipt of an original application and initial payment at the Home Office of The Franklin, will attempt to complete the application and will either accept the application or reject the application and return the initial payment. The number of Accumulation Units so determined will not be changed by any subsequent change in the dollar value of an Accumulation Unit, but the dollar value of an Accumulation Unit may vary from day to day depending upon the investment experience of the Fund. 2. VALUATION OF A CONTRACT OWNER'S CONTRACT The Cash Value of a Contract at any time prior to the initial Annuity Payment Date can be determined by multiplying the total number of Accumulation Units credited to the account by the current Accumulation Unit value. The Contract Owner bears the investment risk, that is, the risk that market values may decline. There is no assurance that the Cash Value of the Contract will equal or exceed the Stipulated Payments made. A Contract Owner may obtain from the Home Office of The Franklin information as to the current value of an Accumulation Unit and the number of Accumulation Units credited to his or her Contract. 3. VALUE OF THE ACCUMULATION UNIT The value of an Accumulation Unit was set at $10 effective July 1, 1971. Accumulation Units currently are valued each Valuation Date (each day in which there is a sufficient degree of trading in the securities in which the Fund invests that the value of an Accumulation Unit might be materially affected by changes in the value of the Fund's investments, other than a day during which no Contract or portion thereof is tendered for redemption and no order to purchase or transfer a Contract is received by the Fund, as of the close of trading on that day). After the close of trading on a Valuation Date, or on a day when Accumulation Units are not valued, the value of an Accumulation Unit is equal to its value as of the immediately following Valuation Date. The value of an Accumulation Unit on the last day of any Valuation Period is determined by multiplying the value of an Accumulation Unit on the last day of the immediately preceding Valuation Period by the Net Investment Factor (defined below) for the current Valuation Period. At each Valuation Date a gross investment rate for the Valuation Period then ended is determined from the investment performance of the Fund for the Valuation Period. Such rate is equal to (i) accrued investment income for the Valuation Period, plus capital gains and minus capital losses for the period, whether realized or unrealized, on the assets of the Fund (adjusted by a deduction for the payment of any applicable state or local taxes as to the income or capital gains of the Fund) divided by (ii) the value of the assets of the Fund at the beginning of the Valuation Period. The gross investment rate may be positive or negative. The net investment rate for the Valuation Period is then determined by deducting, currently, .003945% (1.440% on an annual basis) for each day of the Valuation Period as a charge against the gross investment rate. This charge is made by The Franklin for providing investment management services, annuity rate or mortality assurances and expense assurances. See "Deductions and Charges Under the Contracts," above. The net investment factor for the Valuation Period is the sum of 1.00000000 plus the net investment rate for the Valuation Period ("Net Investment Factor"). The net investment rate may be negative if the combined capital losses, Valuation Period deductions and increase in the tax reserve exceed investment income and capital gains. Thus, the Net Investment Factor may be less than 1.00000000, and the value of an Accumulation Unit at the end of a Valuation Period may be less than the value for the previous Valuation Period. 4. VALUATION OF FUND ASSETS In determining the value of the assets of the Fund, each security traded on a national securities exchange is 18 valued at the last reported sale price on the Valuation Date. If there has been no sale on such day, then thevalue of such security is taken to be the current bid price at the time as of which the value is being ascertained. Any security not traded on a securities exchange but traded in the over-the-counter market is valued at the current bid price on the Valuation Date. Any securities or other assets for which market quotations are not readily available are valued at fair value as determined in good faith by the Board of Managers. 5. REDEMPTION A Contract Owner under a Deferred Variable Annuity Contract, prior to the death of the Variable Annuitant and prior to the initial Annuity Payment Date, may redeem the Contract in whole, or in part, by submission of the Contract and a written request for its redemption to The Franklin's Home Office, and will receive the Cash Value of the part of the Contract redeemed. The Cash Value of a Contract or part thereof redeemed prior to the initial Annuity Payment Date is the number of Accumulation Units credited to the Contract (or that part so redeemed) times the value of an Accumulation Unit at the end of the Valuation Period in which the request for redemption is received. Except in the limited circumstances described below, the payment of the Cash Value will be made within seven days after the date a properly completed and documented request for redemption is received by The Franklin at its Home Office. The right of redemption may be suspended or the date of payment postponed during any periods when the New York Stock Exchange is closed (other than customary weekend and holiday closings); when trading in the markets the Fund normally utilizes is restricted, or an emergency exists as determined by the Securities and Exchange Commission so that disposal of the Fund's investments or determination of its net asset value is not reasonably practicable; or for such other periods as the Securities and Exchange Commission by order may permit to protect Contract Owners. Where the Contract Owner has both a Variable Annuity and a Fixed-Dollar Annuity, a request for partial redemption, if no other indication is obtained from the Contract Owner, will be treated as a pro rata request for partial redemption of the Variable Annuity and the Fixed-Dollar Annuity. In lieu of a single payment of the amount due upon redemption of a Contract, the Contract Owner may elect, at any time prior to the initial Annuity Payment Date and during the lifetime of the Variable Annuitant, to have all or any portion of the amount due applied under any available Settlement Option. See "Settlement Options," below. However, no Settlement Option may be elected upon redemption without surrender of the entire Contract. The payment of the Cash Value of a redeemed Contract either in a single payment or under an available Settlement Option may be subject to federal income tax withholding and federal tax penalties. See "Federal Income Tax Status," below. 6. PAYMENT OF ACCUMULATED VALUE AT TIME OF DEATH In the event of the death of the Variable Annuitant prior to the initial Annuity Payment Date, death benefits payable to the surviving beneficiary will be paid by The Franklin within seven days of receipt by The Franklin of written notice of such death. The death proceeds payable will be the Cash Value of the Contract determined as of the date on which written notice of death is received by The Franklin by mail if such date is a Valuation Date; if such date is not a Valuation Date, the determination will be made on the next following Valuation Date. There is no assurance that the Cash Value of a Contract will equal or exceed the Stipulated Payments made. For the method of valuation of Accumulation Units, see "Crediting Accumulation Units; Deductions for Sales and Administration Expenses," above. The Code imposes certain distribution requirements which affect the payment of death benefits. See "Settlement Options," below. Subject to these requirements, the Contract Owner may, at any time prior to the initial Annuity Payment Date, elect that all or any portion of such death proceeds be paid to the Beneficiary under any one of the available Settlement Options. If the Contract Owner has not made such an election, the Beneficiary may do so after the death of the Variable Annuitant. The Contract Owner or the Beneficiary, whichever selects the method of settlement, may designate contingent Beneficiaries to receive any other amounts due should the first Beneficiary die before completion of the specified payments. If neither the Contract 19 Owner nor the Beneficiary elects payment of death proceeds under an available Settlement Option, payment will be made to the Beneficiary in a single sum. Death proceeds may be applied to provide variable payments, fixed-dollar payments or a combination of both. The payment of death proceeds may be subject to federal income tax withholding. See "Income Tax Withholding," below. 7. OPTIONS UPON FAILURE TO MAKE STIPULATED PAYMENTS Upon a failure to make a Stipulated Payment under a Periodic Stipulated Payment Contract, subject to The Franklin's power of termination described under "Termination by The Franklin," above, and subject to the right of The Franklin to pay the value of the Contract Owner's account in a single sum at the initial Annuity Payment Date if the value on such date is less than $2,000, the Contract Owner may elect, prior to the death of the Variable Annuitant and prior to the initial Annuity Payment Date, either of the following options: (a) to exercise any of the available Settlement Options described under "Settlement Options," below, or redeem the Contract as described under "Redemption," above; or (b) to have the Contract continued from the date of failure to make a Stipulated Payment as a paid-up annuity to commence on the initial Annuity Payment Date stated in the Contract. If no option is elected by the Contract Owner within 31 days after failure to make a Stipulated Payment, the Contract will automatically be continued under the paid-up annuity option. Under a single stipulated payment deferred contract, the Contract Owner may terminate his Contract and exercise any of the Settlement Options described below at any time prior to the initial Annuity Payment Date. 8. REINSTATEMENT (AS TO PERIODIC STIPULATED PAYMENT CONTRACTS) A Contract Owner, by making one Stipulated Payment, may reinstate a Periodic Stipulated Payment Contract as to which there has been a failure to make a Stipulated Payment, if the Contract at the time of the payment is being continued as a paid-up annuity. However, such reinstatement does not automatically reinstate the benefits provided by any riders to the Contract providing life insurance or disability benefits. Following reinstatement, the Contract Owner may exercise any of the options upon failure to make Stipulated Payments or Settlement Options described herein. Sales and administration deductions from Stipulated Payments made upon or after reinstatement will be equivalent to those that would have been made if the payments had been made at the time originally stipulated. 9. CHANGE OF BENEFICIARY OR MODE OF PAYMENT OF PROCEEDS; DEATH OF BENEFICIARIES While the Contract is in force the Contract Owner may (by filing a written request at the Home Office of The Franklin) change the Beneficiary or Settlement Option, or, if agreed to by The Franklin, change to a mode of payment different from one of the Settlement Options. If any Beneficiary predeceases the Variable Annuitant, the interest of such Beneficiary will pass to the surviving Beneficiaries, if any, unless otherwise provided by endorsement. If no Beneficiary survives the Variable Annuitant and no other provision has been made, then, upon the death of the Variable Annuitant, the proceeds will be paid in a single sum to the Contract Owner or, if the Variable Annuitant was the Contract Owner, to the executors or administrators of the Contract Owner's estate. 20 10. SETTLEMENT OPTIONS At any time prior to the initial Annuity Payment Date and during the lifetime of the Variable Annuitant, the Contract Owner may elect to have all or a portion of the amount due in settlement of the Contract applied under any of the available Settlement Options described below. If the Contract Owner fails to elect a Settlement Option, payment automatically will be made in the form of a life annuity. See "First Option," below, and "Deferred Variable Annuity Contracts," below. Annuity Payments under a Settlement Option are made to the Variable Annuitant during his or her lifetime, or for such shorter period that may apply under the particular Settlement Option. Upon the death of the original Variable Annuitant after the initial Annuity Payment Date, any remaining Annuity Payments that are due under the Settlement Option elected will be continued to the Beneficiary or, if elected by the Contract Owner (or, if so designated by the Contract Owner, by the Beneficiary), the Cash Value of the Contract, as described under such Settlement Option below, will be paid to the Beneficiary in one lump sum. Upon the death of any Beneficiary to whom payments are being made under a Settlement Option, a single payment equal to the then remaining Cash Value of the Contract, if any, will be paid to the executors or administrators of the Beneficiary, unless other provision has been specified and accepted by The Franklin. For a discussion of payments if no Beneficiary is surviving at the death of the Variable Annuitant, see "Change of Beneficiary or Mode of Payment of Proceeds; Death of Beneficiaries," immediately above. Payment to a Contract Owner upon redemption of a Contract, and payment of death proceeds to a Beneficiary upon the death of the Variable Annuitant prior to the initial Annuity Payment Date, may also be made under an available Settlement Option in certain circumstances. See "Redemption," above, and "Payment of Accumulated Value at Time of Death," above. Available Settlement Options may be selected on a fixed or variable basis or a combination thereof, except the Seventh Option, which is available on a fixed basis only. Under an Option which is paid on a fixed basis, there is no sharing in the investment experience of the Fund and, upon commencement of payments, participation in the Fund terminates (the subject Contract will be transferred to the general account of The Franklin). Settlement under the First, Second, Third, Fourth or Fifth Option below is subject to satisfactory proof of age of the person or persons to whom the Annuity Payments are to be made. The minimum amount of proceeds which may be applied under any Settlement Option for any person is $2,000 and proceeds of a smaller amount may be paid in a single sum in the discretion of The Franklin. Further, if at any time payments under a Settlement Option become less than $25 per payment, The Franklin has the right to change the frequency of payment to such intervals as will result in payments of at least $25. In the case of Immediate Variable Annuity Contracts, the only Settlement Options offered are the life annuity, the life annuity with 120, 180 or 240 monthly payments certain, or the joint and last survivor life annuity. See "First Option," "Second Option" and "Fourth Option," below, and "Immediate Variable Annuity Contracts," below. Persons contemplating election of the Fifth, Sixth or Seventh Option should consult a qualified tax advisor to determine whether the continuing right of redemption under any such Option might be deemed for tax purposes to result in the "constructive receipt" of the Cash Value of the Contract or proceeds remaining on deposit with The Franklin. In general, certain distribution requirements are imposed by the Code in the case of annuity contracts issued after January 18, 1985 in order for the contracts to qualify as "annuity contracts" under the Code. Certain questions exist about the application of these rules to distributions from the Contracts and their effect on Settlement Option availability thereunder. 21 Under these distribution requirements, if the Contract Owner of a Contract issued after January 18, 1985 dies on or after the date Annuity Payments commence but before the entire interest in the Contract has been distributed, then the remaining portion of such interest must be distributed at least as rapidly as under the method of distribution being used as of the date of his or her death. Also, if the Contract Owner of such a Contract dies before the commencement of Annuity Payments, then the entire interest in the Contract must be distributed within five years after the date of death. Under a special exception, this 5-year distribution rule is deemed satisfied if (i) any portion of the Contract Owner's interest is payable to a designated beneficiary, (ii) that interest is distributed to the designated beneficiary over the life of such beneficiary (or over a period not extending beyond the beneficiary's life expectancy) and (iii) such distributions begin not later than one year after the death of the Contract Owner. If the designated beneficiary is the surviving spouse of the Contract Owner and such surviving spouse dies before Annuity Payments to the spouse commence, the surviving spouse will be treated as the Contract Owner for purposes of these distribution rules. Also, if the Contract Owner is not an individual, then the Variable Annuitant shall be treated as the Contract Owner in applying these distribution requirements and a change in the Variable Annuitant shall be treated as the death of the Contract Owner. The effect of the distribution requirements described above is that, in the case of Contracts issued after January 18, 1985, Settlement Option availability will be limited as necessary to comply with the applicable distribution rules. For example, under these rules, it appears that the First Option (Life Annuity) would not be available to a designated beneficiary under such a Contract unless distributions to the beneficiary begin not later than one year after the date of the Contract Owner's death. Other Settlement Options may be restricted or unavailable as well under the distribution rules. All Settlement Options under Contracts issued after January 18, 1985 are offered subject to the limitations of the distribution rules. Persons contemplating the purchase of a Contract should consult a qualified tax advisor concerning the effect of the distribution rules on the Settlement Option or Options he or she is contemplating. FIRST OPTION-LIFE ANNUITY. An annuity payable monthly during the lifetime of the Variable Annuitant, ceasing with the last Annuity Payment due prior to the death of the Variable Annuitant. This Option offers the maximum level of monthly Annuity Payments since there is no guarantee of a minimum number of Annuity Payments or provision for any continued payments to a Beneficiary upon the death of the Variable Annuitant. It would be possible under this Option for the Variable Annuitant to receive only one Annuity Payment if he or she died before the second Annuity Payment Date, or to receive only two Annuity Payments if he or she died after the second Annuity Payment Date but before the third Annuity Payment Date, and so forth. SECOND OPTION-LIFE ANNUITY WITH 120, 180, OR 240 MONTHLY PAYMENTS CERTAIN. An annuity payable monthly during the lifetime of the Variable Annuitant including the commitment that if, at the death of the Variable Annuitant, Annuity Payments have been made for less than 120 months, 180 months or 240 months (as selected by the Contract Owner in electing this Option), Annuity Payments shall be continued during the remainder of the selected period to the Beneficiary. The cash value under this Settlement Option is the present value of the current dollar amount of any unpaid Annuity Payments certain. THIRD OPTION-UNIT REFUND LIFE ANNUITY. An annuity payable monthly during the lifetime of the Variable Annuitant, ceasing with the last Annuity Payment due prior to the death of the Variable Annuitant, provided that, at the death of the Variable Annuitant, the Beneficiary will receive a payment of the then dollar value of the number of Annuity Units equal to the excess, if any, of (a) over (b) where (a) is the total amount applied under this Option divided by the Annuity Unit value at the initial Annuity Payment Date and (b) is the number of Annuity Units represented by each Annuity Payment multiplied by the number of Annuity Payments made. For example, if $10,000 were applied on the first Annuity Payment Date to the purchase of an annuity under this Option, the Annuity Unit value at the initial Annuity Payment Date were $2.00, the number of Annuity Units represented by each Annuity Payment were 30.55, 10 Annuity Payments were paid prior to the date of the Variable Annuitant's death and the value of an Annuity Unit on the Valuation Date following the Variable Annuitant's death were $2.05, the amount paid to the Beneficiary would be $9,623.73, computed as follows: $10,000 (------ - (30.55 X 10)) X $2.05 = (5,000 - 305.5) X $2.05 = 4,694.5 X $2.05 = $9,623.73 $2.00
22 FOURTH OPTION-JOINT AND LAST SURVIVOR LIFE ANNUITY. An annuity payable monthly during the joint lifetime of the Variable Annuitant and a secondary variable annuitant, and thereafter during the remaining lifetime of the survivor, ceasing with the last Annuity Payment due prior to the death of the survivor. Since there is no minimum number of guaranteed payments under this Option, it would be possible under this Option to receive only one Annuity Payment if both the Variable Annuitant and the secondary variable annuitant died before the second Annuity Payment Date, or to receive only two Annuity Payments if both the Variable Annuitant and the secondary variable annuitant died after the second Annuity Payment Date but before the third Annuity Payment Date, and so forth. FIFTH OPTION-PAYMENTS FOR A DESIGNATED PERIOD. An amount payable monthly to the Variable Annuitant for a number of years which may be from one to 30 (as selected by the Contract Owner in electing this Option). At the death of the Variable Annuitant, payments will be continued to the Beneficiary for the remaining period. The cash value under this Settlement Option is the then present value of the current dollar amount of any unpaid Annuity Payments certain. A Contract under which Annuity Payments are being made under this Settlement Option may be redeemed in whole or in part at any time by the Contract Owner for the aforesaid cash value of the part of the Contract redeemed. See "Redemption," above. It should be noted that, while this Option does not involve a life contingency, charges for annuity rate assurances, which include a factor for mortality risks, are included in the computation of Annuity Payments due under this Option. Further, although not contractually required to do so, The Franklin currently follows a practice, which may be discontinued at any time, of permitting persons receiving Annuity Payments under this Option to elect to convert such payments to a Variable Annuity involving a life contingency under the First, Second, Third or Fourth Options, above, if, and to the extent, such other Options are otherwise available to such person. SIXTH OPTION-PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. The amount due will be paid to the Variable Annuitant in equal annual, semiannual, quarterly or monthly Annuity Payments of a designated dollar amount (not less than $75 a year per $1,000 of the original amount due) until the remaining balance (adjusted each Valuation Period by the Net Investment Factor for the period) is less than the amount of one Annuity Payment, at which time such balance will be paid and will be the final Annuity Payment under this Option. Upon the death of the Variable Annuitant, payments will be continued to the Beneficiary until such remaining balance is paid. The cash value under this Settlement Option is the amount of proceeds then remaining with The Franklin. A Contract under which Annuity Payments are being made under this Settlement Option may be redeemed at any time by the Contract Owner for the aforesaid cash value. Annuity Payments made under the Sixth Option may, under certain circumstances, be converted into a Variable Annuity involving a life contingency. See the last paragraph under the Fifth Option, immediately above, which applies in its entirety to the Sixth Option as well. SEVENTH OPTION-INVESTMENT INCOME. The amount due may be left on deposit with The Franklin in its general account and a sum will be paid annually, semiannually, quarterly or monthly, as selected by the Contract Owner in electing this Option, which shall be equal to the net investment rate of 3% stipulated as payable upon fixed-dollar amounts for the period multiplied by the amount remaining on deposit. Upon the death of the Variable Annuitant, the aforesaid payments will be continued to the Beneficiary. The sums left on deposit with The Franklin may be withdrawn at any time. Periodic payments received under this Option may be treated like interest for federal income tax purposes. Interest payments are fully taxable and are not subject to the general rules applicable to the taxation of annuities described in "Federal Income Tax Status," below. Persons contemplating election of this Seventh Option are advised to consult a qualified tax advisor concerning the availability and tax effect of its election. 23 11. TRANSFER OF FIXED-DOLLAR ANNUITY VALUES TO ACQUIRE VARIABLE ANNUITY ACCUMULATION UNITS Where a Deferred Variable Annuity and a Fixed-Dollar Annuity have been issued on the same Contract, on any Contract Anniversary during the accumulation period of the Contract, the Contract Owner may have the unloaned cash value of his Fixed-Dollar Annuity transferred in whole or in part to his Variable Annuity to purchase Variable Annuity Accumulation Units at net asset value, without any sales or administrative deductions. However, any such partial transfer of cash value must be at least $500. (A similar privilege, but available four times in one contract year, permits transfer of Variable Annuity Accumulation Unit values to establish values under a Fixed-Dollar Annuity issued on the same Contract.) 12. CONTRACT LOANS While the Contract is in force, prior to the initial Annuity Payment Date or the death of the Variable Annuitant, The Franklin will make a contract loan on the sole security of the Contract. Upon receiving a request for a contract loan, The Franklin will convert Accumulation Units under the Contract to a fixed-dollar contract loan account in an amount necessary to provide a sufficient "loan value" for the proposed loan. The maximum amount which may be borrowed on a Contract (the "loan value") is that amount which, when added to any existing contract loan and interest on the total contract loan to the next Contract Anniversary, will equal what the Cash Value of the contract loan account would be on such anniversary. The Contract, except to the extent so converted, has no loan value and The Franklin will not make loans or arrange for the making of loans thereon. The Accumulation Units in the contract loan account do not participate in the investment experience of the Fund, but receive interest credits at the rate then paid by The Franklin upon Fixed-Dollar Annuity accumulations. At the current time, that rate is 4-1/2% per annum during the first five contract years, 4% per annum for the sixth through tenth contract years, and 3-1/2% per annum thereafter. Where the Contract Owner has both a Variable Annuity and a Fixed-Dollar Annuity under the same Contract, unless he otherwise indicates, a contract loan request will be considered a request for a loan on each annuity and will be allocated pro rata according to the loan values available under each annuity. Whenever the total contract loan is equal to or exceeds the Cash Value, the Contract shall terminate, but in no event shall such termination take effect until 31 days after notice shall have been mailed to the last known address of the Contract Owner and any known assignee. On Contracts currently being issued in South Carolina the interest rate on the principal of the contract loan is 7.4% per annum payable in advance to the end of the current Contract Year, and annually in advance thereafter. In all other states the rate is adjustable. This means that the rate may be changed each policy year, effective on the Contract Anniversary. The adjustable loan interest rate will be reflective of the rates then available to The Franklin for corporate bonds as indicated by the "Moody's Corporate Bond Yield Average." Interest not paid when due will be added to the principal of the loan and bear the same rate of interest. Upon a repayment of the contract loan prior to the date through which interest has been paid in advance, the Contract Owner will receive a pro rata credit for the unearned interest. It should be noted that the annual rate of interest charged on contract loans is in excess of the interest credited by The Franklin upon the contract loan account; thus, there is, in effect, a continuing net charge against the Contract Owner of the difference between the two rates while the contract loan is outstanding. 24 The whole or any part of the contract loan may be repaid at any time while the Contract is in force prior to its maturity. Where variable Accumulation Units have been converted into a contract loan account prior to the making of a contract loan, repayments of the loan will result in the conversion of accumulation units under the contract loan account to variable Accumulation Units at net asset value without any sales or administration deduction, unless the Contract Owner elects that such conversion shall not take place. The Contract Owner has the power to designate whether a payment made by him or her is to be applied as a Stipulated Payment (within the limitations on Stipulated Payments set forth under "Annuity Payments," above, "Decrease by Contract Owner in Amount of Periodic Stipulated Payments; Increase by Contract Owner in Number of Periodic Stipulated Payments," above) or as a repayment in the contract loan account. In the case of payments by a Contract Owner having a contract loan outstanding which are not identified, The Franklin will make inquiry as to the intention of the Contract Owner. Contract loans will be treated as distributions that may be taxable. See "Federal Income Tax Status," below. Any Contract Owner contemplating obtaining a contract loan is advised to consult a qualified tax advisor concerning the possibly unfavorable federal income tax treatment of contract loan proceeds and interest payments with respect thereto. C. ANNUITY PERIOD 1. ELECTING ANNUITY PAYMENTS AND SETTLEMENT OPTION; COMMENCEMENT OF ANNUITY PAYMENTS (a) DEFERRED VARIABLE ANNUITY CONTRACTS A Contract Owner selects a Settlement Option and an initial Annuity Payment Date prior to the issuance of the Deferred Variable Annuity Contract. The Contract Owner may defer the initial Annuity Payment Date and continue the Contract to a date not later than the Contract Anniversary on which the attained age of the Variable Annuitant is 75. The Franklin will require satisfactory proof of age of the Variable Annuitant prior to the initial Annuity Payment Date. (b) IMMEDIATE VARIABLE ANNUITY CONTRACTS The Franklin offers three forms of Immediate Variable Annuity Contracts: the life annuity, the life annuity with 120, 180 or 240 monthly payments certain and the joint and last survivor life annuity. For a description of these forms of annuity, see the First, Second and Fourth Options under "Settlement Options," above. Under an Immediate Variable Annuity, the first Annuity Payment is made to the Variable Annuitant one month after the Effective Date of the Contract, unless the period selected by the Contract Owner for the frequency of Annuity Payments is more than one month, in which case the first Annuity Payment will be made after a period equal to the period so selected from the Effective Date (subject in every case to the survival of the Variable Annuitant, except in cases where a guaranteed payment period is provided). 2. THE ANNUITY UNIT The Annuity Unit is a measure used to value the First Option (including the automatic life annuity) and the Second, Third, Fourth and Fifth Options, if elected on a variable basis. The value of the Annuity Unit as of July 1, 1971 was fixed at $1.00 and for each day thereafter is determined by multiplying the value of the Annuity Unit on the preceding day by the "Annuity Change Factor" for the Valuation Period ending on the tenth preceding day or by 1.0 if no Valuation Period ended on the tenth preceding day. The "Annuity Change Factor" for any Valuation Period is equal to the amount determined by dividing the Net Investment Factor for that Valuation Period by a number equal to 1.0 plus the interest rate for the number of calendar days in such Valuation Period at the effective annual rate of 3-1/2%. The division by 1.0 plus an interest factor of 3-1/2% in calculating the Annuity Change Factor is effected in order to cancel out the assumed net investment rate of 3-1/2% per year which is built into the annuity tables specified in the Contract. 25 See "Determination of Amount of First Monthly Annuity Payment (Deferred Variable Annuity Contracts Only)," below, and "Assumed Net Investment Rate," below. Annuity Units are valued in respect of each Annuity Payment Date as of a Valuation Date not less than 10 days prior to the Annuity Payment Date in question in order to permit calculation of amounts of Annuity Payments and mailing of checks in advance of their due dates. 3. DETERMINATION OF AMOUNT OF FIRST MONTHLY ANNUITY PAYMENT (DEFERRED VARIABLE ANNUITY CONTRACTS ONLY) When Annuity Payments commence under a Deferred Variable Annuity Contract, the value of the Contract Owner's account is determined as the product of the value of an Accumulation Unit on the first Annuity Payment Date and the number of Accumulation Units credited to the Contract Owner's account as of such Annuity Payment Date. The Contract utilizes tables indicating the dollar amount of the first monthly Annuity Payment under each Settlement Option for each $1,000 of Cash Value of the Contract. The first monthly Annuity Payment varies according to the Settlement Option selected (see "Settlement Options," above) and the "adjusted age" of the Variable Annuitant. The first monthly Annuity Payment may also vary according to the sex of the Variable Annuitant. See "Annuity Payments," above. (The Contracts provide for age adjustment based on the year of birth of the Variable Annuitant and any joint Variable Annuitant; a person's actual age when Annuity Payments commence may not be the same as the "adjusted age" used in determining the amount of the first Annuity Payment.) The tables for the First, Second, Third and Fourth Options are determined from the Progressive Annuity Table assuming births in the year 1900 and a net investment rate of 3-1/2% a year. The tables for the Fifth Option are based on a net investment rate of 3% for the General Account and 3-1/2% for the Separate Account. The total first monthly Annuity Payment is determined by multiplying the number of thousands of dollars of Cash Value of the Contract Owner's Contract by the amount of the first monthly Annuity Payment per $1,000 of value from the tables in the Contract. The amount of the first monthly Annuity Payment, determined as above, is divided as of the initial Annuity Payment Date by the value of an Annuity Unit to determine the number of Annuity Units represented by the first Annuity Payment. Annuity Units are valued as of a Valuation Date not less than 10 days prior to the initial Annuity Payment Date, pursuant to the procedure discussed under "The Annuity Unit," above. Thus, there will be a double effect of the investment experience of the Fund during the 10-day period referred to in the preceding sentence, since that experience will be included (as part of the value of an Accumulation Unit) in valuing the Contract Owner's Contract on the initial Annuity Payment Date and (as part of the changes in value of an Annuity Unit) in determining the second monthly Annuity Payment. Also, the number of Annuity Units (and hence the amount of Annuity Payments) will be affected by the net asset values of the Fund approximately 10 days prior to the initial Annuity Payment Date even though changes in those net asset values have occurred during that 10-day period, and even though the value of the Accumulation Units used to determine the Cash Value of the Contract will reflect those changes. See "Amount of Second and Subsequent Monthly Annuity Payments (Deferred Variable Annuity Contracts Only)," immediately below. Each Contract contains a provision that the first monthly Annuity Payment will not be less than 103% of the first monthly Annuity Payment available under a then currently issued Immediate Variable Annuity of The Franklin if a single Stipulated Payment were made equal to the value which is being applied under the Contract to provide annuity benefits. This provision assures the Variable Annuitant that if at the initial Annuity Payment Date the annuity rates then applicable to new Immediate Variable Annuity Contracts are significantly more favorable than the annuity rates provided in his or her Contract, the Variable Annuitant will be given the benefit of the new annuity rates. 4. AMOUNT OF SECOND AND SUBSEQUENT MONTHLY ANNUITY PAYMENTS (DEFERRED VARIABLE ANNUITY CONTRACTS ONLY) 26 The number of Annuity Units credited to a Contract on the initial Annuity Payment Date remains fixed during the annuity period, and as of each subsequent Annuity Payment Date the dollar amount of the Annuity Payment is determined by multiplying this fixed number of Annuity Units by the then value of an Annuity Unit. 5. DETERMINATION OF AMOUNT OF ANNUITY PAYMENTS (IMMEDIATE VARIABLE ANNUITY CONTRACTS ONLY) In the case of Immediate Variable Annuities, the number of Annuity Units per month purchased is specified in the Contract. The number of such units is determined by: (1) multiplying the net single Stipulated Payment (after deductions for sales and administrative expenses and premium taxes) by the applicable annuity factor from the annuity tables then used by The Franklin for Immediate Variable Annuity Contracts, and (2) dividing such product by the value of the Annuity Unit as of the date of issue of the Contract. This number of Annuity Units remains fixed for each month during the annuity period, and the dollar amount of the Annuity Payment is determined as of each Annuity Payment Date by multiplying this fixed number of Annuity Units by the value of an Annuity Unit as of each such Annuity Payment Date. Annuity Units are valued as of a Valuation Date not less than 10 days prior to the date of issue of the Contract, pursuant to the procedure discussed under "The Annuity Unit," above. Thus, the number of Annuity Units (and hence the amount of the Annuity Payments) will be affected by the net asset value of the Fund approximately 10 days prior to the Date of Issue of the Contract, even though changes in those net asset values have occurred during that 10-day period. As of the date of this Prospectus, The Franklin was using, in connection with the determination of the number of Annuity Units per month purchased under Immediate Variable Annuity Contracts, the 1955 American Annuity Table with assumed 4-1/2% interest, the purchase rates in such table being increased by 0.5% (which percentage is decreased 0.2% for each year of age at the Date of Issue in excess of 70 years for male Variable Annuitants and in excess of 75 years for female Variable Annuitants). The Annuity Change Factors used by The Franklin for Immediate Variable Annuity Contracts assume a net investment rate of 3-1/2%. 6. ASSUMED NET INVESTMENT RATE The objective of a Variable Annuity Contract is to provide level Annuity Payments during periods when the economy, price levels and investment returns are relatively stable and to reflect as increased Annuity Payments only the excess investment results flowing from inflation, increases in productivity or other factors increasing investment returns. The achievement of this objective will depend in part upon the validity of the assumption in the annuity factor that a 3-1/2% net investment rate would be realized in the periods of relative stability assumed. A higher rate assumption would mean a higher initial Annuity Payment but a more slowly rising series of subsequent Annuity Payments in the event of a rising actual investment rate (or a more rapidly falling series of subsequent Annuity Payments in the event of a lower actual investment rate). A lower assumption would have the opposite effect. If the actual net investment rate is at the annual rate of 3-1/2%, the Annuity Payments under Contracts whose Annuity Payments are measured by Annuity Units will be level. INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND The following are the fundamental investment policies of the Fund: (1) The primary objective of the Fund in making investments is long-term appreciation of capital. Occasional investment for the purpose of seeking short-term capital appreciation may also be made. (2) Realization of current investment return is a secondary objective, subordinate to the primary objective. (3) Any investment income and realized capital gains (net of any capital gains tax) will be retained and reinvested. 27 (4) The Fund's policy is to be substantially fully invested. Generally, the Fund's investments will consist of equity securities, mainly common stocks. The purchase of common stocks may be made both in rising and declining markets. When it is determined, however, that investments of other types may be advantageous in reaching the Fund's objectives, on the basis of combined considerations of risk, income and appreciation, investments may be made in bonds, debentures, notes or other evidences of indebtedness, issued publicly or placed privately, of a type customarily purchased for investment by institutional investors, including United States Government securities, in corporate preferred stock or in certificates of deposit, or funds may be retained in cash. Such debt securities may, or may not, be convertible into stock or be accompanied by stock purchase options or warrants. (5) Temporary investments may be made in United States Government securities, certificates of deposit, short-term corporate debt securities (subject to fundamental restriction (3), below) and other similar securities, pending investment in the above mentioned securities. While The Franklin is obligated to make Annuity Payments in accordance with selected Settlement Options, the amount of the Annuity Payments is not guaranteed but is a variable amount. Since, historically, the value of a diversified portfolio of common stocks held for an extended period of time has tended to rise during periods of inflation and growth in the economy, the Annuity Payments under a Variable Annuity should tend to conform more closely to changes in the cost of living and the level of the economy than payments under a Fixed-Dollar Annuity would do. However, there is no assurance that this objective can be attained. There have been times when the cost of living has increased while securities prices have decreased and times when the cost of living and the level of the economy have gone up or down with no direct correlation to the value of securities in general or to any particular type or class of securities. The value of investments held in the Fund will fluctuate daily and is subject to the risk of changing economic conditions as well as the risks inherent in the ability of management to anticipate changes in those conditions. The value of investments in common stock has historically fluctuated more greatly than the value of investments in securities such as bonds, debentures, notes, other evidences of indebtedness, preferred stock and certificates of deposit, and hence investments in common stocks offer greater opportunities for appreciation and greater risk of depreciation. There is no assurance that the Cash Value of the Contract during the years prior to the Variable Annuitant's retirement or the aggregate amount received during the years following the initial Annuity Payment Date will equal or exceed the Stipulated Payments on the Contract. The investment policies of the Fund include a provision that investments may be made in securities other than common stocks if they are advantageous in reaching the Fund's objectives, on the basis of combined considerations of risk, income and appreciation. No assurance can be given, however, that investment in such other securities will accomplish such objectives. Investments may be made in bonds, debentures, notes or other evidences of indebtedness, issued publicly or placed privately, of a type customarily purchased for investment by institutional investors, including United States Government securities, and may also be made in corporate preferred stock or in certificates of deposit, or funds may be retained in cash. Such debt securities may, or may not, be convertible into stock or be accompanied by stock purchase options or warrants. Funds may also be temporarily invested in United States Government securities, certificates of deposit, short-term corporate debt securities (subject to certain restrictions) and other similar securities, pending long-term investment. Although debt securities and preferred stocks of the type in which the Fund would invest are generally considered to present less risk than common stocks, the value of such securities is subject to market fluctuations as a result of money market rates, the demand for such securities and factors relating to the individual issuers of such securities. In the event the Fund invests in such securities, such factors may limit the ability of the Fund to convert such securities to cash and reinvest in other types of securities. Historically, the Fund has not invested significant amounts in debt securities or preferred stocks except for short-term investments in debt securities pending ultimate long-term application of funds for investment purposes. The following are the fundamental investment restrictions applicable to the Fund: (1) The Fund will not concentrate its investments in any one industry or group of related industries, and no more than 25% of the value of the Fund's assets will be invested in any one industry or group of related industries. 28 (2) The Fund will not issue senior securities, except that the Fund may borrow money as set forth in paragraph (3) immediately below. (3) The Fund will not borrow money except for temporary or emergency purposes from banks, and any such borrowings will not be used to purchase investment securities and will not exceed 5% of the value of the Fund's assets. (4) The Fund will not underwrite securities of other issuers, except that the Fund may acquire portfolio securities under circumstances where, if sold, it might be deemed to be an underwriter for purposes of the Securities Act of 1933. No such securities will be acquired except where parties other than the Fund shall have agreed to bear any and all costs of registration under the Securities Act of 1933. (However, it should be noted that even though an agreement to register has been obtained, enforcement of such an agreement may prove unfeasible or may involve delays which could adversely affect the Fund's ability to resell such securities or the price at which such securities might be resold.) No more than 10% of the value of the Fund's assets will at any time be invested in such securities. (5) The Fund will not engage in the purchase and sale of interests in real estate, except that the Fund may engage in the purchase and sale of readily marketable interests in real estate investment trusts or similar securities, which may be deemed to represent indirect interests in real estate. (6) The Fund will not engage in the making of loans to other persons, except that the Fund may acquire privately placed corporate debt securities of a type customarily purchased by institutional investors. Such securities, if required to be registered under the Securities Act of 1933 prior to public distribution, will be included in the 10% limitation specified in fundamental restriction (4), above. The foregoing does not restrict the purchase by the Fund of a portion of an issue of publicly distributed bonds, debentures or other securities, whether or not the purchase is made upon the original issuance of such securities. (7) The Fund will not engage in the purchase or sale of commodities or commodity contracts. (8) The Fund will not purchase the securities of any one issuer, other than obligations issued or guaranteed by the United States Government and its agencies or instrumentalities, if such purchase would cause more than 5% of the Fund's assets to be invested in the securities of such issuer, except that up to 25% of the Fund's total assets taken at current value may be invested without regard to such 5% limitation. (9) The Fund will not acquire more than 10% of the outstanding voting securities of any one issuer, other than obligations issued or guaranteed by the United States Government and its agencies or instrumentalities, except that up to 25% of the Fund's total assets taken at current value may be invested without regard to such 10% limitation. The fundamental investment policies and the fundamental investment restrictions stated above may not be changed without approval by a vote of a majority of the votes available to the Contract Owners. This means that the policies or restrictions in question may not be changed without the approval of the lesser of (a) the Contract Owners holding 67% or more of the voting power of the Contract Owners present or represented at a meeting if Contract Owners holding more than 50% of the total voting power of all Contract Owners in the Fund are present or represented by proxy, or (b) Contract Owners holding more than 50% of the total voting power of all Contract Owners in the Fund. The following investment restrictions are not fundamental and may be changed by action of the Board of Managers of the Fund: (10) All securities in which the Fund invests shall be permissible for the Fund under the Illinois Insurance Code. The Illinois Insurance Code provides that investments of a separate account, like the Fund, are free of the restrictions or provisions generally applicable to insurance companies under that Code, and does not currently provide any special investment restrictions applicable to separate accounts. However, no investment permitted under the Illinois Insurance Code is thereby exempted from the other investment restrictions specified under this caption. 29 (11) The Fund will not invest in companies for the purpose of exercising control or management. (12) The Fund will not invest in the securities of other investment companies. (13) The Fund will not purchase securities on margin, except for such short-term credits as are necessary for the clearance of transactions. (14) The Fund will not make short sales of securities. (15) The Fund will not invest in corporate debt (other than commercial paper) or preferred stock that is rated lower than one of the three top grades by Moody's Investors Services, Inc. or Standard & Poor's Corporation and the Fund will not invest in commercial paper rated lower than one of the two top grades by such rating agencies. FEDERAL INCOME TAX STATUS INTRODUCTION The Contracts are designed for retirement planning for individuals. The federal income tax treatment of the Contracts and payments received thereunder depends on various factors, including, among other factors, the tax status of The Franklin and the form in which payments are received. The discussion of federal income taxes contained in this Prospectus, which focuses on rules applicable to Contracts purchased under this Prospectus, is general in nature and is based on existing federal income tax law, which is subject to change. The tax discussion is not intended as tax advice. The applicable federal income tax law is complex and contains many special rules and exceptions in addition to the general rules summarized herein. For these reasons, various questions about the applicable rules exist. Accordingly, each person contemplating the purchase of a Contract is advised to consult with a qualified tax advisor concerning federal income taxes and any other federal, state or local taxes that may be applicable. THE FRANKLIN The Franklin is taxed as a "life insurance company" under the Code. Since the operations of the Fund are part of the overall operations of The Franklin, the Fund is subject to tax as part of The Franklin for federal income tax purposes. Thus, the Fund is not taxed separately as a "regulated investment company" under the Code. Under the Code a life insurance company like The Franklin is generally taxed at regular corporate rates, under a single-phase system, on its specially-computed life insurance company taxable income. Some special rules continue to apply, however, in the case of segregated asset accounts like the Fund. Investment income and realized capital gains on the assets of the Fund are reinvested by The Franklin for the benefit of the Fund and are taken into account in determining the value of Accumulation Units and Annuity Units. As a result, such income and gains are applied to increase reserves applicable to the Fund. Under the Code, no federal income tax is payable by The Franklin on such investment income or on realized capital gains of the Fund on assets held in the Fund. However, if changes in the federal tax laws or interpretations thereof result in The Franklin being taxed on income or gains attributable to the Fund, then The Franklin may impose a charge against the Fund (with respect to some or all Contracts) in order to set aside provisions to pay such taxes. THE CONTRACTS Payments received under a Contract are subject to tax under Code Section 72. Under the Code, an increase in the value of the Contract Owner's Contract ordinarily is not taxable to the Contract Owner until received by him or her as annuity payments, a lump sum or a partial redemption. A special rule, however, applies to certain annuity contracts held by a person (such as a corporation or partnership) who is not a natural person. With respect to contributions (i.e., Stipulated Payments) made after February 28, 1986 to a Contract held by a non-natural person, the Contract is not treated as an "annuity contract" for certain federal income tax purposes and 30 the income on the Contract for any taxable year allocable to such contributions is treated as ordinary income taxable to the Contract Owner during such year. This special rule, however, does not apply to any annuity contract which, among other exceptions: (1) is an immediate annuity that is purchased with a single premium or annuity consideration, that has an annuity starting date commencing no later than one year from the date of the purchase of the Contract and which provides for a series of substantially equal periodic payments (to be made not less frequently than annually) during the annuity period; (2) is acquired by the estate of a decedent by reason of the decedent's death; or (3) is held by a trust or other entity as an agent for a natural person. Non-natural persons now holding or contemplating the future purchase of a Contract are advised to consult a qualified tax advisor concerning the tax consequences of such holding or purchase. If payments under a Contract are received in the form of an annuity, then, in general, each payment is taxable as ordinary income to the extent that such payment exceeds the portion of the cost basis of the annuity contract that is allocable to that payment. Payment of the proceeds of an annuity contract in a lump sum either before or at maturity is taxable as ordinary income to the extent the lump sum exceeds the cost basis of the annuity contract. If the Variable Annuitant's life span exceeds his or her life expectancy, the Variable Annuitant's cost basis will eventually be recovered, and any payments made after that point will be fully taxable. If, however, the Annuity Payments cease after the initial Annuity Payment Date by reason of the death of the Variable Annuitant, the amount of any unrecovered cost basis in the Contract will generally be allowed as a deduction to the Variable Annuitant for his or her last taxable year. A payment received on account of a partial redemption of an annuity contract generally is taxable as ordinary income in whole or part. Also, if prior to the initial Annuity Payment Date, (i) an annuity contract is assigned or pledged, (ii) a contract loan is obtained or (iii) a Contract issued after April 22, 1987 is transferred without adequate consideration, then the amount assigned, pledged, borrowed or transferred may similarly be taxable. Special rules may apply with respect to investments in a Contract made before August 14, 1982. Because the applicable tax treatment is complex, a qualified tax advisor should be consulted prior to a partial withdrawal, assignment, pledge, contract loan or contract transfer. In addition, under a provision of federal tax law effective for annuity contracts entered into after October 21, 1988, all annuity contracts (other than contracts held in connection with certain qualified plans and trusts (including Individual Retirement Annuities) accorded special treatment under the Code) issued by the same company (or affiliates) to the same contract owner during any calendar year will generally be treated as one annuity contract for the purpose of determining the amount of any distribution not in the form of an annuity that is includable in gross income. This rule may have the effect of causing more rapid taxation of the distributed amounts from such combination of contracts. It is not certain how this rule will be applied or interpreted by the Internal Revenue Service. In particular, it is not clear if or how this rule applies to Immediate Variable Annuities or "split" annuity arrangements. Accordingly, a qualified tax advisor should be consulted about the application and effect of this rule. Further, in general, in the case of a payment received under a Contract, a penalty may be imposed equal to 10% of the taxable portion of the payment. However, the 10% penalty does not apply in various circumstances. For example, the penalty is generally inapplicable to payments that are: (i) made on or after age 59-1/2; (ii) allocable to investments in the Contract before August 14, 1982; (iii) made on or after the death of the Contract Owner (or when the Contract Owner is not an individual, the death of the Variable Annuitant); (iv) made incident to disability; (v) part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or the life expectancy) of the Variable Annuitant or the joint lives (or joint life expectancies) of the Variable Annuitant and his or her beneficiary; or (vi) made under a Contract purchased with a single premium and which has an annuity starting date commencing no later than one year from the purchase date of the annuity and which provides for a series of substantially equal periodic payments (to be made not less frequently than annually) during the annuity period. 31 A Contract will not be treated as an annuity contract for purposes of certain Code sections, including Section 72, for any period (and any subsequent period) for which the investments made by the Fund attributableto such Contract are not, in accordance with Code Section 817(h) and the Treasury regulations thereunder, adequately diversified. Although certain questions exist about the diversification standards, The Franklin believes that the Fund presently satisfies those standards and intends that the Fund will continue to be adequately diversified for those purposes. In certain circumstances, owners of variable annuity contracts may be considered the owners, for federal income tax purposes, of the assets of the separate accounts used to support their contracts. In those circumstances, income and gains from the separate account assets would be includible in the variable contract owner's gross income. The Internal Revenue Service has stated in published rulings that a variable contract owner will be considered the owner of separate account assets if the contract owner possesses incidents of ownership in those assets, such as the ability to exercise investment control over the assets. The Treasury Department has also announced, in connection with the issuance of regulations concerning diversification, that those regulations "do not provide guidance concerning the circumstances in which investor control for the investments of a segregated asset account may cause the investor [i.e., the Owner], rather than the insurance company, to be treated as the owner of the assets in the account." This announcement also stated that guidance would be issued by way of regulations or rulings on the "extent to which policyholders may direct their investments to particular Sub-Accounts without being treated as owners of the underlying assets." As of the date of this prospectus, no guidance has been issued. The ownership rights under the Contract are similar to, but different in certain respects from those described by the Internal Revenue Service in rulings in which it was determined that contract owners were not owners of separate account assets. For example, a Contract Owner has additional flexibility in allocating premium payments and account values. These differences could result in a Contract Owner being treated as the owner of a pro rata portion of the assets of the Fund. In addition, The Franklin does not know what standards will be set forth, if any, in the regulations or rulings which the Treasury Department has stated it expects to issue. The Franklin therefore reserves the right to modify the Contract as necessary to attempt to prevent a Contract Owner from being considered the owner of a pro rata share of the assets of the Fund. In order to be treated as an annuity contract for federal income tax purposes, section 72(s) of the Code requires the Contracts to provide that (a) if any Contract Owner dies on or after the annuity date but prior to the time the entire interest in the Contract has been distributed, the remaining portion of such interest will be distributed at least as rapidly as under the method of distribution being used as of the date of such owner's death; and (b) if any Contract Owner dies prior to the annuity date, the entire interest in the Contract will be distributed within five years after the date of such owner's death. These requirements will be considered satisfied as to any portion of an owner's interest which is payable to or for the benefit of a "designated beneficiary" and which is distributed over the life of such "designated beneficiary" or over a period not extending beyond the life expectancy of that beneficiary, provided that such distributions begin within one year of the Contract Owner's death. The "designated beneficiary" refers to a natural person designated by the owner as a Beneficiary and to whom ownership of the Contract passes by reason of death. However, if the "designated beneficiary" is the surviving spouse of the deceased Contract Owner, the Contract may be continued with the surviving spouse as the new Contract Owner. The Contracts contain provisions which are intended to comply with the requirements of section 72(s) of the Code, although no regulations interpreting these requirements have yet been issued. The Franklin intends to review such provisions and modify them if necessary to assure that they comply with the requirements of Code section 72(s) when clarified by regulation or otherwise. FUTURE LEGISLATION Although the likelihood of legislative change is uncertain, there is always the possiblity that the tax treatment of the Contracts could change by legislation or other means. For instance, the President's 1999 Budget Proposal recommended legislation that, if enacted, would adversely modify the federal taxation of the Contracts. It is also possible that any change could be retroactive (that is, effective prior to the date of the change). A tax adviser should be consulted with respect to legislative developments and their effect on the Contract. 32 INCOME TAX WITHHOLDING Withholding of federal income tax is generally required from distributions from the Contracts to the extent the distributions are taxable and are not otherwise subject to withholding as wages ("Distributions"). See "The Contracts" immediately above, regarding the taxation of Distributions. However, except in the case of certain payments delivered outside the United States or any possession of the United States, no withholding is required from any Distribution if the payee properly elects, in accordance with prescribed procedures, not to have withholding apply. In the absence of a proper election not to have withholding apply, the amount to be withheld from a Distribution depends on the type of payment being made. Generally, in the case of periodic payments, the amount to be withheld from each payment is the amount that would be withheld therefrom under specified wage withholding tables if the payment were a payment of wages for the appropriate payroll period. In the case of most other Distributions, including partial redemptions and lump sum payments, the amount to be withheld is equal to 10% of the amount of the Distribution. MANAGEMENT The Fund is managed by a Board of Managers elected annually by the Contract Owners. The Board of Managers currently has four members. The members of the Board of Managers also serve as the Board of Managers of Franklin Life Variable Annuity Fund A, a separate account of The Franklin having investment objectives similar to the Fund but the assets of which are held solely with respect to Variable Annuity Contracts used in accordance with certain qualified plans and trusts or individual retirement annuities accorded special tax treatment under the Code, and of Franklin Life Money Market Variable Annuity Fund C, a separate account of The Franklin having investments in money market securities. The affairs of the Fund are conducted in accordance with Rules and Regulations adopted by the Board of Managers. Under the Rules and Regulations, the Board of Managers is authorized to take various actions on behalf of the Fund, including the entry into contracts for the purpose of services with respect to the Fund under circumstances where the approval of such contracts is not required to be submitted to the Contract Owners. Subject to the authority of the Board of Managers, officers and employees of The Franklin are responsible for overall management of the Fund's business affairs. VOTING RIGHTS All Contract Owners will have the right to vote upon: (1) The initial approval of any investment management agreement and any amendment thereto. (2) Ratification of an independent auditor for the Fund. (3) Any change in the fundamental investment policies or fundamental investment restrictions of the Fund. (4) Election of members of the Board of Managers of the Fund (cumulative voting is not permitted). (5) Termination of the investment management agreement (such termination may also be effected by the Board of Managers). (6) Any other matter submitted to them by the Board of Managers. The number of votes which a Contract Owner may cast as to any Contract, except after the initial Annuity Payment Date, is equal to the number of Accumulation Units credited to the Contract. With respect to any Contract as to which Annuity Payments measured by Annuity Units have commenced, the Contract Owner may cast a number of votes equal to (i) the amount of the assets in the Fund to meet the Variable Annuity obligations 33 related to such Contract, divided by (ii) the value of an Accumulation Unit. Accordingly, the voting rights of a Contract Owner will decline during the Annuity Payment period as the amount of assets in the Fund required to meet the Annuity Payments decreases and, in addition, will decline as the value of an Accumulation Unit increases. Fractional votes will be counted. Should assets be maintained in the Fund with respect to contracts other than those offered by this Prospectus, contract owners under such contracts would be entitled to vote, and their votes would be computed in a similar manner. Assets maintained by The Franklin in the Fund in excess of the amounts attributable to the Contracts or other contracts of The Franklin will entitle The Franklin to vote and its vote would be computed in a similar manner. The Franklin will cast its votes in the same proportion as the votes cast by Contract Owners and the owners of such other contracts. The number of votes which each Contract Owner may cast at a meeting shall be determined as of a record date to be chosen by the Board of Managers within 120 days of the date of the meeting. At least 20 days' written notice of the meeting will be given to Contract Owners of record. To be entitled to vote or to receive notice, a Contract Owner must have been such on the record date. DISTRIBUTION OF THE CONTRACTS Franklin Financial Services ("Franklin Financial") Corporation serves as "principal underwriter" (as that term is defined in the Investment Company Act of 1940) for the Contracts pursuant to a Sales Agreement with the Fund. The Sales Agreement is described under "Distribution of The Contracts" in the Statement of Additional Information. Franklin Financial, located at #1 Franklin Square, Springfield, Illinois 62713, is organized under the laws of the State of Delaware and is a wholly-owned subsidiary of The Franklin. The Fund no longer offers new Contracts. Commissions are paid to registered representatives of Franklin Financial with respect to Stipulated Payments received by The Franklin under the Contracts to a maximum of 4% of such Stipulated Payments. STATE REGULATION As a life insurance company organized and operated under Illinois law, The Franklin is subject to statutory provisions governing such companies and to regulation by the Illinois Director of Insurance. An annual statement is filed with the Director on or before March 1 of each year covering the operations of The Franklin for the preceding year and its financial condition on December 31 of such year. The Franklin's books and accounts are subject to review and examination by the Illinois Insurance Department at all times, and a full examination of its operations is conducted by the National Association of Insurance Commissioners ("NAIC") periodically. The NAIC has divided the country into six geographic zones. A representative of each such zone may participate in the examination. In addition, The Franklin is subject to the insurance laws and regulations of the jurisdictions other than Illinois in which it is licensed to operate. Generally, the insurance departments of such jurisdictions apply the laws of Illinois in determining permissible investments for The Franklin. For certain provisions of Illinois law applicable to the Fund's investments, see "Investment Policies and Restrictions of the Fund," above. REPORTS TO OWNERS The Franklin will mail to the Contract Owner, at the last known address of record at the Home Office of The Franklin, at least annually, a report containing such information as may be required by any applicable law or regulation and a statement showing the then Cash Value of his or her Contract. FUNDAMENTAL CHANGES Upon compliance with applicable law, including obtaining any necessary affirmative vote of Contract Owners in each case: (a) the Fund may be operated in a form other than as a "management company" under 34 the Investment Company Act of 1940 (including operation as a "unit investment trust"); (b) the Fund may be deregistered under the Investment Company Act of 1940 in the event such registration is no longer required; or (c) the provisions of the Contracts may be modified to comply with other applicable federal or state laws. In the event of any such fundamental change, The Franklin may make appropriate amendments to the Contracts to give effect to such change or take such other action as may be necessary in this respect. The Board of Managers of the Fund, and the respective Board of Managers of each of Franklin Life Variable Annuity Fund A ("Fund A") and Franklin Life Money Market Variable Annuity Fund C ("Fund C"), have approved resolutions whereby Contract Owners will be asked during 1998 to approve or to disapprove an Agreement and Plan of Reorganization (the "Agreement") and related transactions (together, the Agreement and related transactions are the "Reorganization") whereby: (i) the Fund will be restructured into a single unit investment trust consisting of three subaccounts; (ii) the assets of each of the Fund, Fund A and Fund C will be liquidated and the proceeds transferred to one of the three subaccounts in the restructured Fund (so that the interests of Contract Owners and of Fund A and Fund C contract owners will continue as interests in the restructured Fund); and (iii) each subaccount will invest exclusively in shares of a specified mutual fund portfolio. Contract Owners will be provided with a proxy statement describing the Reorganization in detail. If the Reorganization is approved, then immediately following the consummation of the Reorganization, each Contract Owner will have an interest in a number of units in a subaccount of the restructured Fund having a value equal to the value of that Contract Owner's interest in a Fund immediately prior to the Reorganization. YEAR 2000 TRANSITION Like all financial services providers, The Franklin utilizes systems that may be affected by Year 2000 transition issues and it relies on service providers, including banks, custodians, and investment managers that also may be affected. The Franklin and its affiliates have developed, and are in the process of implementing, a Year 2000 transition plan, and are confirming that their service providers are also so engaged. The resources that are being devoted to this effort are substantial. It is difficult to predict with precision whether the amount of resources ultimately devoted, or the outcome of these efforts, will have any negative impact on The Franklin. However, as of the date of this prospectus, it is not anticipated that Contract Owners will experience negative effects on their investment, or on the services provided in connection therewith, as a result of Year 2000 transition implementation. The Franklin currently anticipates that its systems will be Year 2000 compliant on or about December 31, 1998, but there can be no assurance that The Franklin will be successful, or that interaction with other service providers will not impair The Franklin's services at that time. LEGAL PROCEEDINGS In recent years, various life insurance companies have been named as defendants in class action lawsuits relating to life insurance pricing and sales practices, and a number of these lawsuits have resulted in substantial settlements. The Franklin is a defendant in certain purported class action lawsuits. These claims are being defended vigorously by The Franklin. Given the uncertain nature of litigation and the early stages of this litigation, the outcome of these actions cannot be predicted at this time. The Franklin nevertheless believes that the ultimate outcome of all such pending litigation should not have a material adverse effect on the Fund or on The Franklin's financial position; however, it is possible that settlements or adverse determinations in one or more of these actions or other future proceedings could have a material adverse effect on The Franklin's results of operations for a given period. No provision has been made in the consolidated financial statements related to this pending litigation because the amount of loss, if any, from these actions cannot be reasonably estimated at this time. The Franklin is a party to various other lawsuits and proceedings arising in the ordinary course of business. Many of these lawsuits and proceedings arise in jurisdictions, such as Alabama, that permit damage awards disproportionate to the actual economic damages incurred. Based upon information presently available, The Franklin believes that the total amounts that will ultimately be paid, if any, arising from these lawsuits and 35 proceedings will not have a material adverse effect on the Fund or on The Franklin's results of operations and financial position. However, it should be noted that the frequency of large damage awards, including large punitive damage awards, that bear little or no relation to actual economic damages incurred by plaintiffs in jurisdictions like Alabama continues to increase and creates the potential for an unpredictable judgment in any given suit. REGISTRATION STATEMENT A Registration Statement has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, with respect to the Contracts offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and amendments thereto and exhibits filed as a part thereof, to all of which reference is hereby made for further information concerning the Fund, The Franklin and the Contracts offered hereby. Statements contained in this Prospectus as to the content of Contracts and other legal instruments are summaries. For a complete statement of the terms thereof, reference is made to such instruments as filed. OTHER VARIABLE ANNUITY CONTRACTS The Franklin may offer, under other prospectuses, other variable annuity contracts having interests in the Fund and containing different terms and conditions from those offered hereby. 36 TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PAGE IN STATEMENT OF ADDITIONAL INFORMATION - ----------------------------------------------------------------------------- General Information................................... 2 Investment Objectives................................. 2 Management............................................ 3 Investment Advisory and Other Services................ 4 Distribution of The Contracts......................... 6 Portfolio Turnover and Brokerage...................... 7 Safekeeper of Securities.............................. 7 Legal Matters......................................... 8 Experts............................................... 8 Index to Financial Statements......................... F-1
37 PROSPECTUS FRANKLIN LIFE VARIABLE ANNUITY FUND B INDIVIDUAL VARIABLE ANNUITY CONTRACTS (NOT FOR USE IN CONNECTION WITH QUALIFIED TRUSTS OR PLANS) ISSUED BY THE FRANKLIN LIFE INSURANCE COMPANY #1 FRANKLIN SQUARE SPRINGFIELD, ILLINOIS 62713 Complete and return this form to: The Franklin Life Insurance Company #1 Franklin Square Springfield, Illinois 62713 Attention: Box 1018 (800) 528-2011, extension 2591 Please send me the Statement of Additional Information dated April 30, 1998 for Franklin Life Variable Annuity Fund B. ________________________________________________________________________________ (Name) ________________________________________________________________________________ (Street) ________________________________________________________________________________ (City) (State) (Zip Code) APPENDIX D FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C PROSPECTUS FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C PROSPECTUS INDIVIDUAL VARIABLE ANNUITY CONTRACTS #1 Franklin Square Springfield, Illinois 62713 Telephone (800) 528-2011 THIS PROSPECTUS DESCRIBES INDIVIDUAL IMMEDIATE AND DEFERRED VARIABLE ANNUITY CONTRACTS FOR USE AS INDIVIDUAL RETIREMENT ANNUITIES OR IN CONNECTION WITH TRUSTS AND RETIREMENT OR DEFERRED COMPENSATION PLANS WHICH MAY OR MAY NOT QUALIFY FOR SPECIAL FEDERAL TAX TREATMENT UNDER THE INTERNAL REVENUE CODE (SEE "FEDERAL INCOME TAX STATUS'' BELOW FOR MORE INFORMATION). THE BASIC PURPOSE OF THE VARIABLE CONTRACTS IS TO PROVIDE ANNUITY PAYMENTS WHICH WILL VARY WITH THE INVESTMENT PERFORMANCE OF FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C (THE "FUND''). THE FUND NO LONGER OFFERS NEW CONTRACTS. THE PRIMARY INVESTMENT OBJECTIVE OF THE FUND IS LONG-TERM COMPOUNDING OF INCOME THROUGH RETENTION AND REINVESTMENT OF INCOME FROM INVESTMENTS IN A DIVERSIFIED PORTFOLIO OF SHORT-TERM MONEY MARKET SECURITIES YIELDING A HIGH LEVEL OF CURRENT INCOME TO THE EXTENT CONSISTENT WITH THE PRESERVATION OF CAPITAL AND THE MAINTENANCE OF LIQUIDITY. THERE IS NO ASSURANCE THAT THIS OBJECTIVE WILL BE ATTAINED. THIS PROSPECTUS SETS FORTH INFORMATION ABOUT THE FUND THAT A PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING AND SHOULD BE KEPT FOR FUTURE REFERENCE. ADDITIONAL INFORMATION ABOUT THE FUND AND THE FRANKLIN IS CONTAINED IN A STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 30, 1998, WHICH HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST. A STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED FROM THE FRANKLIN BY WRITING TO THE ADDRESS (ATTENTION: BOX 1018) OR CALLING THE TELEPHONE NUMBER (EXTENSION 2591) SET FORTH ABOVE OR BY RETURNING THE REQUEST FORM ON THE BACK COVER OF THIS PROSPECTUS. CERTAIN INFORMATION CONTAINED IN THE STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED HEREIN BY REFERENCE. THE TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION IS SET FORTH ON PAGE 41 OF THIS PROSPECTUS. AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE UNITED STATES GOVERNMENT. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS APRIL 30, 1998.
TABLE OF CONTENTS Page Special Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Table of Deductions and Charges. . . . . . . . . . . . . . . . . . . . . . 5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Per-Unit Income and Changes in Accumulation Unit Value . . . . . . . . . . 9 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Description of the Separate Account. . . . . . . . . . . . . . . . . . . . 11 Deductions and Charges Under the Contracts . . . . . . . . . . . . . . . . 11 A. Administration Deductions. . . . . . . . . . . . . . . . . . . . 11 B. Premium Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 12 C. Mortality and Expense Risk Charge. . . . . . . . . . . . . . . . 12 D. Investment Management Service Charge . . . . . . . . . . . . . . 12 E. Contingent Deferred Sales Charge . . . . . . . . . . . . . . . . 12 F. Transfers to Other Contracts . . . . . . . . . . . . . . . . . . 13 G. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . 14 The Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 A. General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 B. Deferred Variable Annuity Accumulation Period. . . . . . . . . . 16 C. Annuity Period . . . . . . . . . . . . . . . . . . . . . . . . . 23 Investment Policies and Restrictions of the Fund . . . . . . . . . . . . . 25 Federal Income Tax Status. . . . . . . . . . . . . . . . . . . . . . . . . 31 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 The Franklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 The Contracts: Qualified Plans. . . . . . . . . . . . . . . . . . . . 31 A. Qualified Pension, Profit-Sharing and Annuity Plans. . . . . . . 32 B. H. R. 10 Plans (Self-Employed Individuals) . . . . . . . . . . . 32 C. Section 403(b) Annuities . . . . . . . . . . . . . . . . . . . . 32 D. Individual Retirement Annuities. . . . . . . . . . . . . . . . . 33 The Contracts: Non-Qualified Plans. . . . . . . . . . . . . . . . . . 34 Required Distributions. . . . . . . . . . . . . . . . . . . . . . . . 35 Aggregation of Contracts. . . . . . . . . . . . . . . . . . . . . . . 35 Future Legislation. . . . . . . . . . . . . . . . . . . . . . . . . . 36 Income Tax Withholding. . . . . . . . . . . . . . . . . . . . . . . . 36 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Distribution of the Contracts. . . . . . . . . . . . . . . . . . . . . . . 38 State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Reports to Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Fundamental Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Year 2000 Transition . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Other Variable Annuity Contracts; Effect of Non-Qualification. . . . . . . 40 Yield Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Table of Contents of Statement of Additional Information . . . . . . . . . 41 Appendix. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON HAS BEEN AUTHORIZED BY THE FRANKLIN LIFE INSURANCE COMPANY, FRANKLIN FINANCIAL SERVICES CORPORATION OR FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN ANY AUTHORIZED SUPPLEMENTAL SALES MATERIAL. 2 SPECIAL TERMS The following is a glossary of certain terms used in this Prospectus: ACCUMULATION UNIT-A measure used to determine the value of a Contract Owner's interest in the Fund prior to the initial Annuity Payment Date. ANNUITY PAYMENT DATE-The date the first monthly Annuity Payment is to be made to the Variable Annuitant, and the same day of each month thereafter so long as the annuity is due. Depending on the Settlement Option elected, Annuity Payment Dates may occur on a periodic basis other than monthly. ANNUITY PAYMENTS-Periodic payments made to a Variable Annuitant pursuant to a Contract. In certain circumstances, Annuity Payments may be paid to a Beneficiary after the death of a Variable Annuitant. ANNUITY UNIT-A measure used to determine the value of Annuity Payments after the first. BANK DRAFT-A draft preauthorized by the Contract Owner and a bank of his or her selection in the amount of a periodic Stipulated Payment, which, at the time each periodic Stipulated Payment is due, is submitted by The Franklin directly to such bank for payment. BENEFICIARY-The person or persons designated by the Contract Owner to whom any payment due on death is payable. CASH VALUE-The value of all Accumulation Units or Annuity Units attributable to a Contract. CODE-The Internal Revenue Code of 1986, as amended. CONTRACT-An individual variable annuity contract issued by Franklin Life Money Market Variable Annuity Fund C that is offered by this Prospectus. CONTRACT ANNIVERSARY-An anniversary of the Effective Date of the Contract. CONTRACT OWNER-Except in cases where the Contract is issued to a trustee of a qualified employees' trust or pursuant to a qualified annuity plan, the Contract Owner is the individual Variable Annuitant to whom the Contract is issued. In cases where the Contract is issued to a trustee of a qualified employees' trust or pursuant to a qualified annuity plan, the Contract Owner will be respectively the trustee or the employer establishing such trust or plan, and the employee named as the Variable Annuitant of such Contract is referred to herein as the employee. When the term "Contract Owner" is used in the context of voting rights, it includes the owners of all contracts which depend in whole or in part on the investment performance of the Fund. CONTRACT YEAR-Each year starting with the Effective Date and each Contract Anniversary thereafter. DEFERRED VARIABLE ANNUITY-An annuity contract which provides for Annuity Payments to commence at some future date. Included are periodic payment deferred contracts and single payment deferred contracts. EFFECTIVE DATE-The date shown on the Schedule Page of the Contract as the date the first Contract Year begins. FIXED-DOLLAR ANNUITY-An annuity contract which provides for Annuity Payments which remain fixed as to dollar amount throughout the Annuity Payment period. 3 HOME OFFICE-The Home Office of The Franklin located at #1 Franklin Square, Springfield, Illinois 62713. IMMEDIATE VARIABLE ANNUITY-An annuity contract which provides for Annuity Payments to commence immediately rather than at some future date. INDIVIDUAL RETIREMENT ANNUITY-An annuity contract described in Section 408(b) of the Code. Individual Retirement Annuities may also qualify as Simplified Employee Pensions. NON-QUALIFIED CONTRACTS-Contracts issued under Non-Qualified Plans. NON-QUALIFIED PLANS-Retirement or deferred compensation plans or arrangements which do not receive favorable tax treatment under the Code. PERIODIC STIPULATED PAYMENT CONTRACT-An annuity contract which provides that payments made to purchase the contract will be made in periodic instalments rather than in a single sum. QUALIFIED CONTRACTS-Contracts issued under Qualified Plans. QUALIFIED PLANS-Retirement plans which receive favorable tax treatment under the Code and which are described on page 10, below. ROLLOVER CONTRIBUTION-A transfer pursuant to Sections 402(c), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code. SETTLEMENT OPTION OR OPTIONS-Alternative terms under which payment of the amounts due in settlement of the Contracts may be received. SIMPLIFIED EMPLOYEE PENSION-An Individual Retirement Annuity which meets the additional requirements of Section 408(k) of the Code. SINGLE STIPULATED PAYMENT CONTRACT-An annuity contract which provides that the total payment to purchase the contract will be made in a single sum rather than in periodic instalments. Included are single payment immediate contracts and single payment deferred contracts. STIPULATED PAYMENTS-The payment or payments provided to be made to The Franklin under a Contract. THE FRANKLIN-The Franklin Life Insurance Company, an Illinois legal reserve stock life insurance company. VALUATION DATE-Each date as of which the Accumulation Unit value is determined. This value is determined on each day (other than a day during which no Contract or portion thereof is tendered for redemption and no order to purchase or transfer a Contract is received by the Fund) in which there is a sufficient degree of trading in the securities in which the Fund invests that the value of an Accumulation Unit might be materially affected by changes in the value of the Fund's investments, as of the close of trading on that day. VALUATION PERIOD-The period commencing on a Valuation Date and ending on the next Valuation Date. VARIABLE ANNUITANT-Any natural person with respect to whom a Contract has been issued and a Variable Annuity has been, will be or (but for death) would have been effected thereunder. In certain circumstances, a Variable Annuitant may elect to receive Annuity Payments on a fixed-basis or a combination of a fixed and variable basis. VARIABLE ANNUITY-An annuity contract which provides for a series of periodic annuity payments, the amounts of which may increase or decrease as a result of the investment experience of a separate account. 4 TABLE OF DEDUCTIONS AND CHARGES Contract Owner Transaction Expenses Deferred Sales Load (as a percentage of the lesser of (i) the Cash Value of the part of the Contract surrendered or (ii) the Stipulated Payments made during the immediately preceding 72 months represented by the part of the Contract surrendered (or the Stipulated Payment in the case of a Single Stipulated Payment Contract))
Contract Total Partial Year Redemption Redemption ---- ---------- ---------- Single Stipulated Payment 1 6.00% 6.00% Contract 2 6.00% 6.00% 3 4.00% 4.00% 4 2.00% 4.00% 5 and 0.00% 4.00% thereafter Periodic Stipulated Payment 1 8.00% 8.00% Contract 2 8.00% 8.00% 3 8.00% 8.00% 4 6.00% 6.00% 5 4.00% 4.00% 6 2.00% 4.00% 7 and 0.00% 4.00% thereafter
Administration Fee (as a charge against purchase payments) Single Stipulated Payment Contract $100 Periodic Stipulated Payment Contract $20 per Contract Year plus $1 per Stipulated Payment ($.50 if by Bank Draft or by employer or military preauthorized automatic deduction) Annual Expenses (as a percentage of average net assets) Management Fees 0.38% Mortality and Expense Risk Fees Mortality Fees 0.90% Expense Risk Fees 0.17% ----- Total Annual Expenses 1.45% -----
Example If you surrender your contract at the end of the applicable time period: 1 year 3 years 5 years 10 years You would pay the following expenses on a $1,000 investment, assuming 5% annual return on assets:
5
Single Stipulated Payment Contract $ 169 $ 181 $ 171 $ 255 Periodic Stipulated Payment Contracts: $ 181 $ 191 $ 221 $ 359 If you do not surrender your contract: 1 year 3 years 5 years 10 years You would pay the following expenses on a $1,000 investment, assuming 5% annual return on assets: Single Stipulated Payment Contract $ 113 $ 141 $ 171 $ 255 Periodic Stipulated Payment Contracts: $ 36 $ 106 $ 177 $ 359
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The Table of Deductions and Charges is intended to assist Contract Owners in understanding the various fees and expenses that they bear directly or indirectly. Additional deductions may be made from Stipulated Payments for any premium taxes payable by The Franklin on the consideration received from the sale of the Contracts. See "Premium Taxes," below. For a more detailed description of such fees and expenses, see "Deductions and Charges under the Contracts," below. The example assumes that a single Stipulated Payment of $1,000 is made at the beginning of the periods shown. (It should be noted that The Franklin will not actually issue a Single Stipulated Payment Contract unless the single payment is at least $2,500.) This assumption applies even with respect to Periodic Stipulated Payment Contracts, which would normally require additional payments. The example also assumes a constant investment return of 5% and the expenses might be different if the return of the Fund averaged 5% over the periods shown but fluctuated during such periods. The amounts shown in the example represent the aggregate amounts that would be paid over the life of a Contract if the Contract were surrendered at the end of the applicable time periods. 6 - -------------------------------------------------------------------------------- SUMMARY THE CONTRACTS The individual variable annuity contracts (the "Contracts") being offered by this Prospectus are for use as Individual Retirement Annuities or in connection with trusts and retirement or deferred compensation plans which may or may not qualify for special tax treatment under the Code. See "Federal Income Tax Status," below. The basic purpose of the Contracts is to provide Annuity Payments which will vary with the investment performance of Franklin Life Money Market Variable Annuity Fund C (the "Fund"). The Contracts provide Annuity Payments for life commencing on an initial Annuity Payment Date selected by the Contract Owner; other Settlement Options are provided. See "Introduction," and "The Contracts," below. At any time within 10 days after receipt of a Contract, the Contract Owner may return the Contract and receive a refund of any premium paid on the Contract. See "Right to Revocation of Contract," below. THE FUND AND ITS INVESTMENT OBJECTIVES The Fund is an open-end diversified management investment company. The primary investment objective of the Fund is long-term compounding of income through retention and reinvestment of income from investments in a diversified portfolio of short-term money market securities, yielding a high level of current income to the extent consistent with the preservation of capital and the maintenance of liquidity. There is no assurance that this objective will be attained. In keeping with the primary investment objective of investing in short-term money market securities, at least 80% of the Fund's portfolio will be invested in securities with maturities or remaining maturities of one year or less and not more than 20% will be invested in securities with maturities or remaining maturities of between one and two years. While preservation of capital is a primary investment objective of the Fund and the money market securities in which the Fund invests generally are considered to have low principal risk, such securities are not completely risk-free. There is the risk of the failure of issuers to meet their principal and interest obligations. Commercial paper generally carries the highest risk of money market securities. The Fund may invest in Eurodollar C.D.'s and in securities issued by the Government of Canada and Canadian banks, which involve certain risks relating to marketability, possible adverse political and economic developments and possible restrictions on international currency transactions. See "Investment Policies and Restrictions of the Fund," below. SPECIAL INVESTMENT CONSTRAINTS It is anticipated that the combination of the restrictions on the amount that the Fund may invest in the securities of any one issuer and the relatively small and decreasing size of the Fund's assets will make it more difficult for the Fund's investment adviser to secure appropriate commercial paper investments, which have historically constituted a substantial portion of the Fund's investments. It is possible that the shrinking pool of commercial paper investments available to the Fund due to its size may impair the future investment performance of the Fund. See "Investment Policies and Restrictions of the Fund - Special Investment Constraints," below. INVESTMENT ADVISER; PRINCIPAL UNDERWRITER The Franklin Life Insurance Company ("The Franklin"), an Illinois legal reserve stock life insurance company, acts as investment adviser to the Fund. The Franklin is engaged in the writing of ordinary life policies, annuities and income protection policies. Franklin Financial Services Corporation, a wholly-owned subsidiary of The Franklin, is the principal underwriter for the Fund. The Franklin is an indirect wholly-owned subsidiary of American General Corporation. See "Investment Management Service Charge," and "Distribution of the Contracts," below. DEDUCTIONS AND CHARGES The deductions and charges applicable to a Contract are illustrated in the Table of Deductions and Charges that appears immediately before this summary. There are no deductions for sales charges made from Stipulated Payments under the Contracts. However, a contingent deferred sales charge, applied against the lesser of the Cash Value or Stipulated Payments made during the immediately preceding 72 months, is deducted in the event of certain redemptions. In the case of Periodic Stipulated Payment Contracts, such charges for total redemptions start at 8% for the first three Contract Years and then decline by 2% increments per year through the sixth Contract Year, with no such charge being imposed after the end of the sixth Contract Year. In the case of Single Stipulated Payment Contracts, such charges for total redemptions start at 6% for the first two Contract Years and then decline by 2% increments per year through the fourth Contract Year, with no such charge being imposed after the end of the fourth Contract Year. The contingent deferred sales charges applied to partial redemptions are identical to those applied to total redemptions, except that such charges remain at a constant 4% subsequent to the fifth Contract Year in the case of Periodic Stipulated Payment Contracts, and the third Contract Year in the case of Single Stipulated Payment - -------------------------------------------------------------------------------- 7 Contracts. Contingent deferred sales charges are waived in the case of partial redemptions of an amount in any 12-month period up to 10% of Cash Value as of the date of the first partial redemption during such 12-month period, death of the Variable Annuitant and where proceeds of a total redemption are used to purchase another Variable Annuity, Fixed-Dollar Annuity or life insurance contract issued by The Franklin. See "Contingent Deferred Sales Charge," "Redemption," and "Transfers to Other Contracts," below. A deduction of $20 per Contract Year (subject to increase by The Franklin to a maximum of $30 per Contract Year) and a transaction fee of $1.00 per Stipulated Payment ($.50 if by Bank Draft or by employer or military preauthorized automatic deduction from compensation) in the case of Periodic Stipulated Payment Contracts, and a one-time deduction of $100 in the case of Single Stipulated Payment Contracts, is made from Stipulated Payments for administrative expenses. Any applicable state or local premium taxes on the Stipulated Payments (currently up to 5%) are also deducted from the single or periodic Stipulated Payments. The amount remaining after all such deductions and fees is allocated to the Fund. See "Redemption," "Administration Deductions," "Contingent Deferred Sales Charge," and "Premium Taxes," below. The charges for annuity rate and mortality assurances, expense assurances and investment management services currently aggregate 1.440% on an annual basis and are made daily against the net asset value of the Fund. These charges consist of .900% for The Franklin's assurance of annuity rates or mortality factors, .165% (subject to increase by The Franklin up to a maximum of .850%) for The Franklin's assurances of expense factors, and .375% (subject to increase by The Franklin up to a maximum of .500%) for investment management services by The Franklin. See "Mortality and Expense Risk Charge," and "Investment Management Service Charge," below. MINIMUM PERMITTED INVESTMENT Subject to limited exceptions, the minimum single Stipulated Payment is $2,500. The minimum Periodic Stipulated Payment Contract sold is one under which the periodic Stipulated Payment is $30 ($360 on an annual basis). See "Purchase Limits," below. NEW CONTRACTS NO LONGER BEING ISSUED The Fund no longer issues new Contracts. REDEMPTION A Contract Owner under a Deferred Variable Annuity Contract, prior to the death of the Variable Annuitant and prior to the Contract's initial Annuity Payment Date, may, subject to any limitations on early settlement contained in an applicable Qualified Plan and subject to limitations on early withdrawals imposed in connection with Section 403(b) annuity purchase plans (see "Federal Income Tax Status," below), redeem all or part of the Contract and receive the Cash Value (equal to the number of Accumulation Units credited to the part of the Contract redeemed times the value of an Accumulation Unit at the end of the Valuation Period in which the request for redemption is received) less any applicable contingent deferred sales charge, unpaid administration deductions, and federal income tax withholding. Partial redemptions must be in amounts not less than $500. For information as to Accumulation Units, see "Value of the Accumulation Unit," below. Subject to certain limitations, the Contract Owner may elect to have all or a portion of the amount due upon a total redemption of a Contract applied under certain Settlement Options or applied toward the purchase of other annuity or insurance products offered by The Franklin. Federal tax penalties may apply to certain redemptions. See "Redemption," "Contingent Deferred Sales Charge," "Transfers to and from Other Contracts," "Settlement Options," and "Federal Income Tax Status," below. TERMINATION BY THE FRANKLIN The Franklin reserves the right to terminate Contracts if Stipulated Payments are less than $360 in each of three consecutive Contract Years (excluding the first Contract Year) and if the Cash Value less any surrender charge is less than $500 at the end of such three-year period. Different termination provisions apply in the case of Individual Retirement Annuities. See "Termination by The Franklin," below. 8 FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C SUPPLEMENTARY INFORMATION PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE (SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH YEAR) The financial information in this table for each of the three years in the period ended December 31, 1997 has been audited by Ernst & Young LLP, independent auditors. The financial information in this table for each of the two years in the period ended December 31, 1994 was audited by Coopers & Lybrand L.L.P., independent accountants. This table should be read in conjunction with the financial statements and notes thereto included in the Statement of Additional Information.
YEAR ENDED DECEMBER 31 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 - -------------------------------------------------------------------------------------------------------------------------------- Investment income $ 1.204 $ 1.162 $ 1.203 $ .846 $ .617 $ .746 $ 1.140 $ 1.501 $ 1.542 $ 1.186 Expenses .337 .326 .309 .303 .294 .286 .278 .265 .244 .230 - -------------------------------------------------------------------------------------------------------------------------------- Net investment income .867 .836 .894 .543 .323 .460 .862 1.236 1.298 .956 Net increase in accumulation unit value .867 .836 .894 .543 .323 .460 .862 1.236 1.298 .956 Acumulation unit value: Beginning of year 22.866 22.030 21.136 20.593 20.270 19.819 18.948 17.712 16.414 15.458 End of year $23.733 $22.866 $22.030 $21.136 $20.593 $20.270 $19.810 $18.948 $17.712 $16.414 - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% Ratio of net investment income to average net assets 3.73% 3.71% 4.17% 2.58% 1.58% 2.32% 4.46% 6.71% 7.65% 5.98% Number of accumulation units outstanding at end of year 80,944 87,386 104,641 132,646 159,929 210,310 247,150 270,271 307,850 362,718 - --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS The financial statements for the Fund and The Franklin and the reports of the independent auditors and accountants for the Fund and The Franklin are included in the Statement of Additional Information. 9 INTRODUCTION FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C INDIVIDUAL VARIABLE ANNUITY CONTRACTS ISSUED BY THE FRANKLIN LIFE INSURANCE COMPANY The Qualified and Non-Qualified Contracts offered by this Prospectus are designed primarily to assist in retirement planning for individuals. The Contracts provide Annuity Payments for life commencing on a selected Annuity Payment Date; other Settlement Options are available. The amount of the Annuity Payments will vary with the investment performance of the assets of the Fund, a separate account which has been established by The Franklin under Illinois insurance law. For the primary investment objective of the Fund, see "Investment Policies and Restrictions of the Fund," below. The Qualified Contracts described in this Prospectus will not knowingly be sold other than for use: (1) in connection with qualified employee pension and profit-sharing trusts described in Section 401(a) and tax-exempt under Section 501(a) of the Code, and qualified annuity plans described in Section 403(a) of the Code; (2) in connection with qualified pension, profit-sharing and annuity plans established by self-employed persons ("H.R. 10 Plans"); (3) in connection with annuity purchase plans adopted by public school systems and certain tax-exempt organizations pursuant to Section 403(b) of the Code; or (4) as Individual Retirement Annuities described in Section 408(b) of the Code, including Simplified Employee Pensions described in Section 408(k) of the Code. Pursuant to this Prospectus, The Franklin offers two types of Qualified and Non-Qualified Contracts: those under which Annuity Payments to the Variable Annuitant commence immediately-"Immediate Variable Annuities"-and those under which Annuity Payments to the Variable Annuitant commence in the future-"Deferred Variable Annuities." Deferred Variable Annuities may be purchased either with periodic Stipulated Payments or with a single Stipulated Payment, while Immediate Variable Annuities may only be purchased with a single Stipulated Payment. Periodic Stipulated Payment Contracts are written to provide various agreed periods during which the Stipulated Payments are to be made, with a minimum of two years. The Franklin is a legal reserve stock life insurance company organized under the laws of the State of Illinois in 1884. The Franklin issues individual life insurance, annuity and accident and health insurance policies, group annuities and group life insurance and offers a variety of whole life, life, retirement income and level and decreasing term insurance plans. Its Home Office is located at #1 Franklin Square, Springfield, Illinois 62713. American General Corporation ("American General") through its wholly-owned subsidiary, AGC Life Insurance Company ("AGC Life"), owns all of the outstanding shares of common stock of the Franklin. The address of AGC Life is American General Center, Nashville, Tennessee 37250-0001. The address of American General is 2929 Allen Parkway, Houston, Texas 77019-2155. American General is one of the largest diversified financial services organizations in the United States. American General's operating subsidiaries are leading providers of retirement services, consumer loans, and life insurance. The company was incorporated as a general business corporation in Texas in 1980 and is the successor to American General Insurance Company, an insurance company incorporated in Texas in 1926. The discussion of Contract terms herein in many cases summarizes those terms. Reference is made to the full text of the Contract forms, which are filed with the Securities and Exchange Commission as exhibits to the Registration Statement under the Securities Act of 1933 and the Investment Company Act of 1940 of which this Prospectus is a part. The exercise of certain of the Qualified Contract rights herein described may be subject to the terms and conditions of any Qualified Plan under which such Qualified Contract may be purchased. This Prospectus contains no information concerning any such Qualified Plan. Further information relating to some Qualified Plans may be obtained from the disclosure documents required to be distributed to employees under the Employee Retirement Income Security Act of 1974. 10 DESCRIPTION OF THE SEPARATE ACCOUNT The Fund was established as a separate account on July 23, 1981 by resolution of the Board of Directors of The Franklin pursuant to the provisions of the Illinois Insurance Code. The Fund is an open-end diversified management investment company registered with the Securities and Exchange Commission under the Investment Company Act of 1940. Such registration does not involve supervision of the management or investment practices or policies of the Fund or of The Franklin by the Commission. The Board of Managers of the Fund must be elected annually by Contract Owners. A majority of the members of the Board of Managers are persons who are not otherwise affiliated with The Franklin. See "Management," below. The Fund meets the definition of a "Separate Account" under the federal securities laws. Under the provisions of the Illinois Insurance Code: (i) the income, gains or losses of the Fund are credited to or charged against the amounts allocated to the Fund in accordance with the terms of the Contracts, without regard to the other income, gains or losses of The Franklin; and (ii) the assets of the Fund are not chargeable with liabilities arising out of The Franklin's other business activities, including liabilities of any other separate account which may be established. These assets are held with relation to the Contracts described in this Prospectus and such other Variable Annuity contracts as may be issued by The Franklin and designated by it as participating in the Fund. All obligations arising under the Contracts, including the promise to make Annuity Payments, are general corporate obligations of The Franklin. Accordingly, all of The Franklin's assets (except those allocated to other separate accounts which have been or may be established) are available to meet its obligations and expenses under the Contracts participating in the Fund. The Franklin is taxed as a "life insurance company" under the Code. The Fund is subject to tax as part of The Franklin for federal income tax purposes. However, the operations of the Fund are considered separately from the other operations of The Franklin in computing The Franklin's tax liability and the Fund is not affected by federal income taxes paid by The Franklin with respect to its other operations. The operations of the Fund are treated separately from the other operations of The Franklin for accounting and financial statement purposes. Under existing law, no federal income tax is payable by The Franklin on investment income and realized capital gains of the Fund. See "Federal Income Tax Status," below. DEDUCTIONS AND CHARGES UNDER THE CONTRACTS The Franklin deducts the charges described below to cover costs and expenses, services provided, and risks assumed under the Contracts. The amount of a charge may not necessarily correspond to the costs associated with providing the services or benefits indicated by the designation of the charge or associated with the particular Contract. For example, the contingent deferred sales charge may not fully cover all of the sales and distribution expenses actually incurred by The Franklin, and proceeds from other charges, including the mortality and expense risk charge, may be used in part to cover such expenses. A. ADMINISTRATION DEDUCTIONS Deductions from Stipulated Payments will be made as follows for administrative expenses with respect to the Contracts and the Fund such as preparation of the Contracts, custodial and transfer fees, salaries, rent, postage, telephone and legal, accounting and periodic reporting fees: (1) Under Single Stipulated Payment Contracts, a one-time deduction of $100. (2) Under Periodic Stipulated Payment Contracts, a deduction of $20 per Contract Year (subject to increase at any time by The Franklin to a maximum of $30 per Contract Year) and a transaction fee of $1.00 per Stipulated Payment ($.50 if by Bank Draft or by employer or military preauthorized automatic deduction from compensation). The above deductions for administrative expenses, and charges for mortality and expense risk assurances discussed under "Mortality and Expense Risk Charge," below, are made pursuant to an Administration Agreement dated December 3, 1981 between the Fund and The Franklin. The Administration Agreement is described under "Investment Advisory and Other Services" in the Statement of Additional Information. 11 The administration deductions are designed to cover the actual expenses of administering the Contracts and the Fund. The aggregate dollar amounts of the administration deductions for the fiscal years ended December 31, 1995, 1996 and 1997 were $1,060, $820 and $1,512, respectively. B. PREMIUM TAXES At the time any premium taxes are payable by The Franklin on the consideration received from the sale of the Contracts, the amount thereof will be deducted from the Stipulated Payments. Premium taxes ranging up to 5% are charged by various jurisdictions in which The Franklin is transacting business and in which it may, after appropriate qualification, offer Contracts. C. MORTALITY AND EXPENSE RISK CHARGE While Annuity Payments will reflect the investment performance of the Fund, they will not be affected by adverse mortality experience or by any excess in the actual expenses of the Contracts and the Fund over the maximum administration deductions provided for in the Contracts. The Franklin assumes the risk that Annuity Payments will continue for a longer period than anticipated because the Variable Annuitant lives longer than expected (or the Variable Annuitants as a class do so) and also assumes the risk that the administration deductions may be insufficient to cover the actual expenses of the administration of the Contracts and of the Fund (except those expenses listed under "Investment Management Service Charge," immediately below, which the Fund will bear). The Franklin assumes these risks for the duration of the Contract and the annuity rate, mortality and expense risk deductions and charges set forth herein will not be increased beyond the stated maximum with respect thereto regardless of the actual mortality and expense experience. The mortality risk charge is imposed regardless of whether or not the payment option selected involves a life contingency. For assuming these risks, The Franklin imposes a daily charge against the value of the Accumulation Unit and the Annuity Unit. (For further information as to the Accumulation Unit and the Annuity Unit, see "Deferred Variable Annuity Accumulation Period" and "Annuity Period," below.) These charges are at the current combined annual rate of 1.065% (.002918% on a daily basis), of which .900% is for annuity rate and mortality assurances and .165% (subject to increase at any time by The Franklin up to a maximum of 1.750%) is for expense assurances. If the money collected from this charge is not needed, it will be to The Franklin's gain and may be used to cover contract distribution expenses. During 1995, 1996 and 1997, The Franklin earned and was paid $27,136, $23,215 and $20,938, respectively, by reason of these charges. Such charges during 1997 were equal to 1.065% of average net assets. D. INVESTMENT MANAGEMENT SERVICE CHARGE The Franklin acts as investment manager of the Fund. For acting as such, The Franklin makes a charge against the value of the Accumulation Unit and of the Annuity Unit at an annual rate of up to .500%. The Franklin has agreed to forego initially a portion of this charge and currently makes a charge against the value of the Accumulation Unit and of the Annuity Unit at the annual rate of .375% (.001027% on a daily basis). This charge may be increased up to .500% on an annual basis only upon at least 30 days' prior written notice to Contract Owners. The investment management services are rendered and the charge is made pursuant to an Investment Management Agreement executed and dated January 31, 1995, pursuant to approval by the Contract Owners at their annual meeting held on April 17, 1995, and renewal to January 31, 1999 by the Board of Managers of the Fund at its meeting on January 19, 1998. The Investment Management Agreement is described under "Investment Advisory and Other Services" in the Statement of Additional Information. During 1995, 1996 and 1997, The Franklin earned and was paid $9,551, $8,171 and $7,370, respectively, under the Investment Management Agreement then in effect. E. CONTINGENT DEFERRED SALES CHARGE There are no deductions for sales charges made from Stipulated Payments under the Contracts. However, commissions on the sale of the Contracts are paid by The Franklin to agents of Franklin Financial Services 12 Corporation pursuant to an Agreement dated December 3, 1981. See "Distribution of the Contracts" in the Statement of Additional Information. In addition, Franklin Financial Services Corporation incurs certain sales expenses, such as sales literature preparation and related costs, in connection with the sale of the Contracts pursuant to a Sales Agreement dated January 31, 1995. Because the Contracts are normally purchased for the long term, it is expected that these costs will be recovered over time. If, however, a Contract is totally or partially redeemed in certain circumstances prior to the initial Annuity Payment Date, a means is provided for Franklin Financial Services Corporation to recover sales expenses at that time. Upon redemption of a Periodic Stipulated Payment Contract, the charges determined as follows will be applied against the lesser of the Cash Value of the part of the Contract redeemed or the Stipulated Payments made during the immediately preceding 72 months represented by that part of the Contract redeemed:
Contract Percentage Charge Year Total Redemption Partial Redemption - -------------------------------------------------------------------------------- 1 8% 8% 2 8% 8% 3 8% 8% 4 6% 6% 5 4% 4% 6 2% 4% 7 and thereafter 0% 4%
Upon redemption of a Single Stipulated Payment Contract, the charges determined as follows will be applied against the lesser of the Cash Value of the part of the Contract redeemed or the Stipulated Payment:
Contract Percentage Charge Year Total Redemption Partial Redemption - -------------------------------------------------------------------------------- 1 6% 6% 2 6% 6% 3 4% 4% 4 2% 4% 5 and thereafter 0% 4%
The above charges are not, however, applied to distributions made upon the death of the Variable Annuitant, to partial redemption of an amount in any twelve-month period up to 10% of the Cash Value as of the date of the first partial redemption in such twelve-month period, or to certain transfers described below. Partial redemptions must be in amounts not less than $500. In no event will the total amount of contingent deferred sales charges paid under a Contract exceed 9% of total Stipulated Payments made under such Contract in the first twelve Contract Years (or such fewer Contract Years over which Stipulated Payments are made). The deferred sales charges were $108 during 1995. There were no deferred sales charges during 1996 and 1997. Franklin Financial Services Corportion paid no allowances to unaffiliated dealers in connection with the sale of the Contracts during 1995, 1996 and 1997. F. TRANSFERS TO OTHER CONTRACTS Subject to any limitations in a Qualified Plan, Contracts may be redeemed prior to the death of the Variable Annuitant and the initial Annuity Payment Date and the Cash Value (less the required amount of federal income tax withholding, if any) may be applied to the purchase of certain other Variable Annuities, Fixed-Dollar Annuities or life insurance contracts issued by The Franklin. Franklin Life Variable Annuity Fund A and Franklin Life Variable Annuity Fund B, other separate accounts of The Franklin funding Variable Annuity contracts, no longer issue new contracts. If a Contract is fully redeemed and such Cash Value is immediately applied to the purchase of such other contracts, no contingent deferred sales charge for redeeming the Fund C Contract will apply. Any sales deductions under such 13 other contracts will apply to amounts transferred as if such amounts were a single stipulated payment under such other contracts (however, total sales deductions on the transferred funds will in no instance exceed 9% of all Stipulated Payments made under the Fund C Contract with respect to such transferred funds); provided, however, that if such a transfer occurs after the sixth Contract Year in the case of Periodic Stipulated Payment Contracts or the fourth Contract Year in the case of Single Stipulated Payment Contracts, The Franklin will waive the sales deductions of such other contract with respect to such transferred funds. It is not clear whether gain or loss will be recognized for federal income tax purposes upon the redemption of a Fund C Contract, another annuity contract or life insurance contract issued by The Franklin for purposes of applying the redemption proceeds to the purchase of another contract issued by The Franklin. Federal tax penalties may also apply to such redemptions. Since the income and withholding tax consequences of such redemption and purchase depend on many factors, any person contemplating redemption of a Fund C Contract or another contract issued by The Franklin for purposes of purchasing a different contract issued by The Franklin (or any other contract) is advised to consult a qualified tax advisor prior to the time of redemption. G. MISCELLANEOUS The Fund's total expenses for 1997 were $28,308, or 1.44% of average net assets during 1997. THE CONTRACTS A. GENERAL Certain significant provisions of the Contracts and administrative practices of The Franklin with respect thereto are discussed in the following paragraphs. Contract Owner inquiries may be directed to the Equity Administration Department of The Franklin at the address or telephone number set forth on the cover of this Prospectus. 1. ANNUITY PAYMENTS Variable Annuity Payments are determined on the basis of (i) an annuity rate table specified in the Contract, and (ii) the investment performance of the Fund. In the case of Deferred Variable Annuity Contracts, the annuity rate table is set forth in the Contract (but see below). In the case of Immediate Variable Annuities, the table is that used by The Franklin on the date of issue of the Contract. The amount of the Annuity Payments will not be affected by mortality experience adverse to The Franklin or by an increase in The Franklin's expenses related to the Fund or the Contracts in excess of the expense deductions provided for in the Contracts. The Variable Annuitant under an annuity with a life contingency or one providing for a number of Annuity Payments certain will receive the value of a fixed number of Annuity Units each month, determined as of the initial Annuity Payment Date on the basis of the applicable annuity rate table and the then value of his or her account. The value of Annuity Units, and thus the amounts of the monthly Annuity Payments, will, however, reflect investment gains and losses and investment income occurring after the initial Annuity Payment Date, and thus the amount of the Annuity Payments will vary with the investment experience of the Fund. See "Annuity Period," below. Court decisions, particularly ARIZONA GOVERNING COMMITTEE v. NORRIS, have held that the use of gender-based mortality tables to determine benefits under an employer-related retirement or benefit plan may violate Title VII of the Civil Rights Act of 1964 ("Title VII"). These cases indicate that plans sponsored by employers subject to Title VII generally may not provide different benefits for similarly-situated men and women. The Contracts described in this Prospectus incorporate annuity rate tables which reflect the age and sex of the Variable Annuitant and the Settlement Option selected. Such sex-distinct tables continue to be appropriate for use, for example, under Contracts which are not purchased in connection with an "employer-related" plan subject to NORRIS (such as individual retirement annuities not sponsored by an employer). However, in order to enable subject employers to comply with NORRIS, The Franklin will provide "unisex" annuity rate tables for use under Contracts purchased in connection with "employer-related" plans. Persons contemplating purchase of a Contract, as well as current Contract Owners, should consult a legal advisor regarding the applicability and implications of NORRIS in connection with their purchase and ownership of a Contract. 14 2. INCREASE OR DECREASE BY CONTRACT OWNER IN AMOUNT OR NUMBER OF PERIODIC STIPULATED PAYMENTS Stipulated Payments can be paid on an annual, semi-annual or quarterly schedule or, with The Franklin's consent, monthly. The first Stipulated Payment is due as of the date of issue and each subsequent Stipulated Payment is due on the first day following the interval covered by the next preceding Stipulated Payment and on the same date each month as the date of issue. The Contract Owner may increase the amount of a Stipulated Payment on an annualized basis under a Periodic Stipulated Payment Contract (except in the case of an Individual Retirement Annuity, which cannot be increased above the amounts described under "Purchase Limits," immediately below) up to an amount on an annualized basis equal to ten times the amount of the first Stipulated Payment on an annualized basis. Similarly, subject to the limitations described under "Purchase Limits," immediately below, the amount of a periodic Stipulated Payment may be decreased by the Contract Owner on any date a Stipulated Payment is due. Unless otherwise agreed to by The Franklin, the mode of Stipulated Payment may be changed only on a Contract Anniversary. The Contract Owner may continue making Stipulated Payments after the agreed number of Stipulated Payments has been made, but The Franklin will not accept Stipulated Payments after age 75. Submission of a Stipulated Payment in an amount different from that of the previous payment, subject to the aforesaid limits, will constitute notice of the election of the Contract Owner to make such change. 3. ASSIGNMENT OR PLEDGE A Qualified Contract may not be assigned by the Contract Owner except when issued to a trustee in connection with certain types of plans designed to qualify under Section 401 of the Code or when made pursuant to a qualified domestic relations order rendered by a state court in satisfaction of family support obligations. In general, a pledge or assignment made with respect to certain Qualified Contracts may, depending on such factors as the amount pledged or assigned, be treated as a taxable distribution. See "Individual Retirement Annuities," below, for special rules applicable thereto. Moreover, in certain instances, pledges or assignments of a Qualified Contract may result in the imposition of certain tax penalties. See generally "The Contracts: Qualified Plans," below. A Non-Qualified Contract may be assigned by the Contract Owner or pledged by him or her as collateral security as provided in the Non-Qualified Contract. Assignments or pledges of a Non-Qualified Contract will be treated as distributions that may be taxable. Moreover, in certain instances, pledges or assignments of a Non-Qualified Contract may result in the imposition of certain tax penalties. See "The Contracts: Non-Qualified Plans," below. Persons contemplating the assignment or pledge of a Qualified Contract or a Non-Qualified Contract are advised to consult a qualified tax advisor concerning the federal income tax consequences thereof. 4. PURCHASE LIMITS No periodic Stipulated Payment may be less than $30 ($360 on an annual basis). No single Stipulated Payment may be less than $2,500, except that in the case of a deferred Single Stipulated Payment Contract to be used as an Individual Retirement Annuity funded with a Rollover Contribution, the total Stipulated Payment applicable to the Variable Annuity, prior to administration deductions, must be at least $1,000 unless with consent of The Franklin a smaller single Stipulated Payment is permitted. In the case of a Qualified Contract issued for use as an Individual Retirement Annuity, annual premium payments may not, in general, exceed $2,000. However, if the Individual Retirement Annuity is a Simplified Employee Pension, annual premium payments may not exceed $30,000. Single Stipulated Payment Contracts are not available as Individual Retirement Annuities except for those funded with Rollover Contributions and except for those to be used as Simplified Employee Pensions. 5. TERMINATION BY THE FRANKLIN The Franklin reserves the right to terminate any Contract, other than a Contract issued for use as an Individual Retirement Annuity, if total Stipulated Payments paid are less than $360 in each of three consecutive Contract Years (excluding the first Contract Year) and if the Cash Value less any surrender charge is less than $500 at the end of such three-year period. The Franklin must give 31 days' notice by mail to the Contract Owner of such termination. The Franklin will not exercise any right to terminate such Contract if the value of the Contract declines to less than $500 as a result of a decline in the market value of the securities held by the Fund. 15 The Franklin reserves the right to terminate any Contract issued for use as an Individual Retirement Annuity if no Stipulated Payments have been received for any two Contract Years and if the first monthly Annuity Payment, determined at the initial Annuity Payment Date, arising from the Stipulated Payments received prior to such two-year period would be less than $20. Upon termination as described above, The Franklin will pay to the Contract Owner the Cash Value of the Contract, less any unpaid administration deductions. For certain tax consequences upon such payment, see "Federal Income Tax Status," below. 6. RIGHT TO REVOCATION OF CONTRACT A Contract Owner has the right to revoke the purchase of a Contract within 10 days after receipt of the Contract, and upon such revocation will be entitled to a return of the entire amount paid. The request for revocation must be made by mailing or hand-delivering the Contract within such 10-day period either to The Franklin Life Insurance Company, Cashiers Department, #1 Franklin Square, Springfield, Illinois 62713, or to the agent from whom the Contract was purchased. In general, notice of revocation given by mail is deemed to be given on the date of the postmark, or, if sent by certified or registered mail, the date of certification or registration. 7. NEW CONTRACTS NO LONGER BEING ISSUED The Fund no longer issues new Contracts. B. DEFERRED VARIABLE ANNUITY ACCUMULATION PERIOD 1. CREDITING ACCUMULATION UNITS; DEDUCTION FOR ADMINISTRATIVE EXPENSES During the accumulation period-the period before the initial Annuity Payment Date-deductions from Stipulated Payments for administrative expenses are made as specified under "Deductions and Charges Under the Contracts," above. In addition, any applicable premium taxes, also as specified above under that caption, are deducted from the Stipulated Payments. The balance of each Stipulated Payment is credited to the Contract Owner in the form of Accumulation Units. The number of a Contract Owner's Accumulation Units is determined by dividing the net amount of Stipulated Payments credited to his or her Contract by the value of an Accumulation Unit at the end of the Valuation Period during which the Stipulated Payment is received, except that, in the case of the original application for a Variable Annuity Contract, the value of an Accumulation Unit within two business days after receipt of the application will be used if the application and all information necessary to process the application are complete upon receipt. If the application and such information are not complete upon receipt, The Franklin, within five days after the receipt of an original application and initial payment at the Home Office of The Franklin, will attempt to complete the application and will either accept the application or reject the application and return the initial payment. The number of Accumulation Units so determined will not be changed by any subsequent change in the dollar value of an Accumulation Unit, but the dollar value of an Accumulation Unit may vary from day to day depending upon the investment experience of the Fund. 16 2. VALUATION OF A CONTRACT OWNER'S CONTRACT The Cash Value of a Contract at any time prior to the initial Annuity Payment Date can be determined by multiplying the total number of Accumulation Units credited to the account by the current Accumulation Unit value. The Contract Owner bears the investment risk, that is, the risk that market values may decline. There is no assurance that the Cash Value of the Contract will equal or exceed the Stipulated Payments made. A Contract Owner may obtain from the Home Office of The Franklin information as to the current value of an Accumulation Unit and the number of Accumulation Units credited to his or her Contract. 3. VALUE OF THE ACCUMULATION UNIT The value of an Accumulation Unit was set at $10 effective July 1, 1981. Accumulation Units currently are valued each Valuation Date (each day in which there is a sufficient degree of trading in the securities in which the Fund invests that the value of an Accumulation Unit might be materially affected by changes in the value of the Fund's investments, other than a day during which no Contract or portion thereof is tendered for redemption and no order to purchase or transfer a Contract is received by the Fund, as of the close of trading on that day). After the close of trading on a Valuation Date, or on a day when Accumulation Units are not valued, the value of an Accumulation Unit is equal to its value as of the immediately following Valuation Date. The value of an Accumulation Unit on the last day of any Valuation Period is determined by multiplying the value of an Accumulation Unit on the last day of the immediately preceding Valuation Period by the Net Investment Factor (defined below) for the current Valuation Period. At each Valuation Date a gross investment rate for the Valuation Period then ended is determined from the investment performance of the Fund for the Valuation Period. Such rate is equal to (i) accrued investment income for the Valuation Period, plus capital gains and minus capital losses for the period, whether realized or unrealized, on the assets of the Fund (adjusted by a deduction for the payment of any applicable state or local taxes as to the income or capital gains of the Fund) divided by (ii) the value of the assets of the Fund at the beginning of the Valuation Period. The gross investment rate may be positive or negative. The net investment rate for the Valuation Period is then determined by deducting, currently, .003945% (1.440% on an annual basis) for each day of the Valuation Period as a charge against the gross investment rate. This charge is made by The Franklin for providing investment management services, annuity rate or mortality assurances and expense assurances and may be increased by The Franklin to a maximum of 2.250% on an annual basis. See "Deductions and Charges Under the Contracts," above. The net investment factor for the Valuation Period is the sum of 1.00000000 plus the net investment rate for the Valuation Period ("Net Investment Factor"). The net investment rate may be negative if the combined capital losses, Valuation Period deductions and increase in the tax reserve exceed investment income and capital gains. Thus, the net investment factor may be less than 1.00000000, and the value of an Accumulation Unit at the end of a Valuation Period may be less than the value for the previous Valuation Period. 4. VALUATION OF FUND ASSETS The value of the assets of the Fund is the value of the securities held by the Fund plus any cash or other assets minus all liabilities. The money market securities in which the Fund invests are traded primarily in the over-the-counter market. Portfolio securities will be valued using the best method currently available as determined by the Board of Managers of the Fund. Securities with a maturity or remaining maturity of 60 days or less (including master demand notes) are valued on an amortized cost basis. Under this method of valuation, the security is initially valued at cost on the date of purchase (or in the case of securities purchased with more than 60 days remaining to maturity, the market value on the 61st day prior to maturity); thereafter the Fund assumes a constant proportionate amortization in value until maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the security. In periods of declining interest rates, the daily yield on portfolio securities valued on an amortized cost basis 17 may tend to be higher than the yield derived by using a method of valuation based upon market prices and estimates; in periods of rising interest rates, the daily yield on portfolio securities valued on an amortized cost basis may tend to be lower than the yield derived by using a method of valuation based upon market prices and estimates. For purposes of valuation, the maturity of a variable rate certificate of deposit is deemed to be the next coupon date on which the interest rate is to be adjusted. Securities with a remaining maturity of more than 60 days currently are valued on each Valuation Date generally at the mean between the most recent bid and asked prices or yield equivalent as obtained from dealers that make markets in such securities. Investments for which market quotations are not readily available as of the close of trading on relevant markets on each Valuation Date are valued at prices deemed best to reflect their fair value as determined in good faith by or under the direction of the Board of Managers of the Fund in a manner authorized by the Board of Managers and applied on a consistent basis. The Board of Managers of the Fund has determined that the fair value of Eurodollar certificates of deposit generally will be the market price thereof at the close of trading on European exchanges, unless events between such close and the close of trading on the New York Stock Exchange require a different valuation, in which case the Board of Managers will promptly consider what other method of valuation should be applied to determine fair value. The Board of Managers monitors on an ongoing basis the methods of valuation used to determine what action, if any, should be taken to assure that portfolio securities of the Fund are valued at fair value as determined in good faith by the Board of Managers. 5. REDEMPTION A Contract Owner under a Deferred Variable Annuity Contract, prior to the death of the Variable Annuitant and prior to the initial Annuity Payment Date, may, subject to any limitations on early settlement contained in an applicable Qualified Plan, redeem the Contract, in whole or in part (but, if in part, not less than $500), by submission of the Contract and a written request for its redemption to The Franklin's Home Office, and will receive the Cash Value of the part of the Contract redeemed, less any applicable contingent deferred sales charges and unpaid administration deductions referred to under "Deductions and Charges Under the Contracts," above. Early withdrawal of certain amounts attributable to Contracts issued pursuant to an annuity purchase plan meeting the requirements of Code Section 403(b) may be prohibited. See "Federal Income Tax Status," below. The Cash Value of a Contract or part thereof redeemed prior to the initial Annuity Payment Date is the number of Accumulation Units credited to the Contract (or that part so redeemed) times the value of an Accumulation Unit at the end of the Valuation Period in which the request for redemption is received. Except in limited circumstances discussed below, the payment of the Cash Value will be made within seven days after the date a properly completed and documented request for redemption is received by The Franklin at its Home Office. The right of redemption may be suspended or the date of payment postponed during any periods when the New York Stock Exchange is closed (other than customary weekend and holiday closings); when trading in the markets the Fund normally utilizes is restricted, or an emergency exists as determined by the Securities and Exchange Commission so that disposal of the Fund's investments or determination of its net asset value is not reasonably practicable; or for such other periods as the Securities and Exchange Commission by order may permit to protect Contract Owners. In lieu of a single payment of the amount due upon redemption of a Contract, the Contract Owner may elect, at any time prior to the initial Annuity Payment Date and during the lifetime of the Variable Annuitant, to have all or any portion of the amount due applied under any available Settlement Option. See "Settlement Options," below. However, no Settlement Option may be elected upon redemption without surrender of the entire Contract. The payment of the Cash Value of a redeemed Contract either in a single payment or under an available Settlement Option may be subject to federal income tax withholding and federal tax penalties. See "Federal Income Tax Status," below. 18 6. PAYMENT OF ACCUMULATED VALUE AT TIME OF DEATH In the event of the death of the Variable Annuitant prior to the initial Annuity Payment Date, death benefits payable to the surviving Beneficiary will be paid by The Franklin within seven days of receipt by The Franklin of written notice of such death. The death proceeds payable will be the Cash Value of the Contract determined as of the date on which written notice of death is received by The Franklin by mail if such date is a Valuation Date; if such date is not a Valuation Date, the determination will be made on the next following Valuation Date. There is no assurance that the Cash Value of a Contract will equal or exceed the Stipulated Payments made. No contingent deferred sales charge is made in the case of such death. For payment of death proceeds in the event no Beneficiary is surviving at the death of the Variable Annuitant, see "Change of Beneficiary or Mode of Payment of Proceeds; Death of Beneficiaries," below. The Code imposes certain requirements concerning payment of death benefits payable before the initial Annuity Payment Date in the case of Qualified Contracts. Under those Contracts, death benefits will be paid as required by the Code and as specified in the governing plan documents. The terms of such documents should be consulted to determine the death benefits and any limitations the plan may impose. You should consult your legal counsel and tax advisor regarding these requirements. Subject to the foregoing the Contract Owner may, at any time prior to the initial Annuity Payment Date, elect that all or any portion of such death proceeds be paid to the Beneficiary under any one of the available Settlement Options. See "Settlement Options," below. If the Contract Owner has not made such an election, the Beneficiary may do so after the death of the Variable Annuitant. The Contract Owner or the Beneficiary, whichever selects the method of settlement, may designate contingent Beneficiaries to receive any other amounts due should the first Beneficiary die before completion of the specified payments. If neither the Contract Owner nor the Beneficiary elects payment of death proceeds under an available Settlement Option, payment will be made to the Beneficiary in a single sum. Death proceeds may be applied to provide variable payments, fixed-dollar payments or a combination of both. The payment of death proceeds may be subject to federal income tax withholding. See "Income Tax Withholding," below In the event of the death of the Variable Annuitant after the initial Annuity Payment Date, payments under a Contract will be made as described in "Settlement Options," below. 7. OPTIONS UPON FAILURE TO MAKE STIPULATED PAYMENTS Upon a failure to make a Stipulated Payment under a Periodic Stipulated Payment Contract, subject to The Franklin's power of termination described under "Termination by The Franklin," above, and subject to the right of The Franklin to pay the value of the Contract Owner's account in a single sum at the initial Annuity Payment Date if the value on such date is less than $2,000, the Contract Owner may elect, prior to the death of the Variable Annuitant and prior to the initial Annuity Payment Date, either of the following options: (a) to exercise any of the available Settlement Options described under "Settlement Options," below, or redeem the Contract as described under "Redemption," above; or (b) to have the Contract continued from the date of failure to make a Stipulated Payment as a paid-up annuity to commence on the initial Annuity Payment Date stated in the Contract. If no option is elected by the Contract Owner within 31 days after failure to make a Stipulated Payment, the Contract will automatically be continued under the paid-up annuity option. 8. REINSTATEMENT (AS TO PERIODIC STIPULATED PAYMENT CONTRACTS) A Contract Owner, by making one Stipulated Payment, may reinstate a Periodic Stipulated Payment Contract as to which there has been a failure to make a Stipulated Payment, if the Contract at the time of the payment is being continued as a paid-up annuity. However, such reinstatement does not automatically reinstate the benefits provided by any riders to the Contract providing life insurance or disability benefits. Administration deductions will not accrue during Contract Years in which no Stipulated Payments are made. 19 9. CHANGE OF BENEFICIARY OR MODE OF PAYMENT OF PROCEEDS; DEATH OF BENEFICIARIES While the Contract is in force the Contract Owner may (by filing a written request at the Home Office of The Franklin) change the Beneficiary or Settlement Option, or, if agreed to by The Franklin, change to a mode of payment different from one of the Settlement Options, subject to applicable limitations under the Code and any governing Qualified Plan. If any Beneficiary predeceases the Variable Annuitant, the interest of such Beneficiary will pass to the surviving Beneficiaries, if any, unless otherwise provided by endorsement. If no Beneficiary survives the Variable Annuitant and no other provision has been made, then, upon the death of the Variable Annuitant, the proceeds will be paid in a single sum to the Contract Owner or, if the Variable Annuitant was the Contract Owner, to the executors or administrators of the Contract Owner's estate. 10. SETTLEMENT OPTIONS At any time prior to the initial Annuity Payment Date and during the lifetime of the Variable Annuitant, the Contract Owner may elect to have all or a portion of the amount due in settlement of the Contract applied under any of the available Settlement Options described below. If the Contract Owner fails to elect a Settlement Option, payment automatically will be made in the form of a life annuity. See "First Option," below, and "Deferred Variable Annuity Contracts," below. Annuity Payments under a Settlement Option are made to the Variable Annuitant during his or her lifetime, or for such shorter period that may apply under the particular Settlement Option. Upon the death of the original Variable Annuitant after the initial Annuity Payment Date, any remaining Annuity Payments that are due under the Settlement Option elected will be continued to the Beneficiary or, if elected by the Contract Owner (or, if so designated by the Contract Owner, by the Beneficiary), the Cash Value of the Contract, as described under such Settlement Option below, will be paid to the Beneficiary in one lump sum. Upon the death of any Beneficiary to whom payments are being made under a Settlement Option, a single payment equal to the then remaining Cash Value of the Contract, if any, will be paid to the executors or administrators of the Beneficiary, unless other provision has been specified and accepted by The Franklin. For a discussion of payments if no Beneficiary is surviving at the death of the Variable Annuitant, see "Change of Beneficiary or Mode of Payment of Proceeds; Death of Beneficiaries," immediately above. Payment to a Contract Owner upon redemption of a Contract, and payment of death proceeds to a Beneficiary upon the death of the Variable Annuitant prior to the initial Annuity Payment Date, may also be made under an available Settlement Option in certain circumstances. See "Redemption," above, and "Payment of Accumulated Value at Time of Death," above. Available Settlement Options may be selected on a fixed or variable basis or a combination thereof, except the Seventh Option, which is available on a fixed basis only. Under an Option which is paid on a fixed basis, there is no sharing in the investment experience of the Fund and, upon commencement of payments, participation in the Fund terminates (the subject Contract will be transferred to the general account of The Franklin). Settlement under the First, Second, Third, Fourth or Fifth Option below is subject to satisfactory proof of age of the person or persons to whom the Annuity Payments are to be made. The minimum amount of proceeds which may be applied under any Settlement Option for any person is $2,000 and proceeds of a smaller amount may be paid in a single sum in the discretion of The Franklin, except in the case of a deferred Single Stipulated Payment Contract funded with a Rollover Contribution not in excess of $2,000. See "Purchase Limits," above. Further, if at any time payments under a Settlement Option become less than $25 per payment, The Franklin has the right to change the frequency of payment to such intervals as will result in payments of at least $25. In the case of Immediate Variable Annuity Contracts, the only Settlement Options offered are the life annuity, the life annuity with 120, 180 or 240 monthly payments certain, or the joint and last survivor life annuity. See "First Option," "Second Option" and "Fourth Option," below, and "Immediate Variable Annuity Contracts," below. 20 The distribution rules which Qualified Plans must satisfy in order to be tax-qualified under the Code may limit the utilization of certain Settlement Options, or may make certain Settlement Options unavailable, in the case of Qualified Contracts issued in connection therewith. Similarly, the distribution rules which Non-Qualified Contracts must satisfy in order to qualify as "annuity contracts" under the Code may also limit available Settlement Options under Non-Qualified Contracts. These distribution rules could affect such factors as the commencement of distributions and the period of time over which distributions may be made. All Settlement Options are offered subject to the limitations of the distribution rules. The Statement of Additional Information describes certain limitations on Settlement Options based on The Franklin's current understanding of the distribution rules generally applicable to Non-Qualified Contracts and to Qualified Contracts purchased under this Prospectus for use as Individual Retirement Annuities or issued in connection with Section 403(b) annuity purchase plans. See "Limitations on Settlement Options" in the Statement of Additional Information. Persons considering the purchase of a Contract and Contract Owners contemplating election of a Settlement Option are urged to obtain and read the Statement of Additional Information. Various questions exist, however, about the application of the distribution rules to distributions from the Contracts and their effect on Settlement Option availability thereunder. Persons contemplating the purchase of a Contract should consult a qualified tax advisor concerning the effect of the distribution rules on the Settlement Option or Options he or she is contemplating. Neither this Prospectus nor the Statement of Additional Information, however, describes limitations on Settlement Options based on applicable distribution rules in the case of Qualified Contracts issued in connection with qualified pension and profit-sharing plans under Section 401(a) of the Code and annuity plans under Section 403(a) of the Code. Under those Contracts, available Settlement Options are limited to those Options specified in the governing plan documents. The terms of such documents should be consulted to determine Settlement Option availability and any other limitations the plan may impose on early redemption of the Qualified Contract, payment in settlement thereof, or similar matters. Generally, limitations comparable to those described in the Statement of Additional Information for Individual Retirement Annuities and Section 403(b) annuity purchase plans also apply with respect to such qualified pension, profit-sharing and annuity plans (including H.R. 10 Plans). Persons contemplating election of the Fifth, Sixth or Seventh Option should consult a qualified tax advisor to determine whether the continuing right of redemption under any such Option might be deemed for tax purposes to result in the "constructive receipt" of the Cash Value of the Contract or proceeds remaining on deposit with The Franklin. FIRST OPTION-LIFE ANNUITY. An annuity payable monthly during the lifetime of the Variable Annuitant, ceasing with the last Annuity Payment due prior to the death of the Variable Annuitant. This Option offers the maximum level of monthly Annuity Payments since there is no guarantee of a minimum number of Annuity Payments or provision for any continued payments to a Beneficiary upon the death of the Variable Annuitant. It would be possible under this Option for the Variable Annuitant to receive only one Annuity Payment if he or she died before the second Annuity Payment Date, or to receive only two Annuity Payments if he or she died after the second Annuity Payment Date but before the third Annuity Payment Date, and so forth. SECOND OPTION-LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN. An annuity payable monthly during the lifetime of the Variable Annuitant including the commitment that if, at the death of the Variable Annuitant, Annuity Payments have been made for less than 120 months, 180 months or 240 months (as selected by the Contract Owner in electing this Option), Annuity Payments shall be continued during the remainder of the selected period to the Beneficiary. The cash value under this Settlement Option is the present value of the current dollar amount of any unpaid Annuity Payments certain. THIRD OPTION-UNIT REFUND LIFE ANNUITY. An annuity payable monthly during the lifetime of the Variable Annuitant, ceasing with the last Annuity Payment due prior to the death of the Variable Annuitant, provided that, at the death of the Variable Annuitant, the Beneficiary will receive a payment of the then dollar value of the number of Annuity Units equal to the excess, if any, of (a) over (b) where (a) is the total amount applied under this Option divided by the Annuity Unit value at the initial Annuity Payment Date and (b) is the number of Annuity Units represented by each Annuity Payment multiplied by the number of Annuity Payments made. 21 For example, if $10,000 were applied on the first Annuity Payment Date to the purchase of an annuity under this Option, the Annuity Unit value at the initial Annuity Payment Date were $2.00, the number of Annuity Units represented by each Annuity Payment were 30.55, 10 Annuity Payments were paid prior to the date of the Variable Annuitant's death and the value of an Annuity Unit on the Valuation Date following the Variable Annuitant's death were $2.05, the amount paid to the Beneficiary would be $9,623.73, computed as follows:
($10,000 - (30.55 X 10)) X $2.05 = (5,000 - 305.5) X 2.05 = 4,694.5 X $2.05 = $9,623.73 ------- $2.00
FOURTH OPTION-JOINT AND LAST SURVIVOR LIFE ANNUITY. An annuity payable monthly during the joint lifetime of the Variable Annuitant and a secondary variable annuitant, and thereafter during the remaining lifetime of the survivor, ceasing with the last Annuity Payment due prior to the death of the survivor. Since there is no minimum number of guaranteed payments under this Option, it would be possible under this Option to receive only one Annuity Payment if both the Variable Annuitant and the secondary variable annuitant died before the second Annuity Payment Date, or to receive only two Annuity Payments if both the Variable Annuitant and the secondary variable annuitant died after the second Annuity Payment Date but before the third Annuity Payment Date, and so forth. FIFTH OPTION-PAYMENTS FOR A DESIGNATED PERIOD. An amount payable monthly to the Variable Annuitant for a number of years which may be from one to 30 (as selected by the Contract Owner in electing this Option). At the death of the Variable Annuitant, payments will be continued to the Beneficiary for the remaining period. The cash value under this Settlement Option is the then present value of the current dollar amount of any unpaid Annuity Payments certain. A Contract under which Annuity Payments are being made under this Settlement Option may be redeemed in whole or in part (but, if in part, not less than $500) at any time by the Contract Owner for the aforesaid cash value of the part of the Contract redeemed. See "Redemption," above. It should be noted that, while this Option does not involve a life contingency, charges for annuity rate assurances, which include a factor for mortality risks, are included in the computation of Annuity Payments due under this Option. Further, although not contractually required to do so, The Franklin currently follows a practice, which may be discontinued at any time, of permitting persons receiving Annuity Payments under this Option to elect to convert such payments to a Variable Annuity involving a life contingency under the First, Second, Third or Fourth Options above if, and to the extent, such other Options are otherwise available to such person. SIXTH OPTION-PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. The amount due will be paid to the Variable Annuitant in equal annual, semiannual, quarterly or monthly Annuity Payments of a designated dollar amount (not less than $75 a year per $1,000 of the original amount due) until the remaining balance (adjusted each Valuation Period by the Net Investment Factor for the period) is less than the amount of one Annuity Payment, at which time such balance will be paid and will be the final Annuity Payment under this Option. Upon the death of the Variable Annuitant, payments will be continued to the Beneficiary until such remaining balance is paid. The cash value under this Settlement Option is the amount of proceeds then remaining with The Franklin. A Contract under which Annuity Payments are being made under this Settlement Option may be redeemed at any time by the Contract Owner for the aforesaid cash value. Annuity Payments made under the Sixth Option may, under certain circumstances, be converted into a Variable Annuity involving a life contingency. See the last paragraph under the Fifth Option, above, which applies in its entirety to the Sixth Option as well. SEVENTH OPTION-INVESTMENT INCOME. The amount due may be left on deposit with The Franklin in its general account and a sum will be paid annually, semiannually, quarterly or monthly, as selected by the Contract Owner in electing this Option, which shall be equal to the net investment rate of 3% stipulated as payable upon fixed-dollar amounts for the period multiplied by the amount remaining on deposit. Upon the death of the Variable Annuitant, the aforesaid payments will be continued to the Beneficiary. The sums left on deposit with The Franklin may be withdrawn at any time. 22 Periodic payments received under this Option may be treated like interest for federal income tax purposes. Interest payments are fully taxable and are not subject to the general rules applicable to the taxation of annuities described in "Federal Income Tax Status," below. Persons contemplating election of this Seventh Option are advised to consult a qualified tax advisor concerning the availability and tax effect of its election. C. ANNUITY PERIOD 1. ELECTING ANNUITY PAYMENTS AND SETTLEMENT OPTION; COMMENCEMENT OF ANNUITY PAYMENTS (a) DEFERRED VARIABLE ANNUITY CONTRACTS A Contract Owner selects a Settlement Option and an initial Annuity Payment Date prior to the issuance of the Deferred Variable Annuity Contract, except that Qualified Contracts issued in connection with qualified pension and profit-sharing plans (including H.R. 10 Plans) under Section 401(a) of the Code and annuity plans (including H.R. 10 Plans) under Section 403(a) of the Code provide for Annuity Payments to commence at the date and under the Settlement Option specified in the plan. The Contract Owner may defer the initial Annuity Payment Date and continue the Contract to a date not later than the Contract Anniversary on which the attained age of the Variable Annuitant is 75 unless the provisions of the Code or any governing Qualified Plan require Annuity Payments to commence at an earlier date. See "Limitations on Settlement Options" in the Statement of Additional Information. The Franklin will require satisfactory proof of age of the Variable Annuitant prior to the initial Annuity Payment Date. (b) IMMEDIATE VARIABLE ANNUITY CONTRACTS The Franklin offers three forms of Immediate Variable Annuity Contracts: the life annuity, the life annuity with 120, 180 or 240 monthly payments certain and the joint and last survivor life annuity. For a description of these forms of annuity, see the First, Second and Fourth Options under "Settlement Options," above. Under an Immediate Variable Annuity, the first Annuity Payment is made to the Variable Annuitant one month after the Effective Date of the Contract, unless the period selected by the Contract Owner for the frequency of Annuity Payments is more than one month, in which case the first Annuity Payment will be made after a period equal to the period so selected from the Effective Date (subject in every case to the survival of the Variable Annuitant, except in cases where a guaranteed payment period is provided). 2. THE ANNUITY UNIT The Annuity Unit is a measure used to value the First Option (including the automatic life annuity) and the Second, Third, Fourth and Fifth Options, if elected, on a variable basis. The value of the Annuity Unit as of July 1, 1981 was fixed at $1.00 and for each day thereafter is determined by multiplying the value of the Annuity Unit on the preceding day by the "Annuity Change Factor" for the Valuation Period ending on the tenth preceding day or by 1.0 if no Valuation Period ended on the tenth preceding day. The "Annuity Change Factor" for any Valuation Period is equal to the amount determined by dividing the Net Investment Factor for that Valuation Period by a number equal to 1.0 plus the interest rate for the number of calendar days in such Valuation Period at the effective annual rate of 3-1/2%. The division by 1.0 plus an interest factor of 3-1/2% in calculating the Annuity Change Factor is effected in order to cancel out the assumed net investment rate of 3-1/2% per year which is built into the annuity tables specified in the Contract. See "Determination of Amount of First Monthly Annuity Payment (Deferred Variable Annuity Contracts Only)," below, and "Assumed Net Investment Rate," below. Annuity Units are valued in respect of each Annuity Payment Date as of a Valuation Date not less than 10 days prior to the Annuity Payment Date in question in order to permit calculation of amounts of Annuity Payments and mailing of checks in advance of their due dates. 23 3. DETERMINATION OF AMOUNT OF FIRST MONTHLY ANNUITY PAYMENT (DEFERRED VARIABLE ANNUITY CONTRACTS ONLY) When Annuity Payments commence under a Deferred Variable Annuity Contract, the value of the Contract Owner's account is determined as the product of the value of an Accumulation Unit on the first Annuity Payment Date and the number of Accumulation Units credited to the Contract Owner's account as of such Annuity Payment Date. The Contract utilizes tables indicating the dollar amount of the first monthly Annuity Payment under each Settlement Option for each $1,000 of Cash Value of the Contract. The first monthly Annuity Payment varies according to the Settlement Option selected (see "Settlement Options," above) and the "adjusted age" of the Variable Annuitant. The first monthly Annuity Payment may also vary according to the sex of the Variable Annuitant. See "Annuity Payments," above. (The Contracts provide for age adjustment based on the year of birth of the Variable Annuitant and any joint Variable Annuitant; a person's actual age when Annuity Payments commence may not be the same as the "adjusted age" used in determining the amount of the first Annuity Payment.) For Contracts utilizing sex-distinct annuity tables, the tables for the First, Second, Third and Fourth Options are determined from the Progressive Annuity Table assuming births in the year 1900 and a net investment rate of 3-1/2% a year. The tables for the Fifth Option are based on a net investment rate of 3% for the General Account and 3-1/2% for the Separate Account. The total first monthly Annuity Payment is determined by multiplying the number of thousands of dollars of Cash Value of the Contract Owner's Contract by the amount of the first monthly Annuity Payment per $1,000 of value from the tables in the Contract. The amount of the first monthly Annuity Payment, determined as above, is divided as of the initial Annuity Payment Date by the value of an Annuity Unit to determine the number of Annuity Units represented by the first Annuity Payment. Annuity Units are valued as of a Valuation Date not less than 10 days prior to the initial Annuity Payment Date, pursuant to the procedure discussed under "The Annuity Unit," above. Thus, there will be a double effect of the investment experience of the Fund during the 10-day period referred to in the preceding sentence, since that experience will be included (as part of the value of an Accumulation Unit) in valuing the Contract Owner's Contract on the initial Annuity Payment Date and (as part of the changes in value of an Annuity Unit) in determining the second monthly Annuity Payment. Also, the number of Annuity Units (and hence the amount of Annuity Payments) will be affected by the net asset values of the Fund approximately 10 days prior to the initial Annuity Payment Date even though changes in those net asset values have occurred during that 10-day period, and even though the value of the Accumulation Units used to determine the Cash Value of the Contract will reflect those changes. See "Amount of Second and Subsequent Monthly Annuity Payments (Deferred Variable Annuity Contracts Only)," immediately below. Each Contract contains a provision that the first monthly Annuity Payment will not be less than 103% of the first monthly Annuity Payment available under a then currently issued Immediate Variable Annuity of The Franklin if a single Stipulated Payment were made equal to the value which is being applied under the Contract to provide annuity benefits. This provision assures the Variable Annuitant that if at the initial Annuity Payment Date the annuity rates then applicable to new Immediate Variable Annuity Contracts are significantly more favorable than the annuity rates provided in his or her Contract, the Variable Annuitant will be given the benefit of the new annuity rates. 4. AMOUNT OF SECOND AND SUBSEQUENT MONTHLY ANNUITY PAYMENTS (DEFERRED VARIABLE ANNUITY CONTRACTS ONLY) The number of Annuity Units credited to a Contract on the initial Payment Date remains fixed during the annuity period, and as of each subsequent Annuity Payment Date the dollar amount of the Annuity Payment is determined by multiplying this fixed number of Annuity Units by the then value of an Annuity Unit. 5. DETERMINATION OF AMOUNT OF ANNUITY PAYMENTS (IMMEDIATE VARIABLE ANNUITY CONTRACTS ONLY) In the case of Immediate Variable Annuities, the number of Annuity Units per month purchased is specified in the Contract. The number of such units is determined by: (1) multiplying the net single Stipulated Payment (after deductions for administrative expenses and premium taxes) by the applicable annuity factor from the annuity 24 tables then used by The Franklin for Immediate Variable Annuity Contracts, and (2) dividing such product by the value of the Annuity Unit as of the date of issue of the Contract. This number of Annuity Units remains fixed for each month during the annuity period, and the dollar amount of the Annuity Payment is determined as of each Annuity Payment Date by multiplying this fixed number of Annuity Units by the value of an Annuity Unit as of each such Annuity Payment Date. Annuity Units are valued as of a Valuation Date not less than 10 days prior to the Effective Date of the Contract, pursuant to the procedure discussed under "The Annuity Unit," above. Thus, the number of Annuity Units (and hence the amount of the Annuity Payments) will be affected by the net asset value of the Fund approximately 10 days prior to the Effective Date of the Contract, even though changes in those net asset values have occurred during that 10-day period. As of the date of this Prospectus, The Franklin was using, in connection with the determination of the number of Annuity Units per month purchased under Immediate Variable Annuity Contracts, the 1955 American Annuity Table with assumed 4-1/2% interest, the purchase rates in such table being increased by 0.5% (which percentage is decreased 0.2% for each year of age at the Effective Date in excess of 70 years for male Variable Annuitants and in excess of 75 years for female Variable Annuitants). However, in lieu of such table, The Franklin will provide "unisex" annuity rate tables for use under Contracts purchased in connection with employer-related plans subject to the decision of the Supreme Court in ARIZONA GOVERNING COMMITTEE v. NORRIS. See "Annuity Payments," above. The Annuity Change Factors used by The Franklin for Immediate Variable Annuity Contracts assume a net investment rate of 3-1/2%. 6. ASSUMED NET INVESTMENT RATE The objective of a Variable Annuity Contract is to provide level Annuity Payments during periods when the economy, price levels and investment returns are relatively stable and to reflect as increased Annuity Payments only the excess investment results flowing from inflation, increases in productivity or other factors increasing investment returns. The achievement of this objective will depend in part upon the validity of the assumption in the annuity factor that a 3-1/2% net investment rate would be realized in the periods of relative stability assumed. A higher rate assumption would mean a higher initial Annuity Payment but a more slowly rising series of subsequent Annuity Payments in the event of a rising actual investment rate (or a more rapidly falling series of subsequent Annuity Payments in the event of a lower actual investment rate). A lower assumption would have the opposite effect. If the actual net investment rate is at the annual rate of 3-1/2%, the Annuity Payments under Contracts whose Annuity Payments are measured by Annuity Units will be level. INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND The long-term compounding of income from investments in a diversified portfolio of short-term money market securities yielding a high level of current income to the extent consistent with preservation of capital and the maintenance of liquidity is the primary investment objective of the Fund. This objective does not necessarily require investment in long-term securities since the nature of annuity contracts themselves connotes a long-term relationship; the continual retention and reinvestment of proceeds from matured short-term securities provides the long-term compounding of income. The Board of Managers of the Fund has determined that, in keeping with the primary investment objective of investing in short-term money market securities, at least 80% of the Fund's portfolio will be invested in securities having maturities or remaining maturities of one year or less and not more than 20% will be invested in securities having maturities or remaining maturities of between one and two years. The Board of Managers of the Fund will give consideration to the creditworthiness of the issuers of all money market securities in which the Fund proposes to invest prior to such investment. The Fund's investment authority is also limited by regulations of the Securities and Exchange Commission. See "Legal Restrictions," below. The following investment policies summarize the instruments in which the Fund may invest in order to achieve its primary investment objective, all of which will be in United States dollar obligations: 25 (a) OBLIGATIONS OF THE UNITED STATES GOVERNMENT AND ITS AGENCIES: Obligations issued by or guaranteed as to principal and interest by the United States Government, its agencies or instrumentalities. These include a variety of securities issued by the United States Treasury which are direct obligations of the United States Government and which differ only in their interest rates, maturities and times of issuance. Treasury Bills have a maturity of one year or less, Treasury Notes have maturities of one to ten years and Treasury Bonds generally have maturities of greater than five years. These also include securities issued or guaranteed by United States Government agencies or instrumentalities such as the Federal Home Loan Mortgage Corporation, Federal Home Loan Bank, Federal National Mortgage Association, Government National Mortgage Association and the Farmers Home Administration. Some obligations of United States Government agencies and instrumentalities are supported by the full faith and credit of the United States Treasury; others, by the right of the issuer or guarantor to borrow from the United States Treasury; while still others are supported only by the credit of the agency or instrumentality. Accordingly, depending upon the particular obligations of United States agencies and instrumentalities purchased, at any given time the Fund's investment in these obligations may be supported only by the credit of such agencies or instrumentalities. (b) BANK OBLIGATIONS: Negotiable time deposits, negotiable certificates of deposit (including certificates of deposit issued by London branches of United States banks- "Eurodollar C.D.'s"), bankers' acceptances, and short-term notes of banks (domestic or Canadian) having total assets in excess of one billion dollars (U.S.) as of the date of their most recently published financial statements (including foreign branches of domestic banks). While normally these large domestic banks will be members of the Federal Reserve System and have deposits insured by the Federal Deposit Insurance Corporation, these are not investment requirements. Accordingly, the securities purchased by the Fund and issued by domestic banks may or may not be insured by the Federal Deposit Insurance Corporation, or, if insured, may not be insured for the full amount purchased. (The purchase of obligations issued by foreign branches of domestic banks, including Eurodollar C.D.'s, and by Canadian banks involves investment considerations that are different in some respects from those associated with obligations of domestic issuers, including the possible imposition of withholding taxes on interest income or exchange controls, expropriation, confiscatory taxation, the possible adoption of foreign governmental restrictions which might adversely affect the payment of principal and interest on such obligations, limitations on the removal of funds, or other adverse political or economic developments. In addition, it may be more difficult to obtain and enforce a judgment against a Canadian bank or foreign branch of a domestic bank. To the extent the Fund purchases Eurodollar C.D.'s, consideration will be given to their marketability and possible restrictions on international currency transactions.) Eurodollar C.D.'s will be considered to be one industry for the purpose of the fundamental restrictions set out below, and thus no more than 25% of the Fund's assets at the time of purchase will be invested in Eurodollar C.D.'s. (c) SAVINGS ASSOCIATION OBLIGATIONS: Negotiable time deposits, negotiable certificates of deposit, and other short-term notes of domestic mutual savings banks and savings and loan associations having total assets in excess of one billion dollars (U.S.) as of the date of their most recently published financial statements. The deposits of these savings associations may or may not be insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation. Accordingly, the securities purchased by the Fund and issued by savings associations may or may not be insured, or, if insured, may not be insured for the full amount purchased. (d) COMMERCIAL PAPER: Short-term obligations of domestic issuers which at the time of investment are (i) rated A-1 or A-2 by Standard & Poor's Corporation or Prime-1 or Prime-2 by Moody's Investors Service, Inc., or (ii) if not rated, issued by a company which at the date of investment has any outstanding debt securities rated at least AA by Standard & Poor's or Aa by Moody's. (See Appendix for an explanation of these ratings.) Commercial paper obligations may include variable amount master demand notes which are obligations that permit the investment of fluctuating amounts by the Fund at varying rates of interest pursuant to direct arrangements between the Fund, as lender, and the borrower. These notes permit daily changes in the amounts borrowed. The Fund has the right to increase the amount under the note at any time up to the full amount provided by the note agreement, or to decrease the amount, and the borrower may repay up to the full amount of the note without penalty. The borrower is typically a large industrial or finance company which also issues commercial paper. Generally these notes provide that the interest rate is set daily by the borrower; the rate is usually the same or similar to the interest rate on commercial paper being issued by the borrower. Because variable amount master demand notes are direct lending arrangements between the lender and borrower, it is not generally contemplated that such instruments will be traded, 26 and there is no secondary market for these notes, although they are redeemable (and thus immediately repayable by the borrower) at the face value, plus accrued interest, at any time. Accordingly, the Fund's right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. In connection with master demand note arrangements, the Fund considers earning power, cash flow and other liquidity ratios of the issuer. The Fund will only invest in master demand notes of domestic issuers. If master demand notes are rated by credit rating agencies, the Fund will invest in them only if such notes meet the Fund's rating standards for investment in all commercial paper, described above. If master demand notes are not rated, the Fund will invest in such notes only if the issuer thereof has, at the date of investment, any outstanding debt securities rated at least AA by Standard & Poor's or Aa by Moody's. The Fund does not have any specific limits on the amount it may invest in master demand notes. (See Appendix for an explanation of these ratings.) (e) OTHER CORPORATE DEBT SECURITIES: Other marketable, nonconvertible corporate debt securities of domestic issuers, including bonds and debentures, which at the time of purchase have two years or less remaining to maturity and are rated at least AA by Standard & Poor's or Aa by Moody's. (See Appendix for an explanation of these ratings.) (f) CANADIAN GOVERNMENT SECURITIES: United States dollar denominated securities, such as bonds and Treasury bills, issued or guaranteed by the Government of Canada, a province of Canada, or their instrumentalities or political subdivisions. Some of these securities may be supported by the full faith and credit of the Canadian Government while others may be supported only by the credit of the province, instrumentality or political subdivision. Accordingly, depending upon the particular securities issued by Canadian provinces, instrumentalities or political subdivisions purchased, at any given time the Fund's investment in these securities may be supported only by the credit of such provinces, instrumentalities or political subdivisions. See "Bank Obligations" above regarding investment considerations involving Canadian issues. (g) REPURCHASE AGREEMENTS: A short-term investment in which the purchaser (i.e., the Fund) acquires ownership of a debt security and the seller agrees to repurchase the obligation at a future time and at a set price, thereby determining the yield during the purchaser's holding period. Repurchase agreements usually are for short periods, such as one week or less, but may be longer. The Fund may enter into repurchase agreements with a member bank of the Federal Reserve System or a United States securities dealer. The Fund will not enter into repurchase agreements of more than one week's duration if more than 10% of its total net assets would then be so invested-considering only the remaining days to maturity of existing repurchase agreements. Repurchase agreements are fully collateralized by the underlying debt securities and are considered to be loans under the Investment Company Act of 1940. The underlying securities could be any of those described above (normally securities of the United States Government or its agencies and instrumentalities). In addition, the Fund may lend portfolio securities to brokers, dealers and financial institutions provided that cash, or equivalent collateral, equal to at least 100% of the market value of the securities loaned is maintained by the borrower with the Fund. During the time such securities are on loan, the borrower will pay the Fund any income accruing thereon and the Fund may invest the cash collateral and earn additional income or the Fund may receive an agreed-upon fee from the borrower who has delivered equivalent collateral. Loans will be subject to termination at the Fund's or the borrower's option. The Fund will retain all rights of beneficial ownership as to the loaned portfolio securities, including voting rights and rights to distributions, and will have the right to regain record ownership of loaned securities to exercise such beneficial rights. The Fund may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or equivalent collateral to the borrower or placing broker. The Board of Managers of the Fund has set guidelines and standards for review of investments in repurchase agreements and the creditworthiness of the seller thereof, and monitors the actions of the Fund's investment advisor in entering into repurchase agreements. Repurchase agreements may involve certain risks in the event of bankruptcy or other default by the seller, including possible delays and expenses in liquidating the collateral, decline in collateral value and loss of interest. 27 The Fund will make portfolio investments primarily in anticipation of or in response to changing economic and money market conditions and trends. Investment yields on relatively short-term obligations such as will compromise the Fund's portfolio are subject to substantial and rapid fluctuation. The value of the Fund's assets generally will vary inversely to changes in interest rates. If interest rates increase after a security is purchased, the security, if sold, may return less than its cost. Thus, current yield levels should not be considered representative of yields for any future period of time. Because of the variability of interest rates and the risks inherent in investing in money market securities, including those risks discussed above with respect to securities of foreign branches of domestic banks and of Canadian banks, there can be no assurance that the Fund's investment objective will be attained. In addition, to the extent that investments are made in instruments of non-governmental issuers (and of governmental issuers, except those instruments backed by the full faith and credit of that government), these assets, despite their favorable credit ratings, are subject to some risk of default. Moreover, should many Contract Owners redeem their Contracts or transfer from the Fund to some other annuity product of The Franklin at about the same time, the Fund might have to sell portfolio securities at a time when it would be disadvantageous to do so, and at a lower price than if such securities were held to maturity. There can be no assurance that the Cash Value of the Contracts during the years prior to the Variable Annuitant's initial Annuity Payment Date or the aggregate amount received during the years following the initial Annuity Payment Date will equal or exceed the Stipulated Payments made under the Contracts. Except as limited by the fundamental investment restrictions below, the foregoing investment policies are not fundamental and the Board of Managers of the Fund may change such policies without approval of the Contract Owners. However, the primary investment objective is fundamental and may not be changed without such approval. The following are the fundamental investment restrictions applicable to the Fund: (1) The Fund will not concentrate its investments in any one industry or group of related industries, and no more than 25% of the value of the Fund's assets at the time of purchase will be invested in any one industry or group of related industries, except that there is no limitation with respect to investments in obligations issued or guaranteed by the United States Government or its agencies or instrumentalities, or in bankers' acceptances, repurchase agreements or certificates of deposit of domestic banks. For purposes of this restriction, telephone, gas and electric utilities each shall be considered a separate industry. In addition, banks, savings associations, personal credit institutions, business credit institutions and insurance companies shall each be considered a separate industry. (2) The Fund will not issue senior securities, except that the Fund may borrow money as set forth in paragraph (3), below. (3) The Fund will not borrow money except for temporary or emergency purposes, and any such borrowings will not be used to purchase investment securities and will not exceed 5% of the value of the Fund's assets; provided, however, that the Fund may borrow money up to one-third of its assets, not to increase its income but to meet redemption requests which might otherwise require untimely dispositions of portfolio securities. So long as such borrowings exceed 5% of the value of the Fund's assets, the Fund will not make any new investments. In addition, to the extent such borrowings exceed the 5% limit and cause a subsequent reduction of the required asset coverage, the Fund will reduce the amount of its borrowings to comply with the appropriate asset coverage required under the Investment Company Act of 1940. (4) The Fund will not pledge, hypothecate, mortgage or otherwise encumber its assets except in an amount not in excess of 15% of the value of its assets to secure borrowings made in accordance with investment restriction (3) above. (5) The Fund will not underwrite securities of other issuers, except that the Fund may acquire portfolio securities under circumstances where, if sold, it might be deemed to be an underwriter for purposes of the Securities Act of 1933. No such securities will be acquired except where parties other than the Fund shall have agreed to bear any and all costs of registration under the Securities Act of 1933. (However, it should be noted that even though an agreement to register has been obtained, enforcement of such an agreement may prove unfeasible or may involve delays which could adversely affect the Fund's ability to resell such securities or the price at which such securities might be resold.) No more than 10% of the value of the Fund's assets will at any time be invested in such securities. 28 (6) The Fund will not engage in the purchase and sale of interests in real estate, except that the Fund may engage in the purchase and sale of money market securities secured by real estate or interests therein or securities issued by companies that invest in real estate or interests therein. (7) The Fund will not engage in the making of loans to other persons, except that the Fund may acquire qualified debt obligations or other money market securities and enter into repurchase agreements referred to above (provided, however, that the aggregate value of repurchase agreements maturing in more than seven days will not exceed 10% of the Fund's total assets), and may lend its portfolio securities (provided that such loans do not in the aggregate exceed 20% of the value of the Fund's assets) if such loans are made according to the guidelines of the Securities and Exchange Commission and the Board of Managers of the Fund, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. (8) The Fund will not engage in the purchase or sale of commodities or commodity contracts or invest in oil, gas or other mineral exploration or development programs. (9) The Fund will not purchase securities (other than under repurchase agreements of not more than seven days' duration-considering only the remaining days to maturity of each existing repurchase agreement-or master demand notes) for which there exists no readily available market, or for which there are legal or contractual restrictions on resale (excepting from this restriction securities that are subject to such resale restrictions but which, in the judgment of The Franklin, are readily redeemable on demand), if as a result of any such purchase, more than 10% of the value of the Fund's assets would be invested in such securities. (10) The Fund will not purchase securities on margin, except for such short-term credits as are necessary for the clearance of transactions. (11) The Fund will not make short sales of securities or write, purchase or sell puts, calls, straddles, spreads or combinations thereof. (12) The Fund will not purchase the securities of any one issuer, other than obligations issued or guaranteed by the United States Government and its agencies or instrumentalities, if such purchase would cause more than 5% of the Fund's assets to be invested in the securities of such issuer, except that up to 25% of the Fund's total assets taken at current value may be invested without regard to such 5% limitation. (13) The Fund will not acquire more than 10% of the outstanding voting securities of any one issuer, other than obligations issued or guaranteed by the United States Government and its agencies or instrumentalities (for this purpose, all indebtedness of an issuer shall be deemed a single class); except that up to 25% of the Fund's total assets taken at current value may be invested without regard to such 10% limitation. The primary investment objective and the fundamental investment restrictions stated above may not be changed without approval by a vote of a majority of the votes available to the Contract Owners. This means that the objective or restrictions in question may not be changed without the approval of the lesser of (a) the Contract Owners holding 67% or more of the voting power of the Contract Owners present or represented at a meeting if Contract Owners holding more than 50% of the total voting power of all Contract Owners in the Fund are present or represented by proxy, or (b) Contract Owners holding more than 50% of the total voting power of all Contract Owners in the Fund. The following investment restrictions are not fundamental and may be changed by action of the Board of Managers of the Fund: (14) All securities in which the Fund invests shall be permissible for the Fund under the Illinois Insurance Code. The Illinois Insurance Code provides that investments of a separate account, like the Fund, are free of the restrictions or provisions generally applicable to insurance companies under that Code, and does not currently provide any special investment restrictions applicable to separate accounts. However, no investment permitted under the Illinois Insurance Code is thereby exempted from the other investment restrictions specified under this caption. (15) The Fund will not invest in companies for the purpose of exercising control or management. 29 (16) The Fund will not invest in the securities of other investment companies. (17) The Fund will not invest more than 5% of the value of its assets in securities of issuers (other than issuers of United States agency securities) which, with their predecessors, have a record of less than three years' continuous operation. If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage beyond the specified limit resulting from a change in values of portfolio securities or net assets will not be considered a violation. LEGAL RESTRICTIONS The Securities and Exchange Commission imposes restrictions on the investment authority of money market funds, such as the Fund, which are more restrictive than the policies and restrictions of the Fund described above. In general, such restrictions provide that a money market fund may not purchase any instrument with a remaining maturity greater than 13 months or maintain a dollar-weighted average portfolio maturity which exceeds ninety days. In addition, money market funds are limited to making investments in United States dollar-denominated investments which its board of directors determines present minimal credit risk and which are at the time of acquisition rated (or which have been issued by an issuer that has been rated) in one of the two highest rating categories by at least two national rating agencies or, if unrated, that the money market fund's board of directors determines are of comparable quality to a security so rated. Money market funds are also generally prohibited from acquiring a security if, after such acquisition, (i) more than 5% of the money market fund's assets would be invested in the securities of the issuer of the acquired security, or (ii) if the acquired security is not rated in the highest category by at least two national rating agencies or is not an unrated security of comparable quality, more than 1% of the money market fund's assets would be invested in the securities of the issuer of the acquired security or more than 5% of the money market fund's assets would be invested in securities that are not rated in the highest category by at least two national rating agencies or that are not of comparable quality. The foregoing percentage restrictions do not apply to securities issued or guaranteed as to principal by the United States or by an instrumentality of the United States and such securities may be purchased with remaining maturities of up to two years. The acquisition of a security that is rated by only one national rating agency must be approved by the money market fund's board of directors. SPECIAL INVESTMENT CONSTRAINTS The amount of assets that the Fund may invest in the securities of any one issuer is restricted by the Fund's fundamental investment restrictions and the regulations of the Securities and Exchange Commission and the Internal Revenue Service. See "Federal Income Tax Status - The Contracts: Non-Qualified Plans," below. Under the most restrictive of these provisions, the Fund generally may not invest more than 5% of its assets in the securities of any issuer, except that it may invest up to 55% of its assets in securities issued or guaranteed as to principal by the United States government. It is anticipated that the combination of these restrictions and the relatively small and decreasing size of the Fund's assets will make it more difficult for the Fund's investment adviser to secure appropriate commercial paper investments, which have historically constituted a substantial portion of the Fund's investments. As of December 31, 1997, the Fund's total assets were $1,921,249 (compared to total assets of $1,968,663 as of June 30, 1997 and total assets of $2,001,016 as of December 31, 1996), and the maximum amount that the Fund was permitted to invest in the commercial paper of any one issuer was approximately $96,062. Due to market conditions, it is more difficult to purchase an issue of commercial paper in an amount less than $100,000. It is possible that the shrinking pool of commercial paper investments available to the Fund due to its size may impair the future investment performance of the Fund. 30 FEDERAL INCOME TAX STATUS INTRODUCTION The Contracts are designed for use by individuals in connection with Qualified Plans or Non-Qualified Plans under the Code. The federal income tax treatment of the Contracts and payments received thereunder depends on various factors, including, among other factors, the tax status of The Franklin, the type of retirement plan or program in connection with which the Contracts are used and the form in which payments are received. The discussion of federal income taxes contained in this Prospectus, which focuses on rules applicable to Contracts purchased under this Prospectus, is general in nature and is based on existing federal income tax law, which is subject to change. The tax discussion is not intended as tax advice. The applicable federal income tax law is complex and contains many special rules and exceptions in addition to the general rules summarized herein. For these reasons, various questions about the applicable rules exist. Accordingly, each person contemplating the purchase of a Contract is advised to consult with a qualified tax advisor concerning federal income taxes and any other federal, state or local taxes that may be applicable. THE FRANKLIN The Franklin is taxed as a "life insurance company" under the Code. Since the operations of the Fund are part of the overall operations of The Franklin, the Fund is subject to tax as part of The Franklin for federal income tax purposes. Thus, the Fund is not taxed separately as a "regulated investment company" under the Code. Under the Code a life insurance company like The Franklin is generally taxed at regular corporate rates, under a single-phase system, on its specially-computed life insurance company taxable income. Some special rules continue to apply, however, in the case of segregated asset accounts like the Fund. Investment income and realized capital gains on the assets of the Fund are reinvested by The Franklin for the benefit of the Fund and are taken into account in determining the value of Accumulation Units and Annuity Units. As a result, such income and gains are applied to increase reserves applicable to the Fund. Under the Code, no federal income tax is payable by The Franklin on such investment income or on realized capital gains of the Fund on assets held in the Fund. However, if changes in the federal tax laws or interpretations thereof result in The Franklin being taxed on income or gains attributable to the Fund, then The Franklin may impose a charge against the Fund (with respect to some or all Contracts) in order to set aside provisions to pay such taxes. THE CONTRACTS: QUALIFIED PLANS The manner in which payments received under a Contract are taxed for federal income tax purposes depends on the form of payment. If payments are received in the form of an annuity, then, in general, under Section 72 of the Code, such payment is taxable to the recipient as ordinary income to the extent that such payment exceeds the portion, if any, of the cost basis of the Contract that is allocable to that payment. A payment received on account of partial redemption of an annuity contract generally is taxable in whole or part. The taxation of a partial redemption is governed by complex rules and a qualified tax advisor should be consulted prior to a proposed partial redemption. If the Variable Annuitant's life span exceeds his or her life expectancy, the Variable Annuitant's cost basis will eventually be recovered, and any payments made after that point will be fully taxable. If, however, the Annuity Payments cease after the initial Annuity Payment Date by reason of the death of the Variable Annuitant, the amount of any unrecovered cost basis in the Qualified Contract will generally be allowed as a deduction to the Variable Annuitant for his or her last taxable year. Generally, payment of the proceeds of a Qualified Contract in a lump sum instead of in the form of an annuity, either at or before maturity, also is taxable as ordinary income to the extent the lump sum exceeds the cost basis of the Qualified Contract. Taxation may be deferred, however, to the extent, if any, that "rollover" treatment is available and elected for a particular distribution. The Qualified Contracts are designed for use in connection with several types of Qualified Plans, as described generally below. 31 A. QUALIFIED PENSION, PROFIT-SHARING AND ANNUITY PLANS Under pension and profit-sharing plans that qualify under Section 401(a) of the Code and annuity purchase plans that qualify under Section 403(a) of the Code (collectively "Corporate Qualified Plans"), amounts contributed by an employer to the Corporate Qualified Plan on behalf of an employee and any gains thereon are not, in general, taxable to the employee until distribution. Generally, the cost basis of an employee under a Corporate Qualified Plan will equal the amount of non-deductible contributions, if any, that the employee made to the Corporate Qualified Plan. These retirement plans may permit the purchase of the Contracts to accumulate retirement savings under the plans. Adverse tax consequences to the plan, to the participant, or both may result if this Contract is assigned or transferred to any individual as a means to provide benefit payments. The Code imposes an additional tax of 10% on the taxable portion of any early withdrawal from a Corporate Qualified Plan made by a Variable Annuitant before age 59-1/2, death, or disability. The additional income tax on early withdrawals will not apply however to certain distributions including (a) distributions beginning after separation from service that are part of a series of substantially equal periodic payments made at least annually for the life of the Variable Annuitant or the joint lives of the Variable Annuitant and his or her Beneficiary, and (b) distributions made to Variable Annuitants after attaining age 55 and after separating from service. Further, additional penalties may apply to distributions made on behalf of a "5-percent owner" (as defined by Section 416(i)(1)(B) of the Code). If a lump sum payment of the proceeds of a Contract qualifies as a "lump sum distribution" under the Code, special tax rules (including limited capital gain and income averaging treatment in some circumstances) may apply. B. H.R. 10 PLANS (SELF-EMPLOYED INDIVIDUALS) Self-employed persons (including members of partnerships) are permitted to establish and participate in Corporate Qualified Plans under Sections 401(a) and 403(a) of the Code. Corporate Qualified Plans in which self-employed persons participate are commonly referred to as "H.R. 10 Plans." The tax treatment of annuity payments and lump sum payments received in connection with an H.R. 10 Plan is, in general, subject to the same rules described in "Qualified Pension, Profit-Sharing and Annuity Plans," immediately above. Some special rules apply, however, in the case of self-employed persons which, for example, affect certain "lump sum distribution" and "rollover" rules. C. SECTION 403(b) ANNUITIES Section 403(b) of the Code permits public schools and other tax-exempt organizations described in Section 501(c)(3) of the Code to purchase annuity contracts for their employees subject to special tax rules. If the requirements of Section 403(b) are satisfied, amounts contributed by the employer to purchase an annuity contract for an employee, and any gains thereon, are not, subject to certain limitations, taxable to the employee until distributed to the employee. However, these payments may be subject to FICA (Social Security) taxes. Generally, the cost basis of an employee under a Section 403(b) annuity contract will equal the amount of any non-deductible contributions the employee made toward the contract plus any employer contributions that were taxable to the employee because they exceeded excludable amounts. Federal tax law imposes limitations on distributions from Section 403(b) annuity contracts. Withdrawals of amounts attributable to contributions made pursuant to a salary reduction agreement in connection with a Section 403(b) annuity contract will be permitted only (1) when an employee attains age 59-1/2, separates from service, dies or becomes totally and permanently disabled or (2) in the case of hardship. A withdrawal made in the case of hardship may not include income attributable to the contributions. However, these limitations generally do not apply to distributions which are attributable to assets held as of December 31, 1988. In general, therefore, contributions made prior to January 1, 1989, and earnings on such contributions through December 31, 1988, are not subject to these limitations. In addition, these limitations do not apply to contributions made other than by a salary reduction agreement. A number of questions exist concerning the application of these rules. Anyone considering a withdrawal from a Contract issued in connection with a Section 403(b) annuity plan should consult a qualified tax advisor. 32 The 10% penalty tax on early withdrawals described under "Qualified Pension, Profit-Sharing and Annuity Plans," immediately above, also applies to Section 403(b) annuity contracts. D. INDIVIDUAL RETIREMENT ANNUITIES 1. SECTION 408(b) INDIVIDUAL RETIREMENT ANNUITIES Under Sections 408(b) and 219 of the Code, special tax rules apply to Individual Retirement Annuities. As described below, certain contributions to such annuities (other than Rollover Contributions) are deductible within certain limits and the gains on contributions (including Rollover Contributions) are not taxable until distributed. Generally, the cost basis in an Individual Retirement Annuity will equal the amount of non-deductible contributions (other than rollovers), if any, made to the Individual Retirement Annuity. Under special rules, all individual retirement plans will be treated as one plan for purposes of these rules. Section 408(b) sets forth various requirements that an annuity contract must satisfy before it will be treated as an Individual Retirement Annuity. Although final regulations that interpret some of these requirements have been adopted, other regulations have been proposed that interpret the additional requirement that, under a Section 408(b) Individual Retirement Annuity, the premiums may not be fixed. These proposed regulations, which contain certain ambiguities, may, of course, be changed before they are issued in final form. ACCORDINGLY, WHILE THE FRANKLIN BELIEVES THAT THE CONTRACTS OFFERED BY THIS PROSPECTUS MEET THE REQUIREMENTS OF SECTION 408(b), THE FINAL REGULATIONS AND THE CURRENTLY PROPOSED REGULATIONS THEREUNDER, THERE CAN BE NO ASSURANCE THAT THE CONTRACTS QUALIFY AS INDIVIDUAL RETIREMENT ANNUITIES UNDER SECTION 408(B) PENDING THE ISSUANCE OF COMPLETE FINAL REGULATIONS UNDER THAT CODE SECTION. Individuals who are not "active participants" in an employer-related retirement plan described in Section 219(g) of the Code will, in general, be allowed to contribute to an Individual Retirement Annuity and to deduct a maximum of $2,000 annually (or 100% of the individual's compensation if less). This deduction is phased out at certain income levels for individuals who are active participants in employer-related retirement plans. These income levels vary depending on an individual's marital and tax filing status and are scheduled to gradually increase in the future. Individuals who may not make deductible contributions to an Individual Retirement Annuity may, instead, make non-deductible contributions (up to the applicable maximum described above) on which earnings will accumulate on a tax-deferred basis. If the Individual Retirement Annuity includes non-deductible contributions, distributions will be divided on a pro rata basis between taxable and non-taxable amounts. Special rules apply if, for example, an individual contributes to an Individual Retirement Annuity for his or her own benefit and to another Individual Retirement Annuity for the benefit of his or her spouse. Individual Retirement Annuities are subject to limitations on the time when distributions must commence. In addition, the 10% penalty tax on early withdrawals described under "Qualified Pension, Profit-Sharing and Annuity Plans," above, also applies to Individual Retirement Annuities, except that the circumstances in which the penalty tax will not apply are different in certain respects. Further, for any year in which a Contract Owner borrows any money under or by use of the Individual Retirement Annuity, the Contract ceases to qualify under Section 408(b), and an amount equal to the fair market value of the Contract as of the first day of such year will be includible in the Contract Owner's gross income for such year. The sale of a Contract for use with an Individual Retirement Annuity may be subject to special disclosure requirements of the Internal Revenue Service. Purchasers of a Contract for use with Individual Retirement Annuities will be provided with supplemental information required by the Internal Revenue Service or other appropriate agency. Such purchasers will have the right to revoke their purchase within 7 days of the earlier of the establishment of the Individual Retirement Annuity or their purchase. A Qualified Contract issued in connection with an Individual Retirement Annuity will be amended as necessary to conform to the requirements of the Code. Purchasers should seek competent advice as to the suitability of the Contract for use with Individual Retirement Annuities. 33 2. SECTION 408(k) SIMPLIFIED EMPLOYEE PENSIONS An Individual Retirement Annuity described in Section 408(b) of the Code that also meets the special requirements of Section 408(k) qualifies as a Simplified Employee Pension. Under a Simplified Employee Pension, employers may contribute to the Individual Retirement Annuities of their employees subject to the limitation in Section 408(j). An employee may exclude the employer's contribution on his or her behalf to a Simplified Employee Pension from gross income subject to certain limitations. Elective deferrals under a Simplified Employee Pension are to be treated like elective deferrals under a cash or deferred arrangement under Section 401(k) of the Code and are subject to a $7,000 limitation, adjusted for inflation. In general, the employee may also contribute and deduct an additional amount not in excess of the lesser of (a) $2,000 or (b) 100% of compensation, subject to the phaseout discussed above, if the Simplified Employee Pension meets the qualifications for an Individual Retirement Annuity. In general, except as stated in this section, the rules discussed in "Section 408(b) Individual Retirement Annuities," immediately above, apply to a Simplified Employee Pension. THE CONTRACTS: NON-QUALIFIED PLANS In the case of Non-Qualified Contracts issued in connection with retirement or deferred compensation plans which are Non-Qualified Plans, the provisions of the Plan generally determine the tax treatment of Plan participants. For example, contributions to, or deferred compensation in connection with, Non-Qualified Plans may or may not be currently taxable to participants. Payments received under a Non-Qualified Contract are subject to tax under Section 72 of the Code. If payments are received in the form of an annuity, then, in general, each payment is taxable as ordinary income to the extent that such payment exceeds the portion of the cost basis of the annuity contract that is allocable to that payment. Payment of the proceeds of an annuity contract in a lump sum either before or at maturity is taxable as ordinary income to the extent the lump sum exceeds the cost basis of the annuity contract. If the Variable Annuitant's life span exceeds his or her life expectancy, the Variable Annuitant's cost basis will eventually be recovered, and any payments made after that point will be fully taxable. If, however, the Annuity Payments cease after the initial Annuity Payment Date by reason of the death of the Variable Annuitant, the amount of any unrecovered cost basis in the Contract will generally be allowed as a deduction to the Variable Annuitant for his or her last taxable year. A payment received on account of a partial redemption of an annuity contract generally is taxable as ordinary income in whole or in part. Also, if prior to the initial Annuity Payment Date, (i) an annuity contract is assigned or pledged, or (ii) a Contract issued after April 22, 1987 is transferred without adequate consideration, then the amount assigned, pledged or transferred may similarly be taxable. Special rules may apply with respect to investments in a Contract made before August 14, 1982. Because the applicable tax treatment is complex, a qualified tax advisor should be consulted prior to a partial withdrawal, assignment, pledge, or contract transfer. Further, in general, in the case of a payment received under a Non-Qualified Contract, a penalty may be imposed equal to 10% of the taxable portion of the payment. However, the 10% penalty does not apply in various circumstances. For example, the penalty is generally inapplicable to payments that are: (i) made on or after age 59-1/2; (ii) allocable to investments in the Contract before August 14, 1982, (iii) made on or after the death of the holder; (iv) made incident to disability; (v) part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or the life expectancy) of the Variable Annuitant or the joint lives (or joint life expectancies) of the Variable Annuitant and his or her beneficiary; or (vi) made under a Contract purchased with a single premium and which has an annuity starting date commencing no later than one year from the purchase date of the annuity and which provides for a series of substantially equal periodic payments (to be made not less frequently than annually) during the annuity period. A Non-Qualified Contract will not be treated as an annuity contract for purposes of certain Code sections, including Section 72, for any period (and any subsequent period) for which the investments made by the Fund attributable to such Non-Qualified Contract are not, in accordance with Code Section 817(h) and the Treasury regulations thereunder, adequately diversified. Although certain questions exist about the diversification standards, The Franklin believes that the Fund presently satisfies those standards and intends that the Fund will continue to be adequately diversified for those purposes. 34 In certain circumstances, owners of variable annuity contracts may be considered the owners, for federal income tax purposes, of the assets of the separate accounts used to support their contracts. In those circumstances, income and gains from the separate account assets would be includible in the variable contract owner's gross income. The Internal Revenue Service has stated in published rulings that a variable contract owner will be considered the owner of separate account assets if the contract owner possesses incidents of ownership in those assets, such as the ability to exercise investment control over the assets. The Treasury Department has also announced, in connection with the issuance of regulations concerning diversification, that those regulations "do not provide guidance concerning the circumstances in which investor control for the investments of a segregated asset account may cause the investor [i.e., the Owner], rather than the insurance company, to be treated as the owner of the assets in the account." This announcement also stated that guidance would be issued by way of regulations or rulings on the "extent to which policyholders may direct their investments to particular Sub-Accounts without being treated as owners of the underlying assets." As of the date of this prospectus, no guidance has been issued. The ownership rights under the Contract are similar to, but different in certain respects from those described by the Internal Revenue Service in rulings in which it was determined that contract owners were not owners of separate account assets. For example, a Contract Owner has additional flexibility in allocating premium payments and account values. These differences could result in a Contract Owner being treated as the owner of a pro rata portion of the assets of the Fund. In addition, The Franklin does not know what standards will be set forth, if any, in the regulations or rulings which the Treasury Department has stated it expects to issue. The Franklin therefore reserves the right to modify the Contract as necessary to attempt to prevent a Contract Owner from being considered the owner of a pro rata share of the assets of the Fund. REQUIRED DISTRIBUTIONS In order to be treated as an annuity contract for federal income tax purposes, section 72(s) of the Code requires Non-Qualified Contracts to provide that (a) if any Contract Owner dies on or after the annuity date but prior to the time the entire interest in the Contract has been distributed, the remaining portion of such interest will be distributed at least as rapidly as under the method of distribution being used as of the date of such owner's death; and (b) if any Contract Owner dies prior to the annuity date, the entire interest in the Contract will be distributed within five years after the date of such owner's death. These requirements will be considered satisfied as to any portion of an owner's interest which is payable to or for the benefit of a "designated beneficiary" and which is distributed over the life of such "designated beneficiary" or over a period not extending beyond the life expectancy of that beneficiary, provided that such distributions begin within one year of the Contract Owner's death. The "designated beneficiary" refers to a natural person designated by the owner as a Beneficiary and to whom ownership of the Contract passes by reason of death. However, if the "designated beneficiary" is the surviving spouse of the deceased Contract Owner, the Contract may be continued with the surviving spouse as the new Contract Owner. The Non-Qualified Contracts contain provisions which are intended to comply with the requirements of section 72(s) of the Code, although no regulations interpreting these requirements have yet been issued. The Franklin intends to review such provisions and modify them if necessary to assure that they comply with the requirements of Code section 72(s) when clarified by regulation or otherwise. Other rules may apply to Qualified Contracts. AGGREGATION OF CONTRACTS Under a provision of the federal tax law effective for annuity contracts entered into after October 21, 1988, all annuity contracts (other than contracts held in connection with Qualified Plans) issued by the same company (or affiliates) to the same contract owner during any calendar year will generally be treated as one annuity contract for the purpose of determining the amount of any distribution, not in the form of an annuity, that is includable in gross income. This rule may have the effect of causing more rapid taxation of the distributed amounts from such combination of contracts. It is not certain how this rule will be applied or interpreted by the Internal Revenue Service. In particular, it is not clear if or how this rule applies to Immediate Variable Annuity Contracts or "split" annuity arrangements. Accordingly, a qualified tax advisor should be consulted about the application and effect of this rule. 35 FUTURE LEGISLATION Although the likelihood of legislative change is uncertain, there is always the possibility that the tax treatment of the Contracts could change by legislation or other means. For instance, the President's 1999 Budget Proposal recommended legislation that, if enacted, would adversely modify the federal taxation of the Contracts. It is also possible that any change could be retroactive (that is, effective prior to the date of the change). A tax adviser should be consulted with respect to legislative developments and their effect on the Contract. INCOME TAX WITHHOLDING Withholding of federal income tax is generally required from distributions from Qualified Plans and Non-Qualified Plans, or Contracts issued in connection therewith, to the extent the distributions are taxable and are not otherwise subject to withholding as wages ("Distributions"). See "The Contracts: Qualified Plans," above, and "The Contracts: Non-Qualified Plans," above, regarding the taxation of Distributions. Federal income tax is generally required to be withheld from all or any portion of a Distribution made on or after January 1, 1993 that constitutes an "eligible rollover distribution." An "eligible rollover distribution" generally includes any distribution from a qualified trust described in Section 401(a) of the Code, a qualified annuity plan described in Section 403(a) of the Code or a qualified annuity contract described in Section 403(b) of the Code except for (i) a distribution which is one of a series of substantially equal periodic instalments payable at least annually for the life (or over the life expectancy) of the Variable Annuitant or for the joint lives (or over the joint life expectancies) of the Variable Annuitant and his or her Beneficiary, or for a specified period of 10 years or more or (ii) a minimum distribution required pursuant to Section 401(a)(9) of the Code and (iii) an amount which is not includible in gross income (for example, the return of non-deductible contributions). Any eligible rollover distribution which is not rolled over directly from a Section 401(a) qualified trust, a Section 403(a) qualified annuity plan or a Section 403(b) qualified annuity contract to an "eligible retirement plan" is subject to mandatory federal income tax withholding in an amount equal to 20% of the eligible rollover distribution. An "eligible retirement plan" generally includes a qualified trust described in Section 401(a) of the Code, a qualified annuity plan described in Section 403(a) of the Code, an individual retirement account described in Section 408(a) of the Code or an Individual Retirement Annuity described in Section 408(b) of the Code. Mandatory federal income tax withholding is required even if the Variable Annuitant receives an eligible rollover distribution and rolls it over within 60 days to an eligible retirement plan. Federal income tax is not required to be withheld from any eligible rollover distribution which is rolled over directly from a qualified trust described in Section 401(a) of the Code, a qualified annuity plan described in Section 403(a) of the Code or a qualified annuity contract described in Section 403(b) of the Code to an eligible retirement plan. Except with respect to certain payments delivered outside the United States or any possession of the United States, federal income tax is not required to be withheld from any Distribution which does not constitute an eligible rollover distribution, if the Variable Annuitant or Beneficiary properly elects in accordance with the prescribed procedures not to have withholding apply. In the absence of a proper election not to have withholding apply, the amount to be withheld from a Distribution which is not an eligible rollover distribution depends upon the type of payment being made. Generally, in the case of a periodic payment which is not an eligible rollover distribution, the amount to be withheld from such payment is the amount that would be withheld therefrom under specified wage withholding tables if the payment were a payment of wages for the appropriate payroll period. In the case of a nonperiodic payment which is not an eligible rollover distribution, the amount to be withheld is generally equal to 10% of the amount of the Distribution. The applicable federal law pertaining to income tax withholding from Distributions is complex and contains many special rules and exceptions in addition to the general rules summarized above. Special rules apply, for example, if the Distribution is made to the surviving spouse of a Variable Annuitant or if the Distribution is an eligible rollover distribution from a qualified annuity contract under Section 403(b) of the Code. Any Variable Annuitant or Beneficiary considering a Distribution should consult a qualified tax advisor. 36 MANAGEMENT The Fund is managed by a Board of Managers elected annually by the Contract Owners. The Board of Managers currently has four members. The members of the Board of Managers also serve as the Board of Managers of Franklin Life Variable Annuity Fund A and Franklin Life Variable Annuity Fund B, separate accounts of The Franklin having investment objectives of long-term appreciation of capital through investment appreciation and retention and reinvestment of income derived mainly from investments in equity securities, particularly common stocks. The assets of Fund A are held with respect to Variable Annuity contracts used in connection with certain qualified plans and trusts or individual retirement annuities accorded special tax treatment under the Code and those of Fund B are held with respect to Variable Annuity contracts used for retirement planning for individuals and not in connection with qualified plans and trusts, individual retirement annuities or employer-related plans that are accorded such special tax treatment. The affairs of the Fund are conducted in accordance with Rules and Regulations adopted by the Board of Managers. Under the Rules and Regulations, the Board of Managers is authorized to take various actions on behalf of the Fund, including the entry into contracts for the purpose of services with respect to the Fund under circumstances where the approval of such contracts is not required to be submitted to the Contract Owners. Subject to the authority of the Board of Managers, officers and employees of The Franklin are responsible for overall management of the Fund's business affairs. VOTING RIGHTS All Contract Owners will have the right to vote upon: (1) The initial approval of any investment management agreement and any amendment thereto. (2) Ratification of an independent auditor for the Fund. (3) Any change in the primary investment objective or fundamental investment restrictions of the Fund. (4) Election of members of the Board of Managers of the Fund (cumulative voting is not permitted). (5) Termination of the investment management agreement (such termination may also be effected by the Board of Managers). (6) Any other matter submitted to them by the Board of Managers. The number of votes which a Contract Owner may cast as to any Contract, except after the initial Annuity Payment Date, is equal to the number of Accumulation Units credited to the Contract. With respect to any Contract as to which Annuity Payments measured by Annuity Units have commenced, the Contract Owner may cast a number of votes equal to (i) the amount of the assets in the Fund to meet the Variable Annuity obligations related to such Contract, divided by (ii) the value of an Accumulation Unit. Accordingly, the voting rights of a Contract Owner will decline during the Annuity Payment period as the amount of assets in the Fund required to meet the Annuity Payments decreases and, in addition, will decline as the value of an Accumulation Unit increases. Fractional votes will be counted. An employee covered by an H.R. 10 Plan, if not the Contract Owner, will have the right to instruct the Contract Owner with respect to all votes attributable to the Qualified Contract. An employee covered by a Qualified Contract issued in connection with a qualified pension or profit-sharing plan described in Section 401 of the Code will have the right to instruct the Contract Owner with respect to votes attributable to his or her payments to the plan, if any, and, to the extent authorized by the terms of the plan, with respect to any additional votes under the Qualified Contract. If Annuity Payments are being made under an annuity to a person who is not a Contract Owner, that person will have the right to instruct the Contract Owner with respect to votes attributable to the amount of the assets in the Fund to meet the Annuity Payments related to the Contract. 37 Qualified Contract Owners will cast votes with respect to which instructions have been received in accordance with such instructions. Votes with respect to which employees, Variable Annuitants or other persons to whom payments are being made under a Qualified Contract are entitled to instruct the Contract Owner, but for which the Contract Owner has received no instructions, shall be cast by the Contract Owner for or against each proposal to be voted on in the same proportion as votes for which instructions have been received by such Contract Owner. If no one is entitled to instruct the Contract Owner, or if the Contract Owner receives no instructions, all votes which the Contract Owner is entitled to cast may be cast at his or her sole discretion. Neither the Fund nor The Franklin has any duty to inquire as to the instructions received or the authority of the Contract Owner to cast such votes; except to the extent that the Fund or The Franklin has actual knowledge to the contrary, the votes cast by Contract Owners will be considered valid and effective as among the Fund, The Franklin and other persons having voting rights with respect to the Fund. Should assets be maintained in the Fund with respect to contracts other than those offered by this Prospectus, contract owners under such contracts would be entitled to vote, and their votes would be computed in a similar manner. Assets maintained by The Franklin in the Fund in excess of the amounts attributable to the Contracts or other contracts of The Franklin will entitle The Franklin to vote and its vote would be computed in a similar manner. The Franklin will cast its votes in the same proportion as the votes cast by Contract Owners and the owners of such other contracts. The number of votes which each Contract Owner may cast at a meeting shall be determined as of a record date to be chosen by the Board of Managers within 120 days of the date of the meeting. At least 20 days' written notice of the meeting will be given to Contract Owners of record. To be entitled to vote or to receive notice, a Contract Owner must have been such on the record date. DISTRIBUTION OF THE CONTRACTS Franklin Financial Services Corporation ("Franklin Financial") serves as "principal underwriter" (as that term is defined in the Investment Company Act of 1940) for the Contracts pursuant to a Sales Agreement with the Fund. The Sales Agreement is described under "Distribution of The Contracts" in the Statement of Additional Information. Franklin Financial, located at #1 Franklin Square, Springfield, Illinois 62713, is organized under the laws of the State of Delaware and is a wholly-owned subsidiary of The Franklin. The Fund no longer offers new Contracts. Commissions are paid to registered representatives of Franklin Financial with respect to Stipulated Payments received by The Franklin under the Contracts to a maximum of 2% of such Stipulated Payments. STATE REGULATION As a life insurance company organized and operated under Illinois law, The Franklin is subject to statutory provisions governing such companies and to regulation by the Illinois Director of Insurance. An annual statement is filed with the Director on or before March 1 of each year covering the operations of The Franklin for the preceding year and its financial condition on December 31 of such year. The Franklin's books and accounts are subject to review and examination by the Illinois Insurance Department at all times, and a full examination of its operations is conducted by the National Association of Insurance Commissioners ("NAIC") periodically. The NAIC has divided the country into six geographic zones. A representative of each such zone may participate in the examination. In addition, The Franklin is subject to the insurance laws and regulations of the jurisdictions other than Illinois in which it is licensed to operate. Generally, the insurance departments of such jurisdictions apply the laws of Illinois in determining permissible investments for The Franklin. For certain provisions of Illinois law applicable to the Fund's investments, see "Investment Policies and Restrictions of the Fund," above. REPORTS TO OWNERS The Franklin will mail to the Contract Owner, at the last known address of record at the Home Office of The Franklin, at least annually, a report containing such information as may be required by any applicable law or regulation and a statement showing the then Cash Value of his or her Contract. 38 FUNDAMENTAL CHANGES Upon compliance with applicable law, including obtaining any necessary affirmative vote of Contract Owners in each case: (a) the Fund may be operated in a form other than as a "management company" under the Investment Company Act of 1940 (including operation as a "unit investment trust"); (b) the Fund may be deregistered under the Investment Company Act of 1940 in the event such registration is no longer required; or (c) the provisions of the Contracts may be modified to assure qualification under the pertinent provisions of the Code or to comply with other applicable federal or state laws. In the event of any such fundamental change, The Franklin may make appropriate amendments to the Contracts to give effect to such change or take such other action as may be necessary in this respect. The Board of Managers of the Fund, and the respective Board of Managers of each of Franklin Life Variable Annuity Fund A ("Fund A") and Franklin Life Variable Annuity Fund B ("Fund B"), have approved resolutions whereby Contract Owners will be asked during 1998 to approve or to disapprove an Agreement and Plan of Reorganization ("the Agreement") and related transactions (together, the Agreement and related transactions are the "Reorganization") whereby: (i) the Fund will be restructured into a single unit investment trust consisting of three subaccounts; (ii) the assets of each of the Fund, Fund A and Fund B will be liquidated and the proceeds transferred to one of the three subaccounts in the restructured Fund (so that the interests of Contract Owners and of Fund A and Fund B contract owners will continue as interests in the restructured Fund); and (iii) each subaccount will invest exclusively in shares of a specified mutual fund portfolio. Contract Owners will be provided with a proxy statement describing the Reorganization in detail. If the Reorganization is approved, then immediately following the consummation of the Reorganization, each Contract Owner will have an interest in a number of units in a subaccount of the restructured Fund having a value equal to the value of the Contract Owner's interest in a Fund immediately prior to the Reorganization. YEAR 2000 TRANSITION Like all financial services providers, The Franklin utilizes systems that may be affected by Year 2000 transition issues and it relies on service providers, including banks, custodians, and investment managers that also may be affected. The Franklin and its affiliates have developed, and are in the process of implementing, a Year 2000 transition plan, and are confirming that their service providers are also so engaged. The resources that are being devoted to this effort are substantial. It is difficult to predict with precision whether the amount of resources ultimately devoted, or the outcome of these efforts, will have any negative impact on The Franklin. However, as of the date of this prospectus, it is not anticipated that Contract Owners will experience negative effects on their investment, or on the services provided in connection therewith, as a result of Year 2000 transition implementation. The Franklin currently anticipates that its systems will be Year 2000 compliant on or about December 31, 1998, but there can be no assurance that The Franklin will be successful, or that interaction with other service providers will not impair The Franklin's services at that time. LEGAL PROCEEDINGS In recent years, various life insurance companies have been named as defendants in class action lawsuits relating to life insurance pricing and sales practices, and a number of these lawsuits have resulted in substantial settlements. The Franklin is a defendant in certain purported class action lawsuits. These claims are being defended vigorously by The Franklin. Given the uncertain nature of litigation and the early stages of this litigation, the outcome of these actions cannot be predicted at this time. The Franklin nevertheless believes that the ultimate outcome of all such pending litigation should not have a material adverse effect on the Fund or on The Franklin's financial position; however, it is possible that settlements or adverse determinations in one or more of these actions or other future proceedings could have a material adverse effect on The Franklin's results of operations for a given period. No provision has been made in the consolidated financial statements related to this pending litigation because the amount of loss, if any, from these actions cannot be reasonably estimated at this time. 39 The Franklin is a party to various other lawsuits and proceedings arising in the ordinary course of business. Many of these lawsuits and proceedings arise in jurisdictions, such as Alabama, that permit damage awards disproportionate to the actual economic damages incurred. Based upon information presently available, The Franklin believes that the total amounts that will ultimately be paid, if any, arising from these lawsuits and proceedings will not have a material adverse effect on the Fund or on The Franklin's results of operations and financial position. However, it should be noted that the frequency of large damage awards, including large punitive damage awards, that bear little or no relation to actual economic damages incurred by plaintiffs in jurisdictions like Alabama continues to increase and creates the potential for an unpredictable judgment in any given suit. REGISTRATION STATEMENT A Registration Statement has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, with respect to the Contracts offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and amendments thereto and exhibits filed as a part thereof, to all of which reference is hereby made for further information concerning the Fund, The Franklin and the Contracts offered hereby. Statements contained in this Prospectus as to the content of Contracts and other legal instruments are summaries. For a complete statement of the terms thereof, reference is made to such instruments as filed. OTHER VARIABLE ANNUITY CONTRACTS; EFFECT OF NON-QUALIFICATION The Franklin may offer, under other prospectuses, other variable annuity contracts having interests in the Fund and containing different terms and conditions from those offered hereby. In the event that a plan intended to qualify as a Qualified Plan under the Code fails to meet the applicable qualification requirements under the Code (including Section 818(a)) or in the event a Qualified Plan ceases to qualify thereunder, The Franklin shall have the right, upon receiving notice of such non-qualification, to treat any such Contract issued in connection with such a plan as a Non-Qualified Contract participating in the Fund. YIELD INFORMATION In accordance with regulations adopted by the Securities and Exchange Commission, the Fund has computed an annualized yield and an effective yield for a seven-day period ending on the date of the Fund's most recent balance sheet. The annualized yield is computed by determining the net change, exclusive of realized gains and losses from the sale of investments, unrealized appreciation and depreciation on investments, and income other than investment income, in the value of a hypothetical pre-existing account having a balance of one Accumulation Unit at the beginning of the period, dividing the net change in account value by the value of the account at the beginning of the seven-day period (the "base period return") and multiplying this result by 365/7 to obtain an annualized yield. The annualized yield for the seven calendar day period ended December 31, 1997 was 3.93%. The effective yield is computed by compounding the base period return by adding one, raising the sum to a power equal to 365 divided by 7, and substracting one from the result. The effective yield for the seven calendar day period ended December 31, 1997 was 4.00%. The effective yield is higher because it represents a compound yield, i.e., it assumes that the increase in account value represented by the base period return is reinvested. Yield as determined with respect to a portfolio composed primarily of money market securities normally will fluctuate on a daily basis and is affected by changes in interest rates on money market securities, average portfolio maturities, the type and quality of portfolio securities held and the expenses of the Fund. Therefore, the yield for any given past period should not be considered as a representation of the yield for any future period. In addition, although yield information may be useful in reviewing the Fund's performance and in providing a basis for comparison with other investment alternatives, it should be kept in mind that the Fund's yield cannot be compared to the yield on bank deposits and other investments which pay fixed yields for a stated period of time and that other investment companies may calculate yield on additional bases. When comparing the yields of investment companies, 40 consideration should be given to the quality and maturity of the portfolio of securities of each company as well as to the type of expenses incurred. In this connection, it should be noted that the accrued expenses of the Fund differ from those incurred under conventional money market funds that do not offer variable annuity contracts in that additional charges are made against the Fund relating to The Franklin's assumption of mortality and expense risks under the Contract. See "Mortality and Expense Risk Charge," above. In addition, the yield information contained herein does not reflect administration deductions from Stipulated Payments or deductions for premium taxes, which would reduce the yield and effective yield contained herein. Furthermore, unlike investments in conventional money market funds which may be held on a non-qualified basis by the investor, investment income earned by the Fund during the accumulation period is not currently taxable to holders of Contracts. See "Federal Income Tax Status," above. TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PAGE IN STATEMENT OF ADDITIONAL INFORMATION ---------------------- General Information . . . . . . . . . . . . . . . . . . 3 Investment Objectives . . . . . . . . . . . . . . . . . 3 Limitations on Settlement Options . . . . . . . . . . . 3 Management. . . . . . . . . . . . . . . . . . . . . . . 5 Investment Advisory and Other Services. . . . . . . . . 7 Distribution of The Contracts . . . . . . . . . . . . . 8 Portfolio Turnover and Brokerage. . . . . . . . . . . . 9 Safekeeper of Securities. . . . . . . . . . . . . . . . 10 Legal Matters . . . . . . . . . . . . . . . . . . . . . 10 Experts . . . . . . . . . . . . . . . . . . . . . . . . 10 Index to Financial Statements . . . . . . . . . . . . . F-1
41 APPENDIX-DEBT SECURITY RATINGS STANDARD & POOR'S CORPORATION-BOND RATINGS AAA-Highest grade. Capacity to pay principal and interest is extremely strong. AA-High grade. Capacity to pay principal and interest is very strong, and in the majority of instances these bonds differ from AAA issues only in a small degree. A-Strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. MOODY'S INVESTORS SERVICE, INC.-BOND RATINGS Aaa-Best quality. These securities 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-High quality by all standards. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities, 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. A-Upper medium grade. 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. COMMERCIAL PAPER RATINGS A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market. An A-1 rating (highest quality) by Standard & Poor's indicates that the degree of safety regarding timely repayment is strong. An A-2 rating indicates that capacity for timely payment is satisfactory, although the relative degree of safety is not as high as for issues designated A-1. An A-3 rating indicates adequate capacity for repayment but with more vulnerability to the adverse effects of changes in circumstances than obligations carrying the higher designations. Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations which have an original maturity not exceeding one year. Issuers (or institutions supplying credit support) rated Prime-1 (Moody's highest rating) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics: (1) leading market positions in well-established industries; (2) high rates of return on funds employed; (3) conservative capitalization structure with moderate reliance on debt and ample asset protection; (4) broad margins in earnings coverage of fixed financial charges and high internal cash generation; and (5) well established access to a range of financial markets and assured sources of alternate liquidity. Issuers (or institutions supplying credit support) rated Prime-2 have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers (or institutions supplying credit support) rated Prime-3 have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. 42 PROSPECTUS FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C INDIVIDUAL VARIABLE ANNUITY CONTRACTS ISSUED BY THE FRANKLIN LIFE INSURANCE COMPANY #1 FRANKLIN SQUARE SPRINGFIELD, ILLINOIS 62713 - -------------------------------------------------------------------------------- Complete and return this form to: The Franklin Life Insurance Company #1 Franklin Square Springfield, Illinois 62713 Attention: Box 1018 (800) 528-2011, extension 2591 Please send me the Statement of Additional Information dated April 30, 1998 for Franklin Life Money Market Variable Annuity Fund C. - -------------------------------------------------------------------------------- (Name) - -------------------------------------------------------------------------------- (Street) - -------------------------------------------------------------------------------- (City) (State) (Zip Code) - -------------------------------------------------------------------------------- APPENDIX E AMERICAN GENERAL SERIES PORTFOLIO COMPANY PROSPECTUS AMERICAN GENERAL SERIES PORTFOLIO COMPANY 2929 ALLEN PARKWAY HOUSTON, TEXAS 77019 OCTOBER 1, 1998 PROSPECTUS (AS SUPPLEMENTED THROUGH FEBRUARY 22, 1999) The American General Series Portfolio Company (the "Series Company") is a mutual fund made up of 13 separate Funds (the "Funds"). Each of the Funds has a different investment objective. Each Fund is explained in more detail on its Fact Sheet contained in this prospectus. Here is a summary of the goals of the 13 Funds: INDEX EQUITY FUNDS: INTERNATIONAL EQUITIES FUND Growth through investments tracking the EAFE Index. MIDCAP INDEX FUND Growth through investments tracking the S&P MidCap 400 Index. SMALL CAP INDEX FUND Growth through investments tracking the Russell 2000 Index. STOCK INDEX FUND Growth through investments tracking the S&P 500 Index. ACTIVELY MANAGED EQUITY FUNDS: GROWTH FUND Growth through investments in service sector companies. GROWTH & INCOME FUND Growth and income through investments in stocks (or securities convertible into stocks). INCOME FUNDS: CAPITAL CONSERVATION FUND Income and possible growth through investments in high quality debt securities. GOVERNMENT SECURITIES FUND Income and possible growth through investments in intermediate and long-term government debt securities. INTERNATIONAL GOVERNMENT BOND FUND Income and possible growth through investments in high quality foreign government debt securities. SPECIALTY EQUITY FUNDS: SCIENCE & TECHNOLOGY FUND Growth through investments in stocks of companies which benefit from development of science and technology. SOCIAL AWARENESS FUND Growth through investments in stocks of companies meeting social criteria of the Fund. MONEY MARKET FUND: MONEY MARKET FUND Income through investments in short-term money market securities. ASSET ALLOCATION FUND: ASSET ALLOCATION FUND Maximum return through investments in a mix of stocks, bonds and money market securities. SHARES OF THE MONEY MARKET FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THIS FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. These Funds are available to you only through a variable annuity contract or variable life insurance policy you or your employer bought from The Variable Annuity Life Insurance Company ("VALIC") or one of its affiliates, or employee thrift plans maintained by VALIC or American General Corporation. VALIC is a member of the American General Corporation group of companies. This prospectus sets forth concisely the information you should know before investing in the Funds. Because different contracts contain different combinations of Funds, all of the Funds in this prospectus may not be available to you. And, there may be some Funds that are available to you that don't appear in this prospectus. See the separate prospectus that describes your, or your employer's, annuity contract for a complete list of Funds in which you may invest. BE SURE TO READ BOTH PROSPECTUSES IN FULL BEFORE YOU START PARTICIPATING AND KEEP THEM FOR FUTURE REFERENCE. VALIC has filed a Statement of Additional Information, dated October 1, 1998 (as supplemented through February 22, 1999), with the Securities and Exchange Commission ("SEC"). This Statement contains additional information about these Funds and is part of this prospectus. For a free copy, write to the American General Series Portfolio Company at the address above or call 1-800-44-VALIC. The Statement of Additional Information has been filed with the SEC and is available along with other related materials at the SEC's internet web site (http://www.sec.gov.). SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY, SHARES OF THE FUNDS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE FUNDS. ALSO, IT HAS NOT PASSED ON WHETHER THIS PROSPECTUS IS ADEQUATE OR ACCURATE. IT IS A CRIMINAL OFFENSE TO STATE OTHERWISE. TABLE OF CONTENTS
PAGE ---- COVER PAGE WELCOME........................................ 1 EXPENSE SUMMARY................................ 2 FINANCIAL HIGHLIGHTS........................... 3 ABOUT THE SERIES COMPANY'S MANAGEMENT.......... 10 Investment Adviser........................ 10 Investment Sub-advisers................... 10 Portfolio Manager......................... 10 How Advisers Are Paid for Their Services................................ 11 About the Board of Directors.............. 12 ABOUT THE FUNDS................................ 13 Growth, Income and Stability Categories... 13 About Level of Risk....................... 13 About Portfolio Turnover.................. 13 About Fund Performance.................... 14 ABOUT INDEX EQUITY FUNDS....................... 15 HOW TO READ A FUND FACT SHEET.................. 17 FUND FACT SHEETS............................... 18 Asset Allocation Fund..................... 18 Capital Conservation Fund................. 20 Government Securities Fund................ 22 Growth Fund............................... 24 Growth & Income Fund...................... 26 International Equities Fund............... 28 International Government Bond Fund........ 30 MidCap Index Fund......................... 32 Money Market Fund......................... 34 Science & Technology Fund................. 36 Small Cap Index Fund...................... 38 Social Awareness Fund..................... 40 Stock Index Fund.......................... 42
PAGE ---- TYPES OF INVESTMENTS........................... 44 Stocks.................................... 44 Bonds..................................... 44 Asset-Backed Securities.............. 44 Loan Participations.................. 44 Mortgage-Related Securities............... 45 Illiquid Securities....................... 45 Foreign Securities........................ 45 ADRs...................................... 46 Foreign Currency.......................... 46 When-Issued Securities.................... 46 Money Market Securities................... 46 Variable Rate Demand Notes................ 46 Derivatives............................... 46 Options.............................. 46 Futures Contracts.................... 47 Repurchase Agreements..................... 47 A Word About Risk......................... 47 Investment Practices...................... 48 Limitations.......................... 48 Lending Portfolio Securities......... 48 ABOUT THE SERIES COMPANY....................... 49 Series Company Shares..................... 49 Net Asset Value of the Series Company Shares.................................. 49 Dividends and Capital Gains............... 50 Diversification........................... 50 Taxes..................................... 51 Voting Rights............................. 51 Year 2000 Risks........................... 51 Reports................................... 51
(i) WELCOME - -------------------------------------------------------------------------------- Unless otherwise specified in this prospectus, the words we, our, and VALIC mean The Variable Annuity Life Insurance Company. The words you and your mean the participant. American General Series Portfolio Company (the "Series Company") was incorporated under the laws of Maryland on December 7, 1984. The Series Company is an open-end management investment company and currently consists of 13 different Funds, each of which is described in detail in this prospectus. We serve as each Fund's Investment Adviser and, in this role, report directly to the Series Company's Board of Directors. As Investment Adviser, we make investment decisions for the Funds, are responsible for their day to day operations and perform the cash management function. For more information, see "About the Series Company's Management" in this prospectus. Individuals can't invest in these Funds directly. Instead, they participate through an annuity contract, variable life policy, or employer plan with VALIC or one of its affiliates, or employee thrift plans maintained by VALIC or American General Corporation. Most often employers set up these annuity contracts so they can offer their employees a way to save for retirement or assist them in estate planning. Retirement plans through employers may be entitled to tax benefits that individual retirement plans may not be entitled to. These tax benefits are fully explained in your contract prospectus. After you invest in a Fund you participate in Fund earnings or losses, in proportion to the amount of money you invest. Depending on your contract, if you withdraw your money before retirement, you may incur charges and additional tax liabilities. However, to save for retirement, you generally should let your investments and their earnings build. At retirement, you may withdraw all or a portion of your money, leave it in the account until you need it, or start receiving annuity payments. At a certain age you may be required to begin withdrawals. All inquiries regarding this prospectus and annuity contracts issued by VALIC should be directed, in writing, to VALIC Customer Service, A3-01, 2929 Allen Parkway, Houston, Texas 77019, or by calling 1-800-633-8960. All inquiries regarding annuity contracts or variable life policies issued by American General Life Insurance Company (AGL) should be directed to AGL's Annuity Administration Department, 2727-A Allen Parkway, Houston, Texas 77019- 2191 or call 1-800-813-5065. AGL is a member of the American General Corporation group of companies, as is VALIC. OPEN-END means shares of the FUNDS can be bought or sold by the Series Company at any time. Also, there is no limit on the number of investors who may buy shares. 1 EXPENSE SUMMARY - -------------------------------------------------------------------------------- Annual fund operating expenses are the fees paid out of the assets of a Fund. Each Fund pays a management fee to VALIC. The expenses paid by a Fund are factored into the calculation of its share price or dividends and are not charged directly to investors. The expenses reflected in the tables below are based on the Funds' annual operating expenses for the fiscal year ended May 31, 1998. - -------------------------------------------------------------------------------- ANNUAL FUND OPERATING EXPENSES (as a percentage of net assets) - --------------------------------------------------------------------------------
ASSET CAPITAL GOVERNMENT ALLOCATION CONSERVATION SECURITIES GROWTH GROWTH & INTERNATIONAL FUND FUND FUND FUND INCOME FUND EQUITIES FUND ---------- ------------ ---------- ------ ----------- ------------- Management Fee 0.50% 0.50% 0.50% 0.80% 0.75% 0.35% Other Expenses 0.04% 0.04% 0.04% 0.04% 0.05% 0.05% ----- ----- ----- ----- ----- ---- Total Fund Operating Expenses 0.54% 0.54% 0.54% 0.84% 0.80% 0.40% ===== ===== ===== ===== ===== ==== INTERNATIONAL GOVERNMENT BOND FUND ------------- Management Fee 0.50% Other Expenses 0.05% ----- Total Fund Operating Expenses 0.55% =====
- -------------------------------------------------------------------------------- ANNUAL FUND OPERATING EXPENSES: (as a percentage of net assets) - --------------------------------------------------------------------------------
SCIENCE & SOCIAL MID CAP MONEY MARKET TECHNOLOGY SMALL CAP AWARENESS STOCK INDEX FUND FUND FUND INDEX FUND FUND INDEX FUND ---------- ------------ ---------- ---------- --------- ---------- Management Fee 0.32% 0.50% 0.90% 0.35% 0.50% 0.27% Other Expenses 0.04% 0.04% 0.05% 0.04% 0.04% 0.04% ----- ----- ----- ----- ----- ----- Total Fund Operating Expenses 0.36% 0.54% 0.95% 0.39% 0.54% 0.31% ===== ===== ===== ===== ===== =====
- -------------------------------------------------------------------------------- The purpose of the expense tables above is to assist investors in understanding the various costs and expenses that a shareholder of a Fund will bear directly or indirectly. Each Fund's annual operating expenses do not reflect expenses imposed by separate accounts of VALIC through which an investment in each Fund is made or their related contracts. A separate account's expenses are fully explained in your contract prospectus. 2 FINANCIAL HIGHLIGHTS A FUND'S FISCAL YEAR ends every May 31st. Financial highlights are provided below for each of the Funds. The financial highlights are for the last 10 years of the Funds or if the Fund has been in operation a shorter period of time, since the date the Fund began operation. Ernst & Young LLP, Independent Auditors for the Series Company, has audited the Series Company's financial statements which include the information presented here. Their unqualified report appears in those audited financial statements, which are included in the Statement of Additional Information. Per share data assumes that you held each share from the beginning to the end of each fiscal year. Total return assumes that you bought additional shares with dividends paid by the Fund. Total returns for periods of less than one year are not annualized. The average commission rate paid on investment equity securities (on a per share basis) is presented for the period beginning June 1, 1996. ASSET ALLOCATION FUND(1) - --------------------------------------------------------------------------------
FISCAL YEAR ENDED MAY 31, -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- -------- PER SHARE DATA SHARE VALUE AT BEGINNING OF YEAR $12.57 $12.55 $11.24 $10.84 $11.18 $10.66 $11.05 -------- -------- -------- -------- -------- -------- -------- + INCOME (LOSS) from net investment income 0.41 0.77 0.44 0.44 0.37 0.35 0.30 from net realized & unrealized gain (loss) on securities 2.24 1.44 1.53 0.82 (0.15) 0.61 (0.19) -------- -------- -------- -------- -------- -------- -------- total income from investment operations 2.65 2.21 1.97 1.26 0.22 0.96 0.11 -------- -------- -------- -------- -------- -------- -------- - - DISTRIBUTIONS from net investment income (0.41) (0.78) (0.44) (0.44) (0.37) (0.35) (0.30) from net realized gain on securities (0.79) (1.41) (0.22) (0.42) (0.19) (0.09) (0.20) -------- -------- -------- -------- -------- -------- -------- total distributions (1.20) (2.19) (0.66) (0.86) (0.56) (0.44) (0.50) -------- -------- -------- -------- -------- -------- -------- = SHARE VALUE AT END OF YEAR $14.02 $12.57 $12.55 $11.24 $10.84 $11.18 $10.66 ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN 21.94% 15.89% 17.90% 12.43% 1.86% 9.17% 0.87% ======== ======== ======== ======== ======== ======== ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.54% 0.57% 0.57% 0.58% 0.59% 0.70% 0.90% Ratio of net investment income to average net assets 3.02% 3.26% 3.62% 4.03% 3.24% 3.28% 2.72% Portfolio turnover rate 24% 103% 119% 133% 76% 78% 111% Number of shares outstanding at end of year (000's) 14,269 14,107 15,142 16,319 17,956 14,758 13,341 Net assets at end of year (000's) $200,099 $177,347 $190,024 $183,393 $194,576 $165,002 $142,213 Average net assets during the year (000's) $188,184 $179,615 $187,576 $186,487 $185,036 $151,450 $137,179 Average commission rate paid $0.0205 $0.0401 N/A N/A N/A N/A N/A FISCAL YEAR ENDED MAY 31, ------------------------------ 1991 1990 1989 -------- -------- -------- PER SHARE DATA SHARE VALUE AT BEGINNING OF YEAR $10.48 $10.06 $9.40 -------- -------- -------- + INCOME (LOSS) from net investment income 0.40 0.55 0.62 from net realized & unrealized gain (loss) on securities 0.57 0.44 0.65 -------- -------- -------- total income from investment operations 0.97 0.99 1.27 -------- -------- -------- - - DISTRIBUTIONS from net investment income (0.40) (0.57) (0.61) from net realized gain on securities -- -- -- -------- -------- -------- total distributions (0.40) (0.57) (0.61) -------- -------- -------- = SHARE VALUE AT END OF YEAR $11.05 $10.48 $10.06 ======== ======== ======== TOTAL RETURN 9.75% 10.06% 14.00% ======== ======== ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.92% 0.92% 1.00% Ratio of net investment income to average net assets 3.94% 5.38% 6.43% Portfolio turnover rate 55% 51% 93% Number of shares outstanding at end of year (000's) 11,891 11,158 9,969 Net assets at end of year (000's) $131,416 $116,966 $100,248 Average net assets during the year (000's) $116,266 $107,626 $ 92,364 Average commission rate paid N/A N/A N/A
(1) The Asset Allocation Fund was formerly known as the Timed Opportunity Fund. 3 FINANCIAL HIGHLIGHTS -- CONTINUED CAPITAL CONSERVATION FUND - --------------------------------------------------------------------------------
FISCAL YEAR ENDED MAY 31, -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- -------- PER SHARE DATA SHARE VALUE AT BEGINNING OF YEAR $9.31 $9.23 $9.52 $9.13 $9.87 $9.29 $8.81 ------- -------- ------- ------- ------- ------- ------- + INCOME (LOSS) from net investment income 0.61 0.62 0.62 0.63 0.61 0.65 0.69 from net realized & unrealized gain (loss) on securities 0.37 0.08 (0.29) 0.39 (0.69) 0.58 0.48 ------- -------- ------- ------- ------- ------- ------- total income (loss) from investment operations 0.98 0.70 0.33 1.02 (0.08) 1.23 1.17 ------- -------- ------- ------- ------- ------- ------- - - DISTRIBUTIONS from net investment income (0.61) (0.62) (0.62) (0.63) (0.61) (0.65) (0.69) from net realized gain on securities -- -- -- -- (0.05) -- -- ------- -------- ------- ------- ------- ------- ------- total distributions (0.61) (0.62) (0.62) (0.63) (0.66) (0.65) (0.69) ------- -------- ------- ------- ------- ------- ------- = SHARE VALUE AT END OF YEAR $9.68 $9.31 $9.23 $9.52 $9.13 $9.87 $9.29 ======= ======== ======= ======= ======= ======= ======= TOTAL RETURN 10.76% 7.75% 3.41% 11.80% (1.13)% 13.60% 13.72% ======= ======== ======= ======= ======= ======= ======= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.54% 0.57% 0.57% 0.58% 0.59% 0.67% 0.77% Ratio of net investment income to average net assets 6.32% 6.59% 6.47% 6.88% 6.24% 6.77% 7.80% Portfolio turnover rate 14% 45% 80% 100% 55% 58% 121% Number of shares outstanding at end of period (000's) 6,577 7,168 7,604 6,935 6,712 5,095 3,939 Net assets at end of period (000's) $63,654 $66,747 $70,212 $66,031 $61,305 $50,290 $36,609 Average net assets during the period (000's) $66,996 $69,352 $70,271 $61,568 $59,210 $43,316 $29,793 FISCAL YEAR ENDED MAY 31, ------------------------------ 1991 1990 1989 -------- -------- -------- PER SHARE DATA SHARE VALUE AT BEGINNING OF YEAR $9.08 $9.48 $9.29 ------- ------- ------- + INCOME (LOSS) from net investment income 0.73 0.80 0.75 from net realized & unrealized gain (loss) on securities (0.27) (0.36) 0.17 ------- ------- ------- total income (loss) from investment operations 0.46 0.44 0.92 ------- ------- ------- - - DISTRIBUTIONS from net investment income (0.73) (0.84) (0.73) from net realized gain on securities -- -- -- ------- ------- ------- total distributions (0.73) (0.84) (0.73) ------- ------- ------- = SHARE VALUE AT END OF YEAR $8.81 $9.08 $9.48 ======= ======= ======= TOTAL RETURN 5.40% 4.73% 10.45% ======= ======= ======= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.83% 0.83% 0.88% Ratio of net investment income to average net assets 8.25% 8.64% 8.82% Portfolio turnover rate 142% 125% 55% Number of shares outstanding at end of period (000's) 2,333 1,983 1,429 Net assets at end of period (000's) $20,541 $18,006 $13,544 Average net assets during the period (000's) $19,105 $16,278 $9,562
GOVERNMENT SECURITIES FUND - --------------------------------------------------------------------------------
FISCAL YEAR ENDED MAY 31, -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- -------- PER SHARE DATA SHARE VALUE AT BEGINNING OF YEAR $9.67 $9.61 $9.89 $9.55 $10.30 $9.84 $9.34 ------- -------- ------- ------- ------- ------- ------- + INCOME (LOSS) from investment income 0.58 0.59 0.61 0.60 0.55 0.61 0.65 from net realized & unrealized gain (loss) on securities 0.42 0.06 (0.28) 0.35 (0.59) 0.59 0.49 ------- -------- ------- ------- ------- ------- ------- total income (loss) from investment operations 1.00 0.65 0.33 0.95 (0.04) 1.20 1.14 ------- -------- ------- ------- ------- ------- ------- - - DISTRIBUTIONS from net investment income (0.58) (0.59) (0.61) (0.61) (0.55) (0.61) (0.64) from net realized gain on securities -- -- -- -- (0.16) (0.13) -- ------- -------- ------- ------- ------- ------- ------- total distributions (0.58) (0.59) (0.61) (0.61) (0.71) (0.74) (0.64) ------- -------- ------- ------- ------- ------- ------- = SHARE VALUE AT END OF YEAR $10.09 $9.67 $9.61 $9.89 $9.55 $10.30 $9.84 ======= ======== ======= ======= ======= ======= ======= TOTAL RETURN 10.60% 6.94% 3.32% 10.43% (0.66)% 12.56% 12.60% ======= ======== ======= ======= ======= ======= ======= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.54% 0.56% 0.56% 0.58% 0.59% 0.67% 0.76% Ratio of net investment income to average net assets 5.82% 6.11% 6.21% 6.36% 5.44% 6.08% 6.77% Portfolio turnover rate 24% 38% 36% 229% 85% 105% 78% Number of shares outstanding at end of year (000's) 9,129 8,672 8,164 5,478 4,544 3,110 2,090 Net assets at end of year (000's) $92,120 $83,827 $78,423 $54,174 $43,401 $32,023 $20,559 Average net assets during the year (000's) $87,574 $83,293 $68,017 $45,200 $41,596 $26,145 $17,069 FISCAL YEAR ENDED MAY 31, -------------------------- 1991 1990 1989 -------- ------ ------ PER SHARE DATA SHARE VALUE AT BEGINNING OF YEAR $9.20 $9.42 $9.24 ------- ------ ------ + INCOME (LOSS) from investment income 0.66 0.70 0.71 from net realized & unrealized gain (loss) on securities 0.14 (0.17) 0.15 ------- ------ ------ total income (loss) from investment operations 0.80 0.53 0.86 ------- ------ ------ - - DISTRIBUTIONS from net investment income (0.66) (0.75) (0.68) from net realized gain on securities -- -- -- ------- ------ ------ total distributions (0.66) (0.75) (0.68) ------- ------ ------ = SHARE VALUE AT END OF YEAR $9.34 $9.20 $9.42 ======= ====== ====== TOTAL RETURN 9.28% 5.76% 9.57% ======= ====== ====== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.87% 0.86% 0.85% Ratio of net investment income to average net assets 7.25% 7.77% 7.89% Portfolio turnover rate 87% 85% 38% Number of shares outstanding at end of year (000's) 1,468 978 570 Net assets at end of year (000's) $13,711 $8,997 $5,374 Average net assets during the year (000's) $11,393 $7,233 $4,565
4 FINANCIAL HIGHLIGHTS -- CONTINUED GROWTH FUND - --------------------------------------------------------------------------------
FISCAL YEAR ENDED MAY 31, PERIOD FROM ------------------------------------------------------------------- APRIL 29, 1994 1998 1997 1996 1995 TO MAY 31, 1994 ---------- -------- -------- -------- --------------- PER SHARE DATA SHARE VALUE AT BEGINNING OF PERIOD $17.62 $16.49 $11.43 $9.87 $10.00(1) ---------- -------- -------- -------- ------- + INCOME (LOSS) from net investment income (0.02) 0.02 0.11 0.04 0.01 from net realized & unrealized gain (loss) on securities 4.82 1.45 5.27 1.56 (0.13) ---------- -------- -------- -------- ------- total income (loss) from investment operations 4.80 1.47 5.38 1.60 (0.12) ---------- -------- -------- -------- ------- - - DISTRIBUTIONS from net investment income (0.01) (0.01) (0.09) (0.04) (0.01) from net realized gain on securities (0.33) (0.33) (0.23) -- -- ---------- -------- -------- -------- ------- total distributions (0.34) (0.34) (0.32) (0.04) (0.01) ---------- -------- -------- -------- ------- = SHARE VALUE AT END OF PERIOD $22.08 $17.62 $16.49 $11.43 $9.87 ========== ======== ======== ======== ======= TOTAL RETURN 27.41% 9.00% 47.46% 16.25% (1.19)% ========== ======== ======== ======== ======= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.84% 0.86% 0.83% 0.91% 0.08% Ratio of net investment income to average net assets (0.11)% 0.09% 0.89% 0.41% 0.11% Portfolio turnover rate 43% 40% 36% 61% 0% Number of shares outstanding at end of year (000's) 49,832 42,422 25,826 8,800 1,001 Net assets at end of year (000's) $1,100,137 $747,654 $425,787 $100,614 $9,885 Average net assets during the year (000's) $946,335 $588,056 $238,228 $ 42,232 $9,944 Average commission rate paid $0.0474 $0.0499 N/A N/A N/A
- ------------ (1) The net asset value at the beginning of the period is as of commencement of operations on April 29, 1994. GROWTH & INCOME FUND - --------------------------------------------------------------------------------
PERIOD FROM FISCAL YEAR ENDED MAY 31, APRIL 29, 1994 ----------------------------------------------------------------- TO 1998 1997 1996 1995 MAY 31, 1994 -------- -------- -------- -------- -------------- PER SHARE DATA SHARE VALUE AT BEGINNING OF PERIOD $16.86 $14.78 $11.09 $9.87 $10.00(1) -------- -------- -------- ------- ------- + INCOME (LOSS) from net investment income 0.08 0.10 0.08 0.09 0.02 from net realized & unrealized gain (loss) on securities 3.26 2.38 3.77 1.22 (0.13) -------- -------- -------- ------- ------- total income (loss) from investment operations 3.34 2.48 3.85 1.31 (0.11) -------- -------- -------- ------- ------- - - DISTRIBUTIONS from net investment income (0.08) (0.10) (0.07) (0.09) (0.02) from net realized gain on securities (0.21) (0.29) (0.09) -- -- -------- -------- -------- ------- ------- total distributions (0.29) (0.39) (0.16) (0.09) (0.02) -------- -------- -------- ------- ------- = SHARE VALUE AT END OF PERIOD $19.91 $16.87 $14.78 $11.09 $9.87 ======== ======== ======== ======= ======= TOTAL RETURN 19.87% 17.08% 34.85% 13.35% (1.11)% ======== ======== ======== ======= ======= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.80% 0.81% 0.79% 0.86% 0.07% Ratio of net investment income to average net assets 0.43% 0.70% 0.63% 0.93% 0.22% Portfolio turnover rate 78% 45% 64% 97% 11% Number of shares outstanding at end of year (000's) 13,619 12,422 7,685 3,867 1,002 Net assets at end of year (000's) $271,159 $209,545 $113,546 $42,867 $9,890 Average net assets during the year (000's) $252,647 $161,226 $75,158 $21,910 $9,946 Average commission rate paid $0.0500 $0.0500 N/A N/A N/A
- ------------ (1) The net asset value at the beginning of the period is as of commencement of operations on April 29, 1994. 5 FINANCIAL HIGHLIGHTS -- CONTINUED INTERNATIONAL EQUITIES FUND - --------------------------------------------------------------------------------
PERIOD FROM OCTOBER 2, FISCAL YEAR ENDED MAY 31, 1989 ------------------------------------------------------------------------------------- TO MAY 31, 1998 1997 1996 1995 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- -------- -------- -------- ----------- PER SHARE DATA SHARE VALUE AT BEGINNING OF PERIOD $11.44 $11.15 $10.42 $10.14 $8.99 $8.03 $8.58 $9.17 $10.00(1) -------- -------- -------- -------- -------- ------- ------- ------- -------- + INCOME (LOSS) from net investment income 0.23 0.20 0.17 0.15 0.11 0.18 0.15 0.23 0.10 from net realized & unrealized gain (loss) on securities 0.85 0.63 0.97 0.34 1.17 0.93 (0.55) (0.59) (0.83) -------- -------- -------- -------- -------- ------- ------- ------- -------- total income (loss) from investment operations 1.08 0.83 1.14 0.49 1.28 1.11 (0.40) (0.36) (0.73) -------- -------- -------- -------- -------- ------- ------- ------- -------- - - DISTRIBUTIONS from net investment income (0.24) (0.19) (0.17) (0.15) (0.11) (0.15) (0.15) (0.23) (0.10) from net realized gain on securities (0.33) (0.35) (0.24) (0.06) (0.02) -- -- -- -- -------- -------- -------- -------- -------- ------- ------- ------- -------- total distributions (0.57) (0.54) (0.41) (0.21) (0.13) (0.15) (0.15) (0.23) (0.10) -------- -------- -------- -------- -------- ------- ------- ------- -------- = SHARE VALUE AT END OF PERIOD $11.95 $11.44 $11.15 $10.42 $10.14 $8.99 $8.03 $8.58 $9.17 ======== ======== ======== ======== ======== ======= ======= ======= ======== TOTAL RETURN 9.92% 7.74% 11.14% 4.92% 14.31% 14.18% (4.69)% (3.71)% (7.42)% ======== ======== ======== ======== ======== ======= ======= ======= ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.40% 0.42% 0.42% 0.45% 0.47% 0.53% 0.65% 0.37% 0.19% Ratio of net investment income to average net assets 1.92% 1.75% 1.65% 1.47% 1.43% 2.33% 1.84% 2.67% 1.10% Portfolio turnover rate 9% 12% 20% 14% 7% 9% 5% 3% 0% Number of shares outstanding at end of year (000's) 13,009 15,857 18,497 20,074 17,273 7,429 4,256 2,451 1,310 Net assets at end of year (000's) $155,469 $181,437 $206,259 $209,091 $175,183 $66,809 $34,182 $21,036 $12,005 Average net assets during the year (000's) $165,984 $191,117 $204,792 $199,235 $117,264 $45,509 $26,542 $15,693 $ 7,853 Average commission rate paid $0.0332 $0.0236 N/A N/A N/A N/A N/A N/A N/A
- ------------ (1) The net asset value at the beginning of the period is as of commencement of operations on October 2, 1989. INTERNATIONAL GOVERNMENT BOND FUND - --------------------------------------------------------------------------------
PERIOD FROM OCTOBER 1, FISCAL YEAR ENDED MAY 31, 1991 TO --------------------------------------------------------------- MAY 31, 1998 1997 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- ----------- PER SHARE DATA SHARE VALUE AT BEGINNING OF PERIOD $11.33 $11.79 $12.72 $10.97 $11.16 $10.43 $10.00(1) -------- -------- -------- ------- ------- ------- ------- + INCOME (LOSS) from net investment income 0.56 0.63 0.65 0.65 0.62 0.76 0.48 from net realized & unrealized gain (loss) on securities and foreign currencies (0.26) (0.49) (0.89) 1.80 (0.20) 0.70 0.42 -------- -------- -------- ------- ------- ------- ------- total income (loss) from investment operations 0.30 0.14 (0.24) 2.45 0.42 1.46 0.90 -------- -------- -------- ------- ------- ------- ------- - - DISTRIBUTIONS from net investment income (0.20) (0.58) (0.68) (0.70) (0.60) (0.73) (0.47) from net realized gain on securities (0.01) (0.02) (0.01) -- (0.01) -- -- -------- -------- -------- ------- ------- ------- ------- total distributions (0.21) (0.60) (0.69) (0.70) (0.61) (0.73) (0.47) -------- -------- -------- ------- ------- ------- ------- = SHARE VALUE AT END OF PERIOD $11.42 $11.33 $11.79 $12.72 $10.97 $11.16 $10.43 ======== ======== ======== ======= ======= ======= ======= TOTAL RETURN 2.65% 1.13% (1.91)% 23.23% 3.87% 14.50% 9.18% ======== ======== ======== ======= ======= ======= ======= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.55% 0.56% 0.56% 0.59% 0.48% 0.14% 0.08% Ratio of net investment income to average net assets 4.70% 5.13% 5.45% 5.83% 5.87% 7.02% 4.62% Portfolio turnover rate 17% 4% 11% 6% 3% 26% 12% Number of shares outstanding at end of year (000's) 13,646 15,680 12,073 6,111 3,741 2,062 1,259 Net assets at end of year (000's) $155,783 $177,709 $142,383 $77,734 $41,028 $23,009 $13,126 Average net assets during the year (000's) $168,439 $166,147 $114,693 $51,451 $33,561 $18,135 $11,938
- ------------ (1) The net asset value at the beginning of the period is as of commencement of operations on October 1, 1991. 6 FINANCIAL HIGHLIGHTS -- CONTINUED MIDCAP INDEX FUND(1) - --------------------------------------------------------------------------------
FISCAL YEAR ENDED MAY 31, -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- -------- PER SHARE DATA SHARE VALUE AT BEGINNING OF YEAR $20.83 $19.09 $15.68 $14.54 $14.38 $12.86 $12.51 -------- -------- -------- -------- -------- -------- -------- + INCOME (LOSS) from net investment income 0.23 0.24 0.24 0.26 0.23 0.24 0.23 from net realized & unrealized gain (loss) on securities 5.80 2.95 4.06 1.59 0.28 1.93 0.39 -------- -------- -------- -------- -------- -------- -------- total income (loss) from investment operations 6.03 3.19 4.30 1.85 0.51 2.17 0.62 -------- -------- -------- -------- -------- -------- -------- - - DISTRIBUTIONS from net investment income (0.23) (0.24) (0.24) (0.26) (0.23) (0.24) (0.23) from net realized gain on securities (1.36) (1.21) (0.65) (0.45) (0.12) (0.41) (0.04) -------- -------- -------- -------- -------- -------- -------- total distributions (1.59) (1.45) (0.89) (0.71) (0.35) (0.65) (0.27) -------- -------- -------- -------- -------- -------- -------- = SHARE VALUE AT END OF YEAR $25.27 $20.83 $19.09 $15.68 $14.54 $14.38 $12.86 ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN 29.62% 17.48% 28.10% 13.26% 3.52% 17.21% 5.01% ======== ======== ======== ======== ======== ======== ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.36% 0.40% 0.41% 0.44% 0.46% 0.47% 0.54% Ratio of net investment income to average net assets 0.95% 1.24% 1.36% 1.73% 1.62% 1.79% 1.82% Portfolio turnover rate 26% 19% 21% 23% 17% 5% 112% Number of shares outstanding at end of year (000's) 31,830 29,137 28,322 25,988 24,001 14,673 8,862 Net assets at end of year (000's) $804,318 $607,061 $540,688 $407,557 $349,041 $210,931 $113,992 Average net assets during the year (000's) $722,652 $554,397 $477,372 $376,486 $285,247 $154,979 $88,456 Average commission rate paid $0.0278 $0.0277 N/A N/A N/A N/A N/A FISCAL YEAR ENDED MAY 31, ------------------------------ 1991 1990 1989 -------- -------- -------- PER SHARE DATA SHARE VALUE AT BEGINNING OF YEAR $12.92 $12.25 $10.86 ------- ------- ------- + INCOME (LOSS) from net investment income 0.28 0.28 0.30 from net realized & unrealized gain (loss) on securities (0.30) 0.71 1.51 ------- ------- ------- total income (loss) from investment operations (0.02) 0.99 1.81 ------- ------- ------- - - DISTRIBUTIONS from net investment income (0.28) (0.32) (0.27) from net realized gain on securities (0.11) -- (0.15) ------- ------- ------- total distributions (0.39) (0.32) (0.42) ------- ------- ------- = SHARE VALUE AT END OF YEAR $12.51 $12.92 $12.25 ======= ======= ======= TOTAL RETURN 0.20% 8.22% 17.06% ======= ======= ======= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.67% 0.68% 0.74% Ratio of net investment income to average net assets 2.41% 2.29% 2.72% Portfolio turnover rate 101% 131% 67% Number of shares outstanding at end of year (000's) 6,168 5,712 5,354 Net assets at end of year (000's) $77,146 $73,815 $65,586 Average net assets during the year (000's) $69,696 $67,421 $57,398 Average commission rate paid N/A N/A N/A
- ------------ (1) Effective October 1, 1991 the Fund's name was changed from the Capital Accumulation Fund to the MidCap Index Fund. Additionally, on October 1, 1991 the investment objectives and investment program for the Fund were changed. Bankers Trust has been the Fund's Sub-adviser since May 1, 1992. MONEY MARKET FUND - --------------------------------------------------------------------------------
FISCAL YEAR ENDED MAY 31, -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- -------- PER SHARE DATA SHARE VALUE AT BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 -------- -------- ------- -------- -------- ------- ------- + INCOME from net investment income 0.05 0.05 0.05 0.05 0.03 0.03 0.05 -------- -------- ------- -------- -------- ------- ------- - - DISTRIBUTIONS from net investment income (0.05) (0.05) (0.05) (0.05) (0.03) (0.03) (0.05) -------- -------- ------- -------- -------- ------- ------- = SHARE VALUE AT END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 ======== ======== ======= ======== ======== ======= ======= TOTAL RETURN 5.25% 5.02% 5.26% 4.90% 2.83% 2.85% 4.47% ======== ======== ======= ======== ======== ======= ======= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.54% 0.57% 0.57% 0.57% 0.58% 0.63% 0.67% Ratio of net investment income to average net assets 5.14% 4.95% 5.14% 4.75% 2.78% 2.81% 4.42% Number of shares outstanding at end of year (000's) 190,975 128,125 83,618 82,256 50,534 45,323 48,355 Total net assets at end of year (000's) $190,975 $128,125 $83,618 $82,254 $50,533 $45,322 $48,353 Average net assets during the year (000's) $150,625 $113,882 $84,271 $67,021 $46,222 $45,562 $46,305 FISCAL YEAR ENDED MAY 31, ------------------------------ 1991 1990 1989 -------- -------- -------- PER SHARE DATA SHARE VALUE AT BEGINNING OF YEAR $1.00 $1.00 $1.00 ------- ------- ------- + INCOME from net investment income 0.07 0.08 0.08 ------- ------- ------- - - DISTRIBUTIONS from net investment income (0.07) (0.08) (0.08) ------- ------- ------- = SHARE VALUE AT END OF YEAR $1.00 $1.00 $1.00 ======= ======= ======= TOTAL RETURN 7.11% 8.31% 8.63% ======= ======= ======= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.68% 0.74% 0.46% Ratio of net investment income to average net assets 6.86% 7.93% 8.39% Number of shares outstanding at end of year (000's) 38,572 27,628 21,445 Total net assets at end of year (000's) $38,570 $27,628 $21,445 Average net assets during the year (000's) $34,733 $22,563 $13,385
7 FINANCIAL HIGHLIGHTS -- CONTINUED SCIENCE & TECHNOLOGY FUND - --------------------------------------------------------------------------------
PERIOD FROM FISCAL YEAR ENDED MAY 31, APRIL 29, 1994 ------------------------------------------------------------------- TO 1998 1997 1996 1995 MAY 31, 1994 ---- ---- ---- ---- -------------- PER SHARE DATA SHARE VALUE AT BEGINNING OF PERIOD $19.88 $20.48 $14.43 $9.83 $10.00(1) ---------- -------- -------- -------- ------- + INCOME (LOSS) from net investment income (0.09) -- -- 0.03 -- from realized & unrealized gain (loss) on securities 2.28 0.33 8.08 4.72 (0.17) ---------- -------- -------- -------- ------- total income (loss) from investment operations 2.19 0.33 8.08 4.75 (0.17) ---------- -------- -------- -------- ------- - - DISTRIBUTIONS from net investment income -- -- -- (0.02) -- from net realized gain on securities -- (0.93) (2.03) (0.13) -- ---------- -------- -------- -------- ------- total distributions -- (0.93) (2.03) (0.15) -- ---------- -------- -------- -------- ------- = SHARE VALUE AT END OF PERIOD $22.07 $19.88 $20.48 $14.43 $9.83 ========== ======== ======== ======== ======= TOTAL RETURN 10.85% 1.81% 58.28% 48.61% (1.66)% ========== ======== ======== ======== ======= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.95% 0.96% 0.94% 1.00% 0.08% Ratio of net investment income (loss) to average net assets (0.46)% (0.29)% (0.07)% 0.36% 0.04% Portfolio turnover rate 128% 122% 116% 121% 0% Number of shares outstanding at end of year (000's) 46,355 40,484 27,696 11,550 1,001 Net assets at end of year (000's) $1,023,141 $804,982 $567,187 $166,683 $ 9,834 Average net assets during the year (000's) $949,947 $664,608 $363,087 $ 64,974 $ 9,918 Average commission rate paid $0.0455 $0.0393 N/A N/A N/A
- ------------ (1) The net asset value at the beginning of the period is as of commencement of operations on April 29, 1994. SMALL CAP INDEX FUND - --------------------------------------------------------------------------------
FISCAL YEAR ENDED MAY 31, PERIOD FROM --------------------------------------------------------------- MAY 1, 1992 1998 1997 1996 1995 1994 1993 TO MAY 31, 1992 -------- -------- -------- -------- -------- -------- --------------- PER SHARE DATA SHARE VALUE AT BEGINNING OF PERIOD $16.18 $16.25 $12.49 $11.52 $11.28 $ 9.93 $10.00(1) -------- -------- -------- -------- -------- -------- -------- + INCOME (LOSS) from net investment income 0.19 0.19 0.20 0.17 0.13 0.15 0.02 from net realized & unrealized gain (loss) on securities 3.17 0.93 4.04 0.97 0.58 1.48 (0.07) -------- -------- -------- -------- -------- -------- -------- total income (loss) from investment operations 3.36 1.12 4.24 1.14 0.71 1.63 (0.05) -------- -------- -------- -------- -------- -------- -------- - - DISTRIBUTIONS from net investment income (0.19) (0.19) (0.20) (0.17) (0.13) (0.15) (0.02) from net realized gain on securities (1.41) (1.00) (0.28) -- (0.34) (0.13) -- -------- -------- -------- -------- -------- -------- -------- total distributions (1.60) (1.19) (0.48) (0.17) (0.47) (0.28) (0.02) -------- -------- -------- -------- -------- -------- -------- = SHARE VALUE AT END OF PERIOD $17.94 $16.18 $16.25 $12.49 $11.52 $11.28 $ 9.93 ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN 21.34% 7.51% 34.50% 9.98% 6.18% 16.64% (0.50)% ======== ======== ======== ======== ======== ======== ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.39% 0.41% 0.41% 0.44% 0.47% 0.47% 0.04% Ratio of net investment income to average net assets 1.05% 1.34% 1.36% 1.44% 1.10% 1.40% 0.21% Portfolio turnover rate 36% 42% 31% 34% 16% 20% 0% Number of shares outstanding at end of year (000's) 13,777 11,893 11,129 10,136 9,381 3,687 1,107 Net assets at end of year (000's) $247,183 $192,459 $180,785 $126,567 $108,050 $ 41,581 $10,989 Average net assets during the year (000's) $227,757 $178,368 $150,448 $120,298 $70,690 $ 22,142 $10,989 Average commission rate paid $0.0162 $0.0297 N/A N/A N/A N/A N/A
- ------------ (1) The net asset value at the beginning of the period is as of commencement of operations on May 1, 1992. Bankers Trust has been the Fund's Sub-adviser since May 1, 1992. 8 FINANCIAL HIGHLIGHTS -- CONTINUED SOCIAL AWARENESS FUND - --------------------------------------------------------------------------------
FISCAL YEAR ENDED MAY 31, -------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 1992 1991 -------- --------- -------- -------- -------- -------- -------- -------- PER SHARE DATA SHARE VALUE AT BEGINNING OF PERIOD $17.90 $15.49 $13.02 $11.98 $12.12 $11.43 $11.13 $10.59 -------- --------- ------- ------- ------- ------- ------- ------- + INCOME (LOSS) from net investment income 0.23 0.24 0.26 0.27 0.26 0.24 0.26 0.26 from net realized & unrealized gain (loss) on securities 5.07 4.19 3.37 1.75 (0.02) 1.22 0.30 0.54 -------- --------- ------- ------- ------- ------- ------- ------- total income from investment operations 5.30 4.43 3.63 2.02 0.24 1.46 0.56 0.80 -------- --------- ------- ------- ------- ------- ------- ------- - - DISTRIBUTIONS from net investment income (0.23) (0.24) (0.25) (0.27) (0.26) (0.24) (0.26) (0.26) from net realized gain on securities (0.81) (1.78) (0.91) (0.71) (0.12) (0.53) -- -- -------- --------- ------- ------- ------- ------- ------- ------- total distributions (1.04) (2.02) (1.16) (0.98) (0.38) (0.77) (0.26) (0.26) -------- --------- ------- ------- ------- ------- ------- ------- = SHARE VALUE AT END OF PERIOD $22.16 $17.90 $15.49 $13.02 $11.98 $12.12 $11.43 $11.13 ======== ========= ======= ======= ======= ======= ======= ======= TOTAL RETURN 30.34% 30.48% 28.85% 18.19% 1.97% 13.08% 5.08% 7.89% ======== ========= ======= ======= ======= ======= ======= ======= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.54% 0.56% 0.56% 0.58% 0.60% 0.63% 0.16% 0.44% Ratio of net investment income to average net assets 1.17% 1.53% 1.80% 2.22% 2.19% 2.14% 2.34% 2.66% Portfolio turnover rate 120% 109% 117% 148% 83% 106% 203% 100% Number of shares outstanding at end of year (000's) 15,080 8,677 5,220 4,143 3,817 2,819 1,799 973 Net assets at end of year (000's) $334,167 $155,349 $80,887 $53,927 $45,729 $34,166 $20,570 $10,835 Average net assets during the year (000's) $240,782 $106,139 $66,888 $47,942 $41,002 $26,920 $15,365 $ 7,959 Average commission rate paid $0.0431 $0.0400 N/A N/A N/A N/A N/A N/A PERIOD FROM OCTOBER 2, 1989 TO MAY 31, 1990 --------------- PER SHARE DATA SHARE VALUE AT BEGINNING OF PERIOD $10.00(1) --------- + INCOME (LOSS) from net investment income 0.20 from net realized & unrealized gain (loss) on securities 0.59 --------- total income from investment operations 0.79 --------- - - DISTRIBUTIONS from net investment income (0.20) from net realized gain on securities -- --------- total distributions (0.20) --------- = SHARE VALUE AT END OF PERIOD $10.59 ========= TOTAL RETURN 8.09% ========= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.23% Ratio of net investment income to average net assets 2.04% Portfolio turnover rate 95% Number of shares outstanding at end of year (000's) 612 Net assets at end of year (000's) $ 6,485 Average net assets during the year (000's) $ 5,358 Average commission rate paid N/A
- ------------ (1) The net asset value at the beginning of the period is as of commencement of operations on October 2, 1989. STOCK INDEX FUND(1) - --------------------------------------------------------------------------------
FISCAL YEAR ENDED MAY 31, ------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- -------- -------- PER SHARE DATA SHARE VALUE AT BEGINNING OF YEAR $26.09 $20.69 $16.81 $14.39 $14.36 $13.34 $12.60 ---------- ---------- ---------- ---------- ---------- -------- -------- + INCOME (LOSS) from net investment income 0.40 0.39 0.39 0.37 0.35 0.34 0.32 from net realized & unrealized gain (loss) on securities 7.44 5.57 4.26 2.45 0.12 1.20 0.74 ---------- ---------- ---------- ---------- ---------- -------- -------- total income (loss) from investment operations 7.84 5.96 4.65 2.82 0.47 1.54 1.06 ---------- ---------- ---------- ---------- ---------- -------- -------- - - DISTRIBUTIONS from net investment income (0.40) (0.39) (0.38) (0.37) (0.35) (0.34) (0.32) from net realized gain on securities (0.15) (0.17) (0.39) (0.03) (0.09) (0.18) -- ---------- ---------- ---------- ---------- ---------- -------- -------- total distributions (0.55) (0.56) (0.77) (0.40) (0.44) (0.52) (0.32) ---------- ---------- ---------- ---------- ---------- -------- -------- = SHARE VALUE AT END OF YEAR $33.38 $26.09 $20.69 $16.81 $14.39 $14.36 $13.34 ========== ========== ========== ========== ========== ======== ======== TOTAL RETURN 30.30% 29.24% 28.17% 19.98% 3.29% 11.74% 8.57% ========== ========== ========== ========== ========== ======== ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.31% 0.34% 0.35% 0.38% 0.39% 0.43% 0.50% Ratio of net investment income to average net assets 1.33% 1.76% 2.05% 2.44% 2.44% 2.52% 3.12% Portfolio turnover rate 3% 3% 3% 14% 3% 1% 45% Number of shares outstanding at end of year (000's) 104,334 93,687 85,117 75,451 75,494 66,224 55,598 Net assets at end of year (000's) 3,482,655 $2,444,200 $1,760,786 $1,267,992 $1,086,459 $951,200 $741,667 Average net assets during the year (000's) $2,968,059 $2,019,826 $1,498,398 $1,140,085 $1,030,581 $836,510 $167,262 Average commission rate paid $0.0238 $0.0281 N/A N/A N/A N/A N/A FISCAL YEAR ENDED MAY 31, ------------------------------ 1991 1990 1989 -------- -------- -------- PER SHARE DATA SHARE VALUE AT BEGINNING OF YEAR $11.86 $10.69 $8.90 ------- ------- -------- + INCOME (LOSS) from net investment income 0.31 0.33 0.27 from net realized & unrealized gain (loss) on securities 0.81 1.32 1.86 ------- ------- -------- total income (loss) from investment operations 1.12 1.65 2.13 ------- ------- -------- - - DISTRIBUTIONS from net investment income (0.31) (0.35) (0.25) from net realized gain on securities (0.07) (0.13) (0.09) ------- ------- -------- total distributions (0.38) (0.48) (0.34) ------- ------- -------- = SHARE VALUE AT END OF YEAR $12.60 $11.86 $10.69 ======= ======= ======== TOTAL RETURN 9.98% 15.78% 24.40% ======= ======= ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets 0.67% 0.61% 0.78% Ratio of net investment income to average net assets 2.82% 3.05% 3.05% Portfolio turnover rate 6% 8% 14% Number of shares outstanding at end of year (000's) 6,662 3,456 1,924 Net assets at end of year (000's) $83,970 $40,969 $20,572 Average net assets during the year (000's) $55,147 $29,824 $14,060 Average commission rate paid N/A N/A N/A
- ------------ (1) Bankers Trust has been the Fund's Sub-adviser since May 1, 1992. 9 ABOUT THE SERIES COMPANY'S MANAGEMENT - -------------------------------------------------------------------------------- INVESTMENT ADVISER VALIC, a stock life insurance company, has been in the investment advisory business since 1960. VALIC, as of June 30, 1998, had over $8.5 billion in assets under management. Since May 30, 1985, VALIC has been the Investment Adviser for the Funds that comprise the Series Company. VALIC is a member of the American General Corporation group of companies. The American General Corporation group of companies is a leading provider of retirement services, life insurance, and consumer loans. Members of the American General Corporation group of companies operate in each of the 50 states and Canada and collectively provide financial services with activities heavily weighted toward insurance. As Investment Adviser, VALIC is responsible for each Fund's day to day operations. Also, VALIC supervises the purchase and sale of Fund Investments and performs the cash management function. For the MidCap Index Fund, the Stock Index Fund, the Small Cap Index Fund, the Growth Fund, and the Science & Technology Fund, VALIC employs Investment Sub-advisers who make investment decisions for such Fund(s). However, we make investment decisions for, and are directly responsible for the day to day management of, the Asset Allocation Fund, the Money Market Fund, the Capital Conservation Fund, the Government Securities Fund, the Growth & Income Fund the International Equities Fund, the Social Awareness Fund, and the International Government Bond Fund. VALIC serves as Investment Adviser through an Investment Advisory Agreement it enters into with each Fund. These agreements are renewed once each year, by the Series Company Board of Directors. One Investment Advisory Agreement covers these Funds:
Effective Date of Fund Name Agreement --------- ----------------- Asset Allocation Fund Money Market Fund Capital Conservation Fund September 7, 1990 Government Securities Fund International Equities Fund Social Awareness Fund International Government Bond October 1, 1991 Fund
Another Investment Advisory Agreement covers these Funds:
Effective Date of Fund Name Agreement --------- ----------------- MidCap Index Fund Stock Index Fund May 1, 1992 Small Cap Index Fund Growth Fund Growth & Income Fund May 1, 1994 Science & Technology Fund
For more information on these agreements, see the "Investment Adviser" section in the Statement of Additional Information. INVESTMENT SUB-ADVISERS For some of the Funds, VALIC works with Investment Sub-advisers, financial service companies that specialize in certain types of investing. However, VALIC still retains ultimate responsibility for managing the Funds. The Sub-adviser's role is to make investment decisions for the Funds according to each Fund's investment objectives and restrictions. The Sub-advisers are: BANKERS TRUST COMPANY ("BANKERS TRUST") Since May 1, 1992, Bankers Trust has been the Sub-adviser for the MidCap Index Fund, the Stock Index Fund, and the Small Cap Index Fund. Bankers Trust first offered investment management services in 1938 and began managing index funds in 1977. As of March 31, 1998, Bankers Trust managed $337.8 billion in assets. Bankers Trust is entirely owned by the Bankers Trust New York Corporation, a bank holding company. Bankers Trust is the seventh largest U.S. financial services institution as of December 31, 1996. T. ROWE PRICE ASSOCIATES, INC. ("T. ROWE PRICE") Since May 1, 1994, T. Rowe Price has been the Sub-adviser for the Growth Fund and the Science & Technology Fund. T. Rowe Price was incorporated in Maryland in 1947. The firm, which was founded by Thomas Rowe Price, Jr. in 1937, is one of the pioneers of the growth stock theory of investing. T. Rowe Price, one of the nation's leading no-load fund managers, and its affiliates manage over $141 billion of assets as of June 30, 1998. Its approach to managing money is based on proprietary research and a strict investment discipline developed over six decades. These financial service companies act as Investment Sub-advisers through an agreement each entered into with VALIC. For more information on these agreements and on these Sub-advisers, see the "Investment Sub-Advisers" section in the Statement of Additional Information. PORTFOLIO MANAGER A portfolio manager is a person or team of persons VALIC, or one of its Sub-advisers, has assigned to be primarily responsible for the day to day management of a Fund's investments. A Fund's investments are called its portfolio. VALIC'S ADDRESS is 2929 Allen Parkway, Houston, Texas 77019. BANKERS TRUST'S PRINCIPAL OFFICES are located at One Bankers Trust Plaza, 130 Liberty St., 36th Floor, New York, New York 10006. T. ROWE PRICE'S PRINCIPAL OFFICES are located at 100 East Pratt Street, Baltimore, Maryland 21202. 10 - -------------------------------------------------------------------------------- HOW ADVISERS ARE PAID FOR THEIR SERVICES VALIC Each Fund pays VALIC a fee based on its average daily net asset value. A Fund's net asset value is the total value of the Fund's assets minus any money it owes for operating expenses, such as the fee paid to its Custodian to safeguard the Fund's investments. Here is a list of the percentages each Fund pays VALIC.
Advisory Fee Fund Name (Annual Rate) --------- ------------- Index Equity Funds International Equities 0.35% on the first Fund $500 million; MidCap Index Fund 0.25% on assets Small Cap Index Fund over Stock Index Fund $500 million Growth Fund 0.80% Growth & Income Fund 0.75% Capital Conservation Fund 0.50% Government Securities Fund 0.50% International Government Bond Fund 0.50% Science & Technology Fund 0.90% Social Awareness Fund 0.50% Money Market Fund 0.50% Asset Allocation Fund* 0.50%
The Investment Advisory Agreements we entered into with each Fund do not limit how much the Funds pay in monthly expenses each year. However, we voluntarily limit the Funds' monthly expenses as follows: If a Fund's average monthly expenses, when annualized, are more than 2% of the Fund's estimated average daily net assets, we will pay the difference. As a result the Fund's yield or total return will increase. If VALIC decides to stop voluntarily reducing a Fund's expenses, it may do so by giving 30 days' notice, in writing, to the Series Company. To date, VALIC has not had to reduce expenses of any Fund as a result of this 2% voluntary reduction. For the fiscal year ended May 31, 1998, the total expenses paid by the Series Company of each Fund's average net assets were, as a percentage, as follows:
Total Expenses Fund Name Ratio --------- -------- International Equities Fund 0.40% MidCap Index Fund 0.36% Small Cap Index Fund 0.39% Stock Index Fund 0.31% Growth Fund 0.84% Growth & Income Fund 0.80% Capital Conservation Fund 0.54% Government Securities Fund 0.54% International Government Bond Fund 0.55% Science & Technology Fund 0.95% Social Awareness Fund 0.54% Money Market Fund 0.54% Asset Allocation Fund* 0.54%
* The Asset Allocation Fund was formerly known as the Timed Opportunity Fund. 11 The Sub-advisers According to the agreements we have with the Sub-advisers, we pay them directly out of the fee we receive from the Funds. The Funds do not pay the Sub-advisers directly. We pay them a percentage of what is paid to us by the Funds. We and the Sub-advisers may agree to change the amount of money we pay them. Any such change increasing the charge would have to be approved by the Series Company Board of Directors and by the shareholders of the Fund. Under the Investment Sub-Advisory Agreement we have with Bankers Trust, we pay to Bankers Trust a monthly fee based on the respective average daily net asset values of the MidCap Index Fund at an annual rate of 0.03% on the first $300 million and 0.02% on assets over $300 million, the Stock Index Fund at an annual rate of 0.02% on the first $2 billion and 0.01% on assets over $2 billion and on the Small Cap Index Fund at an annual rate of 0.03% on the first $150 million and 0.02% on assets over $150 million. Under the Investment Sub-Advisory Agreement we have with T. Rowe Price, we pay T. Rowe Price a monthly fee based on the average daily net asset values of the Growth Fund at an annual rate of 0.50% on the first $500 million and 0.45% on assets over $500 million and on the Science & Technology Fund at an annual rate of 0.60% on the first $500 million and 0.55% on assets over $500 million. VALIC is required to pay a minimum yearly sub-advisory fee of $50,000 for the Small Cap Index Fund. There are no minimum yearly sub-advisory fees for the Stock Index Fund, MidCap Index Fund, Growth Fund, Growth & Income Fund and the Science & Technology Fund. According to the agreements we have with the Sub-advisers, we will receive investment advice for each sub-advised Fund. Under these agreements we give the Sub-advisers the authority to manage these Funds and to buy and sell securities for these Funds. We retain the responsibility for the overall management of these Funds. The Sub-advisers may buy and sell securities for each Fund with broker-dealers and other financial intermediaries that they select. The Sub-advisers may place orders to buy and sell securities of these Funds with a broker-dealer affiliated with the Sub-adviser as allowed by law. This could include any affiliated futures commission merchants. Further, in the case of T. Rowe Price, it may include any indirectly related broker. The Investment Company Act of 1940 ("1940 Act") permits Sub-advisers under certain conditions to place an order to buy or sell securities with an affiliated broker. One of these conditions is that the commission received by the affiliated broker can not be greater than the usual and customary broker's commission if the sale was completed on a securities exchange. The Series Company has adopted procedures, as required by the 1940 Act, which provide that any commissions received by a Sub-adviser's affiliated broker are reasonable and fair if compared to the commission received by other brokers for the same type of securities transaction. The Securities Exchange Act of 1934 prohibits members of national securities exchanges from effecting exchange transactions for accounts that they or their affiliates manage, except as allowed under rules adopted by the Securities and Exchange Commission ("SEC"). The Series Company and the Sub-advisers have entered into a written contract, as required by the 1940 Act, to allow the Sub-adviser's affiliate to effect these type of transactions for commissions. The 1940 Act generally prohibits a Sub-adviser or a Sub-adviser's affiliate, acting as principal, from engaging in securities transactions with a Fund, without an exemptive order from the SEC. We and the Sub-advisers may enter into simultaneous purchase and sale transactions for the Funds or affiliates of the Funds. ABOUT THE BOARD OF DIRECTORS The Series Company Board of Directors currently consists of eight members: five are independent directors and three are VALIC employees. The Board of Directors may change each Fund's investment objective, investment policies and non-fundamental investment restrictions without shareholder approval. The Board may not change any fundamental restrictions placed on the types of investments each Fund may buy. The fundamental restrictions appear in the Statement of Additional Information. Changes to these restrictions may be made with shareholder approval only. For more information on WHAT THE SUB-ADVISERS ARE PAID, see the "Investment Sub-Advisers" section in the Statement of Additional Information. 12 ABOUT THE FUNDS - -------------------------------------------------------------------------------- GROWTH, INCOME AND STABILITY CATEGORIES The Funds offered in this prospectus fall into three general investment categories: growth, income and stability. Growth Category The goal of a Fund in the growth category is to increase the value of your investment over the long term by investing mostly in stocks. Stocks are a type of investment that can increase in value over a period of years. Companies sell stock to get the money they need to grow. These companies often keep some of their profits to reinvest in their business. As they grow, the value of their stock may increase. This is how the value of your investment may increase. Series Company Growth Category includes: Asset Allocation Fund Growth Fund Growth & Income Fund International Equities Fund MidCap Index Fund Science & Technology Fund Small Cap Index Fund Social Awareness Fund Stock Index Fund Income Category Unlike Funds in the growth category, where the objective is to make the Fund's investments increase in value, Funds in the income category try to keep the value of their investments from falling, while providing an increase in the value of your investment through the income earned on the Fund's investments. To meet this objective, Funds in the income category buy investments that are expected to pay interest to the Fund on a regular basis. Series Company Income Category includes: Capital Conservation Fund Government Securities Fund International Government Bond Fund Stability Category Funds in the stability category provide liquidity, protection of capital and current income through investments in high quality securities. Series Company Stability Category includes: Money Market Fund ABOUT LEVEL OF RISK The risks involved in each Fund are described in each Fund's Fact Sheet. These risks include market risk, credit risk, interest rate risk and risk associated with foreign securities. These risks are described in the "Types of Investments" section in this prospectus. The money you invest in the Series Company is not insured. And, we can't guarantee that any of the Funds will meet their investment objectives. There's a chance you may lose money and end up with less than you invested. ABOUT PORTFOLIO TURNOVER Portfolio turnover occurs when a Fund sells its investments and buys new ones. In some Funds, high portfolio turnover occurs when these Funds sell and buy investments as part of their investment strategy. In other Funds, like the Index Funds discussed below, portfolio turnover is lower because the make up of the index stays fairly constant. High portfolio turnover may cause a fund's expenses to increase. For example, a fund may have to pay brokerage fees and other related expenses. 13 - -------------------------------------------------------------------------------- For each of the last two fiscal years the portfolio turnover rates for each of the Funds except the Money Market Fund were as follows:
Fiscal Year Ending ----------------------- May 31, May 31, 1997 1998 ------- ------- International Equities Fund 12% 9% MidCap Index Fund 19% 26% Small Cap Index Fund 42% 36% Stock Index Fund 3% 3% Growth Fund 40% 43% Growth & Income Fund 45% 78% Capital Conservation Fund 45% 14% Government Securities Fund 38% 24% International Government Bond Fund 4% 17% Science & Technology Fund 122% 128% Social Awareness Fund 109% 120% Asset Allocation Fund 103% 24%
A portfolio turnover rate over 100% a year is higher than the rates of many other mutual fund companies. A high rate increases a Fund's transaction costs and expenses. ABOUT FUND PERFORMANCE From time to time the Series Company may advertise Fund performance information such as Fund average total return and index total return. Current Fund performance and information as to how this Fund performance information is calculated appears in the Statement of Additional Information. Additionally, information on separate account performance appears in your contract prospectus. 14 ABOUT INDEX EQUITY FUNDS - -------------------------------------------------------------------------------- Four of the 13 Funds in the Series Company are Index Equity Funds investing mostly in stocks. Their investment strategy is to track the performance of a specific index. This strategy is followed whether markets go up or down. As part of this investment strategy, each Fund may also invest in futures contracts and options. Because these Funds do not have a defensive investment strategy, when the market goes down, you will bear the risk of such market decline. Index Funds perform best over the long term. This means you should plan to keep your money in an Index Fund for a period of years. WHAT IS AN INDEX? An index reflects the average performance of a particular class of securities. Examples of indexes include large company stocks (S&P 500 Index), mid-size company stocks (S&P MidCap 400 Index), the bond market, or stocks of companies in specific industries. Indexes are not managed funds, and cannot be bought. Investment advisers compare the results of the funds they manage to indexes that are close to the investment style of the fund. Information about the Series Company's use of Standard & Poor's Indexes is in the Statement of Additional Information. WHICH INDEXES DO THESE FUNDS TRY TO TRACK? While there are more than a hundred different indexes, the Index Funds in this prospectus try to track four very prominent stock indexes: The Stock Index Fund tracks the Standard & Poor's 500 Stock Index(R)* The Standard & Poor's 500 Stock Index(R) (S&P 500) tracks the common stock performance of large U.S. companies in the manufacturing, utilities, transportation, and financial industries. These companies are usually listed on the New York Stock Exchange. It also tracks performance of common stocks sold by foreign and smaller U.S. companies in similar industries. The smaller U.S. companies are usually listed on the American Stock Exchange. In total, this index tracks 500 common stocks. This index may periodically change some of the stocks it tracks. And, different indexes sometimes track some of the same stocks. For example, as of May 31, 1998, this Index was tracking 18 of the same stocks tracked by the Russell 2000 Index. The MidCap Index Fund tracks the Standard & Poor's MidCap 400(R) Index* The Standard & Poor's MidCap 400(R) Index (S&P MidCap 400) tracks the common stock performance of 400 medium capitalized U.S. and foreign companies that are in the manufacturing, utilities, transportation, and financial industries. The average market capitalization of the S&P MidCap 400 Index was $3.4 billion as of May 31, 1998. Standard & Poor's created this Index in 1991 to give investors an idea of how the stocks of medium capitalized companies generally perform. Standard & Poor's may periodically change some of the stocks in the index. And, different indexes sometimes include some of the same stocks. For example, as of May 31, 1998, this Index was tracking 130 of the same stocks tracked by the Russell 2000 Index. This Index does not track the same stocks as the S&P 500 Index. The Small Cap Index Fund tracks The Russell 2000(R) Index** The Russell 2000 Index is provided by The Frank Russell Company. This Index tracks the common stock performance of 2,000 small capitalized U.S. companies in various industries. Small capitalized means these companies have a market value below $1 billion. The Frank Russell Company created this Index in 1979 to give investors an idea of how the stocks of small capitalized companies generally perform. The average market capitalization of the Russell 2000 Index was $820 million as of May 31, 1998. The stocks tracked by this Index are updated annually because many small capitalized companies eventually become medium capitalized companies and some fail. - ------------ * "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "S&P MidCap 400(R)" are trademarks of Standard & Poor's ("S&P"). Neither the MidCap Index Fund nor the Stock Index Fund is sponsored, endorsed, sold or promoted by S&P, and S&P makes no representation regarding the advisability of investment in these Funds. ** The Russell 2000(R) Index is a trademark/service mark of the Frank Russell Trust Company. The Small Cap Index Fund is not promoted, sponsored or endorsed by, nor in any way affiliated with Frank Russell Company. Frank Russell Company is not responsible for and has not reviewed the Fund or any associated literature or publications and makes no representation or warranty, express or implied, as to their accuracy, or completeness, or otherwise. INDEX FUNDS have outperformed most mutual funds over consecutive ten year periods. However, because they are managed to track an index they will rise and fall with the market. 15 - -------------------------------------------------------------------------------- The International Equities Fund tracks The Morgan Stanley Capital International, Europe, Australia and the Far East (EAFE) Index. The EAFE Index tracks the performance of about 1,000 common stocks of companies in 20 foreign countries. This index provides a measure of the performance of companies in the more developed countries in Europe, Australia and the Far East. Morgan Stanley publishes the EAFE Index daily and, at times, may change some of the stocks in the index. HOW CLOSELY CAN INDEX FUNDS TRACK THE PERFORMANCE OF THEIR INDEX? The factors that cause a Fund to perform differently from the Index it tries to track are called tracking differences. There is no assurance that an Index Fund can track its index. The coefficient of correlation (r) is an index number which shows how closely two variables are related. If r=0 there is no tendency for one variable to change with the other. A value of +1 means that one variable will vary exactly with the other. Index funds try to keep their coefficient of correlation as close to 1 as possible. As a practical matter, any coefficient above 0.95, when measured against the comparison index, shows good tracking. The index may remove one stock and substitute another requiring the sub-adviser of the Fund to do the same. When a stock is sold and the new stock purchased, the Fund incurs transaction costs. The index incurs no transaction costs. Therefore, the portfolio manager cannot match exactly the performance of an index. Also, it may not be possible for a Fund to buy every stock in its index or in the same proportions. Fund portfolio managers may rely on a statistical selection technique to figure out, of the stocks tracked by their index, how many and which ones to buy. Stocks are bought and sold when they are added to or dropped from the Index. This keeps brokerage fees and other transaction costs low. For more information, see the "Investment Strategy" sections on each Fund's Fact Sheet. 16 HOW TO READ A FUND FACT SHEET - -------------------------------------------------------------------------------- FACT SHEET DESCRIPTION 17 ASSET ALLOCATION FUND Fact Sheet - ------------------------------------------------- Investment Goal MAXIMUM RETURN THROUGH INVESTMENT IN A MIX OF STOCKS, BONDS AND MONEY MARKET SECURITIES - ------------------------------------------------- Investment Category GROWTH - -------------------------------------------------------------------------------- INVESTMENT ADVISER VALIC PORTFOLIO MANAGER: Leon A. Olver, C.F.A., who is Vice President and Investment Officer for the Series Company is the Portfolio Manager of this Fund. Mr. Olver was an Assistant Vice President for Pulte Financial Companies, Denver, Colorado, from 1984 to 1991. From 1991 to 1995 Mr. Olver worked for First Heights Bank, Houston, Texas; he was Vice President, Assistant Treasurer 1991-1994, and Vice President, Treasurer from 1994-1995. He is also the Portfolio Manager for the Capital Conservation Fund and Government Securities Fund. INVESTMENT OBJECTIVE Seeks maximum aggregate rate of return over the long-term through controlled investment risk by adjusting its investment mix among stocks, long-term debt securities and short-term money market securities. INVESTMENT RISK The Fund uses the Bankers Trust Tactical Asset Allocation Model (Model) which allocates the Fund's assets. The Model tries to get the best return from three types of securities. A part of that program also tries to reduce risk. The mix of securities the Fund invests in involves market risk, credit risk, interest rate risk and risk associated with foreign securities. For a discussion of these risks, see "A Word About Risk" in this prospectus. INVESTMENT STRATEGY The Fund is an asset allocation fund that attempts to maximize returns with a mix of stocks, bonds and money market securities. We buy and sell securities for the Fund by changing its investment mix among stocks, intermediate and long-term bonds and money market securities. As a result, the Fund's investments may change often. Also, the Fund can invest 100% in just one of these market sectors. Unlike an index fund, which tries to increase the money you invest by matching a specific index's performance, the Asset Allocation Fund tries to perform better than a blend of three market sectors measured by: - - the S&P 500 Index; - - the Merrill Lynch Corporate and Government Master Index; and - - the Certificate of Deposit Primary Offering by New York City Banks, 30-Day Rate To help us decide how to allocate the Fund's assets, we rely on the Model. The Model analyzes many factors that affect the performance of securities that comprise certain indexes. Based on the Model, we intend to allocate the Fund's assets around the following benchmarks: stocks (common stock, preferred 55% stock and convertible preferred stock) intermediate and long-term bonds 35% high quality money market securities 10%
The Fund has established separate sub-objectives for investments in each of the three market sectors. Within the stock sector, the Fund seeks appreciation of capital by selecting investments that it expects will participate in the growth of the nation's economy. Within the bond sector, the Fund will generally seek high current income consistent with reasonable investment risk. Within the money market sector, the Fund seeks the highest level of current income consistent with liquidity, stability, and preservation of capital. As of May 31, 1998, the Fund's assets were invested as follows: stocks 58.36% intermediate and long-term bonds 32.53% high quality money market securities 9.11%*
- ------------ * After taking the contract value of futures positions into consideration. See "Types of Investments". Because there is no limit as to how often we may buy and sell securities for this Fund, this can increase what is called the "portfolio turnover" rate. A higher rate of portfolio turnover will also increase the brokerage fees and expenses payable out of the Fund's assets. For more information about portfolio turnover, see "About the Funds" in this prospectus. For additional information about THE FUND'S INVESTMENTS see "Types of Investments" in the prospectus. 18 ASSET ALLOCATION FUND Fact Sheet - --------------------------------------------------------------------------------
Percent of Fund Investments Fund's Assets* - ----------------------------------------------------------------- Foreign securities up to 20% - ----------------------------------------------------------------- Futures and options no more than 33% - ----------------------------------------------------------------- Illiquid securities up to 10% - -----------------------------------------------------------------
*At time of purchase. COMPARISON OF A CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE ASSET ALLOCATION FUND* AND THE S&P 500 INDEX AVERAGE ANNUAL TOTAL RETURN -- FUND - ----------------------------------------------------------------- 1 YEAR 5 YEAR 10 YEAR - ----------------------------------------------------------------- 21.94% 13.79% 11.21% - -----------------------------------------------------------------
[CHART] FISCAL YEAR ENDED MAY 31 * The Asset Allocation Fund was formerly known as the Timed Opportunity Fund. For the fiscal year ended May 31, 1998, the Fund had a return of 22.48% before subtracting expenses of 0.54%. This represents a positive tracking difference of 1.26% compared to the Fund's benchmark, a blended Index of the S&P 500 Index, the Merrill Lynch Corporate and Government Master Index and the Certificate of Deposit Primary Offering to New York City Banks, 30 Day Rate. Bond performance lagged the relevant index due to one Asian holding, and stock performance tracked the index. Over-allocation to stocks resulted in overall outperformance. COMPARISON OF A CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE ASSET ALLOCATION FUND* AND THE MODEL BENCHMARK AVERAGE ANNUAL TOTAL RETURN -- FUND - ---------------------------------------------------------------- 1 YEAR SINCE 9/1/92** - ---------------------------------------------------------------- 21.94% 13.59% - ----------------------------------------------------------------
[CHART] FISCAL YEAR ENDED MAY 31 ** Beginning September 1, 1992 we began to use the Bankers Trust Tactical Asset Allocation Model to manage this Fund. The performance of the Fund may be compared to a benchmark comprised of a weighted average of three market sectors in which the Fund invests. This benchmark is described above. PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. The Fund returns reflect investment management fees and other Fund expenses. The Fund returns do not reflect charges included in the annuity contract for mortality and expense guarantees, administrative fees or surrender charges. 19 CAPITAL CONSERVATION FUND Fact Sheet - ------------------------------------------------- Investment Goal INCOME AND POSSIBLE GROWTH THROUGH INVESTMENTS IN HIGH QUALITY DEBT SECURITIES - ------------------------------------------------- Investment Category INCOME - -------------------------------------------------------------------------------- INVESTMENT ADVISER VALIC PORTFOLIO MANAGER: Craig A. Mitchell is this Fund's Portfolio Manager. Mr. Mitchell has been Vice President and Investment Officer of VALIC since February 1999. Mr. Mitchell joined American General Corporation in May 1995. From July 1992 to April 1995, Mr. Mitchell served as Assistant Portfolio Manager and, subsequently, Portfolio Manager at Providian Corporation. INVESTMENT OBJECTIVE Seeks the highest possible total return consistent with preservation of capital through current income and capital gains on investments in intermediate and long-term debt instruments and other income producing securities. INVESTMENT RISK The securities the Fund invests in involve certain risks, such as interest rate risk, credit risk, market risk and risk associated with foreign securities. This may cause the debt instruments that the Fund owns to be worth less than what the Fund paid. For a discussion of these risks see "A Word About Risk" in this prospectus. INVESTMENT STRATEGY The Fund invests in high quality bonds to provide you with the highest possible total return from current income and capital gains while preserving your investment. To increase the Fund's earning potential, we may use a small part of the Fund's assets to make some higher risk investments. We follow the guidelines listed below for making the primary investments for the Fund.
Percent of Fund Investments Fund's Assets* - ---------------------------------------------------- Investment grade at least 75% intermediate and long-term corporate bonds rated at least Baa by Moody's or another rating organiza- tion**, securities issued or guaranteed by the U.S. Government***, mortgage backed securities, asset- backed securities, collateralized mortgage obligations and high quality money market securities - ---------------------------------------------------- Debt securities up to 25% rated at least B by Moody's or another rating organization**** Preferred or convertible preferred stock, Convertible debt securities - ---------------------------------------------------- Foreign securities, mostly up to 20% foreign bonds that are of the same quality as other bonds purchased by this Fund - ---------------------------------------------------- Common stocks***** up to 10% - ---------------------------------------------------- Futures and options up to 33% - ---------------------------------------------------- Illiquid securities up to 10% - ---------------------------------------------------- *At time of purchase. **For more information concerning ratings see "Description of Corporate Bond Ratings" and "Description of Commercial Paper Ratings" in the Statement of Additional Information. ***U.S. Government securities are securities issued or guaranteed by the U.S. Government which are supported by (i) the full faith and credit of the U.S. Government, (ii) the right of the issuer to borrow from the U.S. Treasury, (iii) the credit of the issuing government agency or (iv) the discretionary authority of the U.S. Government or GNMA to purchase certain obligations of the agency. For more information see "Government Securities Fund" in the Statement of Additional Information. ****The Fund currently intends to limit these investments to no more than 5% of its total assets. For the fiscal year ended May 31, 1998 approximately 3% of the Fund's average monthly assets were invested in securities rated below Baa determined on a dollar-weighted basis. *****Only stocks acquired by conversion of income- bearing securities or by exercising warrants attached to income-bearing securities.
Additional information about THE FUND'S INVESTMENTS is provided under "Types of Investments". 20 CAPITAL CONSERVATION FUND Fact Sheet - -------------------------------------------------------------------------------- For the fiscal year ended May 31, 1998, the Fund had a return of 11.30% before subtracting expenses of 0.54%. This represents a negative tracking difference of 1.05% from the Fund's benchmark; the Merrill Lynch Corporate Master Bond Index. The Fund was impacted by the weak performance of two Asian holdings and the uncertainty surrounding Columbia Healthcare. COMPARISON OF A CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE CAPITAL CONSERVATION FUND AND THE MERRILL LYNCH CORPORATE MASTER INDEX AVERAGE ANNUAL TOTAL RETURN -- FUND - ----------------------------------------------------------------- 1 YEAR 5 YEAR 10 YEAR - ----------------------------------------------------------------- 10.76% 6.41% 7.95% - -----------------------------------------------------------------
[CHART] FISCAL YEAR ENDED MAY 31 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. The Fund returns reflect investment management fees and other Fund expenses. The Fund returns do not reflect charges included in the annuity contract for mortality and expense guarantees, administrative fees or surrender charges. 21 GOVERNMENT SECURITIES FUND Fact Sheet - ------------------------------------------------- Investment Goal INCOME AND POSSIBLE GROWTH THROUGH INVESTMENTS IN INTERMEDIATE & LONG- TERM GOVERNMENT DEBT SECURITIES - ------------------------------------------------- Investment Category INCOME - -------------------------------------------------------------------------------- INVESTMENT ADVISER VALIC PORTFOLIO MANAGER: Leon A. Olver, C.F.A., Vice President and Investment Officer for the Series Company, is this Fund's Portfolio Manager. Mr. Olver was an Assistant Vice President for Pulte Financial Companies, Denver, Colorado from 1984 to 1991. From 1991 to 1995 Mr. Olver worked for First Heights Bank, Houston, Texas; he was Vice President, Assistant Treasurer 1991-1994; and Vice President, Treasurer from 1994 to 1995. He is also the Portfolio Manager for the Capital Conservation Fund and the Asset Allocation Fund. INVESTMENT OBJECTIVE Seeks high current income and protection of capital through investments in intermediate and long-term U.S. Government debt securities. INVESTMENT RISK The securities the Fund invests in involve certain risks, including interest rate risk, credit risk and risk associated with foreign securities. This may cause the debt instruments that the Fund owns to be worth less than what the Fund paid. For a discussion of these risks see "A Word About Risk" in this prospectus. INVESTMENT STRATEGY The Fund primarily invests in intermediate and long term U.S. Government and government sponsored investments. The Fund may also use up to 20% of its assets to make high quality foreign investments payable in U.S. dollars. We follow the guidelines listed below for making the primary investments for the Fund.
Percent of Fund Investments Fund's Assets* - ---------------------------------------------------- Debt securities issued or at least 80% guaranteed by the U.S. Government**, asset- backed securities, high quality domestic money market securities - ---------------------------------------------------- Mortgage-backed securities up to 25% - ---------------------------------------------------- High quality foreign up to 20% government securities and high quality foreign money market securities payable in U.S. dollars - ---------------------------------------------------- Futures and options up to 33% Listed and unlisted call and put options on securities, stock indices and currencies - ---------------------------------------------------- Illiquid securities up to 10% - ---------------------------------------------------- *At time of purchase. **U.S. Government securities are securities issued or guaranteed by the U.S. Government and which are supported by (i) the full faith and credit of the U.S. Government, (ii) the right of the issuer to borrow from the U.S. Treasury, (iii) the credit of the issuing government agency, or (iv) the discretionary authority of the U.S. Government or GNMA to purchase certain obligations of the agency. For more information see "Government Securities Fund" in the Statement of Additional Information.
Additional information about THE FUND'S INVESTMENTS is provided under "Types of Investments". 22 GOVERNMENT SECURITIES FUND Fact Sheet - -------------------------------------------------------------------------------- For the fiscal year ended May 31, 1998, the Fund had a return of 11.14% before subtracting expenses of 0.54%. This represents a negative tracking difference of 0.08% from the Fund's benchmark, the Lehman Brothers U.S. Treasury Composite Index. Positions in callable agency notes and collateralized mortgage obligations marginally lowered the Fund's yield. COMPARISON OF A CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE GOVERNMENT SECURITIES FUND AND THE LEHMAN BROTHERS U.S. TREASURY COMPOSITE INDEX AVERAGE ANNUAL TOTAL RETURN -- FUND - ----------------------------------------------------------------- 1 YEAR 5 YEAR 10 YEAR - ----------------------------------------------------------------- 10.60% 6.04% 7.96% - -----------------------------------------------------------------
[CHART] FISCAL YEAR ENDED MAY 31 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. The Fund returns reflect investment management fees and other Fund expenses. The Fund returns do not reflect charges included in the annuity contract for mortality and expense guarantees, administrative fees or surrender charges. 23 GROWTH FUND Fact Sheet - ------------------------------------------------- Investment Goal GROWTH THROUGH INVESTMENTS IN SERVICE SECTOR COMPANIES - ------------------------------------------------- Investment Category GROWTH - -------------------------------------------------------------------------------- INVESTMENT ADVISER VALIC INVESTMENT SUB-ADVISER T. Rowe Price PORTFOLIO MANAGER: This Fund is managed by an Investment Advisory Committee chaired by John H. Laporte. He has been chairman of this committee since it was started in 1994. Mr. Laporte joined T. Rowe Price in 1976 and has been managing investments since 1984. INVESTMENT OBJECTIVE Seeks to provide long-term growth of capital through investment primarily in common stocks of U.S. growth companies engaged in service-related activities. INVESTMENT RISK This Fund invests in many companies that are small and/or new. These companies face special risks because they may not have the financial strength to do well during difficult times. The securities that the Fund invests in involve certain risks, such as market risk, and risk associated with foreign securities. For a discussion of these risks, see "A Word About Risk" in this prospectus. INVESTMENT STRATEGY The Fund invests primarily in U.S. companies that are in the services industry. Examples include: consumer services (retailing, entertainment/leisure, media communications, restaurants/food distribution) business services (healthcare, computer services), and financial services (insurance, investment service). We believe if service companies outpace overall economic growth, their stocks could generate above-average returns. Currently, over 50% of the U.S. economy is made up of service companies. We follow the guidelines listed below for making the primary investments for the Fund.
Percent of Fund Investments Fund's Assets* - ---------------------------------------------------- Common stocks and at least 75% related securities, bonds, preferred stock, convertible stock of service industry companies - ---------------------------------------------------- Foreign securities up to 15% - ---------------------------------------------------- Equity securities sold by up to 25% non-service related companies - ---------------------------------------------------- Illiquid securities up to 15% - ---------------------------------------------------- Futures and options up to 25% - ---------------------------------------------------- High quality money market up to 100% securities** - ---------------------------------------------------- * At time of purchase. ** If, for temporary defensive reasons, we invest 35% or more of the Fund's assets in money market securities, it is likely 25% or more of the Fund's assets will be invested in securities of the banking industry. This type of concentration in a single industry may increase the general level of risk to the Fund.
Additional information about THE FUND'S INVESTMENTS is provided under "Types of Investments". 24 GROWTH FUND Fact Sheet - -------------------------------------------------------------------------------- For the fiscal year ended May 31, 1998, the Fund had a return of 28.25% before subtracting expenses of 0.84%. This return represented a negative tracking difference of 2.43% compared to the Fund's benchmark, the S&P 500 Index. The Fund's focus on non-cyclical growth companies in service businesses, a strategy that performs well in a slow growth economy, was not in favor as a surprisingly strong economy drove favorable earnings reports in most industries. COMPARISON OF A CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE GROWTH FUND AND THE S&P 500 INDEX AVERAGE ANNUAL TOTAL RETURN -- FUND - ---------------------------------------------------------------- 1 YEAR SINCE INCEPTION* - ---------------------------------------------------------------- 27.41% 23.26% - ----------------------------------------------------------------
[CHART] FISCAL YEAR ENDED MAY 31 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. The Fund returns reflect investment management fees and other Fund expenses. The Fund returns do not reflect charges included in the annuity contract for mortality and expense guarantees, administrative fees or surrender charges. 25 GROWTH & INCOME FUND Fact Sheet - ------------------------------------------------- Investment Goal GROWTH AND INCOME THROUGH INVESTMENTS IN STOCKS OR SECURITIES CONVERTIBLE INTO STOCKS - ------------------------------------------------- Investment Category GROWTH - -------------------------------------------------------------------------------- INVESTMENT ADVISER VALIC PORTFOLIO MANAGER: Paul Green is manager of the Fund. Mr. Green has been Vice President and Investment Officer of VALIC since February 1999. Previously, Mr. Green was with BARRA Consulting, Inc. since July 1993. INVESTMENT OBJECTIVE Seeks to provide long-term growth of capital and, secondarily, current income through investment in common stocks and equity-related securities. INVESTMENT RISK This Fund invests almost entirely in stocks. Stock values can rise and fall over both short and long periods of time. However, we believe that our investment strategy helps us to manage the risks the Fund is subject to such as market risk, credit risk, interest rate risk and risk associated with foreign securities. For a discussion of market risk, credit risk, interest rate risk and risk associated with foreign securities, see "A Word About Risk" in this prospectus. INVESTMENT STRATEGY The Fund invests in stocks that provide long-term growth potential. As a secondary goal, the Fund invests in securities that will provide current income. We use a top-down, highly disciplined investment process. A universe of potential investment candidates is developed and then tested through various filters to determine the appropriate mix for achieving the desired returns while limiting variation relative to the market. The portfolio will usually consist of a diversified selection of large capitalization stocks with a tendency toward lower price/earnings multiples. We follow the guidelines listed below for making the primary investments for the Fund.
Percent of Fund Investments Fund's Assets* - ---------------------------------------------------- Common stocks and equity generally 90-95% related securities bonds, preferred stock, convertible stock and warrants - ---------------------------------------------------- Futures and options up to 25% - ---------------------------------------------------- Foreign securities up to 20% - ---------------------------------------------------- Illiquid securities up to 15% - ---------------------------------------------------- High quality money market up to 100% securities** - ---------------------------------------------------- *At time of purchase. **For temporary defensive reasons, we may invest up to 100% of the Fund's assets in fixed income securities such as U.S. Government securities, bonds, commercial paper, repurchase agreements and cash equivalents. We may do this when we think economic and market conditions make it too risky for us to follow our general guidelines.
Additional information about THE FUND'S INVESTMENTS is provided under "Types of Investments". 26 GROWTH & INCOME FUND Fact Sheet - -------------------------------------------------------------------------------- For the fiscal year ended May 31, 1998, the Fund had a return of 20.67% before subtracting expenses of 0.80%. This return represented a negative tracking difference of 10.01% compared to the Fund's benchmark, the S&P 500 Index. Large capitalization stocks have led this market advance, with small and midcap stocks lagging. This disparate performance impacted the Fund negatively as the small and midcap stocks are well represented in the Value Line Timeliness Ranking System. The Fund is managed using that system. COMPARISON OF A CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE GROWTH & INCOME FUND AND THE S&P 500 INDEX AVERAGE ANNUAL TOTAL RETURN -- FUND - ---------------------------------------------------------------- 1 YEAR SINCE INCEPTION* - ---------------------------------------------------------------- 19.87% 20.19% - ----------------------------------------------------------------
[CHART] FISCAL YEAR ENDED MAY 31 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. The Fund returns reflect investment management fees and other Fund expenses. The Fund returns do not reflect charges included in the annuity contract for mortality and expense guarantees, administrative fees or surrender charges. 27 INTERNATIONAL EQUITIES FUND Fact Sheet - ------------------------------------------------- Investment Goal GROWTH THROUGH INVESTMENTS TRACKING THE EAFE INDEX - ------------------------------------------------- Investment Category GROWTH - -------------------------------------------------------------------------------- INVESTMENT ADVISER VALIC PORTFOLIO MANAGER: This Fund attempts to track the performance of the EAFE Index. William Trimbur, Jr. has been this Fund's Portfolio Manager since 1992. He has been Vice President and Investment Officer for the Series Company since 1987. Mr. Trimbur is also the Portfolio Manager for the International Government Bond Fund and the Social Awareness Fund. INVESTMENT OBJECTIVE Seeks to provide long-term growth of capital through investments primarily in a diversified portfolio of equity and equity related securities of foreign issuers that, as a group, are expected to provide investment results closely corresponding to the performance of the EAFE Index. INVESTMENT RISK As described in the Investment Strategy section below, this Fund invests almost all its assets in foreign securities, which have risks that U.S. investments do not have. For a further explanation of the risks associated with foreign securities and market risk, see "A Word About Risk" in this prospectus. INVESTMENT STRATEGY The Fund invests in a sampling of about 100 foreign stocks of companies that are either in the EAFE Index or are similar to stocks in the EAFE Index. These stocks, as a group, should reflect EAFE's performance. Since it may not be possible for this Fund to buy every stock included in this index or in the same proportions, we buy as many stocks as are needed to closely track the performance of the EAFE Index. We follow the guidelines listed below for making the primary investments for the Fund.
Percent of Fund Investments Fund's Assets* - ---------------------------------------------------- Stocks in the EAFE Index at least 65%** - ---------------------------------------------------- Other investments not in no more than 35% EAFE Index Foreign equity and related securities including common stocks, convertible stocks, preferred stocks and warrants - ---------------------------------------------------- Futures and options no more than 33% Covered put and call options on foreign currencies Listed and unlisted put and call options on currency futures Listed and unlisted foreign currency contracts - ---------------------------------------------------- High quality foreign and up to 100% domestic money market securities** - ---------------------------------------------------- Illiquid securities no more than 10% - ---------------------------------------------------- *At time of purchase. **It is possible we may invest up to 100% of the Fund's assets in short term, high quality, foreign and domestic money market securities when we think economic, political and market conditions in foreign countries make it too risky to follow our general guidelines.
Additional information about THE FUND'S INVESTMENTS is provided under "Types of Investments". 28 INTERNATIONAL EQUITIES FUND Fact Sheet - -------------------------------------------------------------------------------- For the fiscal year ended May 31, 1998, the Fund had a return of 10.32% before subtracting expenses of 0.40%. This return represented a negative tracking difference of 0.79% compared to the EAFE Index. The underperformance resulted from low exposure to smaller capitalization stocks which did well in early 1998. COMPARISON OF A CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE INTERNATIONAL EQUITIES FUND AND THE EAFE INDEX AVERAGE ANNUAL TOTAL RETURN -- FUND - ----------------------------------------------------------------- 1 YEAR 5 YEAR SINCE INCEPTION* - ----------------------------------------------------------------- 9.92% 9.56% 5.04% - -----------------------------------------------------------------
[CHART] FISCAL YEAR ENDED MAY 31 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. The Fund returns reflect investment management fees and other Fund expenses. The Fund returns do not reflect charges included in the annuity contract for mortality and expense guarantees, administrative fees or surrender charges. 29 INTERNATIONAL GOVERNMENT BOND FUND Fact Sheet - ------------------------------------------------- Investment Goal INCOME AND POSSIBLE GROWTH THROUGH INVESTMENTS IN HIGH QUALITY FOREIGN GOVERNMENT DEBT SECURITIES - ------------------------------------------------- Investment Category INCOME - -------------------------------------------------------------------------------- INVESTMENT ADVISER VALIC PORTFOLIO MANAGER: William Trimbur, Jr. has been this Fund's Portfolio Manager since the Fund was started in 1991. He has been Vice President and Investment Officer for the American General Series Portfolio Company since 1987. Mr. Trimbur is also the Portfolio Manager for the International Equities Fund and the Social Awareness Fund. INVESTMENT OBJECTIVE Seeks high current income through investments primarily in high quality debt securities issued or guaranteed by foreign governments. INVESTMENT RISK This Fund invests mostly in bonds that are issued by foreign governments. Although these governments promise to pay the principal and interest due on their bonds, it is still possible you may not get back all the money you invest. For a discussion of the risks associated with foreign securities, credit risk, and interest rate risk see "A Word About Risk" in this prospectus. INVESTMENT STRATEGY The Fund aims to give you foreign investment opportunities primarily in high quality government and government sponsored debt securities. Since the Fund expects to concentrate in certain foreign government securities, it is classified as a "non-diversified" investment company. Also, the Fund attempts to have all of its investments payable in foreign currencies. The Fund may also convert its cash to foreign currency. To help us choose which countries to invest in we rely, in part, on the Salomon Brothers Non-U.S. Dollar World Government Bond Index (Salomon Index). The Salomon Index is a widely used, international government bond index. It tracks the performance of government bonds sold in Austria, Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden, and the United Kingdom. In addition, the Fund may invest in securities in other countries, provided such securities are payable in the currencies of the countries in the Salomon Index. We do not try to copy this index's performance. Rather, we use it as a guide. We follow the guidelines listed below for making the primary investments for the Fund.
Percent of Fund Investments Fund's Assets* - ---------------------------------------------------- High quality debt securities at least 65% issued or guaranteed by foreign governments - ---------------------------------------------------- Other high quality debt no more than 35% securities, including Foreign corporate debt and foreign money market securities sold in the countries listed above High quality domestic money market securities and debt obligations issued or guaranteed by the U.S. Government Foreign currency exchange transactions - ---------------------------------------------------- Futures and options no more than 33% Covered put and call options on foreign currencies Listed put and call options on currencies Listed and unlisted foreign currency futures contracts - ---------------------------------------------------- Illiquid securities up to 10% - ---------------------------------------------------- *At time of purchase.
Additional information about THE FUND'S INVESTMENTS is provided under "Types of Investments". 30 INTERNATIONAL GOVERNMENT BOND FUND Fact Sheet - -------------------------------------------------------------------------------- For temporary defensive reasons, we may invest up to 100% of the Fund's assets in short term, high quality US money market securities, and US Government debt securities. We may do this when we think economic, political or market conditions in foreign countries make it too risky to follow our general guidelines. For the fiscal year ended May 31, 1998, the Fund had a return of 3.20% before subtracting expenses of 0.55%. This represents a positive tracking difference of 0.82% compared to its benchmark, the Salomon Brothers Non-U.S. Dollar World Government Bond Index. The yield was reduced by the strong dollar versus all currencies in which the Fund is invested. COMPARISON OF A CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE INTERNATIONAL GOVERNMENT BOND FUND AND THE SALOMON INDEX AVERAGE ANNUAL TOTAL RETURN -- FUND - ----------------------------------------------------------------- 1 YEAR 5 YEAR SINCE INCEPTION* - ----------------------------------------------------------------- 2.65% 5.44% 7.61% - -----------------------------------------------------------------
[CHART] FISCAL YEAR ENDED MAY 31 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. The Fund returns reflect investment management fees and other Fund expenses. The Fund returns do not reflect charges included in the annuity contract for mortality and expense guarantees, administrative fees or surrender charges. 31 MIDCAP INDEX FUND Fact Sheet - ------------------------------------------------- Investment Goal GROWTH THROUGH INVESTMENTS TRACKING THE S&P 400 MIDCAP INDEX - ------------------------------------------------- Investment Category GROWTH - -------------------------------------------------------------------------------- INVESTMENT ADVISER VALIC INVESTMENT SUB-ADVISER Bankers Trust INVESTMENT OBJECTIVE Seeks to provide growth of capital through investments primarily in a diversified portfolio of common stocks that, as a group, are expected to provide investment results closely corresponding to the performance of the S&P MidCap 400 Index. INVESTMENT RISK The S&P MidCap 400 Index includes the stocks of many medium sized companies. These companies usually do not have as much financial strength as very large companies and so may not be able to do as well in difficult times. However, because they are medium sized, they have more potential to grow, which means the value of their stock may increase. The S&P MidCap 400 Index also includes stocks of certain medium sized foreign companies. These stocks can be more risky than large company stocks. An index fund holding nearly all of the 400 stocks in the S&P MidCap 400 Index avoids the risk of individual stock selection and seeks to provide the return of the medium-sized company sector of the market. On average that return has been positive over many years but can be negative at certain times. There is no assurance that a positive return will occur in the future. Because this Fund invests in many of the stocks tracked by this Index, your investment will experience similar changes in value and share similar risks such as market risk and risk associated with foreign securities. For more information about market risk and risk associated with foreign securities, see "A Word About Risk" in this prospectus. INVESTMENT STRATEGY The Fund invests in a sampling of stocks in the index that, as a group, should reflect its performance. The stocks of the S&P 400 MidCap Index to be included in the Fund will be selected utilizing a statistical sampling technique known as "optimization." This process selects stocks for the Fund so that various industry weightings, market capitalizations and fundamental character-istics (e.g. price-to-book, price-to-earnings, debt-to-asset ratios and dividend yields) closely approximate those of the S&P 400 MidCap Index. The stocks held by the Fund are weighted to make the Fund's aggregate investment characteristics similar to those of the Index as a whole. Since it may not be possible for this Fund to buy every stock included on this index or in the same proportions, we rely on the aforementioned statistical technique to figure out, of the stocks tracked by the index, how many and which ones to buy. We follow the guidelines listed below for making the primary investments for the Fund.
Percent of Fund Investments Fund's Assets* - ---------------------------------------------------- Stocks in the S&P MidCap at least 65% 400 Index - ---------------------------------------------------- Foreign stocks (listed and no more than 20% over-the-counter) in the S&P MidCap 400 Index - ---------------------------------------------------- Futures and options no more than 33% - ---------------------------------------------------- Investments not in the S&P no more than 35% MidCap 400 Index Common stock and related securities High quality money market securities Illiquid securities - ---------------------------------------------------- *At time of purchase.
Additional information about THE FUND'S INVESTMENTS is provided under "Types of Investments". 32 MIDCAP INDEX FUND Fact Sheet - -------------------------------------------------------------------------------- For the fiscal year ended May 31, 1998, the Fund had a return of 29.98%, before subtracting expenses of 0.36%. This represented a positive tracking difference of 0.11% compared to the S&P MidCap 400 Index. The close tracking was the result of low cost trading techniques, and the use of futures to maintain a fully invested position. COMPARISON OF A CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE MIDCAP INDEX FUND AND THE S&P MIDCAP 400 INDEX AVERAGE ANNUAL TOTAL RETURN -- FUND - ----------------------------------------------------------------- 1 YEAR 5 YEAR SINCE 10/1/91* - ----------------------------------------------------------------- 29.62% 17.99% 17.61% - -----------------------------------------------------------------
[CHART] FISCAL YEAR ENDED MAY 31 * Effective October 1, 1991, the Fund's name was changed from the Capital Accumulation Fund to the MidCap Index Fund. Additionally, the investment objectives and investment program for the Fund were changed. PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. The Fund returns reflect investment management fees and other Fund expenses. The Fund returns do not reflect charges included in the annuity contract for mortality and expense guarantees, administrative fees or surrender charges. 33 MONEY MARKET FUND Fact Sheet - ------------------------------------------------- Investment Goal INCOME THROUGH INVESTMENT IN SHORT- TERM MONEY MARKET SECURITIES - ------------------------------------------------- Investment Category STABILITY - -------------------------------------------------------------------------------- INVESTMENT ADVISER VALIC PORTFOLIO MANAGER: Teresa Moro has been this Fund's Portfolio Manager and Vice President and Investment Officer for the Series Company since 1991. From 1986 to 1991, Ms. Moro was an Assistant Vice President and Money Market Trader for the Fund. INVESTMENT OBJECTIVE Seeks liquidity, protection of capital and current income through investments in short-term money market instruments. INVESTMENT RISK The short-term money market securities that this Fund invests in are high quality investments, posing low credit and interest rate risk. The current yield of the Fund will generally go up or down with changes in the level of interest rates. The Fund uses the amortized cost method to value its portfolio securities and tries to keep its net asset value at $1.00 per share. There can be no assurance that the net asset value will be $1.00 per share at all times. Because the risk to the money you invest is low, the potential for profit is also low. The Fund may experience risks including interest rate risk, market risk, credit risk and risk associated with foreign securities. For a discussion of these risks, see "A Word About Risk" in this prospectus. INVESTMENT STRATEGY The Fund invests in short-term money market securities to provide you with liquidity, protection of your investment and current income. We use 95% of the Fund's assets to buy short-term securities that are rated within the highest rating category for short term debt obligations by at least two nationally recognized rating services or unrated securities of comparable investment quality. These eligible securities must mature in 13 months or less and the Fund must have a dollar-weighted average portfolio maturity of 90 days or less. These practices are designed to minimize any fluctuation in the value of the Fund's portfolio. The investments this Fund may buy include: - - Securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities - - Certificates of deposit and other obligations of domestic banks that have total assets in excess of $1 billion - - Commercial paper sold by corporations and finance companies - - Corporate debt obligations with remaining maturities of 13 months or less - - Repurchase agreements - - Money market instruments of foreign issuers payable in U.S. dollars (limited to no more than 20% of the Fund's net assets) - - Asset-backed securities - - Loan participations - - Adjustable rate securities - - Variable rate demand notes - - Illiquid securities* - ------------ *limited to 10% of the Fund's net assets Additional information about THE FUND'S INVESTMENTS is provided under "Types of Investments". 34 MONEY MARKET FUND Fact Sheet - -------------------------------------------------------------------------------- For the fiscal year ended May 31, 1998, the Fund had a return of 5.79%, before subtracting expenses of 0.54%. This return represented a positive tracking difference of 0.98% compared to the 30-Day Certificate of Deposit Primary Offering Rate by New York City Banks. COMPARISON OF A CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE MONEY MARKET FUND AND THE NYC 30 DAY CD RATE AVERAGE ANNUAL TOTAL RETURN -- FUND - ----------------------------------------------------------------- 1 YEAR 5 YEAR 10 YEAR - ----------------------------------------------------------------- 5.25% 4.65% 5.45% - -----------------------------------------------------------------
[CHART] PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. The Fund returns reflect investment management fees and other Fund expenses. The Fund returns do not reflect charges included in the annuity contract for mortality and expense guarantees, administrative fees or surrender charges. 35 SCIENCE & TECHNOLOGY FUND Fact Sheet - ------------------------------------------------- Investment Goal GROWTH THROUGH INVESTMENTS IN STOCKS OF COMPANIES WHICH BENEFIT FROM DEVELOPMENT OF SCIENCE AND TECHNOLOGY - ------------------------------------------------- Investment Category GROWTH - -------------------------------------------------------------------------------- INVESTMENT ADVISER VALIC INVESTMENT SUB-ADVISER T. Rowe Price PORTFOLIO MANAGER: This Fund is managed by an Investment Advisory Committee chaired by Charles A. Morris. He has been chairman of this committee since it was started in 1994. Mr. Morris joined T. Rowe Price in 1987 as an investment analyst. He has been managing investments since 1991. INVESTMENT OBJECTIVE Seeks long-term growth of capital through investment primarily in the common stocks and equity-related securities of companies that are expected to benefit from the development, advancement and use of science and technology. INVESTMENT RISK The Science & Technology Fund invests in many small and/or new companies that develop and sell new products or services. These products or services may fail or become quickly outdated. Also, small and new companies have limited product lines and do not always have the financial strength to do well in difficult times. Because these companies are small, their stock prices will go up and down over the short-term, but may have greater growth potential. The securities the Fund invests in involve certain risks, including market risk and risk associated with foreign securities. For a discussion of these risks, see "A Word About Risk" in this prospectus. INVESTMENT STRATEGY The Fund invests in companies that are expected to benefit from scientific breakthroughs and advancements in technology. We believe that stocks of companies that develop products using new technology or benefit from this technology may greatly increase in value. These companies are in the following industries: computer, pharmaceutical, defense, telecommunications and electronics. We follow the guidelines listed below for making the primary investments for the Fund.
Percent of Fund Investments Fund's Assets* - ---------------------------------------------------- Common stocks of science at least 65% and technology companies - ---------------------------------------------------- Other equity-related up to 25% securities of science and technology companies including convertible debt securities, convertible preferred stock - ---------------------------------------------------- Foreign securities up to 30% - ---------------------------------------------------- Illiquid securities up to 15% - ---------------------------------------------------- Futures and options up to 25% - ---------------------------------------------------- High quality money market up to 100% securities** - ----------------------------------------------------
* At time of purchase. ** For temporary defensive reasons, we may invest up to 100% of the Fund's assets in cash and cash equivalents. We may do this when we think economic and market conditions make it too risky for us to follow our general guidelines. Additional information about THE FUND'S INVESTMENTS is provided under "Types of Investments". 36 SCIENCE & TECHNOLOGY FUND Fact Sheet - -------------------------------------------------------------------------------- For the fiscal year ended May 31, 1998, the Fund had a return of 11.80% before subtracting expenses of 0.95%. This represents a negative tracking difference of 18.88% compared to the Fund's benchmark, the S&P 500 Index. The market performance for large capitalization stocks caused much of the negative tracking as the Fund tends to hold significant amounts of small and midcap stocks. A number of valuation compressions due to volatile market conditions, also weighed on results. COMPARISON OF A CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE SCIENCE & TECHNOLOGY FUND AND THE S&P 500 INDEX AVERAGE ANNUAL TOTAL RETURN -- FUND - ---------------------------------------------------------------- 1 YEAR SINCE INCEPTION* - ---------------------------------------------------------------- 10.85% 26.44% - ----------------------------------------------------------------
[CHART] FISCAL YEAR ENDED MAY 31 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. The Fund returns reflect investment management fees and other Fund expenses. The Fund returns do not reflect charges included in the annuity contract for mortality and expense guarantees, administrative fees or surrender charges. 37 SMALL CAP INDEX FUND Fact Sheet - ------------------------------------------------- Investment Goal GROWTH THROUGH INVESTMENTS TRACKING THE RUSSELL 2000 INDEX - ------------------------------------------------- Investment Category GROWTH - -------------------------------------------------------------------------------- INVESTMENT ADVISER VALIC INVESTMENT SUB-ADVISER Bankers Trust INVESTMENT OBJECTIVE Seeks to provide growth of capital through investment primarily in a diversified portfolio of common stocks that, as a group, are expected to provide investment results closely corresponding to the performance of the Russell 2000 Index. INVESTMENT RISK The Russell 2000 Index includes many small U.S. companies. Some of these companies often do not have the financial strength needed to do well in difficult times. Also, they often sell limited numbers of products, which can make it harder for them to compete with medium and large companies. However, because they are small, their stock prices may fluctuate more over the short- term, but they have more potential to grow. This means their stock value may offer greater potential for appreciation. An index fund holding a large sampling of the 2,000 stocks in the Russell 2000 Index avoids the risks of individual stock selection and seeks to provide the return of the smaller-sized company sector of the market. On average that return has been positive over the years but has been negative at certain times. There is no assurance that a positive return will occur in the future. Because this Fund invests in many of the stocks tracked by this Index, your investment will experience similar changes in value and share similar risks such as market risk and risk associated with foreign securities. For more information about market risk and risk associated with foreign securities, see "A Word About Risk" in this prospectus. INVESTMENT STRATEGY The Fund invests in a sampling of stocks in the index that, as a group, should reflect its performance. The stocks of the Russell 2000 Index to be included in the Fund will be selected utilizing a statistical sampling technique known as "optimization." This process selects stocks for the Fund so that various industry weightings, market capitalizations and fundamental characteristics (e.g. price-to-book, price-to-earnings, debt-to-asset ratios and dividend yields) closely approximate those of the Russell 2000 Index. The stocks held by the Fund are weighted to make the Fund's aggregate investment characteristics similar to those of the Index as a whole. Since it may not be possible for this Fund to buy every stock included on this index or in the same proportions, we rely on the aforementioned statistical technique to figure out, of the stocks tracked by the index, how many and which ones to buy. We follow the guidelines listed below for making the primary investments for the Fund.
Percent of Fund Investments Fund's Assets* - ---------------------------------------------------- Stocks in the Russell 2000 at least 65% Index - ---------------------------------------------------- Foreign stocks (listed and no more than 20% over-the-counter) in the Russell 2000 Index - ---------------------------------------------------- Futures and options no more than 33% - ---------------------------------------------------- Investments not in the no more than 35% Russell 2000 Index Common stock and related securities High quality money market securities Illiquid securities - ---------------------------------------------------- *At time of purchase.
Additional information about THE FUND'S INVESTMENTS is provided under "Types of Investments". 38 SMALL CAP INDEX FUND Fact Sheet - -------------------------------------------------------------------------------- For the fiscal year ended May 31, 1998, the Fund had a return of 21.73%, before subtracting expenses of 0.39%. This represented a positive tracking difference of 0.48% compared to the Russell 2000 Index. The Fund uses futures to maintain a fully invested position to track its index but incurs fees and charges to acquire securities which created a variance from the index. COMPARISON OF A CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE SMALL CAP INDEX FUND AND THE RUSSELL 2000 INDEX AVERAGE ANNUAL TOTAL RETURN -- FUND - ----------------------------------------------------------------- 1 YEAR 5 YEAR SINCE INCEPTION* - ----------------------------------------------------------------- 21.34% 15.43% 15.31% - -----------------------------------------------------------------
[CHART] FISCAL YEAR ENDED MAY 31 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. The Fund returns reflect investment management fees and other Fund expenses. The Fund returns do not reflect charges included in the annuity contract for mortality and expense guarantees, administrative fees or surrender charges. 39 SOCIAL AWARENESS FUND Fact Sheet - ------------------------------------------------- Investment Goal GROWTH THROUGH INVESTMENTS IN STOCKS OF COMPANIES MEETING SOCIAL CRITERIA OF THE FUND - ------------------------------------------------- Investment Category GROWTH - -------------------------------------------------------------------------------- INVESTMENT ADVISER VALIC PORTFOLIO MANAGER: Maruti D. More is this Fund's Portfolio Manager. Mr. More has been Vice President -- Investments of the Series Company since July 1998. Since April 1998, Mr. More serves as Vice President of The Variable Annuity Life Insurance Company and American General Investment Management, L.P. From 1993 to 1995, Mr. More was Managing Director, Marketable Securities at Paul Revere Investment Management Corporation. INVESTMENT OBJECTIVE Seeks to obtain growth of capital through investment, primarily in common stocks, in companies which meet the social criteria established for the Fund. The Fund invests only in companies which meet its social criteria. The Fund does not invest in companies that: - - produce nuclear energy; - - make military weapons or delivery systems; or - - engage continuously in practices or produce products that significantly pollute the environment (such products include tobacco products). INVESTMENT RISK Most of the companies this Fund invests in are included in the S&P 500 Index. This Fund's degree of market risk is slightly greater than the Stock Index Fund's degree of risk. This is because its investments are more limited by its investment objective. This Fund may also experience market risk, and risks associated with foreign securities. For a discussion of these risks see the Stock Index Fund's Fact Sheet and "A Word About Risk" in this prospectus. If a company stops meeting the Fund's social criteria after the Fund invested in it, the Fund will sell these investments even if this means the Fund loses money. Also, if the Fund changes its social criteria and the companies the Fund has already invested in no longer qualify, the Fund will sell these investments even if this means the Fund loses money. Social criteria screening will limit the availability of investment opportunities for the Fund more than for funds having no such criteria. INVESTMENT STRATEGY We follow the guidelines listed below for making the primary investments for the Fund.
Percent of Fund Investments Fund's Assets* - ---------------------------------------------------- Common stocks of companies at least 80% meeting Fund's social criteria - ---------------------------------------------------- Other types of securities of up to 20% companies meeting social criteria including Foreign securities Preferred stock Convertible securities High quality money market securities and warrants - ---------------------------------------------------- Futures and options up to 33% - ---------------------------------------------------- Illiquid securities up to 10% - ---------------------------------------------------- *At time of purchase.
To find out which companies meet the Fund's social criteria, we rely on industry classifications, research services such as the Investor Responsibility Research Center (IRRC), and special magazines and papers that publish this type of information. Since our definition of social criteria is not "fundamental," the Series Company's Board of Directors may change it without shareholder approval. When deciding to make changes to the criteria, the Board will consider, among other things, new or revised state laws that govern or affect the investments of public funds. At least once a year, we survey state laws on this issue to look for any new developments. If our survey shows that at least 20 states have adopted laws that restrict public funds from being invested in a clearly definable category of investments, this category is automatically added to our social criteria list. Additional information about THE FUND'S INVESTMENTS is provided under "Types of Investments". 40 SOCIAL AWARENESS FUND Fact Sheet - -------------------------------------------------------------------------------- For the fiscal year ended May 31, 1998, the Fund had a return of 30.88% before subtracting expenses of 0.54%. This resulted in a positive tracking difference of 0.20% compared to the Fund's benchmark, the S&P 500 Index. Concentration on the larger capitalization growth sectors and avoidance of the volatile tobacco industry aided performance. COMPARISON OF A CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE SOCIAL AWARENESS FUND AND THE S&P 500 INDEX AVERAGE ANNUAL TOTAL RETURN -- FUND - ----------------------------------------------------------------- 1 YEAR 5 YEAR SINCE INCEPTION* - ----------------------------------------------------------------- 30.34% 21.44% 16.16% - -----------------------------------------------------------------
[CHART] FISCAL YEAR ENDED MAY 31 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. The Fund returns reflect investment management fees and other Fund expenses. The Fund returns do not reflect charges included in the annuity contract for mortality and expense guarantees, administrative fees or surrender charges. 41 STOCK INDEX FUND Fact Sheet - ------------------------------------------------- Investment Goal GROWTH THROUGH INVESTMENTS TRACKING THE S&P 500 INDEX - ------------------------------------------------- Investment Category GROWTH - -------------------------------------------------------------------------------- INVESTMENT ADVISER VALIC INVESTMENT SUB-ADVISER Bankers Trust INVESTMENT OBJECTIVE Seeks long-term capital growth through investment in common stocks that, as a group, are expected to provide investment results closely corresponding to the performance of the S&P 500 Index. INVESTMENT RISK The S&P 500 Index includes the stocks of many large, well-established companies. These companies usually have the financial strength to weather difficult financial times. However, the value of any stock can rise and fall over short and long periods of time. This Fund which holds nearly all of the 500 stocks in the S&P 500 Index avoids the risk of individual stock selection and seeks to provide the return of the large company sector of the market. In the past that return has been positive over many years but can be negative at certain times. There is no assurance that a positive return will occur in the future. Because the Fund invests in many of the stocks tracked by this Index, your investment will experience similar changes in value and share similar risks, such as market risk and risk associated with foreign securities. For more information about market risk and risk associated with foreign securities, see "A Word About Risk" in this prospectus. INVESTMENT STRATEGY The Fund invests in a sampling of stocks in the index that, as a group, should reflect its performance. The stocks of the S&P 500 Index to be included in the Fund will be selected utilizing a statistical sampling technique known as "optimization." This process selects stocks for the Fund so that various industry weightings, market capitalizations and fundamental characteristics (e.g. price-to-book, price-to-earnings, debt-to-asset ratios and dividend yields) closely approximate those of the S&P 500 Index. The stocks held by the Fund are weighted to make the Fund's aggregate investment characteristics similar to those of the Index as a whole. Since it may not be possible for this Fund to buy every stock included on this index or in the same proportions, we rely on the aforementioned statistical technique to figure out, of the stocks tracked by the index, how many and which ones to buy. We follow the guidelines listed below for making the primary investments for the Fund.
Percent of Fund Investments Fund's Assets* - ---------------------------------------------------- Stocks in the S&P 500 at least 65% Index - ---------------------------------------------------- Foreign stocks (listed and no more than 20% over-the-counter) in the S&P 500 Index - ---------------------------------------------------- Futures and options no more than 33% - ---------------------------------------------------- Investments not in the S&P no more than 35% 500 Index Common stock and related securities High quality money market securities Illiquid securities - ---------------------------------------------------- *At time of purchase.
Additional information about THE FUND'S INVESTMENTS is provided under "Types of Investments". 42 STOCK INDEX FUND Fact Sheet - -------------------------------------------------------------------------------- For the fiscal year ended May 31, 1998, the Fund had a return of 30.61%, before subtracting expenses of 0.31%. This return represented a negative tracking difference of 0.07% compared to the S&P 500 Index(C). A combination of careful purchasing of securities, low cost trading techniques, and the use of futures to maintain a fully invested position resulted in the close tracking of the Index. COMPARISON OF A CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE STOCK INDEX FUND AND THE S&P 500 INDEX AVERAGE ANNUAL TOTAL RETURN -- FUND - ----------------------------------------------------------------- 1 YEAR 5 YEAR 10 YEAR - ----------------------------------------------------------------- 30.30% 21.75% 17.79% - -----------------------------------------------------------------
[CHART] FISCAL YEAR ENDED MAY 31 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. The Fund returns reflect investment management fees and other Fund expenses. The Fund returns do not reflect charges included in the annuity contract for mortality and expense guarantees, administrative fees or surrender charges. 43 TYPES OF INVESTMENTS - -------------------------------------------------------------------------------- STOCKS -- also called equity securities If you own a share of stock, you own a part of the company that issued it. Companies sell stock to get the money they need to grow. There are three types of stocks: Common stock -- Each share of common stock represents a part of the ownership of the company. The holder of common stock participates in the growth of the company through increasing stock price and receipt of dividends. If the company runs into difficulty, the stock price can decline and dividends may not be paid. Preferred stock -- Each share of preferred stock allows the holder to get a set dividend before the common stock shareholders receive any dividends on their shares. Convertible preferred stock -- A stock with a set dividend which the holder may exchange for a certain amount of common stock. All of the Funds except the Money Market Fund in this prospectus may invest in common, preferred, and convertible preferred stock in accordance with their investment strategies. BONDS -- also called debt securities Bonds are sold by governments on the local, state, and federal levels, and by companies. There are many different kinds of bonds. For example, each bond issue has specific terms. U.S. Government bonds are guaranteed to pay interest and principal by the federal government. Revenue bonds are usually only paid from the revenue of the issuer. An example of that would be an airport revenue bond. Debentures are a very common type of corporate bond (a bond sold by a company). Payment of interest and return of principal is subject to the company's ability to pay. Convertible bonds are corporate bonds that can be exchanged for stock. The types of bonds the Funds may invest in are as follows: U.S. Government bonds and investment grade corporate bonds (the Capital Conservation Fund may also invest in below investment grade bonds). For a description of investment grade bonds see "A Word about Risk -- Market Risk" in this prospectus. Investing in a bond is like making a loan for a fixed period of time at a fixed interest rate. During the fixed period, the bond pays interest on a regular basis. At the end of the fixed period, the bond matures and the investor usually gets back the principal amount of the bond. Fixed periods to maturity are categorized as short term (generally less than 12 months), intermediate (one to 10 years), and long term (10 years or more). Commercial paper is a specific type of corporate or short term note. In fact, it's very short term, being paid in less than 270 days. Most commercial paper matures in 50 days or less. Bonds rated Ba or B by Moody's Investors Services, Inc. (generally known as lower-medium and lower-quality bonds) are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and principal in accordance with the terms of the obligation. While such bonds will likely have some quality and protective characteristics, these are outweighed by uncertainties or risk exposures to adverse conditions. Lower-medium and lower-quality bonds may be more susceptible to real or perceived adverse economic and individual corporate developments than would investment grade bonds. For example, a projected economic downturn or the possibility of an increase in interest rates could cause a decline in high-yield, high-risk bond prices because such an event might lessen the ability of highly leveraged high yield issuers to meet their principal and interest payment obligations, meet projected business goals, or obtain additional financing. In addition, the secondary trading market for lower-medium and lower-quality bonds may be less liquid than the market for investment grade bonds. This potential lack of liquidity may make it more difficult to accurately value certain of these lower-grade portfolio securities. Asset-Backed Securities Asset-backed securities are bonds or notes that are normally supported by a specific property. If the issuer fails to pay the interest or return the principal when the bond matures, then the issuer must give the property to the bondholders or noteholders. All of the Funds in this prospectus may invest in asset-backed securities. Examples of assets supporting asset-backed securities include credit card receivables, retail installment loans, home equity loans, auto loans, and manufactured housing loans. Loan Participations A loan participation is an investment in a loan made to a U.S. company that is secured by the company's assets. The assets must be, at all times, worth enough money to cover the balance due on the loan. Major national and regional banks make loans to companies and then sell the loans to investors. These banks don't guarantee the companies will pay the principal and interest due on the loans. All the Funds in this prospectus may invest in loan participations. ISSUED means the Company (ISSUER) sold it originally to the public. For more information about BONDS AND RATINGS OF BONDS, see the Statement of Additional Information. For more information about ASSET-BACKED SECURITIES see the Statement of Additional Information. For more information about LOAN PARTICIPATIONS see the Statement of Additional Information. 44 - -------------------------------------------------------------------------------- MORTGAGE-RELATED SECURITIES Mortgage-related securities include, but are not limited to, mortgage pass-through securities, collateralized mortgage obligations and commercial mortgage-backed securities. Mortgage Pass-Through Securities are securities representing interests in "pools" of mortgage loans secured by residential or commercial real property. Payments of interest and principal on these securities are generally made monthly, in effect "passing through" monthly payments made by the individual borrowers on the mortgage loans which underlie the securities (net of fees paid to the issuer or guarantor of the securities). Mortgage-related securities are subject to interest rate risk and prepayment risk. Payment of principal and interest on some mortgage pass-through securities may be guaranteed by the full faith and credit of the U.S. Government (i.e., securities guaranteed by GNMA); or guaranteed by agencies or instrumentalities of the U.S. Government (i.e., securities guaranteed by FNMA or the Federal Home Loan Mortgage Corporation ("FHLMC"), which are supported only by the discretionary authority of the U.S. Government to purchase the agency's obligations). Mortgage-related securities created by non-governmental issuers (such as commercial banks, private mortgage insurance companies and other secondary market issuers) may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit, which may be issued by governmental entities, private insurers or the mortgage poolers. Collateralized Mortgage Obligations ("CMOs") are hybrid mortgage-related instruments. CMOs may be collateralized by whole mortgage loans or by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA. CMOs are structured into multiple classes, with each class bearing a different stated maturity. CMOs that are issued or guaranteed by the U.S. Government or by any of its agencies or instrumentalities will be considered U.S. Government securities by the Funds, while other CMOs, even if collateralized by U.S. Government securities, will have the same status as other privately issued securities for purposes of applying a Fund's diversification tests. Commercial Mortgage-Backed Securities include securities that reflect an interest in, and are secured by, mortgage loans on commercial real property. The market for commercial mortgage-backed securities is relatively small compared to the market for residential single-family mortgage-backed securities. Many of the risks of investing in commercial mortgage-backed securities reflect the risks of investing in the real estate securing the underlying mortgage loans. These risks reflect the effects of local and other economic conditions on real estate markets, the ability of tenants to make loan payments, and the ability of a property to attract and retain tenants. Commercial mortgage-backed securities may be less liquid and exhibit greater price volatility than other types of mortgage-related or asset-backed securities. Mortgage-Related Securities include mortgage pass-through securities described above and securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property, such as mortgage dollar rolls, CMO residuals or stripped mortgage-backed securities. These securities may be structured in classes with rights to receive varying proportions of principal and interest. ILLIQUID SECURITIES An illiquid security is one that may not be frequently traded or cannot be disposed of promptly within seven days and in the usual course of business without taking a materially reduced price. Illiquid securities include, but are not limited to, time deposits and repurchase agreements not maturing within seven days and restricted securities. A restricted security is one that has not been registered with the SEC and, therefore, cannot be sold in the public market. Securities eligible for sale under Rule 144A and commercial paper offered pursuant to Section 4(2) of the Securities Act of 1933, as amended, are not deemed by VALIC or the Sub-adviser to be illiquid solely by reason of being restricted. Instead, VALIC or the sub-adviser will determine whether such securities are liquid based on trading markets and pursuant to guidelines adopted by the Series Company's Board of Directors. If VALIC or the Sub-adviser concludes that a security is not liquid, that investment will be included within the Fund's limitation on illiquid securities. All the Funds may buy illiquid securities, but are restricted as to how much money they may invest in them. See "Limitations" below. FOREIGN SECURITIES All of the funds may invest in securities of foreign issuers. Such foreign securities may be denominated in foreign currencies, except with respect to the Government Securities Fund and the Money Market Fund which may only invest in U.S. dollar-denominated securities of foreign issuers. For more information about MORTGAGE-RELATED SECURITIES, see the Statement of Additional Information. For more information about ILLIQUID SECURITIES see the Statement of Additional Information. For more information about FOREIGN SECURITIES, see the Statement of Additional information. 45 - -------------------------------------------------------------------------------- Securities of foreign issuers include obligations of foreign branches of U.S. banks and of foreign banks, common and preferred stocks, fixed income securities issued by foreign governments, corporations and supranational organizations, and American Depository Receipts, European Depository Receipts and Global Depository Receipts ("ADRs", "EDRs" and "GDRs"). See "ADRs" below. ADRS ADRs are certificates issued by a United States bank or trust company and represent the right to receive securities of a foreign issuer deposited in a domestic bank or foreign branch of a United States bank. We consider ADRs foreign securities. ADRs in which a Fund may invest may be sponsored or unsponsored. There may be less information available about foreign issuers of unsponsored ADRs. FOREIGN CURRENCY All of the Funds, except the Government Securities Fund and the Money Market Fund, may buy and sell foreign currencies the same way they buy and sell other investments. Funds buy foreign currencies when they believe the value of the currency will increase. If it does increase, they sell the currency for a profit. If it decreases they will experience a loss. Funds may also buy foreign currencies to pay for foreign securities bought for the Fund. The Funds, except the Money Market Fund and the Government Securities Fund, may purchase forward foreign currency exchange contracts to protect against a decline in the value of the U.S. dollar. WHEN-ISSUED SECURITIES When-issued securities are those investments that have been announced by the issuer and will be on the market soon. The Funds negotiate the price with a broker before it goes on the market. If the security ends up selling on the market at a lower price than negotiated, the Funds may have a loss. If it sells at a higher price, the Funds may have a profit. All of the Funds may buy when-issued securities in accordance with their investment strategy. MONEY MARKET SECURITIES All of the Funds may invest part of their assets in high quality money market securities payable in U.S. dollars. A listing of the types of money market securities in which the Money Market Fund may invest is in that Fund's Fact Sheet. A money market security is high quality when it is rated in one of the two highest credit categories by Moody's or Standard & Poor's or another nationally recognized rating service or if unrated, deemed high quality by VALIC. These high quality money market securities include: - - Securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities - - Certificates of deposit and other obligations of domestic banks having total assets in excess of $1 billion - - Commercial paper sold by corporations and finance companies - - Corporate debt obligations with remaining maturities of 13 months or less - - Repurchase agreements, money market securities of foreign issuers if payable in U.S. dollars, asset-backed securities, loan participations, and adjustable rate securities VARIABLE RATE DEMAND NOTES Variable rate demand notes ("VRDNs") are either taxable or tax-exempt obligations containing a floating or variable interest rate adjustment formula, together with an unconditional right to demand payment of the unpaid principal balance plus accrued interest upon a short notice period, generally not to exceed seven days. The Money Market Fund may invest in participation VRDNs, which provide the Fund with an undivided interest in underlying VRDNs held by major investment banking institutions. Any purchase of VRDNs will meet applicable diversification and concentration requirements, and the conditions established by the SEC under which such securities may be considered to have remaining maturities of 397 days or less. DERIVATIVES Unlike stocks and bonds that represent actual ownership of that stock or bond, derivatives are investments which "derive" their value from securities issued by a company, government, or government agency. In certain cases, derivatives may be purchased for non-speculative investment purposes or to protect ("hedge") against a change in the price of the underlying security. There are some investors who take higher risk ("speculate") and buy derivatives to profit from a change in price of the underlying security. We may purchase derivatives to hedge the investment portfolios and to earn additional income in order to help achieve the Funds' objectives. Generally we do not buy derivatives to speculate. The Funds, except the Money Market Fund, may buy two types of derivatives: futures and options. Options An option is the right to buy or sell any type of investment for a preset price over a specific period of time. For more information about FOREIGN CURRENCY EXCHANGE TRANSACTIONS, see the Statement of Additional Information. For more information about WHEN-ISSUED SECURITIES, see the Statement of Additional Information. For more information on put and call OPTIONS AND FINANCIAL FUTURES CONTRACTS AND OPTIONS, see the Statement of Additional information. For more information about MONEY MARKET SECURITIES OF FOREIGN ISSUERS the Funds may purchase, see the Statement of Additional Information. 46 - -------------------------------------------------------------------------------- Call Option For example, you can buy an option from Mr. Smith that gives you the right to buy 10 shares of stock X at $25.00 per share anytime between now and six weeks from now. You believe stock X will be selling for more than $25.00 per share between now and then. Mr. Smith believes it won't be. If you exercise this option before it expires, Mr. Smith must sell you 10 shares of stock X at $25.00 per share. On the other hand, you can sell an option to Mr. Smith that gives him the right to buy 10 shares of stock X at $25.00 per share anytime between now and six weeks from now. You believe stock X will be selling for less than $25.00 per share between now and then. Mr. Smith believes it won't be. If he exercises this option before it expires, you must sell to Mr. Smith 10 shares of stock X at $25.00 per share. Put Option Or, you can buy an option from Mr. Smith that gives you the right to sell him 10 shares of X stock at $25.00 per share anytime between now and six weeks from now. In this example, you believe stock X will be selling for less than $25.00 per share between now and then. Mr. Smith thinks it will be selling for more. Or, you can sell an option to Mr. Smith that gives him the right to sell to you 10 shares of X stock at $25.00 per share anytime between now and six weeks from now. In this example, he believes stock X will be selling for less than $25.00 per share between now and then. Futures Contracts A futures contract is an agreement between a buyer and a seller to buy or sell an investment on a future date at a price the buyer and seller set today. The buyer thinks the price will go up between now and then, and the seller thinks the price will go down or they may just want to receive today's price because they do not know which way prices are going to go. All of the Funds, except the Money Market Fund, may enter into certain types of futures contracts. The Funds use futures contracts as a tool to earn more money, and to protect against rising or falling prices in the stock and bond markets. The Funds use stock and bond futures to invest cash and cash equivalents. When certain levels are reached the Fund will sell the futures and buy stocks or bonds. All of the Funds, except the Money Market Fund can invest in these types of futures and options: - - Write exchange traded covered put and call options on securities and stock indices. - - Purchase exchange traded put and call options on securities and stock indices. - - Purchase and sell exchange traded financial futures contracts. - - Write covered call options and purchase exchange traded put and call options on financial futures contracts. - - Write covered call options and purchase non-exchange traded call and put options on financial futures contracts. The Capital Conservation Fund, the Government Securities Fund, the International Equities Fund, the International Government Bond Fund and the Science & Technology Fund may write and purchase put and call options on securities and stock indices that are not traded on an exchange. REPURCHASE AGREEMENTS A repurchase agreement requires the seller of the security to buy it back at a set price at a certain time. If a Fund enters into a repurchase agreement, it is really making a short term loan (usually for one day to one week). The Funds may enter into repurchase agreements only with well-established securities dealers or banks that are members of the Federal Reserve System. All the Funds in this prospectus may invest in repurchase agreements. The risk in a repurchase agreement is the failure of the seller to be able to buy the security back. If the value of the security declines, the Fund may have to sell at a loss. A repurchase agreement of more than 7 days duration is illiquid. A discussion of repurchase agreements, illiquid securities and Fund limitations is contained in the Statement of Additional Information. A WORD ABOUT RISK There are four basic types of investment risk you may be subject to: - - Market Risk - - Credit (Financial) Risk - - Interest Rate Risk - - Risk Associated with Foreign Securities Generally stocks are considered to be subject to market risk, while debt securities, such as U.S. government bonds and money market securities are subject to interest rate risk. Other debt securities, such as corporate bonds, involve both interest rate and credit (financial) risk. Lastly, risks associated with foreign securities can involve political, currency and limited information risks. Each of these four basic types of investment risks is discussed below. Market Risk Market risk refers to the loss of capital resulting from changes in the prices of investments. For example, market risk occurs when expectations of lower corporate profits in general cause the broad market of stocks to fall in price. When this happens, even though a company is experiencing growth in profits, the price of its stock could fall. 47 - -------------------------------------------------------------------------------- Credit (Financial) Risk Credit risk refers to the risk that the issuer of a bond may default or be unable to pay interest or principal due on a bond. To help the Funds' Investment Adviser or Sub-advisers decide which U.S. corporate and foreign bonds to buy, they rely on Moody's and Standard & Poor's (two nationally recognized bond rating services), and on VALIC's own research. This research lowers the risk of buying a bond of a company that may not pay the interest and principal on the bond. All of the Funds in this prospectus may buy bonds that are rated as investment grade. There are four different levels of investment grade, from AAA to BBB; see Description of Corporate Bond Ratings in the Statement of Additional Information. All bonds with these ratings are considered to have adequate ability to pay interest and principal. All of the Funds in this prospectus may buy bonds issued by the U.S. Government. The U.S. Government guarantees it will always pay principal and interest. Interest Rate Risk Interest rate risk refers to the risk that fluctuations in interest rates may affect the value of interest paying securities in a Fund. If a fund sells a bond before it matures, it may lose money, even if the bond is guaranteed by the U.S. Government. Say, for example, a fund bought an intermediate government bond last year that was paying interest at a fixed rate of 6%. Now, intermediate government bonds are paying interest at a rate of 7%. If the fund wants to sell the bond paying 6%, it will have to sell it at a discount (and realize a loss) to attract buyers because they can buy new bonds paying 7% interest. Risk Associated with Foreign Securities Each of the Funds may, subject to limits stated in each Fund's Fact Sheet, invest in foreign securities including ADRs. A foreign security is a security issued by an entity domiciled or incorporated outside of the U.S. There are three principal risks of owning foreign securities: Political risk -- the chance of a change in government and the assets of the company being taken away. Currency risk -- a change in the value of the foreign currency compared to the dollar. If the foreign currency declines in value, your investment valued in U.S. dollars will decline even if the value of the foreign stock or bond is unchanged. Limited information -- foreign companies generally are not regulated to the degree U.S. companies are and may not report all of the information we are used to getting. To minimize taxes they may not report some income or they may report higher expenses. INVESTMENT PRACTICES Limitations Each Fund has limitations on the percentage of its assets that it may allocate to certain investments. These limits are determined by the Fund's investment objectives and risk level. For example, the Stock Index Fund's investment goal is growth through investments tracking the S&P 500 Index, an index that includes stocks of domestic and foreign companies. As a result, this Fund may invest no more than 35% of its assets in stocks that are not part of the S&P 500 Index. Some Funds are restricted from buying certain types of investments altogether. For example, the Money Market Fund may not invest in futures and options. Each Fund's limitations are shown in the Investment Strategy section of its Fact Sheet. Lending Portfolio Securities Each Fund except the Growth Fund and the Science & Technology Fund may lend up to 30% of its total assets to broker-dealers and other financial institutions to earn more money for the Fund. The Growth Fund and the Science & Technology Fund may lend up to 33 1/3% of their total assets. Assets are placed in a special account by the borrower to cover the market value of the securities on loan. The assets serving as collateral for the loan are valued daily. A risk of lending portfolio investments is that there may be a delay in the Fund getting its investments back when a loaned security is sold. The Funds will only make loans to broker-dealers and other financial institutions approved by its Custodian, as monitored by VALIC and authorized by the Board of Directors. For more information about LENDING PORTFOLIO SECURITIES, see the Statement of Additional Information. For more information about INVESTMENT LIMITATIONS, see the Statement of Additional Information. For more information about FOREIGN SECURITIES, see the Statement of Additional Information. 48 About the Series Company - -------------------------------------------------------------------------------- SERIES COMPANY SHARES The Series Company is an open-end mutual fund and may offer shares of the Funds for sale at any time. However, the Series Company offers shares of the Funds only to registered and unregistered separate accounts of VALIC and its affiliates, or employee thrift plans maintained by VALIC or American General Corporation. As a participant, you do not directly buy shares of the Funds that make up the Series Company. Instead, you buy units in either a registered or unregistered separate account of VALIC or of its affiliates. When you buy these units, you specify which Funds you want the separate account to invest your money in. The separate account, in turn, buys the shares of the Funds according to your instructions. See your contract prospectus for more information on the separate account associated with your contract. When the separate accounts buy, sell, or transfer shares of the Funds, they do not pay any charges related to these transactions. None of the Funds currently foresees any disadvantages to participants arising out of the fact that it may offer its shares to separate accounts of various insurance companies to serve as the investment medium for their variable annuity and variable life insurance contracts. Nevertheless, the Board of Directors intends to monitor events in order to identify any material irreconcilable conflicts which may possibly arise and to determine what action, if any, should be taken in response to such conflicts. If such a conflict were to occur, one or more insurance companies' separate accounts might be required to withdraw their investments in one or more Funds and shares of another Fund may be substituted. This might force a Fund to sell portfolio securities at disadvantageous prices. In addition, the Board of Directors may refuse to sell shares of any Fund to any separate account or may suspend or terminate the offering of shares of any Fund if such action is required by law or regulatory authority or is on the best interests of the shareholders of the Fund. As distributor, VAMCO sells shares of the Funds to the separate accounts. VAMCO is a wholly owned subsidiary of VALIC and acts as a distributor under an agreement it has with the Series Company. VAMCO does not charge the Series Company or the separate accounts for its services. Also, VAMCO is not required to sell a minimum number of shares to the separate accounts. VAMCO sends orders to buy, sell or transfer shares to the Series Company's transfer agent daily. The price of any share affected by the request is the next net asset value calculated after order is received. For more information on how to participate, see your contract prospectus. NET ASSET VALUE OF THE SERIES COMPANY SHARES How Net Asset Value is Calculated Here is how the Series Company calculates the net asset value of each Fund's shares: Step 1: Total value of the Fund's assets* (including money owed to the fund but not yet The Fund's collected) = Total - -- The Fund's liabilities Net Asset Value (including money owed by the Fund but not yet paid) Step 2: The Fund's total net asset value (from Step 1) NET ASSET VALUE / The total number of the = PER SHARE Fund's shares that are outstanding.
* The Series Company uses the fair market value of Fund's investments to calculate the Fund's total value. However, it uses the amortized cost method to determine the values of all the Money Market Fund's investments and of any other Fund's short-term securities maturing within 60 days. The amortized cost method approximates fair market value. If a Fund's portfolio includes investments that are not sold often or are not sold on any exchanges, the Series Company's Board of Directors or its delegate will, in good faith, estimate fair market value of these investments. When Net Asset Value is Calculated The Series Company calculates the net asset value of each Fund's shares at approximately 4pm EST each day the New York Stock Exchange is open. (The New York Stock Exchange is open Monday through Friday but is closed on certain federal and other holidays.) THE VARIABLE ANNUITY MARKETING COMPANY (VAMCO) acts as the Series Company's distributor. 49 - -------------------------------------------------------------------------------- The separate accounts can buy, sell, and transfer shares in the Funds only on days that the Series Company calculates the net asset value of each Fund's shares. Through VAMCO, the separate accounts send orders to the Series Company to buy, sell, or transfer shares based on requests they receive from participants. DIVIDENDS AND CAPITAL GAINS Dividends from Net Investment Income Net investment income generally includes stock dividends received and bond interest earned less expenses paid by the Fund. Each Fund pays dividends from net investment income occasionally. Dividends from net investment income are automatically reinvested for you into additional shares of the Fund. The Money Market Fund pays dividends daily and all other Funds pay dividends once a month. Distributions from Capital Gains When a Fund sells a security for more than it paid for that security, a capital gain results. Once a year, each Fund pays distributions from capital gains, as long as total capital gains exceed total capital losses. Distributions from capital gains are automatically reinvested for you into additional shares of the Fund. DIVERSIFICATION Each Fund's diversification policy limits the amount that the Fund may invest in certain securities. Each Fund's diversification policy is also designed to comply with the diversification requirements of the Internal Revenue Code (the "Code") as well as the Investment Company Act of 1940 ("the 1940 Act"). All of the Funds except International Government Bond Fund, Growth Fund and Science & Technology Fund may invest up to 5% of their total assets in a single issuer. An issuer, or "company" does not include the U.S. Government or agencies of the U.S. Government according to the Code and the 1940 Act. For diversification purposes, repurchase agreements are considered to be issued by the U.S. Government if backed by U.S. Government securities. Also, these Funds may not own more than 10% of the voting securities of a company. The Growth Fund and the Science & Technology Fund may not invest more than 5% of their total assets in one company and more than 10% of their total assets in the voting securities of one company as long as the total of these investments does not exceed 25% of total assets. The International Government Bond Fund is "non-diversified" under the 1940 Act. This means it can invest more of its assets in fewer issuers and for this reason may be riskier than the other Funds. This Fund may invest up to 25% of its total assets in a single issuer as long as those investments representing over 5% of total assets in one issuer do not exceed 50% of total assets of the Fund. The remaining 50% of total assets may not include more than 5% of total assets in one issuer. Also, the Money Market Fund may not invest more than 5% of its total assets in any company rated as "second tier" by a national rating service (as described in Types of Investments). 50 - -------------------------------------------------------------------------------- TAXES By paying out all earnings as described in the Dividends and Capital Gains section above and by complying with the diversification requirements under the Code, each Fund expects to qualify as a Registered Investment Company (RIC) under Subchapter M of the Code. By qualifying as a RIC the Fund will not have to pay federal income taxes. VOTING RIGHTS One Vote Per Share Each outstanding share has one vote on all matters that shareholders vote on. As a participant, you vote on these matters indirectly by voting your units. The way you vote your units as a participant depends on your contract. See your contract prospectus for specific details. When a matter comes up for vote, the separate account will vote its shares in the same proportion as the unit votes it actually receives. If VALIC determines that it may, under the current interpretation of the 1940 Act, vote shares directly instead of voting through its units, it may decide to vote that way. Shareholder Meetings Maryland law does not require the Series Company to hold regular, annual shareholder meetings. But, the Series Company must hold shareholder meetings on the following matters: - - to approve certain agreements as required by the 1940 Act; - - to change fundamental investment objectives in the Diversification section and to change fundamental investment restrictions, above; - - to fill vacancies on the Series Company's Board of Directors if the shareholders have elected less than a majority of the Directors. Shareholders may call a meeting to remove a Director from the Board if at least 10% of the outstanding shares vote to have this meeting. Then, at the meeting, at least 2/3 of all the outstanding shares of all the Funds must vote in favor of removing the Director. Shareholder Communications The Series Company will assist in shareholder communications. YEAR 2000 RISKS VALIC initiated its Year 2000 readiness plan in 1995. Since that time, VALIC management along with a team of skilled information technology and business professionals have been dedicated to achieving the objectives of the plan. This plan calls for the renovation, upgrade and/or replacement of our mission critical computer systems, whether developed internally or otherwise. It includes the five steps that we believe are essential to Year 2000 readiness: inventory and discovery; analysis; construction; testing; and implementation. As of December 31, 1998, we have substantially completed all steps with respect to our critical systems. VALIC's plan also includes an evaluation of the status of our key third party relationships and their efforts in addressing Year 2000 issues. Throughout 1999 we will continue to work with critical third party dependencies and to develop contingency plans for any identified risks or shortcomings. If significant third parties fail to achieve Year 2000 readiness on a timely basis, then the Year 2000 issue could have a material adverse impact on the operations of VALIC and the Series Company. However, the third party contingency plans we develop are meant to identify those risks and provide alternative actions should a third party not achieve readiness. While we believe no one can predict with certainty outcomes as to all the issues that may arise, VALIC is confident that its comprehensive plan and resource commitment will allow it to meet its Year 2000 objectives. Through December, 1998, VALIC has incurred and expensed $26.7 million (pretax) related to Year 2000 readiness, including $20.2 million incurred during 1998. VALIC currently anticipates that it will incur future costs of $2.1 million for additional internal staff, third party vendors, and other expenses to maintain readiness and complete third party contingency plans. REPORTS The Series Company sends Annual Reports containing audited financial statements, Semi-Annual Reports containing unaudited financial statements, and proxy materials to Contract owners or participants. Also, the Series Company includes an Annual Report with each Statement of Additional Information it sends out. If you have any questions about the Annual or Semi-Annual Reports, call or write to the Series Company at the phone number/address found on the cover page of this prospectus. See the Statement of Additional information and your contract prospectus for further tax discussions. You should also CONSULT YOUR TAX ADVISOR before investing. 51 Please tear off, complete and return the form below to Suite A3-01, Communications Unit, The Variable Annuity Life Insurance Company, 2929 Allen Parkway, Houston, Texas 77019 to order a Statement of Additional Information for the Company. A Statement of Additional Information may also be ordered by calling 1-800-44-VALIC. Please send me a free copy of the Statement of Additional Information for American General Series Portfolio Company. Name: ________________________________________ GA. #: ______________________________ Address: ____________________________________ Policy #: ______________________________ Social Security Number: ____________________
52 (This page intentionally left blank) INVESTMENT ADVISER: The Variable Annuity Life Insurance Company 2929 Allen Parkway Houston, Texas 77019 INVESTMENT SUB-ADVISERS: Bankers Trust Company One Bankers Trust Plaza 130 Liberty St., 36th Floor New York, New York 10006 T. Rowe Price Associates, Inc. 100 East Pratt Street Baltimore, Maryland 21202 DISTRIBUTOR: The Variable Annuity Marketing Company 2929 Allen Parkway Houston, Texas 77019 CUSTODIAN: State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 INDEPENDENT AUDITORS: Ernst & Young LLP 1221 McKinney, Suite 2400 Houston, Texas 77010 TRANSFER AND SHAREHOLDER SERVICE AGENT: The Variable Annuity Life Insurance Company 2929 Allen Parkway Houston, Texas 77019 DIRECTORS AND OFFICERS DIRECTORS OFFICERS Dr. Judith Craven Thomas L. West, Jr. Chairman Dr. Timothy J. Ebner John A. Graf President Judge Gustavo E. Gonzales, Jr. Craig R. Rodby Executive Vice President John A. Graf John E. Arant Executive Vice President Norman Hackerman Joe C. Osborne Executive Vice President John Wm. Lancaster Peter V. Tuters Senior Investment Officer Ben H. Love Maruti D. More Vice President -- Investments Dr. John E. Maupin, Jr. Teresa S. Moro Vice President and F. Robert Paulsen Investment Officer Craig R. Rodby Leon A. Olver Vice President and R. Miller Upton Investment Officer Thomas L. West, Jr. William Trimbur, Jr. Vice President and Investment Officer Brent C. Nelson Vice President Cynthia A. Toles Vice President and Secretary Nori L. Gabert Vice President and Assistant Secretary Cynthia A. Gibbons Assistant Vice President Gregory R. Seward Treasurer Jaime M. Sepulveda Assistant Treasurer Earl E. Allen, Jr. Assistant Treasurer Kathryn A. Pearce Controller Donna L. Hathaway Assistant Controller Heriberto Valdez Assistant Controller
PRINTED MATTER PRINTED IN U.S.A. VA 9017 VER 2/99 [RECYCLED PAPER LOGO] RECYCLED PAPER PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION STATEMENT OF ADDITIONAL INFORMATION Franklin Life Variable Annuity American General Series Portfolio Fund A Company This Statement of Additional Information is not a prospectus and should be read in conjunction with the Proxy Statement/Prospectus of Franklin Life Variable Annuity Fund A dated the same date as this Statement of Additional Information. You may obtain a copy of that Proxy Statement/Prospectus by calling (800) 528-2011, Extension 2591, or by writing The Franklin Life Insurance Company, #1 Franklin Square, Springfield, IL 62713, Attention: Box 1018. March 1, 1999 1 STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS Appendix A - Franklin Life Variable Annuity Fund A - Statement of Additional Information Appendix B - Franklin Life Variable Annuity Fund A - Annual Report dated December 31, 1998 Appendix C - American General Series Portfolio Company - Statement of Additional Information Appendix D - American General Series Portfolio Company - Semi-Annual Report dated November 30, 1998 2 ADDITIONAL INFORMATION ABOUT FRANKLIN LIFE VARIABLE ANNUITY FUND A For additional information regarding Franklin Life Variable Annuity Fund A ("Fund A"), please review the Statement of Additional Information to Fund A's registration statement on Form N-3 filed with the Securities and Exchange Commission as Post-Effective Amendment No. 45 on April 30, 1998 (File Nos. 2-36394 and 811-1990). Appendix A contains Fund A's Statement of Additional Information. ADDITIONAL INFORMATION ABOUT AMERICAN GENERAL SERIES PORTFOLIO COMPANY Additional information regarding the Stock Index Fund and the Money Market Fund of the American General Series Portfolio Company (the "Series Company") is found in the Statement of Additional Information to the registration statement on Form N-1A filed with the Securities and Exchange Commission (File Nos. 2-83631 and 011-3738). This Statement of Additional Information is attached hereto as Appendix C. FINANCIAL STATEMENTS Financial statements regarding Fund A are included in the Statement of Additional Information attached hereto as Appendix A and in the Annual Report dated December 31, 1998 provided in Appendix B. Financial statements regarding the Stock Index Fund and the Money Market Fund of the American General Series Portfolio Company are included in the Statement of Additional Information provided in Appendix C, and in the Semi-Annual Report dated November 30, 1998 provided in Appendix D. Pro Forma financial information is not included because as of December 31, 1998: (1) the net asset value of Franklin Life Variable Annuity Fund A did not exceed 10 percent of the net asset value of the Stock Index Fund; (2) the net asset value of Franklin Life Variable Annuity Fund B did not exceed 10 percent of the net asset value of the Stock Index Fund; and (3) the net asset value of Franklin Life Money Market Variable Annuity Fund C did not exceed 10 percent of the net asset value of the Money Market Fund. 3 APPENDIX A FRANKLIN LIFE VARIABLE ANNUITY FUND A STATEMENT OF ADDITIONAL INFORMATION INDIVIDUAL VARIABLE ANNUITY CONTRACTS FOR USE WITH CERTAIN QUALIFIED PLANS AND TRUSTS ACCORDED SPECIAL TAX TREATMENT AND AS INDIVIDUALRETIREMENT ANNUITIES FRANKLIN LIFE VARIABLE ANNUITY FUND A ISSUED BY THE FRANKLIN LIFE INSURANCE COMPANY #1 FRANKLIN SQUARE SPRINGFIELD, ILLINOIS 62713 TELEPHONE (800) 528-2011 STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information is not a prospectus and should be read in conjunction with the Prospectus dated April 30, 1998 relating to the offering of individual variable annuities for use in connection with certain qualified plans and trusts accorded special tax treatment or as individual retirement annuities. A copy of the Prospectus may be obtained by writing to The Franklin Life Insurance Company at the address set forth above (Attention: Box 1018) or by calling (800) 528-2011, extension 2591. ------------------------------------ THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. ------------------------------------ THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 30, 1998. TABLE OF CONTENTS
PAGE General Information . . . . . . . . . . . . . . . . . . . . . . . . 2 Investment Objectives . . . . . . . . . . . . . . . . . . . . . . . 2 Limitations on Settlement Options . . . . . . . . . . . . . . . . . 2 Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Investment Advisory and Other Services. . . . . . . . . . . . . . . 6 Distribution of The Contracts . . . . . . . . . . . . . . . . . . . 7 Portfolio Turnover and Brokerage. . . . . . . . . . . . . . . . . . 8 Safekeeper of Securities. . . . . . . . . . . . . . . . . . . . . . 9 Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Index to Financial Statements . . . . . . . . . . . . . . . . . . . F-1
1 GENERAL INFORMATION The individual variable annuity contracts offered by the Prospectus dated April 30, 1998 (the "Prospectus") are designed primarily to provide annuity payments which will vary with the investment performance of Franklin Life Variable Annuity Fund A (the "Fund"), a separate account which has been established by The Franklin Life Insurance Company ("The Franklin") under Illinois insurance law. Reference is made to the Prospectus, which should be read in conjunction with this Statement of Additional Information. Capitalized terms not otherwise defined in this Statement of Additional Information shall have the meanings designated in the Prospectus. American General Corporation ("American General") through its wholly-owned subsidiary, AGC Life Insurance Company ("AGC Life"), owns all of the outstanding shares of common stock of The Franklin. The address of AGC Life is American General Center, Nashville, Tennessee 37250-0001. The address of American General is 2929 Allen Parkway, Houston, Texas 77019-2155. American General is one of the largest diversified financial services organizations in the United States. American General's operating subsidiaries are leading providers of retirement services, consumer loans, and life insurance. The company was incorporated as a general business corporation in Texas in 1980 and is the successor to American General Insurance Company, an insurance company incorporated in Texas in 1926. American General has advised the Fund that there was no person who was known to it to be the beneficial owner of 10% or more of the voting power of American General as of March 5, 1998. INVESTMENT OBJECTIVES The investment objectives and policies of the Fund are described under "Investment Policies and Restrictions of the Fund" in the Prospectus. LIMITATIONS ON SETTLEMENT OPTIONS A. LIMITATIONS ON CHOICE OF SETTLEMENT OPTION Described below are certain limitations on Settlement Options based on The Franklin's current understanding of the distribution rules generally applicable to Contracts purchased for use as Individual Retirement Annuities or issued in connection with Section 403(b) annuity purchase plans. Various questions exist, however, about the application of the distribution rules to distributions from the Contracts and their effect on Settlement Option availability thereunder. The Internal Revenue Service has proposed regulations relating to required distributions from qualified plans, individual retirement plans, and annuity contracts under Section 403(b) of the Code. These proposed regulations may limit the availability of the Settlement Options in Contracts purchased for use as Individual Retirement Annuities or issued in connection with Section 403(b) annuity purchase plans. The proposed regulations are generally effective for calendar years after 1984; persons contemplating the purchase of a Contract should consult a qualified tax advisor concerning the effect of the proposed regulations on the Settlement Option or Options he or she is contemplating. FIRST OPTION-LIFE ANNUITY. Under Contracts issued for use as Individual Retirement Annuities or in connection with Section 403(b) annuity purchase plans, if the Variable Annuitant dies before Annuity Payments have commenced, this Option is not available to a Beneficiary unless distributions to the Beneficiary begin not later than one year after the date of the Variable Annuitant's death (except that distributions to a Beneficiary who is the surviving spouse of the Variable Annuitant need not commence earlier than the date on which the Variable Annuitant would have attained age 70-1/2). If the surviving 2 spouse of the Variable Annuitant is the Beneficiary and such surviving spouse dies before Annuity Payments to such spouse have commenced, the surviving spouse will be treated as the Variable Annuitant for purposes of the preceding rule. SECOND OPTION-LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN. Under Contracts issued for use as Individual Retirement Annuities or in connection with Section 403(b) annuity purchase plans, this Option is not available unless the selected period does not extend beyond the life expectancy of the Variable Annuitant (or the life expectancy of the Variable Annuitant and his or her Beneficiary). Further, if the Variable Annuitant dies before Annuity Payments have commenced, this Option is not available to a Beneficiary unless (i) the selected period does not extend beyond the life expectancy of the Beneficiary and (ii) the distribution to the Beneficiary commences not later than one year after the date of the Variable Annuitant's death (except that distributions to a Beneficiary who is the surviving spouse of the Variable Annuitant need not commence earlier than the date on which the Variable Annuitant would have attained age 70-1/2). If the surviving spouse of the Variable Annuitant is the Beneficiary and the surviving spouse dies before Annuity Payments to such spouse have commenced, the surviving spouse will be treated as the Variable Annuitant for purposes of the preceding sentence. This Option is also not available under Individual Retirement Annuities or in connection with Section 403(b) annuity purchase plans unless certain minimum distribution incidental benefit requirements of the proposed regulations are met. THIRD OPTION-UNIT REFUND LIFE ANNUITY. This Option is not available under Contracts issued for use as Individual Retirement Annuities. Also, under Qualified Contracts issued in connection with Section 403(b) annuity purchase plans, if the Variable Annuitant dies before Annuity Payments have commenced, this Option is not available to a Beneficiary unless distributions to the Beneficiary begin not later than one year after the date of the Variable Annuitant's death (except that distributions to a Beneficiary who is the surviving spouse of the Variable Annuitant need not commence earlier than the date on which the Variable Annuitant would have attained age 70-1/2). If the surviving spouse of the Variable Annuitant is the Beneficiary and such surviving spouse dies before Annuity Payments to such spouse have commenced, the surviving spouse will be treated as the Variable Annuitant for purposes of the preceding rule. This Option is also not available in connection with Section 403(b) annuity purchase plans unless certain minimum distribution incidental benefit requirements of the proposed regulations are met. FOURTH OPTION-JOINT AND LAST SURVIVOR LIFE ANNUITY. Under Contracts issued for use as Individual Retirement Annuities or in connection with Section 403(b) annuity purchase plans, this Option is not available unless the secondary variable annuitant is the spouse of the Variable Annuitant or unless certain minimum distribution incidental benefit requirements of the proposed regulations are met. Further, if the Variable Annuitant dies before Annuity Payments have commenced, this Option is not available to a Beneficiary under a Contract issued for use as Individual Retirement Annuities or in connection with Section 403(b) annuity purchase plans. FIFTH OPTION-PAYMENTS FOR A DESIGNATED PERIOD. Under Contracts issued for use as Individual Retirement Annuities or in connection with Section 403(b) annuity purchase plans, this Option is not available unless the limitations described in the Second Option, above, applicable to such Qualified Contracts, are satisfied, except that this Option is otherwise available to a Beneficiary where the Variable Annuitant dies before Annuity Payments have commenced if the designated period does not exceed a period that terminates five years after the death of the Variable Annuitant or the substituted surviving spouse, as the case may be. In addition, this Option is not available if the number of years in the selected period over which Annuity Payments would otherwise be paid plus the attained age of the Variable Annuitant at the initial Annuity Payment Date would exceed 95. SIXTH OPTION-PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. This Option is not available under Contracts issued for use as Individual Retirement Annuities or in connection with Section 403(b) annuity purchase plans. 3 SEVENTH OPTION-INVESTMENT OPTION. This Option is not available under Qualified Contracts issued in connection with any Qualified Plan. B. LIMITATIONS ON COMMENCEMENT OF ANNUITY PAYMENTS The Contract Owner may defer the initial Annuity Payment Date and continue the Contract to a date not later than age 75 unless the provisions of the Code or any governing Qualified Plan require Annuity Payments to commence at an earlier date. For example, under Qualified Contracts, other than those issued for use as Individual Retirement Annuities, the Contract Owner may not defer the initial Annuity Payment Date beyond April 1 of the calendar year following the later of the calendar year in which the Variable Annuitant (i) attains age 70-1/2, or (ii) retires, and must be made in a specified form or manner. In addition, if the plan participant is a "5 percent owner" (as defined in the Code), or if the Contract is issued for use as an Individual Retirement Annuity, distributions generally must begin no later than the date described in (i). The Franklin will require satisfactory proof of age of the Variable Annuitant prior to the initial Annuity Payment Date. MANAGEMENT The following persons hold the positions designated with respect to the Board of Managers. The table also shows any positions held with The Franklin and Franklin Financial Services Corporation, a wholly-owned subsidiary of The Franklin which serves as distributor for the Contracts. (See "Distribution of the Contracts," below.)
PRINCIPAL OCCUPATIONS NAME AND ADDRESS DURING PAST 5 YEARS POSITIONS HELD WITH THE FUND ROBERT G. SPENCER* Officer of The Franklin; Chairman and Member, Board of Managers #1 Franklin Square currently, Vice President Springfield, Illinois 62713 of The Franklin; prior to 1996, also Treasurer of The Franklin and Treasurer and Assistant Secretary of Franklin Financial Services Corporation. ELIZABETH E. ARTHUR* Officer of The Franklin; Secretary, Board of Managers #1 Franklin Square currently, Director, Springfield, Illinois 62713 Assistant Secretary and Associate General Counsel of The Franklin. Ms. Arthur also serves as Assistant Secretary of Franklin Financial Services Corporation. DR. ROBERT C. SPENCER Visiting Professor of Member, Board of Managers 2303 South 3rd Avenue Government, Montana State Bozeman, Montana 59715 University, since 1992; Professor of Government and Public Affairs, Sangamon State University, prior thereto. JAMES W. VOTH Chairman, Resource International Member, Board of Managers 50738 Meadow Green Court Corp., South Bend, Indiana Granger, Indiana 46530 (marketing, manufacturing and engineering service to industry); prior to 1993, also President of Resource International Corp. 4 PRINCIPAL OCCUPATIONS DURING NAME AND ADDRESS PAST 5 YEARS POSITIONS HELD WITH THE FUND CLIFFORD L. GREENWALT Director, President and Chief Executive Member, Board of Managers 607 East Adams Street Officer, CIPSCO Incorporated, since Springfield, Illinois 62739 October, 1990 (utility holding company); Director, President and Chief Executive Officer, Central Illinois Public Service Company, Springfield, Illinois (a subsidiary of CIPSCO Incorporated); Director, Electric Energy, Inc., Joppa, Illinois; Director, First of America Bank, Kalamazoo, Michigan; Director, First of America Bank - Illinois, N.A. (a subsidiary of First of America Bank).
*DENOTES INDIVIDUALS WHO ARE "INTERESTED PERSONS" (AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940) OF THE FUND, THE FRANKLIN OR FRANKLIN FINANCIAL SERVICES CORPORATION BY REASON OF THE CURRENT POSITIONS HELD BY THEM AS SET FORTH IN THE ABOVE TABLE. The following table sets forth a summary of compensation paid for services to the Fund and certain other entities that are deemed to be part of the same "Fund Complex" in accordance with the rules of the Securities and Exchange Commission to all members of the Board of Managers for the year ended December 31, 1997. Pursuant to the terms of its agreement to assume certain of the Fund's administrative expenses, The Franklin pays all compensation received by the members of the Board of Managers and the officers of the Fund. Members of the Board of Managers or officers of the Fund who are also officers, directors or employees of The Franklin do not receive any remuneration for their services as members of the Board of Managers or officers of the Fund. Other members of the Board of Managers received a fee of $1,400 for the year and, thus, the aggregate direct remuneration of all such members of the Board of Managers was $4,200 during 1997. It is currently anticipated that the annual aggregate remuneration of such members of the Board of Managers to be paid during 1998 will not exceed $4,200.
NAME OF PERSON, POSITION AGGREGATE TOTAL COMPENSATION COMPENSATION RELATING TO FUND AND RELATING TO FUND FUND COMPLEX PAID TO EACH MEMBER Each member of the Board of Managers (except $1,400 (1) $4,200 (1)(2) Robert G. Spencer)
- -------------------------- (1) Paid by The Franklin pursuant to an agreement to assume certain Fund administrative expenses. (2) Includes amounts paid to members of the Board of Managers who are not officers, directors or employees of The Franklin for service on the Boards of Managers of Franklin Life Variable Annuity Fund B and Franklin Life Money Market Variable Annuity Fund C. Neither any member of the Board of Managers nor the Secretary of the Fund was, as of April 20, 1998, the owner of any contract participating in the investment experience of the Fund. 5 INVESTMENT ADVISORY AND OTHER SERVICES The Franklin acts as investment manager of the Fund pursuant to an Investment Management Agreement executed and dated January 31, 1995, which was approved by Contract Owners at their annual meeting held on April 17, 1995 and was renewed to January 31, 1999 by the Board of Managers of the Fund at its meeting on January 19, 1998. The method of determining the advisory charge is described in the Prospectus under "Investment Management Service Charge." The Investment Management Agreement: (1) May not be terminated by The Franklin without the prior approval of a new investment management agreement by a "majority" (as that term is defined in the Investment Company Act of 1940) of the votes available to the Contract Owners, and may be terminated without the payment of any penalty on 60 days' written notice by a vote of the Board of Managers of the Fund or by a vote of a majority of the votes available to the Contract Owners. (2) Shall continue in effect from the date of its execution until the second anniversary of such execution date and thereafter shall continue in effect from year to year but only if such continuance is specifically approved at least annually by the Board of Managers or by a vote of a majority of the votes available to Contract Owners, provided that in either case the continuation is also approved by the vote of a majority of the Board of Managers who are not "interested persons" (as that term is defined in the Investment Company Act of 1940) of the Fund or of The Franklin, cast in person at a meeting called for the purpose of voting on such approval. (3) Shall not be amended without prior approval by a majority of the votes available to the Contract Owners. (4) Shall terminate automatically on "assignment" (as that term is defined in the Investment Company Act of 1940). A "majority" of the votes available to the Contract Owners is defined in the Investment Company Act of 1940 as meaning the lesser of (i) Contract Owners holding 67% or more of the voting power of the Contract Owners present at a meeting if Contract Owners holding more than 50% of the total voting power of all Contract Owners in the Fund are present or represented by proxy, or (ii) Contract Owners holding more than 50% of the total voting power of all Contract Owners in the Fund. For the voting rights of Contract Owners, see "Voting Rights," in the Prospectus. Under the Investment Management Agreement, The Franklin, subject to the control of the Board of Managers of the Fund, is authorized and has the duty to manage the investment of the assets of the Fund, subject to the Fund's investment policies and the restrictions on investment activities set forth in the Prospectus, and to order the purchase and sale of securities on behalf of the Fund. In carrying out its obligations to manage the investment of the assets of the Fund, The Franklin is committed by the Agreement, so long as it remains in force, to pay all investment expenses of the Fund other than the following, which the Fund will bear: (i) taxes, if any, based on the income of, capital gains of assets in, or existence of, the Fund; (ii) taxes, if any, in connection with the acquisition, disposition or transfer of assets of the Fund; (iii) commissions or other capital items payable in connection with the purchase or sale of the Fund's investments; and (iv) interest on account of any borrowings by the Fund. Robert G. Spencer and Elizabeth E. Arthur are "affiliated persons," as defined in the Investment Company Act of 1940, of both The Franklin and the Fund by reason of the positions held by them with The Franklin and the Fund as set forth in the table under "Management," above. 6 The Administration Agreement discussed under "Deductions and Charges Under the Contracts-Sales and Administration Deduction" in the Prospectus provides that The Franklin will provide all services and will assume all expenses required for the administration of the Contracts, including expenses for legal and accounting services to the Fund and the cost of such indemnification of members of the Board of Managers and officers, agents, or employees of the Fund as is provided by the Fund in its Rules and Regulations. The Franklin is not, however, obligated under the Administration Agreement to pay the investment management service charge discussed under "Investment Management Service Charge," in the Prospectus. The Administration Agreement also provides that The Franklin will from time to time adjust the assets of the Fund by withdrawing sums in cash or by transferring cash to the Fund so that the assets of the Fund will be equal to the actuarial value of the amounts payable under all outstanding Contracts having an interest in the Fund. The Administration Agreement may be amended or terminated at any time by mutual consent of the Fund and The Franklin. DISTRIBUTION OF THE CONTRACTS Franklin Financial Services Corporation ("Franklin Financial"), #1 Franklin Square, Springfield, Illinois 62713, is organized under the laws of the State of Delaware and is a wholly-owned subsidiary of The Franklin. Franklin Financial serves as "principal underwriter" (as that term is defined in the Investment Company Act of 1940) for the Contracts, pursuant to a Sales Agreement with the Fund. The present Sales Agreement was approved by the Board of Managers of the Fund, and came into effect, on January 31, 1995. It was last renewed by the Board of Managers on January 19, 1998. Franklin Financial's employment will continue thereunder if specifically approved at least annually by the Board of Managers of the Fund, or by a majority of votes available to Contract Owners, provided that in either case the continuance of the Sales Agreement is also approved by a majority of the members of the Board of Managers of the Fund who are not "interested persons" (as that term is defined in the Investment Company Act of 1940) of the Fund or Franklin Financial. The employment of Franklin Financial as principal underwriter automatically terminates upon "assignment" (as that term is defined in the Investment Company Act of 1940) of the Sales Agreement and is terminable by either party on not more than 60 days' and not less than 30 days' notice. The Fund no longer issues new Contracts. To the extent that Stipulated Payments continue to be made on Contracts, the Fund may nevertheless be deemed to be offering interests in Contracts on a continuous basis. Contracts are sold primarily by persons who are insurance agents or brokers for The Franklin authorized by applicable law to sell life and other forms of personal insurance and who are similarly authorized to sell Variable Annuities. Pursuant to an Agreement, dated June 30, 1971 and amended on May 15, 1975, between The Franklin and Franklin Financial, Franklin Financial agreed to employ and supervise agents chosen by The Franklin to sell the Contracts and to use its best efforts to qualify such persons as registered representatives of Franklin Financial, which is a broker-dealer registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers, Inc. Franklin Financial also may enter into agreements with The Franklin and each such agent with respect to the supervision of such agent. Franklin Financial incurs certain sales expenses, such as sales literature preparation and related costs, in connection with the sale of the Contracts pursuant to a Sales Agreement with the Fund. Sales deductions from Stipulated Payments are paid to Franklin Financial as a means to recover sales expenses. Sales deductions are not necessarily related to Franklin Financial's actual sales expenses in any particular year. To the extent sales expenses are not covered by sales deductions, Franklin Financial will cover them from other assets. Pursuant to an Agreement between The Franklin and Franklin Financial, The Franklin has agreed to pay commissions earned by registered representatives of Franklin Financial on the sale of the Contracts and to bear the cost of preparation of prospectuses and other disclosure materials. Commissions and other remuneration and the cost of disclosure materials will be paid by The Franklin from its General Account. 7 Registration as a broker-dealer does not mean that the Securities and Exchange Commission has in any way passed upon the financial standing, fitness or conduct of any broker or dealer, upon the merits of any securities offering or upon any other matter relating to the business of any broker or dealer. Salesmen and employees selling Contracts, where required, are also licensed as securities salesmen under state law. Elizabeth E. Arthur is an "affiliated person" (as that term is defined in the Investment Company Act of 1940) of both Franklin Financial and the Fund by reason of the positions held by her with Franklin Financial and the Fund as set forth in the table under "Management," above. PORTFOLIO TURNOVER AND BROKERAGE A. PORTFOLIO TURNOVER The Fund will purchase securities, in general, for long-term appreciation of capital and income and does not place emphasis on obtaining short-term trading profits. See "Investment Policies and Restrictions of the Fund" in the Prospectus. Accordingly, the Fund expects to have an annual rate of portfolio turnover which is at, or below, the industry average. (The "portfolio turnover" rate means (a) the lesser of the dollar amount of the purchases or of the sales of portfolio securities (other than short-term securities, that is, those with a maturity of one year or less at the time of purchase) by the Fund for the period in question, divided by (b) the monthly average of the value of the Fund's portfolio securities (excluding short-term securities).) However, the rate of portfolio turnover is not a limiting factor when changes in the portfolio are deemed appropriate, and in any given year conditions could result in a higher rate, which would not in and of itself indicate a variation from stated investment objectives. The degree of portfolio activity affects the brokerage costs of the Fund. See "Brokerage," this page, below. For 1996, the portfolio turnover rate was 4.77%; for 1997 the rate was .70%. B. BROKERAGE Decisions to buy and sell securities for the Fund will be made by The Franklin, as the Fund's investment manager, subject to the control of the Fund's Board of Managers. The Franklin, as investment manager, also is responsible for placing the brokerage business of the Fund and, where applicable, negotiating the amount of the commission rate paid, subject to the control of the Fund's Board of Managers. The Fund has no formula for the distribution of brokerage business in connection with the placing of orders for the purchase and sale of investments for the Fund. It is The Franklin's intention to place such orders, consistent with the best execution, to secure the highest possible price on sales and the lowest possible price on purchases of securities. Portfolio transactions executed in the over-the-counter market will be placed directly with the primary market makers unless better executions are available elsewhere. Subject to the foregoing, The Franklin may give consideration in the allocation of brokerage business to services performed by a broker or dealer in furnishing statistical data and research to it. The Franklin may thus be able to supplement its own information and to consider the views and information of other research organizations in arriving at its investment decisions. Any such services would also be available to The Franklin in the management of its own assets and those of any other separate account. To the extent that such services are used by The Franklin in performing its investment management functions with respect to the Fund, they may tend to reduce The Franklin's expenses. However, the dollar value of any information which might be received is indeterminable and may, in fact, be negligible. The Franklin does not consider the value of any research services provided by brokers in negotiating commissions. During 1995, 1996 and 1997, a total of $4,260, $1,865, and $1,695, respectively, in brokerage commissions was paid; none of such brokerage business of the Fund was allocated to Franklin Financial Services Corporation or to brokers who furnished statistical data and research to The Franklin. No officer or director of The Franklin or Franklin Financial Services Corporation (the principal underwriter for the Contracts), and no member of the Board of Managers, is 8 affiliated with any brokerage firm (except with Franklin Financial Services Corporation, as described under "Investment Management Service Charge," in the Prospectus, and "Distribution of the Contracts," above) and no beneficial owner of 5% or more of the total voting power of The Franklin or any of its parents is known to be affiliated with any brokerage firm utilized by the Fund (except with Franklin Financial Services Corporation). SAFEKEEPER OF SECURITIES Securities of the Fund are held by State Street Bank and Trust Company ("State Street"), which is located at 1776 Heritage Drive, North Quincy, Massachusetts, under a Custodian Agreement dated April 17, 1995 to which The Franklin and State Street are parties. Representatives of the Securities and Exchange Commission, the Illinois Insurance Department and the NAIC zonal examination committee have access to such securities in the performance of their official duties. LEGAL MATTERS Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided advice on certain matters relating to the federal securities laws. EXPERTS The statement of assets and liabilities, including the portfolio of investments, as of December 31, 1997 and the related statement of operations for the year then ended and the statements of changes in contract owners' equity for each of the two years in the period then ended and the table of per-unit income and changes in accumulation unit value for each of the three years in the period then ended of the Fund, appearing herein, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein. The consolidated financial statements of The Franklin at December 31, 1997 and 1996 and for each of the two years in the period ended December 31, 1997, the eleven months ended December 31, 1995 and the one month ended January 31, 1995, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein. The table of per-unit income and changes in accumulation unit value for each of the two years in the period ended December 31, 1994 of the Fund, appearing herein, have been audited by Coopers & Lybrand L.L.P., independent accountants, as set forth in their report thereon appearing elsewhere herein. Such financial statements and tables of per-unit income and changes in accumulation unit value referred to above are included in reliance upon such reports given upon the authority of such firms as experts in accounting and auditing. 9 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Franklin Life Variable Annuity Fund A: Reports of Independent Auditors and Accountants F-2 - F-3 Financial Statements: Statement of Assets and Liabilities, December 31, 1997 F-4 Statement of Operations for the year ended December 31, 1997 F-4 Statements of Changes in Contract Owners' Equity for the years ended December 31, 1997 and 1996 F-4 Portfolio of Investments, December 31, 1997 F-5 Notes to Financial Statements F-6 Supplementary Information - Per-Unit Income and Changes in Accumulation Unit Value for the five years ended December 31, 1997 F-7 The Franklin Life Insurance Company and Subsidiaries:* Report of Independent Auditors F-8 Financial Statements: Consolidated Statement of Income for the years ended December 31, 1997 and 1996, the eleven months ended December 31, 1995, and the one month ended January 31, 1995 F-9 Consolidated Balance Sheet, December 31, 1997 and 1996 F-10- F-11 Consolidated Statement of Shareholder's Equity for the years ended December 31, 1997 and 1996, the eleven months ended December 31, 1995, and the one month ended January 31, 1995 F-12 Consolidated Statement of Cash Flows for the years ended December 31, 1997 and 1996, the eleven months ended December 31, 1995, and the one month ended, January 31, 1995 F-13 Notes to Consolidated Financial Statements F-14 - F-38
*The consolidated financial statements of The Franklin contained herein should be considered only as bearing upon the ability of The Franklin to meet its obligations under the Contracts. F-1 REPORT OF INDEPENDENT AUDITORS Board of Managers and Contract Owners Franklin Life Variable Annuity Fund A We have audited the accompanying statement of assets and liabilities of Franklin Life Variable Annuity Fund A, including the portfolio of investments, as of December 31, 1997, the related statement of operations for the year then ended and the statements of changes in contract owners' equity for each of the two years then ended, and the table of per-unit income and changes in accumulation unit value for each of the three years then ended. These financial statements and the table of per-unit income and changes in accumulation unit value are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the table of per-unit income and changes in accumulation unit value based on our audits. The table of per-unit income and changes in accumulation unit value for each of the two years in the period ended December 31, 1994 was audited by other auditors whose report dated February 1, 1995, expressed an unqualified opinion on that table. 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 table of per-unit income and changes in accumulation unit value 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 held by the custodian as of December 31, 1997. 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 the 1997, 1996, and 1995 table of per-unit income and changes in accumulation unit value referred to above present fairly, in all material respects, the financial position of Franklin Life Variable Annuity Fund A at December 31, 1997, and the results of its operations for the year then ended, and the changes in its contract owners' equity for each of the two years then ended, and per-unit income and changes in accumulation unit value for each of the three years then ended in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois January 30, 1998 F-2 REPORT OF INDEPENDENT ACCOUNTANTS Board of Managers and Contract Owners Franklin Life Variable Annuity Fund A Springfield, Illinois We have audited the accompanying table of per-unit income and changes in accumulation unit value of Franklin Life Variable Annuity Fund A for each of the two years in the period ended December 31, 1994. This table of per-unit income and changes in accumulation unit value is the responsibility of the Fund's management. Our responsibility is to express an opinion on this table of per-unit income and changes in accumulation unit value 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 table of per-unit income and changes in accumulation unit value is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the table of per-unit income and changes in accumulation unit value. An audit also includes assessing the accounting principles used by management as well as evaluating the overall presentation of the table of per-unit income and changes in accumulation unit value. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the table of per-unit income and changes in accumulation unit value referred to above presents fairly, in all material respects, the per-unit income and changes in accumulation unit value for each of the two years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Chicago, Illinois February 1, 1995 F-3 FRANKLIN LIFE VARIABLE ANNUITY FUND A STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1997
Assets Investments-at fair value (cost-$6,923,517): Common stocks $ 10,325,291 Short-term notes 1,896,668 ------------- 12,221,959 Cash on deposit 54,548 Dividends and interest receivable 19,871 ------------- Total Assets 12,296,378 Liability -due to The Franklin Life Insurance Company 1,489 ------------- Contract owners' equity Annuity reserves $ 19,380 Value of 124,714.114 accumulation units outstanding, equivalent to $98.42918992 per unit 12,275,509 $ 12,294,889 ---------- ------------- -------------
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997
Investment income Dividends $ 167,447 Interest 83,552 ---------- Total Income $ 250,999 Expenses Mortality and expense charges $ 119,981 Investment management services 52,451 ---------- Total expenses 172,432 ------------ Net investment income 78,567 Realized and unrealized gain on investments: Net realized gain from investment transactions (excluding short-term investments): Proceeds from sales $1,508,962 Cost of investments sold (identified cost method) 1,056,000 ---------- Net realized gain 452,962 Net unrealized appreciation of investments Beginning of year $3,584,070 End of year 5,298,442 ---------- Net unrealized appreciation 1,714,372 ------------ Net gain on investments 2,167,334 ------------ Net increase in contract owners' equity resulting from operations $2,245,901 ------------ ------------
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
YEAR ENDED DECEMBER 31 1997 1996 -------------------------- Net investment income $ 78,567 $ 85,278 Net realized gain from investment transactions 452,962 269,793 Net unrealized appreciation of investments 1,714,372 1,406,762 -------------------------- Net increase In contract owners' equity resulting from operations 2,245,901 1,761,833 Net contract purchase payments 268,272 226,321 Reimbursement for contract guarantees 172 3,178 Annuity payments (4,568) (3,878) Withdrawals (1,636,104) (995,151) -------------------------- Net increase in contract owners' equity 873,673 992,303 Contract owners' equity at beginning of year 11,421,216 10,428,913 -------------------------- Contract owners' equity at end of year $12,294,889 $11,421,216 -------------------------- --------------------------
See Notes to Financial Statements F-4 FRANKLIN LIFE VARIABLE ANNUITY FUND A PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997
NUMBER OF FAIR SHARES VALUE - ------------- ----------- COMMON STOCKS (83.98%) BANKING (4.16%) 3,675 SLM Holding Corporation $ 511,284 BEVERAGES (1.30%) 4,400 PepsiCo, Incorporated 159,500 BUSINESS SERVICES (1.61%) 5,600 Equifax Inc. 198,450 CHEMICALS (2.23%) 2,700 Dow Chemical 274,050 COMPUTER SERVICES (3.00%) 8,100 Ceridian Corporation* 371,081 COSMETICS & HOUSEHOLD PRODUCTS (3.27%) 4,000 Gillette Company 401,750 DRUGS & HEALTH CARE (21.62%) 8,000 Eli Lilly and Company 557,000 4,300 Merck & Company, Inc. 455,800 4,200 Pfizer, Incorporated 313,163 6,450 St. Jude Medical, Inc.* 196,725 6,600 Schering-Plough Corporation 410,025 6,000 Stryker Corporation 223,500 16,000 Walgreen Company 502,000 ----------- 2,658,213 ELECTRONICS & INSTRUMENTATIONS (2.94%) 5,800 Hewlett-Packard Company 361,775 FOOD PROCESSING (2.86%) 10,600 ConAgra, Inc. 351,125 FOOD - RETAIL (2.19%) 5,700 Albertson's, Inc. 269,325 FOOD - WHOLESALE (2.48%) 6,700 Sysco Corporation 305,269 HOUSEHOLD PRODUCTS (1.28%) 3,700 Newell Co. 157,250 MACHINERY - INDUSTRIAL & CONSTRUCTION (.46%) 1,500 Fluor Corporation 56,062 OFFICE EQUIPMENT & SERVICES (8.00%) 5,000 Compaq Computers Corporation* 282,500 5,350 Digital Equipment Corporation* 198,619 International Business 4,800 Machines Corporation 502,200 ----------- 983,319 OIL SERVICES & DRILLING (2.62%) 6,200 Halliburton Company 321,625 OILS & OIL RELATED PRODUCTS (4.9%) 2,700 Amoco Corporation 229,838 2,600 Atlantic Richfield Company 208,325 2,600 Kerr-McGee Corporation 164,612 ----------- 602,775 PACKAGING - CONTAINERS (3.06%) 8,400 Avery-Dennison Corporation 375,900 PHOTOGRAPHY (2.02%) 4,100 Eastman Kodak Company 248,306 RESTAURANTS/LODGING (1.92%) 3,400 Marriott International, Inc. 235,450 RETAIL-SPECIALTY (2.29%) 7,200 NIKE, Inc. 281,250 TECHNOLOGY (7.48%) 5,000 AMP, Incorporated 210,000 4,950 Diebold, Incorporated 250,594 4,800 Intel Corporation 337,200 3,600 Millipore Corporation 122,175 ----------- 919,969 UTILITIES - TELEPHONE (2.29%) 5,000 BellSouth Corporation 281,562 ----------- TOTAL COMMON STOCKS (COST-$5,026,849) 10,325,290 PRINCIPAL AMOUNT ------ SHORT-TERM NOTES (15.43%) $ 450,000 United States Treasury Bill 4.93%, due 2/5/98 (cost-$446,549) 446,549 $ 1,460,000 United States Treasury Bill 5.05%, due 2/5/98 (cost-$1,450,119) 1,450,119 ----------- TOTAL SHORT-TERM NOTES 1,896,669 ----------- TOTAL INVESTMENTS (99.41%) (COST-$6,923,517) 12,221,959 CASH AND RECEIVABLES, LESS LIABILITY (.59%) 72,930 ----------- TOTAL CONTRACT OWNERS' EQUITY (100.0%) $12,294,889 ----------- -----------
*NON-INCOME PRODUCING INVESTMENT IN 1997. See Notes to Financial Statements - -------------------------------------------------------------------------------- THIS REPORT HAS BEEN PREPARED FOR THE INFORMATION OF FRANKLIN LIFE VARIABLE ANNUITY FUND A CONTRACT OWNERS. IT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS. F-5 FRANKLIN LIFE VARIABLE ANNUITY FUND A NOTES TO FINANCIAL STATEMENTS NOTE A-SIGNIFICANT ACCOUNTING POLICIES Franklin Life Variable Annuity Fund A (the Fund) is a segregated investment account of The Franklin Life Insurance Company (The Franklin) and is registered as an open-end diversified management investment company under the Investment Company Act of 1940, as amended. The Fund no longer issues new contracts. Significant accounting policies of the Fund are as follows: VALUATION OF INVESTMENTS: Investments in common stocks listed on national stock exchanges are valued at closing sales prices. Unlisted common stocks are valued at the most recent bid prices, as supplied by broker-dealers. Short-term notes are valued at cost, which approximates fair value. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME: Investment transactions are accounted for on the trade date. Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis. FEDERAL INCOME TAXES: Operations of the Fund will form a part of, and be taxed with those of, The Franklin which is taxed as a "life insurance company" under the Internal Revenue Code. Under current law, no federal income taxes are payable with respect to the Fund. ANNUITY RESERVES: Reserves on contracts, all involving life contingencies, are calculated using the Progressive Annuity Table with an assumed investment rate of 3-1/2%. NOTE B-INVESTMENTS Exclusive of short-term investments, the cost of investments purchased and the proceeds from investments sold during 1997 aggregated $70,929 and $1,508,962, respectively. NOTE C-EXPENSES Amounts are paid to The Franklin for investment management services at the rate of .0012% of the current value of the Fund per day (.438% on an annual basis) and for mortality and expense risk assurances at the rate of .002745% of the current value of the Fund per day (1.002% on an annual basis). NOTE D-SALES AND ADMINISTRATIVE CHARGES Sales and administrative charges aggregating $16,926 and $21,860 were deducted from the proceeds of the sales of accumulation units and retained by Franklin Financial Services Corporation and The Franklin during 1997 and 1996, respectively. Franklin Financial Services Corporation is a wholly-owned subsidiary of The Franklin and principal underwriter for the Fund. NOTE E-SUMMARY OF CHANGES IN ACCUMULATION UNITS
YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 --------------------------------------------------------------------- UNITS AMOUNT UNITS AMOUNT ----- ------ ----- ---------- Balance at beginning of year 139,945 $11,403,341 150,474 $10,412,808 Purchases 2,945 268,272 3,007 226,321 Net investment income* - 78,354 - 85,005 Net realized gain from investment transactions* - 451,738 - 268,930 Net unrealized appreciation of investments* - 1,709,736 - 1,402,260 Withdrawals (18,176) (1,636,104) (13,536) (995,151) Reimbursement for contract guarantees* - 172 - 3,168 ----------------------------------------------------------------------- Balance at end of year 124,714 $12,275,509 139,945 $11,403,341 ----------------------------------------------------------------------- -----------------------------------------------------------------------
*Excludes portion allocated to annuity reserves on a pro rata basis. NOTE F-REMUNERATION OF MANAGEMENT No person receives any remuneration from the Fund because The Franklin pays the fees of members of the Board of Managers and officers and employees of the Fund pursuant to expense assurances. Certain members of the Board of Managers and officers of the Fund are also directors, officers or employees of The Franklin or Franklin Financial Services Corporation. Amounts paid by the Fund to The Franklin and to Franklin Financial Services Corporation are disclosed in this report. NOTE G-NET UNREALIZED APPRECIATION OF INVESTMENTS Net unrealized appreciation of investments at December 31, 1997 and 1996 was as follows:
DECEMBER 31, DECEMBER 31, 1997 1996 -------------------------------- Gross unrealized appreciation $5,387,633 $3,670,260 Gross unrealized depreciation 89,191 86,190 -------------------------------- Net unrealized appreciation of investments $5,298,442 $3,584,070 -------------------------------- --------------------------------
F-6 FRANKLIN LIFE VARIABLE ANNUITY FUND A SUPPLEMENTARY INFORMATION PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE (SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH YEAR)
YEAR ENDED DECEMBER 31 1997 1996 1995 1994 1993 ---------------------------------------------------------------------------- Investment income $1.910 $1.685 $1.948 $1.408 $1.231 Expenses 1.312 1.090 .875 .773 .773 ---------------------------------------------------------------------------- Net investment income .598 .595 1.073 .635 .458 Net realized and unrealized gain (loss) on investments 16.346 11.690 14.139 (.240) .112 ---------------------------------------------------------------------------- Net increase in accumulation unit value 16.944 12.285 15.212 .395 .570 Accumulation unit value: Beginning of year 81.485 69.200 53.988 53.593 53.023 ---------------------------------------------------------------------------- End of year $98.429 $81.485 $69.200 $53.988 $53.593 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Ratio of expenses to average net assets 1.44% 1.44% 1.44% 1.44% 1.44% Ratio of net investment income to average net assets .66% .79% 1.76% 1.18% .85% Portfolio turnover rate .70% 4.77% 14.66% 88.99% 68.62% Number of accumulation units outstanding at end of year 124,714 139,945 150,474 172,507 198,763 - -------------------------------------------------------------------------------------------------------------------------------
F-7 REPORT OF INDEPENDENT AUDITORS ----------------------------- Board of Directors and Shareholder The Franklin Life Insurance Company We have audited the accompanying consolidated balance sheet of The Franklin Life Insurance Company (an indirect wholly-owned subsidiary of American General Corporation) (the Company) as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholder's equity and cash flows for the years ended December 31, 1997 and 1996, the eleven months ended December 31, 1995 and the one month ended January 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Franklin Life Insurance Company at December 31, 1997 and 1996 and the consolidated results of its operations and its cash flows for the years ended December 31, 1997 and 1996, the eleven months ended December 31, 1995 and the one month ended January 31, 1995, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Chicago, Illinois February 23, 1998 F-8 THE FRANKLIN LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF INCOME (In millions)
Predecessor Basis ------------------ Eleven Months One Month YEAR ENDED Year Ended Ended Ended DECEMBER 31 December 31 December 31 January 31 ----------------------------------------------------------------------------- 1997 1996 1995 1995 ----------------------------------------------------------------------------- Revenues Premiums and other considerations $370.2 $ 418.6 $449.6 $34.5 Net investment income 518.6 521.5 468.8 41.3 Realized investment gains (losses) 12.8 2.5 7.2 (7.6) Other 75.8 68.3 55.9 4.1 ----------------------------------------------------------------------------- Total revenues 977.4 1,010.9 981.5 72.3 Benefits and expenses Benefits paid or provided Death claims and other policy benefits 250.6 240.6 236.3 21.5 Investment-type contracts 169.4 173.3 168.3 14.0 Dividends to policyholders 86.3 81.9 85.6 7.5 Change in policy reserves 54.6 95.9 148.5 11.0 Increase in participating policy- holders' interests 4.7 12.0 11.0 1.0 Commissions 106.5 110.2 108.0 7.6 Operating costs and expenses 33.5 35.7 17.3 2.8 Amortization of deferred policy acquisition costs 11.5 10.7 8.3 5.8 Amortization of cost of insurance purchased, net of deferrals 45.3 51.1 29.0 0.8 ----------------------------------------------------------------------------- Total benefits and expenses 762.4 811.4 812.3 72.0 ----------------------------------------------------------------------------- Income before income tax expense 215.0 199.5 169.2 0.3 Income tax expense Current 74.8 94.7 39.7 4.9 Deferred (benefit) (0.4) (25.3) 21.1 (4.7) ----------------------------------------------------------------------------- Total income tax expense 74.4 69.4 60.8 0.2 ----------------------------------------------------------------------------- Net income $140.6 $ 130.1 $108.4 $ 0.1 ----------------------------------------------------------------------------- -----------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. F-9 THE FRANKLIN LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEET (In millions)
DECEMBER 31 ------------------------ ASSETS 1997 1996 ------------ ----------- Investments Fixed maturity securities(amortized cost: $5,157.7; $5,152.3) $5,615.2 $5,476.5 Mortgage loans on real estate 621.6 607.0 Equity securities (cost: $1.1; $2.0) 4.4 5.0 Policy loans 332.7 327.4 Other long-term investments 46.3 47.6 ----------------------- Total investments 6,620.2 6,463.5 Cash and cash equivalents 39.5 24.6 Accrued investment income 100.3 99.7 Note receivable from parent 116.4 116.4 Preferred stock of affiliates, at cost 8.5 8.5 Receivable from brokers 26.5 17.7 Receivable from agents, less allowance ($4.3; 14.4 18.3 $0.4) Amounts recoverable from reinsurers 41.5 84.0 Deferred policy acquisition costs 111.7 82.0 Cost of insurance purchased 303.9 407.8 Property and equipment, at cost, less accumulated depreciation ($10.2; $7.2) 23.4 20.6 Other assets 27.4 29.6 Assets held in Separate Accounts 239.6 134.9 ----------------------- Total assets $7,673.3 $7,507.6 ----------------------- -----------------------
See Notes to Consolidated Financial Statements. F-10
THE FRANKLIN LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEET (CONTINUED) (In millions, except share data) DECEMBER 31 ------------------------- LIABILITIES 1997 1996 ------------------------- Insurance liabilities Life, annuity and accident and health reserves $2,882.8 $2,864.7 Policy and contract claims 34.4 38.1 Investment-type contract deposits and dividend accumulations 2,907.6 2,992.7 Participating policyholders' interests 211.4 209.7 Other 50.7 49.5 Income taxes Current 2.2 6.4 Deferred 4.5 (19.0) Intercompany payables 0.5 0.8 Accrued expenses and other liabilities 109.6 116.6 Liabilities related to Separate Accounts 239.6 134.9 ------------------------- Total liabilities 6,443.3 6,394.4 SHAREHOLDER'S EQUITY Common stock ($2 par value; 30,000,000 shares authorized, 21,002,000 shares issued and outstanding) 42.0 42.0 Paid-in capital 886.1 886.1 Net unrealized gains on securities 150.8 106.6 Retained earnings 151.1 78.5 ------------------------- Total shareholder's equity 1,230.0 1,113.2 ------------------------- Total liabilities and shareholder's equity $7,673.3 $7,507.6 ------------------------- -------------------------
See Notes to Consolidated Financial Statements. F-11 THE FRANKLIN LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (In millions)
Predecessor Basis ----------------- Eleven Months One Month YEAR ENDED Year Ended Ended Ended DECEMBER 31 December 31 December 31 January 31 ------------------------------------------------- 1997 1996 1995 1995 - ----------------------------------------------------------------------------------------- Common stock $ 42.0 $ 42.0 $ 42.0 $ 42.0 ------------------------------------------------- ------------------------------------------------- Paid-in capital Balance at beginning of period 886.1 884.3 884.3 803.0 Paid in during the period - 1.8 - - Adjustment for the acquisition - - - 81.3 ------------------------------------------------- Balance at end of period 886.1 886.1 884.3 884.3 ------------------------------------------------- Net unrealized gains (losses) on securities Balance at beginning of period 106.6 187.5 - (8.1) Change during the period 44.2 (80.9) 187.5 1.4 Adjustment for the acquisition - - - 6.7 ------------------------------------------------- Balance at end of period 150.8 106.6 187.5 - ------------------------------------------------- Retained earnings Balance at beginning of period 78.5 48.4 - 522.7 Net income 140.6 130.1 108.4 0.1 Dividends paid to parent (68.0) (100.0) (60.0) (250.0) Adjustment for the acquisition - - - (272.8) ------------------------------------------------- Balance at end of period 151.1 78.5 48.4 - ------------------------------------------------- Total shareholder's equity at end of period $1,230.0 $1,113.2 $1,162.2 $ 926.3 ------------------------------------------------- -------------------------------------------------
See Notes to Consolidated Financial Statements. F-12 THE FRANKLIN LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (In millions)
Predecessor Basis ----------------- Eleven Months One Month YEAR ENDED Year Ended Ended Ended DECEMBER 31 December 31 December 31 January 31 ------------------------------------------------------------------- 1997 1996 1995 1995 - ---------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 140.6 $ 130.1 $108.4 $ 0.1 Reconciling adjustments Insurance liabilities 33.4 121.5 155.4 19.9 Deferred policy acquisition costs (40.4) (45.5) (59.4) (2.7) Investment (gains) losses (6.1) (4.7) (11.4) (0.9) Investment write-downs and reserves (6.7) 2.2 4.2 8.5 Cost of insurance purchased and intangibles 45.3 51.1 29.0 1.0 Interest credited, net of charges on investment contract deposits 92.5 103.2 153.7 12.0 Purchase of trading securities - - - (1.5) Proceeds from sale of trading securities - - - 85.5 Other, net (5.4) (107.9) 14.3 (7.1) ------------------------------------------------------------------- Net cash provided by operating activities 253.2 250.0 394.2 114.8 ------------------------------------------------------------------- INVESTING ACTIVITIES Investment purchases Available-for-sale (891.8) (5,479.1) (1,055.8) - Held-to-maturity - - - (0.8) Other investments (125.2) (122.6) (95.7) (27.2) Affiliated - - (124.5) - Investment calls, maturities and sales Available-for-sale 978.0 5,526.3 832.0 0.2 Held-to-maturity - - - 24.9 Other investments 70.7 65.1 127.1 6.3 Additions to property and equipment (6.7) (4.6) (3.5) (0.5) ------------------------------------------------------------------- Net cash provided by (used for) investing activities 25.0 (14.9) (320.4) 2.9 ------------------------------------------------------------------- FINANCING ACTIVITIES Policyholder account deposits 194.5 165.3 357.8 29.2 Policyholder account withdrawals (389.8) (297.1) (366.2) (32.6) Additional capital contribution - 1.8 - - Proceeds from intercompany borrowings 230.4 62.0 105.2 - Repayments of intercompany borrowings (230.4) (62.1) (105.1) - Dividend payments (68.0) (100.0) (60.0) (250.0) ------------------------------------------------------------------- Net cash used for financing activities (263.3) (230.1) (68.3) (253.4) ------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 14.9 5.0 5.5 (135.7) Cash and cash equivalents at beginning of period 24.6 19.6 14.1 149.8 ------------------------------------------------------------------- Cash and cash equivalents at end of period $ 39.5 $ 24.6 $ 19.6 $ 14.1 -------------------------------------------------------------------
See Notes to Consolidated Financial Statements. F-13 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Significant Accounting Policies 1.1 NATURE OF OPERATIONS The Franklin Life Insurance Company (Franklin) and its subsidiaries, headquartered in Springfield, Illinois, provide life insurance and annuity products to middle-income customers throughout the United States. Franklin serves this customer base through 3,200 agents. 1.2 PREPARATION OF FINANCIAL STATEMENTS The consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) and include the accounts of Franklin, and its subsidiaries, The American Franklin Life Insurance Company (AMFLIC), Franklin Financial Services Corporation (FFSC) and prior to December 31, 1995, The Franklin United Life Insurance Company (FULIC). Franklin was formerly a wholly-owned subsidiary of American Franklin Company (AFC), and is now an indirect, wholly-owned subsidiary of American General Corporation (AGC) following the dissolution of AFC in June of 1996. All material intercompany transactions have been eliminated in consolidation. On December 31, 1995, Franklin completed the sale of FULIC to American General Life Insurance Company of New York (AGNY), an affiliated entity. Franklin received $8.5 million of preferred stock of American General Life Insurance Company, the parent of AGNY, as consideration. No gain or loss was recognized on the transaction. The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and disclosures of contingent assets and liabilities. Ultimate results could differ from these estimates. 1.3 ACQUISITION On January 31, 1995, AGC Life Insurance Company (AGCL), a subsidiary of AGC, acquired AFC for $1.17 billion. The purchase price consisted of $920 million in cash and a $250 million extraordinary cash dividend paid by AFC to its former parent prior to closing. In addition, $6.3 million of acquisition costs were capitalized as part of the acquisition. F-14 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1.3 ACQUISITION (CONTINUED) The acquisition was accounted for using the purchase method of accounting in accordance with the provisions of Accounting Principles Board Opinion 16, "Business Combinations", and other existing accounting literature pertaining to purchase accounting. Under purchase accounting, the total purchase cost was allocated to the assets and liabilities acquired based on a determination of their fair value. Franklin's consolidated statements of income, shareholder's equity and cash flows for the years ended December 31, 1997 and 1996, and the eleven months ended December 31, 1995, are reported under the purchase method of accounting and, accordingly, are not consistent with the basis of presentation of the "Predecessor Basis" consolidated statements of income, shareholder's equity and cash flows for the one month ended January 31, 1995. 1.4 INVESTMENTS FIXED MATURITY AND EQUITY SECURITIES. All fixed maturity securities and equity securities are classified as available-for-sale and recorded at fair value. After adjusting related balance sheet accounts as if unrealized gains (losses) had been realized, the net adjustment is recorded in net unrealized gains (losses) on securities within shareholder's equity. If the fair value of a security classified as available-for-sale declines below its cost and this decline is considered to be other than temporary, the security is reduced to its fair value, and the reduction is recorded as a realized loss. MORTGAGE LOANS. Mortgage loans are reported at amortized cost, net of an allowance for losses. The allowance for losses covers all non-performing loans and loans for which management has a concern based on management's assessment of risk factors, such as potential non-payment or non-monetary default. The allowance is based on a loan-specific review and a formula that reflects past results and current trends. Loans for which Franklin determines that collection of all amounts due under the contractual terms is not probable are considered to be impaired. Franklin generally looks to the underlying collateral for repayment of impaired loans. Therefore, impaired loans are considered to be collateral dependent and are reported at the lower of amortized cost or fair value of the underlying collateral, less estimated cost to sell. POLICY LOANS. Policy loans are reported at unpaid principal balance. INVESTMENT INCOME. Interest on fixed maturity securities, policy loans and performing and restructured mortgage loans is recorded as income when earned and is adjusted for any amortization of premium or discount. Interest on delinquent mortgage loans is recorded as income when received. Dividends are recorded as income on ex-dividend dates. F-15 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1.4 INVESTMENTS (CONTINUED) OTHER LONG TERM INVESTMENTS. Other long term investments represent investments in joint ventures and limited partnerships and are reported on the equity method. REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses) are recognized using the specific identification method. 1.5 CASH AND CASH EQUIVALENTS Highly liquid investments with an original maturity of three months or less are included in cash and cash equivalents. The carrying amount approximates fair value. 1.6 DEFERRED POLICY ACQUISITION COSTS (DPAC) Certain costs of writing an insurance policy, including commissions, underwriting, and marketing expenses, are deferred and reported as DPAC. DPAC associated with interest-sensitive life contracts, insurance investment contracts, and participating life insurance contracts is charged to expense in relation to the estimated gross profits of those contracts. The interest assumptions used to compute estimated gross profits with respect to participating life insurance contracts were 7.75% at December 31, 1997 and 1996, and 8.5% at December 31, 1995. DPAC associated with all other insurance contracts is charged to expense over the premium-paying period or as the premiums are earned over the life of the contract. DPAC is adjusted for the impact on estimated future gross profits as if net unrealized gains (losses) on securities had been realized at the balance sheet date. The impact of this adjustment is included in net unrealized gains (losses) on securities within shareholder's equity. Franklin reviews the carrying amount of DPAC on at least an annual basis. Management considers estimated future gross profits or future premiums, expected mortality, interest earned and credited rates, persistency, and expenses in determining whether the carrying amount is recoverable. 1.7 COST OF INSURANCE PURCHASED (CIP) The cost assigned to certain insurance contracts in force at January 31, 1995 is reported as CIP. Interest is accreted on the unamortized balance of CIP at rates of 7.0% to 8.5%. CIP is charged to expense and adjusted for the impact of net unrealized gains (losses) on securities in the same manner as DPAC. Franklin reviews the carrying amount of CIP on at least an annual basis using the same methods used to evaluate DPAC. F-16 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1.8 SEPARATE ACCOUNTS Separate Accounts are assets and liabilities associated with certain contracts for which the investment risk lies solely with the contract holder. Therefore, Franklin's liability for these accounts equals the value of the account assets. Investment income, realized investment gains (losses), and policyholder account deposits and withdrawals related to Separate Accounts are excluded from the consolidated statements of income. Assets held in Separate Accounts are carried at fair value. 1.9 INSURANCE LIABILITIES Substantially all of Franklin's insurance liabilities relate to long-duration contracts, which generally require performance over a period of more than one year. The contract provisions normally cannot be changed or canceled by Franklin during the contract period. For interest-sensitive life insurance and insurance investment contracts, reserves equal the sum of the policy account balances and deferred revenue charges. Reserves for non-participating long-duration contracts are based on estimates of the cost of future policy benefits to be paid as a result of present and future claims due to death, disability, surrender of a policy, or payment of an endowment. Reserves are determined using the net level premium method. Interest assumptions used to compute reserves ranged from 2.0% to 8.5% at December 31, 1997. The liability for future policy benefits on participating life insurance contracts is a net level reserve using the nonforfeiture interest rate and mortality table of the plan of insurance. 1.10 PREMIUM RECOGNITION Most receipts for annuities and interest-sensitive life insurance contracts are classified as deposits instead of revenues. Revenues for these contracts consist of mortality, expense, and surrender charges. Policy charges that are designed to compensate Franklin for future services are deferred and recognized in income over the period earned, using the same assumptions used to amortize DPAC. For limited-payment contracts, net premiums are recorded as revenue, and the difference between the gross premium received and the net premium is deferred and recognized in income in a constant relationship to insurance in force. For all other long-duration contracts, premiums are recognized when due. F-17 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1.11 PARTICIPATING LIFE INSURANCE Participating life insurance contracts contain dividend payment provisions that entitle the policyholders to participate in the earnings of the contracts. Participating life insurance accounted for 46% and 47% of life insurance in force at December 31, 1997 and 1996 respectively, and 70%, 62%, 58%, and 69% of premiums and other considerations for the years ended December 31, 1997 and 1996, the eleven months ended December 31, 1995, and the one month ended January 31, 1995, respectively. The portion of earnings allocated to participating policyholders that cannot be expected to inure to Franklin's shareholder is excluded from net income and shareholder's equity. Dividends to be paid on participating life insurance contracts are determined annually based on estimates of the contracts' earnings. 1.12 INCOME TAXES Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities, at the enacted tax rates expected to be in effect when the temporary differences reverse. The effect of a tax rate change is recognized in income in the period of enactment. State income taxes are included in income tax expense. A change in deferred taxes related to fluctuations in fair value of available-for-sale securities is included in net unrealized gains (losses) on securities in shareholder's equity. 1.13 RECLASSIFICATION Certain amounts in the 1996 and 1995 financial statements have been reclassified to conform to the 1997 presentation. 1.14 NEW ACCOUNTING STANDARDS NOT YET ADOPTED In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. Beginning in 1998, Franklin must adopt this statement for all periods presented. Application of this statement will not change recognition or measurement of net income and, therefore, will not impact Franklin's consolidated results of operations or financial position. F-18 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. Investments 2.1 INVESTMENT INCOME Income by type of investment was as follows:
Eleven Months One Month YEAR ENDED Year Ended Ended Ended DECEMBER 31 December 31 December 31 January 31 --------------------------------------------------- In millions 1997 1996 1995 1995 - ------------------------------------------------------------------------------ Fixed maturity securities $435.5 $434.6 $394.3 $33.9 Mortgage loans on real 58.3 58.8 54.3 4.6 estate Policy loans 19.3 18.9 18.6 1.7 Other investments 9.5 13.5 9.1 1.2 --------------------------------------------------- Gross investment income 522.6 525.8 476.3 41.4 Investment expense 4.0 4.3 7.5 0.1 --------------------------------------------------- Net investment income $518.6 $521.5 $468.8 $41.3 --------------------------------------------------- ---------------------------------------------------
The carrying value of investments that produced no investment income during 1997 totaled $12.4 million, or less than .19% of total invested assets at December 31, 1997. The ultimate disposition of these assets is not expected to have a material effect on Franklin's consolidated results of operations or financial position. F-19 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2.2 REALIZED INVESTMENT GAINS (LOSSES) Realized investment gains (losses) for fixed maturity and equity securities, net of DPAC and CIP amortization were as follows:
Eleven Months One Month YEAR ENDED Year Ended Ended Ended DECEMBER 31 December 31 December 31 January 31 ------------------------------------------------------------------------ In millions 1997 1996 1995 1995 - --------------------------------------------------------------------------------------------------------------------------------- Fixed maturity securities Gross gains $ 15.4 $ 25.0 $ 13.8 $ - Gross losses (6.2) (17.6) (1.9) - ------------------------------------------------------------------------ Total fixed maturity securities 9.2 7.4 11.9 - ------------------------------------------------------------------------ Equity securities Gross gains 1.0 1.8 1.9 4.1 Gross losses - - (0.5) (5.4) ------------------------------------------------------------------------ Total equity securities 1.0 1.8 1.4 (1.3) ------------------------------------------------------------------------ Other 2.6 (6.7) (6.1) (6.3) ------------------------------------------------------------------------ Realized investment gains (losses) $ 12.8 $ 2.5 $ 7.2 $(7.6) ------------------------------------------------------------------------ ------------------------------------------------------------------------
Voluntary sales of investments resulted in the following realized gains (losses):
Realized ------------------ In millions Category Proceeds Gains Losses - ------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 AVAILABLE-FOR-SALE $577.6 $10.5 $ 3.1 - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- Year Ended December 31, 1996 Available-for-sale $807.0 $21.8 $15.4 - ------------------------------------------------------------------------------------- Eleven Months Ended December 31, 1995 Available-for-sale $268.7 $ 8.5 $ 0.4 - ------------------------------------------------------------------------------------- One Month Ended January 31, 1995 Trading $ 84.7 $ 4.1 $ 5.4 - ------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------
F-20 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2.3 FIXED MATURITY AND EQUITY SECURITIES VALUATION. Amortized cost and fair value of fixed maturity and equity securities were as follows:
DECEMBER 31, 1997 ---------------------------------------------------------------------- COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR In millions COST GAINS LOSSES VALUE - ----------------------------------------------------------------------------------------------------------------- Fixed maturity securities Corporate bonds Investment grade $2,845.2 $228.9 $0.3 $3,073.8 Below investment grade 307.8 13.7 1.1 320.4 Public utilities 972.3 116.1 - 1,088.4 Mortgage-backed 750.7 67.4 0.1 818.0 Foreign governments 90.0 15.4 0.4 105.0 U.S. government 186.7 17.7 - 204.4 States/political subdivisions 4.8 0.2 - 5.0 Redeemable preferred stocks 0.2 - - 0.2 ---------------------------------------------------------------------- Total fixed maturity securities $5,157.7 $459.4 $1.9 $5,615.2 ---------------------------------------------------------------------- ---------------------------------------------------------------------- Equity securities $ 1.1 $ 3.3 $ - $ 4.4 ---------------------------------------------------------------------- ----------------------------------------------------------------------
F-21 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
DECEMBER 31, 1996 ------------------------------------------------------------------- Cost or Gross Gross Amortized Unrealized Unrealized Fair In millions Cost Gains Losses Value ---------------------------------------------------------------------------------------------------------------------------- Fixed maturity securities Corporate bonds Investment grade $2,747.7 $170.2 $6.3 $2,911.6 Below investment grade 239.7 9.0 1.4 247.3 Public utilities 1,064.7 86.9 - 1,151.6 Mortgage-backed 802.1 41.9 1.4 842.6 Foreign governments 96.2 11.0 - 107.2 U.S. government 190.1 13.9 0.1 203.9 States/political subdivisions 11.5 0.5 - 12.0 Redeemable preferred stocks 0.3 - - 0.3 ------------------------------------------------------------------- Total fixed maturity securities $5,152.3 $333.4 $9.2 $5,476.5 ------------------------------------------------------------------- ------------------------------------------------------------------- Equity securities $ 2.0 $ 3.0 $ - $ 5.0 ------------------------------------------------------------------- -------------------------------------------------------------------
F-22 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED) MATURITIES. The contractual maturities of fixed maturity securities at December 31, 1997 were as follows:
AMORTIZED FAIR In millions COST VALUE - -------------------------------------------------------------------------------- FIXED MATURITY SECURITIES, EXCLUDING MORTGAGE-BACKED SECURITIES, DUE In one year or less $ 55.0 $ 55.4 In years two through five 785.0 825.8 In years six through ten 1,993.5 2,140.3 After ten years 1,573.5 1,775.7 Mortgage-backed securities 750.7 818.0 ---------------------------- Total fixed maturity securities $5,157.7 $5,615.2 ---------------------------- ----------------------------
Actual maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations. Corporate requirements and investment strategies may result in the sale of investments before maturity. 2.4 NET UNREALIZED GAINS ON SECURITIES Net unrealized gains on available-for-sale securities included in shareholder's equity at December 31 were as follows:
In millions 1997 1996 - ------------------------------------------------------------------- Gross unrealized gains $ 462.7 $ 336.4 Gross unrealized losses (1.9) (9.2) DPAC fair value adjustment (10.4) (0.4) CIP fair value adjustment (215.7) (160.9) Participating policyholders' interest (2.5) (1.8) Deferred federal income taxes (81.4) (57.5) ----------------------- Net unrealized gains on securities $ 150.8 $ 106.6 ----------------------- -----------------------
F-23 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2.5 MORTGAGE LOANS ON REAL ESTATE DIVERSIFICATION. Diversification of the geographic location and type of property collateralizing mortgage loans reduces the concentration of credit risk. For new loans, Franklin requires loan-to-value ratios of 75% or less, based on management's credit assessment of the borrower. At December 31, the mortgage loan portfolio was distributed as follows:
DECEMBER 31 ---------------------------------- In millions 1997 1996 ----------------------------------------------------------------------- Geographic distribution East North Central $119.6 $120.0 East South Central 36.2 37.8 Mid Atlantic 35.5 21.5 Mountain 53.5 58.1 New England 22.5 19.2 Pacific 99.5 104.3 South Atlantic 175.2 167.7 West North Central 34.3 35.4 West South Central 53.5 57.9 Allowance for losses (8.2) (14.9) ----------------------------------------------------------------------- Total $621.6 $607.0 ----------------------------------------------------------------------- ----------------------------------------------------------------------- Property type Retail $333.5 $312.3 Office 131.9 147.5 Industrial 96.7 89.4 Residential and other 67.7 72.7 Allowance for losses (8.2) (14.9) ----------------------------------------------------------------------- Total $621.6 $607.0 ----------------------------------------------------------------------- -----------------------------------------------------------------------
F-24 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2.5 MORTGAGE LOANS ON REAL ESTATE (CONTINUED) IMPAIRED LOANS. The carrying value of impaired mortgage loans on real estate and related interest income were as follows as of and for the year ended December 31:
In millions 1997 1996 1995 ------------------------------------------------------------------------- Impaired loans With allowance * $ 8.0 $21.4 5.3 Without allowance 8.1 - 17.8 ---------------------------------------------- Total impaired loans $16.1 $21.4 23.1 ---------------------------------------------- ---------------------------------------------- Average investment $18.8 $22.3 27.4 ---------------------------------------------- ---------------------------------------------- Interest income earned $ 0.8 $ 1.5 1.3 ---------------------------------------------- ----------------------------------------------
* Represents gross amounts before allowance for mortgage loan losses of $3.0 million, $4.9 million, and $1.6 million at December 31, 1997, 1996, and 1995, respectively. There were no impaired loans as of January 31, 1995. ALLOWANCE. Activity in the allowance for mortgage loan losses was as follows:
Eleven One Month YEAR ENDED Year Ended Months Ended Ended DECEMBER 31 December 31 December 31 January 31 --------------------------------------------------- In millions 1997 1996 1995 1995 - ------------------------------------------------------------------------------ Balance at beginning of period $14.9 $12.7 8.5 - Net change in allowance * (6.7) 2.2 4.2 8.5 --------------------------------------------------- Balance at end of period $ 8.2 $14.9 12.7 8.5 ---------------------------------------------------
* Charged to realized investment gains (losses). F-25 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2.6 INVESTMENTS ON DEPOSIT At December 31, 1997 and 1996, bonds and other investments carried at $19.3 million and $22.6 million, respectively, were on deposit with regulatory authorities to comply with state insurance laws. 2.7 INVESTMENT RESTRICTIONS Franklin is restricted by the insurance laws of its domiciliary state as to the amount which it can invest in any entity. At December 31, 1997 and 1996, Franklin's largest investment in any one entity other than U.S. government obligations and related party amounts was $62.8 million and $64.6 million, respectively. 3. Fair Value of Financial Instruments Carrying amounts and fair values for certain of Franklin's financial instruments at December 31 are presented below. Care should be exercised in drawing conclusions based on fair value, since (1) the fair values presented do not include the value associated with all of Franklin's assets and liabilities, and (2) the reporting of investments at fair value without a corresponding revaluation of related policyholder liabilities can be misinterpreted.
DECEMBER 31 ------------------------------------------------ 1997 1996 ------------------------------------------------ CARRYING FAIR Carrying Fair In millions AMOUNT VALUE Amount Value - ------------------------------------------------------------------------------ Assets Fixed maturity securities $5,615.2 $5,615.2 $5,476.5 $5,476.5 Mortgage loans on real estate 621.6 659.4 607.0 637.7 Equity securities 4.4 4.4 5.0 5.0 Liabilities Insurance investment contracts $1,881.4 $ 1,813.3 $1,967.9 $1,892.9 Dividend accumulations $ 780.1 $ 780.1 $ 755.9 $ 755.9
F-26 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. Fair Value of Financial Instruments (continued) The following methods and assumptions were used to estimate the fair value of financial instruments. FIXED MATURITY AND EQUITY SECURITIES. Fair values of fixed maturity and equity securities were based on quoted market prices, where available. For investments not actively traded, fair values were estimated using values obtained from independent pricing services or, in the case of some private placements, by discounting expected future cash flows using a current market rate applicable to yield, credit quality, and average life of the investments. MORTGAGE LOANS ON REAL ESTATE. Fair value of mortgage loans was estimated primarily using discounted cash flows, based on contractual maturities and risk-adjusted discount rates. POLICY LOANS. Policy loans have no stated maturity dates and are an integral part of the related insurance contract. Accordingly, it is not practicable to estimate a fair value. The weighted average interest rate on policy loans was 6% in 1997 and 1996. INSURANCE INVESTMENT CONTRACTS. Fair value of insurance investment contracts was estimated using cash flows discounted at market interest rates. DIVIDEND ACCUMULATIONS. Fair value disclosed for dividend accumulations equals the amount of dividends payable on demand at the reporting date. F-27 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. Deferred Policy Acquisition Costs (DPAC) An analysis of the changes in the DPAC asset is as follows:
Eleven Months One Month YEAR ENDED Year Ended Ended Ended DECEMBER 31 December 31 December 31 January 31 -------------------------------------------------------- In millions 1997 1996 1995 1995 - ------------------------------------------------------------------------------ Beginning of period balance $ 82.0 $ 47.5 $ - $ 510.6 Capitalization 51.9 56.2 67.7 8.5 Amortization (11.5) (10.7) (8.3) (5.8) Effect of unrealized gains on securities (10.0) 11.3 (11.7) - Effect of realized investment gains (0.7) (0.4) (0.2) - Adjustment for the acquisition(a) - - - (513.3) Other - (21.9) - - -------------------------------------------------------- End of period balance $111.7 $ 82.0 $47.5 $ - -------------------------------------------------------- --------------------------------------------------------
(a) Represents the necessary elimination of the historical DPAC asset required by purchase accounting. F-28 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Cost of Insurance Purchased (CIP) An analysis of the changes in the CIP asset is as follows:
Eleven Months One Month YEAR ENDED Year Ended Ended Ended DECEMBER 31 December 31 December 31 January 31 --------------------------------------------------- In millions 1997 1996 1995 1995 - ----------------------------------------------------------------------------- Beginning of period $ 407.8 $ 353.0 $ 656.6 $174.7 balance Interest accretion 47.3 51.8 49.0 2.0 Additions 15.1 13.6 41.3 - Amortization (107.7) (116.5) (118.0) (2.8) Effect of unrealized gains on securities (54.8) 109.1 (270.0) - Effect of realized investment gains (3.8) (3.2) (5.9) - Incremental adjustment for the acquisition(a) - - - 482.7 --------------------------------------------------- End of period balance $ 303.9 $ 407.8 $ 353.0 $656.6 ---------------------------------------------------
(a) Represents the incremental amount necessary to recognize the new CIP asset attributable to the January 31, 1995 acquisition. CIP amortization, net of interest accretion and additions, expected to be recorded in each of the next five years is $41.7 million, $38.4 million, $35.3 million, $32.4 million, and $29.8 million. 6. Separate Accounts Franklin administers three Separate Accounts for variable annuity contracts. AMFLIC administers three Separate Accounts in connection with the issuance of its Variable Universal Life and Variable Annuity products. F-29 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. Income Taxes Franklin files a life/life consolidated return which includes Franklin and AMFLIC. FFSC, a broker-dealer and wholly-owned subsidiary of Franklin, files a separate return. The method of allocation of tax expense is subject to a written agreement. Allocation is based upon separate return calculations with current credit for net losses and tax credits. Consolidated alternative minimum tax, excise tax or surtax, if any, is allocated separately. The tax liability of each subsidiary under this agreement shall not exceed the amount such subsidiary would have paid if it had filed on a separate return basis. Intercompany tax balances are to be settled no later than thirty (30) days after the date of filing the consolidated return. 7.1 DEFERRED TAXES Components of deferred tax liabilities and assets at December 31, were as follows:
In millions 1997 1996 --------------------------------------------------------------------- Deferred tax liabilities, applicable to: Basis differential of investments $ 122.8 $ 63.1 DPAC and CIP 98.6 124.6 Other 10.2 15.7 ----------------------------- Total deferred tax liabilities 231.6 203.4 ----------------------------- Deferred tax assets, applicable to: Policy reserves (124.5) (128.3) Participating policyholders' (74.0) (73.6) interests Postretirement benefits (3.4) (4.0) Basis differential of investments (7.5) (7.7) Other (17.7) (8.8) ----------------------------- Total deferred tax assets (227.1) (222.4) ----------------------------- Net deferred tax liability (asset) $ 4.5 $ (19.0) ----------------------------- -----------------------------
Franklin expects adequate future taxable income to realize the deferred tax assets. Accordingly, no valuation allowance is considered necessary. A portion of life insurance income earned prior to 1984 is not taxable unless it exceeds certain statutory limitations or is distributed as dividends. Such income, accumulated in policyholders' surplus accounts, totaled $200 million at December 31, 1997. At current corporate income tax rates, the maximum amount of tax on such income is approximately $70 million. Deferred income taxes on these accumulations are not required because no distributions are expected. F-30 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7.2 TAX EXPENSE A reconciliation between the federal income tax rate and the effective tax rate follows:
Eleven Months One Month YEAR ENDED Year Ended Ended Ended DECEMBER 31 December 31 December 31 January 31 -------------------------------------------------- 1997 1996 1995 1995 -------------------------------------------------- Federal income tax rate 35.0% 35.0% 35.0% 35.0% State taxes, net 0.9 0.3 0.9 36.3 Tax-exempt investment income (0.5) (0.7) (0.6) (39.3) Amortization of goodwill - - - 34.3 Other (0.8) 0.2 0.6 0.4 -------------------------------------------------- Effective tax rate 34.6% 34.8% 35.9% 66.7% -------------------------------------------------- --------------------------------------------------
7.3 TAXES PAID Federal income taxes paid for the years ended December 31, 1997 and 1996, and the eleven months ended December 31, 1995, were $77 million, $74 million, and $53 million, respectively. State income taxes paid for the years ended December 31, 1997 and 1996, and the eleven months ended December 31, 1995, were $2 million, $2 million, and $1 million, respectively. There were no federal or state income taxes paid during January 1995. 8. Benefit Plans 8.1 PENSION PLANS On January 1, 1996, Franklin's existing defined benefit pension plan (The Franklin Plan) was merged with the plan sponsored by AGC (the AGC Plan). The AGC Plan is a non-contributory defined benefit plan covering most Franklin employees. Under the AGC Plan, pension benefits are based on the participant's compensation and length of credited service. AGC's funding policy is to contribute annually no more than the maximum deductible for federal income tax purposes. Equity and fixed maturity securities were 63% and 28%, respectively, of the AGC Plan's assets at the Plan's most recent balance sheet date. Additionally, 5% of the Plan's assets were invested in general investment accounts of AGC's subsidiaries through deposit administration insurance contracts. F-31 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8.1 PENSION PLANS (continued) The net pension (income)/expense and the computation of the projected benefit obligation for years prior to January 1, 1996 were based on the provisions of the Franklin Plan. The Franklin Plan provided for the payment of retirement benefits; normally commencing at age 65, and also for the payment of certain disability benefits. After meeting certain qualifications, an employee acquired a vested right to future benefits. Pension benefits were based on the participant's average monthly compensation and length of credited service. Annual contributions made to the plan were sufficient to satisfy legal funding requirements. At December 31, 1995, fixed maturity securities constituted the majority of The Franklin Plan's assets. Prior to January 1, 1996, The Franklin Plan purchased annuity contracts from Franklin to provide benefits for its retirees. For the eleven months ended December 31, 1995, and the one month ended January 31, 1995, these contracts provided approximately $3.9 million and $0.3 million annually for retiree benefits, respectively. During the fourth quarter of 1995, Franklin sponsored a program of special incentives to those employees age 55 and over who elected early retirement. The program concluded December 31, 1995. A withdrawal of $26.5 million was made from the Franklin Plan in 1995 to provide full retirement benefits for these employees who elected to retire under the program. Net pension (income)/expense included the following components:
Eleven One Month YEAR ENDED Year Ended Months Ended Ended DECEMBER 31 December 31 December 31 January 31 ----------------------------------------------------- In millions 1997 1996 1995 1995 - ------------------------------------------------------------------------------- Service cost (benefits earned) $ 0.7 $ 0.8 $ 0.9 $ 0.2 Interest cost 1.9 2.0 3.7 0.4 Actual return on plan assets (8.4) (7.8) (11.5) (0.4) Net amortization and deferral 5.0 4.6 6.3 - ----------------------------------------------------- Pension (income) expense $(0.8) $ (0.4) $ (0.6) $ 0.2 -----------------------------------------------------
F-32 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8.1 PENSION PLANS (continued) The funded status and the prepaid pension expense (included in other assets) at December 31 were as follows:
In millions 1997 1996 - ------------------------------------------------------------------------------- Accumulated benefit obligation, primarily vested $ 27.7 $ 27.0 Effect of increase in compensation levels 0.5 0.2 --------------------------- Projected benefit obligation 28.2 27.2 Plan assets at fair value 43.8 35.5 --------------------------- Plan assets at fair value in excess of projected benefit obligation 15.6 8.3 Other unrecognized items, net (3.5) 3.0 --------------------------- Prepaid pension expense $ 12.1 $ 11.3 --------------------------- --------------------------- Weighted-average discount rate on benefit 7.25% 7.50% obligation Rate of increase in compensation levels 4.00 4.00 Expected long-term rate of return on plan assets 10.00 10.00
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS On January 1, 1996, the assets in Franklin's voluntary employees' beneficiary association (Franklin VEBA) for the retiree health and welfare plan were transferred to the AGC VEBA Plan. No changes in assumptions or plan provisions were made as a result of the transfer. Under the AGC VEBA Plan, Franklin has life, medical, supplemental major medical and dental plans for certain retired employees and agents. Most plans are contributory, with retiree contributions adjusted annually to limit employer contributions to predetermined amounts. Franklin has reserved the right to change or eliminate these benefits at any time. The life plans are fully insured for a two-year period. A portion of the retiree medical and dental plans is funded through the AGC VEBA Plan; the remainder is unfunded and self-insured. All of the retiree medical and dental plans' assets held in the AGC VEBA Plan were invested in readily marketable securities. F-33 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued) The funded status and the accrued postretirement benefit cost (included in other liabilities) at December 31 were as follows:
In millions 1997 1996 - -------------------------------------------------------------------------------- Actuarial present value of benefit obligation Retirees $7.2 $ 7.3 Active plan participants Fully eligible 0.3 0.2 Other 2.0 1.8 ------------------------------------ Accumulated postretirement benefit obligation (APBO) 9.5 9.3 Plan assets at fair value 0.2 - ------------------------------------ APBO in excess of plan assets at fair value 9.3 9.3 Unrecognized net gain 0.5 2.2 ------------------------------------ Accrued benefit cost $9.8 $11.5 ------------------------------------ ------------------------------------ Weighted-average discount rate on benefit obligation 7.25% 7.50%
Postretirement benefit expense (income) was as follows:
Eleven Months One Month YEAR ENDED Year Ended Ended Ended DECEMBER 31 December 31 December 31 January 31 - -------------------------------------------------------------------------------- In millions 1997 1996 1995 1995 Service cost (benefits $0.1 $0.1 $0.1 $ - earned) Interest cost 0.7 0.7 0.9 (0.2) Postretirement benefit expense (income) $0.8 $0.8 $1.0 $(0.2)
For measurement purposes, an 8.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998; the rate was assumed to decrease gradually to 5% by the year 2005 and remain at that level. A 1% increase in the assumed rate results in a $0.1 million increase in the accumulated postretirement benefit obligation and no increase in postretirement benefit expense. F-34 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. Statutory Accounting State insurance laws and regulations prescribe accounting practices for calculating statutory net income and equity. In addition, state regulators may permit statutory accounting practices that differ from prescribed practices. During 1995, Franklin received approval to loan $116.0 million to AGCL. Franklin also received approval to pay an extraordinary dividend of $250 million to its former parent as part of the 1995 acquisition, and also received approval to pay an extraordinary dividend of $60 million to AGCL. At December 31, 1997 and 1996, Franklin had statutory shareholder's equity of $521.0 million and $431.0 million, respectively. Statutory net income was $129.7 million, $123.2 million, and $100.2 million for the years ended December 31, 1997, 1996, and 1995, respectively. As determined on a statutory basis, the statutory shareholder's equity and net income of subsidiaries, were reported as follows:
STATUTORY ------------------------------------- In millions 1997 1996 1995 - ------------------------------------------------------------------------- Shareholder's Equity $17.7 $18.1 $ 9.9 ------------------------------------- ------------------------------------- Net Income $(0.6) $(1.9) $(4.7) ------------------------------------- -------------------------------------
Generally, Franklin is restricted by the insurance laws of its domiciliary state as to amounts that can be transferred in the form of dividends, loans, or advances without the approval of the Illinois Insurance Department. Under these restrictions, during 1998, loans or advances in excess of $130.3 million and dividends in any twelve-month period aggregating in excess of $129.7 million will require the approval of the Illinois Insurance Department. 10. Consolidated Statement of Cash Flows In addition to the cash activities shown in the consolidated statement of cash flows, the following transactions, occurred:
Eleven Months One Month YEAR ENDED Year Ended Ended Ended DECEMBER 31 December 31 December 31 January 31 ------------------------------------------------ In millions 1997 1996 1995 1995 - -------------------------------------------------------------------------------- Interest added to annuity and other financial products $169.4 $173.3 $168.3 $14.0
F-35 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. Reinsurance Franklin limits its exposure to loss on any single insured to $2.1 million by ceding additional risks through reinsurance contracts with other insurers. Franklin diversifies its risk of reinsurance loss by using a number of reinsurers that have strong claims-paying ability ratings. If the reinsurer could not meet its obligations, Franklin would reassume the liability. The likelihood of a material reinsurance liability being reassumed by Franklin is considered to be remote. A receivable is recorded for the portion of benefits paid and insurance liabilities that have been reinsured. Reinsurance recoveries on ceded reinsurance contracts were $41.5 million, $67.3 million, $63.3 million and $1.4 million for the years ended December 31, 1997 and 1996, the eleven months ended December 31, 1995, and the one month ended January 31, 1995, respectively. The amount of reinsurance recoverable (payable) on paid and unpaid losses was $(0.5) million and $1.8 million at December 31, 1997 and 1996, respectively. The cost of reinsurance is recognized over the life of the reinsured policies using assumptions consistent with those used to account for the underlying policies. Reinsurance premiums included in premiums and other considerations were as follows:
Eleven Months One Month YEAR ENDED Year Ended Ended Ended DECEMBER 31 December 31 December 31 January 31 ------------------------------------------------------ In millions 1997 1996 1995 1995 - ------------------------------------------------------------------------------- Direct premiums and other considerations $415.3 $491.5 $500.1 $36.8 Reinsurance assumed 8.3 15.9 44.2 (0.8) Reinsurance ceded (53.4) (88.8) (94.7) (1.5) - ------------------------------------------------------------------------------- Premiums and other considerations $370.2 $418.6 $449.6 $34.5 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
12. Related Party Transactions Franklin participates in a program of short-term borrowing with AGC to maintain its long-term commitments. Franklin borrowed $230.4 million and $62.0 million, and repaid $230.4 million and $62.1 million in 1997 and 1996, respectively. Interest was paid on the outstanding balances based on the rate as stipulated in the program. During 1995, Franklin purchased a 6.75% promissory note from AGCL for $116.0 million to mature in 2005 (see Note 9). During 1995, Franklin received $8.5 million of 8% non-voting preferred stock of American General Life Insurance Company as consideration for the sale of FULIC. F-36 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. Related Party Transactions (continued) Franklin has entered into indefinite contracts for the performance of all investment management services as well as cost allocation agreements with its ultimate parent. Total expenses under these agreements were $2.5 million and $2.3 million for the years ended December 31, 1997 and 1996, respectively, and $1.1 million for the eleven months ended December 31, 1995. 13. Legal Proceedings In recent years, various life insurance companies have been named as defendants in class action lawsuits relating to life insurance pricing and sales practices, and a number of these lawsuits have resulted in substantial settlements. Franklin is a defendant in such purported class action lawsuits filed in 1997, asserting claims related to pricing and sales practices. These claims are being defended vigorously by Franklin. Given the uncertain nature of litigation and the early stages of this litigation, the outcome of these actions cannot be predicted at this time. Franklin management nevertheless believes the ultimate outcome of all such pending litigation should not have a material adverse effect on Franklin's financial position. It is possible that settlements or adverse determinations in one or more of these actions or other future proceedings could have a material adverse effect on results of operations for a given period. No provision for any adverse determinations in this pending litigation has been made in the consolidated financial statements because the amount of loss, if any, from these actions cannot be reasonably estimated at this time. Franklin is a party to various other lawsuits and proceedings arising in the ordinary course of business. Many of these lawsuits and proceedings arise in jurisdictions, such as Alabama, that permit damage awards disproportionate to the actual economic damages incurred. Based upon information presently available, Franklin management believes the total amounts that will ultimately be paid, if any, arising from these lawsuits and proceedings will not have a material adverse effect on Franklin's results of operations and financial position. However, it should be noted that the frequency of large damage awards, including large punitive damage awards, that bear little or no relation to actual economic damages incurred by plaintiffs in jurisdictions like Alabama continues to increase and creates the potential for an unpredictable judgment in any given suit. F-37 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. Guaranty Fund Assessments Information about state guaranty fund assessments was as follows as of and for the:
Eleven Months One Month YEAR ENDED Year Ended Ended Ended DECEMBER 31 December 31 December 31 January 31 ------------------------------------------------------ In millions 1997 1996 1995 1995 - ------------------------------------------------------------------------------- Expense, included in operating costs and expenses $1.2 $ 0.7 $ 0.2 $0.6 Liability for anticipated assessments 3.6 7.5 8.5 - Receivable for expected recoveries against future premium taxes 7.4 11.2 11.2 - - -------------------------------------------------------------------------------
Changes in state laws could decrease the amount recoverable against future premium taxes. F-38 STATEMENT OF ADDITIONAL INFORMATION FRANKLIN LIFE VARIABLE ANNUITY FUND A INDIVIDUAL VARIABLE ANNUITY CONTRACTS FOR USE WITH CERTAIN QUALIFIED PLANS AND TRUSTS ACCORDED SPECIAL TAX TREATMENT AND AS INDIVIDUAL RETIREMENT ANNUITIES ISSUED BY THE FRANKLIN LIFE INSURANCE COMPANY #1 FRANKLIN SQUARE SPRINGFIELD, ILLINOIS 62713 APPENDIX B FRANKLIN LIFE VARIABLE ANNUITY FUND A ANNUAL REPORT DATED DECEMBER 31, 1998 [LETTERHEAD] Dear Contract Owner: We are pleased to provide this 1998 annual report which shows the status of and balances in your Franklin Life Variable Annuity Fund A contract.
Investment Position ------------------- December 31, 1998 June 30, 1998 December 31, 1997 ----------------- ------------- ----------------- VARIABLE PORTION: Accumulation Unit Value $123.03 $108.49 $98.43 ------- ------- ------ ------- ------- ------ Percentage Change From: December 31, 1997 +24.99% ------- ------- June 30, 1998 +13.40% ------- -------
The accumulation unit value is based on the market price of the investments held by the Fund. A listing of the investments held at December 31, 1998 appears on page 3. FIXED PORTION: Additional units in the fixed rate portion of your annuity arising from contributions credited during the contract year ending in 1998 were based on a 6.25% interest rate, less a contract expense charge. If your contract anniversary is in the first half of 1999, the interest rate for the fixed portion of your annuity applicable to contributions made during the contract year ending in 1999 is anticipated to be 5.00%, less a contract expense charge. Amounts selected for investment in the fixed rather than the variable portion of your annuity do not participate in the investment experience of the Fund. Contract units resulting from interest added or contributions made prior to the contract year ending in 1998 continue to be credited with additional interest based on investment yields which reflect the years during which such units were purchased. Crediting rates are not guaranteed for future years. The United States economy continued its strong growth in 1998, as measured by the Gross Domestic Product (GDP), increasing at an annual rate of 3.9%. GDP is expected to slow in 1999, with growth being 2.0% to 2.5%. Employment finished strong in 1998, with the December unemployment rate at 4.3% and the average unemployment rate for all of 1998 at 4.5%. New jobs continued to be created during the year, especially in the service sector. The Federal Reserve Board lowered the Federal Funds rate by a total of 75 basis points, over three months in late 1998, to the current level of 4.75%. The stock market had another excellent year, the fourth year in a row. The Standard & Poor's 500 Index was up 26.69% in 1998. The stock market had a correction in the third quarter, but with the short term interest rate reduction in the fourth quarter, the stock market rebounded in the fourth quarter to close at or near record levels. Stocks of U.S. corporations continue to carry very high price/earnings ratios and corporate earnings could slow if the economy slows as indicated above. Inflation, as measured by the Gross Domestic Product deflator, was a very acceptable 1.7% in 1997, declining to 1.0% by the third quarter of 1998. The Consumer Price Index increased by 1.7% in 1997 and a slightly lower +1.6% for 1998. The Producers Price Index declined 0.2% in November, but increased 0.4% in December in light of higher tobacco prices. A decline was recorded in six of the twelve months of 1998, producing a decline in wholesale prices of 0.1% in 1998, against a decline in 1997 of 1.2%. The Producers Price Index indicates that inflation should remain under control for several more months. For stocks to continue to move higher, corporate earnings will need to improve, interest rates decline and investors willing to accept higher price/earnings ratios for stocks. 1999 will be a very challenging year for investors in the stock market. In today's fast-paced world, products, markets, client's needs, and individual risk tolerance all change. In this environment, you may want to take some extra time and review how well this product continues to meet your retirement investment objectives. A Franklin Life representative would be happy to review your financial situation with you and suggest the most appropriate mix of products to provide financial security consistent with your risk tolerance. Cordially yours, William A. Simpson Chairman and Chief Executive Officer 1 FRANKLIN LIFE VARIABLE ANNUITY FUND A STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1998 Assets Investments-at fair value (cost-$5,825,740) Common stocks $ 11,653,302 Short-term notes 1,843,112 ------------- 13,496,414 Cash on deposit 49,523 Dividends and interest receivable 19,458 ------------- Total Assets 13,565,395 Liability -due to The Franklin Life Insurance Company 23,895 ------------- Contract owners' equity Annuity reserves $ 20,793 Value of 109,896.4574 accumulation units outstanding, equivalent to $123.03132938 per unit 13,520,707 $ 13,541,500 ------------ ------------- ------------- STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 Investment income Dividends $ 130,455 Interest 69,792 ------------ Total Income $ 200,247 Expenses Mortality and expense charges $ 124,538 Investment management services 54,443 Miscellaneous expense 8 ------------ Total expenses 178,989 ------------- Net investment income 21,258 Realized and unrealized gain on investments: Net realized gain from investment transactions (excluding short-term investments): Proceeds from sales $1,626,314 Cost of investments sold (identified cost method) 1,197,859 ------------ Net realized gain 428,455 Net unrealized appreciation of investments Beginning of year $ 5,298,442 End of year 7,670,674 ------------ Net unrealized appreciation 2,372,232 ------------- Net gain on investments 2,800,687 ------------- Net increase in contract owners' equity resulting from operations $ 2,821,945 ------------- -------------
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
YEAR ENDED DECEMBER 31 1998 1997 --------------------------------- Net investment income $ 21,258 $ 78,567 Net realized gain from investment transactions 428,455 452,962 Net unrealized appreciation of investments 2,372,232 1,714,372 --------------------------------- Net increase In contract owners' equity resulting from operations 2,821,945 2,245,901 Net contract purchase payments 133,181 268,272 Reimbursement for contract guarantees - 172 Annuity payments (4,788) (4,568) Withdrawals of funds on terminated contracts (1,725,151) (1,636,104) Transfers from (to) fixed account 21,424 - --------------------------------- Net increase in contract owners' equity 1,246,611 873,673 Contract owners' equity at beginning of year 12,294,889 11,421,216 --------------------------------- Contract owners' equity at end of year $13,541,500 $12,294,889 --------------------------------- ---------------------------------
SEE NOTES TO FINANCIAL STATEMENTS 2 FRANKLIN LIFE VARIABLE ANNUITY FUND A PORTFOLIO OF INVESTMENTS DECEMBER 31, 1998
NUMBER NUMBER OF FAIR OF FAIR SHARES VALUE SHARES VALUE - ---------- ----------- ---------- ----------- COMMON STOCKS (86.06%) BANKING (4.56%) OIL SERVICES & DRILLING (1.36%) 12,862 SLM Holding Corporation $ 617,376 6,200 Halliburton Company $ 183,675 BEVERAGES (1.33%) 4,400 PepsiCo, Incorporated 180,125 PACKAGING - CONTAINERS (2.80%) BUSINESS SERVICES (1.41%) 8,400 Avery-Dennison Corporation 378,525 5,600 Equifax Inc. 191,450 PHOTOGRAPHY ( 2.18%) CHEMICALS (1.81%) 4,100 Eastman Kodak Company 295,200 2,700 Dow Chemical 245,531 RETAIL-SPECIALTY (2.16%) COMPUTER SERVICES (4.18%) 7,200 NIKE, Inc. 292,050 8,100 Ceridian Corporation* 565,481 TECHNOLOGY (7.18%) COSMETICS & HOUSEHOLD PRODUCTS 4,361 AMP, Incorporated 227,045 (2.85%) 4,950 Diebold, Incorporated 176,653 8,000 Gillette Company 386,500 4,800 Intel Corporation 569,100 ------------ DRUGS & HEALTH CARE (29.89%) 972,798 8,000 Eli Lilly and Company 711,000 UTILITIES - TELEPHONE (3.68%) 4,300 Merck & Company, Inc. 635,056 10,000 BellSouth Corporation 498,750 4,200 Pfizer, Incorporated 526,838 ------------ 6,450 St. Jude Medical, Inc.* 178,584 13,200 Schering-Plough Corporation 729,300 TOTAL COMMON STOCKS 6,000 Stryker Corporation 330,375 (COST-$3,982,628) 11,653,302 16,000 Walgreen Company 937,000 ------------ PRINCIPAL 4,048,153 AMOUNT ELECTRONICS & INSTRUMENTATIONS --------- (2.93%) SHORT-TERM NOTES (13.61%) 5,800 Hewlett-Packard Company 396,213 $1,855,000 United States Treasury Bill FOOD - RETAIL (2.68%) 4.12%, due 1/7/99 (cost-$1,843,112) 1,843,112 5,700 Albertson's, Inc. 363,019 ------------ FOOD - WHOLESALE ( 2.72%) 13,400 Sysco Corporation 367,662 TOTAL INVESTMENTS (99.67%) HOUSEHOLD PRODUCTS (1.13%) (COST-$5,825,740) 13,496,414 3,700 Newell Co. 152,625 OFFICE EQUIPMENT & SERVICES CASH AND RECEIVABLES, LESS (11.21%) LIABILITY (.33 %) 45,086 15,055 Compaq Computers Corporation 631,369 ------------ 4,800 International Business Machines Corporation 886,800 TOTAL CONTRACT OWNERS' EQUITY (100.0%) $13,541,500 ------------ ------------ 1,518,169 ------------ *NON-INCOME PRODUCING INVESTMENT IN 1998.
SEE NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- THIS REPORT HAS BEEN PREPARED FOR THE INFORMATION OF FRANKLIN LIFE VARIABLE ANNUITY FUND A CONTRACT OWNERS. IT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS. - ------------------------------------------------------------------------------- 3 FRANKLIN LIFE VARIABLE ANNUITY FUND A NOTES TO FINANCIAL STATEMENTS NOTE A-SIGNIFICANT ACCOUNTING POLICIES Franklin Life Variable Annuity Fund A (the Fund) is a segregated investment account of The Franklin Life Insurance Company (The Franklin) and is registered as an open-end diversified management investment company under the Investment Company Act of 1940, as amended. The Fund no longer issues new contracts. Significant accounting policies of the Fund are as follows: VALUATION OF INVESTMENTS: Investments in common stocks listed on national stock exchanges are valued at closing sales prices. Unlisted common stocks are valued at the most recent bid prices, as supplied by broker-dealers. Short-term notes are valued at cost, which approximates fair value. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME: Investment transactions are accounted for on the trade date. Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis. FEDERAL INCOME TAXES: Operations of the Fund form a part of, and are taxed with those of, The Franklin which is taxed as a "life insurance company" under the Internal Revenue Code. Under current law, no federal income taxes are payable with respect to the Fund. ANNUITY RESERVES: Reserves on contracts, all involving life contingencies, are calculated using the Progressive Annuity Table with an assumed investment rate of 3-1/2%. NOTE B-INVESTMENTS Exclusive of short-term investments, the cost of investments purchased and the proceeds from investments sold during 1998 aggregated $153,637 and $1,626,314, respectively. NOTE C-EXPENSES Amounts are paid to The Franklin for investment management services at the rate of .0012% of the current value of the Fund per day (.438% on an annual basis) and for mortality and expense risk assurances at the rate of .002745% of the current value of the Fund per day (1.002% on an annual basis). NOTE D-SALES AND ADMINISTRATIVE CHARGES Sales and administrative charges aggregating $10,036 and $16,926 were deducted from the proceeds of the sales of accumulation units and retained by Franklin Financial Services Corporation and The Franklin during 1998 and 1997, respectively. Franklin Financial Services Corporation is a wholly-owned subsidiary of The Franklin and principal underwriter for the Fund. Beginning in October 1998, The Franklin began waiving all sales and administrative charges specified in each Contract in anticipation of the Funds' proposed reorganization (See Note H-Subsequent Event). NOTE E-SUMMARY OF CHANGES IN ACCUMULATION UNITS
YEAR ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 ---------------------------------------------- UNITS AMOUNT UNITS AMOUNT ----- ------ ----- ------ Balance at beginning of year 124,714 $12,275,509 139,945 $11,403,341 Purchases and transfers 1,559 154,605 2,945 268,272 Net investment income* - 21,210 - 78,354 Net realized gain from investment transactions* - 427,513 - 451,738 Net unrealized appreciation of investments* - 2,367,021 - 1,709,736 Withdrawals (16,377) (1,725,151) (18,176) (1,636,104) Reimbursement for contract guarantees* - - - 172 ---------------------------------------------- Balance at end of year 109,896 $13,520,707 124,714 $12,275,509 ---------------------------------------------- ----------------------------------------------
*Excludes portion allocated to annuity reserves on a pro rata basis. NOTE F-REMUNERATION OF MANAGEMENT No person receives any remuneration from the Fund because The Franklin pays the fees of members of the Board of Managers and officers and employees of the Fund pursuant to expense assurances. Certain members of the Board of Managers and officers of the Fund are also directors, officers or employees of The Franklin or Franklin Financial Services Corporation. Amounts paid by the Fund to The Franklin and to Franklin Financial Services Corporation are disclosed in this report. NOTE G-NET UNREALIZED APPRECIATION OF INVESTMENTS Net unrealized appreciation of investments was as follows:
DECEMBER 31 1998 1997 ------------------------------- Gross unrealized appreciation $7,670,674 $5,387,633 Gross unrealized depreciation - 89,191 ------------------------------- Net unrealized appreciation of investments $7,670,674 $5,298,442 ------------------------------- -------------------------------
4 NOTE H-SUBSEQUENT EVENT The Fund's Board of Managers has approved resolutions whereby Contract Owners will be asked during 1999 to approve a reorganization under which the Fund, together with Franklin Life Variable Annuity Fund B and Franklin Life Money Market Variable Annuity Fund C, will be restructured into a unit investment trust investing exclusively in shares of specified mutual fund portfolios. Contract Owners will be provided with a proxy statement describing the reorganization in detail. NOTE I-YEAR 2000 (UNAUDITED) INTERNAL SYSTEMS. The Franklin's ultimate parent, American General Corporation (AGC), has numerous technology systems that are managed on a decentralized basis. AGC's Year 2000 readiness efforts are therefore being undertaken by its key business units with centralized oversight. Each business unit, including The Franklin, has developed and is implementing a plan to minimize the risk of a significant negative impact on its operations. While the specifics of the plans vary, the plans include the following activities: (1) perform an inventory of The Franklin's information technology and non-information technology systems; (2) assess which items in the inventory may expose The Franklin to business interruptions due to Year 2000 issues; (3) reprogram or replace systems that are not Year 2000 ready; (4) test systems to prove that they will function into the next century as they do currently; and (5) return the systems to operations. As of December 31, 1998, substantially all of The Franklin's critical systems are Year 2000 ready and have been returned to operations. However, activities (3) through (5) for certain systems are ongoing, with vendor upgrades expected to be received during the first half of 1999. THIRD PARTY RELATIONSHIPS. The Franklin has relationships with various third parties who must also be Year 2000 ready. These third parties provide (or receive) resources and services to (or from) The Franklin and include organizations with which The Franklin exchanges information. Third parties include vendors of hardware, software, and information services; providers of infrastructure services such as voice and data communications and utilities for office facilities; investors; customers; distribution channels; and joint venture partners. Third parties differ from internal systems in that The Franklin exercises less, or no, control over Year 2000 readiness. The Franklin has developed a plan to assess and attempt to mitigate the risks associated with the potential failure of third parties to achieve Year 2000 readiness. The plan includes the following activities: (1) identify and classify third party dependencies; (2) research, analyze, and document Year 2000 readiness for critical third parties; and (3) test critical hardware and software products and electronic interfaces. As of December 31, 1998, AGC has identified and assessed approximately 700 critical third party dependencies, including those relating to The Franklin. A more detailed evaluation will be completed during first quarter 1999 as part of The Franklin's contingency planning efforts. Due to the various stages of third parties' Year 2000 readiness, The Franklin's testing activities will extend through 1999. CONTINGENCY PLANS. The Franklin has commenced contingency planning to reduce the risk of Year 2000-related business failures. The contingency plans, which address both internal systems and third party relationships, include the following activities: (1) evaluate the consequences of failure of business processes with significant exposure to Year 2000 risk; (2) determine the probability of a Year 2000-related failure for those processes that have a high consequence of failure; (3) develop an action plan to complete contingency plans for those processes that rank high in consequence and probability of failure; and (4) complete the applicable action plans. The Franklin is currently developing contingency plans and expects to substantially complete all contingency planning activities by April 30, 1999. RISKS AND UNCERTAINTIES. Based on its plans to make internal systems ready for Year 2000, to deal with third party relationships, and to develop contingency actions, The Franklin believes that it will experience at most isolated and minor disruptions of business processes following the turn of the century. Such disruptions are not expected to have a material effect on The Franklin's future results of operations, liquidity, or financial condition. However, due to the magnitude and complexity of this project, risks and uncertainties exist and The Franklin is not able to predict a most reasonably likely worst case scenario. If conversion of The Franklin's internal systems is not completed on a timely basis (due to non-performance by significant third party-vendors, lack of qualified personnel to perform the Year 2000 work, or other unforeseen circumstances in completing The Franklin's plans), or if critical third parties fail to achieve Year 2000 readiness on a timely basis, the Year 2000 issues could have a material adverse impact on The Franklin's operations following the turn of the century. COSTS. Through December 31, 1998, The Franklin has incurred, and anticipates that it will continue to incur, costs for internal staff, third party vendors, and other expenses to achieve Year 2000 readiness. These costs are not passed to the Fund. The cost of activities related to Year 2000 readiness has not had a material adverse effect on The Franklin's results of operations or financial condition. In addition, The Franklin has elected to accelerate the planned replacement of certain systems as part of the Year 2000 plans. Costs of the replacement systems are being capitalized and amortized over their useful lives, in accordance with The Franklin's normal accounting policies. 5 FRANKLIN LIFE VARIABLE ANNUITY FUND A SUPPLEMENTARY INFORMATION PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE (SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH YEAR)
YEAR ENDED DECEMBER 31 1998 1997 1996 1995 1994 ------------------------------------------------------------- Investment income $1.720 $1.910 $1.685 $1.948 $1.408 Expenses 1.537 1.312 1.090 .875 .773 ------------------------------------------------------------- Net investment income 0.183 .598 .595 1.073 .635 Net realized and unrealized gain (loss) on investments 24.419 16.346 11.690 14.139 (.240) ------------------------------------------------------------- Net increase in accumulation unit value 24.602 16.944 12.285 15.212 .395 Accumulation unit value: Beginning of year 98.429 81.485 69.200 53.988 53.593 ------------------------------------------------------------- End of year $123.031 $98.429 $81.485 $69.200 $53.988 ------------------------------------------------------------- ------------------------------------------------------------- Ratio of expenses to average net assets 1.44% 1.44% 1.44% 1.44% 1.44% Ratio of net investment income to average net assets .17% .66% .79% 1.76% 1.18% Portfolio turnover rate 1.42% .70% 4.77% 14.66% 88.99% Number of accumulation units outstanding at end of year 109,896 124,714 139,945 150,474 172,507 - -------------------------------------------------------------------------------------------------------------------
MATTERS SUBMITTED TO VOTE OF CONTRACT OWNERS An annual meeting of Contract Owners of the Fund was held on April 20, 1998. At the meeting, the individuals named below were elected as Members of the Board of Managers of the Fund, and Ernst & Young LLP was ratified as the Fund's independent auditors for the ensuing fiscal year. The number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes, if applicable, as to each matter is set forth in the table below.
Matter Votes: -------------------- ----------------------------------------------------------- For Against Abstain --- ------- ------- Election of Robert G. Spencer as Member, Board of Managers 52,846 683 0 Election of Dr. Robert C. Spencer as Member, Board of Managers 52,751 778 0 Election of James W. Voth as Member, Board of Managers 52,846 683 0 Election of Clifford L. Greenwalt as Member, Board of Managers 52,846 683 0 Ratification of Selection of Ernst & Young LLP as independent auditors 52,200 573 756
6 REPORT OF INDEPENDENT AUDITORS Board of Managers and Contract Owners Franklin Life Variable Annuity Fund A We have audited the accompanying statement of assets and liabilities of Franklin Life Variable Annuity Fund A, including the portfolio of investments, as of December 31, 1998, the related statement of operations for the year then ended and the statements of changes in contract owners' equity for each of the two years then ended, and the table of per-unit income and changes in accumulation unit value for each of the four years then ended. These financial statements and the table of per-unit income and changes in accumulation unit value are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the table of per-unit income and changes in accumulation unit value based on our audits. The table of per-unit income and changes in accumulation unit value for the year ended December 31, 1994 was audited by other auditors whose report dated February 1, 1995, expressed an unqualified opinion on that table. 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 table of per-unit income and changes in accumulation unit value 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 held by the custodian as of December 31, 1998. 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 the 1998, 1997, 1996, and 1995 table of per-unit income and changes in accumulation unit value referred to above present fairly, in all material respects, the financial position of Franklin Life Variable Annuity Fund A at December 31, 1998, and the results of its operations for the year then ended, and the changes in its contract owners' equity for each of the two years then ended, and per-unit income and changes in accumulation unit value for each of the four years then ended in conformity with generally accepted accounting principles. Ernst & Young LLP Chicago, Illinois January 29, 1999 7 APPENDIX C AMERICAN GENERAL SERIES PORTFOLIO COMPANY STATEMENT OF ADDITIONAL INFORMATION AMERICAN GENERAL SERIES PORTFOLIO COMPANY ASSET ALLOCATION FUND CAPITAL CONSERVATION FUND GOVERNMENT SECURITIES FUND GROWTH FUND GROWTH & INCOME FUND INTERNATIONAL EQUITIES FUND INTERNATIONAL GOVERNMENT BOND FUND MIDCAP INDEX FUND MONEY MARKET FUND SCIENCE & TECHNOLOGY FUND SMALL CAP INDEX FUND SOCIAL AWARENESS FUND STOCK INDEX FUND - -------------------------------------------------------------------------------- STATEMENT OF ADDITIONAL INFORMATION -------------------------------------------------------------------- FORM N-1A PART B OCTOBER 1, 1998 (AS SUPPLEMENTED THROUGH FEBRUARY 22, 1999) This Statement of Additional Information is not a prospectus and contains information in addition to that in the Prospectus for American General Series Portfolio Company (the "Company"). It should be read in conjunction with the Prospectus. The Statement of Additional Information and the related Prospectus are both dated October 1, 1998 (as supplemented through February 22, 1999). For an individual interested in a variable annuity contract issued by The Variable Annuity Life Insurance Company ("VALIC"), a Prospectus may be obtained by calling 1-800-44-VALIC or writing the Company or The Variable Annuity Marketing Company ("VAMCO") at 2929 Allen Parkway, Houston, Texas 77019. All inquiries regarding variable annuity contracts issued by American General Life Insurance Company ("AGL"), the successor to California-Western States Life Insurance Company ("Cal-West"), should be directed in writing to AGL's Annuity Administration Department, 2727-A Allen Parkway, Houston, Texas 77019-2191 or by calling 1-800-813-5065. Shares in the Company are available to the public only through the purchase of certain variable annuity contracts issued and employee thrift plans maintained by VALIC and its affiliates. TABLE OF CONTENTS
PAGE ---- General Information and History............................. 4 Additional Information Regarding Certain Funds.............. 5 International Equities Fund............................... 5 Government Securities Fund................................ 5 Asset Allocation Fund..................................... 6 Performance and Yield Information........................... 7 Investment Restrictions..................................... 10 Fundamental Investment Restrictions Applicable to All Funds.................................................. 10 MMF Investment Restrictions............................... 11 AAF, CCF, GSF, SIF, IEF, MIF and SCIF Investment Restrictions........................................... 11 GIF Investment Restrictions............................... 11 GF and STF Investment Restrictions........................ 11 SAF Investment Restrictions............................... 12 IGBF Investment Restrictions.............................. 12 Non Fundamental Investment Restrictions................... 12 Investment Practices........................................ 14 Repurchase Agreements..................................... 14 Lending Portfolio Securities.............................. 14 Convertible Securities.................................... 15 Foreign Securities........................................ 15 Foreign Currency Exchange Transactions.................... 16 Bank Obligations.......................................... 16 When Issued Securities.................................... 17 Debt Securities........................................... 17 Emerging Markets.......................................... 18 Asset-Backed Securities................................... 18 Lower Rated Debt Securities............................... 19 Real Estate Securities and Real Estate Investment Trusts ("REITs").............................................. 19 Warrants.................................................. 20 Swap Agreements........................................... 20 Eurodollar Obligations.................................... 21 Mortgage-Related Securities............................... 22 Commercial Mortgage-Backed Securities..................... 24 Other Mortgage-Related Securities......................... 24 Loan Participations....................................... 25 Adjustable Rate Securities................................ 25 Illiquid Securities....................................... 26 Rule 144A Securities...................................... 26 Options on Securities and Securities Indices.............. 26 Writing Covered Call and Put Options and Purchasing Call and Put Options........................................ 28 Financial Futures Contracts............................... 30 Options on Financial Futures Contracts.................... 31 Certain Additional Risks of Options and Financial Futures Contracts.............................................. 32 Limitations............................................... 33 Money Market Securities of Foreign Issuers................ 34 Investment Adviser.......................................... 35 Investment Sub-Advisers..................................... 37 Portfolio Transactions and Brokerage........................ 39
2
PAGE ---- Offering, Purchase, and Redemption of Fund Shares........... 42 Determination of Net Asset Value............................ 43 Calculation of Yield for the Money Market Fund.............. 44 Accounting and Tax Treatment................................ 45 Calls and Puts............................................ 45 Financial Futures Contracts............................... 45 Subchapter M of the Internal Revenue Code of 1986......... 45 Section 817(h) of the Code................................ 46 Other Information........................................... 46 Shareholder Reports....................................... 46 Voting and Other Rights................................... 46 Custody of Assets......................................... 47 Index Funds............................................... 48 Description of Corporate Bond Ratings..................... 49 Description of Commercial Paper Ratings................... 49 Independent Auditors...................................... 49 Directors and Officers...................................... 50 Compensation of Directors and Certain Officers.............. 54 Financial Statements........................................ 55
3 GENERAL INFORMATION AND HISTORY American General Series Portfolio Company (the "Company") was incorporated in Maryland on December 7, 1984, by VALIC and is registered under the Investment Company Act of 1940, as amended, (the "1940 Act") as an open-end, management investment company. Pursuant to Investment Advisory Agreements with the Company and subject to the authority of the Company's Board of Directors, VALIC serves as the Company's investment adviser and conducts the business and affairs of the Company. Additionally, VALIC has engaged an investment sub-adviser to provide investment sub-advisory services for the Stock Index Fund, the MidCap Index Fund, the Small Cap Index Fund, the Growth Fund, and the Science & Technology Fund, subject to VALIC's control, direction and supervision. The Company consists of thirteen separate investment portfolios (hereinafter collectively referred to as the "Funds" or individually as a "Fund"), each of which is, in effect, a separate mutual fund issuing its own separate class of common stock. The Company issues shares of common stock of each Fund to registered and unregistered separate accounts of VALIC and its affiliates to fund variable annuity contracts (the "Contracts"). Currently the Company acts as an investment vehicle for assets of VALIC's Separate Account A, and AGL Separate Account A and Separate Account D, each of which is a unit investment trust registered as an investment company under the 1940 Act, and AGL Separate Account B, a unit investment trust that is exempt from registration as an investment company under the 1940 Act. Additionally, retirement plans maintained by VALIC and American General Corporation may own shares of certain of the Funds. The Company and VALIC have Codes of Ethics which establish for their officers, directors and certain employees procedures and restrictions as to those individual's personal investment trading activities.
DATE OPERATIONS DATE OF DATE SEED COMMENCED INCORPORATION OR MONEY WAS (BY ISSUANCE OR BOARD APPROVAL FIRST PROVIDED AVAILABILITY NAME OF FUND FOR ORGANIZATION TO THE COMPANY OF SHARES) ------------ ---------------- -------------- --------------- Asset Allocation Fund ("AAF")*............. 02-22-83 08-08-83 09-06-83 Capital Conservation Fund ("CCF").......... 12-07-84 12-16-85 01-16-86 Government Securities Fund ("GSF")......... 12-07-84 12-16-85 01-16-86 Growth Fund ("GF")......................... 01-25-94 04-29-94 04-29-94 Growth & Income Fund ("GIF")............... 01-25-94 04-29-94 04-29-94 International Equities Fund ("IEF")........ 07-18-89 09-29-89 10-02-89 International Government Bond Fund ("IGBF")................................. 07-30-91 10-01-91 10-01-91 MidCap Index Fund ("MIF").................. 03-16-82 08-30-82 10-13-82 Money Market Fund ("MMF").................. 12-07-84 12-16-85 01-16-86 Science & Technology Fund ("STF").......... 12-17-93 04-29-94 04-29-94 Small Cap Index Fund ("SCIF").............. 10-28-91 05-01-92 05-01-92 Social Awareness Fund ("SAF").............. 07-18-89 09-29-89 10-02-89 Stock Index Fund ("SIF")................... 02-02-87 04-20-87 04-20-87
- --------------- *The Asset Allocation Fund was formerly known as the Timed Opportunity Fund. The MidCap Index Fund and the Asset Allocation Fund are the successors to Capital Accumulation Fund, Inc. and Timed Opportunity Fund, Inc., respectively, which were separately registered open-end diversified management investment companies under the 1940 Act, pursuant to a reorganization entered into on September 25, 1985. The MidCap Index Fund effected a change in its name and investment objective, investment program and one of its restrictions as of October 1, 1991. The Asset Allocation Fund effected a change in its name from the Timed Opportunity Fund, effective as of October 1, 1997. In addition, the Quality Growth Fund was combined into the Stock Index Fund, by means of a reclassification of its shares, effective May 1, 1992. 4 ADDITIONAL INFORMATION REGARDING CERTAIN FUNDS The following disclosures supplement disclosures set forth in the Prospectus and do not, standing alone, present a complete explanation of the matters disclosed. Please refer also to the Prospectus for a complete presentation of these matters. INTERNATIONAL EQUITIES FUND The International Equities Fund intends to provide long-term growth of capital through investments primarily in a diversified portfolio of equity and equity-related securities of foreign issuers that, as a group, are expected to provide investment results closely corresponding to the Morgan Stanley's Capital International, Europe, Australia and Far East Index ("EAFE Index"). The EAFE Index, which commenced in 1969, is an unmanaged capitalization weighted stock index consisting of more than 1000 companies operating in 21 countries in Europe, Australia, and the Far East. The EAFE Index is a well known measure for international stock performance. The EAFE Index does not reflect charges, fees, and commissions applicable to the Fund. The weighted breakdown by country of the EAFE Index (as of May 31, 1998) is set forth below: EAFE INDEX BREAKDOWN BY COUNTRY
COUNTRY WEIGHT ------- ------ 1 AUSTRALIA................................................... 2.40 2 AUSTRIA..................................................... 0.44 3 BELGIUM..................................................... 1.65 4 DENMARK..................................................... 1.04 5 FINLAND..................................................... 1.01 6 FRANCE...................................................... 9.32 7 GERMANY..................................................... 11.18 8 HONG KONG................................................... 1.86 9 IRELAND..................................................... 0.51 10 ITALY....................................................... 4.98 11 JAPAN....................................................... 20.91 12 MALAYSIA.................................................... 0.64 13 NETHERLANDS................................................. 6.12 14 NEW ZEALAND................................................. 0.23 15 NORWAY...................................................... 0.59 16 PORTUGAL.................................................... 0.73 17 SINGAPORE................................................... 0.63 18 SPAIN....................................................... 3.41 19 SWEDEN...................................................... 3.33 20 SWITZERLAND................................................. 8.13 21 UNITED KINGDOM.............................................. 20.90
GOVERNMENT SECURITIES FUND The Government Securities Fund may invest in intermediate and long-term debt instruments issued or guaranteed by the U.S. Government, its agencies or instrumentalities. U.S. Government securities in which the Fund may invest include: (1) U.S. Treasury bills, notes, and bonds; (2) obligations issued or guaranteed by U.S. Government agencies and instrumentalities which are supported by any of the following: (a) the full faith and credit of the U.S. Government (e.g., Government National Mortgage Association ("GNMA") Certificates); (b) the right of the issuer to borrow an amount limited to a specific line of credit from the U.S. Treasury (e.g., debt of each of the Federal Home Loan banks); (c) the discretionary authority of the U.S. Government or GNMA to purchase certain financial obligations of the agency or instrumentality (e.g., Federal National Mortgage Association); or (d) the credit of the issuing agency or instrumentality (e.g., Federal Land Banks, Farmers, Farmers Home Administration or Student Loan Marketing Association); and (3) collateralized mortgage obligations ("CMOs") that are issued by governmental or non-governmental entities and collateralized by U.S. Treasury Obligations or by U.S. Government agency or instrumentality securities. 5 No assurance can be given that the U.S. Government will provide support to such U.S. Government sponsored agencies or instrumentalities in the future, since it is not required to do so by law. ASSET ALLOCATION FUND In addition to its overall investment objective, the Fund has established separate sub-objectives for investments in each of the three market sectors. The following is a statement of the sub-objectives of each sector, which are designed to maximize the unique investment return characteristics inherent in that market sector: 1. Within the stock sector, the Fund seeks appreciation of capital by selecting investments that it expects will participate in the growth of the nation's economy. 2. Within the bond sector, the Fund will generally seek high current income consistent with reasonable investment risk. The Fund will pursue the above objective by investing only in (a) investment grade corporate debt obligations rated e.g. at least Baa by Moody's Investor Services, Inc. ("Moody's") or by any other NRSRO or unrated debt obligations which VALIC believes are of comparable investment quality, and (b) obligations of, or debts guaranteed by, the U.S. Government, its agencies, or instrumentalities. See "Government Securities Portfolio" for an explanation of U.S. Government obligation and "Debt Securities" in this Prospectus and the Appendix for an explanation of corporate debt ratings. 3. Within the money market sector, the Fund seeks the highest level of current income consistent with liquidity, stability, and preservation of capital. The chart below indicates the historic allocations, from June 1983 through June 1998, based on the investment benchmarks of 55% in equity securities, 35% in intermediate or long-term debt securities and 10% in money market or short term debt instruments, as recommended by the Bankers Trust Company Tactical Asset Allocation Model. The Bankers Trust Company Tactical Asset Allocation Model is currently used in connection with the management of over $5.12 billion of assets. CHART APPEARS HERE 6 PERFORMANCE AND YIELD INFORMATION The Series Company may compute the total return of a Fund ("Average Annual Total Return"), total return of a Fund before expenses ("Portfolio Total Return"), and compare Portfolio Total Return to the total return of the Fund's benchmark index ("Index Total Return"). The difference between Portfolio Total Return and Index Total Return is referred to as "tracking difference." Tracking difference represents the amount that the return on the investment portfolio (which results from the Adviser's investment selection) deviates from its benchmark's Index Total Return. Fund performance does not reflect contract charges or separate account charges which will reduce Fund values which are available to Participants. Information about Separate Account performance is available in the applicable contract prospectus. AVERAGE ANNUAL TOTAL RETURN Average Annual Total Return quotations for periods of 1, 3, 5, and 10 years, or, since inception of the Fund, are calculated according to the following formula: P (1+T)n = ERV Where: P = A hypothetical initial Purchase Payment of $1,000. T = Average annual total return. n = Number of years. ERV = Ending redeemable value of a hypothetical $1,000 Purchase Payment made at the beginning of the first period.
Average Annual Total Return reflects the deduction of Fund expenses and assumes that all dividends and distributions are reinvested when paid. PORTFOLIO TOTAL RETURN Portfolio Total Return quotations for periods of 1, 3, 5, and 10 years, or, since inception are calculated by adding to the Average Total Annual Return (described above) the expenses of the Fund. Expenses of the Fund are calculated at the end of each Fund's fiscal year and are expressed as a percentage of average net assets. Expenses as a percentage of average net assets are prorated equally over the months in the fiscal year in which the ratio was calculated when determining expenses for periods crossing over fiscal years. INDEX TOTAL RETURN Index Total Return quotations for periods 1, 3, 5, and 10 years, or, since inception, are calculated by determining the percentage change in value of the benchmark index over the applicable period including reinvestment of dividends and interest as applicable. Index Total Return is calculated according to the formula described above for Average Annual Total Return, however it does not include an expense component; if an expense component were included the return would be lower. SEVEN DAY YIELDS The Money Market Fund may quote a Seven Day Current Yield and a Seven Day Effective Yield. The Seven Day Current Yield is calculated by determining the total return for the current seven day period ("based period return") and annualizing the base period return by dividing by seven days, then multiplying the result by 365 days. The Seven Day Effective Yield annualizes the base period return while compounding weekly the base period return according to the following formula: Seven Day Effective Yield = [(Base Period Return + 1)365/7 - 1] 7 30 DAY CURRENT YIELD The Capital Conservation Fund, Government Securities Fund, and the International Government Bond Fund may quote a 30 Day Current Yield which is determined based on the current 30 day period, according to the following standardized formula: Yield = 2[(1 + NII )6 - 1] S x NAV Where: NII = Net investment income (interest income, plus dividend income, plus other income, less fund expenses. S = Average daily shares outstanding. NAV = Net asset value per share on the last day of the period.
8 PERFORMANCE RETURNS MAY 31, 1998
10 YEAR INCEPTION OR SINCE DATE 1 YEAR 3 YEAR 5 YEAR INCEPTION (A) --------- ------ ------ ------ ------------- ASSET ALLOCATION FUND:* 09/06/83 Average Annual Total Return 21.94% 18.55% 13.79% 11.21% Portfolio Total Return 22.48% 19.11% 14.36% 11.94% Benchmark (B) 21.22% 19.12% 15.02% 14.07% CAPITAL CONSERVATION FUND: 01/16/86 Average Annual Total Return 10.76% 7.27% 6.41% 7.95% Portfolio Total Return 11.30% 7.83% 6.98% 8.63% Merrill Lynch Corporate Master Index 12.35% 8.54% 8.05% 10.19% GOVERNMENT SECURITIES FUND: 01/16/86 Average Annual Total Return 10.60% 6.91% 6.04% 7.96% Portfolio Total Return 11.14% 7.46% 6.61% 8.64% Lehman Brothers U.S. Treasury Index 11.22% 7.49% 6.87% 8.97% GROWTH FUND: 04/29/94 Average Annual Total Return 27.41% 26.99% N/A 23.26% Portfolio Total Return 28.25% 27.83% N/A 24.12% S & P 500 30.68% 29.51% N/A 26.97% GROWTH & INCOME FUND: 04/29/94 Average Annual Total Return 19.87% 23.69% N/A 20.19% Portfolio Total Return 20.67% 24.49% N/A 21.00% S & P 500 30.68% 29.51% N/A 26.97% INTERNATIONAL EQUITIES FUND: 10/02/89 Average Annual Total Return 9.92% 9.59% 9.56% 5.04% Portfolio Total Return 10.32% 10.00% 9.99% 5.49% Morgan Stanley Capital International EAFE 11.11% 9.76% 9.52% 5.24% INTERNATIONAL GOVERNMENT BOND FUND: 10/01/91 Average Annual Total Return 2.65% 0.61% 5.44% 7.61% Portfolio Total Return 3.20% 1.17% 5.99% 8.05% Salomon Brothers Non-U.S. Government Bond Index 2.38% 0.53% 5.79% 8.26% MIDCAP INDEX FUND: 10/01/91 Average Annual Total Return 29.62% 24.95% 17.99% 17.61% Portfolio Total Return 29.98% 25.34% 18.40% 18.05% S & P MidCap 400 29.87% 25.40% 18.42% 18.38% MONEY MARKET FUND: 01/16/86 Average Annual Total Return 5.25% 5.18% 4.65% 5.45% Portfolio Total Return 5.79% 5.74% 5.22% 6.05% 30-Day Certificate of Deposit Primary Offering Rate by New York City Banks 4.81% 4.72% 4.26% 5.22% SCIENCE & TECHNOLOGY FUND: 04/29/94 Average Annual Total Return 10.85% 21.33% N/A 26.44% Portfolio Total Return 11.80% 22.28% N/A 27.40% S & P 500 30.68% 29.51% N/A 26.97% SMALL CAP INDEX FUND: 05/01/92 Average Annual Total Return 21.34% 20.61% 15.43% 15.31% Portfolio Total Return 21.73% 21.01% 15.85% 15.74% Russell 2000 21.25% 20.79% 16.14% 16.68% SOCIAL AWARENESS FUND: 10/02/89 Average Annual Total Return 30.34% 29.89% 21.44% 16.16% Portfolio Total Return 30.88% 30.44% 22.01% 16.66% S & P 500 30.68% 29.51% 22.17% 17.21% STOCK INDEX FUND: 04/20/87 Average Annual Total Return 30.30% 29.23% 21.75% 17.79% Portfolio Total Return 30.61% 29.56% 22.10% 18.27% S & P 500 30.68% 29.51% 22.17% 18.62%
- ------------ * The Asset Allocation Fund was formerly known as the Timed Opportunity Fund. (A) Amounts shown are returns for ten years or since inception if the fund has been in existence for less than ten years. (B) Benchmark consists of 55% S&P 500 Index, 35% Merrill Lynch Corporate & Government Master Index, and 10% of NYC 30 Day Primary CD Rate. 9 INVESTMENT RESTRICTIONS The Funds have each adopted certain fundamental investment restrictions which, unlike the other investment objective(s), policies, and investment program of each Fund, may only be changed for each Fund with the consent of a majority of the outstanding voting securities of the particular Fund. The 1940 Act defines such a majority as the lesser of (1) 67% or more of the voting securities present in person or by proxy at a shareholders' meeting, if the holders of more than 50% of the outstanding voting securities of a Fund are present or represented by proxy, or (2) more than 50% of a Fund's outstanding voting securities. FUNDAMENTAL INVESTMENT RESTRICTIONS APPLICABLE TO ALL FUNDS All the Funds, except the International Government Bond Fund, the Growth Fund and the Science & Technology Fund have adopted each of the following fundamental investment restrictions. The percentage limitations referenced in some of the following fundamental investment restrictions are to be determined at the time of purchase. The International Government Bond Fund has adopted fundamental investment restrictions 2-10 below. (The Growth Fund and the Science & Technology Fund have adopted investment restrictions 3, 6 and 7 as non-fundamental operating policies. Such restrictions provide that no Fund may: 1. Invest more than 5% of the value of its total assets in the securities of any one issuer or purchase more than 10% of the outstanding voting securities, or any other class of securities, of any one issuer. For purposes of this restriction, all outstanding debt securities of an issuer are considered as one class, and all preferred stock of an issuer is considered as one class. This restriction does not apply to obligations issued or guaranteed by the U.S. Government, its agencies, or instrumentalities. As a matter of operating policy, the Company will not consider repurchase agreements subject to the 5% limitation if the collateral underlying the repurchase agreements are U.S. Government securities. 2. (a) Issue senior securities except in connection with investments in options and futures contracts; or (b) borrow money except as a temporary measure for extraordinary or emergency purposes (such as to meet redemption requests which might otherwise require the disadvantageous sale of portfolio securities) and then not in excess of 5% of the Fund's total assets. No Fund may mortgage, pledge or hypothecate more than 5% of the value of its total assets, and then only to secure borrowings made under this restriction. 3. Acquire more than 3% of the voting securities of any single other investment company or invest more than 10% of (the value of) the Fund's assets in the securities of other investment companies (5% in the case of each such other company). Additionally, investment company securities will only be purchased on the open market or from brokers or dealers receiving customary commissions. 4. Acquire real estate or real estate contracts, although a Fund may acquire obligations that are secured by real estate or securities issued by companies investing in real estate, such as real estate investment trusts. 5. Underwrite securities of other issuers except where the sale of restricted portfolio securities constitutes an underwriting under the federal securities laws. 6. Acquire securities for the purpose of influencing the management of, or exercising control over, the issuer. 7. Effect short sales of securities or purchase securities on margin, except in connection with investment in options and futures contracts. Each Fund may use short-term credits when necessary to clear transactions. 8. Lend money, except by purchasing debt obligations in which a Fund may invest consistent with its investment objective(s) and policies or by purchasing securities subject to repurchase agreements. 9. Purchase or sell commodities (except in connection with investments in options and futures contracts) or invest in oil, gas or mineral exploration programs. 10. Make loans to other persons, except that a Fund may lend its portfolio securities to broker-dealers and other financial institutions in an amount up to 30% of the value of the Fund's total assets. 10 MMF INVESTMENT RESTRICTIONS MMF may not: 1. Purchase any security which matures more than 13 months from the date of purchase. 2. Purchase or sell commodity contracts. 3. Invest in warrants, or write, purchase or sell puts, calls, straddles, spreads or combinations thereof. 4. Invest more than 25% of the value of its total assets in the securities of issuers primarily engaged in any one industry, except investments in obligations issued or guaranteed by the U.S. Government, its agencies, or instrumentalities. AAF, CCF, GSF, SIF, IEF, MIF, AND SCIF INVESTMENT RESTRICTIONS AAF, CCF, GSF, SIF, IEF, MIF, and SCIF may not: 1. Enter into a financial futures contract (by exercise of any option or otherwise) or acquire any options thereon, if, immediately thereafter, the total of the initial margin deposits required with respect to all open futures positions, at the time such positions were established, plus the sum of the premiums paid for all unexpired options on futures contracts would exceed 5% of the value of its total assets. 2. Invest more than 25% of the value of its total assets in the securities of issuers primarily engaged in any one industry. GIF INVESTMENT RESTRICTIONS GIF may not: 1. Invest 25% or more of its assets in securities of issuers in any one industry. GF AND STF INVESTMENT RESTRICTIONS GF and STF may not: 1. Borrow money except that the Funds may (i) borrow for non-leveraging, temporary or emergency purposes and (ii) engage in reverse repurchase agreements and make other investments or engage in other transactions, which may involve a borrowing, in a manner consistent with the Funds' investment objective and program, provided that the combination of (i) and (ii) shall not exceed 33 1/3% of the value of the Funds' total assets (including the amount borrowed) less liabilities (other than borrowings) or such other percentage permitted by law. Any borrowings which come to exceed this amount will be reduced in accordance with applicable law. The Funds may borrow from banks, other T. Rowe Price Funds or other persons to the extent permitted by law. 2. Purchase the securities of any issuer if, as a result, more than 25% of the value of the Funds' total assets would be invested in the securities of issuers having their principal business activities in the same industry; provided, however, the Growth Fund will normally concentrate 25% or more of its assets in the securities of the banking industry when the Growth Fund's position in issues maturing in one year or less equals 35% or more of the Growth Fund's total assets. 3. Make loans, although the Funds may (i) lend portfolio securities; provided that no such loan may be made if, as a result, the aggregate of such loans would exceed 33 1/3% of the value of the Funds' total assets; (ii) purchase money market securities and enter into repurchase agreements; and (iii) acquire publicly-distributed or privately-placed debt securities and purchase debt. 4. Purchase a security if, as a result, with respect to 75% of the Funds' total assets, more than 5% of the value of its total assets would be invested in the securities of a single issuer or more than 10% of the outstanding voting securities of any issuer would be held by the Funds, except securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities. 5. Purchase or sell physical commodities; except that it may enter into futures contracts and options thereon. 6. Purchase or sell real estate, including limited partnership interests therein, unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Funds from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business). 11 7. Issue senior securities except in compliance with the Investment Company Act of 1940. 8. Underwrite securities issued by other persons, except to the extent that the Funds may be deemed to be an underwriter within the meaning of the Securities Act of 1933 in connection with the purchase and sale of its portfolio securities in the ordinary course of pursuing its investment program. With respect to investment restriction (5), the Fund does not consider forward foreign currency contracts or hybrid investments to be commodities. For purposes of investment restriction (2), U.S., state or local governments, or related agencies or instrumentalities, are not considered an industry. Notwithstanding anything in the above fundamental and operating restrictions to the contrary, subject to any regulatory requirements, GF and STF may each invest all of its assets in a single investment company or a series thereof in connection with a "master-feeder" arrangement. Such an investment would be made where the Fund (a "Feeder"), and one or more other funds with the same investment objective and program as the Fund, sought to accomplish its investment objective and program by investing all of its assets in the shares of another investment company (the "Master"). The Master would, in turn, have the same investment objective and program as the Fund. The Funds would invest in this manner in an effort to achieve the economies of scale associated with having a Master fund make investments in portfolio companies on behalf of a number of Feeder funds. SAF INVESTMENT RESTRICTIONS SAF may not: 1. Enter into financial futures contracts (by exercise of any option or otherwise) or acquire any options thereon, if, immediately thereafter, the total of the initial margin deposits required with respect to all open futures positions at the time such positions were established plus the sum of the premiums paid for all unexpired options on futures contracts would exceed 5% of the value of its total assets. 2. Invest more than 25% of the value of its total assets in the securities of issuers primarily engaged in any one industry. IGBF INVESTMENT RESTRICTIONS IGBF may not: 1. With respect to 50% of its total assets, invest more than 5% of its total assets in securities of any one issuer or purchase more than 10% of the outstanding voting securities of any one issuer. With respect to the remaining 50% of its total assets, invest more than 25% of its total assets in the securities of any one issuer. This restriction does not apply to obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. 2. Enter into a financial futures contract (by exercise of any option or otherwise) or acquire any options thereon, if, immediately thereafter, the total of the initial margin deposits required with respect to all open futures positions, at the time such positions were established, plus the sum of the premiums paid for all unexpired options on futures contracts would exceed 5% of the value of its total assets. 3. Invest more than 25% of the value of its total assets in the securities of issuers primarily engaged in any one industry. NON-FUNDAMENTAL INVESTMENT RESTRICTIONS The following non-fundamental investment restriction is applicable to each Fund: The Fund may not invest more than 10% (15% in the case of the Growth Fund, Growth & Income Fund and Science & Technology Fund) of the Fund's net assets (taken at the greater of cost or market value) in securities that are illiquid or not readily marketable including time deposits and repurchase agreements not maturing within seven days or restricted securities, but excluding (a) Rule 144A securities that have been determined to be liquid by VALIC or the Sub-adviser, in accordance with guidelines adopted by the Company's Board of Directors, and (b) commercial paper that is sold under Section 4(2) of the 1933 Act which: (i) is not traded flat or in default as to interest or principal; (ii) is rated in one of the two highest categories by at least two nationally recognized statistical rating organizations and VALIC or the Sub-adviser, in accordance with guidelines 12 adopted by the Company's Board of Directors, has determined the commercial paper to be liquid; or (iii) is rated in one of the two highest categories by one nationally recognized statistical rating agency and VALIC or the Sub-adviser, in accordance with guidelines adopted by the Company's Board of Directors, has determined that the commercial paper is of equivalent quality and is liquid. In addition, as a non-fundamental operating policy, the Growth Fund and the Science & Technology Fund will not invest in oil, gas or mineral exploration programs if, as a result, more than 5% of the value of the total assets would be invested in such programs.) 13 INVESTMENT PRACTICES REPURCHASE AGREEMENTS Each Fund may hold commercial paper, certificates of deposits, and government obligations (including government guaranteed obligations) subject to repurchase agreements with certain well established domestic banks and certain broker-dealers, including primary government securities dealers, approved as creditworthy by the Board of Directors. The underlying security must be a high-quality domestic money market security (except for the International Equities Fund and International Government Bond Fund which utilize foreign money market securities) and the seller must be a well-established securities dealer or bank that is a member of the Federal Reserve System. For the Money Market Fund, the underlying security must be a U.S. Government security or a security rated in the highest rating category by the Requisite NRSROs (Nationally Recognized Statistical Rating Organization) and must be determined to present minimal credit risk. Repurchase agreements are generally for short periods, often less than a week. Repurchase agreements typically obligate a seller, at the time it sells securities to a Fund, to repurchase the securities at a specific future time and price. The price for which the Fund resells the securities is calculated to exceed the price the Fund initially paid for the same securities, thereby determining the yield during the Fund's holding period. This results in a fixed market rate of interest, agreed upon by that Fund and the seller, which is accrued as ordinary income. Most repurchase agreements mature within seven days although some may have a longer duration. The underlying securities constitute collateral for these repurchase agreements, which are considered loans under the 1940 Act. The Funds do not intend to sell the underlying securities subject to a repurchase agreement (except to the seller upon maturity of the agreement). During the term of the repurchase agreement, the Funds (i) retain the securities subject to the repurchase agreement as collateral securing the seller's obligation to repurchase the securities, (ii) monitor on a daily basis the market value of the securities subject to the repurchase agreement, and (iii) require the seller to deposit with the Company's custodian collateral equal to any amount by which the market value of the securities subject to the repurchase agreement falls below the resale amount provided under the repurchase agreement. In the event that a seller defaults on its obligation to repurchase the securities, the Funds must hold the securities until they mature or may sell them on the open market, either of which may result in a loss to a Fund if, and to the extent that, the values of the securities decline. Additionally, the Funds may incur disposition expenses when selling the securities. Bankruptcy proceedings by the seller may also limit or delay realization and liquidation of the collateral by a Fund and may result in a loss to that Fund. The Board of Directors of the Company will evaluate the creditworthiness of all banks and broker-dealers with which the Company proposes to enter into repurchase agreements. The Funds will not invest in repurchase agreements that do not mature within seven days if any such investment, together with any illiquid assets held by a Fund, exceeds 10% of the value of that Fund's total assets (15% in the case of Growth Fund, Growth & Income Fund and Science & Technology Fund). LENDING PORTFOLIO SECURITIES For purposes of realizing additional income, each Fund may make secured loans of its portfolio securities amounting to no more than 30% of the value of each Fund's total assets (33 1/3% in the case of Growth Fund and Science & Technology Fund). This policy is a fundamental policy of each of the Funds. Securities loans are made to broker-dealers and other financial institutions approved by State Street Bank and Trust Company ("State Street"), custodian to the Funds and pursuant to agreements requiring that the loans be continuously secured by collateral at least equal at all times to the loaned securities 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 permitted by interpretations or rules of the Securities and Exchange Commission ("SEC"). While the securities are on loan, the Funds 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. Any loan of portfolio securities by any Fund will be callable at any time by the lending Fund upon notice of five business days. When voting or consent rights which accompany loaned securities pass to the borrower, the lending Fund will call the loan, in whole or in part as appropriate, to permit 14 the exercise of such rights if the matters involved would have a material effect on that Fund's investment in the securities being loaned. If the borrower fails to maintain the requisite amount of collateral, the loan will automatically terminate, and the lending Fund will be permitted to use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over collateral. As with any extensions of credit, there are risks of delay in receiving additional collateral or in the recovery of the securities or, in some cases, even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of portfolio securities will be made only when State Street considers the borrowing broker-dealers or financial institutions to be creditworthy and of good standing and the interest earned from such loans to justify the attendant risks. On termination of the loan, the borrower will be required to return the securities to the lending Fund. Any gain or loss in the market price during the loan would inure to the lending Fund. The lending Fund may pay reasonable finders', administrative, and custodial fees in connection with a loan of its securities. CONVERTIBLE SECURITIES Certain Funds may invest in convertible securities of foreign or domestic issues. A convertible security is a security (a bond or preferred stock) which may be converted at a stated price within a specified period of time into a certain quantity of the common stock of the same or a different issuer. Convertible securities are senior to common stocks in a corporation's capital structure but are usually subordinated to similar nonconvertible securities. Convertible securities provide, through their conversion feature, an opportunity to participate in capital appreciation resulting from a market price advance in a convertible security's underlying common stock. The price of a convertible security is influenced by the market value of the underlying common stock and tends to increase as the market value of the underlying stock rises, whereas it tends to decrease as the market value of the underlying stock declines. A Fund may be required to permit the issuer of a convertible security to redeem the security, convert it into the underlying common stock, or sell it to a third party. Thus, a Fund may not be able to control whether the issuer of a convertible security chooses to convert that security. If the issuer chooses to do so, this action could have an adverse effect on a Fund's ability to achieve its investment objectives. FOREIGN SECURITIES All Funds may invest in foreign securities. A foreign security includes corporate debt securities of foreign issuers (including preferred or preference stock), certain foreign bank obligations (see "Bank Obligations") and U.S. dollar or foreign currency-denominated obligations of foreign governments or their subdivisions, agencies and instrumentalities, international agencies and supranational entities. A foreign security is a security issued by an entity domiciled or incorporated outside of the United States. Included within the definition of foreign securities are American Depository Receipts (ADRs). ADRs are certificates issued by a United States bank or trust company and represent the right to receive securities of a foreign issuer deposited in a domestic bank or foreign branch of a United States bank and traded on a United States exchange or in an over-the-counter market. Generally, ADRs are in registered form. Investment in ADRs has certain advantages over direct investment in the underlying foreign securities since: (i) ADRs are U.S. dollar-denominated investments that are easily transferable and for which market quotations are readily available, and (ii) issuers whose securities are represented by ADRs are generally subject to auditing, accounting and financial reporting standards similar to those applied to domestic issuers. Each Fund may also, in accordance with its specific investment objective(s) and investment program, policies and restrictions purchase U.S. dollar-denominated money market securities of foreign issuers. Such money market securities may be registered domestically and traded on domestic exchanges or in the over-the-counter market (e.g., Yankee securities) or may be (1) registered abroad and traded exclusively in foreign markets or (2) registered domestically and issued in foreign markets (e.g., Eurodollar securities). In addition, all the Funds, except the Government Securities Fund and the Money Market Fund, may invest in non-U.S. dollar-denominated foreign securities, in accordance with their specific investment objective(s), investment programs, policies, and restrictions. Investing in foreign securities may 15 involve advantages and disadvantages not present in domestic investments. There may be less publicly available information about securities not registered domestically, or their issuers, than is available about domestic issuers or their domestically registered securities. Stock markets outside the U.S. may not be as developed as domestic markets, and there may also be less government supervision of foreign exchanges and brokers. Foreign securities may be less liquid or more volatile than U.S. securities. Trade settlements may be slower and could possibly be subject to failure. In addition, brokerage commissions and custodial costs with respect to foreign securities may be higher than those for domestic investments. Accounting, auditing, financial reporting and disclosure standards for foreign issuers may be different than those applicable to domestic issuers. Non-U.S. dollar-denominated foreign securities may be affected favorably or unfavorably by changes in currency exchange rates and exchange control regulations (including currency blockage) and a Fund may incur costs in connection with conversions between various currencies. Foreign securities may also involve risks due to changes in the political or economic conditions of such foreign countries, the possibility of expropriation of assets or nationalization, and possible difficulty in obtaining and enforcing judgments against foreign entities. FOREIGN CURRENCY EXCHANGE TRANSACTIONS Foreign currency transactions used by certain of the Funds may be either: (i) on the spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange market, or (ii) conducted through the use of forward foreign currency exchange contracts. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date. In general, forward foreign currency exchange contracts are not guaranteed by a third party and, accordingly, each party to a forward foreign currency exchange contract is dependent upon the creditworthiness and good faith of the other party. A Fund will enter into forward foreign currency exchange contracts only under two circumstances. First, a Fund may enter into a forward foreign currency exchange contract to purchase an amount of foreign currency to protect itself against a possible loss that might occur between trade and settlement dates for a particular security, resulting from a decline in the U.S. dollar against the foreign currency in which such security is denominated. This practice may limit the potential gains that might result from a positive change in such currency relationships. Second, when VALIC or a Sub-adviser believes that the currency of a particular foreign country may suffer or enjoy a substantial movement against the U.S. dollar, a Fund may enter into a forward foreign currency exchange contract to purchase or sell an amount of foreign currency approximating the value of some or all of that Fund's portfolio securities denominated in such foreign currency. The forecasting of short-term currency market movements is extremely difficult and it is uncertain whether such short-term hedging strategies will be successful. EURO CONVERSION Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain are members of the European Economic and Monetary Union (the "EMU"). The EMU has established a common European currency for participating countries which will be known as the "euro." Each participating country has supplemented its existing currency with the euro on January 1, 1999, and will replace its existing currency with the euro on July 1, 2002. Any other European country which is a member of the EMU may elect to participate in the EMU and may supplement its existing currency with the euro after January 1, 1999. The ongoing introduction of the euro presents unique risks and uncertainties, including whether the payment and operational systems of banks and other financial institutions will function properly; how outstanding financial contracts will be treated after January 1, 1999; the establishment of exchange rates for existing currencies and the euro; and the creation of suitable clearing and settlement systems for the euro. These and other factors could cause market disruptions and could adversely affect the value of securities held by certain of the Funds. BANK OBLIGATIONS Each Fund may invest in bank obligations. Bank obligations in which the Funds may invest include certificates of deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified return. Bankers' acceptances are negotiable drafts or bills of exchange, 16 normally drawn by an importer or exporter to pay for specific merchandise, which are "accepted" by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Fixed time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties which vary depending upon market conditions and the remaining maturity of the obligation. There are no contractual restrictions on the right to transfer a beneficial interest in a fixed time deposit to a third party, although there is no market for such deposits. A Fund will not invest in fixed time deposits which (1) are not subject to prepayment or (2) provide for withdrawal penalties upon prepayment (other than overnight deposits) if, in the aggregate, more than 10% of its net assets (15% in the case of Growth Fund, Growth & Income Fund and Science & Technology Fund) would be invested in such deposits, repurchase agreements maturing in more than seven days and other illiquid assets. The Funds limit investments in United States bank obligations to obligations of United States banks (including foreign branches) which have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the Federal Deposit Insurance Corporation. A Fund also may invest in certificates of deposit of savings and loan associations (federally or state chartered and federally insured) having total assets in excess of $1 billion. The Funds limit investments in foreign bank obligations to United States dollar-or foreign currency-denominated obligations of foreign banks (including United States branches of foreign banks) which at the time of investment (i) have more than $10 billion, or the equivalent in other currencies, in total assets; (ii) in terms of assets are among the 75 largest foreign banks in the world; (iii) have branches or agencies (limited purpose offices which do not offer all banking services) in the United States; and (iv) in the opinion of VALIC or a Sub-adviser, are of an investment quality comparable to obligations of United States banks in which the Funds may invest. The Government Securities Fund may invest in the same types of bank obligations as the other Funds, but they must be U.S. dollar-denominated. Subject to a Fund's limitation on concentration in the securities of issuers in a particular industry, there is no limitation on the amount of a Fund's assets which may be invested in obligations of foreign banks which meet the conditions set forth herein. Obligations of foreign banks involve somewhat different investment risks than those affecting obligations of United States banks, including the possibilities that their liquidity could be impaired because of future political and economic developments, that their obligations may be less marketable than comparable obligations of United States banks, that a foreign jurisdiction might impose withholding taxes on interest income payable on those obligations, that foreign deposits may be seized or nationalized, that foreign governmental restrictions such as exchange controls may be adopted which might adversely affect the payment of principal and interest on those obligations and that the selection of those obligations may be more difficult because there may be less publicly available information concerning foreign banks or the accounting, auditing and financial reporting standards, practices and requirements applicable to foreign banks may differ from those applicable to United States banks. Foreign banks are not generally subject to examination by any U.S. Government agency or instrumentality. WHEN-ISSUED SECURITIES Each of the Funds except the Money Market Fund may purchase securities on a when-issued or delayed delivery basis. When such transactions are negotiated, the price of such securities is fixed at the time of commitment, but delivery and payment for the securities may take place a month or more after the date of the commitment to purchase. The securities so purchased are subject to market fluctuation, and no interest accrues to the purchaser during this period. Forward commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. VALIC does not believe that a Fund's net asset value or income will be adversely affected by the purchase of securities on a when-issued basis. DEBT SECURITIES Debt securities are considered high-quality if they are rated at least Aa by Moody's or its equivalent by any other NRSRO or, if unrated, are determined to be of equivalent investment quality. High-quality debt securities are considered to have a very strong capacity to pay principal and interest. Debt securities are considered investment grade if 17 they are rated, for example, at least Baa by Moody's or BBB by S&P or their equivalent by any other NRSRO or, if not rated, are determined to be of equivalent investment quality. Investment grade debt securities are regarded as having an adequate capacity to pay principal and interest. Lowermedium and lower-quality securities rated, for example, Ba and B by Moody's or its equivalent by any other NRSRO are regarded on balance as high risk and predominantly speculative with respect to the issuer's continuing ability to meet principal and interest payments. The Adviser or Sub-Advisers will not dispose of an investment grade security that has been downgraded to below investment grade. See the Section regarding "Description of Corporate Bond Ratings" for a description of each rating category in this Statement of Additional Information for a more complete description of lower-medium and lower-quality debt securities and their risks. The maturity of debt securities may be considered long (ten plus years), intermediate (one to ten years), or short-term (thirteen months or less). In general, the principal values of longer-term securities fluctuate more widely in response to changes in interest rates than those of shorter-term securities, providing greater opportunity for capital gain or risk of capital loss. A decline in interest rates usually produces an increase in the value of debt securities, while an increase in interest rates generally reduces their value. EMERGING MARKETS Investments in companies domiciled in emerging market countries may be subject to additional risks. Specifically, volatile social, political and economic conditions may expose investments in emerging or developing markets to economic structures that are generally less diverse and mature. Emerging market countries may have less stable political systems than those of more developed countries. As a result, it is possible that recent favorable economic developments in certain emerging market countries may be suddenly slowed or reversed by unanticipated political or social events in such countries. Moreover, the economies of individual emerging market countries may differ favorably or unfavorably from the US economy in such respects as the rate of growth in gross domestic product, the rate of inflation, capital reinvestment, resource selfsufficiency and balance of payments position. Another risk is that the small current size of the markets for such securities and the currently low or nonexistent volume of trading can result in a lack of liquidity and in greater price volatility. Until recently, there has been an absence of a capital market structure or market-oriented economy in certain emerging market countries. If a Fund's securities will generally be denominated in foreign currencies, the value of such securities to the Fund will be affected by changes in currency exchange rates and in exchange control regulations. A change in the value of a foreign currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of a Fund's securities. In addition, some emerging market countries may have fixed or managed currencies which are not free-floating against the U.S. dollar. Further, certain emerging market currencies may not be internationally traded. Certain of these currencies have experienced a steady devaluation relative to the U.S. dollar. Many emerging markets 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. A further risk is that the existence of national policies may restrict a Fund's investment opportunities and may include restrictions on investment in issuers or industries deemed sensitive to national interests. Also, some emerging markets countries may not have developed structures governing private or foreign investment and may not allow for judicial redress for injury to private property. ASSET-BACKED SECURITIES Each of the Funds may invest in asset-backed securities (unrelated to first mortgage loans) that represent fractional interests in pools of retail installment loans, both secured (such as certificates for automobile receivables) and unsecured, and leases, or revolving credit receivables both secured and unsecured (such as credit card receivable securities). These assets are generally held by a trust and payments of principal and interest, or interest only are passed through monthly or quarterly to certificate holders and may be guaranteed up to certain amounts by letters of credit issued by a financial institution affiliated or unaffiliated with the trustee or originator of the trust. 18 Underlying automobile sales contracts, leases or credit card receivables are subject to prepayment, which may reduce the overall return to certificate holders. Nevertheless, principal repayment rates tend not to vary much with interest rates and the short-term nature of the underlying loans, leases, or receivables tends to dampen the impact of any change in the prepayment level. Certificate holders may also experience delays in payment on the certificates if the full amounts due on underlying loans, leases or receivables are not realized by the trust because of unanticipated legal or administrative costs of enforcing the contracts or because of depreciation or damage to the collateral (usually automobiles) securing certain contracts, or other factors. If consistent with its investment objective(s) and policies, a Fund may invest in other asset-backed securities that may be developed in the future. LOWER RATED DEBT SECURITIES Issuers of lower rated or non-rated securities ("high yield" securities, commonly known as "junk bonds") may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally are greater than is the case with higher rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of high yield securities may be more likely to experience financial stress, especially if such issuers are highly leveraged. 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 also may be adversely affected by specific issuer developments, or the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater for the holders of lower rated securities because such securities may be unsecured and may be subordinated to other creditors of the issuer. Lower rated securities frequently have call or redemption features which would permit an issuer to repurchase the security from a Fund. If a call were exercised by the issuer during a period of declining interest rates, a Fund likely would have to replace such called security with a lower yielding security, thus decreasing the net investment income to a Fund and dividends to shareholders. A Fund may have difficulty disposing of certain lower rated securities because there may be a thin trading market for such securities. The secondary trading market for high yield securities is generally not as liquid as the secondary market for higher rated securities. Reduced secondary market liquidity may have an adverse impact on market price and a Fund's ability to dispose of particular issues when necessary to meet a Fund's liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. Adverse publicity and investor perceptions, which may not be based on fundamental analysis, also may decrease the value and liquidity of lower rated securities, particularly in a thinly traded market. Factors adversely affecting the market value of lower rated securities are likely to adversely affect a Fund's net asset value. In addition, a Fund may incur additional expenses to the extent it is required to seek recovery upon a default on a portfolio holding or participate in the restructuring of the obligation. Finally, there are risks involved in applying credit ratings as a method for evaluating lower rated fixed income securities. For example, credit ratings evaluate the safety of principal and interest payments, not the market risks involved in lower rated fixed income securities. Since credit rating agencies may fail to change the credit ratings in a timely manner to reflect subsequent events, the Sub-adviser will monitor the issuers of lower rated fixed income securities in a Fund to determine if the issuers will have sufficient cash flow and profits to meet required principal and interest payments, and to assure the debt securities' liquidity within the parameters of the Fund's investment policies. The Sub-adviser will not necessarily dispose of a portfolio security when its ratings have been changed. REAL ESTATE SECURITIES AND REAL ESTATE INVESTMENT TRUSTS ("REITS") Each Fund may invest in real estate securities. Real estate securities are equity securities consisting of (i) common stocks, (ii) rights or warrants to purchase common stocks, (iii) securities convertible into common stocks and (iv) preferred stocks issued by real estate companies. A real estate company is one that derives at least 50% of its revenues from the ownership, construction, financing, management or sale of commercial, industrial, or resi- 19 dential real estate or that has at least 50% of its assets invested in real estate. Certain Funds also may invest in REITs. REITs are pooled investment vehicles which invest primarily in income producing real estate or real estate related loans or interest. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest the majority of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income from the collection of interest payments. Like regulated investment companies such as the Funds, REITs are not taxed on income distributed to shareholders provided they comply with certain requirements under the Internal Revenue Code (the "Code"). A Fund will indirectly bear its proportionate share of any expenses paid by REITs in which it invests in addition to the expenses paid by a Fund. Investing in REITs involves certain unique risks. Equity REITs may be affected by changes in the value of the underlying property owned by such REITs, while mortgage REITs may be affected by the quality of any credit extended. REITs are dependent upon management skills, are not diversified (except to the extent the Code requires), and are subject to the risks of financing projects. REITs are subject to heavy cash flow dependency, default by borrowers, self-liquidation, and the possibilities of failing to qualify for the exemption from tax for distributed income under the Code and failing to maintain their exemptions from the 1940 Act. REITs (especially mortgage REITs) are also subject to interest rate risks. WARRANTS Certain Funds may invest in or acquire warrants to purchase equity or fixed income securities. Bonds with warrants attached to purchase equity securities have many characteristics of convertible bonds and their prices may, to some degree, reflect the performance of the underlying stock. Bonds also may be issued with warrants attached to purchase additional fixed income securities at the same coupon rate. A decline in interest rates would permit a Fund to buy additional bonds at the favorable rate or to sell the warrants at a profit. If interest rates rise, the warrants would generally expire with no value. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying securities and do not represent any rights in the assets of the issuing company. In addition, the value of warrants does not, necessarily, in all cases change to the same extent as the value of the underlying securities to which they relate. Warrants cease to have value if they are not exercised prior to the expiration date. These factors can make warrants more speculative than other types of investments. SWAP AGREEMENTS Certain Funds may enter into interest rate, index and currency exchange rate swap agreements. These transactions are entered into in an attempt to obtain a particular return when it is considered desirable to do so, possibly at a lower cost to the Fund than if the Fund had invested directly in an instrument that yielded that desired return. Swap agreements are two party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or "swapped" between the parties are generally calculated with respect to a "notional amount," i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a "basket" of securities representing a particular index. Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or "cap"; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified rate, or "floor"; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding minimum or maximum levels. Most swap agreements entered into by the Funds would calculate the obligations of the parties to the agreement on a "net basis." Consequently, a Fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by 20 each party to the agreement (the "net amount"). A Fund's current obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the segregation of assets determined to be liquid by VALIC or a Sub-adviser in accordance with procedures established by the Board of Directors, to avoid any potential leveraging of a Fund's portfolio. Obligations under swap agreements so covered will not be construed to be "senior securities" for purposes of the Fund's investment restriction concerning senior securities. A Fund will not enter into a swap agreement with any single party if the net amount owed or to be received under existing contracts with that party would exceed 5% of the Fund's assets. Whether a Fund's use of swap agreements will be successful in furthering its investment objective of total return will depend on VALIC or a Sub-adviser's ability to predict correctly whether certain types of investments are likely to produce greater returns than other investments. Because they are two party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The Funds will enter into swap agreements only with counterparties that meet certain standards of creditworthiness (generally, such counterparties would have to be eligible counterparties under the terms of the Fund's repurchase agreement guidelines). Certain restrictions imposed on the Funds by the Internal Revenue Code may limit the Funds' ability to use swap agreements. The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect a Fund's ability to terminate existing swap agreements or to realize amounts to be received under such agreements. Certain swap agreements are exempt from most provisions of the Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity option transactions under the CEA, pursuant to regulations approved by the CFTC effective February 22, 1993. To qualify for this exemption, a swap agreement must be entered into by "eligible participants," which include the following, provided the participants' total assets exceed established levels: a bank or trust company, savings association or credit union, insurance company, investment company subject to regulation under the 1940 Act, commodity pool, corporation, partnership, proprietorship, organization, trust or other entity, employee benefit plan, governmental entity, broker-dealer, futures commission merchant, natural person, or regulated foreign person. To be eligible, natural persons and most other entities must have total assets exceeding $10 million; commodity pools and employee benefit plans must have assets exceeding $5 million. In addition, an eligible swap transaction must meet three conditions. First, the swap agreement may not be part of a fungible class of agreements that are standardized as to their material economic terms. Second, the creditworthiness of parties with actual or potential obligations under the swap agreement must be a material consideration in entering into or determining the terms of the swap agreement, including pricing, cost or credit enhancement terms. Third, swap agreements may not be entered into and traded on or through a multilateral transaction execution facility. This exemption is not exclusive, and participants may continue to rely on existing exclusions for swaps, such as the Policy Statement issued in July 1989 which recognized a safe harbor for swap transactions from regulation as futures or commodity option transactions under the CEA or its regulations. The Policy Statement applies to swap transactions settled in cash that (1) have individually tailored terms, (2) lack exchange-style offset and the use of a clearing organization or margin system, (3) are undertaken in conjunction with a line of business, and (4) are not marketed to the public. EURODOLLAR OBLIGATIONS Certain Funds, in accordance with their investment objective(s), policies, and investment program, may invest in Eurodollar obligations, including Eurodollar bonds and Eurodollar certificates of deposit. A Eurodollar obligation is a security denominated in U.S. dollars and originated principally in Europe, giving rise to the term Eurodollar. Such securities are not registered with the SEC and generally may only be sold to U.S. investors after the initial offering and cooling-off periods. The market for Eurodollar securities is dominated by foreign-based investors and the primary trading market for these securities is London. 21 Eurodollar obligations, including Eurodollar bonds and Eurodollar certificates of deposit, are principally obligations of foreign branches of U.S. banks. These instruments represent the loan of funds actually on deposit in the U.S. The Series Company believes that the U.S. bank would be liable in the event that its foreign branch failed to pay on its U.S. dollar denominated obligations. Nevertheless, the assets supporting the liability could be expropriated or otherwise restricted if located outside the U.S. Exchange controls, taxes, or political and economic developments also could affect liquidity or repayment. Due to possibly conflicting laws or regulations, the foreign branch of the U.S. bank could maintain and prevail that the liability is solely its own, thus exposing a Fund to a possible loss. Such U.S. dollar denominated obligations of foreign branches of Federal Deposit Insurance Corporation ("FDIC") member U.S. banks are not covered by the usual $100,000 of FDIC insurance if they are payable only at an office of such a bank located outside the U.S., Puerto Rico, Guam, American Samoa, and the Virgin Islands. Moreover, there may be less publicly available information about foreign issuers whose securities are not registered with the SEC and such foreign issuers may not be subject to the accounting, auditing, and financial reporting standards applicable to issuers registered domestically. In addition, foreign issuers, stock exchanges, and brokers generally are subject to less government regulation. There are, however, no risks of currency fluctuation since the obligations are U.S. dollar denominated. Certain Funds also may purchase and sell Eurodollar futures contracts, which enable purchasers to obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate for borrowings. A Fund might use Eurodollar futures contracts and options thereon to hedge against changes in a foreign prime lending interest rate to which many interest swaps and fixed income securities are linked. MORTGAGE-RELATED SECURITIES Mortgage-related securities are interests in pools of residential or commercial mortgage loans, including mortgage loans made by savings and loan institutions, mortgage bankers, commercial banks and others. Pools of mortgage loans are assembled as securities for sale to investors by various governmental, government-related and private organizations. See "Mortgage Pass-Through Securities." Certain of the Funds may also invest in fixed income securities which are secured with collateral consisting of mortgage-related securities (see "Collateralized Mortgage Obligations"), and in other types of mortgage-related securities. Mortgage Pass-Through Securities Interests in pools of mortgage-related securities differ from other forms of fixed income securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their residential or commercial mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs which may be incurred. Some mortgage-related securities (such as securities issued by GNMA) are described as "modified pass-through." These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment. The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending the effective maturity of the security beyond what was anticipated at the time of purchase. To the extent that unanticipated rates of prepayment on underlying mortgages increase the effective maturity of a mortgage-related security, the volatility of such security can be expected to increase. The principal governmental guarantor of mortgage-related securities are GNMA, Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). GNMA is a wholly owned United States Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the United States Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and 22 mortgage bankers) and backed by pools of mortgages insured by the Federal Housing Administration (the "FHA"), or guaranteed by the Department of Veterans Affairs (the "VA"). Government-related guarantors (i.e., not backed by the full faith and credit of the United States Government) include FNMA and FHLMC. FNMA is a government-sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. FNMA purchases conventional (i.e., not insured or guaranteed by any government agency) residential mortgages from a list of approved seller/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA but are not backed by the full faith and credit of the United States Government. FHLMC was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. It is a government-sponsored corporation formerly owned by the twelve Federal Home Loan Banks and now owned entirely by private stockholders. FHLMC issues Participation Certificates ("PCs") which represent interests in conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the United States Government. Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may, in addition, be the originators and/or servicers of the underlying mortgage loans as well as the guarantors of the mortgage-related securities. Pools created by such non-governmental issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in the former pools. However, timely payment of interest and principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. Such insurance and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets the Series Company's investment quality standards. There can be no assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. Certain Funds may buy mortgage-related securities without insurance or guarantees if, through an examination of the loan experience and practices of the originator/servicers and poolers, VALIC or a Sub-adviser determines that the securities meet the Series Company's quality standards. Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable. No Fund will purchase mortgage-related securities or any other assets which in VALIC's or the Sub-adviser's opinion are illiquid if, as a result, more than 10% of the value of the Fund's net assets will be illiquid (15% in the case of the Growth Fund, Growth & Income Fund and Science & Technology Fund). Mortgage-backed securities that are issued or guaranteed by the U.S. Government, its agencies or instrumentalities, are not subject to the Funds' industry concentration restrictions, set forth below under "Investment Restrictions," by virtue of the exclusion from that test available to all U.S. Government securities. In the case of privately issued mortgage-related securities, the Funds take the position that mortgage-related securities do not represent interests in any particular "industry" or group of industries. The assets underlying such securities may be represented by a portfolio of first lien residential mortgages (including both whole mortgage loans and mortgage participation interests) or portfolios of mortgage pass-through securities issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a mortgage-related security may in turn be insured or guaranteed by the FHA or the Veterans' Administration. In the case of private issue mortgage-related securities whose underlying assets are neither U.S. Government securities nor U.S. Government-insured mortgages, to the extent that real properties securing such assets may be located in the same geographical region, the security may be subject to a greater risk of default than other comparable securities in the event of adverse economic, political or business developments that may affect such region and, ultimately, the ability of residential homeown- 23 ers to make payments of principal and interest on the underlying mortgages. Collateralized Mortgage Obligations (CMOs) A CMO is a hybrid between a mortgage-backed bond and a mortgage pass-through security. Similar to a bond, interest and prepaid principal is paid, in most cases, monthly. CMOs may be collateralized by whole mortgage loans, but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income streams. CMOs are structured in multiple classes, each bearing a different stated maturity. Actual maturity and average life will depend upon the prepayment experience of the collateral. CMOs provide for a modified form of call protection through a de facto breakdown of the underlying pool of mortgages according to how quickly the loans are repaid. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes receive principal only after the first class has been retired. An investor is partially guarded against a sooner than desired return of principal because of the sequential payments. As an example of CMO transaction, a corporation ("issuer") issues multiple series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to purchase mortgages or mortgage pass-through certificates ("Collateral"). The Collateral is pledged to a third party trustee as security for the Bonds. Principal and interest payments from the Collateral are used to pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds all bear current interest. Interest on the Series Z Bond is accrued and added to principal and a like amount is paid as principal on the Series A, B, or C Bond currently being paid off. When the Series A, B, and C Bonds are paid in full, interest and principal on the Series Z Bond begins to be paid currently. With some CMOs, the issuer serves as a conduit to allow loan originators (primarily builders or savings and loan associations) to borrow against their loan portfolios. COMMERCIAL MORTGAGE-BACKED SECURITIES Commercial mortgage-backed securities include securities that reflect an interest in, and are secured by, mortgage loans on commercial real property. The market for commercial mortgage-backed securities developed more recently and in terms of total outstanding principal amount of issues is relatively small compared to the market for residential single-family mortgage-backed securities. Many of the risks of investing in commercial mortgage-backed securities reflect the risks of investing in the real estate securing the underlying mortgage loans. These risks reflect the effects of local and other economic conditions on real estate markets, the ability of tenants to make loan payments, and the ability of a property to attract and retain tenants. Commercial mortgage-backed securities may be less liquid and exhibit greater price volatility than other types of mortgage- or asset-backed securities. OTHER MORTGAGE-RELATED SECURITIES Other mortgage-related securities include securities other than those described above that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property, including mortgage dollar rolls, CMO residuals or stripped mortgage-backed securities ("SMBS"). Other mortgage-related securities may be equity or fixed income securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, partnerships, trusts and special purpose entities of the foregoing. CMO Residuals CMO residuals are mortgage securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing. The cash flow generated by the mortgage assets underlying a series of CMOs is applied first to make required payments of principal and interest on the CMOs and second to pay the related administrative expenses of the issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments. Each payment of such excess cash flow to a holder of the related CMO residual represents income and/or a return of capital. The amount of residual cash flow resulting from a CMO will 24 depend on, among other things, the characteristics of the mortgage assets, the coupon rate of each class of CMO, prevailing interest rates, the amount of administrative expenses and the prepayment experience on the mortgage assets. In particular, the yield to maturity on CMO residuals is extremely sensitive to prepayments on the related underlying mortgage assets, in the same manner as an interest-only ("IO") class of stripped mortgage-backed securities. See "Other Mortgage-Related Securities -- Stripped Mortgage-Backed Securities." In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes in the level of the index upon which interest rate adjustments are based. As described below with respect to stripped mortgage-backed securities, in certain circumstances a Fund may fail to recoup fully its initial investment in a CMO residual. CMO residuals are generally purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers. The CMO residual market has only very recently developed and CMO residuals currently may not have the liquidity of other more established securities trading in other markets. Transactions in CMO residuals are generally completed only after careful review of the characteristics of the securities in question. In addition, CMO residuals may, or pursuant to an exemption therefrom, may not have been registered under the Securities Act of 1933, as amended (the "1933 Act"). CMO residuals, whether or not registered under the 1933 Act, may be subject to certain restrictions on transferability, and may be deemed "illiquid" and subject to a Fund's limitations on investment in illiquid securities. Stripped Mortgage-Backed Securities ("SMBS") SMBS are derivative multi-class mortgage securities. SMBS may be issued by agencies or instrumentalities of the U.S. Government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing. SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of SMBS will have one class receiving some of the interest and most of the principal from the mortgage assets, while the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the "IO" class), while the other class will receive all of the principal (the principal-only or "PO" class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on a Fund's yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Fund may fail to recoup some or all of its initial investment in these securities even if the security is in one of the highest rating categories. Although SMBS are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers, these securities were only recently developed. As a result, established trading markets have not yet developed and, accordingly, these securities may be deemed "illiquid" and subject to a Fund's limitations on investment in illiquid securities. LOAN PARTICIPATIONS Loan Participations are debt obligations of corporations and are usually purchased from major money center banks, selected regional banks, and major foreign banks with branches in the U.S. which are regulated by the Federal Reserve System or appropriate state regulatory authorities. VALIC and the Sub-advisers believe that the credit standards imposed by such banks are comparable to the standards such banks use in connection with loans originated by them and in which they intend to maintain a full interest. The financial institutions offering loan participations do not guarantee principal or interest on the loan participations which they offer. VALIC and the Sub-advisers will not purchase such securities for the Funds unless they believe that the collateral underlying the corporate loans is adequate and the corporation will be able, in a timely fashion, to pay scheduled interest and principal amounts. ADJUSTABLE RATE SECURITIES Each of the Funds may invest in adjustable rate money market securities. Adjustable rate secu- 25 rities (i.e., variable rate and floating rate instruments) are securities that have interest rates that are adjusted periodically, according to a set formula. The maturity of some adjustable rate securities may be shortened under certain special conditions described more fully below. Variable rate instruments are obligations (usually certificates of deposit) that provide for the adjustment of their interest rates on predetermined dates or whenever a specific interest rate changes. A variable rate instrument whose principal amount is scheduled to be paid in 13 months or less is considered to have a maturity equal to the period remaining until the next readjustment of the interest rate. Many variable rate instruments are subject to demand features which entitle the purchaser to resell such securities to the issuer or another designated party, either (1) at any time upon notice of usually 30 days or less, or (2) at specified intervals, not exceeding 13 months, and upon 30 days notice. A variable rate instrument subject to a demand feature is considered to have a maturity equal to the longer of the period remaining until the next readjustment of the interest rate or the period remaining until the principal amount can be recovered through demand. Floating rate instruments (generally corporate notes, bank notes, or Eurodollar certificates of deposit) have interest rate reset provisions similar to those for variable rate instruments and may be subject to demand features like those for variable rate instruments. The maturity of a floating rate instrument is considered to be the period remaining until the principal amount can be recovered through demand. ILLIQUID SECURITIES The Funds will not invest more than 10% (15% in the case of Growth Fund, Growth & Income Fund and Science & Technology Fund) of the value of their assets in securities or other investments that are illiquid or not readily marketable (including repurchase agreements with maturities exceeding seven days). Securities received as a result of a corporate reorganization or similar transaction affecting readily-marketable securities already held in the portfolio of a Fund will not be considered securities or other investments that are not readily marketable. However, the Funds will attempt, in an orderly fashion, to dispose of any securities received under these circumstances, to the extent that such securities are considered not readily marketable, and together with other illiquid securities, exceed 10% of the value of a Fund's net assets. RULE 144A SECURITIES Each Fund may purchase securities which, while privately placed, are eligible for purchase and sale pursuant to Rule 144A under the Securities Act of 1933 (the "1933 Act"). This Rule permits certain qualified institutional buyers, such as the Funds, to trade in privately placed securities even though such securities are not registered under the 1933 Act. The Company, under the supervision of the Board of Directors, will consider whether securities purchased under Rule 144A are illiquid and thus subject to the Funds' restriction on investing more than 10% (15% in the case of the Growth Fund, Growth & Income Fund and Science & Technology Fund) of its assets in illiquid securities. Determination of whether a Rule 144A security is liquid or not is a question of fact. In making this determination the Company will consider the trading markets for the specific security taking into account the unregistered nature of a Rule 144A security. In addition the Company could consider (i) frequency of trades and quotes, (ii) number of dealers and potential purchasers, (iii) dealer undertakings to make a market, and (iv) nature of the security and market place trades (for example, 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 also be monitored by the Company and, if, as a result of changed conditions, it is determined that a Rule 144A security is no longer liquid, the Funds' holding of illiquid securities will be reviewed to determine what, if any, action is required to assume that the Funds do not invest more than 10% of their assets in illiquid securities (15% in the case of the Growth Fund, Growth & Income Fund and Science & Technology Fund). Investing in Rule 144A securities could have the effect of increasing the amount of the Funds' investments in illiquid securities if qualified institutional buyers are unwilling to purchase such securities. Each Fund may invest in Rule 144A securities (in accordance with each Fund's investment restrictions as listed in the prospectus) that have been determined to be liquid by Board approved guidelines. OPTIONS ON SECURITIES AND SECURITIES INDICES Each Fund, other than the Money Market Fund, may write covered call and put options on 26 securities and securities indices. As a matter of operating policy, the Growth & Income Fund will only write covered call options on securities. The International Equities Fund and the International Government Bond Fund may also write covered call and put options on foreign currencies that correlate with the Fund's portfolio of foreign securities. A call option is a contract that gives to the holder the right to buy a specified amount of the underlying security or currency at a fixed or determinable price (called the exercise or "strike" price) upon exercise of the option. A put option is a contract that gives the holder the right to sell a specified amount of the underlying security or currency at a fixed or determinable price upon exercise of the option. To "cover" a call option written, a Fund may, for example, identify and have available for sale the specific portfolio security, group of securities, or foreign currency to which the option relates. To cover a put option written, a Fund may, for example, establish a segregated asset account with its custodian containing cash or liquid assets that, when added to amounts deposited with its broker or futures commission merchant ("FCM") as margin, equals the market value of the instruments underlying the put option written. Each of these Funds may write options on securities and securities indices and the International Equities Fund and the International Government Bond Fund may write options on currencies for the purpose of increasing the Funds' return on such securities or its entire portfolio of securities or to protect the value of the entire portfolio. Such investment strategies will not be used for speculation. If a Fund writes an option which expires unexercised or is closed out by the Fund at a profit, it will retain the premium received for the option, which will increase its gross income. If the price of the underlying security or currency moves adversely to the Fund's position, the option may be exercised and the Fund, as the writer of the option, will be required to sell or purchase the underlying security or currency at a disadvantageous price, which may only be partially offset by the amount of premium received. Options on stock indices are similar to options on stock, except that all settlements are made in cash rather than by delivery of stock, and gains or losses depend on price movements in the stock market generally (or in a particular industry or segment of the market represented by the index) rather than price movements of individual stocks. When a Fund writes an option on a securities index, and the underlying index moves adversely to the Fund's position, the option may be exercised. Upon such exercise, the Fund, as the writer of the option, will be required to pay in cash an amount equal to the difference between the exercise settlement value of the underlying index and the exercise price of the option, multiplied by a specified index "multiplier." Call or put options on a stock index may be written at an exercise or "strike" price which is either below or above the current value of the index. If the exercise price at the time of writing the option is below the current value of the index for a call option or above the current value of the index for a put option the option is considered to be "in the money." In such a case, the Fund will cover such options written by segregating with its custodian or pledging to its commodity broker as collateral cash, U.S. Government or other high-grade, short-term debt obligations equal in value to the amount by which the option written is in the money, times the multiplier, times the number of contracts. Stock indices for which options are currently traded include the S&P 500 Index, Value Line Index, National OTC Index, Major Market Index, Computer Technology Index, Oil Index, NYSE Options Index, Technology Index, Gold/Silver Index, Institutional Index and NYSE Beta Index. The Funds may also use options on such other indices as may now or in the future be available. Each Fund, except the Money Market Fund, may also purchase put or call options on securities and securities indices in order to (i) hedge against anticipated changes in interest rates or stock prices that may adversely affect the prices of securities that the Fund intends to purchase at a later date, (ii) hedge its investments against an anticipated decline in value, or (iii) attempt to reduce the risk of missing a market or industry segment advance. As a matter of operating policy, the Growth & Income Fund will only purchase call options on securities to close out open positions for covered call options it has written. The International Equities Fund and the International Government Bond Fund also may purchase put options on foreign currencies that correlate with the Fund's portfolio securities in order to minimize or hedge against anticipated declines in the exchange rate of the currencies in which the Fund's securities are denominated and 27 may purchase call options on foreign currencies that correlate with its portfolio securities to take advantage of anticipated increases in exchange rates. In the event that the anticipated changes in interest rates, stock prices, or exchange rates occur, the Fund may be able to offset the resulting adverse effect on the Fund, in whole or in part, through the options purchased. The premium paid for a put or call option plus any transaction costs will reduce the benefit, if any, realized by the Fund upon exercise or liquidation of the option, and, unless the price of the underlying security, securities index, or currency changes sufficiently, the option may expire without value to the Fund. To close option positions purchased by the Funds, the Funds may sell put or call options identical to options previously purchased, which could 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 put or call option purchased. Options used by the Funds may be traded on the national securities exchanges or in the over-the-counter market. Only the Capital Conservation Fund, the Government Securities Fund, the International Equities Fund and the International Government Bond Fund may use over-the-counter options. Options traded in the over-the-counter market may not be as actively traded as those on an exchange. Accordingly, it may be more difficult to value such options. In addition, it may be more difficult to enter into closing transactions with respect to options traded over-the-counter. In this regard, the Funds may enter into contracts with the primary dealers with whom they write over-the-counter options. The contracts will provide that each Fund has the absolute right to repurchase an option it writes at any time at a repurchase price which represents the fair market value of such option, as determined in good faith through negotiations between the parties, but which in no event will exceed a price determined pursuant to a formula contained in the contract. Although the specific details of the formula may vary between contracts with different primary dealers, the formula will generally be based on a multiple of the premium received by each Fund for writing the option, plus the amount, if any, of the option's intrinsic value (i.e., the amount the option is "in-the-money"). The formula will also include a factor to account for the difference between the price of the security and the strike price of the option if the option is written "out-of-the-money." Although the specific details of the formula may vary with different primary dealers, each contract will provide a formula to determine the maximum price at which each Fund can repurchase the option at any time. The Funds have established standards of creditworthiness for these primary dealers. WRITING COVERED CALL AND PUT OPTIONS AND PURCHASING CALL AND PUT OPTIONS All of the Funds, except the Money Market Fund, may write exchange-traded covered call and put options on or relating to specific securities in order to earn additional income or, in the case of a call written, to minimize or hedge against anticipated declines in the value of the Fund's securities. As a matter of operating policy, the Growth Fund and the Science & Technology Fund will not write a covered option if, as a result, the aggregate market value of all portfolio securities or currencies covering put or call options exceeds 25% of the market value of that Fund's net assets. The Growth & Income Fund as a matter of operating policy, will only write covered call options on securities. The International Equities Fund and the International Government Bond Fund may also write covered call and put options on foreign currencies that correlate with its portfolio securities in order to earn additional income or in the case of call options written to minimize or hedge against anticipated declines in the exchange rate of the currencies in which the Fund's securities are denominated. To "cover" an option means, for example, to identify and make available for sale the specific portfolio security or foreign currency to which the option relates. Through the writing of a covered call option a Fund receives premium income but obligates itself to sell to the purchaser of such an option the particular security or foreign currency underlying the option at a specified price at any time prior to the expiration of the option period, regardless of the market value of the security or the exchange rate for the foreign currency during this period. Through the writing of a covered put option a Fund receives premium income but obligates itself to purchase a particular security or foreign currency underlying the option at a specified price at any time prior to the expiration of the option period, regardless of market value or exchange rate during the option period. Certain Funds, in accordance with their investment objective(s) and investment programs, may also write exchange-traded covered call and put 28 options on stock indices and may purchase call and put options on stock indices that correlate with the Fund's portfolio securities. These Funds may engage in such transactions for the same purposes as they may engage in such transactions with respect to individual portfolio securities or foreign currencies, that is, to generate additional income or as a hedging technique to minimize anticipated declines in the value of the Fund's portfolio securities or the exchange rate of the securities in which the Fund invested. In economic effect, a stock index call or put option is similar to an option on a particular security, except that the value of the option depends on the weighted value of the group of securities comprising the index, rather than a particular security, and settlements are made in cash rather than by delivery of a particular security. Each Fund, other than the Money Market Fund, may also purchase exchange-traded call and put options with respect to securities and stock indices that correlate with that Fund's particular portfolio securities. As a matter of operating policy, the Growth & Income Fund will only purchase call options on securities to close out open positions for covered call options written by it. The International Equities Fund and the International Government Bond Fund may also purchase call and put options on foreign currencies that correlate with the currencies in which the Fund's securities are denominated. A Fund may purchase put options for defensive purposes in order to protect against an anticipated decline in the value of its portfolio securities or currencies. As the holder of a put option with respect to individual securities or currencies, the Fund has the right to sell the securities or currencies underlying the options and to receive a cash payment at the exercise price at any time during the option period. As the holder of a put option on an index, a Fund has the right to receive, upon exercise of the option, a cash payment equal to a multiple of any excess of the strike price specified by the option over the value of the index. A Fund may purchase call options on individual securities, currencies or stock indices in order to take advantage of anticipated increases in the price of those securities or currencies by purchasing the right to acquire the securities or currencies underlying the option or, with respect to options on indices, to receive income equal to the value of such index over the strike price. As the holder of a call option with respect to individual securities or currencies, a Fund obtains the right to purchase the underlying securities or currencies at the exercise price at any time during the option period. As the holder of a call option on a stock index, a Fund obtains the right to receive, upon exercise of the option, a cash payment equal to the multiple of any excess of the value of the index on the exercise date over the strike price specified in the option. Unlisted options may be used by the Capital Conservation Fund, the Government Securities Fund, the International Equities Fund and the International Government Bond Fund. Such options are not traded on an exchange and may not be as actively traded as listed securities, making the valuation of these securities more difficult. In addition, an unlisted option entails a risk not found in connection with listed options -- that the party on the other side of the option transaction will default. This may make it impossible to close out an unlisted option position in some cases, and profits may be lost thereby. Such unlisted, over-the-counter options, unless otherwise indicated, will be considered illiquid securities. The Funds will engage in such transactions only with firms of sufficient credit to minimize these risks. In instances in which a Fund has entered into agreements with primary dealers with respect to the unlisted, over-the-counter options it has written, and such agreements would enable the Fund to have an absolute right to repurchase, at a pre-established formula price, the over-the-counter options written by it, the Fund will treat as illiquid only the amount equal to the formula price described above less the amount by which the option is "in-the-money." Although these investment practices will be used to generate additional income and to attempt to reduce the effect of any adverse price movement in the securities or currencies subject to the option, they do involve certain risks that are different in some respects from investment risks associated with similar funds which do not engage in such activities. These risks include the following: writing covered call options -- the inability to effect closing transactions at favorable prices and the inability to participate in the appreciation of the underlying securities or currencies above the exercise price; writing covered put options -- the inability to effect closing transactions at favorable prices and the obligation to purchase the specified securities or currencies or to make a cash settlement on the stock index at prices which may not reflect current market values or exchange rates; and purchasing put and call op- 29 tions -- possible loss of the entire premium paid. In addition, the effectiveness of hedging through the purchase or sale (writing) of stock index options will depend upon the extent to which price movements in the portion of a Fund's portfolio being hedged correlate with price movements in the selected stock index. Perfect correlation may not be possible because the securities held or to be acquired by a Fund may not exactly match the composition of the stock index on which options are purchased or written. If the forecasts of VALIC regarding movements in securities prices, currencies or interest rates are incorrect, a Fund's investment results may have been better without the hedge. FINANCIAL FUTURES CONTRACTS Each Fund, except the Money Market Fund, in accordance with its investment objective(s), investment program, policies, and restrictions may purchase and sell exchange-traded financial futures contracts as a hedge to protect against anticipated changes in prevailing interest rates, overall stock prices or currency rates, or to efficiently and in a less costly manner implement either increases or decreases in exposure to the equity or bond markets. The Funds may also write covered call options and purchase put and call options on financial futures contracts for the same purposes or to earn additional income. The Growth Fund, the Growth & Income Fund and the Science & Technology Fund may also write covered put options on stock index futures contracts. Only the International Equities Fund and the International Government Bond Fund may utilize currency futures contracts and both listed and unlisted financial futures contracts and options thereon. Financial futures contracts consist of interest rate futures contracts, stock index futures contracts, and currency futures contracts. An interest rate futures contract is a contract to buy or sell specified debt securities at a future time for a fixed price. A stock index futures contract is similar in economic effect, except that rather than being based on specific securities, it is based on a specified index of stocks and not the stocks themselves. A currency futures contract is a contract to buy or sell a specific foreign currency at a future time for a fixed price. An interest rate futures contract binds the seller to deliver to the purchaser on a specified future date a specified quantity of one of several listed financial instruments, against payment of a settlement price specified in the contract. A public market currently exists for futures contracts covering a number of indexes as well as financial instruments and foreign currencies, including: U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S. Treasury bills; 90-day commercial paper; bank certificates of deposit; Eurodollar certificates of deposit; the Australian dollar; the Canadian dollar; the British pound; the German mark; the Japanese yen; the French franc; the Swiss franc; the Mexican peso; and certain multinational currencies, such as the European Currency Unit ("ECU"). It is expected that other futures contracts will be developed and traded in the future. Stock index futures contracts bind purchaser and seller to deliver, at a future date specified in the contract, a cash amount equal to a multiple of the difference between the value of a specified stock index on that date and the settlement price specified by the contract. That is, the seller of the futures contract must pay and the purchaser would receive a multiple of any excess of the value of the index over the settlement price, and conversely, the purchaser must pay and the seller would receive a multiple of any excess of the settlement price over the value of the index. A public market currently exists for stock index futures contracts based on the S&P 500 Index, the New York Stock Exchange Composite Index, the Value Line Stock Index, and the Major Market Index. It is expected that financial instruments related to broad-based indices, in addition to those for which futures contracts are currently traded, will in the future be the subject of publicly-traded futures contracts, and the Funds may use any of these, which are appropriate, in its hedging strategies. A financial futures contract is an agreement to buy or sell a security (or deliver a final cash settlement price, in the case of a contract relating to an index or otherwise not calling for physical delivery of a specified security) for a set price in the future. Exchange-traded futures contracts are designated by boards of trade which have been designated "contracts markets" by the Commodity Futures Trading Commission ("CFTC"). Positions taken in the futures markets are not normally held until delivery or cash settlement is required, but instead are liquidated through offsetting transactions which may result in a gain or a loss. While futures positions taken by a Fund will 30 usually be liquidated in this manner, the Fund may instead make or take delivery of underlying securities whenever it appears economically advantageous to the Fund to do so. A clearing organization associated with the relevant exchange assumes responsibility for closing out transactions and guarantees that, as between the clearing members of an exchange, the sale and purchase obligations will be performed with regard to all positions that remain open at the termination of the contract. Unlisted financial futures contracts, which may be purchased or sold only by the International Equities Fund and the International Government Bond Fund, like unlisted options, are not traded on an exchange and, generally, are not as actively traded as listed futures contracts or listed securities. Such financial futures contracts generally do not have the following elements: standardized contract terms, margin requirements relating to price movements, clearing organizations that guarantee counter-party performance, open and competitive trading in centralized markets, and public price dissemination. These elements in listed instruments serve to facilitate their trading and accurate valuation. As a result, the accurate valuation of unlisted financial futures contracts may be difficult. In addition, it may be difficult or even impossible, in some cases, to close out an unlisted financial futures contract, which may, in turn, result in significant losses to the Fund. Such unlisted financial futures contracts will be considered by the Fund to be illiquid securities and together with other illiquid securities will be limited to no more than 10% (15% in the case of the Growth Fund, the Growth & Income Fund and the Science & Technology Fund) of the value of such Fund's total assets. In making such determination, the value of unlisted financial futures contracts will be based upon the "face amount" of such contracts. The International Equities Fund and the International Government Bond Fund will engage in such transactions only with securities firms having sufficient credit or other resources to minimize certain of these risks. When financial futures contracts are entered into by a Fund, either as the purchaser or the seller of such contracts, the Fund is required to deposit with its custodian in a segregated account in the name of the FCM an initial margin of cash or U.S. Treasury bills equalling as much as 5% to 10% or more of the contract settlement price. The nature of initial margin requirements in futures transactions differs from traditional margin payments made in securities transactions in that initial margins for financial futures contracts do not involve the borrowing of funds by the customer to finance the transaction. Instead, a customer's initial margin on a financial futures contract represents a good faith deposit securing the customer's contractual obligations under the financial futures contract. The initial margin deposit is returned, assuming these obligations have been met, when the financial futures contract is terminated. In addition, subsequent payments to and from the FCM, called "variation margin," are made on a daily basis as the price of the underlying security, stock index, or currency fluctuates, reflecting the change in value in the long (purchase) or short (sale) positions in the financial futures contract, a process known as "marking to market." A Fund, as an internal operating policy may not hold financial futures contracts in an amount greater than 33% of the Fund's net assets. A Fund may not adhere to this internal operating policy in circumstances where the Fund is required to invest a large cash infusion. In this circumstance the Fund's total invested position, including the security value of the financial futures contracts may not exceed 100% of the Fund's net assets. Financial futures contracts generally are not entered into to acquire the underlying asset and generally are not held to term. Prior to the contract settlement date, the Funds will normally close all futures positions by entering into an offsetting transaction which operates to cancel the position held, and which usually results in a profit or loss. OPTIONS ON FINANCIAL FUTURES CONTRACTS For bona fide hedging purposes, each Fund, except the Money Market Fund, may also purchase call and put options on financial futures contracts and write call options on financial futures contracts of the type which the particular Fund is authorized to enter into. Except for options on currency futures contracts used by the International Equities Fund and the International Government Bond Fund, options on financial future contracts used by the Funds are traded on exchanges that are licensed and regulated by the CFTC. A call option on a financial futures contract gives the purchaser the right in return for the premium paid, to purchase a financial futures contract (assume a "long" position) at a specified exercise price at any time before the option expires. A put option gives the purchaser the 31 right, in return for the premium paid, to sell a financial futures contract (assume a "short" position), for a specified exercise price, at any time before the option expires. Unlike entering into financial futures contracts, purchasing options on financial futures contracts allows a Fund to decline to exercise the option, thereby avoiding any loss beyond foregoing the purchase price (or "premium") paid for the options. Therefore, the purchase of options on financial futures contracts may be a preferable hedging strategy when a Fund desires maximum flexibility. Whether, in order to achieve a particular objective, a Fund enters into a financial futures contract, on the one hand, or an option contract, on the other, will depend on all the circumstances, including the relative costs, liquidity, availability and capital requirements of such financial futures and options contracts. Also, the Funds will consider the relative risks involved, which may be quite different. These factors, among others, will be considered in light of market conditions and the particular objective to be achieved. CERTAIN ADDITIONAL RISKS OF OPTIONS AND FINANCIAL FUTURES CONTRACTS In addition to the risks described in the Company's Prospectus, the use of options and financial futures contracts may entail the following risks. First, although such instruments when used by the Funds are intended to correlate with the Funds' portfolio securities or currencies, in many cases the options or financial futures contracts used may be based on securities, currencies, or stock indices the components of which are not identical to the portfolio securities owned or intended to be acquired by the Funds. Second, due to supply and demand imbalances and other market factors, the price movements of financial futures contracts, options thereon, currency options, and stock index options may not necessarily correspond exactly to the price movements of the securities, currencies, or stock indices on which such instruments are based. Accordingly, there is a risk that a Fund's transactions in those instruments will not in fact offset the impact on the Fund of adverse market developments in the manner or to the extent contemplated or that such transactions will result in losses to the Fund which are not offset by gains with respect to corresponding portfolio securities owned or to be purchased by that Fund. To some extent, these risks can be minimized by careful management of hedging activities. For example, where price movements in a financial futures or option contract are expected to be less volatile than price movements in the related portfolio securities owned or intended to be acquired by a Fund, it may, in order to compensate for this difference, use an amount of financial futures or option contracts which is greater than the amount of such portfolio securities. Similarly, where the price movement of a financial futures or option contract is anticipated to be more volatile, a Fund may use an amount of such contracts which is smaller than the amount of portfolio securities to which such contracts relate. The risk that the hedging technique used will not actually or entirely offset an adverse change in a Fund's portfolio securities is particularly relevant to financial futures contracts and options written on stock indices and currencies. A Fund, in entering into a futures purchase contract, potentially could lose any or all of the contract's settlement price. In entering into a futures sale contract, a Fund could potentially lose a sum equal to the excess of the contract's value (marked to market daily) over the contract's settlement price. In writing options on stock indices or currencies a Fund could potentially lose a sum equal to the excess of the value of the index or currency (marked to market daily) over the exercise price. In addition, because financial futures contracts require delivery at a future date of either a specified security or currency, or an amount of cash equal to a multiple of the difference between the value of a specified stock index on that date and the settlement price, an algebraic relationship exists between any price movement in the underlying security or currency or index and the potential cost of settlement to a Fund. A small increase or decrease in the value of the underlying security or currency or stock index can, therefore, result in a much greater increase or decrease in the cost to the Fund. Stock index call options written also pose another risk as hedging tools. Because exercises of stock index options are settled in cash, there is an inherent timing risk that the value of a Fund's portfolio securities "covering" a stock index call option written by it may decline during the time between exercise of the option by the option holder and notice to the Fund of such exercise (usually one day or more) thereby requiring the Fund to use additional assets to settle the transaction. This risk 32 is not present in the case of covered call options on individual securities, which are settled by delivery of the actual securities. There are also special risks in using currency options including the following: (i) settlement of such options must occur in the country issuing the currency in conformity with foreign regulations for such delivery, including the possible imposition of additional costs and taxes, (ii) no systematic reporting of "last sale" information for foreign currencies, and (iii) the need to use "odd lot" transactions for underlying currencies at prices less favorable than those for "round lot" transactions. Although the Funds intend to establish positions in these instruments only when there appears to be an active market, there is no assurance that a liquid market for such instruments will exist when a Fund seeks to "close out" (i.e. terminate) a particular financial futures contract or option position. This is particularly relevant for over-the-counter options and financial futures contracts, as previously noted. Trading in such instruments could be interrupted, for example, because of a lack of either buyers or sellers. In addition, the futures and options exchanges may suspend trading after the price of such instruments has risen or fallen more than the maximum amount specified by the exchange. Exercise of options could also be restricted or delayed because of regulatory restrictions or other factors. A Fund may be able, by adjusting investment strategy in the cash or other contract markets, to offset to some extent any adverse effects of being unable to liquidate a hedge position. Nevertheless, in some cases, a Fund may experience losses as a result of such inability. Therefore it may have to liquidate other more advantageous investments to meet its cash needs. In addition, FCMs or brokers in certain circumstances will have access to a Fund's assets posted as margin in connection with these transactions as permitted under the 1940 Act. See "Other Information Custody of Assets" in this Statement of Additional Information. The Funds will use only FCMs or brokers in whose reliability and financial soundness they have full confidence and have adopted certain other procedures and limitations to reduce the risk of loss with respect to any assets which brokers hold or to which they may have access. Nevertheless, in the event of a broker's insolvency or bankruptcy, it is possible that a Fund could experience a delay or incur costs in recovering such assets or might recover less than the full amount due. Also the value of such assets could decline by the time a Fund could effect such recovery. The success of a Fund in using hedging techniques depends, among other things, on VALIC's ability to predict the direction and volatility of price movements in both the futures and options markets as well as the securities markets and on VALIC's ability to select the proper type, time, and duration of hedges. There can be no assurance that these techniques will produce their intended results. In any event, VALIC will use financial future contracts, options thereon, currency options and stock index options only when it believes the overall effect is to reduce, rather than increase, the risks to which a Fund is exposed. Hedging transactions also, of course, may be more, rather than less, favorable to a Fund than originally anticipated. LIMITATIONS No Fund will enter into any financial futures contract or purchase any option thereon if immediately thereafter the total amount of its assets required to be on deposit as initial margin to secure its obligations under financial futures contracts, plus the amount of premiums paid by it for outstanding options to purchase futures contracts, exceeds 5% of the market value of its total assets. (Net assets in the case of Growth & Income Fund); 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. This is a fundamental policy of each Fund that is permitted to use options and financial futures contracts. In addition, each Fund has an operating policy which provides that it will not enter into financial futures contracts or write put or call options with respect to financial futures contracts unless such transactions are either "covered" or subject to segregation requirements considered appropriate by the SEC staff. Further, each Fund has an operating policy which provides that it will not enter into custodial arrangements with respect to initial or variation margin deposits or marked-to-market amounts unless the custody of such initial and variation margin deposits and marked-to-market amounts are in compliance with current SEC staff interpretive positions or no-action letters or rules adopted by the SEC. 33 MONEY MARKET SECURITIES OF FOREIGN ISSUERS Foreign money market instruments utilized by the Funds will be limited to: (i) obligations of, or guaranteed by, a foreign government, its agencies or instrumentalities; (ii) certificates of deposit, bankers' acceptances, short-term notes, negotiable time deposits and other obligations of the ten largest banks in each foreign country, measured in terms of net assets; and (iii) other short-term unsecured corporate obligations (usually 1 to 270 day commercial paper) of foreign companies. For temporary purposes or in light of adverse foreign political or economic conditions, the Funds may invest in short- term high quality foreign money market securities without limitation. 34 INVESTMENT ADVISER VALIC serves as the investment adviser to Asset Allocation Fund, Money Market Fund, Capital Conservation Fund, Government Securities Fund, International Equities Fund and Social Awareness Fund pursuant to an Investment Advisory Agreement dated September 30, 1987, approved by shareholders at a meeting held on September 7, 1990. This Investment Advisory Agreement was also made applicable to the International Government Bond Fund effective October 1, 1991. The Investment Advisory Agreement was approved by the shareholders of the International Government Bond Fund on September 15, 1992. VALIC also serves as investment adviser to the MidCap Index Fund, the Stock Index Fund, the Small Cap Index Fund pursuant to an Investment Advisory Agreement effective May 1, 1992 that was approved by shareholders of the MidCap Index Fund and Stock Index Fund on April 28, 1992 and approved by shareholders of the Small Cap Index Fund on September 15, 1992. This Investment Advisory Agreement was also made applicable to the Growth Fund, the Growth & Income Fund and the Science & Technology Fund effective May 1, 1994. Prior to May 1, 1992, VALIC served as investment adviser to the MidCap Index Fund and Stock Index Fund pursuant to the Investment Advisory Agreement dated September 30, 1987. VALIC is a stock life insurance company organized on May 1, 1969 under the Texas Insurance Code as a successor to The Variable Annuity Life Insurance Company of America, a District of Columbia insurance company organized in 1955. VALIC's sole business consists of offering fixed and variable (and combinations thereof) retirement annuity contracts. VALIC is an indirect wholly-owned subsidiary of American General Corporation, Houston, Texas. Members of the American General Corporation group of companies operate in each of the 50 states, the District of Columbia, and Canada and collectively engage in substantially all forms of financial services, with activities heavily weighted toward insurance. American General Corporation was incorporated as a Texas business corporation on February 26, 1980 as the successor to American General Life Insurance Company (organized in 1926) as the result of a corporate reorganization completed on July 1, 1980. Pursuant to the Investment Advisory Agreements, the Company retains VALIC to manage the investment of the assets of each Fund, maintain a trading desk, and place orders for the purchase and sale of portfolio securities. As investment adviser, VALIC obtains and evaluates as appropriate economic, statistical, and financial information in order to formulate and implement investment programs in furtherance of each Fund's investment objective(s) and investment program. Pursuant to the Investment Advisory Agreements, VALIC provides other services including furnishing the services of the President and such other executives and clerical personnel as the Company requires to conduct its day-to-day operations, to prepare the various reports and statements required by law, and to conduct any other recurring or nonrecurring activity which the Company may need to continue operations. The Investment Advisory Agreement provides that the Company pay all expenses not specifically assumed by VALIC under the Agreements. Examples of the expenses paid by the Company include transfer agency fees, custodial fees, the fees of outside legal and auditing firms, the costs of reports to shareholders, expenses of servicing shareholder accounts (e.g., daily calculation of the net asset value). The Series Company allocates advisory fees, SEC filing fees, interest expenses and state filing fees, if any, to the Fund that incurs such charges and allocates all other expenses among the Funds based on the net assets of each Fund in relation to the net assets of the Series Company. The Investment Advisory Agreements require that VALIC's advisory fee be reduced by any commissions, tender and exchange offer solicitation fees and other fees, or similar payments (less any direct expenses incurred) received by VALIC or its affiliates in connection with the purchase and sale of portfolio investments of the Funds. In this regard, the Investment Advisory Agreements require VALIC to use its best efforts to recapture tender and exchange solicitation offer fees for each Fund's benefits, and to advise the Company's Board of Directors of any other fees, or similar payments that it (or any of its affiliates) may receive in connection with each Fund's portfolio transactions or of other arrangements that may benefit any of the Funds or the Company. The Company, by action of its Board of Directors determined to transfer the function of providing accounting services from the Company's custodian State Street Bank and Trust Company to VALIC. This transfer was effective October 31, 1996. Pursu- 35 ant to this determination the Company entered into an Accounting Services Agreement with VALIC ("Agreement"). The Agreement provides that the Company will pay to VALIC an annual fee payable monthly based on average daily net assets for providing the accounting services. For the fiscal year ended, May 31, 1998, the Company paid VALIC $855,162 for accounting services provided by VALIC. For the fiscal year ended May 31, 1996, the investment advisory fees paid by the Company for the Stock Index Fund, the MidCap Index Fund, the Small Cap Index Fund, the International Equities Fund, the Growth Fund, the Growth & Income Fund, the Science & Technology Fund, the Social Awareness Fund, the Asset Allocation Fund, the Capital Conservation Fund, the Government Securities Fund, the International Government Bond Fund, and the Money Market Fund were $4,242,848, $1,666,107, $523,833, $715,452, $1,871,756, $557,628, $3,228,500, $333,783, $939,313, $352,058, $340,148, $573,962, and $421,853, respectively. For the fiscal year ended May 31, 1997, the investment advisory fees paid by the Company for the Stock Index Fund, the MidCap Index Fund, the Small Cap Index Fund, the International Equities Fund, the Growth Fund, the Growth & Income Fund, the Science & Technology Fund, the Social Awareness Fund, the Asset Allocation Fund, the Capital Conservation Fund, the Government Securities Fund, the International Government Bond Fund, and the Money Market Fund were $5,543,535, $1,880,085, $622,719, $668,871, $4,704,380, $1,211,524, $5,973,280, $525,440, $900,822, $347,154, $417,356, $833,117, and $572,063, respectively. For the fiscal year ended May 31, 1998, the investment advisory fees paid by the Company for the Stock Index Fund, the MidCap Index Fund, the Small Cap Index Fund, the International Equities Fund, the Growth Fund, the Growth & Income Fund, the Science & Technology Fund, the Social Awareness Fund, the Asset Allocation Fund, the Capital Conservation Fund, the Government Securities Fund, the International Government Bond Fund, and the Money Market Fund were $7,946,046, $2,313,256, $798,980, $582,798, $7,593,303, $1,907,885, $8,602,906, $1,204,327, $943,269, $335,861, $436,775, $846,176, and $752,732, respectively. The Investment Advisory Agreements may be continued with respect to any Fund if specifically approved at least annually by (a)(i) the Company's Board of Directors or (ii) a majority of that Fund's outstanding voting securities (as defined by the 1940 Act), and (b) the affirmative vote of a majority of the directors who are not parties to the agreement or "interested persons" of any such party (as defined by the 1940 Act) by votes cast in person at a meeting called for this purpose. The Investment Advisory Agreements also provide that they shall terminate automatically if assigned. The Investment Advisory Agreements may be terminated as to any Fund at any time by the Company's Board of Directors, by vote of a majority of the Fund's outstanding voting securities, or by VALIC, on not more than 60 days' written notice, nor less than 30 days' written notice, or upon such shorter notice as may be mutually agreed upon, without the payment of any penalty. Additionally either Investment Advisory Agreement that VALIC shall not be liable to the Company, or any shareholder in the Company, for any act or omission in rendering services under the Agreement, or for any losses sustained in the purchase, holding, or sale of any portfolio security, so long as there has been no willful misfeasance, bad faith, negligence, or reckless disregard of obligations or duties on the part of VALIC. 36 INVESTMENT SUB-ADVISERS Pursuant to an Investment Sub-Advisory Agreement which was approved by shareholders of the Stock Index Fund and the MidCap Index Fund on April 28, 1992 and by shareholders of the Small Cap Index Fund on September 15, 1992, VALIC has engaged Bankers Trust Company ("Bankers Trust") to provide investment Sub-Advisory services for the Stock Index Fund, the MidCap Index Fund and the Small Cap Index Fund. T. Rowe Price Associates, Inc. ("T. Rowe Price") provides Sub-Advisory services for the Growth Fund and the Science & Technology Fund pursuant to a Sub-Advisory Agreement. Bankers Trust and T. Rowe Price (collectively the "Sub-Advisers") will be subject to the control, supervision and direction of VALIC, which will retain responsibility for the overall management of the Stock Index Fund, the MidCap Index Fund, the Small Cap Index Fund, the Growth Fund and the Science & Technology Fund, respectively (collectively the "Sub-Advised Funds"). In addition to acting as Sub-adviser to the MidCap Index Fund, the Stock Index Fund and Small Cap Index Fund as of September 30, 1995, Bankers Trust and Bankers Trust Australia collectively are the money managers to the following registered investment companies: Accessor Funds, Inc. Short Intermediate Fixed Income Portfolio; Asset Management Portfolio; Asset Management Portfolio II; Asset Management Portfolio III; The Bank Fiduciary Fund -- Equity Portfolio and Fixed Income Portfolio; Capital Appreciation Portfolio; Cash Management Portfolio; Equity 500 Index Portfolio; Small Cap Index Portfolio; EAFE Equity Index Portfolio; U.S. Bond Index Portfolio; Retirement Plus Portfolio; AARP U.S. Stock Index Fund; USAA S&P100 Index Fund; AAS&P 100 Index Fund; Liquid Asset Series and Emerging Market Series; Global High Yield Portfolio; Hercules Latin American Value Fund; International Equity Portfolio; Intermediate Tax Free Portfolio; Latin American Equity Portfolio; Liquid Assets Portfolio; NY Tax Free Money Portfolio; Pacific Basin Equity Portfolio; Pacific Select Fund -- Equity Index Series; Short Intermediate Government Securities Portfolio; Small Cap Portfolio; Tax Free Money Portfolio and Treasury Money Portfolio and Utility Portfolio. In addition to acting as Sub-adviser to the Growth Fund and the Science & Technology Fund, T. Rowe Price manages the following funds with which it is affiliated: T. Rowe Price Growth Stock Fund, Inc.; T. Rowe Price New Horizons Fund, Inc.; T. Rowe Price New Era Fund, Inc.; T. Rowe Price New Income Fund, Inc.; T. Rowe Price Growth & Income Fund, Inc.; T. Rowe Price Prime Reserve Fund, Inc.; T. Rowe Price Tax-Free Income Fund, Inc.; T. Rowe Price Tax-Exempt Money Fund, Inc.; T. Rowe Price Short-Term Bond Fund, Inc.; T. Rowe Price Tax-Free Insured Intermediate Bond Fund, Inc.; T. Rowe Price Tax-Free Short-Intermediate, Inc.; T. Rowe Price High Yield Fund, Inc.; T. Rowe Price Tax-Free High Yield Fund, Inc.; T. Rowe Price GNMA Fund; T. Rowe Price Equity Income Fund; T. Rowe Price New America Growth Fund; T. Rowe Price Capital Appreciation Fund; T. Rowe Price Science & Technology Fund, Inc.; T. Rowe Price Small-Cap Value Fund, Inc.; T. Rowe Price U.S. Treasury Funds, Inc. (which includes U.S. Treasury Money Fund, U.S. Treasury Intermediate Fund and U.S. Treasury Long-Term Fund); T. Rowe Price State Tax-Free Income Trust (which includes Maryland Tax-Free Bond Fund, New York Tax-Free Bond Fund, New York Tax-Free Money Fund, Virginia Short-Term Tax-Free Bond Fund, Virginia Tax-Free Bond Fund, New Jersey Tax-Free Bond Fund, Georgia Tax-Free Bond Fund, Florida Insured Intermediate Tax-Free Fund, and Maryland Short-Term Tax-Free Bond Fund); T. Rowe Price California Tax-Free Income Trust (which includes California Tax-Free Bond Fund and California Tax-Free Money Fund); T. Rowe Price Index Trust, Inc. (which includes the T. Rowe Price Equity Index 500 Fund, T. Rowe Price Extended Equity Market Index Fund and T. Rowe Price Total Equity Market Index Fund); T. Rowe Price Spectrum Fund, Inc. (which includes the Spectrum Growth Fund, Spectrum Income Fund and Spectrum International Fund); T. Rowe Price Short Term U.S. Government Fund, Inc. (formerly T. Rowe Price Adjustable Rate U.S. Government Fund, Inc.); T. Rowe Price Balanced Fund, Inc.; T. Rowe Price Mid-Cap Value Fund, Inc.; T. Rowe Price Small-Cap Stock Fund, Inc. (formerly known as T. Rowe Price OTC Fund, Inc.), T. Rowe Price Blue Chip Growth Fund, Inc., T. Rowe Price Dividend Growth Fund, Inc., T. Rowe Price Capital Opportunity Fund, Inc., T. Rowe Price Financial Services Fund, Inc., T. Rowe Price Health Sciences Fund, Inc., T. Rowe Price Mid-Cap Growth Fund, Inc., T. Rowe Price Value Fund, Inc., T. Rowe Price 37 Corporate Income Fund, Inc., T. Rowe Price Summit Funds, Inc. (which includes T. Rowe Price Summit Cash Reserves Fund, T. Rowe Price Summit Limited-Term Bond Fund and Summit T. Rowe Price GNMA Fund), T. Rowe Price Summit Municipal Funds, Inc. (which includes T. Rowe Price Summit Municipal Money Market Fund, T. Rowe Price Summit Municipal Intermediate Fund, and T. Rowe Price Summit Municipal Income Fund), Reserve Investment Funds, Inc. (which includes Government Reserve Investment Fund and Reserve Investment Fund), T. Rowe Price Diversified Small-Cap Growth Fund, Inc., T. Rowe Price Media & Telecommunications Fund, Inc., T. Rowe Price Real Estate Fund, Inc., and T. Rowe Price Tax-Efficient Balanced Fund, Inc., T. Rowe Price Equity Series, Inc. (which includes T. Rowe Price Equity Income Portfolio, T. Rowe Price New America Growth Portfolio, T. Rowe Price Mid-Cap Growth Portfolio, and T. Rowe Price Personal Strategy Balanced Portfolio), T. Rowe Price Fixed Income Series, Inc. (which includes T. Rowe Price Limited-Term Bond Portfolio and T. Rowe Price Prime Reserve Portfolio), T. Rowe Price International Series, Inc. (which includes T. Rowe Price International Stock Portfolio); T. Rowe Price Personal Strategy Funds, Inc. (which includes T. Rowe Price Personal Strategy Income Fund, T. Rowe Price Strategy Balanced Fund, and Personal Strategy Growth Fund) and Institutional Equity Funds, Inc. (which includes Mid-Cap Equity Growth Fund). In addition, an affiliate of T. Rowe Price, Rowe Price-Fleming International, Inc., acts as investment adviser to the T. Rowe Price International Funds, Inc. (which includes the T. Rowe Price International Stock Fund, T. Rowe Price International Bond Fund, T. Rowe Price International Discovery Fund, T. Rowe Price Emerging Markets Stock Fund, T. Rowe Price Emerging Markets Bond Fund, T. Rowe Price European Stock Fund, T. Rowe Price New Asia Fund, T. Rowe Price Global Bond Fund, formerly T. Rowe Price Global Government Bond Fund, T. Rowe Price Japan Fund; T. Rowe Price Global Stock Fund, and T. Rowe Price Latin America Fund); and the Institutional International Funds, Inc. (which includes the Foreign Equity Fund). Pursuant to the Investment Sub-Advisory Agreements and subject to VALIC's control, supervision and direction, the Sub-Advisers will manage the investment and reinvestment of the assets of the Sub-Advised Funds, including the evaluation of pertinent economic, statistical, financial and other data, and the determination of industries and companies to be represented in the Sub-Advised Funds. Further, the Sub-Advisers will maintain a trading desk and place orders for the purchase and sale of portfolio investments for the Sub-Advised Funds, accounts with brokers and dealers selected by the Sub-Advisers, or arrange for any other entity to provide a trading desk and to place orders with brokers and dealers selected by the Sub-Advisers and VALIC. The Investment Sub-Advisory Agreements provide that the Sub-Advisers will bear the expense of discharging their responsibilities. VALIC shall, from the compensation VALIC receives from the Company for acting as investment adviser, pay to BTC, for the services rendered and expenses paid by BTC, a monthly fee computed at the annual rate of 0.03% on the first $300 million and 0.02% on assets over $300 million for the MidCap Index Fund, 0.02% on the first $2 billion and 0.01% on assets over $2 billion for the Stock Index Fund and 0.03% on the first $150 million and 0.02% on assets over $150 million for the Small Cap Index Fund. VALIC shall, from the compensation VALIC receives from the Company for acting as investment adviser, pay to T. Rowe Price, for the services rendered and expenses paid by T. Rowe Price, a monthly fee computed at the annual rate of 0.50% on the first $500 million and 0.45% on assets over $500 million for the Growth Fund and 0.60% on the first $500 million and 0.55% on assets over $500 million for the Science & Technology Fund. Notwithstanding the above provision, VALIC is required to pay a minimum annual sub-advisory fee of $50,000 to BTC for the Small Cap Index Fund. There are no minimum sub-advisory fees for the Stock Index Fund, MidCap Index Fund, the Growth Fund, or the Science & Technology Fund. The Investment Sub-Advisory Agreements require that each Sub-Adviser promptly reduce its monthly fee by the amount of any commission, tender and exchange offer solicitation fees, other fees or similar payments received by the Sub-Adviser, or any affiliated person of the Sub-Adviser, in connection with Sub-Advised Fund portfolio transactions. Such "commissions" or "other fees" exclude those charged by brokers or dealers affiliated with a Sub-Adviser, as referred to below. Such "tender and exchange offer solicitation fees" ex- 38 clude those received by a Sub-Adviser acting in the capacity of manager for any such offer. In this regard, the Sub-Advisory Agreements require the Sub-Advisers to use their best efforts to obtain tender and exchange solicitation offer fees for each Fund's benefit, and to advise VALIC of any other fees or similar payments that they (or any of their affiliates) may receive in connection with any Fund's portfolio transactions or of other arrangements that may benefit any of the Funds. The Investment Sub-Advisory Agreements may be continued with respect to any of the Funds if approved at least annually by the vote of the Company's Board of Directors who are not parties to the Investment Sub-Advisory Agreements or interested persons of any such parties, cast in person at a meeting called for the purpose of voting on such approval and by a vote of a majority of the Company's Board of Directors or a majority of the relevant Fund's outstanding voting securities. The Investment Sub-Advisory Agreements will automatically terminate in the event of assignment or in the event of termination of the Investment Advisory Agreement between VALIC and the Company as it relates to the relevant Sub-Advised Fund. The Investment Sub-Advisory Agreements may be terminated at any time by VALIC, the relevant Sub-Adviser, the Company's Board of Directors, or by vote of a majority of the outstanding voting securities of the relevant Sub-Advised Fund, on not more than 60 days' nor less than 30 days' written notice to the other entities, or upon such shorter notice as may be mutually agreed upon. Such termination shall be without the payment of any penalty. The Investment Sub-Advisory Agreements provide that the Sub-Advisers shall not be liable to VALIC, the Company or to any shareholder of the Company for any act or omission in rendering services under the Investment Sub-Advisory Agreements or for any losses sustained in the purchase, holding or sale of any portfolio security, so long as there has been no willful misfeasance, bad faith, negligence or reckless disregard of obligations or duties on the part of the Sub-Advisers. PORTFOLIO TRANSACTIONS AND BROKERAGE As investment adviser to the Company, VALIC has responsibility for placing (and deciding when to place) orders for the purchase and sale of investments for the portfolio of each Fund, selecting brokers or dealers to handle these transactions, and negotiating commissions on these transactions. VALIC utilizes the assistance of Sub-Advisers in selecting brokers or dealers to handle transactions for the Stock Index Fund, the MidCap Index Fund, the Small Cap Index Fund, the Growth Fund, the Growth & Income Fund and the Science & Technology Fund. The Sub-Advisers may employ affiliated brokers or, in the case of T. Rowe Price, indirectly related brokers for portfolio transactions under circumstances described in the Prospectus under the heading "Investment Management." Virtually all of the over-the-counter transactions by the Asset Allocation Fund, the Money Market Fund, the Capital Conservation Fund, the Government Securities Fund, the International Government Bond Fund and the Growth & Income Fund are principal transactions with issuers and dealers at net prices which entail no brokerage commissions. The MidCap Index Fund, the Stock Index Fund, the International Equities Fund, the Small Cap Index Fund, and the Social Awareness Fund, each purchase and sell most of their portfolio securities on a national securities exchange on an agency basis. The Growth Fund and the Science & Technology Fund engage in over-the-counter transactions with principals and transactions with national securities exchanges on an agency basis. The Company normally enters into principal transactions directly with the issuer or the market-maker. When the Company purchases or sells securities or financial futures contracts on an exchange, it pays a commission to any FCM or broker executing the transaction. When the Company purchases securities from the issuer, an underwriter usually receives a commission or "concession" paid by the issuer. When the Company purchases securities from a market-maker, it pays no commission, but the price includes a "spread" or "mark-up" (between the bid and asked price) earned by the market-making dealer on the transaction. In purchasing and selling each Fund's portfolio securities, it is the policy of VALIC and the Sub-Advisers (collectively, the "Advisers") to seek the best execution at the most favorable price through responsible broker-dealers and, in the case of 39 agency transactions, at competitive commission rates. When selecting brokers or dealers, and in negotiating prices and commissions, the Advisers consider such factors as: the broker or dealer's reliability; the quality of the broker or dealer's execution services on a continuing basis; the rate of the commission; the size and difficulty of the order and the timeliness of execution; the reliability, integrity, financial condition, general execution, and operational capabilities of that firm and competing broker-dealers. In over-the-counter transactions, the Advisers place orders directly with the principal market-maker unless they believe the Company can obtain a better price (or receive better execution of orders) from a broker on an agency basis. In transactions executed on securities or commodities exchanges, the Advisers seek the best overall price and execution at the most favorable commission rate (except when higher brokerage commissions are paid to obtain brokerage and research services, as explained below). When the Advisers believe that more than one firm meets these criteria the Advisers may prefer brokers who provide the Advisers or the Company with brokerage and research services, described below. The Advisers may cause a Fund to pay a broker-dealer a commission (for executing a securities transaction) that is greater than the commission another broker-dealer would have received for executing the same transaction, if the Advisers determine in good faith that the greater commission paid to the first broker-dealer is reasonable in relation to the value of brokerage and research services provided to the Advisers viewed in terms of either that particular transaction or the overall responsibilities of the Advisers. The Advisers receive a wide range of research services from broker-dealers, including: information on securities markets, the economy and individual companies; statistical information; accounting and tax law interpretations; technical market action; pricing and appraisal services; and credit analyses. Research services are received by the Advisers primarily in the form of written reports, telephone contacts, personal meetings with securities analysts, corporate and industry spokespersons, and access to various computer-generated data. The Advisers have no agreements or understandings with broker-dealers by which specific amounts of transactions or commissions are directed to specific broker-dealers. The Advisers evaluate whether such research services provide lawful and appropriate assistance to them in the performance of their investment decision-making responsibilities, for the Company. The Advisers will not cause the Company to pay higher commissions without first determining, in good faith, that the cost is reasonable considering the brokerage and research services provided, with respect to either the particular transaction or the Advisers' overall responsibilities with respect to accounts for which they exercise investment discretion. The Advisers receive research services at no cost and cannot assign any specific monetary value to them; nevertheless, the Advisers believe these supplemental investment research services are essential to the Advisers' ability to provide high quality portfolio management to the Funds. Research services furnished by broker-dealers through whom a Fund effects securities transactions may be used by the Advisers in servicing all of the Funds, and the Advisers may not use all such services in managing the Funds. The amount of brokerage commissions paid, the quality of execution, the nature and quality of research services provided, and the amount of commissions paid to firms providing research services are reviewed quarterly by the Company's Board of Directors. Brokerage commissions paid by the Stock Index Fund on portfolio transactions for the fiscal years ended May 31, 1998, 1997, and 1996, totalled $131,621, $122,723 and $84,226, respectively. For the fiscal year ended May 31, 1998 the Stock Index Fund paid no brokerage commissions to brokers for research services provided to the Advisers. Brokerage commissions paid by the MidCap Index Fund on portfolio transactions for the fiscal years ended May 31, 1998, 1997, and 1996, totalled $125,995, $80,089 and $93,068, respectively. For the fiscal year ended May 31, 1998, the MidCap Index Fund paid no brokerage commissions to brokers for research services provided to the Advisers. Brokerage commissions paid by the Small Cap Index Fund on portfolio transactions for the fiscal year ended May 31, 1998, 1997 and 1996, totalled $64,613, $90,498 and $37,454, respectively. For the fiscal year ended May 31, 1998, the Small Cap Index Fund paid no brokerage commissions to brokers for research services provided to the Advisers. 40 Brokerage commissions paid by the International Equities Fund on portfolio transactions for the fiscal years ended May 31, 1998, 1997, and 1996 totalled $130,204, $153,793 and $250,882, respectively. For the fiscal year ended May 31, 1998, the International Equities Fund paid no brokerage commissions to brokers for research services provided to VALIC. Brokerage commissions paid by the Growth Fund on portfolio transactions for the fiscal years ended May 31, 1998, 1997 and 1996, totalled $889,312, $757,865 and $486,285, respectively. For the fiscal year ended May 31, 1998, the Growth Fund paid $101,840 in brokerage commissions, on transactions totalling $40,156,191, to brokers selected on the basis of the quality of the execution together with research services provided to the Advisers. Brokerage commissions paid by the Growth & Income Fund on portfolio transactions for the fiscal year ended May 31, 1998, 1997 and 1996, totalled $276,322, $159,571 and $112,767, respectively. For the fiscal year ended May 31, 1997, the Growth & Income Fund paid $158,829 in brokerage commissions, on transactions totalling $147,733,656, to brokers selected on the basis of the quality of the execution together with research services provided to the Advisers. Brokerage commissions paid by the Social Awareness Fund on portfolio transactions for the fiscal years ended May 31, 1998, 1997, and 1996, totalled $518,012, $221,028 and $99,297, respectively. For the fiscal year ended May 31, 1998 the Social Awareness Fund paid no brokerage commissions to brokers for research services provided to VALIC. Brokerage commissions paid by the Science & Technology Fund on portfolio transactions for the fiscal year ended May 31, 1998, 1997 and 1996, totalled $1,031,246, $1,143,004 and $664,932, respectively. For the fiscal year ended May 31, 1998, the Science & Technology Fund paid $88,345 in brokerage commissions, on transactions totalling $75,195,279, to brokers selected on the basis of the quality of the execution together with research services provided to the Advisers. Brokerage commissions paid by the Asset Allocation Fund on portfolio transactions for the fiscal years ended May 31, 1998, 1997 and 1996, totalled $39,049, $239,365 and $235,223, respectively. For the fiscal year ended May 31, 1998, the Asset Allocation Fund paid no brokerage commissions to brokers for research services provided to VALIC. No brokerage commissions were paid by the Capital Conservation Fund, Government Securities Fund, International Government Bond Fund and Money Market Fund for fiscal years ended May 31, 1998, 1997 and 1996. Occasions may arise when one or more of the Funds or other accounts that may be considered affiliated persons of the Funds under the 1940 Act desire to purchase or sell the same portfolio security at approximately the same time. On those occasions when such simultaneous purchase and sale transactions are made such transaction will be allocated in an equitable manner according to written procedures approved by the Company's Board of Directors. Specifically, such written procedures provide that in allocating purchase and sale transactions made on a combined basis the parties will seek to achieve the same net unit price of securities for each Fund or other account and to allocate as nearly as practicable, such transactions on a pro-rata basis substantially in proportion to the amounts ordered to be purchased and sold by each Fund or other account. In some cases, this procedure could have an adverse effect on the price or quantity of securities available to the Funds. However, the Funds may, alternatively, benefit from lower broker's commissions and/or correspondingly lower costs for brokerage and research services by engaging in such combined transactions. In the Advisers' opinion, the results of this procedure will, on the whole, be in the best interest of each Fund. OFFERING, PURCHASE, AND REDEMPTION OF FUND SHARES Pursuant to a distribution agreement, the Variable Annuity Marketing Company ("VAMCO") acts without remuneration as the Company's agent in the distribution of Fund shares to the VALIC, AG Life and AGNY separate accounts. VAMCO's address is the same as that of VALIC. The distribution agreement between VAMCO and the Company provides that it shall continue in force from year to year, provided that such continuance is approved at least annually (a)(i) by the Board of Directors of the Company, or (ii) by vote of a majority of the Company's outstanding voting 41 securities (as defined in the 1940 Act) and (b) by the affirmative vote of a majority of the Company's Directors who are not 'interested persons' (as defined in the 1940 Act) of the Company by votes cast in person at a meeting called for such purpose. The distribution agreement may be terminated at any time, without penalty, by a vote of the Board of Directors of the Company or by a vote of a majority of the outstanding voting securities of the Company, or by VAMCO, on sixty days' written notice to the other party. The distribution agreement also provides that it shall automatically terminate in the event of its assignment. Pursuant to the distribution agreement, VAMCO pays promotional and advertising expenses and the cost of printing prospectuses used to offer and sell shares of the Company (after typesetting and printing the copies required for regulatory filings by the Company). Promotional and advertising expenses include any expense related to distribution of shares of the Funds or attributable to any activity primarily intended to result in the sale of shares, including, for example, the preparation, printing, and distribution of advertising and sales literature (including reports to shareholders used as sales literature). VALIC reimburses VAMCO for these expenses. Thus all such expenses incurred by VAMCO are passed directly on to VALIC, its parent. The Company pays all expenses related to the registration of Fund shares under federal and state laws, including registration and filing fees, the cost of preparing the prospectus for such purpose, and related expenses of outside legal and auditing firms. As explained in the prospectus for the Contracts, payments of surrender values, as well as lump sum payments available under the annuity options of the Contracts, may be suspended or postponed at any time when redemption of shares is suspended. Normally, the Company redeems Fund shares within seven days of receipt of request therefor, but may postpone redemptions beyond seven days when: (1) the New York Stock Exchange is closed for other than weekends and customary holidays, or trading on the New York Stock Exchange becomes restricted; (2) an emergency exists making disposal or valuation of a Fund's assets not reasonably practicable; or (3) the Securities and Exchange Commission has so permitted by order for the protection of the Company's shareholders. The Company normally redeems Fund shares for cash. Although the Company, with respect to each Fund, may make full or partial payment by assigning to the separate accounts investing in the Company portfolio securities at their value used in determining the redemption price (i.e. by redemption-in-kind), the Company, pursuant to Rule 18f-1 under the 1940 Act, has filed a notification of election on Form 18f-1. Pursuant to this election, the Company has committed itself to pay the separate accounts, in cash, all redemptions made during any 90 day period, up to the lesser of $250,000 or 1% of the Company's net asset value. The securities to be paid in-kind to the separate accounts will be selected in such manner as the Board of Directors deems fair and equitable. In such cases, the separate accounts would incur brokerage expenses should they wish to liquidate these portfolio securities. All shares are offered for sale and redeemed at net asset value. Net asset value per share is determined by dividing the net assets of a Fund by the number of that Fund's outstanding shares at such time. DETERMINATION OF NET ASSET VALUE Equity investments (including common stocks, preferred stocks, convertible securities, and warrants) and call options written on all portfolio investments listed or traded on a national exchange are valued at their last sale price on that exchange prior to the time when assets are valued. In the absence of any exchange sales on that day and for unlisted equity securities, such securities and call options written on portfolio securities are valued at the last sale price on the NASDAQ (National Association of Securities Dealers Automated Quotations) National Market System. In the absence of any National Market System sales on that day, equity securities are valued at the last reported bid price and call options written on all portfolio securities for which other over-the-counter market quotations are readily available are valued at the last reported asked price. U.S. Treasury securities and other obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities, are valued at representative quoted prices. Such quotations generally are obtained from government securities pricing services; however, in circumstances where it is deemed appropriate to do so, quotations may be obtained from dealers in government securities. 42 Publicly-traded corporate bonds are valued at prices obtained from State Street Bank and Trust Company. Short-term debt securities for which market quotations are readily available are valued at the last reported bid price, except for those with a remaining maturity of 60 days or less which are valued by the amortized cost method (unless, due to special circumstances, the use of such a method with respect to any security would result in a valuation which does not approximate fair market value). Convertible bonds are valued at prices obtained from one or more of the major dealers in such bonds. Where there is a discrepancy between dealers or when no quotes are readily available, values may be adjusted based on a combination of yields and premium spreads to the underlying common stock. Portfolio securities that are primarily traded on foreign securities exchanges are generally valued at the last sale price on the exchange where such security is primarily traded. All foreign securities traded on the over-the-counter market are valued at the last sale quote, if market quotations are available, or the last closing bid price, if there is no active trading in a particular security for a given day. Where market quotations are not readily available for such foreign over-the-counter securities, then such securities will be valued in good faith by a method that the Company's Board of Directors, or its delegates, believes accurately reflects fair value. Quotations of foreign securities in foreign currencies are converted, at current exchange rates, to their U.S. dollar equivalents in order to determine their current value. In addition, because of the need to value foreign securities (other than ADRs) as of the close of trading on various exchanges and over-the-counter markets throughout the world, the calculation of the net asset value of Funds investing in such foreign securities may not take place contemporaneously with the valuation of such foreign securities in those Funds' portfolios. Options purchased by the Funds (including options on financial futures contracts, stock indices, foreign currencies, and securities) listed on national securities exchanges are valued on the exchange where such security is primarily traded. Over-the-counter options purchased or sold by the Funds are valued based upon prices provided by market-makers in such securities or dealers in such currencies. Exchange-traded financial futures contracts (including interest rate futures contracts, stock index futures contracts, and currency futures contracts) are valued at the settlement price for such contracts established each day by the board of trade or exchange on which such contracts are traded. Unlisted financial futures contracts are valued based upon prices provided by market-makers in such financial futures contracts. All of the assets of the Money Market Fund are valued on the basis of amortized cost. Under the amortized cost method of valuation, securities are valued at a price on a given date, and thereafter a constant accretion of any discount or amortization of any premium to maturity is assumed, regardless of the impact of fluctuating interest rates on the market value of the security. While this method provides certainty in valuation it may result in periods in which value as determined by amortized cost is higher or lower than the price a Fund would receive if it sold the security. During such periods, the yield to investors may differ somewhat from that obtained by a similar fund or portfolio which uses available market quotations to value all of its portfolio securities. The Company's Board of Directors has established procedures reasonably designed, taking into account current market conditions and Money Market Fund's investment objective, to stabilize the net asset value per share for purposes of sales and redemptions at $1.00. These procedures include review by the Board, at such intervals as it deems appropriate, to determine the extent, if any, to which the net asset value per share calculated by using available market quotations deviates from $1.00 per share. In the event such deviation should exceed one half of one percent, the Board will promptly consider initiating corrective action. If the Board believes that the extent of any deviation from a $1.00 amortized cost price per share may result in material dilution or other unfair results to new or existing shareholders, it will take such steps as it considers appropriate to eliminate or reduce these consequences to the extent reasonably practicable. Such steps may include: selling portfolio securities prior to maturity; shortening the average maturity of the portfolio; withholding or reducing dividends; or utilizing a net asset value per share determined from available market quotations. Even if these steps were taken, the Money Market Fund's net asset value might still decline. 43 CALCULATION OF YIELD FOR THE MONEY MARKET FUND The yield of the Money Market Fund is its net income expressed as a percentage of assets on an annualized basis for a seven day period. Rule 482 under the Securities Act of 1933 requires that a yield quotation set forth in an advertisement for a money market fund be computed by a standardized method based on an historical seven calendar day period. The current yield is computed by determining the net change (exclusive of realized gains and losses from the sale of securities and unrealized appreciation and depreciation) in the value of a hypothetical pre-existing account having a balance of one share at the beginning of the period, and then dividing the net change in account value by the value of the account at the beginning of the base period to obtain the base period return. The base period return is then multiplied by (365/7) to annualize the yield figure. The determination of net change in account value reflects the value of additional shares purchased with dividends from the original share, dividends declared on both the original share and such additional shares, and any fees that are charged to all shareholder accounts, in proportion to the length of the base period and the Money Market Fund's average account size. The Money Market Fund may also calculate its compound effective yield by compounding the unannualized base period return (calculated as described above) by adding one to the base period return, raising the sum to a power equal to 365 divided by 7, and subtracting one. The yield quoted by the Money Market Fund at any time represents the amount being earned on a current basis for the indicated period and is a function of the types of instruments in the Money Market Fund's portfolio, their quality and length of maturity, and the Money Market Fund's operating expenses. The length of maturity for the portfolio is the average dollar weighted maturity of the portfolio. In other words, the portfolio has an average maturity for all of its issues, stated in numbers of days and weighted according to the relative value of each investment. The yield fluctuates daily as the income earned on the investments of the Money Market Fund fluctuates. Accordingly, neither the Company nor VALIC can assure the yield quoted on any given occasion will remain constant for any period of time. For example, the Money Market Fund's yield will change if it experiences a net inflow of new assets which it then invests in securities whose yield is higher or lower than that being currently earned on investments. Investments in the Money Market Fund are not insured and investors comparing results of the Money Market Fund with investment results and yields from other sources such as banks or savings and loan associations should understand this distinction. In addition, other money market funds as well as banks and savings and loan associations may calculate their yields on a different basis and the yield quoted by the Money Market Fund from time-to-time could vary upwards or downwards if another method of calculation or base period were used. ACCOUNTING AND TAX TREATMENT CALLS AND PUTS When a Fund writes a call or put option, an amount equal to the premium received by it is included in that Fund's Statement of Assets and Liabilities as an asset and as an equivalent liability. The amount of the liability is subsequently "marked to market" to reflect the current market value of the option written. The current market value of a written option is the last sale price on the principal Exchange on which such option is traded. If a call option which a Fund has written either expires on its stipulated expiration date, or if a Fund enters into a closing purchase transaction, it realizes a gain (or loss if the cost of the closing transaction exceeds the premium received when the option was sold) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is extinguished. If a call option which a Fund has written is exercised, the Fund realizes a capital gain or loss from the sale of the underlying security and proceeds from such sale are increased by the premium originally received. The premium paid by a Fund for the purchase of a put option is included in the asset section of its Statement of Assets and Liabilities as an investment and subsequently adjusted daily to the current market value of the option. For example, if the current market value of the option exceeds the 44 premium paid, the excess would be unrealized appreciation and, conversely, if the premium exceeds the current market value, such excess would be unrealized depreciation. The current market value of a purchased option is the last sale price on the principal Exchange on which such option is traded. If a put option which a Fund has purchased expires unexercised it realizes a capital loss equal to the cost of the option. If a Fund exercises a put option, it realizes a capital gain or loss from the sale of the underlying security and the proceeds from such sale will be decreased by the premium originally paid. FINANCIAL FUTURES CONTRACTS Accounting for financial futures contracts will be in accordance with generally accepted accounting principles. Initial margin deposits made upon entering into financial futures contracts will be recognized as assets due from the FCM (the Fund's agent in acquiring the futures position). During the period the financial futures contract is open, changes in the value of the contract will be recognized as unrealized gains or losses by "marking-to-market" on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation (or maintenance) margin payments will be made or received, depending upon whether gains or losses are incurred. Financial futures contracts held by a Fund at the end of each fiscal year will be required to be "marked to market" for federal income tax purposes (that is, treated as having been sold at market value). SUBCHAPTER M OF THE INTERNAL REVENUE CODE OF 1986 Each Fund of the Company intends to qualify annually as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). A Fund must meet several requirements to obtain and maintain its status as a regulated investment company. Among these requirements are that: (i) at least 90% of a Fund's gross income be derived from dividends, interest, payments with respect to securities loans and gains from the sale or disposition of securities; and (ii) at the close of each quarter of a Fund's taxable year (a) at least 50% of the value of the Fund's assets consist of cash, government securities, securities of other regulated investment companies and other securities (such other securities of any one issuer being not greater than 5% of the value of a Fund and the Fund holding not more than 10% of the outstanding voting securities of any such issuer) and (b) not more than 25% of the value of a Fund's assets be invested in the securities of any one issuer (other than United States government securities or securities of other regulated investment companies). Each Fund of the Company is treated as a separate entity for federal income tax purposes. The Internal Revenue Service ("Service") has ruled publicly that an exchange-traded call option is a security for purposes of the 50% of assets test and that its issuer is the issuer of the underlying security, not the writer of the option, for purposes of the diversification requirements. It has ruled privately (at the request of a taxpayer other than the Company) that income from closing financial futures contracts is considered gain from a disposition of securities for purposes of the 90% of gross income test. However, since taxpayers other than the taxpayer requesting a particular private ruling are not entitled to rely on such ruling, the Company intends to keep its Funds' activity in futures contracts and options at a low enough volume such that gains from closing futures contracts will not exceed 10% of a Fund's gross income until the Service rules publicly on the issues or the Company is otherwise satisfied that those gains are qualifying income. SECTION 817(h) OF THE CODE Each of the Funds intends to comply with Section 817(h) of the Code and the regulations issued thereunder. Section 817(h) of the Code and Treasury Department regulations thereunder impose certain diversification requirements on variable annuity contracts based upon segregated asset accounts. These requirements are in addition to the diversification requirements of Subchapter M and the 1940 Act and may affect the securities in which a Fund may invest. Failure to meet the requirements of Section 817(h) could result in immediate taxation of the Contract Owner to the extent of appreciation on investment under the Contract. The Section 817(h) diversification requirements do not apply to pension plan contracts. "Pension plan contracts" for these purposes generally means annuity contracts issued with respect to plans qualified under Section 401(a) or 403(a) of the Code, Section 403(b) annuities, Individual Retirement Accounts, Individual Retirement Annuities and annuities issued with respect to Section 457 plans. 45 The Secretary of the Treasury may, in the future, issue additional regulations that will prescribe the circumstances in which a Contract Owner's control of the investments of the separate accounts investing in the Company may cause the Contract Owner to be taxable with respect to assets allocated to the separate account, before distributions are actually received under the Contract. In order to comply with the requirements of Section 817(h) and the regulations thereunder, the Company may find it necessary to take action to ensure that a Contract funded by the Company continues to qualify as such under federal tax laws. The Company, for example, may be required to alter the investment objectives of a Fund or Funds, or substitute the shares of one Fund for those of another. No such change of investment objectives or substitution of securities will take place without notice to the shareholders of the affected Fund, and the approval of a majority of such shareholders (as defined in the 1940 Act) and without prior approval of the Securities and Exchange Commission, to the extent legally required. It is not feasible to comment on all of the federal income tax consequences concerning the Funds. Each owner of a Contract funded by the Company should consult a qualified tax adviser for more complete information. The reader should refer to the appropriate prospectus related to his or her Contracts for a more complete description of the taxation of the separate account and of the owner of the particular Contract. OTHER INFORMATION SHAREHOLDER REPORTS Annual Reports containing audited financial statements of the Company and Semiannual Reports containing unaudited financial statements, as well as proxy materials, are sent to Contract Owners, annuitants, or beneficiaries as appropriate. VOTING AND OTHER RIGHTS The Company has an authorized capitalization of 13 billion shares of common stock, $0.01 par value per share, 13 billion of which are authorized to be issued in thirteen classes comprising 1 billion shares each. Each of the thirteen classes of stock corresponds to one of the Funds and represents an ownership interest in that Fund. See "Voting and Other Rights" in the Prospectus for a full discussion of the manner in which shares of the Fund are voted. VALIC has made initial organization investments in each of the following Funds, and, as of May 31, 1998, owned of record the following percentage of the outstanding shares of these Funds: 0% of the Stock Index Fund, 0% of the MidCap Index Fund, 0% of the Small Cap Index Fund, 0% of the International Equities Fund, 0% of the Growth Fund, 0% of the Growth & Income Fund, 0.53% of the Capital Conservation Fund, 0% of the Government Securities Fund, 0% of the International Government Bond Fund, 0% of the Social Awareness Fund, 0% of the Science & Technology Fund, 0% of the Money Market Fund, and 0% of the Asset Allocation Fund. VALIC's ownership of more than 25% of the outstanding shares may result in VALIC's being deemed a controlling entity of each of those Funds as that term is defined in the 1940 Act. Such control will dilute the effect of the votes of other shareholders and contract owners. As of May 31, 1998, VALIC Separate Account A owned of record the following percentage of the outstanding shares of each Fund: 96.95% of the Stock Index Fund, 100% of the MidCap Index Fund, 100% of the Small Cap Index Fund, 99.96% of the International Equities Fund, 97.69% of the Growth Fund, 100% of the Growth & Income Fund, 99.47% of the Capital Conservation Fund, 100% of the Government Securities Fund, 100% of the International Government Bond Fund, 99.99% of the Social Awareness Fund, 100% of the Science & Technology Fund, 100% of the Money Market Fund, and 99.95% of the Asset Allocation Fund. As of May 31, 1998, the other shareholders of the Funds included AGL Separate Account A, AGL Separate Account B, AGL Separate Account D, AGL Select Reserve, AGL Platinum Investor, American General Corporation Thrift Plan and VALIC Agents' and Managers' Thrift Plan. None of these other shareholders owned of record more than 5% of any Fund's outstanding shares. CUSTODY OF ASSETS Pursuant to a Custodian Contract with the Company, State Street Bank and Trust Company ("State Street"), 225 Franklin Street, Boston, Mas- 46 sachusetts 02110, holds the cash and portfolio securities of the Company as custodian. State Street is responsible for holding all securities and cash of each Fund, receiving and paying for securities purchased, delivering against payment securities sold, receiving and collecting income from investments, making all payments covering expenses of the Company, and performing other administrative duties, all as directed by persons authorized by the Company. State Street does not exercise any supervisory function in such matters as the purchase and sale of portfolio securities, payment of dividends, or payment of expenses of the Funds or the Company. Portfolio securities of the Funds purchased domestically are maintained in the custody of State Street and may be entered into the book entry systems of securities depositories approved by the Board of Directors. Pursuant to the Custodian Contract, portfolio securities purchased outside the United States will be maintained in the custody of various foreign branches of State Street and such other custodians, including foreign banks and foreign securities depositories, as are approved by the Board of Directors, in accordance with regulations under the 1940 Act. State Street holds securities of the Funds on which call options have been written and certain assets of the Funds constituting margin deposits with respect to financial futures contracts at the disposal of the FCMs through which such transactions are effected. The Funds may also be required to post margin deposits with respect to covered call and put options written on stock indices and for this purpose certain assets of those Funds may be held by the custodian pursuant to similar arrangements with the brokers involved. This arrangement regarding margin deposits essentially consists of State Street creating a separate segregated account into which it transfers (upon the Company's instructions) assets from a Fund's general (regular) custodial account. The custody agreement for such arrangement provides that FCMs or brokers will have access to the funds in the segregated accounts when and if the FCMs or brokers represent that the Company has defaulted on its obligation to the FCMs or brokers and that the FCMs or brokers have met all the conditions precedent to their right to receive such funds under the agreement between the Company and the FCMs or brokers. The Company has an agreement with each FCM or broker which provides (1) that the assets of any Fund held by the FCM or broker will be in the possession of State Street until released or sold or otherwise disposed of in accordance with or under the terms of such agreement, (2) that such assets would not otherwise be pledged or encumbered by the FCM or broker, (3) that when requested by the Company the FCM or broker will cause State Street to release to its general custodial account any assets to which a Fund is entitled under the terms of such agreement, and (4) that the assets in the segregated account shall otherwise be used only to satisfy the Company's obligations to the FCM or broker under the terms of such agreement. If on any day a Fund experiences net realized or unrealized gains with respect to financial futures contracts or covered options on stock indices held through a given FCM or broker, it is entitled immediately to receive from the FCM or broker, and usually will receive by the next business day, the net amount of such gains. Thereupon, such assets will be deposited in its general or segregated account with State Street, as appropriate. INDEX FUNDS The Small Cap Index Fund is not promoted, sponsored or endorsed by, nor in any way affiliated with Frank Russell Company. Frank Russell Company is not responsible for and has not reviewed the Fund nor any associated literature or publications and Frank Russell Company makes no representation or warranty, express or implied, as to their accuracy, or completeness, or otherwise. Frank Russell Company reserves the right, at any time and without notice, to alter, amend, terminate or in any way change its Index(es). Frank Russell Company has no obligation to take the needs of any particular fund or its participants or any product or person into consideration in determining, comprising or calculating the Index(es). Frank Russell Company's publication of the Index(es) in no way suggests or implies an opinion by Frank Russell Company as to the attractiveness or appropriateness of investment in any or all securities upon which the Index(es) is (are) based. FRANK RUSSELL COMPANY MAKES NO REPRESENTATION, WARRANTY, OR GUARANTEE AS TO THE ACCURACY, COMPLETENESS, RELIABILITY, OR OTHERWISE OF THE INDEX(ES) OR ANY DATA INCLUDED IN THE INDEX(ES). 47 FRANK RUSSELL COMPANY MAKES NO REPRESENTATION OR WARRANTY REGARDING THE USE, OR THE RESULTS OF USE, OF THE INDEX(ES) OR ANY DATA INCLUDED THEREIN, OR ANY SECURITY (OR COMBINATION THEREOF) COMPRISING THE INDEX(ES). FRANK RUSSELL COMPANY MAKES NO OTHER EXPRESS OR IMPLIED WARRANTY, AND EXPRESSLY DISCLAIMS ANY WARRANTY, OF ANY KIND, INCLUDING WITHOUT MEANS OR LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEX(ES) OR ANY DATA OR ANY SECURITY (OR COMBINATION THEREOF) INCLUDED THEREIN. The Stock Index Fund and the MidCap Index Fund are not sponsored, endorsed, sold or promoted by Standard & Poor's Corporation ("S&P"). S&P makes no representation or warranty, express or implied, to the Company or its participants regarding the advisability of investing in securities generally or in the Stock Index Fund or MidCap Index Fund particularly or the ability of the S&P Index or the S&P MidCap 400 Index Fund to track general stock market performance. S&P has no obligation to take the need of the Company or the Company's participants into consideration in determining, composing or calculating the S&P 500 Index or S&P MidCap 400 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the Stock Index Fund or MidCap Index Fund or the timing of the issuance or sale of such Funds or in the determination or calculation of the equation by which such Funds are to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the Funds. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR S&P MIDCAP 400 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE COMPANY FROM THE USE OF THE S&P 500 INDEX OR S&P MIDCAP 400 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR S&P MIDCAP 400 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. DESCRIPTION OF CORPORATE BOND RATINGS Moody's Investors Service, Inc.'s corporate bond ratings are as follows: Aaa -- Bonds which are rated Aaa are judged to be of the best quality and carry the smallest degree of investment risk. 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 some time 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 outstand- 48 ing investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds which are rated Ba are judged to have speculative elements and their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safe-guarded 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. Standard & Poor's Corporation classifications are as follows: AAA -- This is the highest rating assigned by Standard & Poor's to a financial obligation and indicates an extremely strong capacity to meet its financial commitment. AA -- An obligation rated "AA" differs from the highest rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is strong. A -- An obligation rated "A" is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong. BBB -- Obligations rated "BBB" exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. BB-B-CCC-CC -- Obligations rated "BB", "B", "CCC" and "CC" are regarded as having significant speculative characteristics. "BB" indicates the least degree of speculation and "CC" a higher degree of speculation. While such obligations will likely have some quality and protective characteristics, they may be outweighed by large uncertainties or major exposures to adverse conditions. DESCRIPTION OF COMMERCIAL PAPER RATINGS A and Prime Commercial Paper Ratings. Commercial paper rated A by S&P has the following characteristics: Liquidity ratios are adequate to meet cash requirements. Long-term senior debt is rated "A" or better, although, in some cases "BBB" credits may be allowed. 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. The rating is described by S&P as the investment grade category, the highest rating classification. Relative strength or weakness of the above factors determine whether the issuer's commercial paper is rated A-1, A-2 or A-3. Among the factors considered by Moody's in assigning commercial paper 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 ten years; (7) financial strength of a parent company and the relationships which exist with the issuer; and (8) recognition by the management of obligations which may be present or may arise as a result of public interest questions and preparations to meet such obligations. Relative differences in strengths and weaknesses in respect of these criteria establish a rating in one of three classifications. The rating Prime-1 is the highest commercial paper rating assigned by Moody's. Its other two ratings, Prime-2 and Prime-3 are designated Higher Quality and High Quality, respectively. INDEPENDENT AUDITORS Ernst & Young LLP, One Houston Center, 1221 McKinney, Suite 2400, Houston, Texas 77010, serve as independent auditors of the Company. 49 DIRECTORS AND OFFICERS
POSITION(S) HELD PRINCIPAL OCCUPATION(S) NAME AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS ---------------- --------------- ------------------- Thomas L. West, Jr.*.............. Chairman of the Board since Chairman and Chief Executive Officer 2929 Allen Parkway 1998, Director since 1994, (1997-Present), Director and Houston, Texas 77019 President (1997- 1998) and Executive Vice President (1994-1997) Date of Birth: 06/07/37 Executive Vice President and President (1994-1998), VALIC and (1994-1997) Chairman of the Board and Chief Executive Officer (1997-Present), American General Annuity Insurance Company ("AGAIC") Formerly Senior Vice President Annuity Business Unit -- Aetna Life Insurance & Annuity Co. (1987-1994). John A. Graf*..................... Director and President since President and Director, VALIC and 2929 Allen Parkway 1998 AGAIC (1998 to Present). Director, Houston, Texas 77019 Boy Scouts of America. Formerly, Date of Birth: 09/14/59 Director (1993-1998), President and Chief Executive Officer (1997-1998), Vice Chairman (1996-1997), Chief Marketing Officer (1993-1997) and Executive Vice President (1993-1996), Western National Life Insurance Corporation and Senior Vice Presi- dent, Conseco, Inc. (1987-1993). Craig R. Rodby*................... Director since 1998 and Vice Chairman (1997-Present) and 2929 Allen Parkway Executive Vice President Chief Financial Officer Houston, Texas 77019 (1997-Present) (1998-Present), VALIC and AGAIC Date of Birth: 07/05/49 (1998-Present). Formerly, Senior Vice President-Financial Management, ReliaStar (1994-1997) and President and Chief Executive Officer, Northern Life Insurance Company (1990-1994). Dr. Judith L. Craven.............. Director since 1998 Physician, Administrator; President, 3212 Ewing Street United Way of Texas Gulf Coast Houston, Texas 77004 (1992-1998); Director, A.H. Belo Date of Birth: 10/06/45 Corporation (1993-Present); Director, Sysco Corporation (1996-Present); Director, Sisters of Charity of the Incarnate Word (1996-Present)(3). Dr. Timothy J. Ebner.............. Director since 1998 Professor, Departments of 17994 NW Union Street Neurosurgery and Physiology, Elk River, Minnesota 55330 University of Minnesota Date of Birth: 07/15/49 (1991-Present). Formerly, Consultant EMPI Inc. (1994-1995) and Medtronic Inc. (1997-1998)(3). Judge Gustavo E. Gonzales, Jr..... Director since 1998 Municipal Court Judge, Dallas, Texas; 8320 Coolgreen Drive Director, Downtown Dallas YMCA Board Dallas, Texas 75228 (1996-Present); Director, Dallas Date of Birth: 07/27/40 Easter Seals Society (1997-Present)(3). Dr. Norman Hackerman.............. Director since 1984 Chairman -- Scientific Advisory Board 5555 San Felipe for The Robert A. Welch Foundation Suite 1900 (1983- Present); Director, Houston, Texas 77056-2727 Electrosource, Inc.; President Date of Birth: 03/02/12 Emeritus, Rice University, Houston, Texas. Formerly, President, Rice Uni- versity, Houston, Texas (1970- 1985).(1)(2)(3) Dr. John Wm. Lancaster............ Director since 1984 Retired. Pastor Emeritus and Director 4642 Braeburn of Planned Giving, First Presbyterian Bellaire, Texas 77401 Church, Houston, Texas. Formerly, Date of Birth: 12/15/23 Pastor, First Presbyterian Church, Houston, Texas (1961-1990).(3)
50
POSITION(S) HELD PRINCIPAL OCCUPATION(S) NAME AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS ---------------- --------------- ------------------- Ben H. Love....................... Director since 1991 Retired. Formerly, Chief Executive, 4407 Eaton Circle Boy Scouts of America. Colleyville, Texas 76034 (1985-1993).(3) Date of Birth: 09/26/30 Dr. John E. Maupin, Jr............ Director since 1998 President, Meharry Medical College, 2 Morningside Court Nashville, Tennessee; Nashville Nashville, Tennessee 37215 Advisory Board Member, First American Date of Birth: 10/28/46 National Bank (1996-Present); Director, Monarch Dental Corporation (1997-Present). Formerly, Executive Vice President, Morehouse School of Medicine, Atlanta, Georgia (1989-1994).(3) Dr. F. Robert Paulsen............. Director since 1985 Dean Emeritus and Professor Emeritus, 2801 N. Indian Ruins College of Higher Education, Tucson, Arizona 85715 University of Arizona, Tucson, Date of Birth: 07/05/22 Arizona.(1)(2)(3) Dr. R. Miller Upton............... Director since 1984 Consultant; President Emeritus, 914 Tarrant Dr. Beloit College, Beloit, Wisconsin. Fontana, Wisconsin 53125 Formerly, Director, Home Life Date of Birth: 12/27/16 Insurance Company of New York (1961-1991) and Director, Household International, Inc. (1965-1989).(1)(2)(3)
- ------------ * Interested persons of the Company as defined in the 1940 Act specifically because of their capacity as officers, directors or consultants of the Company, VALIC or American General Corporation. (1) Retired Managing General Partner of Van Kampen American Capital Exchange Fund. (2) Retired Trustee of Van Kampen American Capital Bond Fund, Inc., Van Kampen American Capital Income Trust, Van Kampen American Capital Convertible Securities Fund, Inc. and the Common Sense Trust. (3) Directors who are not interested persons of the Company receive an annual retainer of $18,000. In addition, such Directors are paid per board meeting, committee meeting, telephone meeting and committee chair, a fee of $1,500, $250, $250 and $250, respectively, plus expenses incurred, if any. 51 Listed below are the Company's officers and their principal occupations. All are affiliates of VALIC and are located at 2929 Allen Parkway, Houston, Texas 77019. Each officer serves until his or her successor is elected and shall qualify.
POSITION(S) HELD PRINCIPAL OCCUPATION(S) NAME WITH REGISTRANT DURING PAST 5 YEARS ---- --------------- ------------------- John A. Graf...................... President and Director since President and Director, VALIC and Date of Birth: 09/14/59 1998 AGAIC (1998 to Present). Director, Boy Scouts of America. Formerly, Director (1993-1998), President and Chief Executive Officer (1997-1998), Vice Chairman (1996-1997), Chief Marketing Officer (1993-1997) and Executive Vice President (1993-1996), Western National Life Insurance Corporation and Senior Vice Presi- dent, Conseco, Inc. (1987-1993). Joe E. Arant...................... Executive Vice President since Executive Vice President-Sales (1998 1998 to Present) and Senior Vice President (1998), VALIC and AGAIC. Chairman and President, VAMCO (1998 to Present). Joe C. Osborne.................... Executive Vice President since Executive Vice President of Marketing Date of Birth: 09/17/48 1998 and Director (1992-1998) and Director, VALIC and AGAIC. Peter V. Tuters................... Senior Investment Officer since Executive Vice President, American Date of Birth: 04/18/52 1998 and Director (1993-1998) General Investment Management, L.P. (1998 to Present); Vice President and Investment Officer (1998 to Present), Vice President and Chief Investment Officer (1993-1998) VALIC and Vice President and Investment Officer, AGAIC (1998 to Present); Former Director, VALIC. Senior Vice President and Chief Investment Officer, American General Corporation (1993-1998). Teresa S. Moro.................... Vice President and Investment Trader -- VALIC. Formerly, Money Mar- Date of Birth: 08/14/60 Officer since 1990 ket Trader, VALIC (1986-1990); AIM Management Group Inc. (1983-1986). Leon A. Olver..................... Vice President and Investment Portfolio Manager, VALIC (1995 to Date of Birth: 06/27/51 Officer since 1995 Present). Formerly Vice President and Treasurer, First Heights Bank (1994-1995); Vice President and Assistant Treasurer, First Heights Bank (1991-1994); Assistant Vice President, Pulte Financial Companies (1984-1991). William Trimbur, Jr............... Vice President and Investment Portfolio Manager, VALIC. Formerly, Date of Birth: 06/15/51 Officer since 1987 Second Vice President, VALIC (1985-1990); Controller, VALIC (1985-1986); Assistant Controller, VALIC (1982-1985) and Assistant Treasurer, VALIC (1982-1986).
52
POSITION(S) HELD PRINCIPAL OCCUPATION(S) NAME WITH REGISTRANT DURING PAST 5 YEARS ---- --------------- ------------------- Maruti D. More.................... Vice President -- Vice President, American General Date of Birth: 02/02/44 Investments since 1998 Investment Management, L.P. (1998 to Present); Vice President, Investments, VALIC (1998 to Present). Portfolio Manager, American General Corporation (1996 to 1998). For- merly, Managing Director, Marketable Securities, Paul Revere Investment Management Corporation (1993 to 1995); Senior Portfolio Manager, Dewey Square Investors; Investment Vice President, New York Life Insurance Company. Brent C. Nelson................... Vice President since 1987 Senior Vice President, Controller and Date of Birth: 07/24/51 Director, VALIC and AGAIC. Formerly, Vice President and Controller, VALIC (1990-1994); Controller, VALIC (1987- 1990); Second Vice President and Controller, VALIC (1986-1987); Second Vice President -- Fund Operations, VALIC (1985-1986); Assistant Vice President -- Controller, Lomas Financial Security Insurance Co. (1982-1985). Cynthia A. Toles.................. Vice President since 1998 and Senior Vice President, General Date of Birth: 03/28/51 Secretary since 1985 Counsel and Secretary, VALIC (1998 to Present) and AGAIC (1998 to Present). Director and Secretary, VAMCO. Formerly, Senior Associate General Counsel & Secretary, VALIC (1990-1998); Vice President, Asso- ciate General Counsel & Secretary, VALIC (1988-1989); Second Vice President, Associate General Counsel and Assistant Secretary, VALIC (1986-1988); Assistant Vice President, Assistant General Counsel and Assistant Secretary, VALIC (1983-1986). Gregory R. Seward................. Treasurer since 1991 Vice President -- Variable Product Date of Birth: 06/27/56 Accounting (1998 to Present) and Assistant Controller (1991 to 1998), VALIC and Vice President -- Variable Product Accounting AGAIC (1998 to Present). Formerly, Controller, Avanti Health Systems, Inc. (1988-1991); Reports Manager, Amer- ican Capital Asset Management, Inc. (1986-1988); Senior Auditor, Price Waterhouse (1982-1986). Kathryn A. Pearce................. Controller since 1996 Associate Director of Fund Date of Birth: 02/05/47 Accounting, VALIC (1996 to Present). Formerly, Supervisor -- Mutual Fund Accounting, Van Kampen American Capital, Inc. (1977-1996). Nori L. Gabert.................... Vice President since 1998 and Associate General Counsel, VALIC Date of Birth: 08/15/53 Assistant Secretary since (1997 to Present). Formerly, Of 1997 Counsel, Winstead Sechrest & Minick P.C. (1997); Vice President and Associate General Counsel of Van Kampen American Capital, Inc. (1981-1996). Cynthia A. Gibbons................ Assistant Vice President since Senior Compliance Analyst, VALIC Date of Birth: 12/06/67 1998 (1996 to Present).
53
POSITION(S) HELD PRINCIPAL OCCUPATION(S) NAME WITH REGISTRANT DURING PAST 5 YEARS ---- --------------- ------------------- Jaime M. Sepulveda................ Assistant Treasurer Director -- Variable Product Date of Birth: 01/09/52 since 1998 Accounting and Financial Reporting, VALIC (1998 to Present). Formerly, Accounting Manager, Metro Networks, Inc. (1997-1998); Controller and Investment Officer, Port of Houston Authority (1994-1997); Chief Fi- nancial Officer, Intile Designs, Inc. (1993-1994). Earl E. Allen, Jr................. Assistant Treasurer since 1998 Manager -- Fund Reporting, VALIC. Date of Birth: 03/16/60 Formerly, Senior Auditor, Texas Treasury Department; Manager, American General Corporation; Assistant Vice President, Texas Commerce Bank. Donna L. Hathaway................. Assistant Controller since 1998 Manager -- Variable Product Date of Birth: 09/17/64 Accounting, VALIC. Formerly, Gas Revenue Accountant, Texaco Inc.; Accounting Manager, Hewitt Associates, LLC; Revenue Accounting Manager, Trans Texas Gas.
The officers conduct and supervise the daily business operations of the Company, while the directors, in addition to their functions set forth under "Investment Adviser," review such actions and decide on general policy. The Company has an Audit Committee. The Company's Audit Committee consists of Messrs. Lancaster, Hackerman, Paulsen, Upton, and Love. The Audit Committee recommends to the Board the selection of independent auditors for the Company and reviews with such independent auditors the scope and results of the annual audit, reviews the performance of the accounts, and considers any comments of the independent auditors regarding the Company's financial statements or books of account. The Company does not have a standing nominating or compensation committee. The five directors of the Company who are not affiliated with VALIC are each paid annual directors' fees and are reimbursed for certain out-of-pocket expenses by the Company. The directors and officers of the Company and members of their families as a group, beneficially owned less than 1% of the common stock of each Fund outstanding as of May 31, 1998. COMPENSATION OF DIRECTORS AND CERTAIN OFFICERS The following table sets forth information regarding compensation and benefits earned by the Directors for the fiscal year ending May 31, 1998. COMPENSATION TABLE FISCAL YEAR ENDING MAY 31, 1998
PENSION OR RETIREMENT TOTAL BENEFITS ESTIMATED COMPENSATION AGGREGATE ACCRUED AS ANNUAL FROM COMPENSATION PART OF BENEFITS FUND FROM SERIES COMPANY UPON COMPLEX(3) NAME OF PERSON, POSITION* SERIES COMPANY EXPENSES(1) RETIREMENT PAID TO DIRECTORS ------------------------- -------------- -------------- ---------- ----------------- Thomas L. West, Jr.**..................... $ 0 $ 0 $ 0 $ 0 Joe C. Osborne**.......................... $ 0 $ 0 $ 0 $ 0 Peter V. Tuters**......................... $ 0 $ 0 $ 0 $ 0 Dr. Norman Hackerman...................... $33,000 $24,500 (2) $39,073 Dr. John Wm. Lancaster.................... $27,000 $25,000 (2) $31,073 Ben L. Love............................... $33,000 $24,500 (2) $39,073 Dr. F. Robert Paulsen..................... $27,000 $24,500 (2) $31,073 Dr. R. Miller Upton....................... $25,500 $24,500 (2) $29,073
54 - --------------- * Messrs. Osborne and Tuters were Directors until November 10, 1998. On that same date Dr. Judith L. Craven, Dr. Timothy J. Ebner, Judge Gustavo E. Gonzales, Jr., John A. Graf**, Dr. John Maupin and Craig R. Roddy** were first elected Directors of the Series Company. ** "Interested person," as defined in the 1940 Act, specifically because of their capacity as officers, trustees or consultants of the Series Company, VALIC or American General Corporation. (1) The total present value of accumulated benefits as of May 31, 1998 under expense assumptions to be used for the fiscal year ending May 31, 1999 for Messrs. Hackerman, Lancaster, Love, Paulson, and Upton is $749,000. (2) All current directors would earn ten or more years of service as of their normal retirement date. Complete years of service earned as of May 31, 1998 are as follows: Messrs. Hackerman, Lancaster, Paulson, and Upton -- 10 or greater; Mr. Love -- approximately 7 years. PENSION TABLE -- ESTIMATED BENEFITS AT NORMAL RETIREMENT
SERVICE UNDER 5 10 OR MORE AT RETIREMENT YEARS 6 YEARS 7 YEARS 8 YEARS 9 YEARS YEARS - ------------- ------- ------- ------- ------- ------- ---------- COMPENSATION AT RETIREMENT $20,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000 $30,000 $15,000 $18,000 $21,000 $24,000 $27,000 $30,000 $40,000 $20,000 $24,000 $28,000 $32,000 $36,000 $40,000 $50,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000 $60,000 $30,000 $36,000 $42,000 $48,000 $54,000 $60,000
(3) Includes all investment companies managed by VALIC. FINANCIAL STATEMENTS The financial statements for the year ended May 31, 1998 and the report of independent auditors for that period are included in the American General Series Portfolio Company Annual Report for that period. The Annual Report to shareholders as of May 31, 1998 is incorporated by reference in this Statement of Additional Information. The financial statements included in the Annual Report and incorporated by reference in this Statement of Additional Information have been audited by Ernst & Young LLP, Independent Auditors, as set forth in their report thereon which appears in the Annual Report and have been incorporated by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 55 ================================================================================ AMERICAN GENERAL SERIES PORTFOLIO COMPANY - ANNUAL REPORT MAY 31, 1998 ================================================================================ TABLE OF CONTENTS President's Letter ......................... 1 Stock Index Fund ........................... 4 MidCap Index Fund .......................... 11 Small Cap Index Fund ....................... 17 International Equities Fund ................ 33 Growth Fund ................................ 39 Growth & Income Fund ....................... 42 Science & Technology Fund .................. 46 Social Awareness Fund ...................... 49 Asset Allocation Fund ...................... 56 Capital Conservation Fund .................. 64 Government Securities Fund ................. 67 International Government Bond Fund.......... 69 Money Market Fund .......................... 73 Notes to Financial Statements .............. 76 Financial Highlights ....................... 79 Report of Independent Auditors ............. 85 55 =============================================================================== AGSPC PRESIDENT'S LETTER 1 =============================================================================== Dear Valued Customer, In today's environment of rapidly changing markets, the commitment to your financial security remains American General Series Portfolio Company's highest priority. This dedication is reflected in the performance of our funds, and it is my pleasure to introduce AGSPC's May 31, 1998 Annual Report for your review. In this report, you will find financial and performance information for AGSPC's thirteen funds for the period ended May 31, 1998. Through your variable annuity contract, you are permitted to invest in one or more of the funds described in this report. Please refer to the chart on page 3 to determine which funds are available under your contract. MARKET CONDITIONS Securities markets provided significantly above average returns for the year ended May 31, 1998. The Standard & Poor's 500 Index (S&P 500(R)) provided a total return of 30.68% for the 12 months. The Standard & Poor's MidCap 400 Index (MidCap 400(R)) returned 29.87% and the Russell 2000(R) had a total return of 21.25%. The emphasis for the year was on large capitalization stocks. The United States economy continues to expand at an above-trend pace, despite trade and fiscal drag, a strong dollar, and a relatively high real interest environment. The primary factor stimulating the economy is the strength of the U.S. equity market. By raising household net worth the market is fueling spending. People do not have to save as much of their income if the equity market is increasing their net worth. Also, the "wealth effect" - the feeling that he or she is wealthier and should spend more - is bolstering consumer spending. Another positive in the economy is the extremely low level of inflation. Consumer price increases have been held to less than 3% annually and for 1998 less than 2% is expected. Wages and salaries are expanding at the rate of 3.5 to 4.0%. When the inflation rate is subtracted, workers are enjoying real wage increases. The combination of above average economic growth and contained inflation is providing a strong background for the stock and bond markets. In addition, the financial services industry is sending a very strong message, through the media, that saving for retirement is essential. That message is being received and unprecedented amounts of money are being invested in mutual funds. International markets have experienced widely divergent trends. European investors have seen equity markets appreciate more than 50% while most Asian markets have experienced dramatic decreases. The Asian markets declined in local currencies and the international investor saw a greater decrease as the currency values fell precipitously. FUND RETURNS INDEXED FUNDS The AGSPC index funds continued to emulate their respective indices with close correlation dependent upon the liquidity of the sector. The large capitalization Stock Index Fund tracked the S&P 500 Index(R) with a -0.07% difference for the year, returning 30.61% before expenses. The MidCap Index Fund tracked the MidCap 400(R) with a positive 0.11% difference, returning 29.98% before expenses. The Small Cap Index Fund tracked the Russell 2000 Index with a positive 0.48% variance, returning 21.73% before expenses. The International Equities Fund had a wider than normal variance to the EAFE Index as smaller capitalization names outperformed in January and February. The fund has low exposure to the smaller names and relies on the large benchmark names to track its index. In early 1998, the larger names did not provide the high correlation to local market returns that they have provided historically. The fund varied from the EAFE index by - -0.79%, returning 10.32% before expenses. MANAGED FUNDS The Growth Fund earned 28.25% before expenses, a -2.43% variance from the S&P 500 Index. The fund concentrates on stocks with above average growth potential in the service sector. The Science & Technology Fund invests in the highly volatile electronic and health care industries. Concerns surrounding computer pricing and demand have produced substantial variance compared to the basic market index - S&P 500. For the year the fund returned 11.80%, a -18.88% variance from the index. The Social Awareness Fund benefited from the emphasis on large capitalization growth stocks and it returned 30.88%, a positive 0.20% variance above the S&P 500. The Growth and Income Fund continues to use the Value Line Ranking System which emphasizes the small and mid-sized growth companies. The return for the year of 20.67% is closer to the Russell 2000 than the return of the larger capitalization issues in the S&P 500. The fund under performed the S&P 500 by 10.01%. The Asset Allocation Fund (previously the Timed Opportunity Fund) returned 22.48%, outperforming its benchmark by 1.26%. Bonds lagged the relevant index, stocks tracked the index and the over allocation to stocks resulted in the outperformance. BOND FUNDS The Capital Conservation Fund was impacted by two Asian holdings and uncertainty surrounding Columbia Healthcare. Those factors caused the fund to under-perform its relevant index by 1.05%, returning 11.30%. The Government Securities Fund emphasized Agency securities over Treasuries and returned 11.14%, under-performing its index by 0.08%. The International Government Bond Fund benefited from rising bond prices but the Dollar's strength eroded the local market gains. The fund returned 3.20%, out-performing the index by 0.82%. FUTURE OUTLOOK Both the equity and bond markets have provided outstanding returns over the past four years. Even the currency and credit crises in Southeast Asia have had only minor impact on the stock market. The bond market has been aided as foreign investors have sought safety in U.S. Treasury issues. An added benefit of the Asian crises is the devaluation of those currencies which have resulted in lower cost goods being exported to the United States. The other side of the coin is that U.S. exports have become more expensive overseas and the trade deficit has increased. Nevertheless, the domestic economy continues to expand at levels in excess of 3% and could well maintain that pace over the intermediate term. On balance, the less expensive imports have kept prices low and the flow of funds to U.S. bonds have caused interest rates to fall to decades lows. That has had a very positive affect on the real estate market with housing demand at very high levels. Positive economic growth combined with low interest rates augers well for the stock market. The current U.S. Treasury long bond yield of 5.6% compared with a Gross Domestic Product Deflator (a broad measure of inflation) of 1.0% provides an extraordinary real rate of return - 4.6%. That compares with a century long standard of 3.0 - 3.5%. In that context, the bond market should improve modestly. Thank you for your continued confidence in the VALIC investment management. Sincerely, /s/ THOMAS L. WEST, JR. Thomas L. West, Jr., Chairman and President June 22, 1998 American General Series Portfolio Company FUND RETURNS(1) TO INDEX [GRAPH] (1) Represents fund performance before subtracting expenses. See page two for applicable fund expenses and fund level returns after expenses. 56 ================================================================================ AGSPC PRESIDENT'S LETTER CONTINUED 2 ================================================================================ FUND RETURNS AND TRACKING DIFFERENCES For the period ended May 31, 1998
(1) (2) (3) (4) (5) FUND TOTAL PERFORMANCE INDEX BEFORE RETURN SUBTRACTING INCLUDING TRACKING FUND FUND EXPENSES REINVESTED DIFFERENCE AGSPC FUND/RELEVANT MARKET INDEX RETURN(a) EXPENSES (1) + (2) DIVIDENDS (3) - (4) - ------------------------------------------------------------------------------------------------- INDEXED FUNDS: Stock Index Fund / S&P 500............. 30.30% 0.31% 30.61% 30.68% (0.07)% MidCap Index Fund / Standard & Poor's MidCap 400......... 29.62 0.36 29.98 29.87 0.11 Small Cap Index Fund / Russell 2000.... 21.34 0.39 21.73 21.25 0.48 International Equities Fund / EAFE..... 9.92 0.40 10.32 11.11 (0.79) MANAGED FUNDS: Growth Fund / S&P 500.................. 27.41 0.84 28.25 30.68 (2.43) Growth & Income Fund / S&P 500......... 19.87 0.80 20.67 30.68 (10.01) Science & Technology Fund / S&P 500.... 10.85 0.95 11.80 30.68 (18.88) Social Awareness Fund / S&P 500........ 30.34 0.54 30.88 30.68 0.20 Asset Allocation Fund / Benchmark(b)... 21.94 0.54 22.48 21.22 1.26 Capital Conservation Fund / Merrill Lynch Corporate Master Bond.. 10.76 0.54 11.30 12.35 (1.05) Government Securities Fund / Lehman Brothers U.S. Treasury........ 10.60 0.54 11.14 11.22 (0.08) Int'l Gov't Bond Fund / Salomon Non U.S. Gov't Bond.......... 2.65 0.55 3.20 2.38 0.82 Money Market Fund / 30 Day Certificate of Deposit Primary Offering Rate by New York City Banks (NYC 30 Day CD Rate)...... 5.25 0.54 5.79 4.81 0.98
(a)Fund level returns are net of investment management fees and other fund expenses, but do not reflect charges specified in annuity contracts for mortality and expense guarantees, administrative fees, or surrender charges. (b)Benchmark consists of 55% S&P 500 Index, 35% Merrill Lynch Corporate and Government Master Index, and 10% NYC 30 Day CD Rate. SUMMARY OF NET ASSET VALUES PER SHARE AND PER SHARE DISTRIBUTIONS
DISTRIBUTIONS FROM NET INVESTMENT INCOME AND NET REALIZED GAINS ON NET ASSET VALUES (PER SHARE) SECURITIES (PER SHARE) ----------------------------------- ------------------------- MAY 31, NOVEMBER 30, MAY 31, 6/1/97 to 12/1/97 to FUND 1997 1997 1998 11/30/97 5/31/98 - ------------------------------------------------------------------------------------------------- Stock Index (emulate S&P 500)...........$26.09 $29.38 $33.38 $0.19 $0.36 MidCap Index (emulate MidCap 400)....... 20.83 23.98 25.27 0.12 1.47 Small Cap Index (emulate Russell 2000).. 16.18 18.32 17.94 0.10 1.50 International Equities (foreign long term growth stocks)..... 11.44 10.83 11.95 0.14 0.43 Growth Fund (long term growth of capital).............................. 17.62 20.01 22.08 0.00 0.34 Growth & Income Fund (long term growth of capital and current income)........ 16.87 19.20 19.91 0.04 0.25 Science & Technology Fund (long term growth of capital).................... 19.88 20.98 22.07 0.00 0.00 Social Awareness (social criteria growth stocks)........................ 17.90 20.12 22.16 0.11 0.93 Asset Allocation (asset allocation)..... 12.57 13.65 14.02 0.20 1.00 Capital Conservation (quality corporate bonds)................................ 9.31 9.61 9.68 0.29 0.32 Government Securities (intermediate and long term government bonds)........... 9.67 9.99 10.09 0.29 0.29 International Government Bond (high quality foreign government debt securities)........................... 11.33 11.27 11.42 0.19 0.02 Money Market (money market instruments). 1.00 1.00 1.00 0.03 0.02
The change in net asset value of the funds will not be the same as the change in the accumulation unit value of your annuity contract because (1) the change in net asset value does not reflect the reinvestment of income and capital gain distributions and (2) the mortality and expense charges described in your annuity contract are not included. 57 ================================================================================ AGSPC PRESIDENT'S LETTER CONTINUED 3 ================================================================================ FUNDS AVAILABLE UNDER VARIABLE ANNUITY CONTRACTS
VALIC SEPARATE ACCOUNT A CONTRACT FORM -------------------------------------------------------------- PORTFOLIO PORTFOLIO PORTFOLIO INDEPEN- GROUP DIRECTOR DIRECTOR DIRECTOR DENCE UNIT FUND 2 1 T PLUS IMPACT PURCHASE - ----------------------------------- --------- --------- --------- ------- ------ -------- Stock Index (emulate S&P 500)................ Yes Yes Yes Yes Yes Yes MidCap Index (emulate MidCap 400)............. No Yes No Yes Yes No Small Cap Index (emulate Russell 2000)........... No Yes Yes Yes No No International Equities (foreign long term growth stocks) No Yes Yes Yes No No Growth Fund (long term growth of capital).... Yes Yes No No No No Growth & Income Fund (long term growth of capital and current income).......................... No Yes No No No No Science & Technology Fund (long term growth of capital).... Yes Yes No No No No Social Awareness (social criteria growth stocks).. Yes Yes Yes Yes No No Timed Opportunity (asset allocation)............... No Yes Yes Yes Yes No Capital Conservation (quality corporate bonds)........ No Yes No Yes Yes No Government Securities (intermediate and long term government bonds).. No Yes No Yes No No Int'l Government Bond (high quality foreign government debt securities)...................... Yes Yes No Yes No No Money Market (money market instruments)....... Yes Yes Yes Yes Yes No
AMERICAN GENERAL LIFE INSURANCE COMPANY --------------------------------------------------------------------- SEPARATE ACCOUNT A -------------------- SEPARATE SEPARATE NON ACCOUNT ACCOUNT SELECT PLATINUM FUND QUALIFIED QUALIFIED B D PRESERVE INVESTOR - ------------------------------------ --------- --------- -------- -------- -------- -------- Stock Index (emulate S&P 500)................ Yes Yes Yes Yes No Yes MidCap Index (emulate MidCap 400)............. Yes Yes Yes No No Yes Small Cap Index (emulate Russell 2000)........... No No No No No No International Equities (foreign long term growth stocks) No No No Yes No Yes Growth Fund (long term growth of capital).... No No No No No No Growth & Income Fund (long term growth of capital and current income).......................... No No No No No No Science & Technology Fund (long term growth of capital).... No No No No No No Social Awareness (social criteria growth stocks).. No No No Yes No No Timed Opportunity (asset allocation)............... Yes Yes Yes No No No Capital Conservation (quality corporate bonds)........ Yes Yes Yes No No No Government Securities (intermediate and long term government bonds).. Yes Yes Yes No No No Int'l Government Bond (high quality foreign government debt securities)...................... No No No No No No Money Market (money market instruments)....... Yes Yes Yes No Yes Yes
58 ================================================================================ STOCK INDEX FUND - STATEMENT OF NET ASSETS 4 May 31, 1998 ================================================================================
NUMBER MARKET OF SHARES VALUE ----------- ----------- COMMON STOCKS - 99.25% ADVERTISING - 0.17% 43,350 Interpublic Group Cos., Inc.... $ 2,571,197 71,700 Omnicom Group, Inc............. 3,356,456 ----------- 5,927,653 ----------- AEROSPACE/DEFENSE - 1.54% 403,008 Boeing Co...................... 19,193,255 29,000 EG & G, Inc.................... 913,500 55,960 General Dynamics Corp.......... 2,486,723 15,400 Goodrich (B.F.) Co............ 789,250 80,076 Lockheed Martin Corp........... 8,988,531 30,800 Northrop Grumman Corp.......... 3,301,375 112,500 Raytheon Co. Class B........... 6,152,344 44,000 TRW Inc........................ 2,356,750 101,300 United Technologies Corp....... 9,522,200 ----------- 53,703,928 ----------- AIRLINES - 0.41% 36,300* AMR Corp....................... 5,587,931 31,600 Delta Air Lines, Inc........... 3,634,000 82,800 Southwest Airlines Co.......... 2,209,725 41,400* US Airways Group, Inc.......... 2,898,000 ----------- 14,329,656 ----------- APPAREL & PRODUCTS - 0.10% 21,178* Abercrombie & Fitch Co. Class A 894,749 27,000* Fruit of the Loom, Inc. Class A 970,313 32,900 Liz Claiborne, Inc............. 1,667,619 ----------- 3,532,681 ----------- APPLIANCES/FURNISHINGS - 0.11% 35,000 Maytag Corp.................... 1,765,313 30,200 Whirlpool Corp................. 2,063,037 ----------- 3,828,350 ----------- AUTO - CARS - 1.70% 275,774 Chrysler Corp.................. 15,339,929 450,000 Ford Motor Co.................. 23,343,750 284,900 General Motors Corp............ 20,494,994 ----------- 59,178,673 ----------- AUTO - REPLACEMENT PARTS - 0.33% 73,900* AutoZone, Inc.................. 2,457,175 18,700 Cooper Tire & Rubber Co........ 442,956
NUMBER MARKET OF SHARES VALUE ----------- ----------- AUTO - REPLACEMENT PARTS - Continued 14,300 Echlin Inc..................... $ 679,250 74,400 Genuine Parts Co............... 2,524,950 71,700 Goodyear Tire & Rubber Co...... 5,153,438 15,800 Pep Boys-Manny, Moe & Jack..... 351,550 ------------ 11,609,319 ------------ BANKS - NEW YORK CITY - 2.01% 161,100 Bank of New York Co., Inc...... 9,847,238 174,882 Chase Manhattan Corp........... 23,773,022 178,700 CitiCorp....................... 26,648,637 79,200 J. P. Morgan & Co. Inc........ 9,835,650 ------------ 70,104,547 ------------ BANKS - OTHER - 3.08% 278,836 BankAmerica Corp............... 23,056,251 61,300 BankBoston Corp................ 6,459,488 122,223 First Chicago Corp............. 10,686,873 419,200 First Union Corp............... 23,187,000 105,393 Fleet Financial Group, Inc..... 8,642,226 116,500 Mellon Bank Corp............... 7,856,469 133,000 National City Corp............. 9,010,750 51,600 Providian Financial Corp....... 3,283,050 14,000 Republic of New York Corp...... 1,798,125 37,033 Wells Fargo & Co............... 13,387,430 ------------ 107,367,662 ------------ BANKS - REGIONAL - 3.55% 261,349 Banc One Corp.................. 14,406,863 67,950 Comerica Inc................... 4,467,713 106,275 Fifth Third Bancorp............ 5,234,044 59,600 Huntington Bancshares, Inc..... 1,951,900 172,340 KeyCorp........................ 6,538,149 51,500 Mercantile Bancorporation Inc.. 2,632,938 389,917 NationsBank Corp............... 29,536,212 53,900 Northern Trust Corp............ 3,801,637 328,200 Norwest Corp................... 12,758,775 135,900 PNC Bank Corp.................. 7,848,225 61,200 State Street Corp.............. 4,218,975 84,200 Summit Bancorporation.......... 4,220,525 72,200 SunTrust Banks, Inc............ 5,703,800 102,150 Synovus Financial Corp......... 2,291,991 309,990 U.S. Bancorp................... 12,128,359 71,513 Wachovia Corp.................. 5,725,510 ------------ 123,465,616 ------------
NUMBER MARKET OF SHARES VALUE ----------- ----------- BEVERAGE - BREWERS/ DISTRIBUTORS - 0.47% 11,900 Adolph Coors Class B........... $ 446,250 202,800 Anheuser-Busch Companies, Inc.. 9,316,125 18,915 Brown-Forman Corp Class B...... 1,089,977 128,400 Seagram Co. Ltd................ 5,641,575 ------------ 16,493,927 ------------ BEVERAGE - SOFT DRINKS - 2.97% 995,000 Coca-Cola Co................... 77,983,125 624,500 PepsiCo, Inc................... 25,487,406 ------------ 103,470,531 ------------ BROADCASTING - 1.46% 293,158 CBS Corp....................... 9,307,767 38,600* Clear Channel Communications, Inc......................... 3,700,775 141,750 Comcast Corp. Class A Special.. 4,859,374 197,178 Tele-Comm Liberty Media Group Class A..................... 6,765,670 215,200 U S West Communications Group.. 10,921,400 226,800 U S West Media Group........... 8,405,775 122,700* Viacom, Inc Class B............ 6,748,500 ------------ 50,709,261 ------------ BUILDING MATERIALS - 0.38% 8,900 Armstrong World Industries, Inc......................... 748,713 75,300 Lowe's Companies, Inc.......... 5,962,818 81,400 Masco Corp..................... 4,578,750 60,700 Sherwin-Williams Co............ 2,018,275 ------------ 13,308,556 ------------ CHEMICAL - MAJOR - 2.06% 99,700 Dow Chemical Co................ 9,658,437 446,600 E.I. du Pont de Nemours and Co. 34,388,200 47,500 Hercules, Inc.................. 2,092,969 243,800 Monsanto Co.................... 13,500,425 54,900 Morton International, Inc...... 1,671,019 66,500 PPG Industries, Inc............ 4,846,187 18,300 Rohm and Haas Co............... 2,010,713 68,300 Union Carbide Corp............. 3,410,731 ------------ 71,578,681 ------------ CHEMICAL - MISCELLANEOUS - 0.44% 42,100 Air Products and Chemicals, Inc......................... 3,662,700 30,637 Eastman Chemical Co............ 2,052,678 17,100 Ecolab Inc..................... 527,963 15,300* FMC Corp....................... 1,169,494
59 ================================================================================ STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 5 ================================================================================
NUMBER MARKET OF SHARES VALUE ----------- ----------- CHEMICAL - MISCELLANEOUS - Continued 26,500 Great Lakes Chemical Corp...... $ 1,060,000 15,428 Millipore Corp................. 514,910 20,300 Nalco Chemical Co.............. 761,250 6,625* Octel Corp..................... 144,508 64,700 Praxair, Inc................... 3,190,518 39,500 Sigma Aldrich Corp............. 1,441,750 41,400 W.R. Grace & Co................ 768,488 ----------- 15,294,259 ----------- CONGLOMERATES - 1.01% 232,500 Allied Signal Inc.............. 9,939,375 38,800 ITT Inds, Inc.................. 1,430,750 39,400 Loews Corp..................... 3,575,550 65,200 Tenneco Inc.................... 2,713,950 58,300 Textron Inc.................... 4,325,131 237,000 Tyco International Ltd......... 13,123,875 ----------- 35,108,631 ----------- CONSUMER FINANCE - 0.28% 25,000 Beneficial Corp................ 3,350,000 204,275 MBNA Corp...................... 6,472,964 ----------- 9,822,964 ----------- CONTAINERS - METAL/GLASS - 0.31% 4,700 Ball Corp...................... 185,356 101,100 Corning Inc.................... 3,987,132 65,600 Crown Cork & Seal Co., Inc..... 3,403,000 12,100 Owens Corning.................. 453,750 61,200* Owens-Illinois, Inc............ 2,750,175 ----------- 10,779,413 ----------- CONTAINERS - PAPER - 0.10% 6,500 Bemis Co., Inc................. 274,219 39,214* Sealed Air Corp................ 2,097,949 17,700 Temple-Inland Inc.............. 1,039,875 ----------- 3,412,043 ----------- COSMETICS/TOILETRIES - 0.98% 6,800 Alberto-Culver Co. Class B..... 202,300 62,700 Avon Products, Inc............. 5,129,644 220,300 Gillette Co.................... 25,802,637 60,000 International Flavors & Fragrances, Inc............. 2,880,000 ----------- 34,014,581 ----------- DRUGS - 7.86% 22,500 Allergan, Inc.................. 945,000 43,200* ALZA Corp...................... 2,089,800
NUMBER MARKET OF SHARES VALUE ----------- ----------- DRUGS - Continued 543,000 American Home Products Corp.... $26,233,687 112,100* Amgen Inc...................... 6,782,050 23,900 Bausch & Lomb Inc.............. 1,190,519 399,400 Bristol Myers Squibb Co........ 42,935,500 444,400 Eli Lilly and Co............... 27,302,825 480,400 Merck & Co., Inc............... 56,236,825 519,800 Pfizer, Inc.................... 54,481,537 219,870* Pharmacia & Upjohn, Inc........ 9,715,506 298,200 Schering-Plough Corp........... 24,955,613 326,700 Warner-Lambert Co.............. 20,847,544 ----------- 273,716,406 ----------- ELECTRICAL EQUIPMENT - 3.75% 105,800 AMP Inc........................ 4,020,400 62,000 Cabletron Systems, Inc......... 798,250 181,200 Emerson Electric Co............ 11,007,900 1,314,100 General Electric Co............ 109,563,087 30,500 National Service Industries, Inc......................... 1,555,500 48,300 Raychem Corp................... 1,817,288 6,800 Thomas & Betts Corp............ 363,375 14,200 W. W. Grainger Inc............. 1,498,988 ----------- 130,624,788 ----------- ELECTRONIC INSTRUMENTS - 0.16% 1* Commscope Inc.................. 16 28,100 General Signal Corp............ 1,155,612 27,100* Perkin-Elmer Corp.............. 1,856,350 5,400 Tektronix, Inc................. 206,550 70,400* Thermo Electron Corp........... 2,472,800 ----------- 5,691,328 ----------- ENTERTAINMENT - 1.68% 39,400* Harrah's Entertainment, Inc.... 985,000 67,475 Hasbro, Inc.................... 2,580,919 49,400* King World Productions, Inc.... 1,259,700 127,987 Mattel, Inc.................... 4,847,508 216,700 Time Warner Inc................ 16,861,969 283,252 Walt Disney Co................. 32,042,882 ----------- 58,577,978 ----------- FINANCE COMPANIES - 0.71% 141,800 Associates First Capital Corp.. 10,608,412 69,600 Green Tree Financial Corp...... 2,797,050 48,800 Household International, Inc... 6,603,250 96,350 SunAmerica, Inc................ 4,685,019 ----------- 24,693,731 -----------
NUMBER MARKET OF SHARES VALUE ----------- ----------- FINANCIAL SERVICES - 0.64% 180,400 American Express Co............ $18,513,550 39,800 Countrywide Credit Industries, Inc......................... 1,840,750 40,100 H & R Block Inc................ 1,764,400 ----------- 22,118,700 ----------- FOODS - 2.16% 215,192 Archer Daniels Midland Co...... 4,061,748 124,000 BestFoods...................... 6,998,250 174,400 Campbell Soup Co............... 9,504,800 178,700 ConAgra, Inc................... 5,226,975 65,900 General Mills, Inc............. 4,497,675 156,350 H J Heinz Co................... 8,296,322 47,000 Hershey Foods Corp............. 3,254,750 162,800 Kellogg Co..................... 6,725,675 79,380 Pioneer Hi-Bred International, Inc......................... 3,021,401 60,900 Quaker Oats Co................. 3,513,169 47,600 Ralston Purina Co.............. 5,298,475 182,600 Sara Lee Corp.................. 10,750,575 42,500 Wm. Wrigley Jr. Co............. 4,090,625 ----------- 75,240,440 ----------- FOOTWEAR - 0.11% 73,700 NIKE, Inc. Class B............ 3,390,200 18,900* Reebok International Ltd....... 543,375 ----------- 3,933,575 ----------- FREIGHT - 0.13% 52,560* FDX Corp....................... 3,370,410 37,200 Ryder System, Inc.............. 1,267,125 ----------- 4,637,535 ----------- FUNERAL SERVICES - 0.10% 83,800 Service Corp. International.... 3,425,325 ----------- GOLD MINING - 0.15% 151,700 Barrick Gold Corp.............. 2,920,225 52,100 Battle Mountain Gold Co........ 276,781 86,400 Homestake Mining Co............ 939,600 93,800 Placer Dome Inc................ 1,166,638 ----------- 5,303,244 ----------- GOVERNMENT SPONSORED - 1.08% 272,600 Federal Home Loan Mortg. Corp.. 12,403,300 418,500 Federal National Mortgage Association ................... 25,057,688 ----------- 37,460,988 -----------
60 ================================================================================ STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 6 May 31, 1998 ================================================================================
NUMBER MARKET OF SHARES VALUE ----------- ----------- HARDWARE & TOOLS - 0.13% 31,300 Black & Decker Corp............ $ 1,827,138 11,550 Snap-on Inc.................... 506,756 42,600 Stanley Works.................. 2,023,500 ----------- 4,357,394 ----------- HEALTHCARE - 0.45% 49,400 Cardinal Health, Inc........... 4,402,775 154,900* HealthSouth Corp............... 4,395,288 54,400* Humana Inc..................... 1,689,800 79,800 United HealthCare Corp......... 5,107,200 ----------- 15,595,063 ----------- HEAVY DUTY TRUCKS/PARTS - 0.26% 19,700 Cummins Engine Co., Inc........ 1,024,400 30,700 Dana Corp...................... 1,600,238 37,800 Eaton Corp..................... 3,394,913 39,010* Navistar International Corp.... 1,177,614 35,710 PACCAR Inc..................... 1,971,863 ----------- 9,169,028 ----------- HOME BUILDERS - 0.06% 33,200 Centex Corp.................... 1,186,900 14,456 Kaufman & Broad Home Corp...... 371,339 7,900 Pulte Corp..................... 421,168 ----------- 1,979,407 ----------- HOSPITAL MANAGEMENT - 0.38% 250,484 Columbia/HCA Healthcare Corp... 8,187,695 13,000 Manor Care, Inc................ 410,313 13,100 Shared Medical Systems Corp.... 953,025 105,200* Tenet Healthcare Corp.......... 3,682,000 ----------- 13,233,033 ----------- HOSPITAL SUPPLIES - 2.64% 315,500 Abbott Laboratories............ 23,406,155 8,400 Bard (C. R.), Inc.............. 291,375 112,000 Baxter International Inc....... 6,405,000 55,200 Becton, Dickinson and Co....... 3,905,400 64,100 Biomet, Inc.................... 1,850,888 70,477* Boston Scientific Corp......... 4,492,909 531,900 Johnson & Johnson.............. 36,734,343 37,900 Mallinckrodt, Inc.............. 1,167,794 200,900 Medtronic, Inc................. 11,175,063 37,833* St. Jude Medical, Inc.......... 1,352,530 25,700 United States Surgical Corp.... 1,021,575 ----------- 91,803,032 -----------
NUMBER MARKET OF SHARES VALUE ----------- ------------ HOUSEHOLD PRODUCTS - 2.95% 43,200 Clorox Co...................... $ 3,607,200 127,300 Colgate-Palmolive Co........... 11,075,100 173,100 Minnesota Mining & Manufacturing Co............ 16,033,388 59,000 Newell Co...................... 2,846,750 537,852 Procter & Gamble Co............ 45,145,951 63,100 Rubbermaid, Inc................ 2,058,638 35,300 Tupperware Corp................ 953,100 267,300 Unilever N V - ADR............. 21,099,994 ----------- 102,820,121 ----------- INFORMATION PROCESSING - 9.95% 1* A.C. Nielson................... 26 38,200 Adobe Systems Inc.............. 1,525,613 61,400* Apple Computer, Inc............ 1,634,775 27,800 Autodesk, Inc.................. 1,181,500 122,600 Automatic Data Processing, Inc. 7,800,425 78,400* Bay Networks, Inc.............. 2,170,700 319,521* Cendant Corp................... 6,929,612 27,452* Ceridian Corp.................. 1,482,408 409,850* Cisco Systems, Inc............. 30,994,907 68,600 Cognizant Corp................. 3,652,950 622,490 Compaq Computer Corp........... 17,001,758 211,230 Computer Associates International, Inc.......... 11,089,574 49,400* Computer Sciences Corp......... 2,565,713 265,200* Dell Computer Corp............. 21,854,150 66,200* Digital Equipment Corp......... 3,632,725 213,500* E M C Corp..................... 8,846,906 180,554 First Data Corp................ 6,003,421 60,000* Gateway 2000, Inc.............. 2,703,750 45,300* General Instrument Corp........ 1,078,706 94,900 HBO & Co....................... 5,477,514 408,500 Hewlett Packard Co............. 25,378,062 58,500 Honeywell Inc.................. 4,910,344 382,700 International Business Machine. 44,919,412 988,700* Microsoft Corp................. 83,854,119 164,900* Novell, Inc ................... 1,731,450 412,687* Oracle Corp.................... 9,749,730 120,200* Parametric Technology Corp..... 3,684,887 112,900 Pitney Bowes Inc............... 5,306,300 96,300* Seagate Technology............. 2,226,938 58,100* Silicon Graphics, Inc.......... 697,200 161,400* Sun Microsystems, Inc.......... 6,466,088 137,600* 3Com Corp...................... 3,491,600 96,900* Unisys Corp.................... 2,374,050 138,900 Xerox Corp..................... 14,271,975 ----------- 346,689,288 -----------
NUMBER MARKET OF SHARES VALUE ----------- ------------ INSURANCE - CASUALTY - 0.41% 67,800 Chubb Corp..................... $ 5,394,337 27,800 Progressive Corp............... 3,832,925 58,000 SAFECO Corp.................... 2,697,000 56,442 St. Paul Companies, Inc........ 2,504,614 ----------- 14,428,876 ----------- INSURANCE - LIFE - 0.67% 63,192 Aetna Inc...................... 4,940,825 101,400 Conseco Inc.................... 4,727,775 66,112 Jefferson-Pilot Corp........... 3,784,911 57,000 Lincoln National Corp.......... 5,122,875 54,900 Torchmark Corp................. 2,353,838 21,209 Transamerica Corp.............. 2,439,035 ----------- 23,369,259 ----------- INSURANCE - MISCELLANEOUS - 0.50% 37,600 General Re Corp................ 8,267,300 31,600 MBIA, Inc...................... 2,356,175 51,200 MGIC Investment Corp........... 3,068,800 67,400 UNUM Corp...................... 3,744,913 ----------- 17,437,188 ----------- INSURANCE - MULTILINE - 3.05% 183,820 Allstate Corp.................. 17,302,057 281,627 American International Group, Inc......................... 34,868,942 52,400 Aon Corp....................... 3,356,875 110,400 CIGNA Corp..................... 7,562,400 54,000 Cincinnati Financial Corp...... 2,268,000 57,500 Hartford Financial Services Group....................... 6,328,594 79,900 March & McLennan Companies, Inc......................... 6,996,244 453,421 Travelers Group, Inc........... 27,658,681 ----------- 106,341,793 ----------- LEISURE TIME - 0.06% 17,900 Brunswick Corp................. 562,731 70,900* Mirage Resorts, Inc............ 1,475,607 ----------- 2,038,338 ----------- LODGING - 0.19% 108,800 Hilton Hotels Corp............. 3,420,400 94,000 Marriott International Inc..... 3,266,500 ----------- 6,686,900 ----------- MACHINE TOOLS - 0.01% 4,700 Cincinnati Milacron, Inc....... 140,706 -----------
61 ================================================================================ STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 7 ================================================================================
NUMBER MARKET OF SHARES VALUE ----------- ----------- MACHINERY - AGRICULTURE - 0.22% 38,000 Case Corp...................... $ 2,199,250 103,100 Deere & Co..................... 5,348,313 ----------- 7,547,563 ----------- MACHINERY - CONSTRUCTION & CONTRACTS - 0.31% 158,400 Caterpillar Inc................ 8,702,100 34,200 Fluor Corp..................... 1,630,913 2,600 Foster Wheeler Corp............ 65,975 10,800 Harnischfeger Industries Inc... 340,200 ----------- 10,739,188 ----------- MACHINERY - INDUSTRIAL/ SPECIALTY - 0.60% 1,600 Aeroquip-Vickers, Inc.......... 98,800 14,600 Briggs & Stratton Corp......... 662,475 42,700 Cooper Industries, Inc......... 2,748,813 95,600 Dover Corp..................... 3,585,000 89,400 Illinois Tool Works Inc........ 5,900,400 64,300 Ingersoll-Rand Co.............. 2,897,518 32,000 Johnson Controls, Inc.......... 1,904,000 59,533 Pall Corp...................... 1,179,498 33,375 Parker Hannifin Corp........... 1,370,461 12,800 Timken Co...................... 481,600 ----------- 20,828,565 ----------- MEDICAL TECHNOLOGY - 0.13% 68,900 Guidant Corp................... 4,439,744 ----------- MERCHANDISE - DRUG - 0.46% 75,600 CVS Corp....................... 5,306,175 16,600 Longs Drug Stores Corp......... 503,188 100,600 Rite Aid Corp.................. 3,602,738 191,400 Walgreen Co.................... 6,734,887 ----------- 16,146,988 ----------- MERCHANDISE - SPECIALTY - 1.71% 41,000 American Greetings Corp. Class A..................... 1,947,500 27,100 Circuit City Stores, Inc....... 1,148,363 53,600* Consolidated Stores Corp....... 2,046,849 95,522* CostCo Companies, Inc.......... 5,528,336 74,400 Fortune Brands, Inc........... 2,859,750 164,700 Gap, Inc....................... 8,893,800 304,200 Home Depot, Inc................ 23,898,712 49,600 Ikon Office Solutions Inc...... 1,050,900 973 Jostens, Inc................... 24,568
NUMBER MARKET OF SHARES VALUE ----------- ----------- MERCHANDISE - SPECIALTY - Continued 73,873 Limited, Inc................... $ 2,456,277 39,600 Nordstrom, Inc................. 2,853,675 33,600 Tandy Corp..................... 1,486,800 54,000 TJX Companies, Inc............. 2,524,500 109,525* Toys "R" Us, Inc............... 2,902,413 ----------- 59,622,443 ----------- MERCHANDISING - DEPARTMENT - 0.64% 186,200 Dayton Hudson Corp............. 8,635,025 30,800 Dillards, Inc. Class A......... 1,295,525 90,800* Federated Department Stores, Inc......................... 4,704,575 99,800 May Department Stores Co....... 6,418,388 16,000 Mercantile Stores Co., Inc..... 1,258,000 ----------- 22,311,513 ----------- MERCHANDISING - FOOD - 0.57% 113,900 Albertsons, Inc................ 5,274,993 119,200 American Stores Co............. 2,972,550 17,400 Giant Food Inc. Class A........ 748,200 15,300 Great Atlantic & Pacific Tea Co., Inc.................... 489,600 98,300* Kroger Co...................... 4,220,756 16,700 Supervalu Inc.................. 699,313 143,800 SYSCO Corp..................... 3,352,338 52,000 Winn-Dixie Stores, Inc......... 2,115,750 ----------- 19,873,500 ----------- MERCHANDISING - MASS - 2.03% 109,900 J.C. Penney Co., Inc........... 7,892,194 190,300* Kmart Corp..................... 3,687,063 148,400 Sears Roebuck and Co........... 9,172,975 891,800 Wal-Mart Stores, Inc........... 49,216,212 35,000 Woolworth Corp................. 691,250 ----------- 70,659,694 ----------- METALS - ALUMINUM - 0.25% 76,500 Alcan Aluminium Ltd............ 2,180,250 67,200 Aluminum Co. of America........ 4,662,000 33,100 Reynolds Metals Co............. 1,919,800 ----------- 8,762,050 ----------- METALS - COPPER - 0.11% 19,300 ASARCO Inc..................... 437,869 67,631 Newmont Mining Corp............ 1,686,548 27,200 Phelps Dodge Corp.............. 1,659,200 ----------- 3,783,617 -----------
NUMBER MARKET OF SHARES VALUE ----------- ----------- METALS - MISCELLANEOUS - 0.09% 31,350 Cyprus Amax Minerals Co........$ 497,681 57,075 Engelhard Corp................. 1,187,874 48,500 Freeport - McMoRan Copper & Gold Inc. Class B........... 812,375 52,400 Inco Limited................... 753,250 ----------- 3,251,180 ----------- METALS - STEEL - 0.20% 59,525 Allegheny Teldyne Inc.......... 1,383,956 22,300* Armco Inc...................... 121,256 46,100* Bethlehem Steel Corp........... 564,725 20,200 Inland Steel Industries, Inc... 578,225 31,100 Nucor Corp..................... 1,601,650 48,920 USX-US Steel Group, Inc........ 1,755,005 53,625 Worthington Industries, Inc.... 945,141 ----------- 6,949,958 ----------- MISCELLANEOUS - 0.16% 51,800 BB&T Corp...................... 3,428,513 57,800 Equifax Inc.................... 2,102,475 ----------- 5,530,988 ----------- MOBILE HOMES - 0.02% 14,600 Fleetwood Enterprises, Inc..... 584,000 ----------- NATURAL GAS-DIVERSIFIED - 0.13% 43,900 Coastal Corp................... 3,094,950 37,900 Sonat Inc...................... 1,485,206 ----------- 4,580,156 ----------- OIL - INTEGRATED DOMESTIC - 1.57% 35,700 Amerada Hess Corp.............. 1,930,031 405,000 Amoco Corp..................... 16,934,063 26,900 Ashland Oil, Inc............... 1,341,638 125,800 Atlantic Richfield Co.......... 9,922,475 69,067 Burlington Resources, Inc..... 2,909,447 19,400 Kerr-McGee Corp................ 1,227,050 150,600 Occidental Petroleum Corp...... 4,160,325 40,800* Oryx Energy Co................. 951,150 18,500 Pennzoil Co.................... 1,069,531 96,300 Phillips Petroleum Co.......... 4,821,019 40,916 Sun Co., Inc................... 1,738,930 105,400 Unocal Corp.................... 3,754,875 114,100 USX-Marathon Group............. 3,993,500 ----------- 54,754,034 -----------
62 ================================================================================ STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 8 May 31, 1998 ================================================================================
NUMBER MARKET OF SHARES VALUE ----------- ------------ OIL - INTEGRATED INTERNATIONAL - 5.04% 262,000 Chevron Corp................... $ 20,927,250 973,700 Exxon Corp..................... 68,645,850 320,500 Mobil Corp..................... 24,999,000 853,300 Royal Dutch Petroleum Co. - ADR ....................... 47,838,130 226,900 Texaco Inc..................... 13,103,475 ------------ 175,513,705 ------------ OIL - SERVICES - 0.90% 58,800 Baker Hughes Inc............... 2,116,800 85,500 Dresser Industries, Inc........ 3,981,094 115,000 Halliburton Co................. 5,448,125 34,300 McDermott International, Inc... 1,309,831 35,500* Rowan Companies, Inc........... 907,469 193,400 Schlumberger Ltd............... 15,097,287 26,800* Western Atlas Inc.............. 2,319,875 ------------ 31,180,481 ------------ OIL/GAS PRODUCERS - 0.15% 25,300 Anadarko Petroleum Corp........ 1,669,800 33,700 Apache Corp.................... 1,152,119 6,000 Helmerich & Payne, Inc......... 151,500 113,842 Union Pacific Resources Group Inc......................... 2,305,300 ------------ 5,278,719 ------------ PAPER/FOREST PRODUCTS - 1.18% 54,200 Avery Dennison Corp............ 2,808,238 10,566 Boise Cascade Corp............. 352,640 45,400 Champion International Corp.... 2,179,200 88,000 Fort James Corp................ 4,207,500 39,200 Georgia-Pacific Corp........... 2,516,150 127,718 International Paper Co......... 5,875,028 240,432 Kimberly-Clark Corp............ 11,916,410 41,600 Louisiana Pacific Corp......... 829,400 39,200 Mead Corp...................... 1,220,100 4,900 Potlatch Corp.................. 214,681 57,364* Stone Container Corp........... 1,018,211 35,450 Union Camp Corp................ 1,938,672 26,850 Westvaco Corp.................. 765,225 79,500 Weyerhaeuser Co................ 4,039,594 35,000 Willamette Industries, Inc..... 1,200,938 ------------ 41,081,987 ------------
NUMBER MARKET OF SHARES VALUE ----------- ----------- PHOTOGRAPHY - 0.29% 130,750 Eastman Kodak Co............... $ 9,332,282 18,100 Polaroid Corp.................. 734,181 ----------- 10,066,463 ----------- POLLUTION CONTROL - 0.30% 83,300 Browning-Ferris Industries, Inc......................... 2,962,356 97,400* Laidlaw Inc.................... 1,205,325 198,000 Waste Management, Inc.......... 6,435,000 ----------- 10,602,681 ----------- PUBLISHING - NEWS - 0.53% 35,600 Dow Jones & Co., Inc........... 1,713,250 112,000 Gannett Co., Inc............... 7,385,000 42,400 Knight-Ridder, Inc............. 2,419,450 27,500 New York Times Co. Class A... 1,938,750 40,632 Times Mirror Co................ 2,600,448 36,300 Tribune Co..................... 2,427,563 ----------- 18,484,461 ----------- PUBLISHING/PRINTING - 0.31% 50,800 Deluxe Corp.................... 1,704,975 64,500 Dun & Bradstreet Corp.......... 2,176,875 19,217 Harcourt General, Inc.......... 1,047,327 30,100 McGraw-Hill, Inc............... 2,353,443 21,600 Moore Corp. Ltd................ 313,200 71,800 R R Donnelley and Son.......... 3,231,000 ----------- 10,826,820 ----------- RAILROAD - 0.60% 68,517 Burlington Northern Santa Fe... 6,817,441 76,600 CSX Corp....................... 3,648,075 170,400 Norfolk Southern Corp.......... 5,335,650 103,600 Union Pacific Corp............. 5,011,650 ----------- 20,812,816 ----------- RESTAURANTS - 0.65% 55,800 Darden Restaurants, Inc........ 861,413 285,000 McDonald's Corp................ 18,703,124 77,920* Tricon Global Restaurants, Inc. 2,420,390 30,000 Wendy's International, Inc..... 740,625 ----------- 22,725,552 ----------- SAVINGS & LOAN - 0.38% 25,100 Golden West Financial Corp..... 2,710,800 31,700 H.F. Ahmanson & Co............. 2,417,125 113,925 Washington Mutual, Inc......... 8,045,953 ----------- 13,173,878 -----------
NUMBER MARKET OF SHARES VALUE ----------- ----------- SECURITIES RELATED - 1.22% 97,650 Charles Schwab Corp............ $ 3,222,450 95,500 Franklin Resources, Inc........ 4,667,562 45,600 Lehman Brothers Hldings, Inc... 3,234,750 134,900 Merrill Lynch & Co., Inc....... 12,073,550 249,201 Morgan St Dean Witter Discover. 19,453,254 ----------- 42,651,566 ----------- SEMICONDUCTOR EQUIPMENT - 0.19% 158,000* Applied Materials, Inc......... 5,056,000 42,600* KLA-Tencor Corp................ 1,443,075 ----------- 6,499,075 ----------- SEMICONDUCTORS - 2.21% 57,700* Advanced Micro Devices, Inc.... 1,125,150 653,300 Intel Corp..................... 46,670,118 55,500* LSI Logic Corp................. 1,182,844 93,300* Micron Technology, Inc......... 2,198,381 231,600 Motorola, Inc.................. 12,260,325 51,000* National Semiconductor Corp.... 828,750 95,400 Rockwell International Corp.... 5,247,000 146,900 Texas Instruments Inc.......... 7,546,988 ----------- 77,059,556 ----------- TELECOMMUNICATIONS - 2.70% 211,200* Airtouch Communications, Inc... 10,058,400 56,300 ALLTEL Corp.................... 2,220,331 32,335* Andrew Corp.................... 710,361 57,000* DSC Communications Corp........ 974,347 54,300 Frontier Corp.................. 1,652,756 43,800 Harris Corp.................... 2,110,613 515,980 Lucent Technologies, Inc....... 36,602,330 89,900* Nextel Communications, Inc. Class A....................... 2,118,269 203,200 Northern Telecom Ltd........... 13,004,800 29,500 Scientific-Atlanta, Inc........ 650,844 80,100* Tellabs, Inc................... 5,504,376 402,600* WorldCom, Inc.................. 18,318,300 ----------- 93,925,727 ----------- TEXTILE - PRODUCTS - 0.09% 26,100 Russell Corp................... 711,225 48,800 V F Corp....................... 2,595,550 ----------- 3,306,775 -----------
63 ================================================================================ STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 9 ================================================================================
NUMBER MARKET OF SHARES VALUE ----------- ----------- TOBACCO - 1.13% 981,900 Philip Morris Cos Inc.......... $36,698,512 94,300 UST Inc........................ 2,510,738 ----------- 39,209,250 ----------- UTILITIES - COMMUNICATION - 5.50% 654,926 AT & T Corp.................... 39,868,620 451,400 Ameritech Corp................. 19,156,288 327,505 Bell Atlantic Corp............. 30,007,646 384,700 BellSouth Corp................. 24,813,149 403,300 GTE Corp....................... 23,517,431 285,000 MCI Communications Corp........ 15,238,608 733,358 SBC Communications, Inc........ 28,509,291 145,500 Sprint Corp.................... 10,439,625 ----------- 191,550,658 ----------- UTILITIES - ELECTRIC - 2.39% 38,300 Ameren Corp.................... 1,498,488 67,000 American Electric Power, Inc... 3,040,125 35,200 Baltimore Gas and Electric Co.. 1,071,400 60,100 Carolina Power & Light Co...... 2,464,100 105,700 Central & South West Corp...... 2,794,444 42,964 Cinergy Corp................... 1,388,274 114,200 Consolidated Edison, Inc....... 4,889,187 57,650 Dominion Resources, Inc........ 2,287,984 42,300 DTE Energy Co.................. 1,673,494 154,451 Duke Energy Corp............... 8,900,238 170,200 Edison International........... 5,020,900 126,300 Entergy Corp................... 3,323,269 74,200 FirstEnergy Corp............... 2,202,813 87,100 FPL Group, Inc................. 5,351,206 32,600 GPU Inc........................ 1,255,100 168,979 Houston Industries, Inc........ 4,837,023 37,500* Niagara Mohawk Power Corp...... 464,063 26,000 Northern States Power Co....... 1,478,750 161,800 P G & E Corp................... 5,096,700 44,500 P P & L Resources Inc.......... 984,563 85,800 PacifiCorp..................... 1,978,763 109,300 Peco Energy Co................. 3,087,725 121,150 Public Serv Enterprise Group... 4,005,522 262,200 Southern Co.................... 6,964,687 109,420 Texas Utilities Co............. 4,322,090 83,800 Unicom Corp.................... 2,880,625 ----------- 83,261,533 -----------
NUMBER MARKET OF SHARES VALUE ----------- ----------- UTILITIES - GAS, DISTRIBUTION - 0.03% 23,700 NICOR Inc...................... $ 915,413 ------------- UTILITIES - GAS, PIPELINE - 0.56% 25,200 Columbia Energy Group.......... 2,126,250 44,100 Consolidated Natural Gas Co.... 2,494,406 142,000 Enron Corp..................... 7,117,750 18,300 ONEOK Inc...................... 714,844 16,400 Pacific Enterprises............ 624,225 2,200 Peoples Energy Corp............ 81,125 196,500 Williams Companies, Inc........ 6,373,969 ------------- 19,532,569 ------------- TOTAL COMMON STOCKS (Cost $1,669,898,794)........ 3,456,579,262 -------------
PAR VALUE ----------- CORPORATE SHORT TERM COMMERCIAL PAPER - 0.52% FINANCE COMPANIES - 0.14% $5,060,000 Ford Motor Credit Co. 5.45% due 6/1/98.............. 5,060,000 ----------- SECURITIES RELATED - 0.38% Merrill Lynch & Co.: 7,248,000 5.60% due 6/3/98.............. 7,245,745 6,000,000 5.58% due 6/2/98.............. 5,999,070 ----------- 13,244,815 ----------- TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $18,304,815)............. 18,304,815 ----------- UNITED STATES GOVERNMENT - SHORT TERM - 0.04% U.S. TREASURY BILLS - 0.04% United States Treasury Bills: 1,100,000 4.94% due 6/4/98.............. 1,099,547 100,000 4.91% due 6/4/98.............. 99,959 100,000 4.85% due 6/4/98.............. 99,960 ----------- 1,299,466 -----------
MARKET VALUE ----------- TOTAL UNITED STATES GOVERNMENT SHORT TERM (Cost $1,299,466)............ $ 1,299,466 -------------- TOTAL INVESTMENTS (Cost $1,689,503,075) - 99.81%.................... 3,476,183,543 Other assets and liabilities, net - 0.19%.................. 6,471,280 -------------- NET ASSETS (equivalent to $33.38 per share on 104,333,547 shares outstanding) - 100%......... $3,482,654,823 -------------- * Non-income producing
UNREALIZED CONTRACTS DEPRECIATION - ------------- ------------- FUTURES CONTRACTS PURCHASED(1) (Delivery month/Value at 5/31/98) 71(2) S&P 500 Index Futures (June/$1,090.80)........... $ (390,837) -------------
(1)U.S.Treasury Bills with a market value of approximately $1,300,000 were maintained in a segregated account with a portion placed as collateral for futures contracts. (2)Per 250 - -------------------------------------------------------------------------------- NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 104,333,547 shares outstanding........ $ 1,043,335 Additional paid in capital.............. 1,679,728,220 Undistributed net realized gain on securities......................... 15,215,726 Undistributed net investment income..... 377,911 -------------- Unrealized appreciation (depreciation) of: Investments........... $1,786,680,468 Futures .............. (390,837) 1,786,289,631 ------------- -------------- NET ASSETS APPLICABLE TO SHARES OUTSTANDING........................... $3,482,654,823 ==============
64 ================================================================================ STOCK INDEX FUND - FINANCIAL STATEMENTS 10 ================================================================================ STATEMENT OF OPERATIONS For the fiscal year ended May 31, 1998 INVESTMENT INCOME: Dividends ............................................................................... $ 47,362,348 Interest ................................................................................ 1,373,987 ------------ Total investment income ............................................................... 48,736,335 ------------ EXPENSES: Advisory fees ........................................................................... 7,946,046 Custodian and accounting services ....................................................... 669,324 Reports to shareholders ................................................................. 249,861 Audit fees and tax services ............................................................. 83,909 Directors' fees and expenses ............................................................ 58,141 Miscellaneous ........................................................................... 161,192 ------------ Total expenses ........................................................................ 9,168,473 ------------ NET INVESTMENT INCOME ................................................................... 39,567,862 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES: Net realized gain on: Investments ........................................................ $ 10,730,926 Futures contracts .................................................. 6,012,002 16,742,928 ------------ Net unrealized appreciation (depreciation) during the year: Investments ........................................................ 714,529,418 Futures contracts .................................................. (714,337) 713,815,081 ------------ ------------ Net realized and unrealized gain on securities during the year ........................ 730,558,009 INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................................ $770,125,871 ============
STATEMENT OF CHANGES IN NET ASSETS For the fiscal year ended May 31:
1998 1997 --------------- --------------- OPERATIONS: Net investment income ........................................... $ 39,567,862 $ 35,492,537 Net realized gain on securities ................................. 16,742,928 14,778,898 Net unrealized appreciation of securities during the year ....... 713,815,081 489,128,221 --------------- --------------- Increase in net assets resulting from operations .............. 770,125,871 539,399,656 --------------- --------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ........................................... (39,570,522) (35,484,625) Net realized gain on securities ................................. (14,847,655) (14,806,928) --------------- --------------- Decrease in net assets resulting from distributions to shareholders ............................................... (54,418,177) (50,291,553) --------------- --------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold ................................ 367,059,600 241,746,270 Proceeds from capital stock issued for distributions reinvested .................................................... 54,418,177 50,291,553 --------------- --------------- 421,477,777 292,037,823 Cost of capital stock repurchased ............................... (98,730,173) (97,732,690) --------------- --------------- Increase in net assets resulting from capital stock transactions .................................................. 322,747,604 194,305,133 --------------- --------------- TOTAL INCREASE IN NET ASSETS .................................... 1,038,455,298 683,413,236 NET ASSETS: Beginning of year ............................................... 2,444,199,525 1,760,786,289 --------------- --------------- End of year (including undistributed net investment income of $377,911 and $380,571) ..................................... $ 3,482,654,823 $ 2,444,199,525 =============== =============== CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold .................................... 12,118,343 10,718,393 Shares issued for distributions reinvested ...................... 1,806,919 2,200,590 Shares of capital stock repurchased ............................. (3,279,150) (4,348,853) --------------- --------------- Increase in shares outstanding ................................ 10,646,112 8,570,130 Shares outstanding: Beginning of year ............................................. 93,687,435 85,117,305 --------------- --------------- End of year ................................................... 104,333,547 93,687,435 =============== ===============
65 ================================================================================ MIDCAP INDEX FUND - STATEMENT OF NET ASSETS May 31, 1998 11 ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ----------- COMMON STOCKS - 99.36% AEROSPACE/DEFENSE - 0.93% 29,180 Gencorp Inc.................... $ 869,929 49,400* SCI Systems, Inc............... 1,685,775 7,500* Sequa Corp. Class A............ 518,438 51,874 Sunstrand Corp................. 3,216,188 29,420 Teleflex Inc................... 1,189,671 ----------- 7,480,001 ----------- AIRLINES - 0.22% 13,021* Alaska Air Group, Inc.......... 603,035 28,974 ASA Holdings, Inc.............. 1,139,040 ----------- 1,742,075 ----------- APPAREL & PRODUCTS - 0.89% 77,306 Cintas Corp.................... 3,531,918 43,671 Claire's Stores, Inc........... 821,561 27,324* Land's End, Inc................ 882,907 47,000 Warnaco Group Inc. Class A..... 1,938,750 ----------- 7,175,136 ----------- APPLIANCES/FURNISHINGS - 0.99% 39,859 Heilig-Meyers Co............... 478,308 79,656 Herman Miller, Inc............. 2,205,476 37,801 Lancaster Colony Corp.......... 1,516,765 75,176 Leggett & Platt, Inc........... 3,777,594 ----------- 7,978,143 ----------- AUTO - CARS - 0.75% 130,340 Harley-Davidson, Inc........... 4,659,655 57,000 Meritor Automotive, Inc........ 1,371,563 ----------- 6,031,218 ----------- AUTO - ORIGINAL EQUIPMENT - 1.34% 19,725 Arvin Industries, Inc.......... 731,058 22,900 Carlisle Cos Inc............... 1,107,788 46,942 Danaher Corp................... 3,394,493 38,836 Donaldson Co., Inc............. 847,110 34,670 Federal-Mogul Corp............. 2,052,031 50,245 Mark IV Industries, Inc........ 1,105,390 24,928 Modine Manufacturing Co........ 847,552 23,200 Superior Industries International, Inc........... 675,700 ----------- 10,761,122 -----------
NUMBER MARKET OF SHARES VALUE --------- ----------- AUTO - REPLACEMENT PARTS - 0.16% 31,642 Kaydon Corp.................... $ 1,247,881 ----------- BANKS - OTHER - 1.48% 109,204 First Tennessee National Corp.. 3,467,227 116,100 Firstar Corp................... 4,259,418 70,900 Union Planters Corp............ 4,147,650 ----------- 11,874,295 ----------- BANKS - REGIONAL - 5.81% 40,000 Associated Banc-Corp........... 1,980,000 38,455 City National Corp............. 1,413,221 88,972 Crestar Financial Corp......... 5,110,328 139,211 First Security Corp............ 3,167,050 39,862 First Virginia Banks, Inc...... 2,082,790 106,400 Hibernia Corp. Class A......... 2,234,400 79,448 Marshall & Ilsley Corp......... 4,290,192 57,534 Mercantile Bankshares Corp..... 2,049,649 106,650 North Fork Bancorporation Inc.. 2,566,266 76,400 Old Kent Financial Corp........ 3,046,450 64,468 Pacific Century Finl Corp...... 1,615,729 112,718 Regions Financial Corp......... 4,635,528 132,030 SouthTrust Corp................ 5,355,466 73,000 TCF Financial Corp............. 2,377,063 28,678 Wilmington Trust Corp.......... 1,738,604 59,700 Zions Bancorporation........... 3,044,700 ----------- 46,707,436 ----------- BEVERAGE - SOFT DRINKS - 1.47% 314,009 Coca Cola Enterprises, Inc..... 11,794,963 ----------- BROADCASTING - 0.66% 50,228 A.H. Belo Corp................. 2,586,741 26,192* Chris-Craft Industries, Inc.... 1,376,717 22,416 TCA Cable TV, Inc.............. 1,365,975 ----------- 5,329,433 ----------- BUILDING MATERIALS - 1.39% 18,366 CalMat Co...................... 461,446 34,000 Fastenal Co.................... 1,683,000 49,050 Hon Industries Inc............. 1,569,600 38,500 Martin Marietta Materials...... 1,771,000 79,456 RPM, Inc....................... 1,350,751 17,900 Southdown, Inc................. 1,174,687 28,200 Vulcan Materials Co............ 3,200,700 ----------- 11,211,184 -----------
NUMBER MARKET OF SHARES VALUE --------- ----------- CHEMICAL - MAJOR - 0.63% 44,425 Albemarle Corp................. $ 1,080,083 18,700 Borg-Warner Automotive, Inc.... 1,065,900 106,100 Solutia Inc.................... 2,911,119 ----------- 5,057,102 ----------- CHEMICAL - MISCELLANEOUS - 2.28% 29,173 A. Schulman, Inc............... 579,813 53,200* Airgas, Inc.................... 807,975 27,080 Betz Laboratories, Inc......... 1,333,690 64,937 Crompton & Knowles Corp........ 1,749,240 36,000* Cytec Industries, Inc.......... 1,764,000 19,368 Dexter Corp.................... 798,930 49,000 Ethyl Corp..................... 346,063 31,570 Ferro Corp..................... 903,691 26,833 Georgia Gulf Corp.............. 672,502 11,264 H.B. Fuller Co................. 705,408 37,193 Lawter International, Inc...... 357,983 52,619 Lubrizol Corp.................. 1,828,510 64,278 Lyondell Petrochemical Co...... 2,004,670 42,336 M.A. Hanna Co.................. 849,366 18,100 Minerals Technologies Inc...... 958,169 5,955 NCH Corp....................... 379,259 40,242 Olin Corp...................... 1,740,467 28,425 Rollins, Inc................... 586,266 ----------- 18,366,002 ----------- CONGLOMERATES - 1.36% 39,698 Alexander & Baldwin, Inc....... 1,141,318 80,900 Dial Corp...................... 2,007,331 37,000* Litton Industries, Inc......... 2,143,687 6,200 MAXXAM, Inc.................... 365,413 40,200 Ogden Corp..................... 1,148,213 78,400 Viad Corp...................... 2,116,800 91,500 Whitman Corp................... 1,984,406 ----------- 10,907,168 ----------- CONSUMER FINANCE - 0.71% 56,900 Capital One Financial Corp..... 5,679,331 ----------- CONTAINERS - PAPER - 0.46% 18,914 Chesapeake Corp................ 671,447 86,280 Sonoco Products Co............. 3,014,394 ----------- 3,685,841 -----------
66 ================================================================================ MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 12 May 31, 1998 ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ----------- DRUGS - 4.03% 44,180 Bergen Brunswig Corp. Cl A..... $ 1,833,470 63,552* Biogen, Inc.................... 2,796,288 37,246 Carter-Wallace Inc............. 663,444 59,488* Centocor, Inc.................. 2,320,032 139,180 Chiron Corp.................... 2,513,939 55,625* Covance Inc.................... 1,178,555 66,482* Forest Laboratories, Inc....... 2,193,906 61,442* Genzyme Corp................... 1,681,975 56,700 ICN Pharmaceuticals, Inc....... 2,448,731 109,736* IVAX Corp...................... 1,008,200 73,700 McKesson Corp.................. 5,757,812 105,534 Mylan Laboratories Inc......... 3,166,020 19,100 R.P. Scherer Corp.............. 1,576,944 75,500* Watson Pharmaceuticals, Inc.... 3,303,125 ----------- 32,442,441 ----------- ELECTRICAL EQUIPMENT - 1.59% 82,086* American Power Conversion...... 2,462,580 29,031 AMETEK, Inc.................... 838,270 53,970 Hubbell Inc. Class B........... 2,539,963 125,957 Molex Inc...................... 3,511,051 68,846* Teradyne, Inc.................. 2,117,015 41,800* UCAR International, Inc........ 1,337,600 ----------- 12,806,479 ----------- ELECTRONIC INSTRUMENTS - 1.24% 80,552* Arrow Electronics, Inc......... 2,028,904 39,450* Imation Corp................... 717,497 72,000* Integrated Device Technology... 675,000 25,521* MagnaTek, Inc.................. 432,262 33,800 Pittston Brink's Group......... 1,307,638 59,579* Sensormatic Electronics Corp... 763,356 47,413 Symbol Technologies, Inc....... 1,668,345 24,316 Varian Associates, Inc......... 1,168,688 54,313* Vishay Intertechnology, Inc... 1,211,867 ----------- 9,973,557 ----------- ENTERTAINMENT - 0.14% 34,800* GTECH Holdings Corp............ 1,128,825 ----------- FERTLIIZERS - 0.36% 88,946* IMC Global, Inc................ 2,890,745 ----------- FINANCE COMPANIES - 0.41% 59,800 Finova Group, Inc.............. 3,307,688 -----------
NUMBER MARKET OF SHARES VALUE --------- ----------- FOODS - 2.99% 32,282 Dean Foods Co.................. $ 1,589,889 48,109 Dole Food Co., Inc............. 2,222,034 27,036 Dreyer's Grand Ice Cream, Inc.. 684,349 80,204 Flowers Industries, Inc........ 1,654,208 63,000 Hormel Foods Corp.............. 2,118,375 74,000 IBP, Inc....................... 1,433,750 14,612 International Multifoods Corp.. 434,707 59,600 Interstate Bakeries Corp....... 1,922,100 22,871 J.M. Smucker Co. Class A....... 544,616 24,771 Lance, Inc..................... 520,191 67,178 McCormick & Co., Inc........... 2,250,463 34,621 Trinity Industries, Inc........ 1,653,153 182,386 Tyson Foods, Inc. Class A...... 3,852,903 39,200* U. S. Foodservice.............. 1,298,500 44,258 Universal Foods Corp........... 1,053,894 37,200* Vlasic Foods Int'l Inc......... 806,775 ----------- 24,039,907 ----------- FOOTWEAR - 0.36% 28,800* Nine West Group, Inc........... 811,800 30,100* Payless ShoeSource, Inc........ 2,108,881 ----------- 2,920,681 ----------- FREIGHT - 0.37% 37,246 Airborne Freight Corp.......... 1,387,413 34,700 J.B. Hunt Transport Services, Inc.......................... 1,038,831 30,271 Overseas Shipholding Group..... 586,501 Inc. ----------- 3,012,745 ----------- FUNERAL SERVICES - 0.29% 86,200 Stewart Enterprises Inc........ 2,327,400 ----------- HEALTHCARE - 3.34% 45,000 Allegiance Corp................ 2,250,000 49,000* Apria Healthcare Group, Inc.... 373,625 426* Coram Healthcare Corp.......... 879 26,286* First Health Group Corp........ 1,493,373 104,949* Foundation Health Systems Class A...................... 3,194,385 131,600 Health Management Assoc........ 3,923,325 49,391* NovaCare, Inc.................. 543,301 63,000 Omnicare, Inc.................. 2,208,938 65,500* Oxford Health Plans, Inc....... 1,129,875 34,574* PacifiCare Health System, Inc. Class B....................... 2,856,678 59,700* Quintiles Transnational Corp... 2,902,912
NUMBER MARKET OF SHARES VALUE --------- ----------- HEALTHCARE - Continued 66,800* Quorum Health Group Inc........ $ 2,008,175 78,000* Sybron International Corp...... 1,867,125 67,900* Total Renal Care Holdings...... 2,083,681 ----------- 26,836,272 ----------- HEAVY DUTY TRUCKS/PARTS - 0.20% 17,000 Bandag, Inc.................... 786,250 37,404 Federal Signal Corp............ 836,915 ----------- 1,623,165 ----------- HOME BUILDERS - 0.22% 95,125 Clayton Homes, Inc............. 1,789,539 ----------- HOSPITAL MANAGEMENT - 0.51% 87,000* Beverly Enterprises, Inc....... 1,245,188 43,400* Concentra Managed Care, Inc.... 1,014,475 36,900 Health Care & Retirement Corp.. 1,427,568 60,400* Medaphis Corp.................. 453,000 ----------- 4,140,231 ----------- HOSPITAL SUPPLIES - 1.38% 11,410 ATL Ultrasound, Inc............ 517,017 26,335* Acuson Corp.................... 503,658 22,733 Beckman Coulter Inc............ 1,267,366 43,400 DENTSPLY International Inc..... 1,464,751 55,200 Hillenbrand Industries, Inc.... 3,408,601 62,700* PSS World Medical, Inc......... 783,750 77,082 Stryker Corp................... 3,141,093 ----------- 11,086,236 ----------- HOUSEHOLD PRODUCTS - 0.89% 59,700* Bed Bath & Beyond, Inc......... 2,996,194 16,014 Church & Dwight Co., Inc....... 485,424 22,300* Culligan Water Technologies.... 1,244,619 32,446 First Brands Corp.............. 807,094 50,200 Premark International Inc...... 1,609,538 ----------- 7,142,869 ----------- HUMAN RESOURCES - 1.08% 30,603 Kelly Services Inc. Class A.... 1,124,660 65,800 Manpower Inc................... 2,825,288 63,950 Olsten Corp.................... 795,378 77,700* Robert Half International, Inc. 3,933,562 ----------- 8,678,888 -----------
67 ================================================================================ MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 13 ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ----------- INFORMATION PROCESSING - 10.42% 46,373* A.C. Nielson................... $ 1,197,003 173,300* America Online, Inc............ 14,438,056 171,808* BMC Software, Inc.............. 7,913,906 59,458 Comdisco, Inc.................. 2,162,785 146,000* Compuware Corp................. 6,706,875 35,000 Comverse Technology, Inc....... 1,748,908 58,051 Diebold, Inc................... 1,697,992 48,900* Electronic Arts................ 2,127,150 45,864* Fiserv, Inc.................... 2,704,545 22,768* Information Resources, Inc..... 398,440 125,700* Informix Corp.................. 856,331 54,800* Keane, Inc..................... 2,459,150 56,800* Lexmark Intl Group, Inc........ 3,152,400 52,107* Mentor Graphics Corp........... 576,434 86,373* NCR Corp....................... 2,931,284 60,300* Networks Associates, Inc....... 3,693,375 16,971 OEA, Inc....................... 290,628 140,286 Paychex, Inc................... 5,050,279 14,618* Policy Management Systems Corp.......................... 1,205,985 112,492* Quantum Corp................... 2,460,763 73,208 Reynolds and Reynolds Co. Class A...................... 1,532,793 35,225* Sequent Computer Systems, Inc.. 583,414 92,000* Solectron Corp................. 3,806,500 74,152* Sterling Commerce Inc.......... 2,942,908 58,500* Sterling Software, Inc......... 1,590,469 45,990* Storage Technology Corp........ 3,857,411 18,525* Stratus Computer, Inc.......... 668,058 32,595* Structural Dynamic Research Corp......................... 825,061 88,100* SunGard Data Systems, Inc...... 3,006,413 50,612* Symantec Corp.................. 1,208,362 ----------- 83,793,678 ----------- INSURANCE - CASUALTY - 0.52% 47,333 American Financial Group, Inc.. 2,138,860 27,027 Transatlantic Holdings, Inc.... 2,021,958 ----------- 4,160,818 ----------- INSURANCE - MISCELLANEOUS - 0.82% 61,500 AMBAC Financial Group Inc...... 3,363,281 24,699 HSB Group Inc.................. 1,086,756 29,000 PMI Group Inc.................. 2,180,438 ----------- 6,630,475 -----------
NUMBER MARKET OF SHARES VALUE --------- ----------- INSURANCE - MULTILINE - 1.75% 110,025 AFLAC Inc...................... $ 7,034,723 107,100 Old Republic International Corp......................... 3,052,350 108,172 Provident Companies Inc........ 3,988,843 ----------- 14,075,916 ----------- LEISURE TIME - 0.63% 66,400 Callaway Golf Co............... 1,369,500 78,425* Circus Circus Enterprises...... 1,392,044 92,802 International Game Technology.. 2,291,049 ----------- 5,052,593 ----------- LODGING - 0.40% 74,257* Promus Hotel Corp.............. 3,211,615 ----------- MACHINERY - AGRICULTURE - 0.16% 50,200 AGCO Corp...................... 1,261,275 ----------- MACHINERY - CONSTRUCTION & CONTRACTS - 0.14% 15,171 Granite Construction, Inc...... 428,581 21,268* Jacobs Engineering Group, Inc.. 683,235 ----------- 1,111,816 ----------- MACHINERY - INDUSTRIAL/ SPECIALTY - 1.05% 24,573 Albany International Corp. Class A...................... 712,617 29,722 Cordant Technologies Inc....... 1,482,385 28,718 Flowserve Corp................. 832,822 27,800 Newport News Shipbuilding...... 778,400 14,414 Nordson Corp................... 655,837 26,633 Stewart & Stevenson Services, Inc.......................... 552,635 17,600 Tecumseh Products Co. Class A.. 877,800 53,292 Tidewater, Inc................. 2,025,096 21,724 Watts Industries, Inc. Class A. 506,441 ----------- 8,424,033 ----------- MERCHANDISE - DRUG - 0.09% 62,900* Perrigo Co..................... 691,900 ----------- MERCHANDISE - SPECIALTY - 4.79% 28,386* BJ's Wholesale Club Inc........ 1,121,247 53,500* Barnes & Noble, Inc............ 1,812,313 72,400* Best Buy Co., Inc.............. 2,362,050 75,400* CompUSA, Inc................... 1,187,550 120,190 Dollar General Corp............ 4,582,243 15,764 Enesco Group Inc............... 481,787 37,100 Fingerhut Companies, Inc....... 1,087,494 70,800* General Nutrition Cos., Inc.... 2,234,625
NUMBER MARKET OF SHARES VALUE --------- ----------- MERCHANDISE - SPECIALTY - Continued 125,800* Kohl's Corp.................... $ 5,983,363 28,500* Micro Warehouse, Inc........... 498,750 130,437* Office Depot, Inc.............. 3,847,892 110,300* OfficeMax, Inc................. 1,813,056 45,311 Sotheby's Holdings, Inc. Class A...................... 1,042,153 206,225* Staples, Inc................... 5,181,403 29,436 Tiffany & Co................... 1,409,249 114,200* US Office Products, Co......... 1,934,263 68,900 Viking Office Products, Inc.... 1,970,113 ----------- 38,549,551 ----------- MERCHANDISING - DEPARTMENT - 0.52% 75,400* Proffit's Inc.................. 2,959,450 52,500* Saks Holding, Inc.............. 1,237,031 ----------- 4,196,481 ----------- MERCHANDISING - FOOD - 0.27% 34,700 Hannaford Bros. Co............. 1,533,306 36,200 Ruddick Corp................... 647,075 ----------- 2,180,381 ----------- MERCHANDISING - MASS - 0.93% 141,720 Family Dollar Stores, Inc...... 2,347,238 119,900* Fred Meyer, Inc................ 5,155,700 ----------- 7,502,938 ----------- METALS - ALUMINUM - 0.26% 44,167* Alumax Inc..................... 2,067,568 ----------- METALS - MISCELLANEOUS - 0.31% 13,600 Brush Wellman Inc.............. 331,500 21,306 Kennametal, Inc................ 1,025,351 19,350 Precision Castparts Corp....... 1,115,044 ----------- 2,471,895 ----------- METALS - STEEL - 0.55% 47,800 AK Steel Holding Corp.......... 890,275 15,710 Carpenter Technology Corp...... 832,630 9,157 Cleveland-Cliffs Inc........... 484,749 39,742 Harsco Corp.................... 1,733,745 21,123 Oregon Steel Mills, Inc........ 510,913 ----------- 4,452,312 ----------- MISCELLANEOUS - 0.18% 65,400* Corrections Corp. of America... 1,487,850 -----------
68 ================================================================================ MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 14 May 31, 1998 ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ----------- MULTIMEDIA - 1.08% 176,956* Cadence Design Systems, Inc.... $ 6,237,699 57,300* Synopsys Inc................... 2,460,319 ----------- 8,698,018 ----------- NATURAL GAS - DIVERSIFIED - 0.79% 104,400 El Paso Natural Gas Co......... 4,032,450 33,343 Questar Corp................... 1,352,475 59,632* Seagull Energy Corp............ 987,655 ----------- 6,372,580 ----------- OIL - INTEGRATED DOMESTIC - 0.08% 37,114 Quaker State Corp.............. 628,618 ----------- OIL - INTEGRATED INTERNATIONAL - 0.23% 36,446 Murphy Oil Corp................ 1,833,689 ----------- OIL - SERVICE - PRODUCTS - 1.37% 61,842* BJ Services Co................. 2,021,460 79,168* Evi Weatherford Inc,........... 4,002,928 105,700 Noble Drilling Corp............ 3,118,150 61,125* Parker Drilling Co............. 515,742 51,372* Varco International, Inc....... 1,338,883 ----------- 10,997,163 ----------- OIL - SERVICES - 2.45% 32,900 Camco International, Inc....... 2,294,775 115,700 ENSCO International, Inc....... 2,928,656 137,915* Global Marine Inc.............. 3,077,229 87,439* Nabors Industries, Inc......... 2,060,281 33,446* Smith International, Inc....... 1,640,944 85,300 Transocean Offshore, Inc....... 4,206,357 46,046 Witco Corp..................... 1,746,870 34,300 York International Corp........ 1,715,000 ----------- 19,670,112 ----------- OIL/GAS PRODUCERS - 1.50% 55,380 Cabot Corp..................... 1,844,846 49,935* Noble Affiliates, Inc.......... 1,950,586 86,670* Ocean Energy, Inc.............. 1,738,817 89,300 Pioneer Natural Resources Corp. 2,098,550 85,366* Ranger Oil Ltd................. 549,544 74,380 Ultramar Diamond Shamrock Corp. 2,375,511 46,991 Valero Energy Corp............. 1,533,081 ----------- 12,090,935 -----------
NUMBER MARKET OF SHARES VALUE --------- ----------- PAPER/FOREST PRODUCTS - 1.48% 36,339 Bowater Inc.................... $ 1,839,662 72,070 Consolidated Papers, Inc....... 2,085,526 79,200 Georgia-Pacific Corp. Timber Group........................ 1,866,150 40,939 Longview Fibre Co.............. 675,494 33,300 P. H. Glatfelter Co............ 543,206 30,676 Pentair Inc.................... 1,345,910 23,100 Rayonier Inc................... 1,084,256 23,570 Standard Register Co........... 849,993 57,016 Unisource Worldwide, Inc....... 730,518 40,061 Wausau-Mosinee Paper Corp...... 856,304 ----------- 11,877,019 ----------- POLLUTION CONTROL - 1.39% 33,033 Calgon Carbon Corp............. 353,040 81,400* United States Filter Corp...... 2,477,613 176,500* USA Waste Services, Inc........ 8,328,594 ----------- 11,159,247 ----------- PUBLISHING - NEWS - 0.83% 34,700 Lee Enterprises, Inc........... 1,054,012 22,168 Media General, Inc. Class A.... 1,019,728 8,561 Washington Post Co. Class B.... 4,625,080 ----------- 6,698,820 ----------- PUBLISHING/PRINTING - 0.40% 23,886 Banta Corp..................... 756,888 29,232 Houghton Mifflin Co............ 1,015,812 12,900* Scholastic Corp................ 516,000 34,928 Wallace Computer Svcs, Inc..... 934,324 ----------- 3,223,024 ----------- RAILROAD - 0.86% 20,612 GATX Corp...................... 1,692,760 13,359 Illinois Central Corp.......... 495,953 88,796 Kansas City Southern Ind....... 3,762,730 41,500* Wisconsin Central Transport.... 972,656 ----------- 6,924,099 ----------- RESTAURANTS - 1.31% 36,633 Bob Evans Farms, Inc........... 780,741 61,155* Brinker International, Inc..... 1,330,121 37,432* Buffets, Inc................... 610,610 48,966 Cracker Barrel, Inc............ 1,579,153 33,100* Lone Star Steakhouse & Saloon.. 558,563 43,500* Outback Steakhouse Inc......... 1,604,062
NUMBER MARKET OF SHARES VALUE --------- ----------- RESTAURANTS - Continued 16,888* Sbarro, Inc.................... $ 493,974 75,000* Starbucks Corp................. 3,600,000 ----------- 10,557,224 ----------- SAVINGS & LOAN - 0.83% 109,700 Charter One Financial, Inc..... 3,757,225 99,000 Dime Bancorp, Inc.............. 2,889,563 ----------- 6,646,788 ----------- SECURITIES RELATED - 1.82% 96,014 A.G. Edwards, Inc.............. 3,882,567 111,184 Bear Stearns Co. Inc........... 6,031,730 109,200 Paine Webber Group Inc......... 4,688,775 ----------- 14,603,072 ----------- SEMICONDUCTORS - 2.56% 73,540* Altera Corp.................... 2,472,783 129,938* Analog Devices, Inc............ 3,207,836 82,200* Atmel Corp..................... 1,217,588 36,188 Avnet, Inc..................... 2,135,091 56,136 Cirrus Logic, Inc.............. 561,360 74,982* Cypress Semiconductor Corp..... 642,033 62,554 Linear Technology Corp......... 4,374,870 110,500 Maxim Integrated Products, Inc. 3,687,937 61,281* Xilinx, Inc.................... 2,330,596 ----------- 20,630,094 ----------- TELECOMMUNICATIONS - 1.75% 110,128* ADC Communications, Inc........ 3,097,350 39,742 COMSAT Corp.................... 1,386,002 86,700 LCI International, Inc......... 3,245,831 56,900* QUALCOMM, Inc.................. 2,965,912 97,901* 360 Communications Co.......... 2,796,297 34,640* Vanguard Cellular Systems, Inc. Class A....................... 621,355 ----------- 14,112,747 ----------- TEXTILE - PRODUCTS - 1.00% 47,600* Burlington Industries, Inc..... 835,975 44,500 Jones Apparel Group, Inc....... 2,820,187 101,623 Shaw Industries Inc............ 1,625,968 55,429 Unifi, Inc..................... 2,158,266 24,984 Wellman, Inc................... 601,178 ----------- 8,041,574 -----------
69 ================================================================================ MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 15 ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ----------- TOBACCO - 0.13% 28,435 Universal Corp................. $ 1,068,090 ----------- TRUCKERS - 0.26% 20,214 Arnold Industries, Inc......... 315,844 42,700 CNF Transportation, Inc........ 1,753,368 ----------- 2,069,212 ----------- UTILITIES - COMMUNICATION - 1.63% 28,818 Aliant Communications, Inc..... 668,217 72,675 Century Telephone Enterprises, Inc.......................... 3,220,411 110,000 Cincinnati Bell, Inc........... 3,499,375 56,964 Southern New England Telecom... 3,667,057 47,791 Telephone and Data Systems..... 2,090,855 ----------- 13,145,915 ----------- UTILITIES - ELECTRIC - 9.05% 140,472* AES Corp....................... 6,681,200 107,914 Allegheny Energy, Inc.......... 3,028,336 16,279 Black Hills Corp............... 357,121 62,300* Calenergy, Inc................. 1,884,575 27,916 Central Maine Power Co......... 533,894 18,459 Cleco Corp..................... 552,616 75,364 CMS Energy Corp................ 3,283,043 87,538 Conectiv, Inc.................. 1,789,058 55,421 Energy East Corp............... 2,251,478 79,262 Florida Progress Corp.......... 3,269,557 24,166 Hawaiian Electric Industries, Inc.......................... 924,350 30,123 Idaho Power Co................. 1,029,830 68,300 Illinova Corp.................. 1,984,969 16,859 Indiana Energy, Inc............ 520,522 61,916 Interstate Energy Corp......... 1,861,350 39,564 IPALCO Enterprises, Inc........ 1,666,634 59,019 Kansas City Power & Light Co... 1,696,796 104,342 LG&E Energy Corp............... 2,771,583 75,334 Mid American Energy Holdings Co........................... 1,567,888 23,218 Minnesota Power Inc............ 915,660 51,457 Montana Power Co............... 1,865,316 37,633 Nevada Power Co................ 898,488 92,322 New Century Energies, Inc...... 4,246,811 60,017 New England Electrical System.. 2,505,710 101,544 NIPSCO Industries, Inc......... 2,728,995 104,133* Northeast Utilities............ 1,659,620 32,946 OGE Energy Corp................ 1,766,729 68,023 Pinnacle West Capital Corp..... 3,056,783 106,964 Potomac Electric Power Co...... 2,613,933 33,537 Public Service Co. of New Mexico................... 727,334 69,062 Puget Sound Energy Inc......... 1,804,245
NUMBER MARKET OF SHARES VALUE --------- ----------- UTILITIES - ELECTRIC - Continued 84,688 Scana Corp..................... $ 2,440,073 95,820 TECO Energy, Inc............... 2,509,286 45,388 UtiliCorp United Inc........... 1,614,111 34,424 Washington Gas Light Co........ 897,176 96,752 Wisconsin Energy Corp.......... 2,854,184 ----------- 72,759,254 ----------- UTILITIES - GAS, DISTRIBUTION - 1.61% 45,536 AGL Resources, Inc............. 910,720 138,305* Keyspan Energy Corp............ 4,659,150 58,268 MCN Energy Group Inc........... 2,097,647 31,178 National Fuel Gas Co........... 1,321,168 125,446 Tosco Corp..................... 3,982,910 ----------- 12,971,595 ----------- WATER SERVICES - 0.23% 64,000 American Water Works Co., Inc.. 1,880,000 ----------- TOTAL COMMON STOCKS (Cost $534,296,502)............ 799,157,983 ----------- PAR VALUE - ---------- CORPORATE SHORT TERM COMMERCIAL PAPER - 0.35% FINANCE COMPANIES - 0.16% $1,259,000 Ford Motor Credit Co., 5.45% due 06/01/98.......... 1,259,000 ----------- MACHINERY - INDUSTRIAL/ SPECIALTY - 0.19% 1,560,000 Cooper Industries, Inc., 5.67% due 06/01/98.......... 1,560,000 ----------- TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $2,819,000).............. 2,819,000 ----------- UNITED STATES GOVERNMENT - SHORT TERM - 0.07% U.S. TREASURY BILLS - 0.07% United States Treasury Bills: 200,000 4.94 % due 6/4/98........... 199,918 250,000 4.74 % due 6/4/98........... 249,901 100,000 4.65 % due 6/4/98........... 99,961 ----------- 549,780 -----------
MARKET VALUE ------------ TOTAL UNITED STATES GOVERNMENT SHORT TERM - (Cost $549,780)................ $ 549,780 ------------ TOTAL INVESTMENTS (Cost $537,665,282) - 99.78%... 802,526,763 Other assets and liabilities, net - 0.22%................... 1,790,866 ------------ NET ASSETS (equivalent to $25.27 per share on 31,829,893 shares outstanding) -100%........... $804,317,629 ============ * Non-income producing UNREALIZED CONTRACTS DEPRECIATION - --------- ------------ FUTURES CONTRACTS PURCHASED(1) (Delivery month/Value at 5/31/98) 18 (2) S&P MidCap 400 Index Futures (June/$357.75)................. $ (40,725) =========== (1)U.S.Treasury Bills with a market value of approximately $550,000 were maintained in a segregated account with a portion placed as collateral for futures contracts. (2)Per 500 - -------------------------------------------------------------------------------- NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 31,829,893 shares outstanding........... $ 318,299 Additional paid in capital................ 471,400,467 Undistributed net realized gain on securities.............................. 67,735,760 Undistributed net investment income....... 42,347 Unrealized appreciation (depreciation) of: Investments........... $264,861,481 Futures............... (40,725) 264,820,756 ------------ ------------ NET ASSETS APPLICABLE TO SHARES OUTSTANDING............................. $804,317,629 ============
70 =============================================================================== MIDCAP INDEX FUND - FINANCIAL STATEMENTS 16 =============================================================================== STATEMENT OF OPERATIONS For the fiscal year ended May 31, 1998 INVESTMENT INCOME: Dividends............................................................................. $ 8,911,421 Interest.............................................................................. 609,816 ------------ Total investment income............................................................. 9,521,237 ------------ EXPENSES: Advisory fees......................................................................... 2,313,256 Custodian and accounting services..................................................... 165,053 Reports to shareholders............................................................... 58,613 Audit fees and tax services........................................................... 18,922 Directors' fees and expenses.......................................................... 14,303 Miscellaneous......................................................................... 49,866 ------------ Total expenses...................................................................... 2,620,013 ------------ NET INVESTMENT INCOME................................................................. 6,901,224 ------------ REALIZED AND UNREALIZED GAIN ON SECURITIES: Net realized gain on: Investments....................................................... $ 67,034,658 Futures contracts................................................. 1,444,055 68,478,713 ------------ Net unrealized appreciation (depreciation) during the year: Investments....................................................... 104,256,508 Futures contracts................................................. (160,580) 104,095,928 ------------ ------------ Net realized and unrealized gain on securities during the year..................... 172,574,641 ------------ INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...................................... $179,475,865 ============
STATEMENT OF CHANGES IN NET ASSETS For the fiscal year ended May 31:
1998 1997 ------------ ------------ OPERATIONS: Net investment income............................................... $ 6,901,224 $ 6,894,820 Net realized gain on securities..................................... 68,478,713 39,709,142 Net unrealized appreciation of securities during the year........... 104,095,928 45,603,667 ------------ ------------ Increase in net assets resulting from operations.................. 179,475,865 92,207,629 ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income............................................... (6,915,741) (6,892,259) Net realized gain on securities..................................... (39,892,715) (33,690,297) ------------ ------------ Decrease in net assets resulting from distributions to shareholders.................................................. (46,808,456) (40,582,556) ------------ ------------ CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold.................................... 54,227,081 33,601,532 Proceeds from capital stock issued for distributions reinvested..... 46,808,456 40,582,556 ------------ ------------ 101,035,537 74,184,088 Cost of capital stock repurchased................................... (36,446,663) (59,435,374) ------------ ------------ Increase in net assets resulting from capital stock transactions....................................... 64,588,874 14,748,714 ------------ ------------ TOTAL INCREASE IN NET ASSETS........................................ 197,256,283 66,373,787 NET ASSETS: Beginning of year................................................... 607,061,346 540,687,559 ------------ ------------ End of year (including undistributed net investment income of $42,347 and $ 56,864) ......................................... $804,317,629 $607,061,346 ============ ============ CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold........................................ 2,234,398 1,775,391 Shares issued for distributions reinvested.......................... 1,997,359 2,124,784 Shares of capital stock repurchased ................................ (1,539,198) (3,084,568) ------------ ------------ Increase in shares outstanding.................................... 2,692,559 815,607 Shares outstanding: Beginning of year................................................. 29,137,334 28,321,727 ------------ ------------ End of year....................................................... 31,829,893 29,137,334 ============ ============
71 =============================================================================== SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS May 31, 1998 17 ===============================================================================
NUMBER MARKET OF SHARES VALUE ---------- ---------- COMMON STOCKS - 97.11% ADVERTISING - 0.82% 9,025* ADVO, Inc...................... $ 226,189 4,300* American Business Information Class B....................... 54,288 5,100* Catalina Marketing Corp........ 230,775 400 Grey Advertising, Inc.......... 178,800 4,525* HA-LO Industries, Inc.......... 139,992 6,000* Lamar Advertising Co........... 190,500 6,600* NFO Worldwide Inc.............. 112,200 9,200* National Media Corp............ 12,075 10,200* Outdoor Systems Inc............ 306,000 4,000* Snyder Communications, Inc..... 161,250 7,100 True North Communications Inc.. 225,868 6,900* Westwood One, Inc.............. 184,575 ---------- 2,022,512 ---------- AEROSPACE/DEFENSE - 0.77% 2,300* Alliant Techsystems, Inc....... 148,350 6,700* Aviall, Inc.................... 97,988 1,600* Banner Aerospace, Inc.......... 18,900 6,600* BE Aerospace, Inc.............. 190,782 2,700 Cubic Corp..................... 79,313 9,800 EG & G, Inc.................... 308,700 5,200* Fairchild Corp. Class A........ 103,025 6,800 Gencorp Inc.................... 202,725 14,900* Geotek Communications, Inc..... 5,587 7,800* Orbital Sciences Corp.......... 318,825 3,400* Remec, Inc..................... 48,875 2,000* Sequa Corp. Class A............ 138,250 3,700* Tech-Sym Corp.................. 107,068 7,200* Trimble Navigation Ltd......... 141,750 ---------- 1,910,138 ---------- AIRLINES - 0.56% 9,300* Airtran Holdings Inc........... 67,135 3,800* Alaska Air Group, Inc.......... 175,988 14,100* American West Holdings Corp. Class B....................... 399,206 5,500 ASA Holdings, Inc.............. 216,219 3,300 Circle International Grp, Inc.. 89,306 6,100 Expeditors International of WA......................... 244,000 ---------- 1,050* Mesaba Holdings, Inc........... 22,838 1,950* Midwest Express Holdings, Inc.. 55,940 11,100* Transport World Airls, Inc..... 115,162 ---------- 1,385,794 ----------
NUMBER MARKET OF SHARES VALUE ---------- ---------- APPAREL & PRODUCTS - 1.42% 1,800* Abercrombie and Fitch Co....... $ 76,050 9,400* Ann Taylor Stores Corp......... 205,038 5,600 Authentic Fitness Corp......... 101,850 1,000* Buckle, Inc.................... 51,000 11,925 Claire's Stores, Inc........... 224,339 6,300* Dress Barn, Inc................ 182,503 1,200 Fab Industries, Inc............ 32,550 8,900* Footstar Inc................... 393,269 2,900* Gadzooks, Inc.................. 80,928 6,200* Gymboree Corp.................. 98,038 6,000* Hartmarx Corp.................. 47,250 5,250 Kellwood Co.................... 173,578 5,300* Land's End, Inc................ 171,256 4,400 Mens Wearhouse, Inc............ 187,550 8,900* Nautica Enterprises, Inc....... 260,325 3,600 OshKosh B'Gosh, Inc. Class A... 138,600 900 Oxford Inds Inc................ 31,388 4,050* Pacific Sunwear of California.. 181,364 8,900 Phillips-Van Heusen Corp....... 115,700 3,600 St. John Knits, Inc............ 138,375 6,200* Stage Stores, Inc.............. 289,075 4,400 Talbots, Inc................... 125,675 2,400 UniFirst Corp.................. 61,800 2,400* Urban Outfitters, Inc.......... 39,300 3,700* Wet Seal, Inc.................. 111,000 ---------- 3,517,801 ---------- APPLIANCES/FURNISHINGS - 1.14% 4,850 Bassett Furniture Industries... 147,925 5,000* CORT Business Services Corp.... 195,625 6,800 Ethan Allen Interiors Inc...... 342,125 15,600* Furniture Brands International................. 460,200 8,997* Griffon Corp................... 124,833 17,500 Heilig-Meyers Co............... 210,000 5,800* Helen Of Troy, Ltd............. 110,925 4,100 Hunt Corp...................... 95,325 9,200 Kimball International, Inc. Class B....................... 226,550 2,700 La-Z-Boy Chair Co.............. 138,206 9,085* Metromedia International Group......................... 122,648 1,500 National Presto Industries..... 60,656 4,650 Oneida Ltd..................... 129,909 5,500* Renters Choice, Inc............ 146,439 2,850* SLI, Inc....................... 81,225 6,800* Windmere Corp.................. 215,475 9,523* Zenith Electronics Corp........ 4,285 ---------- 2,812,351 ----------
NUMBER MARKET OF SHARES VALUE ---------- ---------- AUTO - CARS - 0.09% 3,900* Budget Group, Inc.............. $ 115,050 5,100* United Auto Group, Inc......... 104,550 ---------- 219,600 ---------- AUTO - ORIGINAL EQUIPMENT - 0.95% 5,900* Allen Telecom, Inc............. 70,800 5,000 Arvin Industries, Inc.......... 185,313 5,100 Breed Technologies, Inc........ 97,219 8,400 Carlisle Cos Inc............... 406,350 10,200 Donaldson Co., Inc............. 222,488 9,600 Federal-Mogul Corp............. 568,200 6,800 Hayes Lemmerz Intl, Inc........ 266,475 7,150* Miller Industries, Inc......... 50,944 5,700 Modine Manufacturing Co........ 193,800 5,100 Superior Industries International, Inc............ 148,537 3,100* Tower Automotive, Inc.......... 145,505 ---------- 2,355,631 ---------- AUTO - REPLACEMENT PARTS - 0.68% 2,800* Aftermarket Technology Corp.... 47,950 3,400 A.O. Smith Corp................ 171,700 15,100* Collins & Aikman Corp.......... 105,700 3,900 Discount Auto Parts, Inc....... 100,181 5,400 Furon Co....................... 86,063 8,200 Kaydon Corp.................... 323,388 3,457 Myers Industries, Inc.......... 73,029 1,600* O'Reilly Automotive, Inc....... 52,000 3,200* SPX Corp....................... 221,200 5,350 Simpson Industries, Inc........ 74,900 3,200* Standard Motor Products, Inc... 70,400 4,450 Standard Products Co. Class A.. 130,719 6,700* TBC Corp....................... 54,019 3,300* Walbro Corp.................... 34,031 6,468 Wynn's International, Inc...... 135,827 ---------- 1,681,107 ---------- BANKS - OTHER - 0.41% 1 BankBoston Corp................ 105 700 Citizens Bancshares, Inc....... 48,913 1,600 Irwin Financial Corp........... 43,600 38,612 Sovereign Bancorp, Inc......... 682,950 14,200 Westernbank Puerto Rico........ 241,400 ---------- 1,016,968 ----------
72 =============================================================================== SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS 18 May 31, 1998 ===============================================================================
NUMBER MARKET OF SHARES VALUE --------- ---------- BANKS - REGIONAL - 6.45% 7,350 AMCORE Financial, Inc.......... $ 180,994 3,850 Anchor BanCorp Wisconsin, Inc.. 163,144 12,396 Associated Banc-Corp........... 613,602 1,207* BOK Financial Corp............. 59,747 2,600 BancFirst Corp................. 123,500 9,400 BancorpSouth, Inc.............. 200,338 1,785 Bank of Granite Corp........... 73,185 9,200 Bank United Corp............... 460,000 6,400 Banknorth Group, Inc........... 233,600 4,464 CNB Bancshares, Inc............ 206,460 2,100 Capital City Bank Group, Inc... 97,519 4,110 Chemical Financial Corp........ 173,648 6,450 Citizens Banking Corp.......... 223,331 10,400 Colonial BancGroup, Inc........ 336,700 5,249 Commerce Bancorp, Inc.......... 291,648 8,175 Commercial Federal Corp........ 272,330 7,500 Commonwealth Bancorp, Inc...... 177,188 13,000 Community First Bankshares..... 316,875 760 Community Trust Bancorp........ 23,180 3,850 Corus Bankshares, Inc.......... 162,181 5,740 Cullen/Frost Bankers, Inc...... 311,036 3,500 F & M Bancorporation, Inc...... 141,750 4,742 F & M National Corp............ 139,593 6,510 FNB Corp....................... 231,105 5,586 First American Financial Corp. Class A....... 402,890 2,450 First Citizens BancShares, Inc. Class A...... 259,700 8,800 First Colorado Bancorp., Inc... 250,800 1,500 First Commerce Bancshares, Inc Class B....................... 40,500 5,600 First Commonwealth Financial... 158,200 3,872 First Financial Bancorp........ 222,156 900 First Financial Bankshares..... 36,844 531 First Financial Corp........... 27,280 5,875 First Midwest Bancorp, Inc..... 269,883 700 First United Bancshares........ 36,400 5,208 First Western Bancorp, Inc..... 160,635 3,805 Firstbank of Illinois Co....... 162,664 5,800 FirstBank Puerto Rico.......... 324,075 11,346 Fulton Financial Corp.......... 297,839 2,000 GBC Bancorp.................... 57,250 5,124 HUBCO, Inc..................... 180,621 3,346 Harleysville National Corp..... 136,350 2,850 Heritage Financial Services.... 100,106 10,339* Imperial Bancorp............... 302,416 8,700 Magna Group, Inc............... 483,394 NUMBER MARKET OF SHARES VALUE --------- ---------- BANKS - REGIONAL - Continued 1,100 MainStreet Financial Corp...... $ 33,413 10,118 Mid-Am, Inc.................... 258,009 2,400 Mississippi Valley Bancshares,. 92,700 7,700 National Bancorp of Alaska..... 245,438 4,336 National City Bancshares, Inc.. 173,711 2,421 National Penn Bancshares, Inc.. 81,709 6,200 Ocean Financial Corp........... 119,059 8,800* Ocwen Financial Corp........... 214,500 6,546 Old National Bancorp Indiana... 314,208 3,900* Omega Financial Corp........... 145,275 9,258 One Valley Bancorp of West Va.. 324,030 8,100* PFF Bancorp, Inc............... 158,456 2,200 Park National Corp............. 209,550 1,031 Peoples First Corp............. 35,344 7,100 Riggs National Corp............ 194,363 9,900 Roslyn Bancorp, Inc............ 232,960 3,690 S&T Bancorp, Inc............... 198,337 12,250 St. Paul Bancorp, Inc.......... 309,312 4,600* Silicon Valley Bancshares...... 150,650 1,400* Southwest Bancorporation of TX. 55,125 2,200 Sumitomo Bank of California.... 82,225 4,912 Susquehanna Bancshares, Inc.... 182,357 5,400 Texas Regional Bancshares Class A............ 172,800 4,700 Trans Financial, Inc........... 250,862 1,800 Triangle Bancorp, Inc.......... 52,537 6,700 Trust Co. of New Jersey........ 182,575 5,992 TrustCo Bank Corp. NY.......... 170,771 19,100 Trustmark Corp................. 408,262 5,892 UMB Financial Corp............. 324,060 8,700 UST Corp....................... 241,968 7,400 United Bankshares Inc. WV...... 185,925 400 USBANCORP, Inc................. 31,950 1,200 Vermont Financial Services..... 33,975 8,600 Webster Financial Corp......... 290,250 12,561 Westamerica Bankcorporation.... 387,820 2,294 Westcorp....................... 27,815 4,300 Whitney Holding Corp........... 237,037 ---------- 15,931,995 ---------- BEVERAGE - BREWERS/ DISTRIBUTORS - 0.24% 9,300 Adolph Coors Class B........... 348,750 3,200* Boston Beer, Inc. Class A...... 35,200 3,300* Canandaigua Brands, Inc. Class A....................... 152,213 1,300* Robert Mondavi Corp. Class A... 46,312 ---------- 582,475 ---------- NUMBER MARKET OF SHARES VALUE --------- ----------- BEVERAGE - SOFT DRINKS - 0.05% 1,400 Coca-Cola Bottling Co.......... $ 87,238 4,500* National Beverage Corp......... 46,406 ---------- 133,644 ---------- BROADCASTING - 1.57% 3,200 Ackerley Group, Inc............ 64,000 7,900* American Mobile Satellite Corp................ 90,850 4,870 American Radio Systems, Corp. Class A........ 322,029 8,900* ANTEC Corp..................... 170,491 9,000* Cablevision Systems Corp. Class A......... 498,375 12,600* Century Communications Corp. Class A....................... 200,813 1,300* Cox Radio, Inc. Class A........ 54,763 3,100* Emmis Broadcasting Corp. Class A....................... 136,981 6,400 Heftel Broadcasting Corp. Class A....................... 242,400 14,100* Jacor Communications, Inc...... 745,538 2,500* Paxson Communications Corp..... 29,531 2,400 SFX Broadcasting, Inc. Class A....................... 181,200 2,675* SAGA Communications, Inc. Class A....................... 55,506 4,200 TCA Cable TV, Inc.............. 255,938 9,800* United International Holdings Class A.............. 161,700 12,500* United States Satellite Broadcasting Co., Inc Class A....................... 119,530 1,700 United Television, Inc......... 185,938 4,100* United Video Satellite Group Class A....... 159,643 4,200* Young Broadcasting Inc. Class A....................... 217,875 ---------- 3,893,101 ---------- BUILDING MATERIALS - 1.28% 3,800* ABT Building Products Corp..... 54,150 1,100 Ameron, Inc.................... 66,138 6,900 Apogee Enterprises, Inc........ 96,169 1,850 Butler Manufacturing Co........ 64,750 8,400 CalMat Co...................... 211,050 3,000 Centex Construction Production. 114,750 2,600* Cooper Companies, Inc.......... 102,700 7,300* Dal-Tile International, Inc.... 101,288 3,450 Elcor Corp..................... 91,425 19,100 Fedders USA Inc................ 119,375 3,400 Florida Rock Industries, Inc... 105,825 5,200 Interface, Inc. Class A........ 203,775 3,800 Lone Star Industries, Inc...... 285,713 4,200 Medusa Corp.................... 242,025 1,000* Mestek, Inc.................... 19,125 1,700* NCI Building Systems, Inc...... 90,206 1,100 Puerto Rican Cement Co., Inc... 58,781
73 =============================================================================== SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 19 ===============================================================================
NUMBER MARKET OF SHARES VALUE --------- ---------- BUILDING MATERIALS - Continued 7,000 Southdown, Inc................. $ 459,375 5,700 Texas Industries, Inc.......... 338,437 3,800* Triangle Pacific Corp.......... 167,675 5,700 Watsco, Inc.................... 167,437 ---------- 3,160,169 ---------- CHEMICAL - MAJOR - 0.34% 8,100 Albemarle Corp................. 196,931 4,100 Chemed Corp.................... 150,931 6,409* Hexcel Corp.................... 175,446 6,900 Polymer Group, Inc............. 82,369 4,100* Synetic, Inc................... 242,669 ---------- 848,346 ---------- CHEMICAL - MISCELLANEOUS - 1.81% 4,150 Cambrex Corp................... 232,141 7,900 ChemFirst, Inc................. 202,931 5,800 Dexter Corp.................... 239,250 9,600 Ferro Corp..................... 274,800 8,500* Fisher Scientific Int'l., Inc.. 113,156 3,600 Foamex International, Inc...... 55,800 3,500 H.B. Fuller Co................. 219,188 4,500 General Chemical Group, Inc.... 114,750 5,900 Geon, Co....................... 127,588 7,100 Georgia Gulf Corp.............. 177,944 9,100 M.A. Hanna Co.................. 182,569 12,200 Lawter International, Inc...... 117,425 4,950 LeaRonal, Inc.................. 146,643 6,600 MacDermid, Inc................. 270,600 1,600 McWhorter Technologies, Inc.... 44,200 5,600 Minerals Technologies Inc...... 296,450 5,600* Mycogen Corp................... 132,300 1,200 NCH Corp....................... 76,425 8,200 NL Industries, Inc............. 164,000 7,300 OM Group, Inc.................. 302,950 8,500 Rollins, Inc................... 175,312 9,400 A. Schulman, Inc............... 186,825 2,000 Stepan Co...................... 63,250 4,000* TETRA Technologies, Inc........ 87,250 4,450* VWR Scientific Products Corp... 126,825 6,750 W.H. Brady Co. Class A......... 195,750 5,000 WD-40 Co....................... 137,187 ---------- 4,463,509 ----------
NUMBER MARKET OF SHARES VALUE --------- ---------- COAL - 0.13% 1,634 NACCO Industries, Inc. Class A....................... $ 239,381 4,100 Zeigler Coal Holding Co........ 74,569 ---------- 313,950 ---------- CONGLOMERATES - 0.22% 2,700 MAXXAM, Inc.................... 159,131 12,400 Ogden Corp..................... 354,175 1,400* PEC Israel Economic Corp....... 30,975 ---------- 544,281 ---------- CONSUMER FINANCE - 0.67% 7,700* AmeriCredit Corp............... 251,213 12,100* Arcadia Financial Ltd.......... 90,750 6,875 Chittenden Corp................ 256,094 5,800 Eaton Vance Corp............... 260,638 1,050 Fund American Enterprises...... 153,890 9,200* IMC Mortgage Co................ 120,750 44,400* Mercury Finance Co............. 11,100 3,830* National Auto Credit, Inc...... 3,830 5,000 SEI Corp....................... 333,750 6,450 WesBanco, Inc.................. 169,312 ---------- 1,651,327 ---------- CONTAINERS - METAL/GLASS - 0.59% 1,900* Alltrista Corp................. 48,450 4,500 AptarGroup, Inc................ 291,656 9,500 Ball Corp...................... 374,656 1,400* CSS Industries, Inc............ 45,850 9,150* CLARCOR, Inc................... 210,450 5,500 Greif Brothers Corp. Class A... 200,063 1,125 Liqui-Box Corp................. 48,164 4,000* Silgan Holdings, Inc........... 133,000 6,100* U.S. Can Corp.................. 103,319 ---------- 1,455,608 ---------- CONTAINERS - PAPER - 0.22% 5,300 Chesapeake Corp................ 188,150 13,000* Gaylord Container Corp. Class A....................... 108,875 8,190 Rock-Tenn Co. Class A.......... 120,291 9,000* Shorewood Packaging Corp....... 124,312 ---------- 541,628 ---------- COSMETICS/TOILETRIES - 0.09% 2,100 Alberto-Culver Co. Class B..... 62,475 11,500 Playtex Products, Inc.......... 165,313 ---------- 227,788 ----------
NUMBER MARKET OF SHARES VALUE --------- ---------- DRUGS - 2.76% 7,500* Agouron Pharmaceuticals, Inc... $ 255,000 2,000* Algos Pharmaceuticals Corp..... 73,125 6,100* Alkermes, Inc.................. 133,438 9,600* Alliance Pharmaceutical Corp... 45,000 3,500 A.L. Pharma Inc. Class A....... 76,125 6,200* AmeriSource Health Corp Class A....................... 337,125 8,500* Amylin Pharmaceuticals, Inc.... 36,125 1,700* Aphton Corp.................... 21,781 2,700* Barr Laboratories, Inc......... 110,194 2,700 Bindley Western Industries..... 95,850 5,300* CNS, Inc....................... 21,863 7,900 Carter-Wallace Inc............. 140,719 7,900* Cephalon, Inc.................. 83,938 7,000* Columbia Laboratories, Inc..... 59,063 7,300* COR Therapeutics, Inc.......... 125,469 18,000* Covance Inc.................... 381,375 6,400* Cygnus, Inc.................... 59,200 4,500* GelTex Pharmaceuticals, Inc.... 103,781 14,500* Gensia, Inc.................... 61,625 5,000* Guilford Pharmaceuticals, Inc.. 90,313 2,100 Herbalife International, Inc. Class A....................... 54,075 2,200 Herbalife International, Inc. Class B....................... 51,425 4,900* Human Genome Sciences, Inc..... 178,850 15,697 ICN Pharmaceuticals, Inc....... 677,914 11,200* ICOS Corp...................... 235,900 4,400* IDEC Pharmaceuticals Corp...... 138,600 5,500* Incyte Pharmaceuticals, Inc.... 201,953 4,400* Inhale Therapeutic Systems..... 145,200 5,900* Interneuron Pharmaceuticals.... 26,919 5,600 Jones Pharma Inc............... 172,200 5,000* KOS Pharmaceuticals, Inc....... 57,188 4,450 Life Technologies, Inc......... 152,134 9,558* Ligand Pharmaceuticals, Inc. Class B....................... 133,215 4,300* Martek Biosciences Corp........ 53,213 4,100* Medicis Pharmaceutical Class A....................... 167,331 7,300* Millennium Pharmaceuticals..... 128,663 2,400* Miravant Medical Technologies.. 64,800 4,030 Natures Sunshine Products, Inc................. 93,193 6,700* Neoprobe Corp.................. 29,312 2,900* Neurogen Corp.................. 49,662 8,300* NeXstar Pharmaceuticals, Inc... 83,518 11,000* P-Com, Inc..................... 165,000 4,800* Parexel International Corp..... 144,000 5,300* Pathogenesis Corp.............. 191,462 6,600* Regeneron Pharmaceuticals Inc.. 61,669
74 =============================================================================== SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 20 May 31, 1998 ===============================================================================
NUMBER MARKET OF SHARES VALUE --------- ------ DRUGS - Continued 2,900* Roberts Pharmaceutical Corp.... $ 47,850 5,200* SangStat Medical Corp.......... 136,500 8,400* Sepracor Inc................... 361,200 12,400* SEQUUS Pharmaceuticals, Inc.... 141,050 5,600* Vertex Pharmaceuticals Inc..... 161,000 5,750* Vitalink Pharmacy Services..... 124,703 8,000* Vivus Inc...................... 74,000 ---------- 6,814,808 ---------- ELECTRICAL EQUIPMENT - 1.83% 8,200 AMETEK, Inc.................... 236,775 3,800* Amphenol Corp. Class A......... 206,625 6,200* Applied Magnetics Corp......... 34,875 5,257* BancTec, Inc................... 122,882 6,100 Belden, Inc.................... 242,094 6,900* Cable Design Technologies...... 162,581 4,300* California Microwave, Inc...... 92,181 9,600 Digital Microwave Corp......... 92,700 6,950* Electro Rent Corp.............. 165,714 2,900* Electro Scientific Industries.. 97,150 6,600* Esterline Technologies Corp.... 141,900 5,700 General Cable Corp............. 151,050 7,000* GenRad, Inc.................... 122,500 2,800* Holophane Corp................. 73,500 4,800* Hutchinson Technology, Inc..... 120,000 4,800* Identix Inc.................... 34,200 14,600* Intergraph Corp................ 128,663 7,400 Juno Lighting, Inc............. 157,250 9,400* Kemet Corp..................... 151,282 8,900* Kent Electronics Corp.......... 186,900 5,100 Kuhlman Corp................... 215,475 4,800* Littelfuse, Inc................ 109,800 5,100* Mail-Well, Inc................. 234,600 4,600* Plexus Corp.................... 98,900 2,700* Spectrian Corp................. 44,213 4,900 Standex International Corp..... 147,613 1,200* Thermo Ecotek Corp............. 19,050 6,450 Thomas Industries Inc.......... 165,281 2,000* Triumph Group, Inc............. 98,000 9,400* Uniphase Corp.................. 479,400 7,900* Vicor Corp..................... 123,438 5,100 X-Rite, Inc.................... 68,850 ---------- 4,525,442 ---------- NUMBER MARKET OF SHARES VALUE --------- ------ ELECTRONIC INSTRUMENTS - 2.36% 2,300* ADE Corp....................... $ 34,500 13,800* Ampex Corp. Class A............ 31,050 1,950 Analogic Corp.................. 88,725 7,100 BMC Industries................. 104,281 7,600* Berg Electronics Corp.......... 156,750 7,300* C-Cube Microsystems, Inc....... 142,806 6,700 CTS Corp....................... 209,375 11,500 Checkpoint Systems, Inc........ 202,688 8,300* Cognex Corp.................... 157,700 4,300 Daniel Industries, Inc......... 87,344 3,000 Dionex Corp.................... 156,750 1,950* Dynatech Corp. W/I............. 7,800 2,100* Eltron International, Inc...... 46,200 2,800* Evans & Sutherland Computer.... 70,350 7,600* Exabyte Corp................... 74,100 5,400 Fluke Corp..................... 173,475 10,800* Gentex Corp.................... 395,550 6,800 Gerber Scientific, Inc......... 171,275 2,200* HADCO Corp..................... 70,675 4,575 Harman International Industries.................... 194,723 9,000* Imation Corp................... 163,688 23,000* Integrated Device Technology... 215,625 16,300* InterDigital Communication..... 89,650 9,500* LTX Corp....................... 36,516 7,000* LoJack Corp.................... 87,938 7,700* MagnaTek, Inc.................. 130,419 4,200* Marshall Industries............ 129,938 7,350 Methode Electronics, Inc. Class A....................... 93,713 10,400 National Computer Systems, Inc. 252,200 3,800* Nimbus CD International, Inc... 40,850 18,900* OIS Optical Imaging Systems.... 23,625 2,600* Optical Cable Corp............. 24,700 4,400 Park Electrochemical Corp...... 104,500 4,700* Performance Food Group Co...... 88,125 93* Perkin-Elmer Corp. (Warrants).. 395 9,537 Pioneer-Standard Electronics... 118,616 4,800 Pittston Bax Group............. 84,300 12,600* Read-Rite Corp................. 111,038 5,100* Robotic Vision Systems, Inc.... 32,193 5,000 Technitrol, Inc................ 201,875 5,700* Telxon Corp.................... 189,525 3,900* Thermedics Detection, Inc...... 37,538 4,300* Thermospectra Corp............. 47,568 7,000* Thermedics, Inc................ 99,750 5,500* Tracor, Inc.................... 217,250 NUMBER MARKET OF SHARES VALUE --------- ------ ELECTRONIC INSTRUMENTS - Continued 6,400* Waters Corp.................... $ 372,800 3,400 Watkins-Johnson Co............. 85,637 5,100 ZERO Corp...................... 147,262 1,600* Zygo Corp...................... 28,700 ---------- 5,832,051 ---------- ENTERTAINMENT - 0.57% 3,200* AMC Entertainment, Inc......... 57,600 17,200* Aztar Corp..................... 120,400 1,800* BET Holdings, Inc. Class A..... 112,388 3,900* Carmike Cinemas, Inc. Class A.. 102,131 10,500* Florida Panthers Holdings, Inc................. 203,438 1,900* GC Companies, Inc.............. 94,763 6,100* Hollywood Entertainment Corp... 64,050 6,946* Midway Games Inc............... 93,771 3,000 NN Ball & Roller, Inc.......... 36,000 1,600* Penn National Gaming, Inc...... 14,200 4,000 Playboy Enterprises, Inc....... 71,500 3,300* Primadonna Resorts, Inc........ 57,337 2,400* SFX Entertainment Inc. Class A....................... 106,200 6,700* Sodak Gaming, Inc.............. 42,294 9,300* TCI Satellite Entmt Inc. Class A....................... 52,312 4,900* Ticketmaster Group, Inc........ 134,750 5,900* Toy Biz, Inc. Class A.......... 57,525 ---------- 1,420,659 ---------- FERTILIZERS - 0.24% 9,686 Delta & Pine Land Co........... 414,682 2,000* IMC Global, Inc. Warrant....... 6,625 6,504 Mississippi Chemical Corp...... 108,942 7,100 Terra Industries, Inc.......... 71,887 ---------- 602,136 ---------- FINANCE COMPANIES - 1.05% 6,200 Aames Financial Corp........... 89,513 9,700* Amresco, Inc................... 327,375 2,600* Capital Factors Holdings, Inc.. 47,937 5,000* Cityscape Financial Corp....... 1,563 9,000* Credit Acceptance Corp......... 92,813 2,800* Delta Financial Corp........... 49,350 4,800 Doral Financial Corp........... 80,100 7,700* FIRSTPLUS Financial Group...... 307,037 5,734* Imperial Credit Industries..... 121,131 15,001 Keystone Financial, Inc........ 585,039 925 Oriental Financial Group....... 39,717
75 =============================================================================== SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 21 ===============================================================================
NUMBER MARKET OF SHARES VALUE --------- ------ FINANCE COMPANIES - Continued 16,400 Phoenix Investment Partners, Ltd................. $ 153,750 106* Search Financial Services...... 10 3,700* Southern Pacific Funding....... 56,887 2,000 Student Loan Corp.............. 96,500 2,300* Triad Guaranty, Inc............ 75,900 6,000 U.S. Trust Corp................ 449,250 2,530* WFS Financial, Inc............. 21,821 ---------- 2,595,693 ---------- FINANCIAL SERVICES - 0.01% 1,520 Omega Worldwide, Inc........... 12,920 ---------- FOODS - 1.20% 6,400 Dreyer's Grand Ice Cream, Inc.. 162,000 5,000 Earthgrains Co................. 264,063 4,100 International Multifoods Corp.. 121,975 3,600 Interpool, Inc................. 53,325 7,600 Lance, Inc..................... 159,600 3,200 Michael Foods, Inc............. 89,200 17,400* NBTY, Inc...................... 303,413 4,200 Pilgrims Pride Corp............ 71,925 8,200* Ralcorp Holdings, Inc.......... 174,763 10,200 Richfood Holdings, Inc......... 249,263 6,800 J.M. Smucker Co. Class A....... 161,925 6,945* Suiza Foods Corp............... 405,847 10,263* U. S. Foodservice.............. 339,961 800* United Natural Foods, Inc...... 21,000 16,800 Universal Foods Corp........... 400,050 ---------- 2,978,310 ---------- FOOTWEAR - 0.36% 7,000 Brown Group, Inc............... 125,562 2,100* Kenneth Cole Productions, Inc. Class A....................... 48,169 5,400* Converse, Inc.................. 27,000 8,800* Genesco, Inc................... 113,300 8,250 Just For Feet, Inc............. 180,984 4,300 Justin Industries, Inc......... 68,263 12,000 Stride Rite Corp............... 159,750 2,000* Timberland Co. Class A......... 164,000 ---------- 887,028 ---------- NUMBER MARKET OF SHARES VALUE --------- ------ FREIGHT - 0.69% 7,350 Air Express International Corp............ $ 189,722 11,800 Airborne Freight Corp.......... 439,550 3,200* Eagle USA Airfreight, Inc...... 104,200 10,800* Greyhound Lines, Inc........... 67,500 8,700 J.B. Hunt Transport Services, Inc................. 260,456 5,512* Kirby Corp..................... 118,508 14,000* OMI Corp....................... 128,625 10,300 Overseas Shipholding Group Inc..................... 199,563 3,500* SEACOR Holdings, Inc........... 204,750 ---------- 1,712,874 ---------- GOLD MINING - 0.10% 12,800 Amax Gold, Inc................. 40,800 5,600* Coeur d'Alene Mines Corp....... 49,350 8,230* Getchell Gold Corp............. 156,370 ---------- 246,520 ---------- HARDWARE & TOOLS - 0.14% 4,700 Barnes Group Inc............... 139,825 6,200* Barnett, Inc................... 112,375 3,900 Lawson Products, Inc........... 105,788 ---------- 357,988 ---------- HEALTHCARE - 2.19% 5,500* Access Health, Inc............. 140,938 11,000* Advanced Tissue Sciences, Inc.. 100,375 3,100* Alternative Living Services.... 84,088 8,900* American Oncology Resources.... 113,475 11,100* Apria Healthcare Group, Inc.... 84,638 2,612 Block Drug Co., Inc. Class A... 114,275 1,215 Coram Healthcare Corp.......... 2,506 218* Coram Healthcare Corp. (Warrants)..................... 0 4,000* Curative Technologies, Inc..... 112,500 21,202* CYTOGEN Corp................... 21,201 3,300 Henry Schein, Inc.............. 127,050 4,900 HealthPlan Services Corp....... 108,718 12,544 Integrated Health Services..... 466,480 7,000 Invacare Corp.................. 184,625 11,900* Laboratory Corp. of America.... 25,287 7,800* Mariner Health Group, Inc...... 116,025 5,500* Maxicare Health Plans, Inc..... 51,562 1,800 Medquist, Inc.................. 78,975 6,200 Mentor Corp.................... 164,106 NUMBER MARKET OF SHARES VALUE --------- ------ HEALTHCARE - Continued 3,600 NCS HealthCare, Inc. Class A... $ 103,950 4,650* National Surgery Centers, Inc.. 129,618 15,900* NovaCare, Inc.................. 174,900 3,000 PHP Healthcare Corp............ 27,375 21,873* Paragon Health Network, Inc.... 336,298 5,475* Patterson Dental Co............ 177,938 5,199* Pharmaceutical Product Dev..... 110,479 5,250* Renal Care Group, Inc.......... 190,313 9,896* Respironics Inc................ 162,666 4,000* RightCHOICE Managed Care, Inc. Class A....................... 46,250 4,400* Rural/Metro Corp............... 103,950 3,800* Sierra Health Services, Inc.... 141,075 2,600* SpaceLabs Medical, Inc......... 43,063 10,488* Sun Healthcare Group, Inc...... 176,330 5,500* Sunrise Medical Inc............ 85,250 2,500* Superior Consultant Holdings C.................... 105,000 20,343* Total Renal Care Holdings...... 624,276 9,700* Trigon Healthcare, Inc......... 329,800 4,000* VISX, Inc...................... 196,500 2,300 Vital Signs, Inc............... 39,963 ---------- 5,401,818 ---------- HEAVY DUTY TRUCKS/PARTS - 0.17% 6,100 Cascade Corp................... 104,463 2,200* Detroit Diesel Corp............ 53,900 8,000 Titan International, Inc....... 155,500 4,450 Wabash National Corp........... 115,421 ---------- 429,284 ---------- HOME BUILDERS - 0.89% 7,905 D R Horton, Inc................ 142,290 6,100 Del Webb Corp.................. 147,925 11,500* Fairfield Communities, Inc..... 235,031 12,300 Kaufman & Broad Home Corp...... 315,956 4,100* NVR, Inc....................... 131,713 5,125* Palm Harbor Homes, Inc......... 213,648 5,500 Pulte Corp..................... 293,219 6,700 Ryland Group, Inc.............. 134,419 11,100 Standard Pacific Corp.......... 192,169 7,700* Toll Brothers, Inc............. 198,275 4,670* U.S. Home Corp................. 188,843 ---------- 2,193,488 ----------
76 =============================================================================== SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 22 May 31, 1998 ===============================================================================
NUMBER MARKET OF SHARES VALUE --------- ---------- HOSPITAL MANAGEMENT - 0.57% 7,400* ABR Information Services, Inc.. $ 189,625 9,929* Concentra Managed Care, Inc.... 232,090 11,000* Coventry Health Care Inc....... 159,500 6,000* FPA Medical Management......... 26,250 7,700* Magellan Health Services, Inc.. 207,900 16,700 Medaphis Corp.................. 125,250 8,000* Orthodontic Centers of America. 169,500 2,700* Pediatrix Medical Group........ 97,706 10,300 Physicians Resource Group...... 52,788 3,800* Prime Medical Services, Inc.... 39,900 4,100* Sunquest Information Systems,.. 35,363 2,800* Sunrise Assisted Living Inc.... 84,350 ---------- 1,420,222 ---------- HOSPITAL SUPPLIES - 1.37% 3,700 ATL Ultrasound, Inc............ 167,656 5,400* Acuson Corp.................... 103,275 4,700 Arrow International, Inc....... 162,444 16,600* Arterial Vascular Engineering.. 513,045 6,900 Ballard Medical Products....... 154,388 11,600* Bio-Technology General Corp.... 98,600 2,600* Closure Medical Corp........... 66,300 5,800* Coherent, Inc.................. 133,763 3,600* CONMED Corp.................... 76,050 5,300* Datascope Corp................. 149,063 4,200 Diagnostic Products Corp....... 130,200 5,500* Immunomedics, Inc.............. 28,187 8,300* Isis Pharmaceuticals, Inc...... 115,162 2,100 Landauer, Inc.................. 59,850 5,500* Marquette Medical Systems,Inc.. 154,000 1,600* MiniMed, Inc................... 80,000 9,350 Owens & Minor, Inc............. 109,862 16,875* PSS World Medical, Inc......... 210,938 4,100* Physio-Control International... 86,100 8,200* Safeskin Corp.................. 287,000 1,233* SonoSight, Inc................. 8,322 9,500* Summit Technology, Inc......... 51,062 4,400 TECHE Corp..................... 77,000 7,200* Theragenics Corp............... 200,700 5,200 West Co., Inc.................. 153,400 ---------- 3,376,367 ----------
NUMBER MARKET OF SHARES VALUE --------- ---------- HOUSEHOLD PRODUCTS - 0.48% 6,500 Church & Dwight Co., Inc....... $ 197,031 6,061* Culligan Water Technologies.... 338,280 8,200 First Brands Corp.............. 203,975 3,900 Libbey, Inc.................... 153,563 8,800* Linens `N Things, Inc.......... 282,700 1,500* USA Detergents, Inc............ 20,906 ---------- 1,196,455 ---------- HUMAN RESOURCES - 0.48% 3,100* Data Processing Resources...... 90,288 6,000* Employee Solutions, Inc........ 24,375 12,200* Interim Services Inc........... 354,563 3,200 Kelly Services Inc. Class A.... 117,600 6,200* Metamor Worldwide, Inc......... 186,194 3,300 Norrell Corp................... 74,455 8,400* Personnel Group of America..... 170,100 4,800* Staffmark, Inc................. 176,400 ---------- 1,193,975 ---------- INFORMATION PROCESSING -9.11 % 16,400* A.C. Nielson................... 423,325 3,200* Activision, Inc................ 32,200 12,100* Acxiom Corp.................... 261,663 4,733* ADAC Laboratories.............. 94,068 2,600* Advent Software, Inc........... 92,950 11,300* Affiliated Computer Services Class A.............. 376,431 9,300* American Management Systems.... 252,263 7,800 Analysts International Corp.... 228,150 8,800* Anixter Internationall, Inc.... 177,100 2,120* Applied Graphics Technology.... 102,290 3,800* Arbor Software Corp............ 129,913 8,494* Artesyn Technologies, Inc...... 139,355 1,300* Aspect Development, Inc........ 74,344 5,100* Aspen Technology, Inc.......... 227,110 8,900* Auspex Systems, Inc............ 49,506 6,808* Avant! Corp.................... 174,881 2,918* Baan Company NV................ 132,040 2,550* Barra, Inc..................... 51,956 5,200* Bea Systems, Inc............... 104,325 4,100* Bell & Howell Co............... 110,700 5,800* BISYS Group, Inc............... 215,325 4,100* Black Box Corp................. 163,488 9,337* Boole & Babbage, Inc........... 229,924 2,600* BRC Holdings, Inc.............. 48,588 5,200* Broderbund Software, Inc....... 83,200 6,900* CCC Information Services....... 156,544
NUMBER MARKET OF SHARES VALUE --------- ---------- INFORMATION PROCESSING - Continued 2,400* CDW Computer Centers, Inc...... $ 98,850 4,200* Centennial Technologies, Inc... 12,600 6,000* Cerner Corp.................... 153,750 12,600* Checkfree Holdings Corp........ 285,862 9,750* CHS Electronics, Inc........... 193,781 6,200* Ciber, Inc..................... 198,788 10,050* Citrix Systems, Inc............ 524,484 6,500 Clarify, Inc................... 79,625 8,125 Computer Horizons Corp......... 271,426 1,950* Computer Management Sciences... 46,313 4,700 Computer Task Group, Inc....... 148,638 11,660* Comverse Technology, Inc....... 582,636 16,900* CopyTele, Inc.................. 57,038 6,900* CSG Systems International, Inc............ 294,760 3,000* CyberMedia, Inc................ 18,375 2,900* Data Dimensions, Inc........... 40,963 9,900* Data General Corp.............. 150,975 3,800* Data Transmission Network...... 146,300 2,900* Davox Corp..................... 53,288 3,100* Dialogic Corp.................. 102,300 11,400* Diamond Multimedia Systems..... 86,925 1,160 DocuCorp International, Inc.... 8,845 2,300* Documentum, Inc................ 108,388 4,700* Edify Corp..................... 49,350 4,600* Envoy Corp..................... 201,825 3,200 Fair Issac & Co., Inc.......... 116,200 5,400* FileNet Corp................... 297,169 5,900* Forte Software, Inc............ 29,500 7,500* FTP Software, Inc.............. 19,688 6,800* General DataComm Industries.... 31,025 8,000* GT Interactive Software Corp... 75,000 6,000* Harbinger Corp................. 139,687 2,900 HCIA, Inc...................... 23,925 4,450 Henry Jack & Associates........ 145,181 10,500* HMT Technology Corp............ 122,063 4,500* HNC Software, Inc.............. 155,531 5,800* Hyperion Software Corp......... 187,413 2,000* IDX Systems Corp............... 84,125 5,400* IKOS Systems, Inc.............. 31,725 3,400* Imnet Systems, Inc............. 37,719 7,600* In Focus Systems, Inc.......... 59,850 7,800* Industri-Matematik Int'l. Corp................... 125,288 5,700* Information Management Resourc....................... 128,428 9,700* Information Resources, Inc..... 169,750 4,600 Innovex, Inc................... 85,388 11,800 Inprise Corp. Borland International, Inc............ 98,088
77 =============================================================================== SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 23 ===============================================================================
NUMBER MARKET OF SHARES VALUE --------- ---------- INFORMATION PROCESSING - Continued 3,000* Inso Corp...................... $ 40,875 2,400* Integrated Circuit Systems..... 33,075 3,800* Integrated Systems, Inc........ 71,250 6,700* International Network Services...................... 210,003 5,800* INTERSOLV, Inc................. 83,375 2,800* Intevac, Inc................... 26,600 2,900 JDA Software Group, Inc........ 130,953 1,900* JPM Co......................... 19,475 2,000* Kronos, Inc.................... 71,500 11,600* Learning Co., Inc.............. 330,600 3,300* Learning Tree International.... 52,800 10,600 Legato Systems, Inc............ 303,425 4,800* LHS Group, Inc................. 277,500 3,600* Lycos, Inc..................... 190,913 10,000* Macromedia, Inc................ 158,438 3,900* Manugistics Group, Inc......... 111,028 11,800* Mentor Graphics Corp........... 130,538 5,800* Mercury Interactive Corp....... 192,850 2,600* Metro Information Services, Inc................. 84,825 4,000* Micrel, Inc.................... 125,125 1,400* MicroProse, Inc................ 7,525 2,700* MICROS Systems, Inc............ 158,625 8,000 MTS Systems Corp............... 150,000 5,200* Mylex Corp..................... 36,075 5,250* National Instruments Corp...... 174,891 3,900* National TechTeam, Inc......... 35,344 6,800* Network Appliance, Inc......... 236,513 6,800* Network Computing Devices...... 58,225 4,200* NOVA Corp...................... 138,338 11,800* Oak Technology, Inc............ 64,900 6,100* ODS Networks, Inc.............. 41,556 4,100 OEA, Inc....................... 70,213 7,645* Paxar Corp..................... 94,607 2,800* Pegasystems, Inc............... 60,637 2,200* Perceptron, Inc................ 26,950 4,300* Periphonics Corp............... 43,538 4,700 Phoenix Technologies Ltd....... 47,881 7,500 Physician Computer Network..... 1,875 10,600 Picturetel Corp................ 99,375 17,300* PLATINUM technology, inc....... 473,587 7,100 PMC-Sierra, Inc................ 276,456 10,700 PMT Services, Inc.............. 208,650 4,700 Policy Management Systems Corp.................. 387,750 5,800* Primark Corp................... 193,937 5,100* Progress Software Corp......... 165,112 2,300* Project Software & Development................. 51,750
NUMBER MARKET OF SHARES VALUE --------- ---------- INFORMATION PROCESSING - Continued 11,000* PsiNet, Inc.................... $ 118,250 2,900 QuickResponse Services, Inc.... 102,860 1,500* Radisys Corp................... 39,843 4,000* Rambus Inc..................... 154,625 20,843* Rationale Software Corp........ 317,856 6,000* Remedy Corp.................... 96,938 2,320* Renaissance Worldwide Inc...... 43,645 12,000* S3, Inc........................ 78,750 5,900* Safeguard Scientifics, Inc..... 254,069 4,000* Sandisk Corp................... 64,500 900* Sapient Corp................... 40,275 9,200* Sequent Computer Systems, Inc.. 152,375 8,800* Shiva Corp..................... 82,500 12,958* Siebel Systems, Inc............ 294,795 2,600* Sipex Corp..................... 56,550 7,200* SMART Modular Technologies..... 98,550 3,500* Splash Technology Holdings..... 59,280 2,700* SPSS, Inc...................... 60,243 8,100* Stratus Computer, Inc.......... 292,105 8,700* Structural Dynamic Research Corp................. 220,218 3,100* Sykes Enterprises, Inc......... 64,712 15,300* Symantec Corp.................. 365,287 9,650* System Software Associates..... 70,565 10,000* Systems & Computer Technology.. 256,250 4,300* Systemsoft Corp................ 8,062 6,450* Technology Solutions Co........ 194,708 5,800* Transition Systems, Inc........ 114,912 2,900* Trident Microsystems, Inc...... 20,300 6,800* USCS International, Inc........ 127,925 9,400* Vanstar Corp................... 136,888 3,600* Vantive Corp................... 96,750 1,600* Veeco Instruments, Inc......... 47,000 11,475* Veritas Software Corp.......... 462,945 4,400* Viasoft, Inc................... 67,925 4,100* VideoServer, Inc............... 33,825 5,100* Visio Corp..................... 239,063 2,800* Volt Information Sciences, Inc................. 85,225 3,200* Wall Data, Inc................. 41,400 8,500* Wang Laboratories, Inc......... 204,000 4,850* Wind River Systems Inc......... 160,656 5,500* Xircom, Inc.................... 86,281 6,100* Yahoo!, Inc.................... 667,950 4,900* Zebra Technologies Corp. Class A....................... 188,038 ---------- 22,528,819 ----------
NUMBER MARKET OF SHARES VALUE --------- ---------- INSURANCE - CASUALTY - 1.02% 5,000* Acceptance Insurance Co., Inc.. $ 115,000 4,700 Baldwin & Lyons, Inc. Class B.. 112,800 2,600 Citizens Corp.................. 83,525 5,100 Commerce Group, Inc............ 182,006 4,500 E.W. Blanch Holdings, Inc...... 169,313 6,370 Frontier Insurance Group, Inc.. 156,065 4,473 Gainsco, Inc................... 32,708 7,500 HCC Insurance Holdings, Inc.... 160,312 5,700* Highlands Insurance Group...... 118,987 3,600 NAC Re Corp.................... 168,075 1,100 Nymagic, Inc................... 32,175 6,362 Orion Capital Corp............. 358,260 1,500 RLI Corp....................... 78,188 6,500* Risk Capital Holdings, Inc..... 161,688 7,200 Selective Insurance Group...... 189,900 4,350 Trenwick Group Inc............. 165,300 1,805 United Fire & Casualty Co...... 69,493 3,100 Vesta Insurance Group, Inc..... 163,331 ---------- 2,517,126 ---------- INSURANCE - LIFE - 0.78% 3,900 American Heritage Life Invest.. 81,900 2,500* Compdent Corp.................. 36,875 6,200 Hartford Life Inc. Class A..... 319,300 300 Kansas City Life Insurance Co.. 25,500 4,300 Life USA Holding, Inc.......... 69,606 500* National Western Life Ins. Co. Class A...................... 56,531 1,900 Nationwide Financial Svcs Inc Class A....................... 82,531 9,400 Presidential Life Corp......... 206,800 10,850 Reinsurance Group of America... 541,144 7,570 United Companies Financial..... 139,099 7,650 W.R. Berkley................... 357,638 ---------- 1,916,924 ---------- INSURANCE - MISCELLANEOUS - 1.35% 5,512 ALLIED Group, Inc.............. 232,193 6,200* Amerin Corp.................... 186,388 4,100 Arthur J. Gallaher & Co........ 176,813 6,400 CMAC Investment Corp........... 387,200 2,700 Capital Re Corp................ 201,150 9,000 Crawford & Co. Class B......... 163,125 3,600 Executive Risk, Inc............ 226,575 5,364 Fidelity National Financial.... 179,024
78 =============================================================================== SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 24 May 31, 1998 ===============================================================================
NUMBER MARKET OF SHARES VALUE --------- ---------- INSURANCE - MISCELLANEOUS - Continued 5,700 Foremost Corp. of America...... $ 140,363 5,512 Fremont General Corp........... 315,218 7,650 HSB Group Inc.................. 336,600 3,200 Harleysville Group............. 77,600 3,250 Hilb, Rogal & Hamilton Co...... 56,875 2,747 Liberty Corp................... 138,207 4,400 MMI Companies, Inc............. 97,350 10,300* Mid Atlantic Med Services, Inc............. 133,255 887 Poe & Brown Inc................ 33,152 4,200 SCPIE Holdings, Inc............ 152,250 4,100 Zenith National Insurance Corp................ 117,619 ---------- 3,350,957 ---------- INSURANCE - MULTILINE - 0.85% 4,650 Alfa Corp...................... 91,838 5,278 American Annuity Group, Inc.... 127,332 6,253 AmerUs Life Holdings, Inc...... 200,096 4,400 Argonaut Group, Inc............ 141,350 5,600* CNA Surety Corp................ 90,650 3,495* Delphi Financial Group, Inc. Class A....................... 189,822 7,800 FBL Financial Group, Inc. Class A....................... 218,888 8,700 John Alden Financal Corp....... 192,488 3,500 Life Re Corp................... 257,687 1,050* Markel Corp.................... 181,452 2,000 Meadowbrook Insurance Group.... 61,625 5,191* Medical Assurance, Inc......... 143,401 6,200 PennCorp Financial Group, Inc.. 137,175 3,000 United Wisconsin Services...... 93,000 ---------- 2,126,804 ---------- LEISURE TIME - 1.14% 8,100* Acclaim Entertainment, Inc..... 52,144 3,800* Action Performance Co., Inc.... 105,688 2,100* Anchor Gaming.................. 191,100 9,000* Boyd Gaming Corp............... 60,188 6,000* Family Golf Centers, Inc....... 157,500 11,000* Grand Casinos Inc.............. 193,188 8,500* Handleman Co................... 104,125 6,100* Hollywood Park, Inc............ 78,918 5,000 Huffy Corp..................... 75,937 6,200 Lewis Galoob Toys, Inc......... 68,588 8,500 Polaris Industries, Inc........ 297,500 3,500 Premier Parks, Inc............. 185,937 4,900* Rio Hotel & Casino Inc......... 106,575 6,900* Sabre Group Holdings, Inc...... 241,930
NUMBER MARKET OF SHARES VALUE --------- ---------- LEISURE TIME - Continued 4,800* Scotts Co. Class A............. $ 167,400 6,100 Showboat Inc................... 186,812 5,150* Signature Resorts, Inc......... 79,825 5,200* Station Casinos, Inc........... 77,350 5,800* Trump Hotels & Casino Resorts.. 49,663 5,700* Vail Resorts Inc............... 165,300 3,300* Vistana, Inc................... 70,125 5,800* WMS Industries Inc............. 25,738 7,600 Winnebago Industries, Inc...... 85,025 ---------- 2,826,556 ---------- LODGING - 0.53% 13,550* Bristol Hotel Co............... 359,075 4,900* CapStar Hotel Co............... 143,325 14,400 Choice Hotels Intl Inc......... 216,900 4,100 Deltic Timber Corp............. 113,519 12,600* Host Marriott Services Corp.... 179,550 4,400* Interstate Hotels Co........... 142,725 7,939 Marcus Corp.................... 140,421 8,200* Prime Hospitality Corp......... 147,087 4,300* Red Roof Inns, Inc............. 75,787 7,000* Sunburst Hospitality Corp...... 48,563 ---------- 1,566,952 ---------- MACHINE TOOLS - 0.46% 2,300 Chase Industries, Inc.......... 71,156 9,100 Cincinnati Milacron, Inc....... 272,431 8,800* Gilead Sciences, Inc........... 284,900 3,200 Gleason Corp................... 94,600 5,000 OmniQuip International, Inc.... 109,688 2,900 PRI Automation Inc............. 58,816 7,600 Roper Industries, Inc.......... 252,225 ---------- 1,143,816 ---------- MACHINERY - AGRICULTURE - 0.14% 2,700 Allied Products Corp........... 58,050 3,600 Lindsay Manufacturing Co....... 167,400 3,100 Toro Co........................ 108,306 ---------- 333,756 ---------- MACHINERY - CONSTRUCTION & CONTRACTS - 0.68% 5,400 Blount, Inc. Class A........... 152,213 3,700* CDI Corp....................... 136,206 7,600* Calpine Corp................... 135,375 5,200 Columbus McKinnon Corp......... 151,450
NUMBER MARKET OF SHARES VALUE --------- ---------- MACHINERY - CONSTRUCTION & CONTRACTS - Continued 3,300 Granite Construction, Inc...... $ 93,225 3,900 J. Ray Mcdermott S.A........... 157,463 5,300* Jacobs Engineering Group, Inc.. 170,262 5,300 Kaman Corp. Class A............ 97,387 10,000 Lennar Corp.................... 265,000 3,522* Morrison Knudsen Corp.......... 41,824 2,900 Stone & Webster, Inc........... 117,450 5,600 TJ International Inc........... 162,050 ---------- 1,679,905 ---------- MACHINERY - INDUSTRIAL/ SPECIALTY - 2.30% 7,350 AAR Corp....................... 194,315 4,700 Albany International Corp. Class A....................... 136,300 6,075 Applied Industrial Tech., Inc.. 142,762 6,450 Applied Power, Inc. Class A.... 220,912 1,600* Asyst Technologies, Inc........ 26,400 6,373 Baldor Electric Co............. 166,095 7,080 Burlington Coat Factory Whse... 142,043 7,900 DII Group, Inc................. 148,619 5,400 Exide Corp..................... 97,538 12,500 Flowserve Corp................. 362,500 1,175 General Binding Corp........... 40,097 6,750 Graco, Inc..................... 233,719 5,800 Helix Technology Corp.......... 103,313 4,800 Hughes Supply, Inc............. 161,700 9,250 IDEX Corp...................... 342,250 2,550* Insilco Corp................... 111,244 4,700* Integrated Process Equipment... 65,213 5,700* Ionics, Inc.................... 255,075 9,200 JLG Industries, Inc............ 162,150 5,100* Kulicke & Soffa Industries..... 87,338 5,850 Lilly Industries, Inc. Class A....................... 114,075 5,000 Lincoln Electric Holdings...... 220,938 4,275 Manitowoc CO.,Inc.............. 175,275 6,900 Newport News Shipbuilding...... 193,200 2,800 Nordson Corp................... 127,400 6,040* Oak Industries Inc............. 210,645 900* Osmonics Inc................... 13,331 5,200 Regal-Beloit Corp.............. 169,650 3,100 Robbins & Myers, Inc........... 92,031 3,800* SPS Technologies, Inc.......... 222,775 4,500 Scotsman Industries Inc........ 128,531
79 =============================================================================== SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 25 ===============================================================================
NUMBER MARKET OF SHARES VALUE --------- ---------- MACHINERY - INDUSTRIAL/ SPECIALTY - Continued 4,400* Specialty Equipment Companies.. $ 96,800 7,700 Stewart & Stevenson Services, Inc................. 159,775 6,000* Stillwater Mining Co........... 145,500 3,800 Tennant Co..................... 162,094 6,700 Watts Industries, Inc. Class A....................... 156,194 3,300* Zoltek Companies, Inc.......... 100,650 ---------- 5,688,447 ---------- MEDICAL TECHNOLOGY - 1.55% 4,900* Affymetrix, Inc................ 131,688 4,800* Arqule, Inc.................... 68,400 2,200* Bio-Rad Laboratories, Inc. Class A....................... 69,850 2,700* Biomatrix, Inc................. 91,800 4,100* Cadus Pharmaceutical Corp...... 24,088 7,700* Creative BioMolecules, Inc..... 45,960 3,800* Cytyc Corp..................... 63,650 8,900 Dekalb Genetics Corp. Class B.. 853,287 7,875* Enzo Biochem, Inc.............. 102,375 5,900* Haemonetics Corp............... 89,975 5,200 Heartport Inc.................. 41,600 3,900* Hologic, Inc................... 81,900 4,200* I-STAT Corp.................... 40,687 7,400* Idexx Laboratories, Inc........ 164,650 26,600* Imatron, Inc................... 73,982 1,235 Lab Holdings, Inc.............. 27,787 8,400* Liposome, Inc.................. 51,712 1,800* Lunar Corp..................... 32,737 2,700* Myriad Genetics, Inc........... 54,337 8,400* NABI, Inc...................... 30,450 5,800* Neopath, Inc................... 73,588 6,300* Neurex Corp.................... 176,794 7,400* Neuromedical Systems, Inc...... 11,563 9,218* Organogenesis, Inc............. 233,907 2,700* Perclose, Inc.................. 68,513 13,700 Pharmerica Inc................. 166,969 3,800* Protein Design Labs, Inc....... 95,475 12,200 Psychemedics Corp.............. 68,625 5,700* Quest Diagnostics Inc.......... 123,619 3,400* Sabratek Corp.................. 89,250 11,124* Scios Nova Inc................. 104,288 5,350* Serologicals Corp.............. 157,825 3,700* Thermo Cardiosystems, Inc...... 83,250 3,400* ThermoTrex Corp................ 67,575 3,800* Transkaryotic Therapies, Inc... 114,000 5,400* US Bioscience, Inc............. 50,625 ---------- 3,826,781 ----------
NUMBER MARKET OF SHARES VALUE --------- ---------- MERCHANDISE - DRUG - 0.38% 3,300* Express Scripts, Inc. Class A.. $ 253,893 7,600 Longs Drug Stores Corp......... 230,375 5,700 Medimmune, Inc................. 284,288 16,500* Perrigo Co..................... 181,500 ---------- 950,056 ---------- MERCHANDISE - SPECIALTY - 3.53% 5,100* APAC Teleservices, Inc......... 46,378 2,700* Advanced Energy Industries..... 38,475 1,100* Amazon.com, Inc................ 96,938 4,200* Ames Department Stores, Inc.... 103,688 6,818 Arctic Cat, Inc................ 62,214 5,500* Avid Technology, Inc........... 222,922 11,800* BJ's Wholesale Club Inc........ 466,100 17,200* Best Buy Co., Inc.............. 561,150 1,600* Bush Boake Allen, Inc.......... 47,200 13,000 Caseys General Stores, Inc..... 184,438 6,567 Cash America International..... 110,818 7,500* Central Garden & Pet Co........ 221,719 24,700 Charming Shoppes, Inc.......... 125,044 3,000* Cole National Corp. Class A.... 116,438 5,600* Compucom Systems, Inc.......... 40,950 1,000* Copart, Inc.................... 17,938 2,900 Cross (A.T.) Co. Class A....... 33,531 4,200* Daisytek International Corp.... 107,100 4,500* Department 56, Inc............. 165,094 5,900* Eagle Hardware & Garden, Inc... 107,306 4,500 Enesco Group Inc............... 137,531 12,200 Fingerhut Companies, Inc....... 357,613 3,150* Fossil, Inc.................... 60,933 5,200* Franklin Covey Co.............. 104,000 5,000* Friedman's, Inc. Class A....... 98,750 5,950* Garden Ridge Corp.............. 104,125 6,100* Gibson Greetings, Inc.......... 147,163 7,200* Graham Field Health Products... 42,300 2,600* Guitar Center, Inc............. 68,738 8,800 Hancock Fabrics, Inc........... 116,600 3,105 Hancock Holding Co............. 175,044 8,300* Homebase, Inc.................. 72,106 3,200* Inacom Corp.................... 103,800 7,800 Jostens, Inc................... 196,950 3,578 K2, Inc........................ 71,560 2,000* Knoll, Inc..................... 63,125 3,700 LabOne, Inc.................... 65,675 5,500* Michaels Stores, Inc........... 164,656 5,200* MicroAge, Inc.................. 70,200 7,300* Micro Warehouse, Inc........... 127,750
NUMBER MARKET OF SHARES VALUE --------- -------- MERCHANDISE - SPECIALTY - Continued 4,000* Nu Skin Asia Pacific, Inc. Class A....................... $104,000 7,000* Paragon Trade Brands, Inc...... 33,250 4,000* Petco Animal Supplies, Inc..... 77,500 5,900 Price Enterprises Inc.......... 105,093 9,300* Rexall Sundown, Inc............ 311,550 2,700 Russ Berrie and Co. Inc........ 68,175 7,400* Seitel, Inc.................... 125,800 9,600* Sitel Corp..................... 60,000 9,300 Sotheby's Holdings, Inc. Class A....................... 213,900 1,614 South Jersey Industries, Inc... 44,081 6,200* Spiegel, Inc. Class A.......... 32,937 8,050* Sports Authority, Inc.......... 121,252 7,300 Sturm, Ruger & Co. Inc......... 135,962 18,700* Sunglass Hut International..... 227,906 3,500* Tractor Supply Co.............. 84,438 6,500* Twinlab Corp................... 241,313 33,150* US Office Products, Co......... 561,478 4,300* United Stationers Inc.......... 256,388 3,300 Unitog Co...................... 75,488 2,100* West Marine, Inc............... 40,294 11,800* Williams-Sonoma, Inc........... 325,975 8,600* Zale Corp...................... 266,063 ---------- 8,736,903 ---------- MERCHANDISING - DEPARTMENT - 0.63% 1,300* Alexander's, Inc............... 114,806 19,272 Pier 1 Imports, Inc............ 463,732 21,667* Proffit's Inc.................. 850,430 7,500* Stein Mart, Inc................ 118,125 ---------- 1,547,093 ---------- MERCHANDISING - FOOD - 0.70% 4,500 Dominick's Supermarkets, Inc... 194,063 75 Farmer Bros. Co................ 15,000 9,400 Fleming Companies, Inc......... 179,188 6,500 Great Atlantic & Pacific Tea Co., Inc.......... 208,000 3,700* IHOP Corp...................... 149,850 1,500 Ingles Markets, Inc. Class A... 18,750 2,875 NashFinch Co................... 48,515 6,700 Ruddick Corp................... 119,762 1,600 Sanderson Farms, Inc........... 18,600 5,000* ShowBiz Pizza Time, Inc........ 177,500 3,000 Smart & Final Inc.............. 56,250 7,400* Smithfield Foods, Inc.......... 199,800 6,300* Whole Foods Market, Inc........ 346,500 ---------- 1,731,778 ----------
80 =============================================================================== SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 26 MAY 31, 1998 ===============================================================================
NUMBER MARKET OF SHARES VALUE --------- ---------- MERCHANDISING - MASS - 0.13% 4,900* Global Directmail Corp............ $ 101,063 34,000 Service Merchandise Co., Inc...... 72,250 4,500* ShopKo Stores, Inc................ 156,937 ---------- 330,250 ---------- METALS - ALUMINUM - 0.27% 5,300* ACX Technologies, Inc............. 120,243 8,300 Century Aluminum Co............... 124,500 5,700 Commonwealth Industries, Inc...... 83,363 4,400 IMCO Recycling, Inc............... 83,325 5,500* Kaiser Aluminum Corp.............. 57,063 2,300 Tredegar Industries, Inc.......... 198,950 ---------- 667,444 ---------- METALS - COPPER - 0.11% 3,700* Essex International, Inc.......... 90,881 5,000* Wolverine Tube, Inc............... 182,500 ---------- 273,381 ---------- METALS - MISCELLANEOUS - 0.59% 3,337 A.M. Castle & Co.................. 75,082 6,100 Brush Wellman Inc................. 148,687 4,033 Commercial Metals Co.............. 123,763 1,267* Freeport McMoran Sulphur.......... 17,580 19,700 Hecla Mining Co................... 99,731 7,800 Kennametal, Inc................... 375,375 4,050 Material Sciences Corp............ 40,753 4,500* RMI Titanium Co................... 96,469 5,000* Ryerson Tull, Inc. Class A........ 105,000 7,900* Steel Dynamics, Inc............... 153,063 5,900 Titanium Metals Corp.............. 143,444 1,300 Tremont Corp...................... 73,125 ---------- 1,452,072 ---------- METALS - STEEL - 1.18% 14,200 AK Steel Holding Corp............. 264,475 3,000* Acme Metals, Inc.................. 23,625 2,400 Amcast Industrial Corp............ 51,750 25,300* Armco Inc......................... 137,569 8,600 Birmingham Steel Corp............. 120,400 4,500 Carpenter Technology Corp......... 238,500 1,800 Citation Corp..................... 34,425 2,800 Cleveland-Cliffs Inc.............. 148,225 3,650 Commercial Intertech Corp......... 69,350 3,000* Gibraltar Steel Corp.............. 65,250
NUMBER MARKET OF SHARES VALUE --------- ---------- METALS - STEEL - Continued 4,200* Intermedia Communications, Inc.... $ 311,325 7,200 Intermet Corp..................... 140,400 4,500 J & L Specialty Steel, Inc........ 31,500 6,100 Lukens Inc........................ 195,581 9,800* Mueller Industries, Inc........... 303,800 7,400 National Steel Corp. Class B...... 116,550 5,400 Oregon Steel Mills, Inc........... 130,613 3,700 Quanex Corp....................... 114,931 2,100 Reliance Steel & Aluminium Co..... 80,194 6,000 Rohn Industries, Inc.............. 26,250 3,300* Shiloh Industries, Inc............ 70,331 7,700 Valmont Industries, Inc........... 154,000 4,800* Wyman-Gordon Co................... 95,400 ---------- 2,924,444 ---------- MISCELLANEOUS - 2.52% 2,900* Abacus Direct Corp................ 145,363 4,800* Alternative Resources Corp........ 97,800 9,300 AMCOL International Corp.......... 127,875 4,500* AMERCO, Inc....................... 146,250 4,600 Arch Coal, Inc.................... 111,263 5,200* Associated Group, Inc. Class A.......................... 183,950 2,800* Avondale Industries, Inc.......... 78,750 5,000* Bacou U.S.A., Inc................. 94,375 7,600* Billing Concepts Corp............. 176,700 3,500* Borg-Warner Security Corp......... 77,219 11,750* Brightpoint, Inc.................. 185,797 3,400* Caribiner International, Inc...... 75,225 1,950 Central Parking Corp.............. 87,384 4,500* Century Business Services......... 77,344 3,300* Clin Trials, Inc.................. 17,944 4,500* Coach USA, Inc.................... 193,781 1,800* Coinmach Laundry Corp............. 43,875 3,800 Computer Learning Centers......... 65,075 6,700* DeVry, Inc........................ 266,744 3,600* Encad, Inc........................ 38,025 2,100* Equity Corp. International........ 49,875 6,600* Firearms Training Systems......... 28,257 3,758* Gemstar Group Ltd................. 163,473 4,100* Hvide Marine, Inc. Class A........ 62,013 1,275* ITT Educational Services, Inc..... 36,338 1,800 Matthews International Corp. Class A.......................... 89,438 3,000* Metzler Group, Inc................ 83,813 2,850 Pinkerton's, Inc.................. 59,494 6,800 Prepaid Legal Services, Inc....... 241,400 2,900 The Profit Recovery Group......... 71,050 4,700 Regis Corp........................ 131,600
NUMBER MARKET OF SHARES VALUE --------- ---------- MISCELLANEOUS - Continued 5,800* Romac International, Inc.......... $ 163,488 3,100* Samsonite Corp.................... 89,125 7,500* Scott Technologies Inc - Cl A Class A..................... 110,625 5,800* Sola International, Inc........... 229,462 9,225* Sylvan Learning Systems, Inc...... 281,362 4,200* Triangle Pharmaceuticals, Inc..... 65,887 4,200* Turbochef, Inc.................... 37,275 3,600* U.S. Rentals, Inc................. 116,775 7,700 Valhi, Inc........................ 75,555 5,300* Veritas DGC Inc................... 274,605 5,000* Veterinary Centers of America..... 94,375 5,000 Wackenhut Corp.................... 110,312 3,900* Wackenhut Corrections Corp........ 94,575 10,700 Washington Water Power Co......... 230,718 6,600* West Teleservices Corp............ 90,750 4,500* Westell Technologies, Inc. Class A.......................... 44,437 5,600 Westinghouse Air Brake Co......... 154,700 3,100* Whittman-Hart, Inc................ 126,713 3,500 Woodward Governor Co.............. 101,500 5,100* World Access, Inc................. 160,013 9,800* Xlyan Corp........................ 236,425 4,700* Zitel Corp........................ 37,453 ---------- 6,233,620 ---------- MOBILE HOMES - 0.54% 12,352* Champion Enterprises, Inc......... 332,732 3,800 Coachmen Industries, Inc.......... 90,488 8,800 Fleetwood Enterprises, Inc........ 352,000 2,500 McGrath Rentcorp.................. 51,875 12,400 Oakwood Homes Corp................ 337,125 4,200 Skyline Corp...................... 122,325 1,575 Thor Industries, Inc.............. 43,607 ---------- 1,330,152 ---------- NATURAL GAS - DIVERSIFIED - 0.7 2% 8,450 Atmos Energy Corp................. 259,838 6,100 Bay State Gas Co.................. 232,181 4,800 Eastern Enterprises............... 192,600 4,500 Laclede Gas Co.................... 111,375 4,500 New Jersey Resources Corp......... 161,719 2,200* Southern Union Co................. 58,850 10,300 Southwest Gas Corp................ 225,313 8,300 UGI Corp.......................... 210,094 4,400 WICOR, Inc........................ 201,300 7,300 Western Gas Resources, Inc........ 118,168 ---------- 1,771,438 ----------
81 =============================================================================== SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 27 ===============================================================================
NUMBER MARKET OF SHARES VALUE --------- ---------- OIL - INTEGRATED DOMESTIC - 0.21% 7,875 Cross Timbers Oil Co........... $ 136,336 12,700 Quaker State Corp.............. 215,106 9,100* Tesoro Petroleum Corp.......... 175,744 ---------- 527,186 ---------- OIL - SERVICE - PRODUCTS - 0.73% 7,950* Barrett Resources Corp......... 276,759 3,100 Getty Realty Corp.............. 67,619 5,800* Global Industrial Technologies.................. 98,238 13,000* Global Industries, Inc......... 277,063 32,300* Kelley Oil & Gas Corp.......... 72,675 6,800* Lone Star Technologies, Inc.... 129,200 1,500* Maverick Tube Corp............. 22,687 20,100* Parker Drilling Co............. 169,594 12,100* Pride International, Inc....... 271,494 6,300* TransMontaigne Oil Co.......... 101,981 4,900* Trico Marine Services, Inc..... 96,775 8,326* Varco International, Inc....... 216,996 ---------- 1,801,081 ---------- OIL - SERVICES - 0.60% 3,800* Cliffs Drilling Company........ 156,750 2,800* Key Energy Group, Inc.......... 46,025 6,400 Lomak Petroleum, Inc........... 77,600 13,900* Marine Drilling Companies, Inc................ 261,494 7,200 Mascotech, Inc................. 176,400 6,500* Oceaneering International, Inc............ 139,750 7,100* Offshore Logistics, Inc........ 144,663 5,850 Pennsylvania Enterprises, Inc.. 152,100 4,800 Pool Energy Services Co........ 97,800 10,700* Tuboscope Inc.................. 242,087 ---------- 1,494,669 ---------- OIL/GAS PRODUCERS - 1.40% 3,800* Atwood Oceanics, Inc........... 196,650 160* Aztec Energy Corp.............. 0 683* Bayard Drilling Technologies... 7,556 8,300* Benton Oil and Gas Co.......... 86,631 4,500 Berry Petroleum Co. Class A.... 64,125 7,600 Cabot Oil & Gas Corp. Class A.. 153,900 17,416 Chesapeake Energy Corp......... 75,106 4,200 Comstock Resources, Inc........ 42,000 6,700 Devon Energy Corp.............. 245,806 10,100 Equitable Resources, Inc....... 287,850 3,700* Forcenergy, Inc................ 68,913 8,000* Forest Oil Corp................ 115,000
NUMBER MARKET OF SHARES VALUE --------- ---------- OIL/GAS PRODUCERS - Continued 23,100* Grey Wolf, Inc................. $ 89,513 2,491* Gulfport Energy Corp........... 3,347 23,000* Harken Energy Corp............. 123,625 1,400 Holly Corp..................... 38,325 11,600* Input/Output, Inc.............. 255,200 5,900 KCS Energy, Inc................ 70,063 2,800* Louis Dreyfus Natural Gas Corp...................... 49,000 8,500* Newfield Exploration Co........ 190,187 6,100* Nuevo Energy Co................ 198,250 6,000* Patterson Energy, Inc.......... 67,125 3,300* Plains Resources, Inc.......... 63,112 3,400 St. Mary Land & Exploration.... 92,650 10,200 Snyder Oil Corp................ 197,625 4,200* Stone Energy Corp.............. 148,837 5,610* Swift Energy Co................ 101,331 6,800* Titan Exploration, Inc......... 55,250 8,200 Tom Brown, Inc................. 137,350 3,800* Unit Corp...................... 29,688 10,800 Vintage Petroleum, Inc......... 195,750 ---------- 3,449,765 ---------- PAPER/FOREST PRODUCTS - 0.56% 5,800* American Pad & Paper Co........ 38,425 7,200* Buckeye Technologies Inc....... 162,450 6,300 Caraustar Industries, Inc...... 193,331 6,000 P. H. Glatfelter Co............ 97,875 12,600 Longview Fibre Co.............. 207,900 4,700 Pope & Talbot, Inc............. 63,744 4,000 Schweitzer-Mauduit Inc......... 132,250 3,700 Standard Register Co........... 133,431 2,300 Universal Forest Products...... 39,532 14,334 Wausau-Mosinee Paper Corp...... 306,389 ---------- 1,375,327 ---------- PHOTOGRAPHY - 0.21% 2,220 CPI Corp....................... 56,888 6,600* Panavision, Inc................ 174,075 6,100 Photronics Inc................. 160,887 2,000* Seattle Filmworks, Inc......... 17,250 5,900* Ultratech Stepper, Inc......... 119,475 ---------- 528,575 ---------- POLLUTION CONTROL - 0.94% 28,800* Allied Waste Industries, Inc... 763,200 546 Arcadis N.V.................... 6,279 3,450* Cuno, Inc...................... 70,078 8,700 Calgon Carbon Corp............. 92,981
NUMBER MARKET OF SHARES VALUE --------- ---------- POLLUTION CONTROL - Continued 7,700 Dames & Moore, Inc............. $ 99,619 55,240* Laidlaw Environmental Srv Inc.. 214,055 1,625 Mine Safety Appliances Co...... 116,086 737* NCS Corp....................... 1,497 19,000* Newpark Resources, Inc......... 345,563 5,200 OHM Corp....................... 70,850 5,600* Superior Services, Inc......... 171,500 6,500* Tetra Tech, Inc................ 143,000 6,600* Thermo TerraTech, Inc.......... 31,350 4,900 Zurn Industries, Inc........... 203,350 ---------- 2,329,408 ---------- PUBLISHING - NEWS - 0.27% 4,700 Media General, Inc. Class A.... 216,200 7,400* Network Equipment Technologies.................. 116,088 3,833 Pulitzer Publishing Co......... 339,220 ---------- 671,508 ---------- PUBLISHING/PRINTING - 1.23% 5,500 American Business Products..... 122,375 7,750 Banta Corp..................... 245,578 3,400* Berlitz International, Inc..... 94,350 6,000* Big Flower Holdings, Inc....... 184,125 4,300 Bowne & Co., Inc............... 184,094 2,900* Consolidated Graphics, Inc..... 148,444 8,700* Golden Books Family Entertainment, Inc 70,144 11,400 John H. Harland Co............. 204,488 7,000 Houghton Mifflin Co............ 243,250 3,300 John Wiley & Sons, Inc. Class A....................... 178,200 14,200 Journal Register Co............ 284,000 5,975 McClatchy Company Class A...... 177,383 5,600 Merrill Corp................... 126,700 4,700 New England Business Service... 153,043 4,200* Scholastic Corp................ 168,000 2,800* Scientific Games Holdings...... 59,150 14,400* Topps Co. Inc.................. 49,500 6,509 Thomas Nelson, Inc............. 84,210 8,400* World Color Press, Inc......... 252,525 ---------- 3,029,559 ---------- RAILROAD - 0.10% 1,200 Florida East Coast Industries.. 149,700 3,500* Motivepower Industries, Inc.... 96,906 ---------- 246,606 ----------
82 =============================================================================== SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 28 May 31, 1998 ===============================================================================
NUMBER MARKET OF SHARES VALUE --------- ---------- REAL ESTATE - 0.57% 2,300* Avatar Holdings, Inc........... $ 62,388 3,700* CB Richard Ellis Services...... 124,413 3,800* Castle & Cooke, Inc............ 71,725 5,675 Cousins Properties, Inc........ 173,442 2,100 Forest City Enterprises, Inc. Class A..... 118,387 7,200* Grubb & Ellis Co............... 86,400 7,800* Insignia Financial Group, Inc. Class A.......... 191,587 7,100 LNR Property Corp.............. 183,712 8,800 Merry Land & Investment Co..... 195,250 7,467 Republic Bancorp Inc........... 140,940 2,100 Tejon Ranch Co................. 56,044 ---------- 1,404,288 ---------- REAL ESTATE INVESTMENT TRUSTS - 7.20% 7,000 Amli Residential Properties.... 157,063 8,300 American General Hospitality... 197,125 5,300 American Health Properties Com- Core Group.................... 147,075 8,600 Apartment Investment & Mgt. Co Class A....................... 335,400 13,100 Arden Realty, Inc.............. 359,431 2,800 Associated Estates Realty...... 53,200 7,600 Avalon Properties, Inc......... 213,750 8,230 BRE Properties, Inc. Class A... 218,095 8,600 Bay Apartment Communities, Inc.............. 316,050 3,200 Bedford Prpty Investors, Inc... 61,600 9,200 Berkshire Realty Co., Inc...... 110,975 5,373 Bradley Real Estate, Inc....... 112,161 2,300 Burnham Pacific Properties..... 32,344 9,600 CBL & Associates Properties.... 235,800 16,241 Camden Property Trust.......... 496,366 6,500 Capstone Capital Corp.......... 151,531 17,850 Capstead Mortgage Corp......... 325,763 2,800 CenterPoint Properties Corp.... 94,850 5,400 Charles E. Smith, Realty Inc... 174,825 8,900 Chateau Communities, Inc....... 263,663 3,200 Chelsea GCA Properties......... 128,200 8,400 Colonial Properties Trust...... 255,150 9,800 Commercial Net Lease Realty.... 157,413 23,500 Cornerstone Properties, Inc.... 411,250 10,800 Cornerstone Reality Income..... 127,575 7,800 Criimi Mae, Inc................ 118,950 6,100 Crown American Realty Trust.... 61,763 7,200 Developers Diversified Realty.. 282,150
NUMBER MARKET OF SHARES VALUE --------- ---------- REAL ESTATE INVESTMENT TRUSTS - Continued 10,400 Dynex Capital, Inc............. $ 124,150 800 EastGroup Properties, Inc...... 16,050 12,500 Equity Inns, Inc............... 178,906 4,900 Essex Property Trust, Inc...... 159,250 3,900* Excel Legacy Corp.............. 19,988 3,900 Excel Realty Trust, Inc........ 106,275 13,400 Federal Realty Investment Trust.............. 331,650 7,600 FelCor Suite Hotels, Inc....... 261,725 11,100 First Industrial Realty Trust.. 344,100 4,000 First Union Real Estate........ 43,750 8,200 Franchise Finance Corp......... 213,200 4,800 Gables Residential Trust....... 133,800 7,000 General Growth Properties...... 259,000 6,400 Glenborough Realty Trust, Inc.. 180,000 5,800 Glimcher Realty Trust.......... 120,713 9,600 Health Care Property Investors..................... 337,800 3,500 Healthcare Realty Trust, Inc... 99,094 3,500 Health Care REIT, Inc.......... 90,344 15,800 Highwoods Properties, Inc...... 521,400 2,600 Home Properties of NY, Inc..... 69,550 3,892 Horizon Group, Inc............. 43,299 5,300 Hospitality Properties Trust... 165,625 11,300 IRT Property Co................ 128,537 15,300 Indymac Mortgage Holdings...... 362,418 3,700 Innkeepers USA Trust........... 51,568 4,100 Irvine Apartment Communities... 122,487 5,400 JDN Realty Corp................ 175,500 3,300 JP Realty, Inc................. 75,487 4,400 Kilroy Realty Corp............. 115,225 7,200 Koger Equity, Inc.............. 151,200 5,800 LTC Properties, Inc............ 116,362 11,400 Liberty Property Trust......... 301,387 3,200 MGI Properties................. 77,800 3,500 Macerich Co.................... 94,500 15,100 Mack Cali Realty Corp.......... 543,600 8,500 Manufactured Home Communities.. 211,968 11,300 Meridian Indust. Trust, Inc.... 262,725 5,300 Mid-Amer Apartment Communities................... 142,768 8,800 Mills Corp..................... 217,250 4,300 National Golf Properties, Inc.. 129,268 5,600 National Health Investors, Inc................ 197,750 10,500 Nationwide Health Properties... 252,000 6,300 Ocwen Asset Investment Corp.... 107,100 4,586 Omega Healthcare Investors..... 157,930
NUMBER MARKET OF SHARES VALUE --------- ---------- REAL ESTATE INVESTMENT TRUSTS - Continued 8,300 Pacific Gulf Properties, Inc... $ 180,525 4,500 Pennsylvania Real Estate Inv... 106,031 9,482 Post Properties, Inc........... 389,947 7,000 Prentiss Properties Trust...... 178,938 4,700 Price REIT, Inc................ 224,131 1,700 Prime Retail, Inc.............. 22,419 9,000 RFS Hotel Investors, Inc....... 178,875 5,800 Realty Income Corp............. 154,063 7,400 Reckson Associates Realty Corp................... 184,075 2,500 Redwood Trust, Inc............. 58,594 5,300 Regency Realty Corp............ 129,850 2,900 Saul Centers, Inc.............. 50,388 5,200* Security Capital Atlantic, Inc................. 116,025 369 Security Capital Group (Warrants).................... 369 6,800 Shurgard Storage Centers, Inc. Class A......... 195,075 1,600 Sovran Self Storage, Inc....... 43,700 6,200 Storage USA, Inc............... 230,563 5,800 Storage Trust Realty........... 139,925 5,600 Summit Properties, Inc......... 111,650 7,100 Sun Communities, Inc........... 240,956 5,300 Sunstone Hotel Investors, Inc.. 76,188 7,700 Taubman Centers, Inc........... 105,394 6,200 Thornburg Mortgage Asset Corp.. 87,188 10,000 Town & Country Trust........... 164,375 3,600 TriNet Corporate Realty Trust.. 125,550 3,600 Universal Health Realty Income. 70,425 7,100 Urban Shopping Centers, Inc.... 234,300 6,300 Walden Residential Properties.. 152,775 7,900 Washington Real Estate Inv..... 139,731 7,200 Weeks Corp..................... 229,950 4,300 Western Investment Real Estate................... 59,125 ---------- 17,795,117 ---------- RESTAURANTS - 1.41% 7,562 Apple South, Inc............... 99,251 7,850 Applebees International, Inc... 191,344 10,400 Bob Evans Farms, Inc........... 221,650 17,100* Brinker International, Inc..... 371,925 14,880* Buffets, Inc................... 242,730 11,145 CKE Restaurants, Inc........... 353,854 4,200 The Cheesecake Factory......... 84,788 2,500* Consolidated Products, Inc..... 49,531 9,900* Foodmaker, Inc................. 167,063 7,100* Landrys Seafood Restaurants.... 160,860
83 =============================================================================== SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 29 ===============================================================================
NUMBER MARKET OF SHARES VALUE --------- ---------- RESTAURANTS - Continued 7,600* Lone Star Steakhouse & Saloon.. $ 128,250 5,900 Luby's Cafeterias, Inc......... 109,150 2,700 Morrison Health Care, Inc...... 46,238 6,800* NPC International, Inc......... 84,150 4,625* Papa Johns International, Inc.. 192,516 7,800* Rainforest Cafe, Inc........... 108,469 11,800 Ruby Tuesday, Inc.............. 189,538 15,600* Ryan's Family Steak Houses..... 158,925 5,000* Sbarro, Inc.................... 146,250 16,200* Shoney's, Inc.................. 71,887 7,125* Sonic Corp..................... 147,398 6,100* Triarc Companies Inc. Class A.. 148,686 ---------- 3,474,453 ---------- SAVINGS & LOAN - 1.63% 5,020 ALBANK Financial Corp.......... 261,040 6,540 Astoria Financial Corp......... 359,905 6,000 Bay View Capital Corp.......... 193,500 6,150 CitFed Bancorp, Inc............ 304,041 5,200* Coast Federal Litigation-CVF... 77,350 5,200 Dime Community Bancorp, Inc.... 150,800 5,155 Downey Financial Corp.......... 170,759 600 First Financial Holdings, Inc.. 13,875 4,700 First Indiana Corp............. 113,975 3,913 First Source Bancorp Inc....... 39,619 4,500 FirstFed Financial Corp........ 220,781 4,000 HFNC Financial Corp............ 50,500 2,900 JSB Financial, Inc............. 168,563 2,600 Klamath First Bancorp.......... 51,513 7,600 Long Island Bancorp, Inc....... 469,538 4,132 MAF Bancorp, Inc............... 155,983 18,184 Peoples Heritage Financial Grp................. 409,140 7,625 Provident Bankshares Corp...... 238,281 3,748 Queens County Bancorp, Inc..... 164,911 400 Reliance Bancorp, Inc.......... 15,275 2,100 St Francis Capital Corp........ 86,625 7,100 TR Financial Corp.............. 317,725 ---------- 4,033,699 ---------- SECURITIES RELATED - 1.17% 3,300 Dain Rauscher Corp............. 187,275 8,200* E*Trade Group, Inc............. 177,325 3,100 Enhanced Financial Services.... 201,888 8,017 Financial Security Assurance... 475,007 5,600* Hambrecht & Quist Group........ 172,200 3,099 Investors Financial Services... 154,950
NUMBER MARKET OF SHARES VALUE --------- ---------- SECURITIES RELATED - Continued 4,800 Jefferies Group, Inc........... $ 220,800 5,333 Legg Mason, Inc................ 321,647 6,600 McDonald & Co Investments, Inc.............. 198,000 9,150 Morgan Keegan, Inc............. 209,878 5,400 Pioneer Group, Inc............. 153,562 9,150 Raymond James Financial Inc.... 276,787 1,700* White River Corp............... 151,725 ---------- 2,901,044 ---------- SEMICONDUCTOR EQUIPMENT - 0.02% 3,000* ATMI Inc....................... 54,375 SEMICONDUCTORS - 1.04% 6,300* Actel Corp..................... 80,325 6,200* Alliance Semiconductor Corp.... 29,838 6,500* Altron, Inc.................... 71,906 3,600* Anadigics, Inc................. 51,975 9,300* Burr Brown Corp................ 238,604 13,400 Cirrus Logic, Inc.............. 134,000 3,100 Cohu, Inc...................... 95,325 6,650* Credence Systems Corp.......... 139,650 6,400* Cymer Inc...................... 121,800 12,600* DSP Communications, Inc........ 231,525 5,300* ESS Technology, Inc............ 24,015 5,700* Etec Systems, Inc.............. 208,405 4,300* Electroglas, Inc............... 58,587 8,000* FSI International, Inc......... 92,000 2,900* Fusion Systems Corp............ 272 11,000* International Rectifier Corp... 116,188 9,300* Level One Communications, Inc.. 248,194 4,600* MRV Communications, Inc........ 106,950 11,000* Ramtron International Corp..... 44,344 2,950* SDL, Inc....................... 64,900 7,400* Silicon Valley Group Inc....... 135,513 3,400* Siliconix, Inc................. 91,588 1,600* Speedfam International, Inc.... 31,200 2,700* Triquint Semiconductor, Inc.... 61,088 6,200* Unitrode Corp.................. 80,988 ---------- 2,559,180 ---------- TELECOMMUNICATIONS - 3.00% 7,100 ABM Industries, Inc............ 196,581 6,000* Adtran, Inc.................... 145,875 4,600* Aerial Communications, Inc..... 27,888 14,100* Aspect Telecommunications Co... 363,956 700* CKS Group, Inc................. 14,000
NUMBER MARKET OF SHARES VALUE --------- ---------- TELECOMMUNICATIONS - Continued 5,250* Cellular Communications Int'l.. $ 247,406 4,200* CellStar Corp.................. 126,394 12,800* CellNet Data Systems, Inc...... 129,600 8,180* Cellular Technical Services.... 8,180 4,800* Centennial Cellular Corp. Class A....................... 168,000 3,700* Cidco, Inc..................... 30,063 3,500* Coherent Communications........ 165,594 14,900 COMSAT Corp.................... 519,638 3,200* CoreComm Inc................... 68,000 13,400* Glenayre Technologies, Inc..... 205,187 7,100* HighwayMaster Communications... 25,737 5,000* IXC Communications, Inc........ 217,968 5,200 Inter-Tel, Inc................. 97,662 5,400* InterVoice, Inc................ 71,550 4,300* Itron, Inc..................... 66,380 2,750 MasTec, Inc.................... 56,719 9,000 McLeodUSA, Inc. Class A........ 373,500 2,794* Millicom International Cellula....................... 108,617 6,766* NTL Inc........................ 274,869 3,200* Natural Microsystems Corp...... 68,500 1,600 North Pittsburgh Systems....... 25,200 7,300* Omnipoint Corp................. 150,106 1,900* Pacific Gateway Exchange, Inc.. 80,988 12,500* PageMart Wireless, Inc. Class A....................... 113,281 29,700* Paging Network, Inc............ 406,519 4,400 Plantronics, Inc............... 201,300 74 Porta Systems Corp............. 315 7,800 Premisys Communications Inc.... 194,269 4,800 Premier Technologies, Inc...... 114,600 6,640* PriCellular Class A............ 90,055 3,500* Proxim, Inc.................... 45,938 1,200* Quintel Entertainment, Inc..... 6,525 7,000* RCN Corp....................... 150,500 4,900* Sanmina Corp................... 381,588 12,400* Skytel Communications Inc...... 280,550 9,100* Symmetricom, Inc............... 57,444 1,900* Tekelec........................ 84,431 7,700* Tel-Save Holdings, Inc......... 152,075 3,455* Teleport Communications Gro Cl A...................... 193,238 4,100* Transaction Network Services... 83,538 8,200* Vanguard Cellular Systems, Inc. Class A......... 147,088 17,000* Western Wireless Corp Class A.. 314,500 8,800* WinStar Communications, Inc.... 330,000 8,600* Wireless Telecom Group......... 30,100 ---------- 7,412,012 ----------
84 =============================================================================== SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 30 May 31, 1998 ===============================================================================
NUMBER MARKET OF SHARES VALUE --------- ---------- TEXTILE - PRODUCTS - 0.66% 14,200* Burlington Industries, Inc..... $ 249,388 6,100* Cone Mills Corp................ 58,713 4,100 Culp, Inc...................... 71,750 5,500* Fabri-Centers of America, Inc. Class A......... 162,250 4,750 G & K Services, Inc. Class A... 185,250 7,650 Guilford Mills, Inc............ 206,550 6,600* Lydall, Inc.................... 115,500 8,100* Mohawk Industries, Inc......... 246,037 3,200 Springs Industries, Inc. Class A....................... 179,600 6,800 Wellman, Inc................... 163,625 ---------- 1,638,663 ---------- TOBACCO - 0.10% 3,000 Cons Cigar Holdings Inc........ 41,437 12,100 DIMON, Inc..................... 163,350 3,601* General Cigar Holdings, Inc.... 35,785 ---------- 240,572 ---------- TRUCKERS - 0.68% 7,500* American Freightways Corp...... 85,781 4,950 Arnold Industries, Inc......... 77,344 7,800* Consolidated Freightways Corp.. 115,050 5,832 Heartland Express, Inc......... 127,575 750* Knight Transportation, Inc..... 14,297 5,200* Landstar System, Inc........... 175,825 2,300* M.S. Carriers, Inc............. 68,713 3,100 Roadway Express, Inc........... 58,319 18,862 Rollins Truck Leasing Corp..... 226,344 6,900* Swift Transportation Co., Inc.. 153,525 5,600 USFreightways Corp............. 176,400 4,687 Werner Enterprises, Inc........ 89,052 3,700 Xtra Corp...................... 194,250 6,500* Yellow Corp.................... 121,875 ---------- 1,684,350 ---------- UTILITIES - COMMUNICATION - 0.24% 9,200 Aliant Communications, Inc..... 213,325 3,200 CFW Communications Co.......... 80,000 4,666 Commonwealth Telephone Ent..... 138,814 5,178 PXRE Corp...................... 163,107 ---------- 595,246 ----------
NUMBER MARKET OF SHARES VALUE --------- ---------- UTILITIES - ELECTRIC - 2.20% 5,400 Black Hills Corp............... $ 118,463 5,600 Cleco Corp..................... 167,650 13,100 Central Maine Power Co......... 250,538 3,400 CILCORP, Inc................... 149,813 4,600 Commonwealth Energy System Co.. 174,800 31,300 Conectiv, Inc.................. 639,694 1,900 Conectiv, Inc. Class A......... 61,512 9,300 Eastern Utilities Associates... 235,987 15,100* El Paso Electric Co............ 143,450 4,100 Empire District Electric Co.... 83,793 6,100 Hawaiian Electric Industries, Inc............... 233,325 5,600 Indiana Energy, Inc............ 172,900 17,432 Interstate Energy Corp......... 524,050 7,525 Madison Gas & Electric Co...... 159,905 6,600 Minnesota Power Inc............ 260,287 11,600 Nevada Power Co................ 276,950 8,100 Northwestern Corp.............. 195,413 2,875 Otter Tail Power Co............ 92,000 10,400 Public Service Co. of New Mexico................. 225,550 13,400 Rochester Gas & Electric Corp.. 412,050 5,950 SIG Corp, Inc.................. 185,566 2,700 TNP Enterprises, Inc........... 87,919 8,020* Unisource Energy Corp. Hldg.... 126,816 3,700 United Illuminating Co......... 175,288 10,500 Washington Gas Light Co........ 273,656 ---------- 5,427,375 ---------- UTILITIES - GAS, DISTRIBUTION - 0.78% 18,600 AGL Resources, Inc............. 372,000 2,700 Connecticut Natural Gas Corp... 62,775 2,200 Colonial Gas Co................ 62,563 2,200 Connecticut Energy Corp........ 63,938 8,600 Energen Corp................... 174,688 1,200 NUI Corp....................... 29,550 12,600* National-Oilwell, Inc.......... 440,212 5,600 Northwest Natural Gas Co....... 154,000 7,400 Piedmont Natural Gas Co., Inc.. 234,487 7,800 Public Service Co. of NC....... 165,750 9,900 Southwestern Energy Co......... 104,568 2,550 Yankee Energy Systems, Inc..... 61,200 ---------- 1,925,731 ----------
NUMBER MARKET OF SHARES VALUE --------- ---------- UTILITIES - GAS, PIPELINE - 0.12% 2,400 North Carolina Natural Gas..... $ 55,500 5,900 ONEOK Inc...................... 230,469 ---------- 285,969 ---------- UTILITIES - MISCELLANEOUS - 0.52% 4,400 Central Hudson Gas & Electric.. 192,225 7,150 MDU Resources Group, Inc....... 238,184 3,500 Orange and Rockland Utilities.. 187,031 7,700 Sierra Pacific Resources....... 264,206 2,900 Trigen Energy Corp............. 40,238 5,600 WPS Resources Corp............. 175,350 9,000* Walter Industries, Inc......... 172,125 ---------- 1,269,359 ---------- WATER SERVICES - 0.23% 3,000 Aquarion Co.................... 100,125 2,800 California Water Service Group................. 62,125 1,900 E'Town Corp.................... 65,550 9,700 Philadelphia Suburban Corp..... 190,968 2,150 Southern California Water Co... 46,897 6,200 United Water Resources......... 99,588 ---------- 565,253 ---------- TOTAL COMMON STOCKS (Cost $186,116,688)............ 240,043,605
PAR VALUE - ---------- CORPORATE SHORT TERM COMMERCIAL PAPER - 2.36% FINANCE COMPANIES - 0.93% $2,291,000 Ford Motor Credit Co., 5.45% due 06/01/98........... 2,291,000 SECURITIES RELATED - 1.43% Merrill Lynch & Co. 1,534,000 5.60% due 06/06/98........... 1,533,523 2,000,000 5.58% due 06/02/98........... 1,999,690 ---------- 3,533,213 ---------- TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $5,824,213).............. 5,824,213 ==========
85 =============================================================================== May 31, 1998 31 SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED ===============================================================================
PAR MARKET VALUE VALUE - ---------- ----------- UNITED STATES GOVERNMENT - SHORT TERM - 0.08% U. S. TREASURY BILLS - 0.08% $ 200,000 United States Treasury Bills, 4.94% due 06/04/98........... $ 199,918 ------------ UNITED STATES GOVERNMENT - SHORT TERM (Cost $199,918)................ 199,918 ------------ TOTAL INVESTMENTS (Cost $192,140,819) - 99.55%... 246,067,736 Other assets and liabilities, net - 0.45%................... 1,114,822 ------------ NET ASSETS (equivalent to $17.94 per share on 13,776,917 shares outstanding) - 100%........... $247,182,558 ============ * Non-income producing
UNREALIZED CONTRACTS DEPRECIATION - --------- ------------- FUTURES CONTRACTS PURCHASED(1) (Delivery month/Value at 5/31/98) 26 (2) Russell 2000 Index Futures (June/$456.45)................ $ (311,225) =============
(1) U.S. Treasury Bills with a market value of approximately $200,000 were maintained in a segregated account with a portion placed as collateral for futures contracts. (2) Per 500
MARKET VALUE ------------ NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 13,776,917 shares outstanding........... $ 137,769 Additional paid in capital................ 174,700,392 Undistributed net realized gain on securities....................... 18,696,806 Undistributed net investment income....... 31,899 Unrealized appreciation (depreciation) of: Investments........... $53,926,917 Futures .............. (311,225) 53,615,692 ----------- ------------ NET ASSETS APPLICABLE TO SHARES OUTSTANDING............................. $247,182,558 ============
86 ================================================================================ SMALL CAP INDEX FUND - FINANCIAL STATEMENTS 32 ================================================================================ STATEMENT OF OPERATIONS For the fiscal year ended May 31, 1998 INVESTMENT INCOME: Dividends ........................................................................... $ 2,784,313 Interest ............................................................................ 493,266 ------------ Total investment income ........................................................... 3,277,579 ------------ EXPENSES: Advisory fees ....................................................................... 798,980 Custodian and accounting services ................................................... 48,447 Reports to shareholders ............................................................. 18,071 Audit fees and tax services ......................................................... 5,971 Directors' fees and expenses ........................................................ 4,511 Miscellaneous ....................................................................... 20,829 Total expenses .................................................................... 896,809 ------------ NET INVESTMENT INCOME ............................................................... 2,380,770 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES: Net realized gain on: Investments ...................................................... $ 18,026,929 Futures contracts ................................................ 1,045,986 19,072,915 ------------ Net unrealized appreciation (depreciation) during the year: Investments ...................................................... 20,249,083 Futures contracts ................................................ (623,225) 19,625,858 ------------ ------------ Net realized and unrealized gain on securities during the year ................... 38,698,773 ------------ INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .................................... $ 41,079,543 ============
STATEMENT OF CHANGES IN NET ASSETS For the fiscal year ended May 31:
1998 1997 ------------- ------------- OPERATIONS: Net investment income .................................................. $ 2,380,770 $ 2,388,474 Net realized gain on securities ........................................ 19,072,915 17,523,137 Net unrealized appreciation (depreciation) of securities during the year ...................................................... 19,625,858 (6,382,053) ------------- ------------- Increase in net assets resulting from operations ..................... 41,079,543 13,529,558 ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income .................................................. (2,367,516) (2,385,945) Net realized gain on securities ........................................ (17,477,319) (11,216,991) ------------- ------------- Decrease in net assets resulting from distributions to shareholders ..................................................... (19,844,835) (13,602,936) ------------- ------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold ....................................... 39,604,509 20,665,121 Proceeds from capital stock issued for distributions reinvested ........ 19,844,835 13,602,936 ------------- ------------- 59,449,344 34,268,057 Cost of capital stock repurchased ...................................... (25,960,237) (22,521,418) ------------- ------------- Increase in net assets resulting from capital stock transactions ..... 33,489,107 11,746,639 ------------- ------------- TOTAL INCREASE IN NET ASSETS ........................................... 54,723,815 11,673,261 NET ASSETS: Beginning of year ...................................................... 192,458,743 180,785,482 ------------- ------------- End of year (including undistributed net investment income of $31,899 and $18,645) .............................................. $ 247,182,558 $ 192,458,743 ============= ============= CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold ........................................... 2,173,506 1,339,448 Shares issued for distributions reinvested ............................. 1,157,942 890,371 Shares of capital stock repurchased .................................... (1,447,855) (1,465,127) ------------- ------------- Increase in shares outstanding ....................................... 1,883,593 764,692 Shares outstanding: Beginning of year .................................................... 11,893,324 11,128,632 ------------- ------------- End of year .......................................................... 13,776,917 11,893,324 ============= =============
87 ================================================================================ INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS May 31, 1998 33 ================================================================================
NUMBER MARKET OF SHARES VALUE - ----------- ----------- COMMON STOCKS - 98.63% AIRLINES - 0.89% 4,100 British Airways plc - ADR...... $ 431,013 40,000* Japan Air Lines Co. Ltd........ 102,535 25,000 Lufthansa Ag................... 624,912 60,000 Malay Airline System Bhd....... 35,889 35,000 Singapore Airlines............. 194,386 ----------- 1,388,735 ----------- APPAREL & PRODUCTS - 0.16% 20,000 Onward Kashiyama Co., Ltd...... 248,393 ----------- APPLIANCES/FURNISHINGS - 1.72% 4,200 Matsushita Electric Industrial Co.Ltd. - ADR................. 656,250 10,000 Philips Electronics NV......... 950,250 33,000 Sanyo Electric Co. Ltd......... 94,599 3,400 Sanyo Electric Co. Ltd. - ADR.. 49,725 10,970 Sony Corp - ADR................ 919,423 ----------- 2,670,247 ----------- AUTO - CARS - 3.99% 15,000 Daimler-Benz AG - ADR.......... 1,483,125 50,000 Fiat S.p.A..................... 223,834 16,500 Fiat S.p.A. - ADR.............. 368,156 12,500 Honda Motor Co., Ltd. - ADR.... 831,250 35,000 Nissan Motor Co., Ltd.......... 106,145 18,000 Nissan Motor Co., Ltd. - ADR... 112,500 500 Peugeot Citroen SA............. 97,693 78,000 Toyota Motor Corp.............. 1,931,836 500 Volkswagen Ag.................. 405,493 20,000 Volvo AB....................... 639,251 ----------- 6,199,283 ----------- AUTO - ORIGINAL EQUIPMENT - 0.06% 25,000 Calsonic Corp.................. 88,996 ----------- AUTO - REPLACEMENT PARTS - 1.03% 26,000 Bridgestone Corp............... 593,256 5,550 Denso Corp..................... 376,501 10,093 Michelin (CGDE) Class B........ 624,508 ----------- 1,594,265 -----------
NUMBER MARKET OF SHARES VALUE - ----------- ----------- BANKS - OTHER - 13.32% 60,000 AMMB Holdings BHD.............. $ 53,365 50,000 Asahi Bank Ltd................. 188,100 3,190 Asahi Bank Ltd. - ADR.......... 119,943 126,000 Bank of Tokyo - Mitsubishi..... 1,296,484 68,000 Bank of Yokohama Ltd........... 165,961 2,296 Bank of Yokohama Ltd. - ADR.... 56,006 38,287 Barclays plc................... 1,021,809 11,977 Bco Comm Portugues............. 396,588 25,000 Bco Santander.................. 1,258,660 7,000 Bco Totta E Acores............. 259,075 40,000 Chiba Bank Ltd................. 142,393 108,000 Commerce Asset Holding......... 57,017 11,250 Commerce Asset Holding (Warrants).................... 1,082 6,300 Den Danske Bank AF 1871 - ADR.. 783,819 27,500 Deutsche Bank AG - ADR......... 2,369,315 13,000 Development Bank of Singapore Ltd........................... 78,411 14,987 Development Bank of Singapore Ltd. - ADR.................... 361,692 17,000 Dresdner Bank AG - ADR......... 956,420 10,000 Foreningssparbk................ 300,486 25,000 Hang Seng Bank................. 186,314 2,180 HSBC Holdings plc - ADR........ 528,894 15,000 Industrial Bank of Japan Ltd... 92,064 25,000* Ist Bc S.Paolo To.............. 391,780 13,500 Istituto Mobiliare Italiano S.p.A. - ADR.................. 690,187 48,000 Joyo Bank...................... 170,525 147,654 Lloyds TSB Group plc........... 2,145,149 60,000* Malayan Bk Bhd................. 84,261 31,435 National Australia Bank Ltd.... 435,931 9,319 National Australia Bank Ltd. - ADR........................... 642,429 10,591 National Westminster Bank plc.. 193,575 2,500 Paribas Banque................. 254,889 250,000 RHB Capital BHD................ 136,534 50,000 RHB Capital BHD (Warrants)..... 7,672 20,598 Royal Bank Scot Group.......... 347,866 98,000 Sakura Bank Ltd................ 290,837 2,000 Schweiz Bankverein............. 722,241 30,000 Shizuoka Bank.................. 324,500 74,000 Sumitomo Bank.................. 691,963 26,000 Tokai Bank..................... 143,996 2,225 Tokai Bank - ADR............... 246,321 1,000 Union Bank of Switzerland AG... 1,680,729 13,300 Westpac Banking Corp. Ltd. - ADR........................... 438,900 ----------- 20,714,183 -----------
NUMBER MARKET OF SHARES VALUE - ----------- ----------- BEVERAGE - BREWERS/ DISTRIBUTORS - 1.38% 34,642* Bass........................... $ 636,534 60,500 Diageo......................... 684,292 16,000 Kirin Brewery Co., Ltd......... 148,921 12,000 LVMH (Moet Hennessy Louis Vuitton) - ADR................ 508,500 45,000 Sapporo Breweries.............. 170,590 ----------- 2,148,837 ----------- BROADCASTING - 0.48% 50,000 British Sky Broadcasting Group plc........................... 351,976 764 Canal Plus..................... 138,677 40,000 Mediaset....................... 256,542 ----------- 747,195 ----------- BUILDING MATERIALS - 1.90% 20,000 Asahi Glass Co. Ltd............ 108,022 1,223 Cie De St Gobain............... 241,207 31,072 CRH plc........................ 447,547 2,505 Fletcher Challenge Building Division...................... 41,959 2,700 Glaverbel SA................... 399,973 725 Holderbank Finance Glarus...... 926,865 40,000 Inax Corp...................... 135,750 343* Lafarge........................ 34,971 4,116 Lafarge SA..................... 417,585 15,000 Tostem Corp.................... 192,360 ----------- 2,946,239 ----------- CHEMICAL - MAJOR - 1.36% 25,000 BASF AG........................ 1,158,750 10,000 Bayer AG....................... 478,072 10,000 Bayer AG - ADR................. 478,462 ----------- 2,115,284 ----------- CHEMICAL - MISCELLANEOUS - 1.84% 13,603 Air Liquide - ADR.............. 536,136 5,100 Akzo Nobel N V- ADR............ 533,587 23,420 BOC Group plc.................. 371,044 7,500 Degussa Ag..................... 478,773 6,000 Imperial Chemical Industries plc - ADR..................... 447,750 13,100 Shin Etsu Chemical Co.......... 243,574 50,000 Toray Industries Inc........... 249,115 ----------- 2,859,979 -----------
88 ================================================================================ INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED 34 May 31, 1998 ================================================================================
NUMBER MARKET OF SHARES VALUE - ----------- ----------- CONGLOMERATES - 1.21% 6,890 Broken Hill Proprietary Co. Ltd. - ADR.................... $ 118,422 34,942* Btr............................ 115,140 15,408* Btr Plc........................ 211,860 30,000 Hutchison Whampoa.............. 156,794 3,300 Itochu Corp. - ADR............. 74,305 71,250 Keppel Corp. Ltd............... 142,117 26,875 Keppel Corp. Ltd. - ADR........ 107,242 8,157 Lagardere Groupe............... 358,564 70,000 Marubeni Corp.................. 141,527 3,200 Marubeni Corp. - ADR........... 64,663 22,000 Mitsubishi Corp................ 132,804 50,000 Mitsui & Co.................... 256,336 ---------- 1,879,774 ---------- CONSUMER FINANCE - 0.03% 37,000 Nippon Shinpan Co.............. 49,960 ---------- COSMETICS/TOILETRIES - 1.44% 1,100 Loreal Co...................... 546,231 15,400 Loreal Co. - ADR............... 1,529,505 14,490 Shiseido Ltd. - ADR............ 168,359 ---------- 2,244,095 ---------- DRUGS - 7.80% 26,666 Astra AB....................... 535,885 47,900 Glaxo Wellcome plc - ADR....... 2,583,606 7,700 Kissei Pharmaceutical Co....... 97,577 1,600 Novartis Ag.................... 2,708,606 5,000 Ono Pharmaceutical............. 111,560 200 Roche Holdings AG.............. 2,056,699 10,000 Sankyo Co. Ltd................. 241,173 148,897 Smithkline Beecham............. 1,613,590 35,000 Takeda Chemical Industries Ltd. 904,759 30,900 Zeneca Group plc - ADR......... 1,278,488 ---------- 12,131,943 ---------- ELECTRICAL EQUIPMENT - 1.52% 1,000 Barco.......................... 255,776 15,000 Fanuc.......................... 552,387 30,000 Fujikura....................... 136,905 84,000 General Electric plc........... 688,730 10,400 General Electric plc - ADR..... 85,262 10,000 Murata Manufacturing Co........ 289,552 3,400 Sumitomo Electric Industries Ltd.- ADR..................... 355,054 ---------- 2,363,666 ----------
NUMBER MARKET OF SHARES VALUE - ----------- ----------- ELECTRONIC INSTRUMENTS - 2.60% 50,000 Hitachi Ltd.................... $ 329,627 8,550 Hitachi Ltd. - ADR............. 567,506 6,000 Kyocera Corp................... 292,873 25,000 NEC Corp....................... 254,531 5,100 NEC Corp. - ADR................ 260,100 50,000 Racal Electronics plc.......... 307,877 7,110 Schneider SA................... 601,314 8,000 Siemens AG..................... 516,520 12,000 Siemens AG - ADR............... 775,412 25,000 Yokogawa Electric.............. 129,251 ---------- 4,035,011 ---------- FINANCE COMPANIES - 2.94% 20,000 Abbey National................. 357,040 63,000 ABN Amro Holdings N V.......... 1,525,621 126 Dekia France................... 17,121 8,182 Fortis Amev NV................. 490,664 20,180 ING Groep NV................... 1,385,772 3,984 Societe Generale............... 789,076 ---------- 4,565,294 ---------- FOODS - 3.29% 25,000 Ajinomoto Inc.................. 210,304 1,900 Ajinomoto Inc. - ADR........... 159,744 22,084 Cadbury Schweppes plc.......... 337,791 3,929 Cadbury Schweppes plc - ADR.... 240,651 31,794 Coca Cola Amatil Ltd........... 233,954 10,000 Daiei, Inc..................... 28,161 11,500 Daiei, Inc. - ADR.............. 63,250 100,000 Golden Hope Plantations........ 109,227 1,000 Groupe Danone.................. 269,263 30,000 Nestle S A - ADR............... 3,218,862 30,750 Tate & Lyle plc................ 250,116 ---------- 5,121,323 ---------- FOOTWEAR - 0.17% 1,500 Adidas AG...................... 264,817 ---------- FREIGHT - 0.67% 98,000 Mitsui Osk Lines Ltd........... 150,018 40,000 Nippon Yusen Kabushiki Kaish... 138,349 8,570 Nippon Yusen Kabushiki Kaish - ADR.......................... 296,253 33,599 P & O Steam Navigation......... 462,890 ---------- 1,047,510 ----------
NUMBER MARKET OF SHARES VALUE - ----------- ----------- HOME BUILDERS - 0.27% 15,000 Daiwa House Industry Co. Ltd... $ 116,868 214* Sekisui Homes Ltd. - ADR....... 15,830 20,000 Sekisui House, Ltd............. 148,025 3,000 Skanska Ab..................... 141,630 ---------- 422,353 ---------- HOSPITAL SUPPLIES - 0.65% 2,000 Novo-Nordisk A/S............... 314,803 8,800 Novo-Nordisk A/S - ADR......... 690,800 ---------- 1,005,603 ---------- HOUSEHOLD PRODUCTS - 0.88% 7,000 Katokichi Co................... 77,991 16,400 Unilever N V - ADR.............. 1,294,575 ---------- 1,372,566 ---------- INFORMATION PROCESSING - 1.03% 14,000 Fujitsu Ltd.................... 160,734 7,200 Fujitsu Ltd. - ADR............. 413,091 2,000 SAP AG......................... 1,033,487 ---------- 1,607,312 ---------- INSURANCE - CASUALTY - 0.29% 25,000 Mitsui Marine & Fire........... 122,752 50,000 Nippon Fire & Marine Insurance..................... 191,350 25,000 Sumitomo Marine & Fire......... 138,999 ---------- 453,101 ---------- INSURANCE - LIFE - 1.19% 66,911 Irish Life plc................. 549,708 15,240 Prudential plc - ADR........... 1,010,849 20,000* Skandia Forsakring............. 292,192 ---------- 1,852,749 ---------- INSURANCE - MULTILINE - 3.79% 3,000 Allianz AG..................... 948,298 88* Allianz AG..................... 27,570 27,313 Assic Generali................. 877,807 10,962 AXA UAP........................ 1,247,722 1,500 Munchener Ruckvers............. 681,379 55,267 Royal Sun Alliance............. 586,288 154,095 Sedgwick Group plc............. 372,492 500 Swiss Reinsurance AG........... 1,151,873 ---------- 5,893,429 ----------
89 ================================================================================ INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 35 ================================================================================
NUMBER MARKET OF SHARES VALUE - ----------- ----------- LEISURE TIME - 1.16% 20,000 Canon, Inc. - ADR.............. $ 470,000 15,000 Fuji Photo..................... 507,979 53,882 Ladbroke Group plc............. 304,499 88,050 Rank Group..................... 513,409 ----------- 1,795,887 ----------- LODGING - 0.15% 297,916 Hong Kong & Shanghai Hotels.... 159,550 22,916* Hong Kong & Shanghai Hotels (Warrants).................... 29 180,000 Hotel Properties............... 65,572 ----------- 225,151 ----------- MACHINE TOOLS - 0.39% 35,000 Amada Co., Ltd................. 176,908 16,000 Makita Corp. - ADR............. 167,000 25,000 Minebea Co. Ltd................ 256,517 ----------- 600,425 ----------- MACHINERY - CONSTRUCTION & CONTRACTS - 0.75% 3,501* Algeco......................... 377,427 2,000 Groupe Gtm..................... 186,528 2,000 Jean Lefebvre SA............... 165,134 52,000 Kajima Corp.................... 139,678 2,340 Kajima Corp. - ADR............. 62,821 80,000 Kumagai Gumi Co................ 40,263 16,000* Kumagai Gumi Co. (Warrants).... 21 70,000 Shimizu Corp................... 192,072 ----------- 1,163,944 ----------- MACHINERY - INDUSTRIAL/ SPECIALTY - 2.62% 10,000 Atlas Copco AB Series A........ 289,641 125 Bobst SA....................... 236,247 61,056* British Aerospace.............. 541,495 8,000 Ebara Corp..................... 71,687 2,530 Ebara Corp. - ADR.............. 226,589 100,000 Halma plc...................... 209,063 50,000 Kawasaki Heavy Industries...... 93,509 70,000 Kubota Corp.................... 169,326 1,350 Kubota Corp. - ADR............. 67,162 750 Man AG......................... 298,445 1,000 Mannesmann AG.................. 978,002
NUMBER MARKET OF SHARES VALUE - ----------- ----------- MACHINERY - INDUSTRIAL/ SPECIALTY - Continued 612 Rauma Oy....................... $ 12,639 49,662 Rolls Royce.................... 236,647 25,367 Siebe plc...................... 635,980 ----------- 4,066,432 ----------- MEDICAL TECHNOLOGY - 0.02% 20,000* Instrumentation Laboratory S. p. A. ..................... 32,500 ----------- MERCHANDISE - SPECIALTY - 1.22% 42,487 BAA plc........................ 507,617 10,000 Esselte AB Series B............ 234,775 35,000 Great Universal Stores plc..... 497,626 10,000 Hennes and Mauritz............. 561,418 1,500 Herlitz AG..................... 94,157 ----------- 1,895,593 ----------- MERCHANDISING - DEPARTMENT - 0.99% 500 Karstadt AG.................... 261,314 15,000 Marks & Spencer plc............ 133,768 15,033 Marks & Spencer plc - ADR...... 804,559 16,000 Marui Co., Ltd................. 245,505 36,000 Mitsukoshi Ltd................. 91,761 200 Mitsukoshi Ltd. - ADR.......... 5,095 ----------- 1,542,002 ----------- MERCHANDISING - FOOD - 1.47% 15,607 Ahold Kon Nv................... 492,800 1,550 Carrefour SA................... 947,150 10,000* Delhaize-Le Lion, S.A.......... 686,328 15,000 Melco International Development Limited....................... 1,452 10,000 Uny Co. Ltd.................... 150,913 ----------- 2,278,643 ----------- MERCHANDISING - MASS - 0.65% 4,356 Familymart Co.................. 163,559 10,200 Ito-Yokado Co. Ltd. - ADR...... 504,900 6,500 Jeronimo Martins Sgps.......... 293,416 20,000 Seiyu Ltd...................... 42,747 ----------- 1,004,622 -----------
NUMBER MARKET OF SHARES VALUE - ----------- ----------- METALS - MISCELLANEOUS - 0.93% 200* Alusuisse Lonza Holdings....... $ 268,646 37,410 NMC............................ 117,140 109,658 North Ltd...................... 255,465 8,062 Rio Tinto Limited.............. 388,700 6,432 Rio Tinto plc.................. 80,419 6,700 Rio Tinto plc.................. 338,350 ---------- 1,448,720 ---------- METALS - STEEL - 0.98% 500 Bekaert SA..................... 394,469 36,700 British Steel plc.............. 90,812 2,000 British Steel plc - ADR........ 50,875 50,000 Cockerill Sambre............... 297,635 60,000 Kawasaki Steel................. 96,180 5,420 Kawasaki Steel - ADR........... 86,836 78,000 Sumitomo Metal Industries Ltd.. 121,092 50,000 Sumitomo Metal Mining.......... 212,290 2,000* Vallourec Usin................. 169,480 ----------- 1,519,669 ----------- MISCELLANEOUS - 0.39% 30,000 Rexam.......................... 152,142 8,000 Secom Co....................... 454,618 ----------- 606,760 ----------- OIL - INTEGRATED INTERNATIONAL - 6.05% 27,405 British Petroleum Co. PLC - ADR 2,428,768 20,946 Elf Aquitaine SA - ADR......... 1,436,110 225,000 Eni S.p.A...................... 1,590,870 10,000 Repsol S A - ADR............... 547,500 40,392 Royal Dutch Pete Co............ 2,264,477 9,207 Total.......................... 1,143,373 ----------- 9,411,098 ----------- OIL/GAS PRODUCERS - 0.56% 2,505 Fletcher Challenge Energy Division...................... 78,125 3,500 Norsk Hydro A/S - ADR.......... 157,281 3,000 OMV AG......................... 434,187 62,500 Santos Ltd..................... 205,488 ----------- 875,081 -----------
90 ================================================================================ INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED 36 May 31, 1998 ================================================================================
NUMBER MARKET OF SHARES VALUE - ----------- ----------- PAPER/FOREST PRODUCTS - 0.92% 150,801 Fletcher Challenge Forest Ltd.. $ 92,902 4,326 Fletcher Challenge Ltd. - ADR.. 27,578 5,010 Fletcher Challenge Paper Division...................... 65,756 22,000 New Oji Paper Co., Ltd......... 92,931 300 New Oji Paper Co., Ltd. - ADR.. 12,666 60,000 Nippon Paper Industries........ 259,080 15,000 Stora Kopparbergs.............. 243,068 22,000 UPM - Kymmene Corp............. 637,693 ---------- 1,431,674 ---------- PUBLISHING - NEWS - 0.76% 50,651 Independent Newspapers plc..... 318,596 22,500 News Corp Ltd. - ADR........... 554,062 21,379 United News & Media plc........ 307,456 ---------- 1,180,114 ---------- PUBLISHING/PRINTING - 0.68% 43,333 Reuters Group.................. 497,200 20,000 Trelleborg Ab.................. 283,261 2,020 Wolters Kluwer NV.............. 283,757 ---------- 1,064,218 ---------- RAILROAD - 0.59% 30,000 Fukuyama Transporting Co....... 117,843 9,218 Nagoya Railroad Co. Ltd. - ADR. 274,746 101,970 Odakyu Electric Railway Co. Ltd. ......................... 332,071 60,000 Tokyu Corp..................... 197,126 ---------- 921,786 ---------- REAL ESTATE - 1.33% 6,000* Asticus Ab..................... 66,605 12,000 Diligentia..................... 110,242 41,427 Hammerson plc.................. 356,583 240,000 Hang Lung Development Co....... 247,774 43,000 Mitsubishi Estate Co. Ltd...... 377,868 35,000 Mitsui Fudosan................. 283,306 26,163 New World Development Co....... 61,786 83,597 Sun Hung Kai Properties Ltd.... 403,475 128,000 Wharf (Holdings) Ltd........... 163,531 ---------- 2,071,170 ----------
NUMBER MARKET OF SHARES VALUE - ----------- ----------- SECURITIES RELATED - 0.59% 25,000 Daiwa Securities Co. Ltd....... $ 95,133 46,000 Mitsubishi Trust & Banking Corp. ........................ 408,549 3,800 Nomura Securities Co. Ltd. - ADR .......................... 414,102 160,000* Peregrine Investment Holdings Ltd. ......................... 0 6,000* Yamaichi Securities Co. Ltd. - ADR........................... 0 ---------- 917,784 ---------- TELECOMMUNICATIONS - 10.20% 2,000* Alcatel Alst Cge............... 427,879 35,550 British Telecommunications plc. ......................... 371,028 13,379 British Telecommunications plc - ADR ................... 1,396,433 45,924 Cable & Wireless plc........... 520,179 30,000 Deutsche Telekom............... 804,540 30,400 Ericsson LMTEL Co Class B - ADR 847,400 10,000* France Telecom................. 560,087 40,600 Hong Kong Telecommunications Ltd. - ADR.................... 738,412 15,621 Kon Ptt Nederland.............. 873,076 5,000* Netcom Asa..................... 126,080 300 Nippon Tel+Tel Cp.............. 2,469,493 14,000* Nokia Ab Oy.................... 908,672 2,600 Telecom Corp. of New Zealand Ltd. - ADR.................... 95,063 250,000 Telecom Italia Mobile.......... 1,478,242 186,111* Telecom Italia Spa............. 1,406,419 14,000 Telefonica de Espana........... 625,404 6,290 Telefonica de Espana - ADR..... 846,005 115,000 Telekom Malaysia Berhad........ 263,185 10,000 Vodafone Group plc - ADR....... 1,098,750 ---------- 15,856,347 ---------- TEXTILE - PRODUCTS - 0.46% 20,000 Courtaulds Textiles plc........ 95,711 30,000* Marzotto & Figli S.p.A......... 460,751 15,000 Wacoal Corp.................... 151,636 ---------- 708,098 ----------
NUMBER MARKET OF SHARES VALUE - ----------- ------------ TOBACCO - 0.76% 77,759 B.A.T. Industries plc......... $ 700,426 20,100 B.A.T. Industries plc - ADR... 371,850 32,000 Swedish Match AB............... 112,692 ------------ 1,184,968 ------------ UTILITIES - COMMUNICATION - 0.17% 1,500 Telecel Comuni Pes............. 262,798 ------------ UTILITIES - ELECTRIC - 3.91% 55,000 Clp Holdings................... 237,063 48,000 Endesa S A..................... 1,152,000 6,500 Hidroel Cantabrico............. 304,520 30,000 Iberdrola SA................... 494,886 16,600 Kansai Electric Power Co. Inc.. 264,301 60,000 National Power................. 558,589 4,000 Oesterreichisch Elektrizitatswirt Schafts - AG Class A.................... 469,632 10,000 RWE AG - ADR................... 531,189 48,488 Scottish Power plc............. 437,951 95,000 Tenaga Nasional Berhad......... 156,884 25,200 Tokyo Electric Power........... 482,201 15,000 VEBA AG........................ 985,288 ------------ 6,074,504 ------------ UTILITIES - GAS, DISTRIBUTION - 0.32% 44,117 Bg............................. 227,518 127,000 Osaka Gas Co................... 274,193 ------------ 501,711 ------------ WATER SERVICES - 1.71% 21,503 Hyder plc...................... 343,131 26,385 Thames Water plc............... 428,576 43,780 United Utilities plc........... 593,499 6,349* Vivendi........................ 1,275,531 10,196 Vivendi (Warrants)............. 17,723 ------------ 2,658,460 ------------ TOTAL COMMON STOCKS (Cost $115,663,437)............ 153,332,301 ------------
91 ================================================================================ INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 37 ================================================================================
PAR MARKET VALUE VALUE - ----------- ------------ UNITED STATES GOVERNMENT - SHORT TERM - 0.14% U.S. TREASURY BILLS - 0.14% $ 225,000 United States Treasury Bills: 4.94% due 6/4/98.............. $ 199,917 4.85% due 6/4/98.............. 24,990 ------------ TOTAL UNITED STATES GOVERNMENT - SHORT TERM (Cost $224,907)................ 224,907 ------------ TOTAL INVESTMENTS (Cost $115,888,344) - 98.77%... 153,557,208 Other assets and liabilities, net - 1.23%................... 1,911,959 ------------ NET ASSETS (equivalent to $11.95 per share on 13,009,276 shares outstanding) - 100%........... $155,469,167 ============
* Non-income producing
UNREALIZED CONTRACTS DEPRECIATION - ----------- ------------ FUTURES CONTRACTS PURCHASED(1) (Delivery month/Value at 5/31/98) 30 (2) Nikkei 225 Futures (June/$113.22)................ $ (121,309) ===========
(1) U.S. Treasury Bills with a market value of approximately $225,000 were maintained in a segregated account with a portion placed as collateral for futures contracts. (2) Per 500
MARKET VALUE ------------ NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 13,009,276 shares outstanding................. $ 130,093 Additional paid in capital..................... 106,757,575 Undistributed net realized gain on securities.................................... 10,593,190 Undistributed net investment income............ 468,817 Unrealized appreciation (depreciation) of: Investments................... $ 37,668,864 Futures ...................... (121,309) Foreign currency translation.. (28,063) 37,519,492 ------------ ------------- NET ASSETS APPLICABLE TO SHARES OUTSTANDING.................................. $ 155,469,167 =============
92 ================================================================================ INTERNATIONAL EQUITIES FUND - FINANCIAL STATEMENTS 38 ================================================================================ STATEMENT OF OPERATIONS For the fiscal year ended May 31, 1998 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $465,853)............. $ 3,358,662 Interest............................................................. 489,661 ----------- Total investment income............................................ 3,848,323 ----------- EXPENSES: Advisory fees........................................................ 582,798 Custodian and accounting services.................................... 32,720 Reports to shareholders.............................................. 10,913 Audit fees and tax services.......................................... 3,182 Directors' fees and expenses......................................... 3,684 Insurance............................................................ 2,555 Miscellaneous........................................................ 32,300 ----------- Total expenses..................................................... 668,152 ----------- NET INVESTMENT INCOME................................................ 3,180,171 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES AND FOREIGN CURRENCIES: Net realized gain (loss) on: Investments.......................................... $11,174,773 Foreign currency translations........................ (153,279) Futures contracts.................................... (93,539) 10,927,955 ----------- Net unrealized appreciation (depreciation) during the year: Investments.......................................... 1,952,789 Foreign currency translation......................... (52,149) Futures contracts.................................... (423,327) 1,477,313 ----------- ----------- Net realized and unrealized gain on securities and foreign currencies during the year.............................. 12,405,268 ----------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... $15,585,439 ===========
STATEMENT OF CHANGES IN NET ASSETS For the fiscal year ended May 31:
1998 1997 -------------- -------------- OPERATIONS: Net investment income.................................. $ 3,180,171 $ 3,339,991 Net realized gain on securities and foreign currency transactions................................ 10,927,955 6,077,411 Net unrealized appreciation of securities and translation of foreign currencies during the year............................................. 1,477,313 3,956,886 -------------- -------------- Increase in net assets resulting from operations.... 15,585,439 13,374,288 -------------- -------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income.................................. (3,388,878) (3,206,176) Net realized gain on securities........................ (4,595,687) (6,030,686) -------------- -------------- Decrease in net assets resulting from distributions to shareholders..................................... (7,984,565) (9,236,862) -------------- -------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold....................... 58,848,665 74,488,255 Proceeds from capital stock issued for distributions reinvested........................................... 7,984,565 9,236,862 -------------- -------------- 66,833,230 83,725,117 Cost of capital stock repurchased...................... (100,401,920) (112,684,896) -------------- -------------- Decrease in net assets resulting from capital stock transactions................................. (33,568,690) (28,959,779) -------------- -------------- TOTAL DECREASE IN NET ASSETS........................... (25,967,816) (24,822,353) NET ASSETS: Beginning of year...................................... 181,436,983 206,259,336 -------------- -------------- End of year (including undistributed net investment income of $468,817 and $448,887)..................... $ 155,469,167 $ 181,436,983 -------------- -------------- CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold........................... 5,111,681 6,846,567 Shares issued for distributions reinvested............. 728,332 848,956 Shares of capital stock repurchased ................... (8,688,179) (10,334,613) -------------- -------------- Decrease in shares outstanding....................... (2,848,166) (2,639,090) Shares outstanding: Beginning of year.................................... 15,857,442 18,496,532 -------------- -------------- End of year.......................................... 13,009,276 15,857,442 ============== ==============
93 ================================================================================ GROWTH FUND - STATEMENT OF NET ASSETS May 31, 1998 39 ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ------------ COMMON STOCKS - 96.64% ADVERTISING - 3.86% 415,000* ADVO, Inc...................... $ 10,400,937 330,000* Catalina Marketing Corp........ 14,932,500 570,000* Outdoor Systems Inc............ 17,100,000 ------------ 42,433,437 ------------ AUTO - CARS - 0.73% 330,000* Avis Rent A Car Inc............ 8,002,500 ------------ AUTO - REPLACEMENT PARTS - 1.89% 625,000* AutoZone, Inc.................. 20,781,250 ------------ BANKS - REGIONAL - 2.59% 200,000 BANC ONE CORP.................. 11,025,000 450,000 Norwest Corp................... 17,493,750 ------------ 28,518,750 ------------ BROADCASTING - 7.56% 195,000 CBS Corp....................... 6,191,250 285,000* Chancellor Media Corp. Class A...................... 11,916,588 625,000 Comcast Corp. Class A Special.. 21,425,812 225,000* Jacor Communications, Inc...... 11,896,875 520,000* Sinclair Broadcast Group, Inc.. 13,227,500 559,350* Tele-Comm Liberty Media Group Class A....................... 18,458,550 ------------ 83,116,575 ------------ ENTERTAINMENT - 3.27% 280,000 Carnival Corp. Class A......... 18,970,000 150,000 Walt Disney Co................. 16,968,750 ------------ 35,938,750 ------------ FINANCE COMPANIES - 1.29% 190,000 Associates First Capital Corp.. 14,214,375 ------------ FINANCIAL SERVICES - 1.76% 560,000 CIT Group Inc.................. 17,640,000 60,000 Heller Financial Inc........... 1,672,500 ------------ 19,312,500 ------------ GOVERNMENT SPONSORED - 3.59% 460,000 Federal Home Loan Mortgage Corp. ........................ 20,930,000 220,000 Federal National Mortgage Association................... 13,172,500
NUMBER MARKET OF SHARES VALUE --------- ------------ GOVERNMENT SPONSORED - Continued 135,000 SLM Holding Corp............... $ 5,391,562 ------------ 39,494,062 ------------ FUNERAL SERVICES - 2.04% 550,000 Service Corp. International.... 22,481,250 ------------ HEALTHCARE - 6.24% 275,000 Cardinal Health, Inc........... 24,509,375 550,000 PhyCor, Inc.................... 9,281,250 700,000* Quorum Health Group Inc........ 21,043,750 450,000* Total Renal Care Holdings...... 13,809,375 ------------ 68,643,750 ------------ HOSPITAL MANAGEMENT - 1.27% 600,000* Concentra Managed Care, Inc.... 14,025,000 ------------ HOUSEHOLD PRODUCTS - 0.27% 90,000 ServiceMaster Co............... 2,975,625 ------------ HUMAN RESOURCES - 4.05% 200,000* Accustaff, Inc................. 6,587,500 685,000* Interim Services Inc........... 19,907,813 600,000* Metamor Worldwide, Inc......... 18,018,780 ------------ 44,514,093 ------------ INFORMATION PROCESSING - 11.80% 660,000* Acxiom Corp.................... 14,272,500 470,000* Affiliated Computer Services Class A....................... 15,656,875 415,000* BISYS Group, Inc............... 15,406,875 1,000,000* Cendant Corp................... 21,687,500 550,000 First Data Corp................ 18,287,500 410,000* Galileo International Inc...... 16,143,750 337,500 Paychex, Inc................... 12,150,000 475,000* SunGard Data Systems, Inc...... 16,209,375 ------------ 129,814,375 ------------ INSURANCE - MISCELLANEOUS - 1.79% 300,000 Ace Limited.................... 10,687,500 150,000 MGIC Investment Corp........... 8,990,625 ------------ 19,678,125 ------------
NUMBER MARKET OF SHARES VALUE --------- ------------ INSURANCE - MULTILINE - 2.28% 36,300* Fairfax Financial Hldgs Ltd.... $ 14,002,747 182,500 Travelers Group, Inc........... 11,132,500 ------------ 25,135,247 ------------ LEISURE TIME - 1.46% 185,500* Mirage Resorts, Inc............ 3,860,719 230,000* Premier Parks, Inc............. 12,218,750 ------------ 16,079,469 ------------ LODGING - 1.80% 700,000* Extended Stay America, Inc..... 7,700,000 385,000 Hilton Hotels Corp............. 12,103,437 ------------ 19,803,437 ------------ MERCHANDISE - SPECIALTY - 13.04% 410,000 Circuit City Stores, Inc....... 17,373,750 440,000* Cole National Corp. Class A.... 17,077,500 960,300* Corporate Express, Inc......... 11,133,526 320,000* CostCo Companies, Inc.......... 18,520,000 660,000* General Nutrition Cos., Inc.... 20,831,250 235,000 Home Depot, Inc................ 18,462,188 306,300 Ikon Office Solutions Inc...... 6,489,731 250,000* Kohl's Corp.................... 11,890,625 760,000* Viking Office Products, Inc.... 21,731,288 ------------ 143,509,858 ------------ MERCHANDISING - FOOD - 1.46% 440,000* Safeway, Inc................... 16,032,500 ------------ MERCHANDISING - MASS - 1.56% 400,000* Fred Meyer, Inc................ 17,200,000 ------------ MISCELLANEOUS - 0.44% 215,000* Corrections Corp. of America... 4,891,250 ------------ OIL - SERVICES - 3.62% 155,000 Camco International, Inc....... 10,811,250 100,000 Schlumberger Ltd............... 7,806,250 185,000* Smith International, Inc....... 9,076,563 140,000* Western Atlas Inc.............. 12,118,750 ------------ 39,812,813 ------------
94 ================================================================================ GROWTH FUND - STATEMENT OF NET ASSETS 40 May 31, 1998 ================================================================================
NUMBER MARKET OF SHARES VALUE --------- -------------- POLLUTION CONTROL - 3.63% 395,000* Republic Industries, Inc...... $ 9,726,875 640,000* USA Waste Services, Inc....... 30,200,000 -------------- 39,926,875 -------------- PUBLISHING - NEWS - 1.09% 180,000 Tribune Co.................... 12,037,500 -------------- RESTAURANTS - 1.63% 485,000* Outback Steakhouse Inc........ 17,884,375 -------------- SECURITIES RELATED - 3.37% 560,000 Franklin Resources, Inc....... 27,370,000 125,000 Morgan Stanley, Dean Witter, Discover and Co.............. 9,757,813 -------------- 37,127,813 -------------- TELECOMMUNICATIONS - 6.26% 550,000* Airtouch Communications, Inc.. 26,193,750 950,000* Paging Network, Inc........... 13,003,125 114,700* 360 Communications Co......... 3,276,119 600,000* Western Wireless Corp Class A..................... 11,100,000 335,000* WorldCom, Inc................. 15,242,500 -------------- 68,815,494 -------------- UTILITIES - COMMUNICATION - 1.00% 205,000 MCI Communications Corp....... 10,961,104 -------------- TOTAL COMMON STOCKS (Cost $ 782,991,834).......... 1,063,162,152 --------------
PAR MARKET VALUE VALUE ----- -------------- CORPORATE SHORT TERM COMMERCIAL PAPER - 3.63% CONSUMER FINANCE - 1.57% Beneficial Corp., $17,239,000 5.55% due 06/02/98....... $ 17,236,342 -------------- FINANCE COMPANIES - 1.59% Ford Motor Credit Co. 17,536,000 5.50% due 06/01/98...... 17,536,000 -------------- SECURITIES RELATED - 0.47% Merrill Lynch & Co., Inc. 5,218,000 5.60% due 06/03/98....... 5,216,377 -------------- TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $39,988,719)........... 39,988,719 -------------- TOTAL INVESTMENTS (Cost $822,980,553) - 100.27% 1,103,150,871 Other assets and liabilities, net - (0.27)%............... (3,013,808) -------------- NET ASSETS (equivalent to $22.08 per share on 49,832,259 shares outstanding) - 100%......... $1,100,137,063 ==============
*Non-income producing
MARKET VALUE -------------- NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 49,832,259 shares outstanding.......... $ 498,323 Additional paid in capital............... 768,928,479 Undistributed net realized gain on securities............................. 51,655,725 Accumulated net investment loss.......... (1,115,782) Unrealized appreciation of securities.... 280,170,318 -------------- Net Assets Applicable to Shares Outstanding............................ $1,100,137,063 ==============
95 ================================================================================ GROWTH FUND - FINANCIAL STATEMENTS 41 ================================================================================ STATEMENT OF OPERATIONS For the fiscal year ended May 31, 1998 INVESTMENT INCOME: Dividends............................................................ $ 2,806,130 Interest............................................................. 4,126,518 ------------ Total investment income............................................ 6,932,648 ------------ EXPENSES: Advisory fees........................................................ 7,593,303 Custodian and accounting services.................................... 213,073 Reports to shareholders.............................................. 81,027 Audit fees and tax services.......................................... 27,624 Directors' fees and expenses......................................... 18,286 Miscellaneous........................................................ 51,367 ------------ Total expenses..................................................... 7,984,680 ------------ NET INVESTMENT LOSS.................................................. (1,052,032) ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES: Net realized gain (loss) on: Investments.......................................... $ 52,237,757 Foreign currency translation......................... (63,750) 52,174,007 ------------ Net unrealized appreciation of securities during the year............ 165,960,273 ------------ Net realized and unrealized gain on securities during the year..... 218,134,280 ------------ INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... $217,082,248 ============
STATEMENT OF CHANGES IN NET ASSETS For the fiscal year ended May 31:
1998 1997 ---- ---- OPERATIONS: Net investment income (loss)......................... $ (1,052,032) $ 552,393 Net realized gain on securities...................... 52,174,007 16,994,556 Net unrealized appreciation of securities during the year........................................... 165,960,273 39,599,901 -------------- ------------ Increase in net assets resulting from operations... 217,082,248 57,146,850 -------------- ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income................................ (303,215) (503,196) Net realized gain on securities...................... (15,121,487) (11,891,551) -------------- ------------ Decrease in net assets resulting from distributions to shareholders................................... (15,424,702) (12,394,747) -------------- ------------ CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold..................... 155,432,936 268,628,198 Proceeds from capital stock issued for distributions reinvested........................... 15,424,702 12,394,747 -------------- ------------ 170,857,638 281,022,945 Cost of capital stock repurchased.................... (20,032,134) (3,908,102) -------------- ------------ Increase in net assets resulting from capital stock transactions............................... 150,825,504 277,114,843 -------------- ------------ TOTAL INCREASE IN NET ASSETS......................... 352,483,050 321,866,946 NET ASSETS: Beginning of year.................................... 747,654,013 425,787,067 -------------- ------------ End of year (including undistributed net investment (loss)/income of ($1,115,782) and $303,215)........ $1,100,137,063 $747,654,013 ============== ============ CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold......................... 7,600,994 16,096,764 Shares issued for distributions reinvested........... 769,312 733,851 Shares of capital stock repurchased ................. (959,921) (234,388) -------------- ------------ Increase in shares outstanding..................... 7,410,385 16,596,227 Shares outstanding: Beginning of year.................................. 42,421,874 25,825,647 -------------- ------------ End of year........................................ 49,832,259 42,421,874 ============== ============
96 ================================================================================ GROWTH & INCOME FUND - STATEMENT OF NET ASSETS 42 May 31, 1998 ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ------------ COMMON STOCKS - 92.75% ADVERTISING - 1.31% 76,000 Omnicom Group, Inc............. $ 3,557,750 ------------ AIRLINES - 1.11% 65,000* Alaska Air Group, Inc.......... 3,010,313 ------------ BANKS - NEW YORK CITY - 1.27% 23,000 CitiCorp....................... 3,429,875 ------------ BANKS - OTHER - 2.35% 28,000 BankAmerica Corp............... 2,315,250 60,000 Mellon Bank Corp............... 4,046,250 ------------ 6,361,500 ------------ BANKS - REGIONAL - 3.94% 90,000 Norwest Corp................... 3,498,750 54,000 Star Banc Corp................. 3,294,000 40,000 State Street Corp.............. 2,757,500 22,400 Zions Bancorporation........... 1,142,400 ------------ 10,692,650 ------------ BROADCASTING - 1.94% 55,000* Clear Channel Communications, Inc.......................... 5,273,125 ------------ BUILDING MATERIALS - 1.98% 80,000 HON INDUSTRIES Inc............. 2,560,000 20,000 Lowe's Companies, Inc.......... 1,583,750 40,000* Nortek Inc. Com................ 1,230,000 ------------ 5,373,750 ------------ CHEMICAL - MAJOR - 0.01% 600 Hercules, Inc.................. 26,438 ------------ DRUGS - 7.37% 363* Crescendo Phamarceuticals Corp. 4,628 60,000 Eli Lilly and Co............... 3,686,250 105,321 ICN Pharmaceuticals, Inc....... 4,548,550 61,000 Pfizer, Inc.................... 6,393,562 60,000 Warner-Lambert Co.............. 3,828,750 35,000* Watson Pharmaceuticals, Inc.... 1,531,250 ------------ 19,992,990 ------------ ELECTRICAL EQUIPMENT - 1.23% 40,000* General Electric Co............ 3,335,000 ------------
NUMBER MARKET OF SHARES VALUE --------- ------------ FINANCE COMPANIES - 1.28% 15,000* Fleetwood Capital Trust........ $ 802,500 55,000 SunAmerica, Inc................ 2,674,375 ------------ 3,476,875 ------------ FOODS - 2.54% 56,000 Campbell Soup Co............... 3,052,000 25,000 Trinity Industries, Inc........ 1,193,750 80,000* U. S. Foodservice.............. 2,650,000 ------------ 6,895,750 ------------ FREIGHT - 0.48% 35,000 Airborne Freight Corp.......... 1,303,750 ------------ HEALTHCARE - 2.86% 45,000 Cardinal Health, Inc........... 4,010,625 131,480* HealthSouth Corp............... 3,730,745 ------------ 7,741,370 ------------ HOME BUILDERS - 0.82% 50,000 Centex Corp.................... 1,787,500 25,000 Standard Pacific Corp.......... 432,813 ------------ 2,220,313 ------------ HOSPITAL SUPPLIES - 1.36% 35,000 Medtronic, Inc................. 1,946,875 50,000* Safeskin Corp.................. 1,750,000 ------------ 3,696,875 ------------ HOUSEHOLD PRODUCTS - 1.02% 55,000* Bed Bath & Beyond, Inc......... 2,760,313 ------------ INFORMATION PROCESSING - 16.31% 20,000* America Online, Inc............ 1,666,250 100,000* BMC Software, Inc.............. 4,606,250 52,500 Cisco Systems, Inc............. 3,970,312 80,000 Compaq Computer Corp........... 2,185,000 75,000 Computer Associates International................ 3,937,500 120,000 Compuware Corp................. 5,512,500 52,083* Data General Corp.............. 794,266 50,000* Dell Computer Corp............. 4,120,315 110,000* E M C Corp..................... 4,558,125 5,000 Microsoft Corp................. 466,875 110,000 Parametric Technology Corp..... 3,372,193 120,000* Peoplesoft Inc................. 5,242,500 14,183* Storage Technology Corp........ 1,189,599
NUMBER MARKET OF SHARES VALUE --------- ------------ INFORMATION PROCESSING - Continued 65,000 Sun Microsystems, Inc.......... $ 2,604,063 ------------ 44,225,748 ------------ INSURANCE - CASUALTY - 1.02% 20,000 Progressive Corp............... 2,757,500 ------------ INSURANCE - LIFE - 1.71% 40,000 Conseco Inc.................... 1,865,000 40,404 Equitable Cos., Inc............ 2,782,826 ------------ 4,647,826 ------------ INSURANCE - MISCELLANEOUS - 1.28% 55,000 Executive Risk, Inc............ 3,461,563 ------------ INSURANCE - MULTILINE - 4.78% 60,000 Allstate Corp.................. 5,647,500 70,000 Reliastar Financial Corp....... 3,027,500 69,999 Travelers Group, Inc........... 4,269,939 ------------ 12,944,939 ------------ MACHINERY - INDUSTRIAL/ SPECIALTY - 0.88% 36,000 Illinois Tool Works Inc........ 2,376,000 ------------ MEDICAL TECHNOLOGY - 1.56% 40,000 Guidant Corp................... 2,577,500 20,000* Sofamor Danek Group, Inc....... 1,662,500 ------------ 4,240,000 ------------ MERCHANDISE - DRUG - 1.06% 15,910 CVS Corp....................... 1,116,683 50,000 Walgreen Co.................... 1,759,375 ------------ 2,876,058 ------------ MERCHANDISE - SPECIALTY - 3.85% 55,312* Consolidated Stores Corp....... 2,112,226 20,000 Home Depot, Inc................ 1,571,250 113,062* Staples, Inc................... 2,840,682 84,000 TJX Companies, Inc............. 3,927,000 ------------ 10,451,158 ------------ MERCHANDISING - DEPARTMENT - 1.95% 114,000 Dayton Hudson Corp............. 5,286,750 ------------
97 ================================================================================ GROWTH & INCOME FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 43 ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ------------ MERCHANDISING - FOOD - 3.49% 90,000 Albertsons, Inc................ $ 4,168,125 70,000* Safeway, Inc................... 2,550,625 50,000* Whole Foods Market, Inc........ 2,750,000 ------------ 9,468,750 ------------ MERCHANDISING - MASS - 0.48% 25,000 Dollar Tree Stores Inc......... 1,293,750 ------------ MOBILE HOMES - 1.05% 105,000 Oakwood Homes Corp............. 2,854,688 ------------ MISCELLANEOUS - 1.97% 193,400* Brightpoint, Inc............... 3,058,138 100,000* Corrections Corp. of America... 2,275,000 ------------ 5,333,138 ------------ MULTIMEDIA - 0.37% 25,000 Meredith Corp.................. 993,750 ------------ OIL - INTEGRATED INTERNATIONAL - 0.01% 180 British Petroleum Co. plc - ADR 15,953 ------------ OIL - SERVICE - PRODUCTS - 1.81% 150,000 B.J. Services Co............... 4,903,125 ------------ OIL - SERVICES - 5.29% 60,000 Baker Hughes Inc............... 2,160,000 80,000 Halliburton Co................. 3,790,000 35,000 Schlumberger Ltd............... 2,732,187 25,000* Smith International, Inc....... 1,226,562 90,000 Transocean Offshore, Inc....... 4,438,125 ------------ 14,346,874 ------------ OIL/GAS PRODUCERS - 1.35% 27,285* Noble Affiliates, Inc.......... 1,065,820 90,000* R & B Falcon Corp.............. 2,581,875 ------------ 3,647,695 ------------ POLLUTION CONTROL - 0.44% 45,000* Allied Waste Industries, Inc... 1,192,500 ------------ PUBLISHING - NEWS - 0.91% 35,000 New York Times Co. Class A..... 2,467,500 ------------
NUMBER MARKET OF SHARES VALUE --------- ------------ SAVINGS & LOAN - 0.84% 30,000 H.F. Ahmanson & Co............. $ 2,287,500 ------------ SEMICONDUCTORS - 1.22% 30,000 Intel Corp..................... 2,143,125 35,000 Maxim Integrated Products, Inc.......................... 1,168,125 ------------ 3,311,250 ------------ TELECOMMUNICATIONS - 3.40% 50,000* Airtouch Communications, Inc... 2,381,250 50,000* Tellabs, Inc................... 3,435,940 75,000* WorldCom, Inc.................. 3,412,500 ------------ 9,229,690 ------------ TOBACCO - 1.10% 80,000 Philip Morris Cos Inc.......... 2,990,000 ------------ UTILITIES - ELECTRIC - 1.75% 100,000* AES Corp....................... 4,756,250 ------------ TOTAL COMMON STOCKS (Cost $186,482,335)............ 251,508,592 ------------
PAR VALUE ----- CONVERTIBLE BONDS - 6.43% AEROSPACE/DEFENSE - 0.92% $ 500,000 Rohr, Inc., 7.75% due 05/15/04............ 1,732,591 500,000 SCI Systems, Inc., 5.00% due 05/01/06............ 756,560 ------------ 2,489,151 ------------ AIRLINES - 0.40% 500,000 Alaska Air Group, Inc., 6.50% due 06/15/05............ 1,073,435 ------------ BANKS - REGIONAL - 0.87% 2,000,000 Bank Atlantic Bancorp, 5.63% due 12/01/07............ 2,355,000 ------------ DRUGS - 0.25% 500,000 ALZA Corp., 5.00% due 05/01/06............ 681,250 ------------
PAR MARKET VALUE VALUE ----- ------------ ELECTRONIC INSTRUMENTS - 0.10% $ 300,000 C - Cube Microsystems, Inc., 5.88% due 11/01/05............ $ 271,500 ------------ HEALTHCARE - 0.32% 1,000,000 PhyCor, Inc., 4.50% due 02/15/03............ 876,250 ------------ INFORMATION PROCESSING - 0.81% 500,000 Adaptec, Inc., 4.75% due 02/01/04............ 399,375 1,500,000 National Data Corp., 5.00% due 11/01/03............ 1,515,000 300,000 Data General Corp., 6.00% due 05/15/04........... 272,625 ------------ 2,187,000 ------------ LODGING - 0.20% 500,000 Hilton Hotels Corp., 5.00% due 05/15/06........... 552,500 ------------ MACHINERY - INDUSTRIAL/ SPECIALTY - 0.16% 500,000 Halter Marine Group, Inc., 4.50% due 09/15/04............ 440,000 ------------ MERCHANDISE - SPECIALTY - 0.41% 500,000 Home Depot, Inc., 3.25% due 10/01/01............ 853,125 250,000 Inacom Corp., 4.50% due 11/01/04............ 255,000 ------------ 1,108,125 ------------ OIL - INTEGRATED DOMESTIC - 0.51% 1,000,000 Pennzoil Co., 4.75% due 10/01/03............ 1,371,250 ------------ OIL - SERVICE - 0.86% 2,000,000 Key Energy Group, Inc., 5.00% due 09/15/04............ 1,642,500 500,000 Nabors Industries, Inc., 5.00% due 05/15/06............ 695,000 ------------ 2,337,500 ------------
98 ================================================================================ GROWTH & INCOME FUND - STATEMENT OF NET ASSETS CONTINUED 44 May 31, 1998 ================================================================================
PAR MARKET VALUE VALUE - --------- ------------ OIL/GAS PRODUCERS - 0.24% $ 500,000 Diamond Offshore Drilling, Inc., 3.75% due 02/15/07............ $ 646,250 ------------ PUBLISHING/PRINTING - 0.38% 1,000,000 World Color Press, Inc., 6.00% due 10/01/07............ 1,035,000 ------------ TOTAL CONVERTIBLE BONDS (Cost $15,210,128)............. 17,424,211 ------------ CORPORATE SHORT TERM COMMERCIAL PAPER - 0.87% MACHINERY - INDUSTRIAL/ SPECIALTY - 0.87% 2,365,000 Cooper Industries, Inc., 5.67% due 06/01/98............ 2,365,000 ------------ TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $2,365,000).............. 2,365,000 ------------ TOTAL INVESTMENTS (Cost $204,057,463) - 100.05%.. 271,297,803 Other assets and liabilities, net - (0.05%)................. (138,805) ------------ NET ASSETS (equivalent $19.91 per share on 13,618,559 shares outstanding) - 100%........... $271,158,998 ============
* Non-income producing
MARKET VALUE ------------ NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 13,618,559 shares outstanding........... $ 136,186 Additional paid in capital................ 183,647,905 Undistributed net realized gain on securities.............................. 19,961,158 Undistributed net investment income....... 173,409 Unrealized appreciation of securities..... 67,240,340 ------------ NET ASSETS APPLICABLE TO SHARES OUTSTANDING............................. $271,158,998 ============
99 ================================================================================ GROWTH & INCOME FUND - FINANCIAL STATEMENTS 45 ================================================================================ STATEMENT OF OPERATIONS For the fiscal year ended May 31, 1998 INVESTMENT INCOME: Dividends............................................................ $ 1,491,393 Interest............................................................. 1,616,330 ----------- Total investment income............................................ 3,107,723 ----------- EXPENSES: Advisory fees........................................................ 1,907,885 Custodian and accounting fees........................................ 57,561 Reports to shareholders.............................................. 20,611 Audit fees and tax services.......................................... 7,217 Directors' fees and expenses......................................... 5,166 Miscellaneous........................................................ 13,114 ----------- Total expenses..................................................... 2,011,554 ----------- NET INVESTMENT INCOME................................................ 1,096,169 ----------- REALIZED AND UNREALIZED GAIN ON SECURITIES: Net realized gain on securities...................................... 20,112,463 Net unrealized appreciation on securities during the year............ 21,794,919 ----------- Net realized and unrealized gain on securities during the year.... 41,907,382 ----------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... $43,003,551 ===========
STATEMENT OF CHANGES IN NET ASSETS For the fiscal year ended May 31:
1998 1997 ------------- ------------- OPERATIONS: Net investment income ................................................ $ 1,096,169 $ 1,134,645 Net realized gain on securities ...................................... 20,112,463 2,722,032 Net unrealized appreciation of securities during the year ............ 21,794,919 24,022,009 ------------- ------------- Increase in net assets resulting from operations ................... 43,003,551 27,878,686 ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ................................................ (1,084,032) (1,058,649) Net realized gain on securities ...................................... (2,863,622) (3,131,642) ------------- ------------- Decrease in net assets resulting from distributions to shareholders ................................................... (3,947,654) (4,190,291) ------------- ------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold ..................................... 31,809,939 70,892,821 Proceeds from capital stock issued for distributions reinvested ...... 3,947,654 4,190,291 ------------- ------------- 35,757,593 75,083,112 Cost of capital stock repurchased .................................... (13,199,616) (2,772,662) ------------- ------------- Increase in net assets resulting from capital stock transactions ... 22,557,977 72,310,450 ------------- ------------- TOTAL INCREASE IN NET ASSETS ......................................... 61,613,874 95,998,845 NET ASSETS: Beginning of year .................................................... 209,545,124 113,546,279 ------------- ------------- End of year (including undistributed net investment income of $173,409 and $161,272) .......................................... $ 271,158,998 $ 209,545,124 ============= ============= CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold ......................................... 1,662,136 4,647,143 Shares issued for distributions reinvested ........................... 209,426 268,315 Shares of capital stock repurchased .................................. (675,165) (177,920) ------------- ------------- Increase in shares outstanding ..................................... 1,196,397 4,737,538 Shares outstanding: Beginning of year .................................................. 12,422,162 7,684,624 ------------- ------------- End of year ........................................................ 13,618,559 12,422,162 ============= =============
100 ================================================================================ SCIENCE & TECHNOLOGY FUND - STATEMENT OF NET ASSETS 46 May 31, 1998 ================================================================================
NUMBER MARKET OF SHARES VALUE - ----------- ----------- COMMON STOCKS - 97.90% AEROSPACE/DEFENSE - 0.55% 165,000* SCI Systems, Inc............... $ 5,630,625 ----------- ELECTRICAL EQUIPMENT - 0.09% 70,000* Brooks Automation, Inc......... 901,250 ----------- ELECTRONIC INSTRUMENTS - 0.65% 110,000* Cognex Corp.................... 2,090,000 55,000* Lattice Semiconductor Corp..... 2,124,375 80,000* Marshall Industries............ 2,475,000 ----------- 6,689,375 ----------- ENTERTAINMENT - 0.09% 48,500* N2K Inc........................ 956,363 ----------- INFORMATION PROCESSING - BUSINESS SOFTWARE - 10.18% 85,000* AXENT Technologies, Inc........ 2,093,125 440,000* BMC Software, Inc.............. 20,267,500 53,000* Great Plains Software, Inc..... 1,934,500 355,000* Microsoft Corp................. 30,108,438 1,245,000* Oracle Corp.................... 29,413,125 1,700* Peerless Systems Corp.......... 30,812 165,000* Peoplesoft Inc................. 7,208,437 135,000 PLATINUM technology, Inc....... 3,695,625 11,000* Sap............................ 6,087,997 82,500* Veritas Software Corp.......... 3,328,363 ----------- 104,167,922 ----------- INFORMATION PROCESSING - COM- PUTER HARDWARE SYSTEMS - 3.36% 167,500* Dell Computer Corp............. 13,803,055 625,000* Electronics for Imaging, Inc... 12,343,750 205,000* Sun Microsystems, Inc.......... 8,212,813 ----------- 34,359,618 ----------- INFORMATION PROCESSING - COMPUTER SERVICES - 13.93% 245,000* America Online, Inc............ 20,411,562 110,000 Automatic Data Processing, Inc. 6,998,750 101,100 Checkfree Holdings Corp........ 2,293,706 1,110,000 First Data Corp................ 36,907,500 522,200* Gartner Group, Inc............. 17,265,239 165,000 National Data Corp............. 6,187,500
NUMBER MARKET OF SHARES VALUE - ----------- ----------- INFORMATION PROCESSING - COMPUTER SERVICES - Continued 410,000* Security Dynamics Technology...$ 8,661,250 750,000* Sterling Commerce Inc.......... 29,765,625 273,000* SunGard Data Systems, Inc...... 9,316,125 170,000* Vantive Corp................... 4,568,750 4,700 VeriSign, Inc.................. 150,106 ----------- 142,526,113 ----------- INFORMATION PROCESSING - CONSUMER SOFTWARE - 6.83% 435,000* Networks Associates, Inc....... 26,643,750 1,410,000 Parametric Technology Corp..... 43,225,383 ----------- 69,869,133 ----------- INFORMATION PROCESSING - DATA SERVICES - 15.13% 580,000 Adobe Systems Inc.............. 23,163,750 140,000 Affiliated Computer Services, Inc. Class A.................. 4,663,750 555,000* Anixter International, Inc..... 11,169,375 275,000* Avant! Corp.................... 7,064,063 110,000* BISYS Group, Inc............... 4,083,750 95,000* Caere Corp..................... 1,330,000 294,800* CBT Group PLC.................. 14,666,300 660,000* E M C Corp..................... 27,348,750 140,000* Electronic Arts................ 6,090,000 50,000* Envoy Corp..................... 2,193,750 80,000 HCIA, Inc...................... 660,000 210,000 Hewlett Packard Co............. 13,046,250 75,000* Integrated Systems, Inc........ 1,406,250 110,000* Learning Co., Inc.............. 3,135,000 77,100* Legato Systems, Inc............ 2,206,988 85,000* Micrel, Inc.................... 2,658,911 32,300* National Instruments Corp...... 1,075,994 38,200* PsiNet, Inc.................... 410,650 60,000* Renaissance Worldwide Inc...... 1,128,750 320,000* Solectron Corp................. 13,240,000 140,000* Tech Data Corp................. 5,687,500 111,500* Technology Solutions Co........ 3,365,906 69,000* Transaction Systems Architects Class A.......... 2,794,500 140,000* Viasoft, Inc................... 2,161,250 ----------- 154,751,437 -----------
NUMBER MARKET OF SHARES VALUE - ----------- ----------- INFORMATION PROCESSING - NETWORKING - 6.73% 775,000* Ascend Communications Inc...... $33,470,313 440,000 Cisco Systems, Inc............. 33,275,000 15,800* Concentric Network Corp........ 349,575 33,000* International Network Services. 1,034,345 20,000 PMC-Sierra, Inc................ 778,750 ----------- 68,907,983 ----------- INSURANCE - CASUALTY - 0.04% 28,000* Atlantic Data Services, Inc.... 367,500 ----------- MACHINERY - INDUSTRIAL/ SPECIALTY - 0.03% 18,500 Ortel Corp..................... 270,562 ----------- MISCELLANEOUS - 0.15% 65,000* Xlyan Corp..................... 1,568,125 ----------- MULTIMEDIA - 3.38% 140,000* Cadence Design Systems, Inc.... 4,935,000 690,000* Synopsys Inc................... 29,626,875 ----------- 34,561,875 ----------- SECURITIES RELATED - 1.01% 480,000* E*Trade Group, Inc............. 10,380,000 ----------- SEMICONDUCTOR EQUIPMENT - 5.26% 360,000* Applied Materials, Inc......... 11,520,000 230,000 ASM Lithography Holding NV..... 8,811,875 330,000* KLA-Tencor Corp................ 11,178,750 445,000* LAM Research Corp.............. 10,596,562 430,000* Microchip Technology, Inc...... 10,535,000 30,000* QLogic Corp.................... 1,215,000 ----------- 53,857,187 ----------- SEMICONDUCTORS - 14.78% 415,000* Altera Corp.................... 13,954,375 1,040,000* Analog Devices, Inc............ 25,675,000 80,000* Applied Micro Circuits Corp.... 1,800,000 170,000* Burr Brown Corp................ 4,361,568 137,500 Intel Corp..................... 9,822,656 70,000* Level One Communications, Inc.. 1,868,125 180,000 Linear Technology Corp......... 12,588,750 950,000* Maxim Integrated Products, Inc. 31,706,250 55,000* Speedfam International, Inc.... 1,072,500 330,000 Texas Instruments Inc.......... 16,953,750 825,000* Xilinx, Inc.................... 31,375,823 ----------- 151,178,797 -----------
101 ================================================================================ SCIENCE & TECHNOLOGY FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 47 ================================================================================
NUMBER MARKET OF SHARES VALUE - ----------- ----------- TELECOMMUNICATIONS - 14.64% 550,000* ADC Communications, Inc......... $ 15,468,750 245,000* Advanced Fibre Communications... 9,080,313 110,000* Airtouch Communications, Inc.... 5,238,750 135,000* CIENA Corp...................... 7,020,000 180,000 Ericsson (LM) Tel Co. - ADR Series B................. 5,017,500 34,000* Excel Switching Corp............ 671,500 110,000* Glenayre Technologies, Inc...... 1,684,375 75,000 Lucent Technologies, Inc........ 5,320,312 50,000* Natural Microsystems Corp....... 1,070,315 110,000 Nokia Corp - ADR Series A....... 7,143,125 370,000* Paging Network, Inc............. 5,064,375 55,000 Pairgain Technologies Inc....... 859,375 103,400* PanAmSat Corp. New.............. 5,648,225 170,000 Premisys Communications Inc..... 4,234,071 610,000* QUALCOMM, Inc................... 31,796,250 80,000* Sanmina Corp.................... 6,230,000 54,000* Teledata Communications Ltd..... 634,500 95,000* Tellabs, Inc.................... 6,528,286 120,000* Transaction Network Services.... 2,445,000 55,000 Vodafone Group plc - ADR........ 6,043,125 495,000* WorldCom, Inc................... 22,522,500 ------------- 149,720,647 ------------- UTILITIES - COMMUNICATION - 1.07% 205,000 MCI Communications Corp......... 10,961,104 ------------- TOTAL COMMON STOCKS (Cost $891,023,542)............. 1,001,625,616 -------------
PAR MARKET VALUE VALUE - ----------- ----------- CORPORATE SHORT TERM COMMERCIAL PAPER - 2.27% CONSUMER FINANCE - 0.73% 7,470,000 Beneficial Corp., 5.55% due 06/02/98......... $ 7,468,849 -------------- FINANCE COMPANIES - 1.15% 11,761,000 Ford Motor Credit Co., 5.50% due 06/01/98........ 11,761,000 -------------- SECURITIES RELATED - 0.39% 3,985,000 Merrill Lynch & Co., 5.60% due 06/03/98........ 3,983,760 -------------- TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $23,213,609).......... 23,213,609 -------------- TOTAL INVESTMENT (Cost $914,237,151) - 100.17%.................. 1,024,839,225 Other assets and liabilities, net - (0.17%).................. (1,698,287) -------------- NET ASSETS (equivalent to $22.07 per share on 46,355,160 shares outstanding) - 100%........ $1,023,140,938 ==============
* Non-income producing
FACE MARKET UNREALIZED VALUE VALUE DEPRECIATION ----------- ----------- ------------ Forward currency contracts sold: Deutsche Mark 6/2/98........... $ 1,629,371 $ 1,627,315 ($ 2,056) ----------- ----------- -----------
MARKET VALUE ----------- NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 46,355,160 shares outstanding.......... $ 463,552 Additional paid in capital............... 817,508,725 Undistributed net realized gain on securities............................. 94,571,161 -------------- Unrealized appreciation (depreciation) of: Investments............. $ 110,602,074 Forward contracts....... (2,056) Foreign currency translation.......... (2,518) 110,597,500 -------------- -------------- NET ASSETS APPLICABLE TO SHARES OUTSTANDING............................ $1,023,140,938 ==============
102 ================================================================================ SCIENCE & TECHNOLOGY FUND - FINANCIAL STATEMENTS 48 ================================================================================ STATEMENT OF OPERATIONS For the fiscal year ended May 31, 1998 INVESTMENT INCOME: Dividends......................................................... $ 786,120 Interest.......................................................... 3,796,710 ----------- Total investment income......................................... 4,582,830 ----------- EXPENSES: Advisory fees...................................................... 8,602,906 Custodian and accounting services.................................. 216,890 Reports to shareholders............................................ 73,409 Audit fees and tax services........................................ 24,471 Directors' fees and expenses....................................... 18,818 Miscellaneous...................................................... 46,100 ----------- Total expenses................................................... 8,982,594 ----------- NET INVESTMENT LOSS................................................ (4,399,764) ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES AND FOREIGN CURRENCIES: Net realized gain on: Investments......................................... $111,216,186 Foreign currency translation........................ 12,822 111,229,008 ------------ Net unrealized appreciation (depreciation) during the year: Investments......................................... (16,754,541) Foreign currency translation........................ 55,815 (16,698,726) ------------ ----------- Net realized and unrealized gain on securities during the year... 94,530,282 ----------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................... $90,130,518 ===========
STATEMENT OF CHANGES IN NET ASSETS For the fiscal year ended May 31:
1998 1997 --------------- ------------ OPERATIONS: Net investment loss............................... $ (4,399,764) $ (1,919,791) Net realized gain (loss) on securities............ 111,229,008 (8,889,903) Net unrealized appreciation (depreciation) of securities during the year...................... (16,698,726) 33,692,829 --------------- ------------ Increase in net assets resulting from operations................................... 90,130,518 22,883,135 --------------- ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income............................. - - Net realized gain on securities................... - (32,117,202) --------------- ------------ Decrease in net assets resulting from distributions to shareholders.................. - (32,117,202) --------------- ------------ CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold.................. 217,275,229 286,682,331 Proceeds from capital stock issued for distributions reinvested........................ - 32,117,202 --------------- ------------ 217,275,229 318,799,533 Cost of capital stock repurchased................. (89,246,756) (71,770,130) --------------- ------------ Increase in net assets resulting from capital stock transactions.................... 128,028,473 247,029,403 --------------- ------------ TOTAL INCREASE IN NET ASSETS...................... 218,158,991 237,795,336 NET ASSETS: Beginning of year................................. 804,981,947 567,186,611 --------------- ------------ End of year (including accumulated net investment losses of $0 and ($1,935,355)) ...... $1,023,140,938 $804,981,947 =============== ============ CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold...................... 10,004,608 14,868,580 Shares issued for distributions reinvested........ - 1,636,128 Shares of capital stock repurchased .............. (4,133,577) (3,716,452) --------------- ------------ Increase in shares outstanding.................. 5,871,031 12,788,256 Shares outstanding: Beginning of year............................... 40,484,129 27,695,873 --------------- ------------ End of year..................................... 46,355,160 40,484,129 =============== ============
103 ================================================================================ SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS May 31, 1998 49 ================================================================================
NUMBER MARKET OF SHARES VALUE - ----------- ----------- COMMON STOCKS - 97.52% ADVERTISING - 0.18% 5,352 Interpublic Group Cos., Inc.... $ 317,441 6,030 Omnicom Group, Inc............. 282,279 ----------- 599,720 ----------- AEROSPACE/DEFENSE - 0.21% 12,604 Goodrich (B.F.) Co............ 645,955 1,349 Teleflex Inc................... 54,550 ----------- 700,505 ----------- AIRLINES - 0.25% 2,418* AMR Corp....................... 372,221 265 Delta Air Lines, Inc........... 30,475 9,344 Southwest Airlines Co.......... 249,368 2,546* US Airways Group, Inc.......... 178,220 ----------- 830,284 ----------- APPAREL & PRODUCTS - 0.05% 3,570 Liz Claiborne, Inc............. 180,954 ----------- APPLIANCES/FURNISHINGS - 0.05% 1,457 Herman Miller, Inc............. 40,341 2,612 Maytag Corp.................... 131,742 ----------- 172,083 ----------- AUTO - CARS - 0.81% 48,472 Chrysler Corp.................. 2,696,255 ----------- AUTO - ORIGINAL EQUIPMENT - 0.02% 2,160 Arvin Industries, Inc.......... 80,055 ----------- AUTO - REPLACEMENT PARTS - 0.57% 3,174* AutoZone, Inc.................. 105,536 3,429 Echlin Inc..................... 162,878 19,107 Genuine Parts Co............... 648,444 13,617 Goodyear Tire & Rubber Co...... 978,721 ----------- 1,895,579 ----------- BANKS - NEW YORK CITY - 2.61% 25,098 Bank of New York Co., Inc...... 1,534,115 22,509 Chase Manhattan Corp........... 3,059,817 20,409 CitiCorp....................... 3,043,493 8,717 J. P. Morgan & Co. Inc........ 1,082,542 ----------- 8,719,967 -----------
NUMBER MARKET OF SHARES VALUE - ----------- ----------- BANKS - OTHER - 3.22% 37,866 BankAmerica Corp............... $ 3,131,045 5,115 BankBoston Corp................ 538,993 10,940 First Chicago Corp............. 956,566 46,963 First Union Corp............... 2,597,641 11,371 Fleet Financial Group, Inc..... 932,422 5,993 Mellon Bank Corp............... 404,153 18,719 National City Corp............. 1,268,212 2,238 Providian Financial Corp....... 142,393 2,222 Wells Fargo & Co............... 803,253 ----------- 10,774,678 ----------- BANKS - REGIONAL - 3.63% 43,086 BANC ONE CORP.................. 2,375,116 5,444 Comerica Inc................... 357,943 9,709 Fifth Third Bancorp............ 478,168 1,170 Huntington Bancshares, Inc..... 38,318 12,758 KeyCorp........................ 484,007 45,383 NationsBank Corp............... 3,437,761 2,298 Northern Trust Corp............ 162,081 45,414 Norwest Corp................... 1,765,469 10,848 PNC Bank Corp.................. 626,472 214 Summit Bancorporation.......... 10,727 2,560 SunTrust Banks, Inc............ 202,240 6,650 Synovus Financial Corp......... 149,198 37,479 U.S. Bancorp................... 1,466,366 7,025 Wachovia Corp.................. 562,439 ----------- 12,116,305 ----------- BEVERAGE - BREWERS/ DISTRIBUTORS - 0.79% 44,570 Anheuser-Busch Companies, Inc.. 2,047,435 13,258 Seagram Co. Ltd................ 582,523 ----------- 2,629,958 ----------- BEVERAGE - SOFT DRINKS - 3.80% 121,862 Coca-Cola Co................... 9,550,934 77,247 PepsiCo, Inc................... 3,152,643 ----------- 12,703,577 ----------- BROADCASTING - 1.47% 8,056* Clear Channel Communications, Inc......................... 772,369 13,957 Comcast Corp. Class A Special.. 478,464 15,578* Tele-Comm Liberty Media Group Class A..................... 534,520 33,716 U S West Communications Group.. 1,711,087
NUMBER MARKET OF SHARES VALUE - ----------- ----------- BROADCASTING - Continued 13,835 U S West Media Group........... $ 512,760 16,159* Viacom, Inc Class B............ 888,745 ----------- 4,897,945 ----------- BUILDING MATERIALS - 0.49% 5,833 Lowe's Companies, Inc.......... 461,901 14,473 Masco Corp..................... 814,106 10,859 Sherwin-Williams Co............ 361,062 ----------- 1,637,069 ----------- CHEMICAL - MAJOR - 0.70% 1,391 Albemarle Corp................. 33,819 12,352 Morton International, Inc...... 375,964 18,475 PPG Industries, Inc............ 1,346,365 5,402 Rohm and Haas Co............... 593,545 ----------- 2,349,693 ----------- CHEMICAL - MISCELLANEOUS - 0.50% 6,287 A. Schulman, Inc............... 124,954 240* Airgas, Inc.................... 3,645 14,644 Ethyl Corp..................... 103,423 241 Ferro Corp..................... 6,899 5,577 Great Lakes Chemical Corp...... 223,080 7,763 Lawter International, Inc...... 74,719 3,750 Lubrizol Corp.................. 130,313 1,029 Lyondell Petrochemical Co...... 32,092 9,012 Nalco Chemical Co.............. 337,950 1,258 NCH Corp....................... 80,119 1,394* Octel Corp..................... 30,412 11,008 Praxair, Inc................... 542,831 ----------- 1,690,437 ----------- CONGLOMERATES - 0.57% 12,845 Tenneco Inc.................... 534,673 24,449 Tyco International Ltd......... 1,353,864 ----------- 1,888,537 ----------- CONSUMER FINANCE - 0.47% 3,648 Beneficial Corp................ 488,832 34,619 MBNA Corp...................... 1,096,990 ----------- 1,585,822 -----------
104 ================================================================================ SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS 50 May 31, 1998 ================================================================================
NUMBER MARKET OF SHARES VALUE - ----------- ----------- CONTAINERS - METAL/GLASS - 0.43% 6,844 Corning Inc.................... $ 269,910 12,817 Crown Cork & Seal Co., Inc..... 664,882 11,688* Owens-Illinois, Inc............ 525,230 ----------- 1,460,022 ----------- CONTAINERS - PAPER - 0.11% 867 Bemis Co., Inc................. 36,577 1,141* Sealed Air Corp................ 61,034 7,349 Sonoco Products Co............. 256,759 ----------- 354,370 ----------- COSMETICS/TOILETRIES - 1.30% 3,477 Avon Products, Inc............. 284,462 34,025 Gillette Co.................... 3,985,178 1,242 International Flavors & Fragrances, Inc............. 59,616 ----------- 4,329,256 ----------- DRUGS - 7.52% 65,302 American Home Products Corp.... 3,154,903 6,253* Amgen Inc...................... 378,307 57,755 Bristol Myers Squibb Co........ 6,208,662 46,603 Eli Lilly and Co............... 2,863,172 58,320 Merck & Co., Inc............... 6,827,085 38,793 Schering-Plough Corp........... 3,246,489 38,538 Warner-Lambert Co.............. 2,459,206 ----------- 25,137,824 ----------- ELECTRICAL EQUIPMENT - 1.10% 25,796 AMP Inc........................ 980,247 4,214* Cabletron Systems, Inc......... 54,255 35,767 Emerson Electric Co............ 2,172,845 857 Hubbell Inc. Class B........... 40,333 2,617 National Service Industries, Inc......................... 133,467 2,297 Raychem Corp................... 86,425 2,652* Teradyne, Inc.................. 81,549 2,326 Thomas & Betts Corp............ 124,296 ----------- 3,673,417 ----------- ELECTRONIC INSTRUMENTS - 0.05% 10,086* Integrated Device Technology... 94,556 847* Perkin-Elmer Corp.............. 58,020 273 Tektronix, Inc................. 10,442 481* Vishay Intertechnology, Inc... 10,730 ----------- 173,748 -----------
NUMBER MARKET OF SHARES VALUE - ----------- ----------- ENTERTAINMENT - 1.94% 5,200 Hasbro, Inc.................... $ 198,900 1,880* King World Productions, Inc.... 47,940 17,295 Mattel, Inc.................... 655,048 28,933 Time Warner Inc................ 2,251,349 29,522 Walt Disney Co................. 3,339,676 ----------- 6,492,913 ----------- FINANCE COMPANIES - 0.50% 833 Finova Group, Inc.............. 46,075 11,413 Household International, Inc... 1,544,321 1,908 SunAmerica, Inc................ 92,777 ----------- 1,683,173 ----------- FINANCIAL SERVICES - 1.14% 30,448 American Express Co............ 3,124,726 6,641 Countrywide Credit Industries, Inc......................... 307,146 8,421 H & R Block Inc................ 370,524 ----------- 3,802,396 ----------- FOODS - 2.40% 24,423 BestFoods...................... 1,378,373 23,687 Campbell Soup Co............... 1,290,942 23,005 ConAgra, Inc................... 672,896 12,478 General Mills, Inc............. 851,624 31,300 H J Heinz Co................... 1,660,855 4,969 Hershey Foods Corp............. 344,103 26,133 Kellogg Co..................... 1,079,620 7,720 Quaker Oats Co................. 445,348 225 Ralston Purina Co.............. 25,045 3,109 Wm. Wrigley Jr. Co............. 299,241 ----------- 8,048,047 ----------- FOOTWEAR - 0.17% 12,089 NIKE, Inc. Class B............ 556,094 ----------- FREIGHT - 0.06% 2,986* FDX Corp....................... 191,477 ----------- GOLD MINING - 0.16% 16,388 Barrick Gold Corp.............. 315,469 17,951 Placer Dome Inc................ 223,266 ----------- 538,735 ----------- GOVERNMENT SPONSORED - 1.71% 39,749 Federal Home Loan Mortgage Corp........................ 1,808,580 65,100 Federal National Mortgage Association................. 3,897,862 ----------- 5,706,442 -----------
NUMBER MARKET OF SHARES VALUE - ----------- ----------- FUNERAL SERVICES - 0.18% 14,805 Service Corp. International.... $ 605,154 ----------- HARDWARE & TOOLS - 0.20% 4,637 Black & Decker Corp............ 270,685 352 Snap-on Inc.................... 15,444 7,762 Stanley Works.................. 368,695 ----------- 654,824 ----------- HEALTHCARE - 0.25% 6,605 HealthSouth Corp............... 187,417 1,291* PacifiCare Health System, Inc. Class B................ 106,669 8,422 United HealthCare Corp......... 539,008 ----------- 833,094 ----------- HEAVY DUTY TRUCKS/PARTS - 0.49% 16,392 Dana Corp...................... 854,433 6,175* Navistar International Corp.... 186,408 10,887 PACCAR Inc..................... 601,167 ----------- 1,642,008 ----------- HOME BUILDERS - 0.03% 2,703 Centex Corp.................... 96,632 ----------- HOSPITAL MANAGEMENT - 0.43% 23,355 Columbia/HCA Healthcare Corp... 763,416 273 Manor Care, Inc................ 8,617 2,175 Medaphis Corp.................. 16,313 1,968 Shared Medical Systems Corp.... 143,172 14,264* Tenet Healthcare Corp.......... 499,240 ----------- 1,430,758 ----------- HOSPITAL SUPPLIES - 3.74% 51,175 Abbott Laboratories............ 3,796,545 607 ATL Ultrasound, Inc............ 27,505 21,155 Baxter International Inc....... 1,209,802 3,665 Becton, Dickinson and Co....... 259,299 4,336 Boston Scientific Corp......... 276,420 73,937 Johnson & Johnson.............. 5,106,273 5,863 Mallinckrodt, Inc.............. 180,654 27,161 Medtronic, Inc................. 1,510,831 3,009 United States Surgical Corp.... 119,608 ----------- 12,486,937 -----------
105 ================================================================================ SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 51 ================================================================================
NUMBER MARKET OF SHARES VALUE - ----------- ----------- HOUSEHOLD PRODUCTS - 3.45% 8,377 Clorox Co........................ $ 699,480 19,040 Colgate-Palmolive Co............. 1,656,480 1,750 Newell Co........................ 84,438 77,432 Procter & Gamble Co.............. 6,499,449 1,495 Rubbermaid, Inc.................. 48,774 32,171 Unilever N V - ADR............... 2,539,498 ----------- 11,528,119 ----------- INFORMATION PROCESSING - 10.17% 2,834* Apple Computer, Inc.............. 75,455 15,833 Automatic Data Processing, Inc... 1,007,375 11,463* Bay Networks, Inc................ 317,382 32,522* Cendant Corp..................... 705,321 43,197* Cisco Systems, Inc............... 3,266,773 7,311 Cognizant Corp................... 389,311 58,595 Compaq Computer Corp............. 1,600,376 19,011 Computer Associates International................. 998,078 3,654 Computer Sciences Corp........... 189,780 2,366* Data General Corp................ 36,082 23,747* Dell Computer Corp............... 1,956,902 846 Diebold, Inc..................... 24,746 7,099 Digital Equipment Corp........... 389,558 17,257* E M C Corp....................... 715,087 5,828 First Data Corp.................. 193,781 1,072* Gateway 2000, Inc................ 48,307 115* General Instrument Corp.......... 2,738 8,538 HBO & Co......................... 492,803 42,819 Hewlett Packard Co............... 2,660,130 42,490 International Business Machines.. 4,987,263 366* Keane, Inc....................... 16,424 98,648* Microsoft Corp................... 8,366,583 5,057* Novell, Inc ..................... 53,099 37,379* Oracle Corp...................... 883,079 3,691 Parametric Technology Corp....... 113,152 22,489 Pitney Bowes Inc................. 1,056,983 10,590* Seagate Technology............... 244,894 17,327* Silicon Graphics, Inc............ 207,924 229* Storage Technology Corp.......... 19,207 684* Stratus Computer, Inc............ 24,667 18,152* Sun Microsystems, Inc............ 727,215 15,838* 3Com Corp........................ 401,889 17,575 Xerox Corp....................... 1,805,831 ----------- 33,978,195 -----------
NUMBER MARKET OF SHARES VALUE - ----------- ----------- INSURANCE - CASUALTY - 0.56% 8,021 Chubb Corp..................... $ 638,171 12,459 SAFECO Corp.................... 579,344 14,884 St. Paul Companies, Inc........ 660,477 ----------- 1,877,992 ----------- INSURANCE - LIFE - 0.48% 5,136 Aetna Inc...................... 401,570 6,115 Conseco Inc.................... 285,112 1,430 Jefferson-Pilot Corp........... 81,868 4,001 Lincoln National Corp.......... 359,590 4,155 Transamerica Corp.............. 477,825 ----------- 1,605,965 ----------- INSURANCE - MISCELLANEOUS - 0.25% 3,514 General Re Corp................ 772,641 877 MGIC Investment Corp........... 52,565 ----------- 825,206 ----------- INSURANCE - MULTILINE - 4.03% 22,940 Allstate Corp.................. 2,159,228 35,148 American International Group, Inc......................... 4,351,761 20,635 Aon Corp....................... 1,321,930 10,443 CIGNA Corp..................... 715,346 1,746 Cincinnati Financial Corp...... 73,332 2,107 Hartford Financial Services Group....................... 231,902 15,767 March & McLennan Companies, Inc......................... 1,380,598 52,917 Travelers Group, Inc........... 3,227,936 ----------- 13,462,033 ----------- LEISURE TIME - 0.07% 5,220 Brunswick Corp................. 164,104 3,755* Mirage Resorts, Inc............ 78,151 ----------- 242,255 ----------- LODGING - 0.07% 6,943 Marriott Services Inc.......... 241,269 ----------- MACHINE TOOLS - 0.01% 1,098 Cincinnati Milacron, Inc....... 32,871 ----------- MACHINERY - AGRICULTURE - 0.25% 1,636 Case Corp...................... 94,684 14,380 Deere & Co..................... 745,963 ----------- 840,647 -----------
NUMBER MARKET OF SHARES VALUE - ----------- ----------- MACHINERY - CONSTRUCTION & CONTRACTS - 0.31% 18,362 Caterpillar Inc................ $ 1,008,763 667 Foster Wheeler Corp............ 16,925 248 Harnischfeger Industries Inc... 7,812 ----------- 1,033,500 ----------- MACHINERY - INDUSTRIAL/ SPECIALTY - 0.85% 3,660 Aeroquip-Vickers, Inc.......... 226,005 6,426 Cooper Industries, Inc......... 413,674 6,943 Dover Corp..................... 260,363 11,285 Illinois Tool Works Inc........ 744,810 12,486 Ingersoll-Rand Co.............. 562,650 5,094 Johnson Controls, Inc.......... 303,093 7,985 Pall Corp...................... 158,203 709 Tecumseh Products Co. Class A.. 35,361 3,982 Tidewater, Inc................. 151,316 ----------- 2,855,475 ----------- MEDICAL TECHNOLOGY - 0.17% 8,752 Guidant Corp................... 563,957 ----------- MERCHANDISE - DRUG - 0.54% 9,682 CVS Corp....................... 679,555 9,762 Rite Aid Corp.................. 349,602 21,809 Walgreen Co.................... 767,404 ----------- 1,796,561 ----------- MERCHANDISE - SPECIALTY - 1.47% 4,516* Best Buy Co., Inc.............. 147,335 804 Circuit City Stores, Inc....... 34,070 158 CompUSA, Inc................... 2,489 2,338* Consolidated Stores Corp....... 89,282 1,059* CostCo Companies, Inc.......... 61,290 30,111 Fortune Brands, Inc........... 1,157,392 11,343 Gap, Inc....................... 612,522 31,623 Home Depot, Inc................ 2,484,382 5,249 Ikon Office Solutions Inc...... 111,213 7,534* Toys "R" Us, Inc............... 199,651 ----------- 4,899,626 -----------
106 ================================================================================ SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED 52 May 31, 1998 ================================================================================
NUMBER MARKET OF SHARES VALUE - ----------- ----------- MERCHANDISING - DEPARTMENT - 0.40% 16,268 Dayton Hudson Corp............. $ 754,429 1,450* Federated Department Stores, Inc......................... 75,128 8,077 May Department Stores Co....... 519,452 ----------- 1,349,009 ----------- MERCHANDISING - FOOD - 0.36% 11,629 Albertsons, Inc................ 538,568 1,069 American Stores Co............. 26,658 2,747* Kroger Co...................... 117,949 7,808 SYSCO Corp..................... 182,024 7,944 Winn-Dixie Stores, Inc......... 323,222 ----------- 1,188,421 ----------- MERCHANDISING - MASS - 2.40% 18,255 J.C. Penney Co., Inc........... 1,310,937 7,550* Kmart Corp..................... 146,281 16,794 Sears Roebuck and Co........... 1,038,079 99,819 Wal-Mart Stores, Inc........... 5,508,762 527 Woolworth Corp................. 10,408 ----------- 8,014,467 ----------- METALS - ALUMINUM - 0.20% 23,491 Alcan Aluminum Ltd............. 669,494 ----------- METALS - COPPER - 0.04% 5,732 Newmont Mining Corp............ 142,942 ----------- METALS - MISCELLANEOUS - 0.15% 9,537 Freeport - McMoRan Copper & Gold Inc. Class B............. 159,745 17,391 Inco Limited................... 249,996 1,650 Precision Castparts Corp....... 95,081 ----------- 504,822 ----------- METALS - STEEL - 0.06% 1,772 AK Steel Holding Corp.......... 33,004 1,028* Bethlehem Steel Corp........... 12,593 7,993 Worthington Industries, Inc.... 140,876 ----------- 186,473 -----------
NUMBER MARKET OF SHARES VALUE - ----------- ----------- NATURAL GAS-DIVERSIFIED - 0.27% 3,475 Eastern Enterprises............ $ 139,434 5,944 El Paso Natural Gas Co......... 229,587 1,206 Questar Corp................... 48,918 12,348 Sonat Inc...................... 483,888 ----------- 901,827 ----------- OIL - INTEGRATED DOMESTIC - 2.16% 11,073 Amerada Hess Corp.............. 598,634 8,737 Ashland Oil, Inc............... 435,758 29,509 Burlington Resources, Inc..... 1,243,067 8,364 Kerr-McGee Corp................ 529,023 900* Oryx Energy Co................. 20,981 8,332 Pennzoil Co.................... 481,694 46,171 Phillips Petroleum Co.......... 2,311,436 6,171 Quaker State Corp.............. 104,521 2,864 Sun Co., Inc................... 121,720 39,072 USX-Marathon Group............. 1,367,520 ----------- 7,214,354 ----------- OIL - INTEGRATED INTERNATIONAL - 1.47% 7,876 Murphy Oil Corp................ 396,261 77,982 Texaco Inc..................... 4,503,461 ----------- 4,899,722 ----------- OIL - SERVICE - PRODUCTS - 0.07% 7,713 Noble Drilling Corp............ 227,534 ----------- OIL - SERVICES - 1.44% 22,192 Baker Hughes Inc............... 798,912 8,354 Dresser Industries, Inc........ 388,983 2,104* Global Marine Inc.............. 46,946 17,351 Halliburton Co................. 822,004 34,672 Schlumberger Ltd............... 2,706,582 1,094 Transocean Offshore, Inc....... 53,948 ----------- 4,817,375 ----------- OIL/GAS PRODUCERS - 0.59% 4,410 Anadarko Petroleum Corp........ 291,060 10,523 Apache Corp.................... 359,755 6,270 Helmerich & Payne, Inc......... 158,318 9,513 Pioneer Natural Resources Corp........................ 223,556 7,778 Ultramar Diamond Shamrock Corp........................ 248,410 33,072 Union Pacific Resources Group Inc......................... 669,707 1,026 Valero Energy Corp............. 33,473 ----------- 1,984,279 -----------
NUMBER MARKET OF SHARES VALUE - ----------- ----------- PAPER/FOREST PRODUCTS - 1.21% 11,986 Avery Dennison Corp................ $ 621,025 13,069 Fort James Corp.................... 624,862 39,335 Kimberly-Clark Corp................ 1,949,540 15,063 Louisiana Pacific Corp............. 300,319 9,331 Mead Corp.......................... 290,427 11,783 Unisource Worldwide, Inc........... 150,970 2,884 Willamette Industries, Inc......... 98,957 ----------- 4,036,100 ----------- POLLUTION CONTROL - 0.29% 8,715 Browning - Ferris Industries, Inc............................. 309,927 19,929 Waste Management, Inc.............. 647,693 ----------- 957,620 ----------- PUBLISHING - NEWS - 0.66% 6,029 Dow Jones & Co., Inc............... 290,146 20,914 Gannett Co., Inc................... 1,379,016 578 New York Times Co. Class A....... 40,749 7,190 Tribune Co......................... 480,831 ----------- 2,190,742 ----------- PUBLISHING/PRINTING - 0.28% 8,020 Dun & Bradstreet Corp.............. 270,675 8,690 McGraw-Hill, Inc................... 679,449 ----------- 950,124 ----------- RAILROAD - 0.97% 7,629 Burlington Northern Santa Fe....... 759,086 18,025 CSX Corp.......................... 858,441 35,920 Norfolk Southern Corp.............. 1,124,745 10,257 Union Pacific Corp................. 496,182 ----------- 3,238,454 ----------- RESTAURANTS - 0.73% 37,338 McDonald's Corp.................... 2,450,305 163* Tricon Global Restaurants, Inc..... 5,063 ----------- 2,455,368 ----------- SAVINGS & LOAN - 0.32% 4,017 H.F. Ahmanson & Co................. 306,296 10,796 Washington Mutual, Inc............. 762,468 ----------- 1,068,764 -----------
107 ================================================================================ SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 53 ================================================================================
NUMBER MARKET OF SHARES VALUE - ----------- ----------- SECURITIES RELATED - 1.47% 10,173 Charles Schwab Corp............ $ 335,709 9,098 Franklin Resources, Inc........ 444,665 5,293 Lehman Brothers Holdings, Inc.. 375,472 16,296 Merrill Lynch & Co., Inc....... 1,458,492 29,310 Morgan St Dean Witter Discover. 2,288,015 ----------- 4,902,353 ----------- SEMICONDUCTOR EQUIPMENT - 0.19% 17,737* Applied Materials, Inc......... 567,584 2,176* KLA-Tencor Corp................ 73,712 ----------- 641,296 ----------- SEMICONDUCTORS - 1.92% 8,243* Advanced Micro Devices, Inc.... 160,739 69,714 Intel Corp..................... 4,980,193 6,444* LSI Logic Corp................. 137,338 10,409* Micron Technology, Inc......... 245,262 1,557* National Semiconductor Corp.... 25,301 15,718 Rockwell International Corp.... 864,490 ----------- 6,413,323 ----------- TELECOMMUNICATIONS - 2.60% 5,172* Airtouch Communications, Inc... 246,317 3,618 ALLTEL Corp.................... 142,685 2,879* DSC Communications Corp........ 49,213 5,582 Frontier Corp.................. 169,902 58,688 Lucent Technologies, Inc....... 4,163,180 10,140* Nextel Communications, Inc. Class A..................... 238,924 26,975 Northern Telecom Ltd........... 1,726,400 6,549* Tellabs, Inc................... 450,039 33,221* WorldCom, Inc.................. 1,511,556 ----------- 8,698,216 ----------- TEXTILE - PRODUCTS - 0.18% 11,114 V F Corp....................... 591,126 ----------- TRUCKERS - 0.02% 4,542 Arnold Industries, Inc......... 70,969 ----------- UTILITIES - COMMUNICATION - 5.81% 55,805 Ameritech Corp................. 2,368,225 76,878 AT & T Corp.................... 4,679,947 39,345 Bell Atlantic Corp............. 3,604,985 49,159 BellSouth Corp................. 3,170,756
NUMBER MARKET OF SHARES VALUE - ----------- ----------- UTILITIES - COMMUNICATION - Continued 24,143 MCI Communications Corp........ $ 1,290,897 81,739 SBC Communications, Inc........ 3,177,604 15,727 Sprint Corp.................... 1,128,412 ----------- 19,420,826 ----------- UTILITIES - ELECTRIC - 2.36% 3,807 Black Hills Corp............... 83,516 27,665 Cinergy Corp................... 893,925 3,941 Cleco Corp..................... 117,984 5,568 Hawaiian Electric Industries, Inc......................... 212,976 6,599 Idaho Power Co................. 225,603 4,645 IPALCO Enterprises, Inc........ 195,671 10,023 LG&E Energy Corp............... 266,236 5,860 Minnesota Power Inc............ 231,104 9,591 Montana Power Co............... 347,674 8,790 Nevada Power Co................ 209,861 19,391 New Century Energies, Inc...... 891,986 22,013 NIPSCO Industries, Inc......... 591,599 7,085 OGE Energy Corp................ 379,933 52,031 PacifiCorp..................... 1,199,965 20,791 Potomac Electric Power Co...... 508,080 14,837 Puget Sound Energy Inc......... 387,617 22,966 TECO Energy, Inc............... 601,422 9,433 UtiliCorp United Inc........... 335,461 7,441 Washington Gas Light Co........ 193,931 ----------- 7,874,544 ----------- UTILITIES - GAS, DISTRIBUTION - 0.37% 9,966 AGL Resources, Inc............. 199,320 8,976* Marketspan Corp................ 302,379 3,002 MCN Energy Group Inc........... 108,072 6,711 National Fuel Gas Co........... 284,379 8,483 NICOR Inc...................... 327,656 ----------- 1,221,806 ----------- UTILITIES - GAS, PIPELINE - 1.53% 3,322 Columbia Energy Group.......... 280,294 16,752 Consolidated Natural Gas Co.... 947,535 33,683 Enron Corp..................... 1,688,360 5,438 ONEOK Inc...................... 212,422 14,631 Pacific Enterprises............ 556,892 6,181 Peoples Energy Corp............ 227,924 37,307 Williams Companies, Inc........ 1,210,145 ----------- 5,123,572 -----------
NUMBER MARKET OF SHARES VALUE - ----------- ------------- WATER SERVICES - 0.02% 2,552 American Water Works Co., Inc.. $ 74,965 ------------- TOTAL COMMON STOCKS (Cost $277,608,938)............ 325,861,302 -------------
PAR VALUE - ----------- CORPORATE SHORT TERM COMMERCIAL PAPER - 2.19% MACHINERY - INDUSTRIAL/SPECIALTY - 0.95% $3,183,000 Cooper Industries, Inc., 5.67% due 06/01/98............ 3,183,000 ------------ SECURITIES RELATED - 1.24% Merrill Lynch & Co.: 2,126,000 5.52% due 06/03/98............ 2,125,348 2,014,000 5.52% due 06/04/98............ 2,013,074 ------------ 4,138,422 ------------ TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $7,321,422).............. 7,321,422 ------------ UNITED STATES GOVERNMENT SHORT TERM - 0.12% U.S. TREASURY BILLS - 0.12% United States Treasury Bills: 100,000 4.94% due 06/04/98.......... 99,959 100,000 4.91% due 06/04/98.......... 99,959 100,000 4.90% due 06/04/98.......... 99,959 100,000 4.65% due 06/04/98.......... 99,961 ------------ 399,838 ------------ TOTAL UNITED STATES GOVERNMENT SHORT TERM (Cost $399,838)................ 399,838 ------------ TOTAL INVESTMENTS (Cost $285,330,198) - 99.83%... 333,582,562 Other assets and liabilities, net - 0.17%................... 584,788 ------------ NET ASSETS (equivalent to $22.16 per share on 15,080,463 shares outstanding) - 100 %..........$334,167,350 ============
108 ================================================================================ SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED 54 May 31, 1998 ================================================================================
UNREALIZED CONTRACTS DEPRECIATION - --------- ------------ FUTURES CONTRACTS PURCHASED(1) (Delivery month/Value at 5/31/98) 27(2) S&P 500 Index Futures (June/$1,090.80).............. $ (137,250) ===========
(1)U.S. Treasury Bills with a market value of approximately $400,000 were maintained in a segregated account with a portion placed as collateral for futures contracts. (2)Per 250 * Non-income producing
MARKET VALUE ------------ NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 15,080,463 shares outstanding........... $ 150,805 Additional paid in capital................ 250,214,914 Undistributed net realized gain on securities........................... 35,511,010 Undistributed net investment income....... 175,507 Unrealized appreciation (depreciation) of: Investments........... $48,252,364 Futures .............. (137,250) 48,115,114 ----------- ------------ NET ASSETS APPLICABLE TO SHARES OUTSTANDING............................. $334,167,350 ============
109 ================================================================================ SOCIAL AWARENESS FUND - FINANCIAL STATEMENTS 55 ================================================================================ STATEMENT OF OPERATIONS For the fiscal year ended May 31, 1998 INVESTMENT INCOME: Dividends....................................................... $ 3,754,102 Interest........................................................ 371,484 ----------- Total investment income....................................... 4,125,586 ----------- EXPENSES: Advisory fees................................................... 1,204,327 Custodian and accounting services............................... 51,735 Reports to shareholders......................................... 23,321 Audit fees and tax services..................................... 7,949 Directors' fees and expenses.................................... 4,216 Miscellaneous................................................... 13,183 ----------- Total expenses................................................ 1,304,731 ----------- NET INVESTMENT INCOME........................................... 2,820,855 ----------- REALIZED AND UNREALIZED GAIN ON SECURITIES: Net realized gain on: Investments..................................... 34,461,580 Futures contracts............................... 1,849,928 36,311,508 ----------- Net unrealized appreciation (depreciation) during the year: Investments..................................... 21,517,279 Futures contracts............................... (227,900) 21,289,379 ----------- ----------- Net realized and unrealized gain on securities during the year:........................................... 57,600,887 ----------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................ $60,421,742 ===========
STATEMENT OF CHANGES IN NET ASSETS For the fiscal year ended May 31:
1998 1997 ------------ ------------ OPERATIONS: Net investment income............................. $ 2,820,855 $ 1,619,474 Net realized gain on securities................... 36,311,508 13,356,463 Net unrealized appreciation of securities during the year................................. 21,289,379 14,695,812 ------------ ------------ Increase in net assets resulting from operations.................................... 60,421,742 29,671,749 ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income............................. (2,737,376) (1,578,118) Net realized gain on securities................... (9,562,689) (10,727,011) ------------ ------------ Decrease in net assets resulting from distributions to shareholders................. (12,300,065) (12,305,129) ------------ ------------ CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold.................. 120,526,570 52,814,227 Proceeds from capital stock issued for distributions reinvested........................ 12,300,065 12,305,129 ------------ ------------ 132,826,635 65,119,356 Cost of capital stock repurchased................. (2,130,016) (8,024,362) ------------ ------------ Increase in net assets resulting from capital stock transactions............................ 130,696,619 57,094,994 ------------ ------------ TOTAL INCREASE IN NET ASSETS...................... 178,818,296 74,461,614 NET ASSETS: Beginning of year................................. 155,349,054 80,887,440 ------------ ------------ End of year (including undistributed net investment income of $175,507 and $92,028)...... $334,167,350 $155,349,054 ------------ ------------ CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold...................... 5,891,588 3,190,691 Shares issued for distributions reinvested........ 618,253 775,715 Shares of capital stock repurchased .............. (106,789) (509,440) ------------ ------------ Increase in shares outstanding.................. 6,403,052 3,456,966 Shares outstanding: Beginning of year............................... 8,677,411 5,220,445 ------------ ------------ End of year..................................... 15,080,463 8,677,411 ============ ============
110 ================================================================================ ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS 56 May 31, 1998 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- COMMON STOCKS - 58.36% ADVERTISING - 0.11% 1,795 Interpublic Group Cos., Inc.... $ 106,466 2,400 Omnicom Group, Inc............. 112,350 ---------- 218,816 ---------- AEROSPACE/DEFENSE- 0.91% 13,811 Boeing Co...................... 657,749 521 Crane Co....................... 27,450 258 EG & G, Inc.................... 8,127 1,754 General Dynamics Corp.......... 77,943 842 Goodrich (B.F.) Co............ 43,153 2,383 Lockheed Martin Corp........... 267,492 932 Northrop Grumman Corp.......... 99,899 4,718 Raytheon Co. Class B........... 258,016 1,578 TRW Inc........................ 84,522 3,034 United Technologies Corp....... 285,195 ---------- 1,809,546 ---------- AIRLINES - 0.23% 1,126* AMR Corp....................... 173,334 1,007 Delta Air Lines, Inc........... 115,805 2,876 Southwest Airlines Co.......... 76,753 1,413* US Airways Group, Inc.......... 98,910 ---------- 464,802 ---------- APPAREL & PRODUCTS - 0.03% 1,010 Liz Claiborne, Inc............. 51,194 ---------- APPLIANCES/FURNISHINGS - 0.08% 1,729 Maytag Corp.................... 87,206 1,029 Whirlpool Corp................. 70,294 ---------- 157,500 ---------- AUTO - CARS - 1.01% 8,655 Chrysler Corp.................. 481,434 16,556 Ford Motor Co.................. 858,843 9,478 General Motors Corp............ 681,824 ---------- 2,022,101 ---------- AUTO - REPLACEMENT PARTS - 0.20% 2,408* AutoZone, Inc.................. 80,066 200 Cooper Tire & Rubber Co........ 4,738 915 Echlin Inc..................... 43,462 2,726 Genuine Parts Co............... 92,513 2,176 Goodyear Tire & Rubber Co...... 156,400 982 Pep Boys-Manny, Moe & Jack..... 21,850 ---------- 399,029 ----------
NUMBER MARKET OF SHARES VALUE - --------- ---------- BANKS - NEW YORK CITY - 1.17% 5,608 Bank of New York Co., Inc...... $ 342,789 5,879 Chase Manhattan Corp........... 799,177 6,039 CitiCorp....................... 900,566 2,384 J. P. Morgan & Co. Inc........ 296,062 ---------- 2,338,594 ---------- BANKS - OTHER - 1.73% 9,576 BankAmerica Corp............... 791,816 2,033 BankBoston Corp................ 214,227 3,954 First Chicago Corp............. 345,728 12,927 First Union Corp............... 715,025 3,688 Fleet Financial Group, Inc..... 302,416 3,288 Mellon Bank Corp............... 221,735 4,497 National City Corp............. 304,672 1,374 Providian Financial Corp....... 87,420 805 Republic of New York Corp...... 103,392 1,050 Wells Fargo & Co............... 379,575 ---------- 3,466,006 ---------- BANKS - REGIONAL - 2.12% 9,270 Banc One Corp.................. 511,009 2,530 Comerica Inc................... 166,348 3,557 Fifth Third Bancorp............ 175,182 3,200 Huntington Bancshares, Inc..... 104,800 5,880 KeyCorp........................ 223,073 2,000 Mercantile Bancorporation Inc.. 102,250 12,591 NationsBank Corp............... 953,768 2,000 Northern Trust Corp............ 141,063 10,736 Norwest Corp................... 417,362 3,973 PNC Bank Corp.................. 229,441 2,200 State Street Corp.............. 151,663 2,800 Summit Bancorporation.......... 140,350 2,685 SunTrust Banks, Inc............ 212,115 3,900 Synovus Financial Corp......... 87,506 10,221 U.S. Bancorp................... 399,896 2,852 Wachovia Corp.................. 228,337 ---------- 4,244,163 ---------- BEVERAGE - BREWERS/ DISTRIBUTORS - 0.29% 378 Adolph Coors Class B........... 14,175 6,996 Anheuser-Busch Companies, Inc.. 321,379 933 Brown-Forman Corp Class B...... 53,764 4,325 Seagram Co. Ltd................ 190,030 ---------- 579,348 ----------
NUMBER MARKET OF SHARES VALUE - --------- ---------- BEVERAGE - SOFT DRINKS - 1.74% 33,599 Coca-Cola Co................... $ 2,633,322 20,761 PepsiCo, Inc................... 847,308 ----------- 3,480,630 ----------- BROADCASTING - 0.91% 10,102 CBS Corp....................... 320,739 2,100* Clear Channel Communications, Inc. ........................ 201,338 4,984 Comcast Corp. Class A Special.. 170,858 6,767* Tele-Comm Liberty Media Group Class A........................ 232,193 6,565 U S West Communications Group.. 333,174 7,763 U S West Media Group........... 287,715 4,950* Viacom, Inc Class B............ 272,250 ----------- 1,818,267 ----------- BUILDING MATERIALS - 0.23% 605 Armstrong World Industries, Inc. ........................ 50,896 2,392 Lowe's Companies, Inc.......... 189,417 2,567 Masco Corp..................... 144,394 2,368 Sherwin-Williams Co............ 78,735 ----------- 463,442 ----------- CHEMICAL - MAJOR - 1.20% 3,219 Dow Chemical Co................ 311,841 15,062 E.I. du Pont de Nemours and Co. 1,159,774 1,753 Hercules, Inc.................. 77,242 8,208 Monsanto Co.................... 454,518 1,910 Morton International, Inc...... 58,135 2,135 PPG Industries, Inc............ 155,587 843 Rohm and Haas Co............... 92,625 1,720 Union Carbide Corp............. 85,893 ----------- 2,395,615 ----------- CHEMICAL - MISCELLANEOUS - 0.30% 1,461 Air Products and Chemicals, Inc.......................... 127,107 1,088 Eastman Chemical Co............ 72,896 1,106 Ecolab Inc..................... 34,148 600* FMC Corp....................... 45,863 1,431 Great Lakes Chemical Corp...... 57,240 573 Millipore Corp................. 19,124 1,204 Nalco Chemical Co.............. 45,150 358* Octel Corp..................... 7,803 2,486 Praxair, Inc................... 122,591 1,336 Sigma Aldrich Corp............. 48,764 1,087 W.R. Grace & Co................ 20,177 ----------- 600,863 -----------
111 ================================================================================ ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 57 ================================================================================
NUMBER MARKET OF SHARES VALUE - ---------- ----------- CONGLOMERATES - 0.60% 7,960 Allied Signal Inc.............. $ 340,290 1,600 ITT Industries, Inc............ 59,000 1,481 Loews Corp..................... 134,401 1,851 Tenneco Inc.................... 77,048 2,156 Textron Inc.................... 159,948 7,758 Tyco International Ltd......... 429,599 ----------- 1,200,286 ----------- CONSUMER FINANCE - 0.15% 666 Beneficial Corp................ 89,244 6,941 MBNA Corp...................... 219,943 ----------- 309,187 ----------- CONTAINERS - METAL/GLASS - 0.15% 2,892 Corning Inc.................... 114,053 1,693 Crown Cork & Seal Co., Inc..... 87,825 2,400* Owens-Illinois, Inc............ 107,850 ----------- 309,728 ----------- CONTAINERS - PAPER - 0.05% 1,000 Bemis Co., Inc................. 42,188 1,082* Sealed Air Corp................ 57,887 ----------- 100,075 ----------- COSMETICS/TOILETRIES - 0.55% 799 Alberto-Culver Co. Class B..... 23,770 1,457 Avon Products, Inc............. 119,201 7,746 Gillette Co.................... 907,250 1,071 International Flavors & Fragrances, Inc................ 51,408 ----------- 1,101,629 ----------- DRUGS - 4.59% 475 Allergan, Inc.................. 19,950 814* ALZA Corp...................... 39,377 17,956 American Home Products Corp.... 867,499 3,326* Amgen Inc...................... 201,223 592 Bausch & Lomb Inc.............. 29,489 13,614 Bristol Myers Squibb Co........ 1,463,505 14,760 Eli Lilly and Co............... 906,818 16,537 Merck & Co., Inc............... 1,935,863 6,911* Pharmacia & Upjohn, Inc........ 305,380 17,542 Pfizer, Inc.................... 1,838,620 10,254 Schering-Plough Corp........... 858,132 11,154 Warner-Lambert Co.............. 711,765 ----------- 9,177,621 -----------
NUMBER MARKET OF SHARES VALUE - ---------- ----------- ELECTRICAL EQUIPMENT - 2.21% 3,337 AMP Inc........................ $ 126,806 2,284* Cabletron Systems, Inc......... 29,407 5,988 Emerson Electric Co............ 363,771 44,802 General Electric Co............ 3,735,367 710 National Service Industries, Inc............................ 36,210 1,496 Raychem Corp................... 56,287 850 Thomas & Betts Corp............ 45,421 348 W. W. Grainger Inc............. 36,736 ----------- 4,430,005 ----------- ELECTRONIC INSTRUMENTS - 0.08% 591 General Signal Corp............ 24,305 706* Perkin-Elmer Corp.............. 48,360 650 Tektronix, Inc................. 24,863 1,876* Thermo Electron Corp........... 65,895 ----------- 163,423 ----------- ENTERTAINMENT - 0.96% 939* Harrah's Entertainment, Inc.... 23,475 1,766 Hasbro, Inc.................... 67,550 1,936* King World Productions, Inc.... 49,368 4,261 Mattel, Inc.................... 161,385 7,863 Time Warner Inc................ 611,840 8,904 Walt Disney Co................. 1,007,265 ----------- 1,920,883 ----------- FINANCE COMPANIES - 0.41% 5,139 Associates First Capital Corp.. 384,460 1,256 Green Tree Financial Corp...... 50,476 1,778 Household International, Inc... 240,586 2,700 SunAmerica, Inc................ 131,288 ----------- 806,810 ----------- FOODS - 1.29% 8,318 Archer Daniels Midland Co...... 157,002 4,438 BestFoods...................... 250,470 6,150 Campbell Soup Co............... 335,175 6,682 ConAgra, Inc................... 195,449 2,334 General Mills, Inc............. 159,296 5,234 H J Heinz Co................... 277,729 1,744 Hershey Foods Corp............. 120,772 5,832 Kellogg Co..................... 240,935 2,716 Pioneer Hi - Bred International Inc............................ 103,378 2,119 Quaker Oats Co................. 122,240 1,100 Ralston Purina Co.............. 122,443
NUMBER MARKET OF SHARES VALUE - ---------- ----------- FOODS - Continued 6,496 Sara Lee Corp.................. $ 382,451 1,176 Wm. Wrigley Jr. Co............. 113,190 ----------- 2,580,530 ----------- FINANCIAL SERVICES - 0.39% 6,221 American Express Co............ 638,430 1,600 Countrywide Credit Industries, Inc............................ 74,000 1,459 H & R Block Inc................ 64,196 ----------- 776,626 ----------- FOOTWEAR - 0.10% 3,731 NIKE, Inc. Class B............ 171,626 995* Reebok International Ltd....... 28,606 ----------- 200,232 ----------- FREIGHT - 0.08% 1,954* FDX Corp....................... 125,300 1,263 Ryder System, Inc.............. 43,021 ----------- 168,321 ----------- GOLD MINING - 0.09% 5,183 Barrick Gold Corp.............. 99,773 1,600 Battle Mountain Gold Co........ 8,500 1,971 Homestake Mining Co............ 21,435 3,779 Placer Dome Inc................ 47,001 ----------- 176,709 ----------- GOVERNMENT SPONSORED - 0.66% 9,580 Federal Home Loan Mortgage..... 435,890 14,825 Federal National Mortgage Association.................... 887,647 ----------- 1,323,537 ----------- FUNERAL SERVICES - 0.07% 3,445 Service Corp. International.... 140,814 ----------- HARDWARE & TOOLS - 0.10% 1,684 Black & Decker Corp............ 98,304 984 Snap-on Inc.................... 43,173 1,188 Stanley Works.................. 56,430 ----------- 197,907 ----------- HEALTHCARE - 0.23% 1,300 Cardinal Health, Inc........... 115,862 4,668 HealthSouth Corp............... 132,455 2,069* Humana Inc..................... 64,268 2,405 United HealthCare Corp......... 153,920 ----------- 466,505 -----------
112 ================================================================================ ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED 58 May 31, 1998 ================================================================================
NUMBER MARKET OF SHARES VALUE - ---------- ----------- HEAVY DUTY TRUCKS/PARTS - 0.17% 506 Cummins Engine Co., Inc........ $ 26,312 1,824 Dana Corp...................... 95,076 1,078 Eaton Corp..................... 96,818 1,827* Navistar International Corp.... 55,153 1,388 PACCAR Inc..................... 76,643 ----------- 350,002 ----------- HOME BUILDERS - 0.03% 1,032 Centex Corp.................... 36,894 895 Kaufman & Broad Home Corp...... 22,990 ----------- 59,884 ----------- HOSPITAL MANAGEMENT - 0.25% 8,136 Columbia/HCA Healthcare Corp... 265,946 1,322 Manor Care, Inc................ 41,725 600 Shared Medical Systems Corp.... 43,650 4,281* Tenet Healthcare Corp.......... 149,835 ----------- 501,156 ----------- HOSPITAL SUPPLIES - 1.56% 10,424 Abbott Laboratories............ 773,330 819 Bard (C. R.), Inc.............. 28,408 4,110 Baxter International Inc....... 235,040 1,597 Becton, Dickinson and Co....... 112,988 1,500 Biomet, Inc.................... 43,313 2,473* Boston Scientific Corp......... 157,654 18,448 Johnson & Johnson.............. 1,274,065 1,522 Mallinckrodt, Inc.............. 46,897 6,732 Medtronic, Inc................. 374,468 647* St. Jude Medical, Inc.......... 23,130 1,422 United States Surgical Corp.... 56,525 ----------- 3,125,818 ----------- HOUSEHOLD PRODUCTS - 1.69%% 1,548 Clorox Co...................... 129,258 4,116 Colgate-Palmolive Co........... 358,092 5,543 Minnesota Mining & Manufacturing Co............... 513,420 1,910 Newell Co...................... 92,158 18,438 Procter & Gamble Co............ 1,547,640 2,190 Rubbermaid, Inc................ 71,449 412 Tupperware Corp................ 11,124 8,332 Unilever N V - ADR............. 657,707 ----------- 3,380,848 -----------
NUMBER MARKET OF SHARES VALUE - ---------- ----------- INFORMATION PROCESSING - 5.80% 700 Adobe Systems Inc.............. $ 27,956 1,828* Apple Computer, Inc............ 48,671 435 Autodesk, Inc.................. 18,488 3,929 Automatic Data Processing, Inc............... 249,983 3,482* Bay Networks, Inc.............. 96,408 11,296* Cendant Corp................... 244,982 632* Ceridian Corp.................. 34,128 13,983* Cisco Systems, Inc............. 1,057,464 2,401 Cognizant Corp................. 127,853 20,579 Compaq Computer Corp........... 562,050 7,333 Computer Associates International, Inc............. 384,983 2,270 Computer Sciences Corp......... 117,898 1,214* Data General Corp.............. 18,514 8,728* Dell Computer Corp............. 719,242 2,310 Digital Equipment Corp......... 126,761 6,622* E M C Corp..................... 274,399 4,898 First Data Corp................ 162,859 1,700* Gateway 2000, Inc.............. 76,606 1,547* General Instrument Corp........ 36,838 3,000 HBO & Co....................... 173,156 13,865 Hewlett Packard Co............. 861,363 1,565 Honeywell Inc.................. 131,362 13,274 International Business Machines...................... 1,558,036 33,214* Microsoft Corp................. 2,816,962 4,684* Novell, Inc ................... 49,182 13,220* Oracle Corp.................... 312,323 3,256* Parametric Technology Corp..... 99,817 4,306 Pitney Bowes Inc............... 202,382 3,318* Seagate Technology............. 76,729 3,599* Silicon Graphics, Inc.......... 43,188 5,478* Sun Microsystems, Inc.......... 219,462 5,144* 3Com Corp...................... 130,529 2,900* Unisys Corp.................... 71,050 4,583 Xerox Corp..................... 470,902 ----------- 11,602,526 ----------- INSURANCE - CASUALTY - 0.29% 2,484 Chubb Corp..................... 197,633 900 Progressive Corp............... 124,088 2,353 SAFECO Corp.................... 109,415 3,568 St. Paul Companies, Inc........ 158,330 ----------- 589,466 -----------
NUMBER MARKET OF SHARES VALUE - ---------- ----------- INSURANCE - LIFE - 0.36% 2,197 Aetna Inc...................... $ 171,778 2,798 Conseco Inc.................... 130,457 1,596 Jefferson-Pilot Corp........... 91,370 1,340 Lincoln National Corp.......... 120,433 2,370 Torchmark Corp................. 101,614 887 Transamerica Corp.............. 102,005 ----------- 717,657 ----------- INSURANCE - MISCELLANEOUS - 0.28% 1,097 General Re Corp................ 241,203 1,244 MBIA, Inc...................... 92,756 1,806 MGIC Investment Corp........... 108,247 2,214 UNUM Corp...................... 123,015 ----------- 565,221 ----------- INSURANCE - MULTILINE - 1.75% 5,746 Allstate Corp.................. 540,842 9,590 American International Group, Inc............................ 1,187,362 2,552 Aon Corp....................... 163,488 2,829 CIGNA Corp..................... 193,787 2,100 Cincinnati Financial Corp...... 88,200 1,503 Hartford Financial Services Group.......................... 165,424 2,284 Marsh & McLennan Companies Inc................. 199,992 15,662 Travelers Group, Inc........... 955,382 ----------- 3,494,477 ----------- LEISURE TIME - 0.06% 1,543 Brunswick Corp................. 48,508 3,200* Mirage Resorts, Inc............ 66,600 ----------- 115,108 ----------- LODGING - 0.10% 3,010 Hilton Hotels Corp............. 94,627 3,288 Marriott Services Inc.......... 114,258 ----------- 208,885 ----------- MACHINERY - AGRICULTURE - 0.13% 1,311 Case Corp...................... 75,874 3,670 Deere & Co..................... 190,381 ----------- 266,255 -----------
113 ================================================================================ ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED May 31 1998 59 ================================================================================
NUMBER MARKET OF SHARES VALUE - ---------- ----------- MACHINERY - CONSTRUCTION & CONTRACTS - 0.18% 4,640 Caterpillar Inc................ $ 254,910 1,303 Fluor Corp..................... 62,137 626 Foster Wheeler Corp............ 15,885 979 Harnischfeger Industries Inc... 30,838 ----------- 363,770 ----------- MACHINERY - INDUSTRIAL/ SPECIALTY - 0.34% 1,307 Cooper Industries, Inc......... 84,138 2,820 Dover Corp..................... 105,750 2,960 Illinois Tool Works Inc........ 195,360 2,434 Ingersoll-Rand Co.............. 109,682 1,087 Johnson Controls, Inc.......... 64,677 1,795 Pall Corp...................... 35,563 2,104 Parker Hannifin Corp........... 86,396 ----------- 681,566 ----------- MACHINE TOOLS - 0.01% 844 Cincinnati Milacron, Inc....... 25,267 ----------- MEDICAL TECHNOLOGY - 0.08% 2,406 Guidant Corp................... 155,037 ----------- MERCHANDISING - DEPARTMENT - 0.36% 5,952 Dayton Hudson Corp............. 276,024 1,630 Dillards, Inc. Class A......... 68,562 2,816* Federated Department Stores, Inc ........................... 145,904 3,057 May Department Stores Co....... 196,603 358 Mercantile Stores Co., Inc..... 28,148 ----------- 715,241 ----------- MERCHANDISING - FOOD - 0.33% 3,303 Albertsons, Inc................ 152,970 3,442 American Stores Co............. 85,835 570 Giant Food Inc. Class A........ 24,510 300 Great Atlantic & Pacific Tea Co., Inc....................... 9,600 3,642* Kroger Co...................... 156,378 996 Supervalu Inc.................. 41,708 4,514 SYSCO Corp..................... 105,233 2,279 Winn-Dixie Stores, Inc......... 92,726 ----------- 668,960 -----------
NUMBER MARKET OF SHARES VALUE - ---------- ----------- MERCHANDISING - MASS - 1.22% 3,548 J.C. Penney Co., Inc........... $ 254,791 6,176* Kmart Corp..................... 119,660 5,296 Sears Roebuck and Co........... 327,359 30,774 Wal-Mart Stores, Inc........... 1,698,340 2,461 Woolworth Corp................. 48,605 ----------- 2,448,755 ----------- MERCHANDISE - DRUG - 0.30% 2,789 CVS Corp....................... 195,753 597 Longs Drug Stores Corp......... 18,097 3,762 Rite Aid Corp.................. 134,726 6,904 Walgreen Co.................... 242,935 ----------- 591,511 ----------- MERCHANDISE - SPECIALTY - 1.01% 1,089 American Greetings Corp. Class A........................ 51,727 1,351 Circuit City Stores, Inc....... 57,248 1,700* Consolidated Stores Corp....... 64,918 2,966* CostCo Companies, Inc.......... 171,657 3,357 Fortune Brands, Inc........... 129,035 5,147 Gap, Inc....................... 277,938 9,956 Home Depot, Inc................ 782,168 1,906 Ikon Office Solutions Inc...... 40,383 491 Jostens, Inc................... 12,398 2,944 Limited, Inc................... 97,888 1,033 Nordstrom, Inc................. 74,441 1,978 TJX Companies, Inc............. 92,472 1,382 Tandy Corp..................... 61,154 3,833* Toys "R" Us, Inc............... 101,575 ----------- 2,015,002 ----------- METALS - MISCELLANEOUS - 0.06% 1,666 Cyprus Amax Minerals Co........ 26,448 774 Engelhard Corp................. 16,109 2,553 Freeport-McMoran Copper & Gold Inc. Class B.................. 42,763 2,507 Inco Limited................... 36,038 ----------- 121,358 ----------- METALS - ALUMINUM - 0.15% 2,843 Alcan Aluminum Ltd............. 81,025 2,290 Aluminum Co. of America........ 158,869 942 Reynolds Metals Co............. 54,636 ----------- 294,530 -----------
NUMBER MARKET OF SHARES VALUE - ---------- ----------- METALS - COPPER - 0.06% 1,000 ASARCO Inc..................... $ 22,688 2,373 Newmont Mining Corp............ 59,177 559 Phelps Dodge Corp.............. 34,098 ----------- 115,963 ----------- METALS - STEEL - 0.11% 2,679 Allegheny Teldyne Inc.......... 62,286 1,895* Bethlehem Steel Corp........... 23,213 300 Inland Steel Industries, Inc... 8,588 967 Nucor Corp..................... 49,801 1,415 USX-US Steel Group, Inc........ 50,763 1,500 Worthington Industries, Inc.... 26,438 ----------- 221,089 ----------- MISCELLANEOUS - 0.10% 2,100 BB & T Corp.................... 138,994 1,500 Equifax Inc.................... 54,562 ----------- 193,556 ----------- MOBILE HOMES - 0.01% 600 Fleetwood Enterprises, Inc..... 24,000 ----------- MULTIMEDIA - 0.02% 902 Meredith Corp.................. 35,855 ----------- NATURAL GAS-DIVERSIFIED - 0.07% 881 Coastal Corp................... 62,111 200 Eastern Enterprises............ 8,025 1,741 Sonat Inc...................... 68,225 ----------- 138,361 ----------- OIL - INTEGRATED DOMESTIC - 0.92% 864 Amerada Hess Corp.............. 46,710 12,888 Amoco Corp..................... 538,880 1,162 Ashland Oil, Inc............... 57,955 4,508 Atlantic Richfield Co.......... 355,569 2,463 Burlington Resources, Inc..... 103,754 767 Kerr-McGee Corp................ 48,513 4,307 Occidental Petroleum Corp...... 118,980 1,373* Oryx Energy Co................. 32,008 832 Pennzoil Co.................... 48,100 3,684 Phillips Petroleum Co.......... 184,430 1,104 Sun Co., Inc................... 46,920 4,011 USX-Marathon Group............. 140,385 3,360 Unocal Corp.................... 119,700 ----------- 1,841,904 -----------
114 ================================================================================ ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED 60 May 31, 1998 ================================================================================
NUMBER MARKET OF SHARES VALUE - ---------- ----------- OIL - INTEGRATED INTERNATIONAL - 2.99% 8,859 Chevron Corp................... $ 707,613 33,628 Exxon Corp..................... 2,370,774 10,600 Mobil Corp..................... 826,800 29,492 Royal Dutch Pete Co. - ADR..... 1,653,395 7,474 Texaco Inc..................... 431,623 ----------- 5,990,205 ----------- OIL - SERVICES - 0.51% 2,860 Baker Hughes Inc............... 102,960 2,177 Dresser Industries, Inc........ 101,367 3,714 Halliburton Co................. 175,951 881 McDermott International, Inc... 33,643 1,229* Rowan Companies, Inc........... 31,416 6,602 Schlumberger Ltd............... 515,369 658* Western Atlas Inc.............. 56,958 ----------- 1,017,664 ----------- OIL/GAS PRODUCERS - 0.09% 700 Anadarko Petroleum Corp........ 46,200 1,400 Apache Corp.................... 47,863 1,400 Helmerich & Payne, Inc......... 35,350 2,711 Union Pacific Resources Group Inc........................... 54,897 ----------- 184,310 ----------- PAPER/FOREST PRODUCTS - 0.69% 1,863 Avery Dennison Corp............ 96,527 766 Boise Cascade Corp............. 25,565 1,507 Champion International Corp.... 72,336 3,338 Fort James Corp................ 159,598 833 Georgia-Pacific Corp........... 53,468 4,262 International Paper Co......... 196,052 7,734 Kimberly-Clark Corp............ 383,316 2,342 Louisiana Pacific Corp......... 46,694 1,568 Mead Corp...................... 48,804 215 Potlatch Corp.................. 9,420 272* Stone Container Corp........... 4,828 944 Union Camp Corp................ 51,625 1,821 Westvaco Corp.................. 51,899 2,544 Weyerhaeuser Co................ 129,267 1,378 Willamette Industries, Inc..... 47,282 ----------- 1,376,681 ----------- PHOTOGRAPHY - 0.18% 4,334 Eastman Kodak Co............... 309,339 1,146 Polaroid Corp.................. 46,485 ----------- 355,824 -----------
NUMBER MARKET OF SHARES VALUE - ---------- ----------- POLLUTION CONTROL - 0.19% 2,859 Browning - Ferris Industries, Inc........................... $ 101,672 6,500* Laidlaw Inc.................... 80,438 5,931 Waste Management, Inc.......... 192,758 ----------- 374,868 ----------- PUBLISHING - NEWS - 0.35% 1,527 Dow Jones & Co., Inc........... 73,487 4,238 Gannett Co., Inc............... 279,443 996 Knight-Ridder, Inc............. 56,834 1,129 New York Times Co. Class A... 79,595 1,267 Times Mirror Co................ 81,088 1,901 Tribune Co..................... 127,129 ----------- 697,576 ----------- PUBLISHING/PRINTING - 0.16% 1,986 Dun & Bradstreet Corp.......... 67,028 971 Harcourt General, Inc.......... 52,920 1,578 McGraw-Hill, Inc............... 123,380 1,496 Moore Corp. Ltd................ 21,691 1,296 R R Donnelley and Son.......... 58,320 ----------- 323,339 ----------- RAILROAD - 0.33% 2,033 Burlington Northern Santa Fe... 202,284 2,976 CSX Corp...................... 141,732 4,905 Norfolk Southern Corp.......... 153,588 3,346 Union Pacific Corp............. 161,862 ----------- 659,466 ----------- RESTAURANTS - 0.37% 2,057 Darden Restaurants, Inc........ 31,755 9,261 McDonald's Corp................ 607,753 2,276* Tricon Global Restaurants, Inc.......................... 70,698 1,600 Wendy's International, Inc..... 39,500 ----------- 749,706 ----------- SAVINGS & LOAN - 0.21% 325 Golden West Financial Corp..... 35,100 1,785 H.F. Ahmanson & Co............. 136,106 3,664 Washington Mutual, Inc......... 258,770 ----------- 429,976 -----------
NUMBER MARKET OF SHARES VALUE - ---------- ----------- SECURITIES RELATED - 0.72% 3,800 Charles Schwab Corp............ $ 125,400 3,300 Franklin Resources, Inc........ 161,288 1,800 Lehman Brothers Holdings, Inc.. 127,688 4,530 Merrill Lynch & Co., Inc....... 405,435 7,912 Morgan Stanley, Dean Witter, Discover and Co............... 617,630 ----------- 1,437,441 ----------- SEMICONDUCTOR EQUIPMENT - 0.11% 5,266* Applied Materials, Inc......... 168,512 1,300* KLA-Tencor Corp................ 44,038 ----------- 212,550 ----------- SEMICONDUCTORS - 1.31% 2,157* Advanced Micro Devices, Inc.... 42,062 22,202 Intel Corp..................... 1,586,055 2,010* LSI Logic Corp................. 42,838 3,044* Micron Technology, Inc......... 71,724 8,290 Motorola, Inc.................. 438,852 2,337* National Semiconductor Corp.... 37,976 2,717 Rockwell International Corp.... 149,435 4,928 Texas Instruments Inc.......... 253,176 ----------- 2,622,118 ----------- TELECOMMUNICATIONS - 1.63% 7,049* Airtouch Communications, Inc... 335,709 2,784 ALLTEL Corp.................... 109,794 524* Andrew Corp.................... 11,512 2,047* DSC Communications Corp........ 34,991 2,378 Frontier Corp.................. 72,380 1,100 Harris Corp.................... 53,006 17,908 Lucent Technologies, Inc....... 1,270,349 4,200* Nextel Communications, Inc. Class A....................... 98,963 7,234 Northern Telecom Ltd........... 462,976 381 Scientific-Atlanta, Inc........ 8,406 2,404* Tellabs, Inc................... 165,200 13,868* WorldCom, Inc.................. 630,993 ----------- 3,254,279 ----------- TEXTILE - PRODUCTS - 0.06% 683 Russell Corp................... 18,612 300 Springs Industries, Inc. Class A....................... 16,838 1,700 V F Corp....................... 90,418 ----------- 125,868 -----------
115 ================================================================================ ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED May 31 1998 61 ================================================================================
NUMBER MARKET OF SHARES VALUE - ---------- ------------ TOBACCO - 0.64% 32,729 Philip Morris Cos Inc.......... $ 1,223,246 2,427 UST Inc........................ 64,619 ------------ 1,287,865 ------------ UTILITIES - COMMUNICATION - 3.24% 22,454 AT & T Corp.................... 1,366,887 15,018 Ameritech Corp................. 637,326 10,495 Bell Atlantic Corp............. 961,604 13,427 BellSouth Corp................. 866,042 13,087 GTE Corp....................... 763,136 9,357 MCI Communications Corp........ 500,308 25,014 SBC Communications, Inc........ 972,419 5,720 Sprint Corp.................... 410,410 ------------ 6,478,132 ------------ UTILITIES - ELECTRIC - 1.43% 1,825 Ameren Corp.................... 71,403 2,949 American Electric Power, Inc... 133,811 2,598 Baltimore Gas and Electric Co.. 79,077 1,506 Carolina Power & Light Co...... 61,746 2,692 Central & South West Corp...... 71,170 2,718 Cinergy Corp................... 87,825 3,299 Consolidated Edison Co. of New York, Inc.................. 141,238 2,193 DTE Energy Co.................. 86,761 2,808 Dominion Resources, Inc........ 111,443 4,904 Duke Energy Corp............... 282,593 5,717 Edison International........... 168,652 3,027 Entergy Corp................... 79,648 2,370 FPL Group, Inc................. 145,607 3,126 FirstEnergy Corp............... 92,803 2,354 GPU Inc........................ 90,629 3,889 Houston Industries, Inc........ 111,323 1,200* Niagara Mohawk Power Corp...... 14,850 1,134 Northern States Power Co....... 64,496 1,677 Peco Energy Co................. 47,375 5,335 P G & E Corp................... 168,053 1,700 P P & L Resources Inc.......... 37,613 4,945 PacifiCorp..................... 114,044 3,081 Public Service Enterprise Group 101,866 10,308 Southern Co.................... 273,805 3,494 Texas Utilities Co............. 138,012 2,300 Unicom Corp.................... 79,060 ------------ 2,854,903 ------------ UTILITIES - GAS, DISTRIBUTION - 0.02% 790 NICOR Inc...................... 30,514 ------------
NUMBER MARKET OF SHARES VALUE - ---------- ------------ UTILITIES - GAS, PIPELINE - 0.31% 887 Columbia Energy Group.......... $ 74,841 1,295 Consolidated Natural Gas Co.... 73,248 3,947 Enron Corp..................... 197,843 400 ONEOK Inc...................... 15,625 1,220 Pacific Enterprises............ 46,436 725 Peoples Energy Corp............ 26,735 5,926 Williams Companies, Inc........ 192,225 ------------ 626,953 ------------ TOTAL COMMON STOCKS (Cost $73,829,020)............. 116,780,010 ------------ PAR VALUE - ----------- CORPORATE BONDS - 18.40% AUTO - CARS - 1.07% $2,000,000 Ford Motor Co., 7.25% due 10/01/08............ 2,141,080 ------------ BANKS - OTHER - 2.50% 1,000,000 BankAmerica Corp., 6.63% due 05/30/01............ 1,015,680 3,000,000 Malayan Banking Berhad-NY, 7.13% due 09/15/05............ 2,518,410 1,500,000 Santander Finance Issuance, 6.38% due 02/15/15............ 1,463,745 ------------ 4,997,835 ------------ BANKS - REGIONAL - 1.12% 2,000,000 NationsBank Corp., 7.75% due 08/15/15............ 2,232,740 ------------ FINANCE COMPANIES - 4.36% 3,000,000 AT&T Capital Corp., 6.80% due 02/01/01............ 3,060,540 1,500,000 Finova Capital Corp., 9.13% due 02/27/02............ 1,641,675 1,000,000 Ford Motor Credit Co., 6.25% due 11/08/00............ 1,005,960 3,000,000 International Lease Finance Corp., 6.45% due 09/11/00...... 3,028,410 ------------ 8,736,585 ------------
PAR MARKET VALUE VALUE - ---------- ------------ HOSPITAL MANAGEMENT - 0.77% $1,650,000 Columbia/HCA Healthcare Corp., 7.19% due 11/15/15............ $ 1,539,203 ------------ INSURANCE - CASUALTY - 1.10% 2,000,000 Orion Cap Trust, 8.73% due 01/01/37............ 2,197,680 ------------ MERCHANDISING - MASS - 0.51% 1,000,000 Sears Roebuck and Co., 7.35% due 03/23/00............ 1,024,350 ------------ MERCHANDISE - SPECIALTY - 2.33% Goodrich (B.F.), 2,000,000 7.10% due 11/15/27............ 2,089,160 Tandy Corp., 2,500,000 6.95% due 09/01/07............ 2,566,700 ------------ 4,655,860 ------------ OIL - INTEGRATED DOMESTIC - 1.05% 2,000,000 Union Oil Co. California, 7.20% due 05/15/05............ 2,099,900 ------------ SECURITIES RELATED - 1.05% 1,000,000 Bear Stearns Co. Inc.: 9.38% due 06/01/01............ 1,086,960 6.75% due 05/01/01............ 1,016,390 ------------ 2,103,350 ------------ TELECOMMUNICATIONS - 1.81% 1,500,000 Tele-Communications Inc., 7.25% due 08/01/05............ 1,563,540 2,000,000 360 Communications Co., 7.13% due 03/01/03............ 2,069,580 ------------ 3,633,120 ------------ UTILITIES - ELECTRIC - 0.73% Texas Utilities Electric, 1,444,575 6.62% due 07/01/01............ 1,464,888 ------------ TOTAL CORPORATE BONDS (Cost $36,476,391)............. 36,826,591 ------------
116 ================================================================================ ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED 62 May 31, 1998 ================================================================================
PAR MARKET VALUE VALUE - ---------- ----------- UNITED STATES GOVERNMENT - LONG TERM - 14.13% GOVERNMENT SPONSORED - 3.18% Federal Home Loan Mortgage Corp (pools/REMICS): $ 166,641 7.50% due 09/01/25............ $ 171,275 364,499 7.50% due 09/01/25............ 374,635 309,452 7.50% due 09/01/25............ 318,057 468,190 7.50% due 09/01/25............ 481,211 Federal National Mortgage Association: 2,000,000 7.00% due 05/10/01............ 2,000,620 3,000,000 6.90% due 10/09/01............ 3,010,770 ----------- 6,356,568 ----------- UNITED STATES BONDS & NOTES - 10.95% United States Treasury Bonds: 1,500,000 8.13% due 08/15/19............ 1,898,430 2,000,000 7.25% due 05/15/16............ 2,302,500 4,000,000 7.25% due 08/15/22............ 4,684,360 United States Treasury Notes: 1,000,000 8.00% due 08/15/99............ 1,028,120 4,000,000 6.50% due 08/15/05............ 4,198,760 2,200,000 6.38% due 04/30/99............ 2,216,500 2,000,000 6.25% due 02/28/02............ 2,041,880 1,500,000 6.25% due 02/15/03............ 1,539,375 1,000,000 5.75% due 08/15/03............ 1,007,190 1,000,000 5.50% due 04/15/00............ 999,220 ----------- 21,916,335 ----------- TOTAL UNITED STATES GOVERNMENT - LONG TERM (Cost $27,395,726)............. 28,272,903 ----------- CORPORATE SHORT TERM COMMERCIAL PAPER - 8.38% CONSUMER FINANCE - 4.27% 2,533,000 Beneficial Corp., 5.52% due 06/03/98............ 2,532,180 Sears Roebuck Acceptance Corp.: 665,000 5.55% due 06/05/98............ 664,544 5,353,000 5.50% due 06/01/98............ 5,353,000 ----------- 8,549,724 -----------
PAR MARKET VALUE VALUE - ---------- ------------ FINANCE COMPANIES - 1.43% $1,032,000 Ford Motor Credit Co., 5.50% due 06/05/98............ $ 1,031,320 1,822,000 General Motors Acceptance Corp., 5.50% due 06/04/98............ 1,821,099 ------------ 2,852,419 ------------ MACHINERY - INDUSTRIAL/ SPECIALTY - 0.19% 389,000 Cooper Industries, Inc., 5.67% due 06/01/98............ 389,000 ------------ SECURITIES RELATED - 1.24% Merrill Lynch & Co.: 1,202,000 5.58% due 06/10/98............ 1,200,170 1,290,000 5.52% due 06/02/98............ 1,289,792 ------------ 2,489,962 ------------ UTILITIES - COMMUNICATION - 1.25% GTE Corp., 2,500,000 5.61% due 06/08/98............ 2,496,969 ------------ TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $16,778,074)............. 16,778,074 ------------ UNITED STATES GOVERNMENT - SHORT TERM - 0.18% UNITED STATES TREASURY BILLS - 0.18% 250,000 4.94% due 06/04/98............. 249,894 100,000 4.75% due 06/04/98............. 99,959 ------------ 349,853 ------------ TOTAL UNITED STATES GOVERNMENT - SHORT TERM (Cost $349,853)................ 349,853 ------------ TOTAL INVESTMENTS (Cost $154,829,064) - 99.45%... 199,007,431 Other assets and liabilities, net - 0.55%................... 1,091,381 ------------ NET ASSETS (equivalent to $14.02 per share on 14,269,480 shares outstanding) - 100%........... $200,098,812 ============
UNREALIZED CONTACTS DEPRECIATION -------- ------------ FUTURES CONTRACTS PURCHASED(1) (Delivery month/Value at 5/31/98) 20(2) S&P 500 Index Futures (June/$1,090.80).............. $ (68,925) =========== (1) U.S.Treasury Bills with a market value of approximately $350,000 were maintained in a segregated account with a portion placed as collateral for futures contracts. (2) Per 250 ======================================================= NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 14,269,480 shares outstanding........... $ 142,695 Additional paid in capital................ 143,094,934 Undistributed net realized gain on securities.............................. 12,699,945 Undistributed net investment income....... 51,796 Unrealized appreciation (depreciation) of: Investments........... $44,178,367 Futures .............. (68,925) 44,109,442 ----------- ------------ NET ASSETS APPLICABLE TO SHARES OUTSTANDING............................. $200,098,812 ============
117 ================================================================================ ASSET ALLOCATION FUND - FINANCIAL STATEMENTS 63 ================================================================================
STATEMENT OF OPERATIONS For the fiscal year ended May 31, 1998 INVESTMENT INCOME: Dividends....................................................... $ 1,794,610 Interest........................................................ 4,912,556 ------------ Total investment income....................................... 6,707,166 ------------ EXPENSES: Advisory fees................................................... 943,269 Custodian and accounting services............................... 44,310 Reports to shareholders......................................... 14,240 Audit fees and tax services..................................... 4,390 Directors' fees and expenses.................................... 3,849 Miscellaneous................................................... 12,429 ------------ Total expenses................................................ 1,022,487 ------------ NET INVESTMENT INCOME........................................... 5,684,679 ------------ REALIZED AND UNREALIZED GAIN ON SECURITIES: Net realized gain on: Investments..................................... $11,723,542 Futures contracts............................... 1,548,855 13,272,397 ------------ ------------ Net unrealized appreciation (depreciation) during the year: Investments..................................... 18,457,664 ------------ Futures contracts............................... (171,525) 18,286,139 ------------ ------------ Net realized and unrealized gain during the year............. 31,558,536 ------------ INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................ $ 37,243,215 ------------
STATEMENT OF CHANGES IN NET ASSETS For the fiscal year ended May 31: 1998 1997 ------------ ------------ OPERATIONS: Net investment income............................. $ 5,684,679 $ 5,846,609 Net realized gain on securities................... 13,272,397 10,528,549 Net unrealized appreciation of securities during the year........................................ 18,286,139 9,840,402 ------------ ------------ Increase in net assets resulting from operations 37,243,215 26,215,560 ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income............................. (5,673,369) (5,861,358) Net realized gain on securities................... (10,552,054) (19,664,171) ------------ ------------ Decrease in net assets resulting from distributions to shareholders................. (16,225,423) (25,525,529) ------------ ------------ CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold.................. 6,643,565 3,274,322 Proceeds from capital stock issued for distributions reinvested........................ 16,225,423 25,525,529 ------------ ------------ 22,868,988 28,799,851 Cost of capital stock repurchased................. (21,134,651) (42,167,070) ------------ ------------ Increase (decrease) in net assets resulting from capital stock transactions.................... 1,734,337 (13,367,219) ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS........... 22,752,129 (12,677,188) NET ASSETS: Beginning of year................................. 177,346,683 190,023,871 ------------ ------------ End of year (including undistributed net investment income of $51,796 and $ 40,486)...... $200,098,812 $177,346,683 ============ ============ CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold...................... 488,059 264,558 Shares issued for distributions reinvested........ 1,231,303 2,146,236 Shares of capital stock repurchased .............. (1,556,774) (3,446,167) ------------ ------------ Increase (decrease) in shares outstanding....... 162,588 (1,035,373) Shares outstanding: Beginning of year............................... 14,106,892 15,142,265 ------------ ------------ End of year..................................... 14,269,480 14,106,892 ============ ============
118 ================================================================================ CAPITAL CONSERVATION FUND - STATEMENT OF NET ASSETS 64 May 31, 1998 ================================================================================
PAR MARKET VALUE VALUE - ---------- ----------- CORPORATE BONDS - 84.06% AIRLINES - 6.54% $1,500,000 Delta Air Lines, Inc., 9.75% due 05/15/21........... $ 1,935,060 2,000,000 Southwest Airlines Co., 8.75% due 10/15/03........... 2,226,020 ----------- 4,161,080 ----------- AUTO - CARS - 2.32% 1,500,000 Hertz Corp., 6.00% due 01/15/03........... 1,478,400 ----------- BANKS - OTHER - 5.65% 1,000,000 BankAmerica Corp., 7.25% due 04/15/06........... 1,054,380 1,500,000 Santander Finance Issuance, 7.25% due 11/01/15........... 1,559,370 1,000,000 Toronto Dominion Bank, 6.13% due 11/01/08........... 982,350 ----------- 3,596,100 ----------- BANKS - REGIONAL - 6.81% 1,500,000 Bank Boston Capital Trust I, 8.25% due 12/15/26........... 1,630,395 1,500,000 Barnett Capital Trust I, 8.06% due 12/01/26........... 1,644,330 1,000,000 SouthTrust Corp., 7.63% due 05/01/04........... 1,063,040 ----------- 4,337,765 ----------- BUILDING MATERIALS - 3.22% 2,000,000 CSR America, Inc., 6.88% due 07/21/05........... 2,046,800 ----------- FINANCE COMPANIES - 9.15% 2,000,000 Capital One Bank, 8.13% due 03/01/00........... 2,063,200 1,000,000 C.I.T. Group Holdings, Inc., 8.38% due 11/01/01........... 1,070,000 2,000,000 Finova Capital Corp., 9.13% due 02/27/02........... 2,188,900 500,000 Ford Motor Credit Co., 6.38% due 11/05/08........... 500,965 ----------- 5,823,065 -----------
PAR MARKET VALUE VALUE - ---------- ----------- HEALTHCARE - 2.22% $1,500,000 Columbia Healthcare Corp., 7.50% due 12/15/23........... $ 1,410,315 ----------- MERCHANDISE - DRUG - 0.76% 500,000 Imcera Group Inc., 6.00% due 10/15/03........... 485,620 ----------- MERCHANDISING - DEPARTMENT - 3.64% 2,000,000 Associated Dry Goods Corp. Depentures, 8.85% due 03/01/06........... 2,313,960 ----------- MERCHANDISING - MASS - 3.92% 1,000,000 Sears Roebuck and Co., 6.25% due 01/15/04........... 998,760 1,500,000 ShopKo Stores, Inc., 6.50% due 08/15/03........... 1,493,700 ----------- 2,492,460 ----------- METALS - STEEL - 2.80% 2,000,000 Pohang Iron & Steel Limited, 7.50% due 08/01/02........... 1,782,200 ----------- PAPER/FOREST PRODUCTS - 3.87% 2,000,000 Georgia-Pacific Corp., 9.50% due 12/01/11........... 2,464,640 ----------- PUBLISHING - NEWS - 3.49% 2,000,000 News America Holdings, 8.25% due 08/10/18........... 2,222,480 ----------- SECURITIES RELATED - 5.58% Lehman Brothers, Inc., 1,500,000 7.13% due 09/15/03........... 1,555,110 2,000,000 6.13% due 02/01/01........... 1,997,180 ----------- 3,552,290 ----------- TELECOMMUNICATIONS - 6.59% 2,000,000 Airtouch Communications, Inc., 7.50% due 07/15/06........... 2,132,380 2,000,000 360 Communications Co., 7.13% due 03/01/03........... 2,069,580 ----------- 4,201,960 -----------
PAR MARKET VALUE VALUE - ---------- ----------- UTILITIES - COMMUNICATION - 6.46% $2,500,000 Century Telephone Enterprises, Inc., 7.20% due 12/01/25..................... $ 2,641,350 1,500,000 GTE South, Inc., 6.00% due 02/15/08..................... 1,474,095 ----------- 4,115,445 ----------- UTILITIES - ELECTRIC - 4.43% 1,000,000 Georgia Power Co., 6.13% due 09/01/99..................... 1,001,680 2,000,000 Tenaga Nasional Berhad, 7.88% due 06/15/04..................... 1,817,100 ----------- 2,818,780 ----------- UTILITIES - GAS, PIPELINE - 6.61% 2,000,000 Columbia Energy Group, 7.62% due 11/28/25...................... 2,083,900 2,000,000 Enron Corp., 7.63% due 09/10/04..................... 2,122,020 ----------- 4,205,920 ----------- TOTAL CORPORATE BONDS (Cost $52,488,290)....................... 53,509,280 ----------- UNITED STATES GOVERNMENT LONG TERM - 12.58% FEDERAL AGENCIES - 0.44% Government National Mortgage Association: 68,950 9.50% due 05/15/18..................... 74,784 2,550 9.50% due 06/15/18..................... 2,766 1,240 9.50% due 06/15/18..................... 1,345 151,748 9.50% due 07/15/18..................... 164,587 19,961 9.50% due 08/15/18..................... 21,650 11,896 9.50% due 10/15/18..................... 12,902 ----------- 278,034 ----------- GOVERNMENT SPONSORED - 11.29% Federal Home Loan Mortgage Corp.: 921,110 6.50% due 06/01/12..................... 928,304 1,000,000 5.75% due 12/15/16..................... 997,500 2,000,000 Federal National Mortgage Association, 7.23% due 03/30/06..................... 2,015,940
119 ================================================================================ CAPITAL CONSERVATION FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 65 ================================================================================
PAR MARKET VALUE VALUE - ---------- ----------- GOVERNMENT SPONSORED - Continued Federal National Mortgage Association, (Pools/REMICS): $ 825,801 7.50% due 07/01/26.............. $ 849,022 792,792 7.00% due 05/01/11.............. 809,140 753,210 7.00% due 05/01/11.............. 768,742 803,910 7.00% due 06/01/11.............. 820,487 ----------- 7,189,135 ----------- UNITED STATES NOTES - 0.85% 500,000 United States Treasury Notes, 6.88% due 05/15/06.............. 537,890 ----------- TOTAL UNITED STATES GOVERNMENT - LONG TERM (Cost $7,801,256)................. 8,005,059 ----------- FOREIGN GOVERNMENT BONDS - 0.82% CANADA - 0.82% 500,000 New Brunswick Province, 7.13% due 10/01/02 (Cost $499,176).................. 518,865 ----------- CORPORATE SHORT TERM COMMERCIAL PAPER - 0.83% MACHINERY - INDUSTRIAL/ SPECIALTY - 0.83% 529,000 Cooper Industries, Inc., 5.67% due 06/01/98 (Cost $529,000).................. 529,000 ----------- TOTAL INVESTMENTS (Cost $61,317,722) - 98.29%....... 62,562,204 Other assets and liabilities, net - 1.71%...................... 1,091,348 ----------- NET ASSETS (equivalent to $9.68 per share on 6,577,011 shares outstanding) - 100% ............. $63,653,552 ===========
UNREALIZED CONTRACTS DEPRECIATION - ---------- ----------- FUTURES CONTRACTS PURCHASED(1) (Delivery month/Value at 5/31/98) 13 (2) U.S. Treasury Bond Futures (September/$121.50).............. $ (102) =========== (1) U.S. Treasury Notes with a market value of approximately $100,000 were maintained in a segregated account with a portion placed as collateral for futures contracts. (2) Per 1,000 - -------------------------------------------------------------------------------- NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 6,577,011 shares outstanding................ $ 65,770 Additional paid in capital.................... 62,825,983 Accumulated net realized loss on securities... (517,185) Undistributed net investment income........... 34,604 Unrealized appreciation (depreciation) of: Investments........... $ 1,244,482 Futures .............. (102)........ 1,244,380 ----------- ----------- NET ASSETS APPLICABLE TO SHARES OUTSTANDING................................. $63,653,552 ===========
120 ================================================================================ CAPITAL CONSERVATION FUND - FINANCIAL STATEMENTS 66 ================================================================================ STATEMENT OF OPERATIONS For the fiscal year ended May 31, 1998 INVESTMENT INCOME: Interest .................................................................. $ 4,595,681 ----------- EXPENSES: Advisory fees ............................................................. 335,861 Custodian and accounting services ......................................... 15,946 Reports to shareholders ................................................... 4,902 Audit fees and tax services ............................................... 1,534 Directors' fees and expenses .............................................. 1,427 Miscellaneous ............................................................. 5,159 ----------- Total expenses .......................................................... 364,829 ----------- NET INVESTMENT INCOME ..................................................... 4,230,852 ----------- REALIZED AND UNREALIZED GAIN ON SECURITIES: Net realized gain on: Investments ................................................. $ 149,517 Futures contracts ........................................... 109,743 259,260 ----------- Net unrealized appreciation (depreciation) during the year: Investments ................................................. 2,347,085 Futures contracts ........................................... (102) 2,346,983 ----------- ----------- Net realized and unrealized gain on securities during the year ......... 2,606,243 ----------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .......................... $ 6,837,095 ===========
STATEMENT OF CHANGES IN NET ASSETS For the fiscal year ended May 31:
1998 1997 ------------ ------------ OPERATIONS: Net investment income ..................................................... $ 4,230,852 $ 4,570,257 Net realized gain (loss) on securities .................................... 259,260 (127,757) Net unrealized appreciation of securities during the year ......................................................... 2,346,983 760,448 ------------ ------------ Increase in net assets resulting from operations ....................... 6,837,095 5,202,948 ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ..................................................... (4,220,237) (4,560,074) ------------ ------------ CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold .......................................... 11,469,948 5,054,950 Proceeds from capital stock issued for distributions reinvested ........... 4,220,237 4,560,074 ------------ ------------ 15,690,185 9,615,024 Cost of capital stock repurchased ......................................... (21,400,947) (13,722,282) ------------ ------------ Decrease in net assets resulting from capital stock transactions ............................................. (5,710,762) (4,107,258) ------------ ------------ TOTAL DECREASE IN NET ASSETS .............................................. (3,093,904) (3,464,384) NET ASSETS: Beginning of year ......................................................... 66,747,456 70,211,840 ------------ ------------ End of year (including undistributed net investment income of $34,604 and $23,989) ................................................. $ 63,653,552 $ 66,747,456 ============ ============ CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold .............................................. 1,185,836 540,826 Shares issued for distributions reinvested ................................ 439,548 488,804 Shares of capital stock repurchased ....................................... (2,216,430) (1,466,062) ------------ ------------ Decrease in shares outstanding .......................................... (591,046) (436,432) Shares outstanding: Beginning of year ....................................................... 7,168,057 7,604,489 ------------ ------------ End of year ............................................................. 6,577,011 7,168,057 ============ ============
121 ================================================================================ GOVERNMENT SECURITIES FUND - STATEMENT OF NET ASSETS May 31, 1997 67 ================================================================================
PAR MARKET VALUE VALUE - ----------- ----------- UNITED STATES GOVERNMENT LONG TERM - 96.90% GOVERNMENT SPONSORED - 62.24% $ 1,500,000 Federal Farm Credit Bank, 6.92% due 05/13/02...................... $ 1,559,535 Federal Home Loan Banks: 1,155,000 7.26% due 09/06/01 ..................... 1,205,173 1,150,000 7.10% due 11/02/02 ..................... 1,208,041 2,000,000 6.38% due 12/20/00 ..................... 2,031,880 3,000,000 5.70% due 12/19/00 ..................... 2,999,520 Federal Home Loan Mortgage Corp.: 3,000,000 7.13% due 07/21/99 ..................... 3,045,480 1,500,000 7.09% due 06/01/05 ..................... 1,528,365 1,500,000 6.90% due 03/26/03 ..................... 1,508,205 3,500,000 6.71% due 11/09/05 ..................... 3,536,085 1,500,000 6.37% due 01/23/06 ..................... 1,499,760 Federal Home Loan Mortgage Corp. (Pools/REMICS): 104,277 7.50% due 09/01/25 ..................... 107,177 373,170 7.50% due 09/01/25 ..................... 383,548 190,881 7.50% due 09/01/25 ..................... 196,189 2,000,000 7.00% due 09/15/23 ..................... 2,047,500 2,302,775 6.50% due 06/01/12 ..................... 2,320,760 175,000 5.50% due 02/25/19 ..................... 172,265 Federal National Mortgage Association: 1,000,000 9.05% due 04/10/00 ..................... 1,057,190 2,000,000 7.27% due 08/24/05 ..................... 2,051,240 3,000,000 7.00% due 08/27/12 ..................... 3,107,820 2,300,000 6.90% due 10/09/01 ..................... 2,308,257 2,000,000 6.85% due 09/12/05 ..................... 2,021,560 2,000,000 6.62% due 06/25/07 ..................... 2,088,740 2,000,000 6.41% due 03/08/06 ..................... 2,052,500 2,500,000 6.40% due 12/10/01 ..................... 2,501,550 4,000,000 6.25% due 12/13/02 ..................... 4,006,880 3,000,000 6.06% due 05/07/03 ..................... 3,002,820 2,000,000 5.74% due 12/23/99 ..................... 2,002,180 Student Loan Marketing Association, 1,000,000 7.50% due 03/08/00 ..................... 1,030,000 Tennessee Valley Authority: 2,500,000 6.75% due 11/01/25 ..................... 2,702,150 2,000,000 6.38% due 06/15/05 ..................... 2,054,680 ----------- 57,337,050 -----------
PAR MARKET VALUE VALUE - ----------- ----------- UNITED STATES BONDS, NOTES & STRIPS - 34.66% United States Treasury Bonds: $ 1,800,000 9.00% due 11/15/18 ..................... $ 2,457,846 4,000,000 8.75% due 08/15/20 ..................... 5,394,360 3,500,000 8.50% due 02/15/20 ..................... 4,600,855 3,500,000 7.25% due 08/15/22 ..................... 4,098,815 United States Treasury Notes: 2,500,000 6.75% due 04/30/00 ..................... 2,552,725 1,000,000 6.38% due 01/15/00 ..................... 1,012,190 6,000,000 5.88% due 11/15/99 ..................... 6,025,320 3,000,000 5.75% due 08/15/03 ..................... 3,021,570 2,000,000 5.50% due 01/31/03 ..................... 1,991,880 United States Treasury Strips, 1,500,000 0.00% due 11/15/09 ..................... 768,930 ----------- 31,924,491 ----------- TOTAL UNITED STATES GOVERNMENT - LONG TERM (Cost $86,245,519)....................... 89,261,541 ----------- CORPORATE SHORT TERM COMMERCIAL PAPER - 1.24% MACHINERY - INDUSTRIAL/ SPECIALTY - 1.24% 1,143,000 Cooper Industries, Inc., 5.67% due 06/01/98...................... 1,143,000 ----------- TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $1,143,000)........................ 1,143,000 ----------- TOTAL INVESTMENTS (Cost $87,388,519) - 98.14%.............. 90,404,541 Other assets and liabilities, net 1.86%............................... 1,715,676 ----------- NET ASSETS (equivalent to $10.09 per share on 9,129,497 shares outstanding) - 100% .................... $92,120,217 ===========
UNREALIZED CONTRACTS DEPRECIATION --------- ------------ FUTURES CONTRACTS PURCHASED(1) (Delivery month/Value at 5/31/98) 17(2) U.S. Treasury Bond Futures (September/$121.50)..................... $ (133) =========== (1) U.S. Treasury Bonds with a market value of approximately $100,000 were maintained in a segregated account with a portion placed as collateral for futures contracts. (2) Per 1,000. - -------------------------------------------------------------------------------- NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 9,129,497 shares outstanding......................... $ 91,295 Additional paid in capital............................. 90,699,767 Accumulated net realized loss on securities............ (1,734,207) Undistributed net investment income.................... 47,473 Unrealized appreciation (depreciation) of: Investments..................... $ 3,016,022 Futures ........................ (133) 3,015,889 ----------- ----------- NET ASSETS APPLICABLE TO SHARES OUTSTANDING.......................................... $92,120,217 ===========
122 ================================================================================ GOVERNMENT SECURITIES FUND - FINANCIAL STATEMENTS 68 ================================================================================ STATEMENT OF OPERATIONS For the fiscal year ended May 31, 1998 INVESTMENT INCOME: Interest ....................................................................... $5,571,826 ---------- EXPENSES: Advisory fees .................................................................. 436,775 Custodian and accounting services .............................................. 20,527 Reports to shareholders ........................................................ 6,612 Audit fees and tax services .................................................... 2,067 Directors' fees and expenses ................................................... 1,804 Miscellaneous .................................................................. 6,262 ---------- Total expenses ............................................................... 474,047 ---------- NET INVESTMENT INCOME .......................................................... 5,097,779 ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES: Net realized gain on: Investments ................................................... $ 245,563 Futures contracts ............................................. 112,838 358,401 ---------- Net unrealized appreciation (depreciation) during the year: Investments ................................................... 3,271,194 Futures contracts ............................................. (133 3,271,061 ---------- ---------- Net realized and unrealized gain on securities during the year ............... 3,629,462 ---------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................... $8,727,241 ==========
STATEMENT OF CHANGES IN NET ASSETS For the fiscal year ended May 31:
1998 1997 ------------ ------------ OPERATIONS: Net investment income ..................................................... $ 5,097,779 $ 5,088,757 Net realized gain on securities ........................................... 358,401 4,132 Net unrealized appreciation of securities during the year ......................................................... 3,271,061 479,407 ------------ ------------ Increase in net assets resulting from operations ....................... 8,727,241 5,572,296 ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ..................................................... (5,081,964) (5,073,340) ------------ ------------ CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold .......................................... 17,280,167 11,299,725 Proceeds from capital stock issued for distributions reinvested ........... 5,081,964 5,073,340 ------------ ------------ 22,362,131 16,373,065 Cost of capital stock repurchased ......................................... (17,713,793) (11,468,468) ------------ ------------ Increase in net assets resulting from capital stock transactions ........ 4,648,338 4,904,597 ------------ ------------ TOTAL INCREASE IN NET ASSETS .............................................. 8,293,615 5,403,553 NET ASSETS: Beginning of year ......................................................... 83,826,602 78,423,049 ------------ ------------ End of year (including undistributed net investment income of $47,473 and $31,658) ................................................. $ 92,120,217 $ 83,826,602 ============ ============ CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold .............................................. 1,716,427 1,165,828 Shares issued for distributions reinvested ................................ 509,952 523,483 Shares of capital stock repurchased ....................................... (1,769,096) (1,180,771) ------------ ------------ Increase in shares outstanding .......................................... 457,283 508,540 Shares outstanding: Beginning of year ....................................................... 8,672,214 8,163,674 ------------ ------------ End of year ............................................................. 9,129,497 8,672,214 ============ ============
123 ================================================================================ INTERNATIONAL GOVERNMENT BOND FUND - STATEMENT OF NET ASSETS May 31, 1998 69 ================================================================================
PAR MARKET VALUE VALUE - ---------------- ------------ GOVERNMENT BONDS - 86.49% AUSTRALIA - 1.16% Commonwealth: A$ 500,000 9.75% due 3/15/02 ............. $ 364,521 A$ 500,000 9.00% due 9/15/04 ............. 376,558 A$ 500,000 8.75% due 1/15/01 ............. 343,151 A$ 500,000 7.50% due 7/15/05 ............. 354,652 A$ 500,000 7.50% due 9/15/09 ............. 369,509 ------------ 1,808,391 ------------ AUSTRIA - 3.01% Republic of Austria: DM 1,000,000 7.25% due 5/3/07 .............. 650,974 As 2,000,000 7.125% due 7/12/04 ............ 178,900 As 1,500,000 7.00% due 2/14/00 ............. 124,915 As 2,200,000 7.00% due 1/20/03 ............. 192,497 As 2,000,000 7.00% due 5/16/05 ............. 179,458 As 2,000,000 6.875% due 4/19/02 ............ 172,607 As 2,000,000 6.50% due 11/17/05 ............ 175,475 As 6,000,000 6.25% due 5/31/06 ............. 521,120 As 3,000,000 5.625% due 7/15/07 ............ 250,667 As 2,000,000 5.50% due 1/18/04 ............. 165,816 Ff. 3,000,000 5.50% due 1/18/04 ............. 522,340 Y. 100MM 4.75% due 12/20/04 ............ 880,028 Y. 50MM 4.50% due 9/28/05 ............. 440,916 As 3,000,000 4.375% due 2/28/02 ............ 238,600 ------------ 4,694,313 ------------ BELGIUM - 3.53% Kingdom of Belgium: Bf 10,000,000 8.75% due 6/25/02 ............. 313,917 Bf 10,000,000 8.00% due 12/24/12 ............ 348,464 Bf 10,000,000 8.00% due 3/28/15 ............. 353,710 Bf 10,000,000 7.75% due 12/22/00 ............ 294,210 Bf 25,000,000 7.75% due 10/15/04 ............ 788,801 Bf 20,000,000 7.50% due 7/29/08 ............. 649,198 Bf 15,000,000 7.00% due 5/15/06 ............. 463,251 Bf 20,000,000 6.50% due 3/31/05 ............. 596,140 Bf 20,000,000 6.25% due 3/28/07 ............. 592,933 Bf 20,000,000 5.00% due 3/28/01 ............. 553,303 Bf 20,000,000 4.00% due 1/22/00 ............. 542,764 ------------ 5,496,691 ------------
PAR MARKET VALUE VALUE - ---------------- ------------ CANADA - 4.76% Government of Canada: C$ 550,000 9.50% due 6/1/10............... $ 512,958 C$ 500,000 9.00% due 12/1/04 ............. 412,592 C$ 500,000 9.00% due 6/1/25 .............. 504,726 C$ 1,000,000 8.75% due 12/1/05 ............. 831,457 C$ 1,000,000 8.50% due 4/1/02 .............. 763,622 C$ 1,000,000 8.00% due 6/1/23 .............. 907,406 C$ 500,000 7.50% due 9/1/00 .............. 359,719 C$ 1,000,000 7.50% due 3/1/01 .............. 726,138 C$ 1,000,000 7.25% due 6/1/03 .............. 746,153 C$ 1,000,000 7.00% due 12/1/06 ............. 764,795 C$ 500,000 6.50% due 6/1/04 .............. 364,716 C$ 750,000 5.50% due 2/1/00 .............. 517,453 ------------ 7,411,735 ------------ DENMARK - 2.35% Kingdom of Denmark: DK 5,000,000 8.00% due 11/15/01 ............ 813,487 DK 2,500,000 8.00% due 5/15/03 ............. 419,431 DK 3,000,000 8.00% due 3/15/06 ............. 524,942 DK 5,500,000 7.00% due 12/15/04 ............ 902,764 DK 1,250,000 7.00% due 11/10/24 ............ 220,564 DK 5,000,000 6.00% due 11/15/02 ............ 772,371 ------------ 3,653,559 ------------ FINLAND - 1.98% Republic of Finland: FIM 2,000,000 10.00% due 9/15/01 ............ 430,336 FIM 1,000,000 9.50% due 3/15/04 ............. 228,271 FIM 3,000,000 7.25% due 4/18/06 ............. 636,603 Ff. 5,000,000 7.00% due 6/15/04 ............. 934,418 Y. 100MM 6.00% due 1/29/02 ............. 858,726 ------------ 3,088,354 ------------ FRANCE - 4.30% Government of France: Ff. 4,600,000 9.50% due 1/25/01 ............. 867,027 Ff. 3,500,000 8.50% due 11/25/02 ............ 679,759 Ff. 1,500,000 8.50% due 12/26/12 ............ 336,955 Ff. 3,000,000 7.25% due 4/25/06 ............. 580,645 Ff. 7,000,000 6.75% due 10/25/03 ............ 1,290,373 Ff. 2,000,000 6.50% due 10/25/06 ............ 370,516 Ff. 8,500,000 6.00% due 10/25/25 ............ 1,525,539 Ff. 2,000,000 5.50% due 4/25/04 ............. 349,657 Ff. 4,000,000 5.50% due 4/25/07 ............. 699,315 ------------ 6,699,786 ------------
PAR MARKET VALUE VALUE - ---------------- ------------ GERMANY - 11.92% Federal Republic of Germany: DM 2,000,000 7.50% due 9/9/04 .............. $ 1,289,505 DM 3,100,000 7.125% due 12/20/02 ........... 1,922,982 DM 2,000,000 7.00% due 1/13/00 ............. 1,172,706 DM 1,000,000 6.75% due 7/15/04 ............. 622,334 DM 3,000,000 6.50% due 3/15/00 ............. 1,752,165 DM 3,000,000 6.50% due 7/15/03 ............. 1,829,172 DM 2,000,000 6.50% due 10/14/05 ............ 1,238,840 DM 1,000,000 6.25% due 4/26/06 ............. 612,526 DM 1,000,000 6.25% due 1/4/24 .............. 624,016 DM 1,000,000 6.00% due 11/12/03 ............ 598,324 DM 1,000,000 6.00% due 1/5/06 .............. 602,606 DM 1,000,000 6.00% due 1/4/07 .............. 604,288 DM 4,000,000 6.00% due 6/20/16 ............. 2,446,518 DM 2,000,000 5.00% due 5/21/01 ............. 1,144,346 DM 3,750,000 4.50% due 8/19/02 ............. 2,108,239 ------------ 18,568,567 ------------ IRELAND - 0.65% Republic of Ireland: Ilb 100,000 8.25% due 8/18/15 ............. 185,875 Ilb 100,000 8.00% due 8/18/06 ............. 168,206 Ilb 150,000 6.50% due 10/18/01 ............ 222,838 Ilb 150,000 6.25% due 4/1/99 .............. 213,488 Ilb 150,000 6.25% due 10/18/04 ............ 226,019 ------------ 1,016,426 ------------ ITALY - 9.01% Republic of Italy: Lit 1,000MM 12.00% due 6/1/01 ............. 682,480 Lit 1,000MM 12.00% due 1/1/02 ............. 702,844 Lit 1,000MM 10.50% due 7/15/00 ............ 635,836 Lit 500MM 10.50% due 4/1/05 ............. 374,545 Lit 500MM 10.50% due 9/1/05 ............. 379,010 Lit 3,400MM 10.00% due 8/1/03 ............. 2,385,802 Lit 500MM 9.50% due 1/1/05 .............. 356,030 Lit 500MM 9.50% due 2/1/06 .............. 364,903 Lit 2,000MM 9.00% due 11/1/23 ............. 1,670,080 Lit 1,000MM 8.50% due 4/1/04 .............. 672,241 Lit 1,500MM 8.50% due 8/1/04 .............. 1,012,961 Lit 1,000MM 7.75% due 9/15/01 ............. 621,843 Lit 1,500MM 6.75% due 2/1/07 .............. 952,389 Lit 500MM 6.25% due 3/1/02 .............. 299,545 Lit 2,000MM 5.75% due 9/15/02 ............. 1,182,366 Lit 3,000MM 5.50% due 9/15/00 ............. 1,742,031 ------------ 14,034,906 ------------
124 ================================================================================ INTERNATIONAL GOVERNMENT BOND FUND - STATEMENT OF NET ASSETS CONTINUED 70 May 31, 1998 ================================================================================
PAR MARKET VALUE VALUE - ---------------- ------------ JAPAN - 20.99% Government of Japan: Y. 50MM 6.70% due 6/20/00 ............. $ 407,177 Y. 250MM 6.60% due 6/20/01 ............. 2,133,367 Y. 320MM 6.40% due 3/20/00 ............. 2,557,643 Y. 105MM 6.00% due 12/20/01 ............ 899,729 Y. 365MM 5.50% due 3/20/02 ............. 3,107,073 Y. 120MM 5.00% due 12/20/02 ............ 1,026,789 Y. 100MM 5.00% due 9/21/09 ............. 972,850 Y. 100MM 5.00% due 3/20/15 ............. 1,030,616 Y. 130MM 4.80% due 6/21/99 ............. 982,158 Y. 127MM 4.50% due 6/20/03 ............. 1,077,698 Y. 75MM 4.50% due 12/20/04 ............ 655,607 Y. 150MM 4.40% due 9/22/03 ............. 1,273,955 Y. 200MM 4.20% due 9/21/15 ............. 1,900,065 Y. 150MM 4.10% due 6/21/04 ............. 1,273,522 Y. 100MM 3.90% due 6/21/04 ............. 840,494 Y. 100MM 3.80% due 9/20/16 ............. 911,402 Y. 250MM 3.50% due 3/21/16 ............. 2,189,147 Y. 100MM 3.30% due 6/20/06 ............. 829,085 Y. 200MM 3.20% due 3/20/06 ............. 1,644,018 Y. 250MM 3.00% due 9/20/05 ............. 2,021,807 Y. 150MM 2.90% due 12/20/05 ............ 1,207,994 Y. 100MM 2.70% due 3/20/07 ............. 798,383 Y. 150MM 2.00% due 12/20/07 ............ 1,134,450 Y. 250MM 1.10% due 10/22/01 ............ 1,830,475 ------------ 32,705,504 ------------ NETHERLANDS - 4.59% Government of the Netherlands: NG 1,050,000 9.00% due 10/16/00 ............ 577,199 NG 1,000,000 8.75% due 9/15/01 ............. 562,641 NG 500,000 8.50% due 3/15/01 ............. 275,602 NG 500,000 8.25% due 2/15/02 ............. 280,575 NG 500,000 8.25% due 6/15/02 ............. 283,061 NG 500,000 8.25% due 2/15/07 ............. 307,427 NG 1,500,000 7.75% due 3/1/05 .............. 875,289 NG 500,000 7.50% due 4/15/10 ............. 303,573 NG 750,000 7.50% due 1/15/23 ............. 479,600 NG 2,000,000 6.50% due 4/15/03 ............. 1,079,038 NG 1,500,000 6.00% due 1/15/06 ............. 803,685 NG 2,000,000 5.75% due 1/15/04 ............. 1,051,192 NG 500,000 5.75% due 2/15/07 ............. 264,414 ------------ 7,143,296 ------------
PAR MARKET VALUE VALUE - ---------------- ------------ PORTUGAL - 0.36% Ff. 3,000,000 Republic of Portugal, 6.625% due 5/13/08.......... $ 560,964 ------------ SPAIN - 4.77% Government of Spain: Pst 100MM 10.50% due 10/30/03 ........... 838,436 Pst 100MM 10.30% due 6/15/02 ............ 796,899 Pst 100MM 10.15% due 1/31/06 ............ 875,784 Pst 50MM 10.10% due 2/28/01 ............ 377,598 Pst 50MM 10.00% due 2/28/05 ............ 425,701 Pst 50MM 8.40% due 4/30/01 ............. 365,424 Pst 70MM 8.20% due 2/28/09 ............. 577,598 Pst 80MM 8.00% due 5/30/04 ............. 615,163 Pst 50MM 7.90% due 2/28/02 ............. 367,618 Pst 150MM 6.75% due 4/15/00 ............. 1,033,421 Ff. 2,000,000 6.50% due 6/20/01 ............. 354,129 Pst 50MM 6.00% due 1/31/08 ............. 353,233 Pst 67MM 5.25% due 1/31/03 ............. 456,150 ------------ 7,437,154 ------------ SWEDEN - 2.43% Kingdom of Sweden: SK 3,000,000 10.25% due 5/5/00 ............. 422,108 SK 6,000,000 10.25% due 5/5/03 ............. 946,084 SK 3,000,000 9.00% due 4/20/09 ............. 504,664 SK 3,000,000 8.00% due 8/15/07 ............. 464,452 C$ 500,000 6.75% due 12/31/01 ............ 357,619 SK 2,000,000 6.50% due 10/25/06 ............ 280,632 SK 6,000,000 6.00% due 2/9/05 .............. 812,805 ------------ 3,788,364 ------------ SWITZERLAND - 0.48% Government of Switzerland: Chf 500,000 4.50% due 7/8/02 .............. 367,027 Chf 500,000 4.50% due 4/8/06 .............. 377,995 ------------ 745,022 ------------ UNITED KINGDOM - 8.74% Government of United Kingdom: L. 250,000 9.75% due 8/27/02 ............. 463,194 L. 400,000 9.00% due 10/13/08 ............ 818,692 L. 250,000 9.00% due 7/12/11 ............. 529,547 L. 400,000 9.00% due 8/6/12 .............. 856,258 L. 750,000 8.75% due 8/25/17 ............. 1,656,780 L. 500,000 8.50% due 12/7/05 ............. 948,335
PAR MARKET VALUE VALUE - ---------------- ------------ UNITED KINGDOM - Continued L. 500,000 8.00% due 9/25/09 ............. $ 969,517 L. 500,000 8.00% due 12/7/15 ............. 1,025,407 L. 750,000 8.00% due 6/7/21 .............. 1,585,578 L. 1,000,000 7.50% due 12/7/06 ............. 1,817,048 L. 1,500,000 7.00% due 11/6/01 ............. 2,515,028 L. 250,000 6.75% due 11/26/04 ............ 429,890 ------------ 13,615,274 ------------ UNITED STATES - 1.46% DM 4,000,000 Federal National Mortgage Association, 5.00% due 2/16/01 .......... 2,278,268 ------------ TOTAL GOVERNMENT BONDS (Cost $139,653,971) ................. 134,746,574 ------------ SUPRANATIONAL - 6.44% Eurofima: Ff. 5,000,000 9.875% due 8/21/00 ............ 932,852 Ff. 1,600,000 9.25% due 12/18/03 ............ 325,255 Ff. 3,000,000 5.625% due 11/25/99 ........... 512,389 European Investment Bank: Lit 1,100MM 10.50% due 2/7/02 ............. 756,328 L. 250,000 9.00% due 5/14/02 ............. 445,840 Y. 25MM 6.625% due 3/15/00 ............ 200,601 Ff. 2,000,000 6.125% due 10/8/04 ............ 360,187 Y. 100MM 4.625% due 2/26/03 ............ 845,729 Y. 100MM 3.00% due 9/20/06 ............. 811,431 Y. 55MM Inter America Development Bank, 6.75% due 2/20/01 .......... 463,165 International Bank for Reconstruction & Development: Lit 150MM 10.80% due 11/13/01 ........... 103,029 Lit 200MM 9.45% due 8/11/03 ............. 138,083 L. 400,000 9.25% due 7/20/07 ............. 795,826 Y. 250MM 5.25% due 3/20/02 ............. 2,108,681 Y. 100MM 4.50% due 3/20/03 ............. 843,924 Y. 50MM 4.50% due 6/20/00 ............. 391,048 ------------ TOTAL SUPRANATIONAL (Cost $11,221,358) .................. 10,034,368 ------------
125 ================================================================================ INTERNATIONAL GOVERNMENT BOND FUND - STATEMENT OF NET ASSETS CONTINUED May 31, 1998 71 ================================================================================
PAR MARKET VALUE VALUE - ----------------------------------------------------------------- CORPORATE BONDS - 4.34% FRANCE - 4.34% Credit Local de France: Lit 2,000MM 9.00% due 6/14/01 ............. $ 1,272,048 Ff. 5,000,000 8.875% due 6/10/02 ............ 964,190 Ff. 8,000,000 6.25% due 9/27/05 ............. 1,444,927 Ff. 4,000,000 6.00% due 11/15/01 ............ 699,482 Ff. 10,000,000 Elf Aquitaine SA, 7.125% due 8/11/03............. 1,843,766 Ff. 3,000,000 Toyota Motor Credit, 6.25% due 4/11/02.............. 530,252 ------------ 6,754,665 ------------ TOTAL CORPORATE BONDS (Cost $7,219,766) ................... 6,754,665 ------------ UNITED STATES GOVERNMENT - SHORT TERM - 0.10% U.S. TREASURY BILLS - 0.10% USD 150,000 United States Treasury Bills, 4.30% due 6/25/98 ............. 149,570 ------------ TOTAL UNITED STATES GOVERNMENT SHORT TERM (Cost $149,570) ..................... 149,570 ------------ TOTAL INVESTMENTS (Cost $158,244,665) - 97.37% ........ 151,685,177 Other assets and liabilities, net - 2.63% ........................ 4,097,706 ------------ NET ASSETS (equivalent to $11.42 per share on 13,645,599 shares outstanding) - 100% ................ $155,782,883 ------------
UNREALIZED CONTRACTS APPRECIATION - ----------------------------------------------------------------- FUTURES CONTRACTS SOLD(1) (Delivery month/Value at 5/31/98) 15 (2) Currency futures - British Pound (June/$163.02) ...................... $ 14,813 ------------ (Delivery month/Value at 5/31/98) 70 (3) Currency futures - Japanese Yen (June/$72.22) ....................... 199,250 ------------ 214,063 ============
(1) U.S.Treasury Bills with a market value of approximately $150,000 were maintained in a segregated account with a portion placed as collateral for futures contracts. (2) Per 625 (3) Per 1,250
MARKET VALUE - ----------------------------------------------------------------- NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 13,645,599 shares outstanding .................. $ 136,456 Additional paid in capital ....................... 160,890,463 Accumulated net realized gain on securities ...... 658,703 Undistributed net investment income .............. 462,129 Unrealized appreciation (depreciation) of: Investments ..................... $ (6,559,488) Futures ......................... 214,063 ------------ Foreign currency translation..... (19,443) (6,364,868) ------------ ------------ NET ASSETS APPLICABLE TO SHARES OUTSTANDING .................................... $155,782,883 ============
126 ================================================================================ INTERNATIONAL GOVERNMENT BOND FUND - FINANCIAL STATEMENTS 72 ================================================================================ STATEMENT OF OPERATIONS For the fiscal year ended May 31, 1998 INVESTMENT INCOME: Interest (net of foreign withholding taxes of $158,558) ....... $ 8,845,092 ----------- EXPENSES: Advisory fees ................................................. 846,176 Custodian and accounting services ............................. 32,947 Reports to shareholders ....................................... 11,638 Audit fees and tax services ................................... 3,835 Directors' fees and expenses .................................. 3,717 Miscellaneous ................................................. 23,639 ----------- Total expenses .............................................. 921,952 ----------- NET INVESTMENT INCOME ......................................... 7,923,140 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES AND FOREIGN CURRENCIES: Net realized loss on: Investments ......................................... $(3,464,702) Foreign currency translation ........................ (387,612) (3,852,314) ----------- Net unrealized appreciation (depreciation) during the year: Securities .......................................... (74,327) Foreign currency translation ........................ 101,888 Futures contracts ................................... 214,063 241,624 ----------- ----------- Net realized and unrealized loss on securities and foreign currencies during the year ....................... (3,610,690) ----------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............. $ 4,312,450 ===========
STATEMENT OF CHANGES IN NET ASSETS For the fiscal year ended May 31: 1998 1997 ------------ ------------ OPERATIONS: Net investment income .............................. $ 7,923,140 8,522,441 Net realized loss on securities and foreign currency transactions ..................................... (3,852,314) (145,962) Net unrealized appreciation (depreciation) of securities and translation of foreign currencies during the year .................................. 241,624 (7,210,455) ------------ ------------ Increase in net assets resulting from operations. 4,312,450 1,166,024 ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income .............................. (3,034,869) (8,295,746) Net realized gain on securities .................... (136,607) (295,588) ------------ ------------ Decrease in net assets resulting from distributions to shareholders .................. (3,171,476) (8,591,334) ------------ ------------ CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold ................... 30,361,915 72,164,939 Proceeds from capital stock issued for distributions reinvested........................................ 3,171,476 8,591,334 ------------ ------------ 33,533,391 80,756,273 Cost of capital stock repurchased .................. (56,600,279) (38,005,431) ------------ ------------ Increase (decrease) in net assets resulting from capital stock transactions ...................... (23,066,888) 42,750,842 TOTAL INCREASE (DECREASE) IN NET ASSETS ............ (21,925,914) 35,325,532 NET ASSETS: Beginning of year .................................. 177,708,797 142,383,265 ------------ ------------ End of year (including undistributed net investment income of $462,129 and $84,875) .................. $155,782,883 $177,708,797 ------------ ============ CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold ....................... 2,685,573 6,113,938 Shares issued for distributions reinvested ......... 279,556 729,242 Shares of capital stock repurchased ................ (4,999,093) (3,236,292) ------------ ------------ Increase (decrease) in shares outstanding ........ (2,033,964) 3,606,888 Shares outstanding: Beginning of year ................................ 15,679,563 12,072,675 ------------ ------------ End of year ...................................... 13,645,599 15,679,563 ------------ ============
127 ================================================================================ MONEY MARKET FUND - STATEMENT OF NET ASSETS May 31, 1998 73 ================================================================================
PAR MARKET VALUE VALUE - ---------- ----------- CORPORATE SHORT TERM COMMERCIAL PAPER - 89.58% BANKS - REGIONAL - 5.18% $5,000,000 Banc One Corp, 5.48% due 06/08/98............. $ 4,994,672 5,000,000 NationsBank Corp., 5.48% due 10/21/98............. 4,891,922 ----------- 9,886,594 ----------- BEVERAGE - SOFT DRINKS - 1.83% 3,500,000 Coca Cola Co., 5.48% due 06/19/98............. 3,490,410 ----------- CHEMICAL - MAJOR - 5.65% E.I. Du Pont de Nemeurs and Co.: 3,500,000 5.49% due 07/07/98.............. 3,480,785 3,000,000 5.44% due 06/25/98.............. 2,989,120 PPG Industries: 2,500,000 5.50% due 06/30/98.............. 2,488,924 1,840,000 5.51% due 06/30/98.............. 1,831,833 ----------- 10,790,662 ----------- CONGLOMERATES - 2.70% Fortune Brands: 2,500,000 5.50% due 07/08/98.............. 2,485,868 2,688,000 5.50% due 07/09/98.............. 2,672,395 ----------- 5,158,263 ----------- CONSUMER FINANCE - 16.67% Associates Corp. of North America: 1,000,000 5.75% due 11/15/98.............. 999,736 2,000,000 5.50% due 08/18/98.............. 1,976,167 1,800,000 5.49% due 06/02/98.............. 1,799,726 2,000,000 5.49% due 07/01/98.............. 1,990,850 825,000 5.48% due 06/16/98.............. 823,116 500,000 5.25% due 09/01/98.............. 499,100 Beneficial Corp: 1,500,000 5.52% due 06/22/98.............. 1,495,170 1,500,000 5.51% due 08/24/98.............. 1,480,715 2,300,000 5.51% due 08/04/98.............. 2,277,470 2,000,000 5.49% due 06/29/98.............. 1,991,460 Commercial Credit Co.: 1,800,000 5.50% due 07/21/98.............. 1,786,250 1,900,000 5.50% due 07/28/98.............. 1,883,454 1,500,000 5.49% due 08/06/98.............. 1,484,903 2,000,000 5.48% due 07/06/98.............. 1,989,344 1,200,000 5.47% due 06/18/98.............. 1,196,900
PAR MARKET VALUE VALUE - ---------- ----------- CONSUMER FINANCE - Continued Sears Roebuck Acceptance Corp.: $2,400,000 5.54% due 06/16/98.............. $ 2,394,460 644,000 5.52% due 07/29/98.............. 638,273 553,000 5.50% due 07/30/98.............. 548,015 2,100,000 5.50% due 08/03/98.............. 2,079,788 1,400,000 5.50% due 08/05/98.............. 1,386,097 1,100,000 5.48% due 06/29/98.............. 1,095,312 ----------- 31,816,306 ----------- ELECTRICAL EQUIPMENT - 1.10% 2,100,000 General Electric Co., 5.49% due 06/09/98.............. 2,097,438 ----------- ENTERTAINMENT - 2.09% Walt Disney Co.: 1,500,000 5.57% due 06/04/98.............. 1,499,304 2,500,000 5.44% due 06/26/98.............. 2,490,556 ----------- 3,989,860 ----------- FINANCE COMPANIES - 19.65% Ciesco LP: 3,000,000 5.50% due 06/01/98............... 3,000,000 2,500,000 5.50% due 07/02/98............... 2,488,160 2,000,000 5.45% due 06/10/98............... 1,997,275 CIT Group Holdings, Inc.: 1,707,000 5.52% due 06/11/98............... 1,704,383 2,033,000 5.50% due 06/01/98............... 2,033,000 1,500,000 5.49% due 06/25/98............... 1,494,510 3,300,000 5.46% due 06/23/98............... 3,288,989 Ford Motor Credit Co.: 2,500,000 5.50% due 08/17/98............... 2,470,590 1,404,000 5.48% due 06/12/98............... 1,401,649 General Electric Capital Corp.: 1,000,000 5.51% due 08/10/98............... 989,286 1,800,000 5.50% due 07/15/98............... 1,787,900 1,200,000 5.50% due 06/03/98............... 1,199,633 2,200,000 5.50% due 06/03/98............... 2,199,328 General Motors Acceptance Corp.: 1,000,000 6.30% due 06/11/98............... 1,000,100 2,257,000 5.52% due 06/05/98............... 2,255,616 1,000,000 5.51% due 08/13/98............... 988,827 750,000 5.50% due 06/09/98............... 749,083 1,500,000 5.49% due 06/11/98............... 1,497,713 1,000,000 5.48% due 07/08/98............... 994,368 1,000,000 5.47% due 07/13/98............... 993,618
PAR MARKET VALUE VALUE - ----------- ----------- FINANCE COMPANIES - Continued $1,000,000 IBM Credit Co., 5.80% due 11/04/98................ $ 999,979 2,000,000 International Lease Finance Corp., 5.46% due 07/16/98................ 1,986,350 ----------- 37,520,357 ----------- FOODS - 3.71% Archer Daniels Midland Co.: 3,000,000 5.52% due 06/02/98................ 2,999,540 1,100,000 5.50% due 07/22/98................ 1,091,429 1,500,000 5.48% due 06/08/98................ 1,498,402 Kellogg Co., 1,500,000 5.50% due 06/05/98................ 1,499,083 ----------- 7,088,454 ----------- INFORMATION PROCESSING - 1.72% International Business Machines Corp.: 2,000,000 5.81% due 10/01/98................ 1,999,820 1,300,000 5.50% due 08/11/98................ 1,285,899 ----------- 3,285,719 ----------- MACHINERY - INDUSTRIAL/ SPECIALTY - 7.01% 5,613,000 Cooper Industries, Inc., 5.67% due 06/01/98................ 5,613,000 Dover Corp.: 3,000,000 5.55% due 06/03/98................ 2,999,075 1,500,000 5.53% due 06/05/98................ 1,499,078 3,270,000 5.50% due 06/10/98................ 3,265,504 ----------- 13,376,657 ----------- MERCHANDISE - SPECIALTY - 2.25% Toys "R" Us, Inc.: 1,300,000 5.50% due 07/02/98................ 1,293,843 3,000,000 5.48% due 06/15/98................ 2,993,607 ----------- 4,287,450 ----------- OIL - INTEGRATED DOMESTIC - 3.14% Atlantic Richfield Co.: 3,000,000 5.52% due 06/12/98................ 2,994,940 3,000,000 5.46% due 06/18/98................ 2,992,265 ----------- 5,987,205 -----------
128 ================================================================================ MONEY MARKET FUND - STATEMENT OF NET ASSETS CONTINUED 74 May 31, 1998 ================================================================================
PAR MARKET VALUE VALUE - -------------------------------------------------------------- SECURITIES RELATED - 8.45% Merrill Lynch & Co., Inc.: $2,100,000 5.52% due 08/12/98................ $ 2,076,815 1,300,000 5.51% due 06/17/98................ 1,296,816 1,350,000 5.51% due 07/27/98................ 1,338,429 2,700,000 5.51% due 08/19/98................ 2,667,353 1,100,000 5.49% due 06/30/98................ 1,095,135 Morgan Stanley, Dean Witter, Discover and Co.: 2,500,000 5.50% due 06/15/98................ 2,494,653 2,500,000 5.50% due 06/24/98................ 2,491,215 2,689,000 5.49% due 07/20/98................ 2,668,906 ------------ 16,129,322 ------------ UTILITIES - COMMUNICATION - 8.43% BellSouth Telecomm: 900,000 5.50% due 08/21/98................ 888,863 3,000,000 5.49% due 07/24/98................ 2,975,752 2,200,000 5.48% due 06/04/98................ 2,198,995 2,000,000 5.46% due 06/22/98................ 1,993,630 GTE Corp.: 2,000,000 5.55% due 06/22/98................ 1,993,525 2,500,000 5.55% due 07/23/98................ 2,479,958 1,500,000 5.53% due 06/09/98................ 1,498,157 2,077,000 5.53% due 06/17/98................ 2,071,895 ------------ 16,100,775 ------------ TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $171,005,472)................. 171,005,472 ------------ CORPORATE SHORT TERM OBLIGATIONS - 2.62% SECURITIES RELATED - 2.62% Bear Stearns Co. Inc.: 2,000,000 Floating rate note due 07/06/98, 5.61188% at 05/31/98............. 2,000,000 3,000,000 Floating rate note due 07/30/98, 5.65875% at 05/31/98............. 3,000,000 ------------ 5,000,000 ------------ TOTAL CORPORATE SHORT TERM OBLIGATIONS (Cost $5,000,000)................... 5,000,000 ------------
PAR MARKET VALUE VALUE - -------------------------------------------------------------- UNITED STATES GOVERNMENT SHORT TERM - 8.38% Federal Farm Credit Bank: $1,000,000 5.75% due 09/11/98................ $ 999,827 2,000,000 5.70% due 11/03/98................ 2,000,117 1,000,000 5.50% due 04/01/99................ 998,562 Federal Home Loan Bank: 2,000,000 5.72% due 10/06/98................ 2,000,271 1,000,000 5.70% due 10/23/98................ 999,771 1,000,000 5.60% due 03/10/99................ 1,000,039 1,000,000 5.56% due 03/25/99................ 999,126 1,000,000 5.50% due 03/26/99................ 999,143 Federal National Mortgage Association: 1,000,000 5.68% due 10/23/98................ 999,507 1,000,000 5.65% due 04/09/99................ 999,769 1,000,000 5.63% due 05/05/99................ 999,176 2,000,000 5.57% due 05/07/99................ 1,996,721 1,000,000 Student Loan Marketing Association, 5.79% due 09/16/98................ 1,000,057 ------------- 15,992,086 ------------- TOTAL UNITED STATES GOVERNMENT SHORT TERM (Cost $15,992,086).................. 15,992,086 ------------- TOTAL INVESTMENTS (Cost $191,997,558) - 100.58%....... 191,997,558 Other assets and liabilities, net - (0.58%)...................... (1,022,108) ------------- NET ASSETS (equivalent to $1.00 per share on 190,975,450 shares outstanding) - 100% ............... $ 190,975,450 -------------
PAR MARKET VALUE VALUE - -------------------------------------------------------------- NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 190,975,450 shares outstanding................ $ 1,909,754 Additional paid in capital...................... 189,065,696 ------------ NET ASSETS APPLICABLE TO SHARES OUTSTANDING..................................... 190,975,450 ============
129 ================================================================================ MONEY MARKET FUND - FINANCIAL STATEMENTS 75 ================================================================================ STATEMENT OF OPERATIONS For the fiscal year ended May 31, 1998 INVESTMENT INCOME: Interest............................................................. $ 8,554,039 ----------- EXPENSES: Advisory fees........................................................ 752,732 Custodian and accounting services.................................... 32,727 Reports to shareholders.............................................. 11,862 Audit fees and tax services.......................................... 4,093 Directors' fees and expenses......................................... 3,069 Miscellaneous........................................................ 9,824 ----------- Total expenses..................................................... 814,307 ----------- NET INVESTMENT INCOME................................................ 7,739,732 ----------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... $ 7,739,732 ===========
STATEMENT OF CHANGES IN NET ASSETS For the fiscal year ended May 31: 1996 1997 ------------ ------------- OPERATIONS: Net investment income.................................. $ 7,739,732 $ 5,637,643 ------------ ------------- Increase in net assets resulting from operations..... 7,739,732 5,637,643 ------------ ------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income.................................. (7,739,732) (5,637,643) ------------ ------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold....................... 331,782,891 294,478,892 Proceeds from capital stock issued for distributions reinvested.................. 7,739,732 5,637,643 ------------ ------------- 339,522,623 300,116,535 Cost of capital stock repurchased...................... (276,671,818) (255,609,535) ------------ ------------- Increase in net assets resulting from capital stock transactions......................... 62,850,805 44,507,000 ------------ ------------- TOTAL INCREASE IN NET ASSETS........................... 62,850,805 44,507,000 NET ASSETS: Beginning of year...................................... 128,124,645 83,617,645 ------------ ------------ End of year............................................ $190,975,450 $128,124,645 ------------ ------------ CHANGE IN SHARES OUTSTANDING Shares of capital stock sold........................... 331,782,891 294,478,892 Shares issued for distributions reinvested............. 7,739,732 5,637,643 Shares of capital stock repurchased ................... (276,671,818) (255,609,535) ------------ ------------ Increase in shares outstanding....................... 62,850,805 44,507,000 Shares outstanding: Beginning of year.................................... 128,124,645 83,617,645 ------------ ------------ End of year.......................................... 190,975,450 128,124,645 ============ ============
130 ================================================================================ NOTES TO FINANCIAL STATEMENTS 76 ================================================================================ NOTE 1 -- ORGANIZATION The American General Series Portfolio Company (the "Series") consists of thirteen separate investment portfolios (the "Funds"): Stock Index Fund MidCap Index Fund Small Cap Index Fund International Equities Fund Growth Fund Growth & Income Fund Science & Technology Fund Social Awareness Fund Asset Allocation Fund (formerly Timed Opportunity Fund) Capital Conservation Fund Government Securities Fund International Government Bond Fund Money Market Fund The Series is registered under the Investment Company Act of 1940 (the "1940 Act"), as amended, as an open-end management investment company. Each Fund is diversified with the exception of International Government Bond Fund which is non-diversified as defined by the 1940 Act. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"). GAAP requires accruals which occasionally are based upon management estimates. The following is a summary of significant accounting policies consistently followed by each Fund in the preparation of its financial statements. A. INVESTMENT VALUATION Securities listed or traded on a national exchange are valued daily at their last reported sale price. In the absence of any exchange sales on that day and for unlisted issues, securities are valued at the last sale price on the NASDAQ National Market System. In the absence of any National Market System sales on that day, securities are valued at the last reported bid price. However, options written for which other over-the-counter market quotations are readily available are valued at the last reported asked price, in the absence of any National Market System sales on that day. Futures contracts, options thereon, and options on stock indexes are valued at the amount which would be received upon a current disposition of such investments (i.e., their fair market value), in the absence of any sales on that day. Short term debt securities for which market quotations are readily available are valued at the last reported bid price. However, any short term security with a remaining maturity of 60 days or less and all investments of the Money Market Fund are valued by the amortized cost method which approximates fair market value. Investments for which market quotations are not readily available are valued at fair value as determined in good faith by, or under authority delegated by, the Series' Board of Directors. B. OPTIONS AND FUTURES Call and Put Options. When a Fund writes a call or a put option, an amount equal to the premium received is recorded as a liability. The liability is "marked to market" daily to reflect the current market value of the option written. When a written option expires, the Fund realizes a gain in the amount of the premium originally received. If the Fund enters into a closing purchase transaction, the Fund realizes a gain or loss in the amount of the original premium less the cost of the closing transaction. If a written call option is exercised, the Fund realizes a gain or loss from the sale of the underlying security, and the proceeds from such sale are increased by the premium originally received. If a written put option is exercised, the amount of the premium originally received reduces the cost of the security which the Fund purchases upon exercise of the option. Purchased options are recorded as investments. If a purchased option expires, the Fund realizes a loss in the amount of the cost of the option. If the Fund enters into a closing transaction, it realizes a gain (or loss), to the extent that the proceeds from the sale are greater (or less) than the cost of the option. If the Fund exercises a put option, it realizes a gain or loss from the sale of the underlying security by adjusting the proceeds from such sale by the amount of the premium originally paid. If the Fund exercises a call option, the cost of the security purchased upon exercise is increased by the premium originally paid. FUTURES CONTRACTS. The initial margin deposit made upon entering into a futures contract is held by the custodian, in a segregated account, in the name of the broker (the Fund's agent in acquiring the futures position). During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments are received or made daily, as unrealized gains or losses are incurred. When the contract is closed, the Fund realizes a gain or loss in the amount of the cost of or proceeds from the closing transaction less the Fund's basis in the contract. C. REPURCHASE AGREEMENTS The seller of a repurchase agreement collateralizes the agreement with securities delivered to the Fund's custodian bank. The Adviser determines, on a daily basis, that the seller maintains collateral of at least 100% of the repurchase proceeds due to the Fund at maturity. D. FOREIGN CURRENCY TRANSLATION The accounting records of each Fund are maintained in U.S. dollars. Transactions denominated in foreign currencies ("local currencies") are translated into U.S. dollars at prevailing exchange rates on transaction date. Net realized gains or losses on foreign currency transactions include exchange rate gains and losses from disposition of foreign currencies, currency gains and losses realized between trade and settlement dates of security transactions, and currency gains and losses realized on settlement of other assets and liabilities settled in local currencies. In determining realized and unrealized gains or losses on foreign securities for the period, the Funds do not isolate exchange rate fluctuations from local security price fluctuations. Foreign currencies and other assets and liabilities denominated in local currencies are marked-to-market daily to reflect fluctuations in foreign exchange rates. E. FEDERAL INCOME TAXES Each Fund intends to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code and to distribute all of its taxable net investment income and taxable net realized capital gains, in excess of any available capital loss carryovers. Therefore no federal income tax provision is required. 131 ================================================================================ NOTES TO FINANCIAL STATEMENTS 77 ================================================================================ F. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME Investment transactions are accounted for on the trade date. Realized gains and losses are determined on the basis of identified cost. Dividend income is recorded on the ex-dividend date, except for dividend income on certain foreign securities which is recorded when the Fund becomes aware of the dividend. Interest income on investments is accrued daily. G. DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders are recorded on the record date. The Funds declare distributions from net investment income monthly, except for the Money Market Fund, which declares daily. Capital gains distributions are declared annually. Investment income and capital gains and losses are recognized in accordance with generally accepted accounting principles ("book"). Distributions from net investment income and realized capital gains are based on earnings as determined in accordance with federal tax regulations ("tax") which may differ from book basis earnings. At the end of the year, offsetting adjustments to undistributed net investment income and undistributed net realized gains (losses) are made to eliminate permanent book/tax differences arising in the current year. NOTE 3 -- ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES VALIC (the "Adviser") serves as investment adviser to the Series. VALIC is an indirect wholly-owned subsidiary of American General Corporation, Houston, Texas. On May 1, 1992, the Adviser entered into a sub-advisory agreement with Bankers Trust Company ("Bankers Trust"), a wholly-owned subsidiary of Bankers Trust New York Corporation, to serve as investment sub-adviser to the Stock Index Fund, the MidCap Index Fund, and the Small Cap Index Fund. On April 29, 1994, the Adviser entered into sub-advisory agreements with T. Rowe Price Associates, Inc. to serve as investment sub-adviser to the Growth Fund and the Science & Technology Fund, and with Value Line, Inc., to serve as investment sub-adviser to the Growth & Income Fund. Sub-advisers are compensated for such services by the Adviser. The Adviser receives from the Series a monthly fee based on each Fund's average daily net asset value at the following annual rates: for Stock Index Fund, MidCap Index Fund, Small Cap Index Fund and International Equities Fund .35% on the first $500 million and .25% on the excess over $500 million; for Social Awareness Fund, Asset Allocation Fund, Capital Conservation Fund, Government Securities Fund, International Government Bond Fund, and Money Market Fund, .50%; for Growth & Income Fund, .75%; for Growth Fund, .80%; for Science & Technology Fund, .90%. To the extent that any Fund's accrued expenses for a given month exceed, on an annualized basis, 2% of the Fund's average daily net assets, the Adviser will voluntarily reduce expenses of any such Fund by the amount of the excess. The Adviser may withdraw this voluntary undertaking upon 30 days written notice to the Series. On October 31, 1996, the Series entered into an accounting services agreement with VALIC which appointed VALIC as Accounting Services Agent. Under the agreement VALIC will provide, or cause to be provided, certain accounting and administrative services to the Series. During the year ended May 31, 1998, the Series paid VALIC $855,162 for such services provided directly by VALIC. VALIC provided to the Series, at cost, certain services associated with the printing of reports to shareholders. During the fiscal year ended May 31, 1998, the Series paid $10,971 for such services. During the fiscal year ended May 31, 1998, security transactions were affected between the following Funds at the then current market price with no brokerage commissions incurred:
SELLER PURCHASER COST TO PURCHASER NET GAIN TO SELLER - -------------------- ----------------- ----------------- ------------------ MidCap Index Fund Stock Index Fund $20,433,419 $12,850,048 Stock Index Fund MidCap Index Fund 1,016,474 600,277 Small Cap Index Fund MidCap Index Fund 70,400 18,156
At May 31, 1998, VALIC Separate Account A (a registered separate account of VALIC) and VALIC owned over five percent of the outstanding shares of the following Funds:
VALIC SEPARATE ACCOUNT A -------------- Stock Index Fund.............................................. 96.95% MidCap Index Fund............................................. 100.00 Small Cap Index Fund.......................................... 100.00 International Equities Fund................................... 99.96 Growth Fund................................................... 97.69 Growth & Income Fund.......................................... 100.00 Science & Technology Fund..................................... 100.00 Social Awareness Fund......................................... 99.99 Asset Allocation Fund......................................... 99.95 Capital Conservation Fund..................................... 99.47 Government Securities Fund.................................... 100.00 International Government Bond Fund............................ 100.00 Money Market Fund............................................. 100.00
Certain officers and directors of the Series are officers and directors of VALIC or American General Corporation. NOTE 4 -- INVESTMENT ACTIVITY The information in the following table is presented on the basis of cost for federal income tax purposes at May 31,1998.
IDENTIFIED COST GROSS GROSS NET UNREALIZED OF INVESTMENTS UNREALIZED UNREALIZED APPRECIATION OWNED APPRECIATION DEPRECIATION (DEPRECIATION) ------------------------------------------------------------------------ Stock Index Fund .................. $ 1,690,305,856 $ 1,813,294,495 $ 27,807,645 $ 1,785,486,850 MidCap Index Fund ................. 539,426,341 292,072,472 29,012,775 263,059,697 Small Cap Index Fund .............. 191,880,517 70,403,693 16,527,699 53,875,994 International Equities Fund ....... 116,325,350 60,941,263 23,709,405 37,231,858 Growth Fund ....................... 823,952,075 305,250,052 26,051,256 279,198,796 Growth & Income Fund .............. 204,371,731 73,811,981 6,885,909 66,926,072 Science & Technology Fund ......... 933,282,452 138,508,705 46,951,932 91,556,773 Social Awareness Fund ............. 286,826,157 51,590,026 4,970,871 46,619,155 Asset Allocation Fund ............. 155,071,503 45,808,444 1,941,441 43,867,003 Capital Conservation Fund ......... 61,317,620 1,963,553 719,071 1,244,482 Government Securities Fund ........ 87,388,386 3,087,643 71,621 3,016,022 International Government Bond Fund ...................... 158,458,728 5,390,646 11,950,134 (6,559,488) Money Market Fund ................. 191,997,558 -- -- --
The following net realized capital loss carryforwards at May 31, 1998, may be utilized to offset future capital gains.
CAPITAL LOSS CARRYFORWARD EXPIRATION THROUGH ---------------------------------------------- Capital Conservation Fund........... $ 517,286 May 31, 2003 Government Securities Fund.......... 1,734,344 May 31, 2003 Money Market Fund................... 3,017 May 31, 2004
132 ================================================================================ NOTES TO FINANCIAL STATEMENTS 78 ================================================================================ During the period, the cost of purchases and proceeds from sales of securities, excluding short term securities were:
Cost of Proceeds from Securities Securities Sold Purchased or Matured -------------- -------------- Stock Index Fund........................ $ 405,413,872 $ 87,617,371 MidCap Index Fund....................... 213,029,461 185,622,455 Small Cap Index Fund.................... 100,497,790 84,751,878 International Equities Fund............. 13,855,496 51,338,982 Growth Fund............................. 573,707,759 381,931,725 Growth & Income Fund.................... 206,759,036 183,186,836 Science & Technology Fund............... 1,381,981,685 1,140,937,153 Social Awareness Fund................... 399,387,329 277,756,979 Asset Allocation Fund................... 40,901,054 54,286,294 Capital Conservation Fund............... 8,777,152 14,450,296 Government Securities Fund.............. 24,632,462 20,475,563 International Government Bond Fund...... 27,372,470 43,955,348
NOTE 5 -- PORTFOLIO SECURITIES LOANED To realize additional income, a Fund may lend portfolio securities with a value of up to 30% (33 1/3% in the case of Growth Fund and Science & Technology Fund) of its total assets. Any such loans will be continuously secured by collateral consisting of cash or U.S. Government securities, maintained in a segregated account, at least equal to the market value of the securities loaned. The risks in lending portfolio securities, as with other extensions of secured credit, consist of possible 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. Loans by a Fund will only be made to broker-dealers deemed by the Custodian to be creditworthy and will not be made unless, in the judgment of the Adviser, the consideration to be earned from such loans would justify the risk. Each Fund receives income earned on the securities loaned during the lending period and a portion of the interest or rebate earned on the collateral received. Portfolio securities on loan at May 31, 1998 are summarized as follows:
Market Value Collateral Value ------------ ---------------- Stock Index Fund....................... $ 11,699,781 $ 12,181,300 MidCap Index Fund...................... 14,927,604 15,530,058 Small Cap Index Fund................... 13,684,195 14,319,771 International Equities Fund............ 4,623,275 4,761,605 Growth & Income Fund................... 5,454,666 5,732,494 Science & Technology Fund.............. 26,557,536 27,784,445 Social Awareness Fund.................. 893,750 920,000 Asset Allocation Fund.................. 439,690 456,252 Capital Conservation Fund.............. 2,102,551 2,148,400 ------------ ---------------- Total............................... $ 80,383,048 $ 83,834,325 ------------ ----------------
NOTE 6 -- INVESTMENT CONCENTRATION A significant portion of Government Securities Fund's investments may be in U.S. Government sponsored securities. No assurance can be given that the U.S. Government will provide support to such U.S. Government sponsored agencies or instrumentalities in the future since it is not required to do so by law. As a result of the Fund's concentration in such investments, it may be subject to risks associated with U.S. Government sponsored securities. At May 31, 1998, Government Securities Fund had 62% of its net assets invested in such securities. At May 31, 1998, International Government Bond Fund had 21% of its net assets invested in securities issued by the Government of Japan and an additional 5% in issues of companies located in Japan and/or denominated in Japanese Yen. Future economic and political developments in a foreign country could adversely affect the liquidity and value of foreign securities or the currency exchange rates from which foreign currencies are translated. 133 ================================================================================ FINANCIAL HIGHLIGHTS 79 ================================================================================ Per share data is for a share of capital stock outstanding throughout the period. Total return includes reinvestment of dividends on the reinvestment date. Total returns and ratios for periods of less than one year are not annualized. The average commission rate paid on investment equity securities (on a per share basis) is presented for the periods beginning June 1, 1996. STOCK INDEX FUND
FISCAL YEAR ENDED MAY 31, ---------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- -------------- ---------- PER SHARE DATA Net asset value at beginning of period ....... $ 26.09 $ 20.69 $ 16.81 $ 14.39 $ 14.36 ---------- ---------- ---------- -------------- ---------- Income from investment operations: Net investment income .................... 0.40 0.39 0.39 0.37 0.35 Net realized and unrealized gain on securities ........................... 7.44 5.57 4.26 2.45 0.12 ---------- ---------- ---------- -------------- ---------- Total income from investment operations .. 7.84 5.96 4.65 2.82 0.47 ---------- ---------- ---------- -------------- ---------- Distributions: Distributions from net investment income .................................. (0.40) (0.39) (0.38) (0.37) (0.35) Distributions from net realized gain on securities ........................... (0.15) (0.17) (0.39) (0.03) (0.09) ---------- ---------- ---------- -------------- ---------- Total distributions ...................... (0.55) (0.56) (0.77) (0.40) (0.44) ---------- ---------- ---------- -------------- ---------- Net asset value at end of period ............. $ 33.38 $ 26.09 $ 20.69 $ 16.81 $ 14.39 ---------- ---------- ---------- -------------- ---------- TOTAL RETURN ................................. 30.30% 29.24% 28.17% 19.98% 3.29% ========== ========== ========== ============== ========== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .... 0.31% 0.34% 0.35% 0.38% 0.39% Ratio of net investment income to average net assets ........................ 1.33% 1.76% 2.05% 2.44% 2.44% Portfolio turnover rate .................... 3% 3% 3% 14% 3% Number of shares outstanding at end of period (000's) ......................... 104,334 93,687 85,117 75,451 75,494 Net assets at end of period (000's) ........ $3,482,655 $2,444,200 $1,760,786 $ 1,267,992 $1,086,459 Average net assets during the period (000's) ............................ $2,968,059 $2,019,826 $1,498,398 $ 1,140,085 $1,030,581 Average commission rate paid ............... $ 0.0238 $ 0.0281 n/a n/a n/a
MIDCAP INDEX FUND
FISCAL YEAR ENDED MAY 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- PER SHARE DATA Net asset value at beginning of period ....... $ 20.83 $ 19.09 $ 15.68 $ 14.54 $ 14.38 -------- -------- -------- -------- -------- Income from investment operations: Net investment income .................... 0.23 0.24 0.24 0.26 0.23 Net realized and unrealized gain on securities ........................... 5.80 2.95 4.06 1.59 0.28 -------- -------- -------- -------- -------- Total income from investment operations .. 6.03 3.19 4.30 1.85 0.51 -------- -------- -------- -------- -------- Distributions: Distributions from net investment income .................................. (0.23) (0.24) (0.24) (0.26) (0.23) Distributions from net realized gain on securities ........................... (1.36) (1.21) (0.65) (0.45) (0.12) -------- -------- -------- -------- -------- Total distributions ...................... (1.59) (1.45) (0.89) (0.71) (0.35) -------- -------- -------- -------- -------- Net asset value at end of period ............. $ 25.27 $ 20.83 $ 19.09 $ 15.68 $ 14.54 -------- -------- -------- -------- -------- TOTAL RETURN ................................. 29.62% 17.48% 28.10% 13.26% 3.52% ======== ======== ======== ======== ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .... 0.36% 0.40% 0.41% 0.44% 0.46% Ratio of net investment income to average net assets ........................ 0.95% 1.24% 1.36% 1.73% 1.62% Portfolio turnover rate .................... 26% 19% 21% 23% 17% Number of shares outstanding at end of period (000's) ......................... 31,830 29,137 28,322 25,988 24,001 Net assets at end of period (000's) ........ $804,318 $607,061 $540,688 $407,557 $349,041 Average net assets during the period (000's) ............................ $722,652 $554,397 $477,372 $376,486 $285,247 Average commission rate paid ............... $ 0.0278 $ 0.0277 n/a n/a n/a
134 ================================================================================ FINANCIAL HIGHLIGHTS CONTINUED 80 ================================================================================ Per share data is for a share of capital stock outstanding throughout the period. Total return includes reinvestment of dividends on the reinvestment date. Total returns and ratios for periods of less than one year are not annualized. The average commission rate paid on investment equity securities (on a per share basis) is presented for the periods beginning June 1, 1996. SMALL CAP INDEX FUND
FISCAL YEAR ENDED MAY 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- PER SHARE DATA Net asset value at beginning of period ........ $ 16.18 $ 16.25 $ 12.49 $ 11.52 $ 11.28 -------- -------- -------- -------- -------- Income from investment operations: Net investment income ...................... 0.19 0.19 0.20 0.17 0.13 Net realized and unrealized gain on securities ............................ 3.17 0.93 4.04 0.97 0.58 -------- -------- -------- -------- -------- Total income from investment operations ............................... 3.36 1.12 4.24 1.14 0.71 -------- -------- -------- -------- -------- Distributions: Distributions from net investment income ... (0.19) (0.19) (0.20) (0.17) (0.13) Distributions from net realized gain on securities ............................ (1.41) (1.00) (0.28) -- (0.34) -------- -------- -------- -------- -------- Total distributions ......................... (1.60) (1.19) (0.48) (0.17) (0.47) -------- -------- -------- -------- -------- Net asset value at end of period .............. $ 17.94 $ 16.18 $ 16.25 $ 12.49 $ 11.52 ======== ======== ======== ======== ======== TOTAL RETURN .................................. 21.34% 7.51% 34.50% 9.98% 6.18% ======== ======== ======== ======== ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets ....... 0.39% 0.41% 0.41% 0.44% 0.47% Ratio of net investment income to average net assets .......................... 1.05% 1.34% 1.36% 1.44% 1.10% Portfolio turnover rate ....................... 36% 42% 31% 34% 16% Number of shares outstanding at end of period (000's) ....................... 13,777 11,893 11,129 10,136 9,381 Net assets at end of period (000's) .......... $247,183 $192,459 $180,785 $126,567 $108,050 Average net assets during the period (000's) .. $227,757 $178,368 $150,448 $120,298 $ 70,690 Average commission rate paid .................. $ 0.0162 $ 0.0297 n/a n/a n/a
INTERNATIONAL EQUITIES FUND
FISCAL YEAR ENDED MAY 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- PER SHARE DATA Net asset value at beginning of period .................. $ 11.44 $ 11.15 $ 10.42 $ 10.14 $ 8.99 -------- -------- -------- -------- -------- Income from investment operations: Net investment income ................................ 0.23 0.20 0.17 0.15 0.11 Net realized and unrealized gain on securities and foreign currencies ............... 0.85 0.63 0.97 0.34 1.17 -------- -------- -------- -------- -------- Total income from investment operations ........................................ 1.08 0.83 1.14 0.49 1.28 -------- -------- -------- -------- -------- Distributions: Distributions from net investment income ............. (0.24) (0.19) (0.17) (0.15) (0.11) Distributions from net realized gain on securities ...................................... (0.33) (0.35) (0.24) (0.06) (0.02) -------- -------- -------- -------- -------- Total distributions .................................. (0.57) (0.54) (0.41) (0.21) (0.13) -------- -------- -------- -------- -------- Net asset value at end of period ........................ $ 11.95 $ 11.44 $ 11.15 $ 10.42 $ 10.14 ======== ======== ======== ======== ======== TOTAL RETURN ............................................ 9.92% 7.74% 11.14% 4.92% 14.31% ======== ======== ======== ======== ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets ................. 0.40% 0.42% 0.42% 0.45% 0.47% Ratio of net investment income to average net assets .................................... 1.92% 1.75% 1.65% 1.47% 1.43% Portfolio turnover rate ................................. 9% 12% 20% 14% 7% Number of shares outstanding at end of period (000's) ................................. 13,009 15,857 18,497 20,074 17,273 Net assets at end of period (000's)...................... $155,469 $181,437 $206,259 $209,091 $175,183 Average net assets during the period (000's) ............ $165,984 $191,117 $204,792 $199,235 $117,264 Average commission rate paid ............................ $ 0.0332 $ 0.0236 n/a n/a n/a
135 ================================================================================ FINANCIAL HIGHLIGHTS CONTINUED 81 ================================================================================ Per share data is for a share of capital stock outstanding throughout the period. Total return includes reinvestment of dividends on the reinvestment date. Total returns and ratios for periods of less than one year are not annualized. The average commission rate paid on investment equity securities (on a per share basis) is presented for the periods beginning June 1, 1996. GROWTH FUND
PERIOD FROM FISCAL YEAR ENDED MAY 31, APRIL 29, 1994 ----------------------------------------------------- TO 1998 1997 1996 1995 MAY 31, 1994 ----------- -------- --------- --------- ------------ PER SHARE DATA Net asset value at beginning of period ........... $ 17.62 $ 16.49 $ 11.43 $ 9.87 $ 10.00(1) ----------- -------- --------- --------- ------- Income (loss) from investment operations: Net investment (loss) income ................. (0.02) 0.02 0.11 0.04 0.01 Net realized and unrealized gain (loss) on securities ............................... 4.82 1.45 5.27 1.56 (0.13) ----------- -------- --------- --------- ------- Total income (loss) from investment operations .................................. 4.80 1.47 5.38 1.60 (0.12) ----------- -------- --------- --------- ------- Distributions: Distributions from net investment income ..... (0.01) (0.01) (0.09) (0.04) (0.01) Distributions from net realized gain (loss) on securities ............................... (0.33) (0.33) (0.23) -- -- ----------- --------- --------- --------- ------- Total distributions .......................... (0.34) (0.34) (0.32) (0.04) (0.01) ----------- --------- --------- --------- ------- Net asset value at end of period ................. $ 22.08 $ 17.62 $ 16.49 $ 11.43 $ 9.87 =========== ========= ========= ========= ======= TOTAL RETURN ..................................... 27.41% 9.00% 47.46% 16.25% (1.19)% =========== ========= ========= ========= ======= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets ........ 0.84% 0.86% 0.83% 0.91% 0.08% Ratio of net investment (loss) income to average net assets ............................ (0.11%) 0.09% 0.89% 0.41% 0.11% Portfolio turnover rate ........................ 43% 40% 36% 61% 0% Number of shares outstanding at end of period (000's) ............................. 49,832 42,422 25,826 8,800 1,001 Net assets at end of period (000's) ............ $1,100,137 $747,654 $425,787 $100,614 $ 9,885 Average net assets during the period (000's) ... $ 946,335 $588,056 $238,228 $ 42,232 $ 9,944 Average commission rate paid ................... $ 0.0474 $ 0.0499 n/a n/a n/a
(1) The net asset value at the beginning of the period is as of commencement of operations on April 29, 1994. GROWTH & INCOME FUND
PERIOD FROM FISCAL YEAR ENDED MAY 31, APRIL 29, 1994 ----------------------------------------------------- TO 1998 1997 1996 1995 MAY 31, 1994 --------- --------- -------- -------- ---------- PER SHARE DATA Net asset value at beginning of period ........... $ 16.86 $ 14.78 $ 11.09 $ 9.87 $10.00(1) --------- --------- -------- -------- ------ Income (loss) from investment operations: Net investment income ........................ 0.08 0.10 0.08 0.09 0.02 Net realized and unrealized gain (loss) on securities ............................... 3.26 2.38 3.77 1.22 (0.13) --------- --------- -------- -------- ------ Total income (loss) from investment operations .................................. 3.34 2.48 3.85 1.31 (0.11) --------- --------- -------- -------- ------ Distributions: Distributions from net investment income ..... (0.08) (0.10) (0.07) (0.09) (0.02) Distributions from net realized gain (loss) on securities ............................... (0.21) (0.29) (0.09) -- -- --------- --------- --------- -------- ------ Total distributions .......................... (0.29) (0.39) (0.16) (0.09) (0.02) --------- --------- --------- -------- ------ Net asset value at end of period ................. $ 19.91 $ 16.87 $ 14.78 $ 11.09 $ 9.87 ========= ========= ========= ======== ====== TOTAL RETURN ..................................... 19.87% 17.08% 34.85% 13.35% (1.11)% ========= ========= ========= ======== ====== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets ........ 0.80% 0.81% 0.79% 0.86% 0.07% Ratio of net investment income to average net assets ............................ 0.43% 0.70% 0.63% 0.93% 0.22% Portfolio turnover rate ........................ 78% 45% 64% 97% 11% Number of shares outstanding at end of period (000's) ............................. 13,619 12,422 7,685 3,867 1,002 Net assets at end of period (000's) ............ $271,159 $209,545 $113,546 $42,867 $9,890 Average net assets during the period (000's) ... $252,647 $161,226 $ 75,158 $21,910 $9,946 Average commission rate paid ................... $ 0.0500 $ 0.0500 n/a n/a n/a
(1) The net asset value at the beginning of the period is as of commencement of operations on April 29, 1994. 136 ================================================================================ FINANCIAL HIGHLIGHTS CONTINUED 82 ================================================================================ Per share data is for a share of capital stock outstanding throughout the period. Total return includes reinvestment of dividends on the reinvestment date. Total returns and ratios for periods of less than one year are not annualized. The average commission rate paid on investment equity securities (on a per share basis) is presented for the periods beginning June 1, 1996. SCIENCE & TECHNOLOGY FUND
PERIOD FROM FISCAL YEAR ENDED MAY 31, APRIL 29, 1994 ----------------------------------------------------- TO 1998 1997 1996 1995 MAY 31, 1994 ----------- --------- --------- --------- -------------- PER SHARE DATA Net asset value at beginning of period .......... $ 19.88 $ 20.48 $ 14.43 $ 9.83 $ 10.00(1) ----------- --------- --------- --------- -------- Income (loss) from investment operations: Net investment (loss) income ................ (0.09) -- -- 0.03 -- Net realized and unrealized gain (loss) on securities and foreign currencies ....... 2.28 0.33 8.08 4.72 (0.17) ----------- --------- --------- --------- -------- Total income (loss) from investment operations ................................. 2.19 0.33 8.08 4.75 (0.17) ----------- --------- --------- --------- -------- Distributions: Distributions from net investment income .... -- -- -- (0.02) -- Distributions from net realized gain on securities .............................. -- (0.93) (2.03) (0.13) -- ----------- --------- --------- --------- -------- Total distributions .......................... -- (0.93) (2.03) (0.15) -- ----------- --------- --------- --------- -------- Net asset value at end of period ................ $ 22.07 $ 19.88 $ 20.48 $ 14.43 $ 9.83 =========== ========= ========= ========= ======== TOTAL RETURN .................................... 10.85% 1.81% 58.28% 48.61% (1.66)% =========== ========= ========= ========= ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets ....... 0.95% 0.96% 0.94% 1.00% 0.08% Ratio of net (loss) investment income to average net assets ........................... (0.46)% (0.29)% (0.07)% 0.36% 0.04% Portfolio turnover rate ....................... 128% 122% 116% 121% 0% Number of shares outstanding at end of period (000's) ............................ 46,355 40,484 27,696 11,550 1,001 Net assets at end of period (000's) ........... $ 1,023,141 $ 804,982 $ 567,187 $ 166,683 $ 9,834 Average net assets during the period (000's) .. $ 949,947 $ 664,608 $ 363,087 $ 64,974 $ 9,918 Average commission rate paid .................. $ 0.0455 $ 0.0393 n/a n/a n/a
(1) The net asset value at the beginning of the period is as of commencement of operations on April 29, 1994. SOCIAL AWARENESS FUND
FISCAL YEAR ENDED MAY 31, ---------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- -------- -------- -------- PER SHARE DATA Net asset value at beginning of period ....... $ 17.90 $ 15.49 $ 13.02 $ 11.98 $ 12.12 --------- --------- -------- -------- -------- Income from investment operations: Net investment income .................... 0.23 0.24 0.26 0.27 0.26 Net realized and unrealized gain (loss) on securities ........................... 5.07 4.19 3.37 1.75 (0.02) --------- --------- -------- -------- -------- Total income from investment operations .. 5.30 4.43 3.63 2.02 0.24 --------- --------- -------- -------- -------- Distributions: Distributions from net investment income .................................. (0.23) (0.24) (0.25) (0.27) (0.26) Distributions from net realized gain on securities ........................... (0.81) (1.78) (0.91) (0.71) (0.12) --------- --------- -------- -------- -------- Total distributions ...................... (1.04) (2.02) (1.16) (0.98) (0.38) --------- --------- -------- -------- -------- Net asset value at end of period ............. $ 22.16 $ 17.90 $ 15.49 $ 13.02 $ 11.98 ========= ========= ======== ======== ======== TOTAL RETURN ................................. 30.34% 30.48% 28.85% 18.19% 1.97% ========= ========= ======== ======== ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .... 0.54% 0.56% 0.56% 0.58% 0.60% Ratio of net investment income to average net assets ........................ 1.17% 1.53% 1.80% 2.22% 2.19% Portfolio turnover rate .................... 120% 109% 117% 148% 83% Number of shares outstanding at end of period (000's) ......................... 15,080 8,677 5,220 4,143 3,817 Total net assets at end of period (000's) .. $ 334,167 $ 155,349 $ 80,887 $ 53,927 $ 45,729 Average net assets during the period (000's) ............................ $ 240,782 $ 106,139 $ 66,888 $ 47,942 $ 41,002 Average commission rate paid ............... $ 0.0431 $ 0.0400 n/a n/a n/a
137 ================================================================================ FINANCIAL HIGHLIGHTS CONTINUED 83 ================================================================================ Per share data is for a share of capital stock outstanding throughout the period. Total return includes reinvestment of dividends on the reinvestment date. Total returns and ratios for periods of less than one year are not annualized. The average commission rate paid on investment equity securities (on a per share basis) is presented for the periods beginning June 1, 1996. ASSET ALLOCATION FUND
FISCAL YEAR ENDED MAY 31, --------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- ------------- ------------- ------------- PER SHARE DATA Net asset value at beginning of period ....... $ 12.57 $ 12.55 $ 11.24 $ 10.84 $ 11.18 --------- --------- ------------- ------------- ------------- Income from investment operations: Net investment income .................... 0.41 0.77 0.44 0.44 0.37 Net realized and unrealized gain (loss) on securities ........................... 2.24 1.44 1.53 0.82 (0.15) --------- --------- ------------- ------------- ------------- Total income from investment operations .. 2.65 2.21 1.97 1.26 0.22 --------- --------- ------------- ------------- ------------- Distributions: Distributions from net investment income .................................. (0.41) (0.78) (0.44) (0.44) (0.37) Distributions from net realized gain on securities ........................... (0.79) (1.41) (0.22) (0.42) (0.19) --------- --------- ------------- ------------- ------------- Total distributions ...................... (1.20) (2.19) (0.66) (0.86) (0.56) --------- --------- ------------- ------------- ------------- Net asset value at end of period ............. $ 14.02 $ 12.57 $ 12.55 $ 11.24 $ 10.84 ========= ========= ============= ============= ============= TOTAL RETURN ................................. 21.94% 15.89% 17.90% 12.43% 1.86% ========= ========= ============= ============= ============= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .... 0.54% 0.57% 0.57% 0.58% 0.59% Ratio of net investment income to average net assets ........................ 3.02% 3.26% 3.62% 4.03% 3.24% Portfolio turnover rate .................... 24% 103% 119% 133% 76% Number of shares outstanding at end of period (000's) ......................... 14,269 14,107 15,142 16,319 17,956 Total net assets at end of period (000's) .. $ 200,099 $ 177,347 $ 190,024 $ 183,393 $ 194,576 Average net assets during the period (000's) ............................ $ 188,184 $ 179,615 $ 187,576 $ 186,487 $ 185,036 Average commission rate paid ............... $ 0.0205 $ 0.0401 n/a n/a n/a
CAPITAL CONSERVATION FUND
FISCAL YEAR ENDED MAY 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- --------- PER SHARE DATA Net asset value at beginning of period ....... $ 9.31 $ 9.23 $ 9.52 $ 9.13 $ 9.87 -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income .................... 0.61 0.62 0.62 0.63 0.61 Net realized and unrealized gain (loss) on securities ........................... 0.37 0.08 (0.29) 0.39 (0.69) -------- -------- -------- -------- -------- Total income (loss) from investment operations .............................. 0.98 0.70 0.33 1.02 (0.08) -------- -------- -------- -------- -------- Distributions: Distributions from net investment income .................................. (0.61) (0.62) (0.62) (0.63) (0.61) Distributions from net realized gain on securities ........................... -- -- -- -- (0.05) -------- -------- -------- -------- -------- Total distributions ...................... (0.61) (0.62) (0.62) (0.63) (0.66) -------- -------- -------- -------- -------- Net asset value at end of period ............. $ 9.68 $ 9.31 $ 9.23 $ 9.52 $ 9.13 ======== ======== ======== ======== ======== TOTAL RETURN ................................. 10.76% 7.75% 3.41% 11.80% (1.13)% ======== ======== ======== ======== ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .... 0.54% 0.57% 0.57% 0.58% 0.59% Ratio of net investment income to average net assets ........................ 6.32% 6.59% 6.47% 6.88% 6.24% Portfolio turnover rate .................... 14% 45% 80% 100% 55% Number of shares outstanding at end of period (000's) ......................... 6,577 7,168 7,604 6,935 6,712 Total net assets at end of period (000's) .. $ 63,654 $ 66,747 $ 70,212 $ 66,031 $ 61,305 Average net assets during the period (000's) ............................ $ 66,996 $ 69,352 $ 70,271 $ 61,568 $ 59,210
138 ================================================================================ FINANCIAL HIGHLIGHTS CONTINUED 84 ================================================================================ Per share data is for a share of capital stock outstanding throughout the period. Total return includes reinvestment of dividends on the reinvestment date. Total returns and ratios for periods of less than one year are not annualized. The average commission rate paid on investment equity securities (on a per share basis) is presented for the periods beginning June 1, 1996. GOVERNMENT SECURITIES FUND
FISCAL YEAR ENDED MAY 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- PER SHARE DATA Net asset value at beginning of period ....... $ 9.67 $ 9.61 $ 9.89 $ 9.55 $ 10.30 -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income .................... 0.58 0.59 0.61 0.60 0.55 Net realized and unrealized gain (loss) on securities ........................... 0.42 0.06 (0.28 0.35 (0.59) -------- -------- -------- -------- -------- Total income (loss) from investment operations .............................. 1.00 0.65 0.33 0.95 (0.04) -------- -------- -------- -------- -------- Distributions: Distributions from net investment income .................................. (0.58) (0.59) (0.61) (0.61) (0.55) Distributions from net realized gain on securities ........................... -- -- -- -- (0.16) -------- -------- -------- -------- -------- Total distributions ...................... (0.58) (0.59) (0.61) (0.61) (0.71) -------- -------- -------- -------- -------- Net asset value at end of period ............. $ 10.09 $ 9.67 $ 9.61 $ 9.89 $ 9.55 ======== ======== ======== ======== ======== TOTAL RETURN ................................. 10.60% 6.94% 3.32% 10.43% (0.66)% ======== ======== ======== ======== ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .... 0.54% 0.56% 0.56% 0.58% 0.59% Ratio of net investment income to average net assets ........................ 5.82% 6.11% 6.21% 6.36% 5.44% Portfolio turnover rate .................... 24% 38% 36% 229% 85% Number of shares outstanding at end of period (000's) ......................... 9,129 8,672 8,164 5,478 4,544 Total net assets at end of period (000's) .. $ 92,120 $ 83,827 $ 78,423 $ 54,174 $ 43,401 Average net assets during the period (000's) ............................ $ 87,574 $ 83,293 $ 68,017 $ 45,200 $ 41,596
INTERNATIONAL GOVERNMENT BOND FUND
FISCAL YEAR ENDED MAY 31, ---------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- -------- -------- PER SHARE DATA Net asset value at beginning of period ....... $ 11.33 $ 11.79 $ 12.72 $ 10.97 $ 11.16 --------- --------- --------- -------- -------- Income (loss) from investment operations: Net investment income .................... 0.56 0.63 0.65 0.65 0.62 Net realized and unrealized gain (loss) on securities and foreign currencies .... (0.26) (0.49) (0.89) 1.80 (0.20) --------- ---------- --------- -------- -------- Total income (loss) from investment operations .............................. 0.30 0.14 (0.24) 2.45 0.42 --------- ---------- --------- -------- -------- Distributions: Distributions from net investment income .................................. (0.20) (0.58) (0.68) (0.70) (0.60) Distributions from net realized gain on securities ........................... (0.01) (0.02) (0.01) -- (0.01) --------- ---------- --------- -------- -------- Total distributions .................... (0.21) (0.60) (0.69) (0.70) (0.61) --------- ---------- --------- -------- -------- Net asset value at end of period ............. $ 11.42 $ 11.33 $ 11.79 $ 12.72 $ 10.97 ========= ========== ========= ======== ======== TOTAL RETURN ................................. 2.65% 1.13% (1.91)% 23.23% 3.87% ========= ========== ========= ======== ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .... 0.55% 0.56% 0.56% 0.59% 0.48% Ratio of net investment income to average net assets ........................ 4.70% 5.13% 5.45% 5.83% 5.87% Portfolio turnover rate .................... 17% 4% 11% 6% 3% Number of shares outstanding at end of period (000's) ......................... 13,646 15,680 12,073 6,111 3,741 Total net assets at end of period (000's) .. $ 155,783 $ 177,709 $ 142,383 $ 77,734 $ 41,028 Average net assets during the period (000's) ............................ $ 168,439 $ 166,147 $ 114,693 $ 51,451 $ 33,561
139 ================================================================================ FINANCIAL HIGHLIGHTS CONTINUED 85 ================================================================================ Per share data is for a share of capital stock outstanding throughout the period. Total return includes reinvestment of dividends on the reinvestment date. MONEY MARKET FUND
FISCAL YEAR ENDED MAY 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- --------- --------- -------- PER SHARE DATA Net asset value at beginning of period ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ---------- ---------- --------- --------- -------- Income from investment operations: Net investment income ..................... 0.05 0.05 0.05 0.05 0.03 ---------- ---------- --------- --------- -------- Distributions: Distributions from net investment income .. (0.05) (0.05) (0.05) (0.05) (0.03) ---------- ---------- --------- --------- -------- Net asset value at end of period .............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ========== ========== ========= ========= ======== TOTAL RETURN .................................. 5.25% 5.02% 5.26% 4.90% 2.83% ========== ========== ========= ========= ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets ..... 0.54% 0.57% 0.57% 0.57% 0.58% Ratio of net investment income to average net assets ......................... 5.14% 4.95% 5.14% 4.75% 2.78% Number of shares outstanding at end of period (000's) ............................. 190,975 128,125 83,618 82,256 50,534 Total net assets at end of period (000's) ... $ 190,975 $ 128,125 $ 83,618 $ 82,254 $ 50,533 Average net assets during the period (000's) ............................. $ 150,625 $ 113,882 $ 84,271 $ 67,021 $ 46,222
=============================================================================== REPORT OF INDEPENDENT AUDITORS =============================================================================== TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF AMERICAN GENERAL SERIES PORTFOLIO COMPANY We have audited the accompanying statements of net assets of Stock Index Fund, MidCap Index Fund, Small Cap Index Fund, International Equities Fund, Growth Fund, Growth & Income Fund, Science & Technology Fund, Social Awareness Fund, Asset Allocation Fund (formerly the Timed Opportunity Fund), Capital Conservation Fund, Government Securities Fund, International Government Bond Fund, and Money Market Fund (such "Funds" comprising the American General Series Portfolio Company) as of May 31, 1998. We have also audited for each of the Funds the related statement of operations for the year ended May 31, 1998, the statement of changes in net assets for each of the two years in the period ended May 31, 1998, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Company'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 financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 1998, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the respective Funds comprising the American General Series Portfolio Company at May 31, 1998, the results of their operations and the changes in their net assets for the periods identified above, and the financial highlights for each of the periods indicated therein, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Houston, Texas July 2, 1998 140 American General Series Portfolio Company BOARD OF DIRECTORS Norman Hackerman John W. Lancaster Ben H. Love Joe C. Osborne F. Robert Paulsen Peter V. Tuters R. Miller Upton Thomas L. West, Jr. DISTRIBUTOR The Variable Annuity Marketing Company (VAMCO) 2929 Allen Parkway Houston, Texas 77019 CUSTODIAN State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 INVESTMENT ADVISER The Variable Annuity Life Insurance Company (VALIC) 2929 Allen Parkway Houston, Texas 77019 INVESTMENT SUB-ADVISERS Bankers Trust Company 1 Bankers Trust Plaza New York, New York 10006 T. Rowe Price Associates, Inc. 100 East Pratt Street Baltimore, Maryland 21202 Value Line, Inc. 220 East 42nd Street New York, New York 10017-5891 Independent Auditors Ernst & Young LLP 1221 McKinney Houston, Texas 77010 SHAREHOLDER SERVICE AGENT The Variable Annuity Life Insurance Company (VALIC) 2929 Allen Parkway Houston, Texas 77019 OFFICERS Thomas L. West, Jr., Chairman and President Craig R. Rodby, Executive Vice President Michael G. Atnip, Executive Vice President Norman Jaskol, Vice President and Senior Investment Officer Brent C. Nelson, Vice President Maruti D. More, Vice President and Investment Officer Teresa S. Moro, Vice President and Investment Officer John W. Mossbarger, Vice President and Investment Officer Leon A. Olver, Vice President and Investment Officer William Trimbur, Jr., Vice President and Investment Officer Cynthia A. Toles, General Counsel and Secretary Gregory R. Seward, Treasurer Kathryn A. Pearce, Controller Nori L. Gabert, Assistant Secretary Jaime M. Sepulveda, Assistant Treasurer Earl E. Allen, Jr., Assistant Treasurer Donna L. Hathaway, Assistant Controller Cynthia A. Gibbons, Assistant Vice President This report is for the information of the shareholders and variable contract owners participating in the American General Series Portfolio Company. It is authorized for distribution to other persons only when preceded or accompanied by an effective prospectus which contains information on how to purchase shares and other pertinent information. If you would like further information about this material or products issued by VALIC or American General Life Insurance Company, please contact your account representative. "Standard & Poor's(R)", "Standard & Poor's MidCap 400 Index" and "S&P 500(R)" are trademarks of Standard & Poor's Corporation. The Stock Index Fund and MidCap Index Fund are not sponsored, endorsed, sold or promoted by S&P and S&P makes no representation regarding the advisability of investing in the funds. The Russell 2000(R) Index is a trademark/service mark of the Frank Russell Company. Russell(TM) is a trademark of the Frank Russell Company. (C)1998 The Variable Annuity Life Insurance Company, Houston Texas VALIC is a registered service mark of The Variable Annuity Life Insurance Company. 141 America's Retirement Plan Specialists(SM) [VALIC LOGO] (R) PRINTED MATTER PRINTED IN U.S.A. VA9017-1 REV 2/99 The Variable Annuity Life Insurance Company, Houston, Texas APPENDIX D AMERICAN GENERAL SERIES PORTFOLIO COMPANY SEMI-ANNUAL REPORT DATED NOVEMBER 30, 1998 SEMI-ANNUAL REPORT NOVEMBER 30, 1998 American General Series Portfolio Company [FRONT COVER] ================================================================================ AMERICAN GENERAL SERIES PORTFOLIO COMPANY - SEMI-ANNUAL REPORT NOVEMBER 30, 1998 ================================================================================ TABLE OF CONTENTS CHAIRMAN'S LETTER............................................................... 1 STOCK INDEX FUND................................................................ 4 MIDCAP INDEX FUND............................................................... 12 SMALL CAP INDEX FUND............................................................ 19 INTERNATIONAL EQUITIES FUND..................................................... 36 GROWTH FUND..................................................................... 42 GROWTH & INCOME FUND............................................................ 45 SCIENCE & TECHNOLOGY FUND....................................................... 49 SOCIAL AWARENESS FUND........................................................... 52 ASSET ALLOCATION FUND........................................................... 59 CAPITAL CONSERVATION FUND....................................................... 68 GOVERNMENT SECURITIES FUND...................................................... 71 INTERNATIONAL GOVERNMENT BOND FUND.............................................. 73 MONEY MARKET FUND............................................................... 78 NOTES TO FINANCIAL STATEMENTS................................................... 81 FINANCIAL HIGHLIGHTS............................................................ 84 SUPPLEMENTARY INFORMATION....................................................... 90
================================================================================ AGSPC CHAIRMAN'S LETTER 1 ================================================================================ Dear Valued Customer, It is my pleasure to introduce American General Series Portfolio Company's (AGSPC) November 30, 1998 Semi-Annual Report for your review. In this report, you will find financial and performance information for AGSPC's 13 funds for the six-month period ending November 30, 1998. Through your variable annuity contract, you are permitted to invest in one or more of the funds described in this report. Please refer to the chart on page three to determine which funds are available under your contract. MARKET CONDITIONS The six-month period ended November 30 was a volatile period for securities markets. Specifically, the third calendar quarter (contained in the period) was a wake-up call to many investors who expected the U.S. bull market to rage on ad infinitum. The Standard & Poor's 500 Index (S&P 500(R)) closed down 10% for the quarter, making it the first down quarter in over three years and by far the worst quarter in eight years. The negative impact of the overseas markets on U.S. shores deepened with the economic crises in Japan, other points in Asia, and emerging markets acting as the main catalyst. For the quarter, the average diversified domestic equity portfolio declined a negative 15% and the average diversified international equity portfolio lost 16%. Fortunately, the third-quarter performance was a market correction, and very-strong equity market performance in October and November served to more than offset it. As a result, equity market returns for the entire six months ended November 30 were favorable, and the S&P 500 displayed a 7.49% total return for the period. Although it was a good period for the overall equity market, it was a difficult environment for active equity managers who seek to maintain broadly diversified portfolios relative to the S&P 500, because the strong performance of large-cap stocks far outran that of the mid-cap and small-cap sectors. To illustrate, the Lipper Mid-Cap Funds Index and Small-Cap Funds Index showed negative returns of 5% and 14%, respectively, for the six-month period. On the fixed income side, the market shrugged off the disruptive effect of Long-Term Capital Management's debacle in August, and enjoyed a low-inflation environment and a Fed easing of interest rates. As a result, the bond market returns, as reflected in the Lehman Aggregate Bond Index's 5% total return for the period, was favorable. FUND RETURNS (1) Indexed Funds Indexed Funds are designed to emulate the performance of their respective indices. All four of our equity indexed funds provided slightly better than index returns. o The large capitalization Stock Index Fund returned 7.83% before expenses, with a positive tracking difference of 0.34 over the S&P 500 Index. o Although S&P 500 Index returns were positive, both MidCap S&P 400 and SmallCap Russell 2000(R) Indices had negative returns. However, our MidCap Index Fund tracked the MidCap 400(R) with a positive 0.30 difference, returning -1.26% before expenses. o Similarly, the Small Cap Index Fund tracked the Russell 2000 Index with a positive 0.46~variance, returning -11.89% before expenses. o The International Equities Fund tracked the EAFE Index with a positive 0.10 difference and returned 0.44% before expenses. Managed Funds o The Science & Technology Fund was our best performing managed stock fund, as it returned 10.21%, 2.72 above the S&P 500 Index before expenses. o The Social Awareness Fund was the next best performing managed stock fund, with a return of 7.30%, 0.19 below the S&P 500 Index before expenses. The absence of tobacco stocks in the Fund detracted from the performance, as tobacco stocks were the best performing group in the S&P 500 Index with a return of about 50%. o AGSPC's Growth Fund which concentrates on companies with above average growth potential in the service sectors, recorded a negative return of 2.88% before expenses with a difference of 10.37 below the S&P 500. The fund return was negatively impacted because of the holdings largely in the mid-cap media service sector, which underperformed large-cap stocks. o The Growth & Income Fund utilizes the stock selection process of the Value Line Ranking System which tends to emphasis small and mid-sized companies. The fund underperformed the larger capitalization issues in the S&P 500 by 10.06 with a return of -2.57% before expenses. o The Asset Allocation Fund returned 5.26% and underperformed the relevant blended Index by 1.65 before expenses. Due to the flight to quality, bonds lagged while stocks tracked their ~relevant indices. Bond Funds In general, bond funds underperformed the relevant indices due to flight to quality concerns brought on by crises in Russia, Southeast Asia, Brazil, and the Long-Term Capital hedge fund recapitalization. o The best relative return was produced by the Money Market Fund with a return of 2.81%, ~0.50 over the NYC CD Index. o International Government Bond returned 11.33%, and underperformed the relevant Index by 0.43. o The Government Securities Fund returned 5.77%, and underperformed the long term Treasury Index by 1.14 due to spread widening in Agency Securities. o The Capital Conservation Fund returned 2.93%, and underperformed the relevant Corporate Bond Index by 1.27 due to spread widening associated with less liquid corporate bonds. All bond fund returns are before expenses. FUTURE OUTLOOK While international markets outside of North America and Europe remain unsettled, the U. S. economy is experiencing unprecedented prosperity. The Western European economy should get an additional boost by the introduction of the common currency, the Euro, at the start of 1999. Furthermore, with worldwide inflation rates low, and the Fed wary of weakness in Asia and emerging markets, it appears that we can expect a continuation of the current stable rate environment. As a result, the outlook for bond and equity markets is excellent. In fact, some of our equity portfolios may even get a boost in future performance from a "snap back" in the valuations of small and mid-cap issues relative to the very large-cap issues that have led the market in recent quarters. Additionally, the larger-than-expected U.S. Government budget surplus is bullish for bond markets. In short, the future looks promising. With the prospect of another good year ahead, I hope that you will continue to trust your future with us. I assure you that we continue to strive to provide you with a variety of quality options to meet your investment needs. In today's environment of rapidly changing markets, the commitment to your financial security remains American General Series Portfolio Company's highest priority. Thank you for your continued confidence in our ability to invest your funds wisely. Sincerely, /s/ THOMAS L. WEST, JR. Thomas L. West, Jr., Chairman January 21, 1999 American General Series Portfolio Company FUND RETURNS(1) TO INDEX 6 Months Ended 11/30/98 [GRAPH] (1) Represents fund performance before subtracting expenses. See page two for applicable fund expenses and fund level returns after expenses. ================================================================================ 2 AGSPC CHAIRMAN'S LETTER CONTINUED ================================================================================ FUND RETURNS AND TRACKING DIFFERENCES For the six months ended November 30, 1998
(1) (2) (3) (4) (5) FUND TOTAL PERFORMANCE INDEX BEFORE RETURN SUBTRACTING INCLUDING TRACKING FUND FUND EXPENSES REINVESTED DIFFERENCE AGSPC FUND/RELEVANT MARKET INDEX RETURN(a) EXPENSES (1) + (2) DIVIDENDS (3) - (4) - -------------------------------- --------- -------- --------- --------- --------- INDEXED FUNDS: Stock Index Fund / S&P 500 .............................. 7.67% 0.16% 7.83% 7.49% 0.34 MidCap Index Fund / Standard & Poor's MidCap 400 ........................... (1.42) 0.16 (1.26) (1.56) 0.30 Small Cap Index Fund / Russell 2000...................... (12.09) 0.20 (11.89) (12.35) 0.46 International Equities Fund / EAFE ...................... 0.23 0.21 0.44 0.34 0.10 MANAGED FUNDS: Growth Fund / S&P 500 ................................... (3.31) 0.43 (2.88) 7.49 (10.37) Growth & Income Fund / S&P 500 .......................... (2.97) 0.40 (2.57) 7.49 (10.06) Science & Technology Fund / S&P 500 ..................... 9.74 0.47 10.21 7.49 2.72 Social Awareness Fund / S&P 500 ......................... 7.02 0.28 7.30 7.49 (0.19) Asset Allocation Fund / Benchmark(b) .................... 4.98 0.28 5.26 6.91 (1.65) Capital Conservation Fund / Merrill Lynch Corporate Master Bond .................... 2.65 0.28 2.93 4.20 (1.27) Government Securities Fund / Lehman Brothers U.S. Treasury .......................... 5.49 0.28 5.77 6.91 (1.14) International Government Bond Fund / Salomon Brothers Non U.S. Gov't Bond ................... 11.05 0.28 11.33 11.76 (0.43) Money Market Fund / 30 Day Certificate of Deposit Primary Offering Rate by New York City Banks (NYC 30 Day CD Rate).................................... 2.53 0.28 2.81 2.31 0.50
(a) Fund level returns are net of investment management fees and other fund expenses, but ~do not reflect charges specified in annuity contracts for mortality and expense guarantees, administrative fees, or surrender charges. (b) Benchmark consists of 55% S&P 500 Index, 35% Merrill Lynch Corporate and Government Master Index, and 10% NYC 30 Day CD Rate. SUMMARY OF NET ASSET VALUES PER SHARE AND PER SHARE DISTRIBUTIONS
DISTRIBUTIONS FROM NET INVESTMENT INCOME AND NET REALIZED GAINS NET ASSET VALUES ON SECURITIES --------------------------------- ----------------------- (UNAUDITED) (UNAUDITED) NOVEMBER 30, MAY 31, NOVEMBER 30, 12/1/97 TO 6/1/98 TO FUND 1997 1998 1998 5/31/98 11/30/98 - ---- ------------ ------- ------------- ---------- --------- Stock Index (emulate S&P 500)................................... $29.38 $33.38 $35.73 $ 0.36 $ 0.20 MidCap Index (emulate MidCap 400) .............................. 23.98 25.27 24.79 1.47 0.11 Small Cap Index (emulate Russell 2000).......................... 18.32 17.94 15.67 1.50 0.10 International Equities (foreign long term growth stocks) ............................. 10.83 11.95 11.84 0.43 0.13 Growth Fund (long term growth of capital) ...................... 20.01 22.08 21.35 0.34 0.00 Growth & Income Fund (long term growth of capital and current income) ................................ 19.20 19.91 19.28 0.25 0.04 Science & Technology Fund (long term growth of capital) ................................................... 20.98 22.07 24.22 0.00 0.00 Social Awareness (social criteria growth stocks) ............... 20.12 22.16 23.60 0.93 0.11 Asset Allocation (asset allocation) ............................ 13.65 14.02 14.51 1.00 0.20 Capital Conservation (quality corporate bonds) ................. 9.61 9.68 9.64 0.32 0.30 Government Securities (intermediate and long term government bonds) ................................... 9.99 10.09 10.36 0.29 (0.28) International Government Bond (high quality foreign government debt securities) ........................... 11.27 11.42 12.50 0.02 0.18 Money Market (money market instruments) ........................ 1.00 1.00 1.00 0.02 0.03
The change in net asset value of the funds will not be the same as the change in the accumulation unit value of your annuity contract because (1) the change in net asset value does not reflect the reinvestment of income and capital gain distributions and (2) the mortality and expense charges described in your annuity contract are not included. ================================================================================ AGSPC CHAIRMAN'S LETTER CONTINUED 3 ================================================================================ FUNDS AVAILABLE UNDER VARIABLE ANNUITY CONTRACTS
AMERICAN GENERAL LIFE VALIC SEPARATE ACCOUNT A CONTRACT FORM INSURANCE COMPANY ------------------------------------------------------------------ ------------------- SEPARATE ACCOUNT A PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO INDEPEN- GROUP ------------------- DIRECTOR DIRECTOR DIRECTOR DIRECTOR DENCE UNIT NON FUND PLUS 2 1 T PLUS IMPACT PURCHASE QUALIFIED QUALIFIED - ---- --------- --------- --------- --------- -------- ------- -------- --------- --------- Stock Index (emulate S&P 500)..................... Yes Yes Yes Yes Yes Yes Yes Yes Yes MidCap Index (emulate MidCap 400).................. Yes No Yes No Yes Yes No Yes Yes Small Cap Index (emulate Russell 2000)................ Yes No Yes Yes Yes No No No No International Equities (foreign long term growth stocks...... Yes No Yes No Yes No No No No Growth (long term growth of capital)......... Yes Yes Yes Yes No No No No No Growth & Income (long term growth of capital and current income.. Yes No Yes No No No No No No Science & Technology (long term growth of capital)......... Yes Yes Yes Yes No No No No No Social Awareness (social criteria growth stocks)....... Yes Yes Yes Yes Yes No No No No Asset Allocation (asset allocation).................... Yes No Yes Yes Yes Yes No Yes Yes Capital Conversation (quality corporate bonds)............ Yes No Yes No Yes Yes No Yes Yes Government Securities (intermediate and long term government bonds)....... Yes No Yes No Yes No No Yes Yes Int'l Government Bond (high quality foreign government debt securities.... Yes Yes Yes No Yes No No No No Money Market (money market instruments)............ Yes Yes Yes Yes Yes Yes No Yes Yes AMERICAN GENERAL LIFE INSURANCE COMPANY ------------------------------------------------------------------------------- PLATINUM AMERICAN SEPARATE PLATINUM INVESTOR PPVUL AMERICAN GENERAL ACCOUNT SELECT INVESTOR VARIABLE LEGACY ESTATE GENERAL SIGNATURE FUND B RESERVE I & II ANNUALLY PLUS MANAGER SIGNATURE II-A - ---- -------- ------- --------- -------- ------ ------- --------- --------- Stock Index (emulate S&P 500)..................... Yes No Yes Yes No No No Yes MidCap Index (emulate MidCap 400).................. Yes No Yes Yes No No No Yes Small Cap Index (emulate Russell 2000)................ No No No No No No No No International Equities (foreign long term growth stocks...... No No Yes Yes No No No Yes Growth (long term growth of capital)......... No No No No No No No No Growth & Income (long term growth of capital and current income.. No No No No No No No No Science & Technology (long term growth of capital)......... No No No No No No No No Social Awareness (social criteria growth stocks)....... No No No No No No No No Asset Allocation (asset allocation).................... Yes No No No No No No No Capital Conversation (quality corporate bonds)............ Yes No No No No No No No Government Securities (intermediate and long term government bonds)....... Yes No No No No No No No Int'l Government Bond (high quality foreign government debt securities.... No No No No No No No No Money Market (money market instruments)............ Yes Yes Yes Yes Yes Yes Yes Yes
================================================================================ STOCK INDEX FUND - STATEMENT OF NET ASSETS 4 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ----- COMMON STOCKS - 99.14% ADVERTISING - 0.18% 43,350 Interpublic Group Cos., Inc........................... $ 2,980,312 71,700 Omnicom Group, Inc.................................... 3,831,469 ------------ 6,811,781 ------------ AEROSPACE/DEFENSE - 1.43% 407,008 Boeing Co............................................. 16,534,700 29,000 EG & G, Inc........................................... 810,187 61,260 General Dynamics Corp................................. 3,556,908 15,400 Goodrich (B.F.) Co.................................... 584,238 87,576 Lockheed Martin Corp.................................. 9,086,010 30,800 Northrop Grumman Corp................................. 2,502,500 155,000 Raytheon Co. Class B.................................. 8,583,125 49,800 TRW Inc............................................... 2,742,113 101,300 United Technologies Corp.............................. 10,858,094 ------------ 55,257,875 ------------ AIRLINES - 0.34% 72,600* AMR Corp.............................................. 4,787,063 63,200 Delta Air Lines, Inc.................................. 3,393,050 124,200 Southwest Airlines Co................................. 2,670,300 41,300* US Airways Group, Inc................................. 2,147,600 ------------ 12,998,013 ------------ APPAREL & PRODUCTS - 0.04% 2* Abercrombie and Fitch Co.............................. 112 27,000* Fruit of the Loom, Inc. Class A....................... 398,250 32,900 Liz Claiborne, Inc.................................... 1,114,488 ------------ 1,512,850 ------------ APPLIANCES/FURNISHINGS - 0.09% 35,000 Maytag Corp........................................... 1,894,375 30,200 Whirlpool Corp........................................ 1,691,200 ------------ 3,585,575 ------------ AUTO - CARS - 1.16% 460,300 Ford Motor Co......................................... 25,431,575 279,600 General Motors Corp................................... 19,572,000 ------------ 45,003,575 ------------ AUTO - ORIGINAL EQUIPMENT - 0.06% 54,400 Danaher Corp.......................................... 2,482,000 ------------
NUMBER MARKET OF SHARES VALUE --------- ----- AUTO - REPLACEMENT PARTS - 0.24% 73,900* AutoZone, Inc......................................... $ 2,226,237 18,700 Cooper Tire & Rubber Co............................... 365,819 74,400 Genuine Parts Co...................................... 2,450,550 73,500 Goodyear Tire & Rubber Co............................. 4,171,125 15,800 Pep Boys-Manny, Moe & Jack............................ 223,175 1* SPX Corp. (fractional share).......................... 26 ------------ 9,436,932 ------------ BANKS - NEW YORK CITY - 1.71% 337,200 Bank of New York Co., Inc............................. 11,549,100 923,271 Citigroup Inc......................................... 46,336,663 76,100 J. P. Morgan & Co. Inc................................ 8,133,188 ------------ 66,018,951 ------------ BANKS - OTHER - 3.55% 727,321 BankAmerica Corp...................................... 47,412,237 136,800 BankBoston Corp....................................... 5,694,300 404,000 First Union Corp...................................... 24,543,000 232,386 Fleet Financial Group, Inc............................ 9,687,591 116,500 Mellon Bank Corp...................................... 7,332,219 133,000 National City Corp.................................... 8,944,250 51,600 Providian Financial Corp.............................. 4,737,525 28,000 Republic of New York Corp............................. 1,309,000 53,500 Union Planters Corp................................... 2,547,938 703,930 Wells Fargo Company................................... 25,341,480 ------------ 137,549,540 ------------ BANKS - REGIONAL - 3.01% 471,550 Bank One Corp......................................... 24,196,409 349,764 Chase Manhattan Corp.................................. 22,188,154 67,950 Comerica Inc.......................................... 4,382,775 106,275 Fifth Third Bancorp................................... 7,054,003 65,560 Huntington Bancshares, Inc............................ 1,942,215 180,040 KeyCorp............................................... 5,524,978 51,500 Mercantile Bancorporation Inc......................... 2,269,219 53,900 Northern Trust Corp................................... 4,352,425 135,900 PNC Bank Corp......................................... 7,007,344 84,400 Regions Financial Corp................................ 3,270,500 61,200 State Street Corp..................................... 4,199,850 84,200 Summit Bancorporation................................. 3,520,613 72,200 SunTrust Banks, Inc................................... 5,040,463 102,150 Synovus Financial Corp................................ 2,253,684 301,390 U.S. Bancorp.......................................... 11,094,919
NUMBER MARKET OF SHARES VALUE --------- ----- BANKS - REGIONAL - Continued 95,713 Wachovia Corp......................................... $ 8,356,941 ------------ 116,654,492 ------------ BEVERAGE - BREWERS/DISTRIBUTORS - 0.49% 11,900 Adolph Coors Class B.................................. 592,025 202,800 Anheuser-Busch Companies, Inc......................... 12,294,750 18,915 Brown-Forman Corp Class B............................. 1,376,066 135,500 Seagram Co. Ltd....................................... 4,649,344 ------------ 18,912,185 ------------ BEVERAGE - SOFT DRINKS - 2.60% 998,400 Coca-Cola Co.......................................... 69,950,400 160,600 Coca Cola Enterprises, Inc............................ 6,072,687 630,900 PepsiCo, Inc.......................................... 24,407,944 ------------ 100,431,031 ------------ BROADCASTING - 1.57% 311,858* CBS Corp.............................................. 9,297,266 89,900* Clear Channel Communications.......................... 4,202,825 141,750 Comcast Corp. Class A Special......................... 6,892,594 241,000* Media One Group Inc................................... 9,760,500 197,178 Tele-Comm Liberty Media Group Class A.............................................. 8,330,771 223,193 U S WEST, Inc......................................... 13,893,764 126,400* Viacom, Inc Class B................................... 8,413,500 ------------ 60,791,220 ------------ BUILDING MATERIALS - 0.35% 8,900 Armstrong World Inds. Inc............................. 592,962 150,600 Lowe's Companies, Inc................................. 6,362,850 162,800 Masco Corp............................................ 4,700,850 60,700 Sherwin-Williams Co................................... 1,722,363 ------------ 13,379,025 ------------ CHEMICAL - MAJOR - 1.52% 92,200 Dow Chemical Co....................................... 8,977,975 449,100 E.I. du Pont de Nemours and Co........................ 26,384,625 47,500 Hercules, Inc......................................... 1,561,562 249,000 Monsanto Co........................................... 11,282,812 54,900 Morton International, Inc............................. 1,616,119 66,500 PPG Industries, Inc................................... 4,068,969 54,900 Rohm and Haas Co...................................... 1,918,069 68,300 Union Carbide Corp.................................... 3,056,425 ------------ 58,866,556 ------------
================================================================================ STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED NOVEMBER 30, 1998 (UNAUDITED) 5 ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ------------ CHEMICAL - MISCELLANEOUS - 0.37% 84,200 Air Products and Chemicals Inc........................ $ 3,210,125 45,837 Eastman Chemical Co................................... 2,655,681 27,600 Ecolab Inc............................................ 853,875 15,300* FMC Corp.............................................. 889,312 41,400 W.R. Grace & Co....................................... 683,100 26,500 Great Lakes Chem Corp................................. 1,058,344 15,428 Millipore Corp........................................ 433,913 20,300 Nalco Chemical Co..................................... 678,781 64,700 Praxair, Inc.......................................... 2,470,731 39,500 Sigma Aldrich Corp.................................... 1,268,938 ------------ 14,202,800 ------------ CONGLOMERATES - 1.11% 232,500 Allied Signal Inc..................................... 10,230,000 38,800 ITT Inds, Inc......................................... 1,396,800 39,400 Loews Corp............................................ 3,940,000 125,000 RJR Nabisco Holdings Corp............................. 3,601,563 65,200 Tenneco Inc........................................... 2,322,750 58,300 Textron Inc........................................... 4,529,181 256,667 Tyco International Ltd................................ 16,891,896 ------------ 42,912,190 ------------ CONSUMER FINANCE - 0.25% 26,300 Capital One Financial Corp............................ 2,893,000 306,412 MBNA Corp............................................. 6,951,722 ------------ 9,844,722 ------------ CONTAINERS - METAL/GLASS - 0.23% 4,700 Ball Corp............................................. 200,925 101,100 Corning Inc........................................... 4,056,638 65,600 Crown Cork & Seal Co., Inc............................ 2,214,000 12,100 Owens Corning......................................... 451,481 61,200* Owens-Illinois, Inc................................... 1,966,050 ------------ 8,889,094 ------------ CONTAINERS - PAPER - 0.08% 6,500 Bemis Co., Inc........................................ 245,781 46,814 Sealed Air Corp....................................... 2,065,668 17,700 Temple-Inland Inc..................................... 950,269 ------------ 3,261,718 ------------ COSMETICS/TOILETRIES - 0.73% 6,800 Alberto-Culver Co. Class B............................ 174,250 123,700 Avon Products, Inc.................................... 5,025,313 444,700 Gillette Co........................................... 20,428,406
NUMBER MARKET OF SHARES VALUE --------- ------------ COSMETICS/TOILETRIES - Continued 60,000 Int'l. Flavors & Fragrances,.......................... $ 2,512,500 ------------ 28,140,469 ------------ DRUGS - 8.68% 36,000 Allergan, Inc......................................... 2,191,500 43,200* ALZA Corp............................................. 2,257,200 555,800 American Home Products Corp........................... 29,596,350 103,400* Amgen Inc............................................. 7,780,850 23,900 Bausch & Lomb Inc..................................... 1,326,450 405,200 Bristol Myers Squibb Co............................... 49,662,325 448,600 Eli Lilly and Co...................................... 40,233,813 482,200 Merck & Co., Inc...................................... 74,680,725 219,870 Pharmacia & Upjohn, Inc............................... 11,446,982 528,000 Pfizer, Inc........................................... 58,938,000 307,000 Schering-Plough Corp.................................. 32,657,125 326,700 Warner-Lambert Co..................................... 24,665,850 ------------ 335,437,170 ------------ ELECTRICAL EQUIPMENT - 3.66% 92,284 AMP Inc............................................... 4,464,238 62,000* Cabletron Systems, Inc................................ 868,000 189,000 Emerson Electric Co................................... 12,285,000 1,322,700 General Electric Co................................... 119,704,350 28,400 W. W. Grainger Inc.................................... 1,199,900 30,500 National Service Indus., Inc.......................... 1,178,063 48,300 Raychem Corp.......................................... 1,645,219 6,800 Thomas & Betts Corp................................... 294,525 ------------ 141,639,295 ------------ ELECTRONIC INSTRUMENTS - 0.10% 1* Commscope Inc......................................... 15 27,100 Perkin-Elmer Corp..................................... 2,527,075 5,400 Tektronix, Inc........................................ 144,788 70,400* Thermo Electron Corp.................................. 1,188,000 ------------ 3,859,878 ------------ ENTERTAINMENT - 1.53% 849,756 Walt Disney Co........................................ 27,351,521 39,400 Harrah's Entertainment, Inc........................... 613,163 67,475 Hasbro, Inc........................................... 2,365,842 49,400* King World Productions, Inc........................... 1,346,150 119,187 Mattel, Inc........................................... 4,119,401 220,200 Time Warner Inc....................................... 23,286,150 ------------ 59,082,227 ------------
NUMBER MARKET OF SHARES VALUE --------- ------------ FINANCE COMPANIES - 0.72% 148,200 Associates First Capital Corp......................... $ 11,541,075 223,065 Household International, Inc.......................... 8,727,418 96,350 SunAmerica, Inc....................................... 7,635,738 ------------ 27,904,231 ------------ FINANCIAL SERVICES - 0.56% 180,400 American Express Co................................... 18,051,275 40,100 H & R Block Inc....................................... 1,801,994 39,800 Countrywide Credit Ind Inc............................ 1,970,100 ------------ 21,823,369 ------------ FOODS - 1.95% 225,951 Archer Daniels Midland Co............................. 4,151,849 117,100 BestFoods............................................. 6,806,437 174,400 Campbell Soup Co...................................... 9,962,600 199,800 ConAgra, Inc.......................................... 6,281,212 62,300 General Mills, Inc.................................... 4,703,650 156,350 H J Heinz Co.......................................... 9,117,159 47,000 Hershey Foods Corp.................................... 3,160,750 162,800 Kellogg Co............................................ 5,962,550 79,380 Pioneer Hi-Bred Int'l, Inc............................ 2,376,439 60,900 Quaker Oats Co........................................ 3,737,738 142,800 Ralston Purina Co..................................... 4,971,225 182,600 Sara Lee Corp......................................... 10,659,275 42,500 Wm. Wrigley Jr. Co.................................... 3,745,313 ------------ 75,636,197 ------------ FOOTWEAR - 0.08% 73,700 NIKE, Inc. Class B.................................... 2,948,000 18,900* Reebok International Ltd.............................. 301,219 ------------ 3,249,219 ------------ FREIGHT - 0.13% 60,560* FDX Corp.............................................. 3,928,830 37,200 Ryder System, Inc..................................... 1,062,525 ------------ 4,991,355 ------------ FUNERAL SERVICES - 0.08% 83,800 Service Corp. International........................... 3,132,025 ------------ GOLD MINING - 0.14% 151,700 Barrick Gold Corp..................................... 3,034,000 52,100 Battle Mountain Gold Co............................... 244,218 86,400 Homestake Mining Co................................... 928,800
================================================================================ STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 6 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ----- GOLD MINING - 0.14% - Continued 93,800 Placer Dome Inc....................................... $ 1,365,963 ------------ 5,572,981 ------------ GOVERNMENT SPONSORED - 1.32% 272,600 Federal Home Loan Mortg. Corp......................... 16,492,300 433,700 Federal National Mortgage Asso........................ 31,551,675 67,800 SLM Holding Corp...................................... 2,983,200 ------------ 51,027,175 ------------ HARDWARE & TOOLS - 0.10% 40,100 Black & Decker Corp................................... 2,172,918 11,550 Snap-on Inc........................................... 392,700 42,600 Stanley Works......................................... 1,301,963 ------------ 3,867,581 ------------ HEALTHCARE - 0.52% 89,700 Cardinal Health, Inc.................................. 6,155,662 58,500* HCR Manor Care Inc.................................... 1,857,375 180,800* HealthSouth Corp...................................... 2,429,500 65,300* Humana Inc............................................ 1,293,756 68,600 IMS Helath Inc........................................ 4,553,325 87,500 United HealthCare Corp................................ 3,948,438 ------------ 20,238,056 ------------ HEAVY DUTY TRUCKS/PARTS - 0.19% 17,300 Cummins Engine Co., Inc............................... 642,262 52,988 Dana Corp............................................. 2,066,532 37,800 Eaton Corp............................................ 2,582,213 20,110* Navistar International Corp........................... 520,346 35,710 PACCAR Inc............................................ 1,624,805 ------------ 7,436,158 ------------ HOME BUILDERS - 0.05% 30,300 Centex Corp........................................... 1,081,331 14,456 Kaufman & Broad Home Corp............................. 364,110 15,800 Pulte Corp............................................ 401,913 ------------ 1,847,354 ------------ HOSPITAL MANAGEMENT - 0.26% 250,484 Columbia/HCA Healthcare Corp.......................... 6,168,168 13,100 Shared Med Systems Corp............................... 686,113 105,200* Tenet Healthcare Corp................................. 3,109,975 ------------ 9,964,256 ------------
NUMBER MARKET OF SHARES VALUE --------- ----- HOSPITAL SUPPLIES - 2.92% 631,000 Abbott Laboratories................................... $ 30,288,000 8,400 Bard (C. R.), Inc..................................... 384,825 117,800 Baxter International Inc.............................. 7,487,662 117,300 Becton, Dickinson and Co.............................. 4,985,250 64,100 Biomet, Inc........................................... 2,451,825 140,954* Boston Scientific Corp................................ 6,977,223 550,400 Johnson & Johnson..................................... 44,720,000 30,000 Mallinckrodt, Inc..................................... 969,375 200,900 Medtronic, Inc........................................ 13,598,419 37,833* St Jude Medical, Inc.................................. 1,099,522 ------------ 112,962,101 ------------ HOUSEHOLD PRODUCTS - 2.65% 43,200 Clorox Co............................................. 4,797,900 127,300 Colgate-Palmolive Co.................................. 10,900,062 173,100 Minnesota Mining & Mfg. Co............................ 13,902,093 59,000 Newell Co............................................. 2,610,750 537,852 Procter & Gamble Co................................... 47,129,282 68,600 Rubbermaid, Inc....................................... 2,268,088 35,300 Tupperware Corp....................................... 615,544 260,800 Unilever N V - ADR.................................... 20,163,100 ------------ 102,386,819 ------------ INFORMATION PROCESSING - 0.18% 189,800 HBO & Co.............................................. 4,733,138 136,200* Parametric Technology Corp............................ 2,315,400 ------------ 7,048,538 ------------ INFORMATION PROCESSING - BUSINESS SOFTWARE - 3.73% 87,300* BMC Software, Inc..................................... 4,457,756 1,015,700* Microsoft Corp........................................ 123,915,400 412,687* Oracle Corp........................................... 14,134,530 92,600* Peoplesoft Inc........................................ 1,904,088 ------------ 144,411,774 ------------ INFORMATION PROCESSING - COMPUTER HARDWARE SYSTEMS - 1.78% 61,400 Apple Computer, Inc................................... 1,960,962 685,049 Compaq Computer Corp.................................. 22,264,093 530,400* Dell Computer Corp.................................... 32,254,950 58,100* Silicon Graphics, Inc................................. 711,725 155,600 Sun Microsystems, Inc................................. 11,524,125 ------------ 68,715,855 ------------
NUMBER MARKET OF SHARES VALUE --------- ----- INFORMATION PROCESSING - COMPUTER SERVICES - 0.72% 132,800 Automatic Data Processing, Inc........................ $ 10,225,600 27,452* Ceridian Corp......................................... 1,786,095 196,400 Electronic Data Systems Corp. New..................... 7,659,600 182,654 First Data Corp....................................... 4,874,579 65,800 Paychex, Inc.......................................... 3,273,550 ------------ 27,819,424 ------------ INFORMATION PROCESSING - DATA SERVICES - 4.25% 1 A.C. Nielson.......................................... 27 38,200* Adobe Systems Inc..................................... 1,709,450 27,800 Autodesk, Inc......................................... 1,011,225 329,421* Cendant Corp.......................................... 6,258,999 211,230 Computer Associates Int'l............................. 9,346,927 52,800* Computer Sciences Corp................................ 3,016,200 213,500* E M C Corp............................................ 15,478,750 60,000* Gateway 2000, Inc..................................... 3,367,500 420,800 Hewlett Packard Co.................................... 26,405,200 51,400 Honeywell Inc......................................... 4,108,787 380,100 International Business Machine........................ 62,716,500 164,900* Novell, Inc .......................................... 2,731,156 112,900 Pitney Bowes Inc...................................... 6,322,400 116,400* Seagate Technology.................................... 3,433,800 104,100* Unisys Corp........................................... 2,966,850 142,300 Xerox Corp............................................ 15,297,250 ------------ 164,171,021 ------------ INFORMATION PROCESSING - NETWORKING - 1.54% 82,700* Ascend Communications Inc............................. 4,646,706 635,475* Cisco Systems, Inc.................................... 47,898,928 45,300* General Insturment Corp............................... 1,274,063 145,500* 3Com Corp............................................. 5,629,031 ------------ 59,448,728 ------------ INSURANCE - CASUALTY - 0.37% 73,700 Chubb Corp............................................ 5,163,606 27,800 Progressive Corp...................................... 4,124,825 58,000 SAFECO Corp........................................... 2,490,375 74,842 St. Paul Companies, Inc............................... 2,638,181 ------------ 14,416,987 ------------
================================================================================ STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED NOVEMBER 30, 1998 (UNAUDITED) 7 ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ----- INSURANCE - LIFE - 0.61% 71,892 Aetna Inc............................................. $ 5,558,150 165,188 Conseco Inc........................................... 5,471,853 66,112 Jefferson-Pilot Corp.................................. 4,512,144 43,900 Lincoln National Corp................................. 3,673,881 54,900 Torchmark Corp........................................ 2,086,200 21,209 Transamerica Corp..................................... 2,253,456 ------------ 23,555,684 ------------ INSURANCE - MISCELLANEOUS - 0.44% 32,100 General Re Corp....................................... 7,495,350 57,100 MBIA, Inc............................................. 3,697,225 51,200 MGIC Investment Corp.................................. 2,249,600 67,400 UNUM Corp............................................. 3,631,175 ------------ 17,073,350 ------------ INSURANCE - MULTILINE - 2.12% 367,640 Allstate Corp......................................... 14,981,329 422,440 American International Gp. Inc........................ 39,709,360 55,100 Aon Corp.............................................. 3,175,137 86,900 CIGNA Corp............................................ 6,761,906 54,000 Cincinnati Financial Corp............................. 2,109,375 115,000 Hartford Financial Svcs Group......................... 6,346,563 119,850 Marsh & McLennan Companies Inc........................ 6,973,772 54,100 Provident Companies Inc............................... 2,079,469 ------------ 82,136,911 ------------ LEISURE TIME - 0.04% 17,900 Brunswick Corp........................................ 393,800 70,900* Mirage Resorts, Inc................................... 1,054,638 ------------ 1,448,438 ------------ LODGING - 0.13% 108,800 Hilton Hotels Corp.................................... 2,366,400 94,000 Marriott International Inc............................ 2,761,250 ------------ 5,127,650 ------------ MACHINE TOOLS - 0.01% 4,700 Milacron Inc.......................................... 95,175 ------------ MACHINERY - AGRICULTURE - 0.12% 41,700 Case Corp............................................. 1,011,225 108,300 Deere & Co............................................ 3,783,731 ------------ 4,794,956 ------------
NUMBER MARKET OF SHARES VALUE --------- ----- MACHINERY - CONSTRUCTION & CONTRACTS - 0.25% 153,000 Caterpillar Inc....................................... $ 7,563,937 31,900 Fluor Corp............................................ 1,365,719 29,000 Foster Wheeler Corp................................... 496,625 10,800 Harnischfeger Industries Inc.......................... 108,000 ------------ 9,534,281 ------------ MACHINERY - INDUSTRIAL/SPECIALTY - 0.51% 1,600 Aeroquip-Vickers, Inc................................. 58,200 14,600 Briggs & Stratton Corp................................ 736,387 42,700 Cooper Industries, Inc................................ 2,097,638 95,600 Dover Corp............................................ 3,405,750 89,400 Illinois Tool Works Inc............................... 5,682,488 67,700 Ingersoll-Rand Co..................................... 3,169,206 32,000 Johnson Controls, Inc................................. 1,852,000 59,533 Pall Corp............................................. 1,384,142 33,375 Parker Hannifin Corp.................................. 1,159,781 12,800 Timken Co............................................. 246,400 ------------ 19,791,992 ------------ MEDICAL TECHNOLOGY - 0.15% 68,900 Guidant Corp.......................................... 5,912,481 ------------ MERCHANDISE - DRUG - 0.59% 151,200 CVS Corp.............................................. 7,465,500 16,600 Longs Drug Stores Corp................................ 591,375 100,600 Rite Aid Corp......................................... 4,665,325 191,400 Walgreen Co........................................... 10,275,788 ------------ 22,997,988 ------------ MERCHANDISE - SPECIALTY - 2.00% 41,000 American Greetings Corp. Class A...................... 1,734,812 40,900 Circuit City Stores, Inc.............................. 1,480,068 53,600* Consolidated Stores Corp.............................. 1,152,400 95,522* CostCo Companies, Inc................................. 5,994,005 71,500 Dollar General Corp................................... 1,702,594 74,400 Fortune Brands, Inc................................... 2,534,250 164,700 Gap, Inc.............................................. 12,115,744 608,400 Home Depot, Inc....................................... 30,267,900 89,900 Ikon Office Solutions Inc............................. 876,525 973 Jostens, Inc.......................................... 22,805 63,200* Kohl's Corp........................................... 3,108,650 84,773 Limited, Inc.......................................... 2,453,119 79,200 Nordstrom, Inc........................................ 2,950,200 113,000* Staples, Inc.......................................... 3,947,938
NUMBER MARKET OF SHARES VALUE --------- ----- MERCHANDISE - SPECIALTY - Continued 108,000 TJX Companies, Inc.................................... $ 2,767,500 33,600 Tandy Corp............................................ 1,514,100 127,625* Toys "R" Us, Inc...................................... 2,520,594 ------------ 77,143,204 ------------ MERCHANDISING - DEPARTMENT - 0.51% 179,800 Dayton Hudson Corp.................................... 8,091,000 48,600 Dillards, Inc. Class A................................ 1,670,625 92,300* Federated Dept Stores, Inc ........................... 3,847,756 99,800 May Department Stores Co.............................. 6,019,188 ------------ 19,628,569 ------------ MERCHANDISING - FOOD - 0.85% 113,900 Albertsons, Inc....................................... 6,499,418 119,200 American Stores Co.................................... 4,000,650 15,300 Great Atlantic & Pacific Tea.......................... 417,881 98,300 Kroger Co............................................. 5,216,044 191,600* Safeway, Inc.......................................... 10,118,875 33,400 Supervalu Inc......................................... 862,138 143,800 SYSCO Corp............................................ 3,873,613 52,000 Winn-Dixie Stores, Inc................................ 2,096,250 ------------ 33,084,869 ------------ MERCHANDISING - MASS - 2.31% 190,300* KMart Corp............................................ 2,902,075 59,600 Fred Meyer, Inc....................................... 3,032,150 119,400 J.C. Penney Co., Inc.................................. 6,567,000 163,300 Sears Roebuck and Co.................................. 7,746,544 35,000* Venator Group, Inc.................................... 275,625 914,100 Wal-Mart Stores, Inc.................................. 68,843,156 ------------ 89,366,550 ------------ METALS - ALUMINUM - 0.25% 115,900 Alcan Aluminium Ltd................................... 3,085,838 67,200 Aluminum Co. of America............................... 4,981,200 33,100 Reynolds Metals Co.................................... 1,816,362 ------------ 9,883,400 ------------ METALS - COPPER - 0.08% 19,300 ASARCO Inc............................................ 373,938 67,631 Newmont Mining Corp................................... 1,344,166 27,200 Phelps Dodge Corp..................................... 1,541,900 ------------ 3,260,004 ------------
================================================================================ STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 8 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ----- METALS - MISCELLANEOUS - 0.07% 31,350 Cyprus Amax Minerals Co............................... $ 356,606 57,075 Engelhard Corp........................................ 1,102,261 48,500* Freeport-McMoRan Copper & Gold Class ......................................... 633,531 52,400 Inco Limited.......................................... 605,875 ------------ 2,698,273 ------------ METALS - STEEL - 0.12% 59,525 Allegheny Teldyne Inc................................. 1,223,982 46,100* Bethlehem Steel Corp.................................. 380,325 31,100 Nucor Corp............................................ 1,306,200 48,920 USX-US Steel Group, Inc............................... 1,195,483 53,625 Worthington Industries, Inc........................... 653,555 ------------ 4,759,545 ------------ MISCELLANEOUS - 0.16% 103,600 BB & T Corp........................................... 3,826,725 57,800 Equifax Inc........................................... 2,398,700 ------------ 6,225,425 ------------ MOBILE HOMES - 0.01% 14,600 Fleetwood Enterprises, Inc............................ 491,838 ------------ NATURAL GAS-DIVERSIFIED - 0.11% 87,800 Coastal Corp.......................................... 3,062,025 37,900 Sonat Inc............................................. 1,125,156 ------------ 4,187,181 ------------ OIL - INTEGRATED DOMESTIC - 1.41% 35,700 Amerada Hess Corp..................................... 1,981,350 406,400 Amoco Corp............................................ 23,952,200 26,900 Ashland Oil, Inc...................................... 1,308,012 131,400 Atlantic Richfield Co................................. 8,738,100 74,967 Burlington Resources, Inc............................. 2,670,699 19,400 Kerr-McGee Corp....................................... 766,300 150,600 Occidental Petroleum Corp............................. 3,049,650 40,800* Oryx Energy Co........................................ 563,550 18,500 Pennzoil Co........................................... 686,812 96,300 Phillips Petroleum Co................................. 4,044,600 114,100 USX-Marathon Group.................................... 3,237,588 98,300 Unocal Corp........................................... 3,329,913 ------------ 54,328,774 ------------ OIL - INTEGRATED INTERNATIONAL - 4.63% 268,200* Chevron Corp.......................................... 22,428,225
NUMBER MARKET OF SHARES VALUE --------- ----- OIL - INTEGRATED INTERNATIONAL - Continued 991,500 Exxon Corp............................................ $ 74,424,469 320,500 Mobil Corp............................................ 27,623,094 884,900 Royal Dutch Pete Co. - ADR............................ 41,590,300 222,600 Texaco Inc............................................ 12,813,412 ------------ 178,879,500 ------------ OIL - SERVICES - 0.50% 131,160 Baker Hughes Inc...................................... 2,401,868 200,500 Halliburton Co........................................ 5,889,688 34,300 McDermott International, Inc.......................... 919,669 35,500* Rowan Companies, Inc.................................. 348,343 217,400 Schlumberger Ltd...................................... 9,715,062 ------------ 19,274,630 ------------ OIL/GAS PRODUCERS - 0.13% 50,600 Anadarko Petroleum Corp............................... 1,426,288 33,700 Apache Corp........................................... 775,100 6,000 Helmerich & Payne, Inc................................ 103,500 38,716 Sunoco Inc............................................ 1,311,504 113,842 Union Pacific Res. Group Inc.......................... 1,273,607 ------------ 4,889,999 ------------ PAPER/FOREST PRODUCTS - 1.02% 54,200 Avery Dennison Corp................................... 2,598,212 10,566 Boise Cascade Corp.................................... 334,810 45,400 Champion International Corp........................... 1,886,937 96,600 Fort James Corp....................................... 3,779,475 39,200 Georgia-Pacific Corp.................................. 2,224,600 128,918 International Paper Co................................ 5,599,876 240,432 Kimberly-Clark Corp................................... 12,652,734 41,600 Louisiana Pacific Corp................................ 707,200 39,200 Mead Corp............................................. 1,188,250 4,900 Potlatch Corp......................................... 185,281 35,450 Union Camp Corp....................................... 2,293,172 26,850 Westvaco Corp......................................... 755,156 79,500 Weyerhaeuser Co....................................... 3,984,938 35,000 Willamette Industries, Inc............................ 1,222,813 ------------ 39,413,454 ------------ PHOTOGRAPHY - 0.25% 130,750 Eastman Kodak Co...................................... 9,487,547 35,300 Polaroid Corp......................................... 750,125 ------------ 10,237,672 ------------
NUMBER MARKET OF SHARES VALUE --------- ----- POLLUTION CONTROL - 0.34% 83,300 Browning-Ferris Industries Inc........................ $ 2,457,350 97,400 Laidlaw Inc........................................... 967,913 224,150 Waste Management, Inc................................. 9,610,431 ------------ 13,035,694 ------------ PUBLISHING - NEWS - 0.45% 35,600 Dow Jones & Co., Inc.................................. 1,702,125 116,400 Gannett Co., Inc...................................... 7,515,075 42,400 Knight-Ridder, Inc.................................... 2,180,950 77,200 New York Times Co. Class A............................ 2,398,025 24,232 Times Mirror Co....................................... 1,420,601 36,300 Tribune Co............................................ 2,327,738 ------------ 17,544,514 ------------ PUBLISHING/PRINTING - 0.28% 50,800 Deluxe Corp........................................... 1,765,300 74,100 Dun & Bradstreet Corp New............................. 2,236,893 19,217 Harcourt General, Inc................................. 994,480 30,100 McGraw-Hill, Inc...................................... 2,693,950 21,600 Moore Corp. Ltd....................................... 236,250 71,800 R R Donnelley and Son................................. 3,047,013 ------------ 10,973,886 ------------ RAILROAD - 0.57% 205,551 Burlington Northern Santa Fe.......................... 6,988,733 115,900 CSX Corp.............................................. 4,831,581 170,400 Norfolk Southern Corp................................. 5,175,900 103,600 Union Pacific Corp.................................... 5,037,550 ------------ 22,033,764 ------------ RESTAURANTS - 0.64% 55,800 Darden Restaurants, Inc............................... 882,337 285,000 McDonald's Corp....................................... 19,967,813 72,620* Tricon Global Restaurants, Inc........................ 3,308,749 30,000 Wendy's International, Inc............................ 600,000 ------------ 24,758,899 ------------ SAVINGS & LOAN - 0.30% 23,500 Golden West Financial Corp............................ 2,225,156 246,443 Washington Mutual, Inc................................ 9,549,666 ------------ 11,774,822 ------------ SECURITIES RELATED - 1.07% 45,700 Bear Stearns Co. Inc.................................. 1,919,400 97,650 Charles Schwab Corp................................... 5,505,019
================================================================================ STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED NOVEMBER 30, 1998 (UNAUDITED) 9 ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ------------ SECURITIES RELATED - Continued 95,500 Franklin Resources, Inc............................... $ 4,082,625 45,600 Lehman Brothers Hldings, Inc.......................... 2,277,150 134,900 Merrill Lynch & Co., Inc.............................. 10,117,500 249,201 Morgan Stanley, Dean Witter, Discover and Co...................................... 17,381,771 ------------ 41,283,465 ------------ SEMICONDUCTOR EQUIPMENT - 0.19% 158,000* Applied Materials, Inc................................ 6,122,500 35,600* KLA-Tencor Corp....................................... 1,212,625 ------------ 7,335,125 ------------ SEMICONDUCTORS - 2.93% 58,600 Advanced Micro Devices, Inc........................... 1,622,487 683,300 Intel Corp............................................ 73,540,163 55,500* LSI Logic Corp........................................ 860,250 93,300* Micron Technology, Inc................................ 3,854,456 244,700 Motorola, Inc......................................... 15,171,400 95,800* National Semiconductor Corp........................... 1,377,125 95,400 Rockwell International Corp........................... 4,668,638 159,600 Texas Instruments Inc................................. 12,189,450 ------------ 113,283,969 ------------ TELECOMMUNICATIONS - 3.37% 217,800* Airtouch Communications, Inc.......................... 12,455,437 96,500 ALLTEL Corp........................................... 5,114,500 32,335* Andrew Corp........................................... 517,360 54,300 Frontier Corp......................................... 1,635,788 32,800 Harris Corp........................................... 1,244,350 546,580 Lucent Technologies, Inc.............................. 47,040,041 734,612* MCI Worldcom Inc...................................... 43,342,079 89,900* Nextel Communications, Inc. Class A................... 1,932,850 257,040 Northern Telecom Ltd.................................. 12,000,555 29,500 Scientific-Atlanta, Inc............................... 571,563 80,100* Tellabs, Inc.......................................... 4,330,406 ------------ 130,184,929 ------------ TEXTILE - PRODUCTS - 0.08% 26,100 Russell Corp.......................................... 621,506 48,800 V F Corp.............................................. 2,394,250 ------------ 3,015,756 ------------ TOBACCO - 1.52% 994,200 Philip Morris Cos Inc................................. 55,613,063
NUMBER MARKET OF SHARES VALUE --------- ------------ TOBACCO - Continued 94,300 UST Inc............................................... $ 3,276,925 ------------ 58,889,988 ------------ UTILITIES - COMMUNICATION - 5.63% 726,026 A T & T Corp.......................................... 45,240,495 461,500 Ameritech Corp........................................ 24,978,688 655,010 Bell Atlantic Corp.................................... 36,434,931 392,000 BellSouth Corp........................................ 34,202,000 413,000 GTE Corp.............................................. 25,606,000 797,758 SBC Communications, Inc............................... 38,242,524 140,800 Sprint Corp. FON Group................................ 10,243,200 176,000 Sprint Corp. PCS Group................................ 2,816,000 ------------ 217,763,838 ------------ UTILITIES - ELECTRIC - 2.50% 71,700* AES Corp.............................................. 3,280,275 43,700 Ameren Corp........................................... 1,799,893 72,900 American Electric Power, Inc.......................... 3,380,738 35,200 Baltimore Gas and Electric Co......................... 1,080,200 60,100 Carolina Power & Light Co............................. 2,787,137 123,800 Central & South West Corp............................. 3,404,500 42,964 Cinergy Corp.......................................... 1,484,943 114,200 Consolidated Edison, Inc.............................. 5,802,787 42,300 DTE Energy Co......................................... 1,845,337 57,650 Dominion Resources, Inc............................... 2,662,709 154,451 Duke Energy Corp...................................... 9,662,841 170,200 Edison International.................................. 4,680,500 138,300 Entergy Corp.......................................... 4,053,919 87,100 FPL Group, Inc........................................ 5,334,875 80,700 FirstEnergy Corp...................................... 2,496,656 32,600 GPU Inc............................................... 1,428,288 116,279 Houston Industries, Inc............................... 3,677,323 44,900 New Century Energies, Inc............................. 2,158,006 37,500* Niagara Mohawk Power Corp............................. 576,563 52,000 Northern States Power Co.............................. 1,413,750 91,300 Peco Energy Co........................................ 3,663,413 161,800 P G & E Corp.......................................... 5,005,688 42,264 P P & L Resources Inc................................. 1,154,336 121,600 PacifiCorp............................................ 2,280,000 94,950 Public Serv Enterprise Group.......................... 3,703,050 279,700 Southern Co........................................... 8,251,150 142,220 Texas Utilities Co.................................... 6,337,679 83,800 Unicom Corp........................................... 3,158,213 ------------ 96,564,769 ------------
NUMBER MARKET OF SHARES VALUE --------- ------------- UTILITIES - GAS, DISTRIBUTION - 0.03% 23,700 NICOR Inc............................................. $ 996,881 ------------- UTILITIES - GAS, PIPELINE - 0.54% 37,800 Columbia Energy Group................................. 2,145,150 44,100 Consolidated Natural Gas Co........................... 2,395,181 142,000 Enron Corp............................................ 7,463,875 18,300 ONEOK Inc............................................. 637,069 2,200 Peoples Energy Corp................................... 82,913 94,262 Sempra Energy......................................... 2,362,441 196,500 Williams Companies, Inc............................... 5,661,656 ------------- 20,748,285 ------------- TOTAL COMMON STOCK (Cost $1,821,768,439)................................. 3,835,442,745 -------------
PAR VALUE - ----- CORPORATE SHORT TERM COMMERCIAL PAPER - 0.67% AUTO - CARS - 0.21% $7,950,000 Hertz Corp., 5.05% due 12/07/1998................................. 7,943,308 ------------ FINANCE COMPANIES - 0.46% 11,652,000 Ford Credit Europe PLC, 4.94 12/01/1998...................................... 11,652,000 6,308,000 General Electric Cap Svcs Inc., 4.95% due 12/03/1998................................. 6,306,264 ------------ 17,958,264 ------------ TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $25,901,572).................................... 25,901,572 ------------ UNITED STATES GOVERNMENT SHORT TERM - 0.06% U. S. TREASURY BILLS - 0.06% 2,475,000 United States Treasury Bills, 3.25% due 12/03/1998.................................. 2,463,794 ------------ TOTAL UNITED STATES GOVERNMENT SHORT TERM (Cost $2,463,794)..................................... 2,463,794 ------------
================================================================================ STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 10 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
MARKET VALUE -------------- TOTAL INVESTMENTS (Cost $1,850,133,805) - 99.87%....................... $3,863,808,111 Other assets less liabilities, net - 0.13%......................................... 4,870,753 -------------- NET ASSETS (equivalent to $35.73 per share on 108,284,238 shares outstanding) - 100%................................. $3,868,678,864 ============== * Non-income producing
UNREALIZED CONTRACTS APPRECIATION --------- ------------ FUTURES CONTRACTS PURCHASED(1) (Delivery month/Value at 11/30/98) 81 (2) S&P 500 Index Futures (December/$1,166.90)................................ $ 112,450 ============ (1)U.S.Treasury Bills with a market value of approximately $2,175,000 were maintained in a segregated account with a portion placed as collateral for futures contracts. (2)Per 250
NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 108,284,238 shares outstanding................................ $ 1,082,842 Additional paid in capital..................................... 1,816,182,773 Accumulated net realized gain on securities.................... 37,099,937 Undistributed net investment income............................ 526,556 Unrealized appreciation of: Investments........... $2,013,674,306 Futures .............. 112,450 2,013,786,756 -------------- --------------- NET ASSETS APPLICABLE TO SHARES OUTSTANDING.................................................. $ 3,868,678,864 ===============
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ STOCK INDEX FUND - FINANCIAL STATEMENTS (Unaudited) 11 ================================================================================ STATEMENT OF OPERATIONS For the six months ended November 30, 1998 INVESTMENT INCOME: Dividends ........................................................ $ 26,050,437 Interest ......................................................... 686,813 ------------ Total investment income ........................................ 26,737,250 ------------ EXPENSES: Advisory fees .................................................... 4,696,528 Custodian and accounting services ................................ 416,470 Reports to shareholders .......................................... 296,034 Audit fees and tax services ...................................... 64,696 Directors' fees and expenses ..................................... 48,092 Miscellaneous .................................................... 92,748 ------------ Total expenses ................................................. 5,614,568 ------------ NET INVESTMENT INCOME ............................................ 21,122,682 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES: Net realized gain (loss) on: Investments .................................... $ 22,720,875 Futures contracts .............................. (836,664) 21,884,211 ------------ Net unrealized appreciation of securities during the period: Investments .................................... 226,993,838 Futures contracts .............................. 503,287 227,497,125 ------------ ------------ Net realized and unrealized gain on securities during the period ............................................. 249,381,336 ------------ INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................. $270,504,018 ============
STATEMENT OF CHANGES IN NET ASSETS
For the For the six months ended fiscal year ended November 30, 1998 May 31, 1998 ----------------- ----------------- OPERATIONS: Net investment income ........................................ $ 21,122,682 $ 39,567,862 Net realized gain on securities .............................. 21,884,211 16,742,928 Net unrealized appreciation of securities during the period... 227,497,125 713,815,081 --------------- --------------- Increase in net assets resulting from operations ........... 270,504,018 770,125,871 --------------- --------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ........................................ (20,974,037) (39,570,522) Net realized gain on securities .............................. _ (14,847,655) --------------- --------------- Decrease in net assets resulting from distributions to shareholders ........................................... (20,974,037) (54,418,177) --------------- --------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold ............................. 179,639,812 367,059,600 Proceeds from capital stock issued for distributions reinvested ................................................. 20,974,037 54,418,177 --------------- --------------- .............................................................. 200,613,849 421,477,777 Cost of capital stock repurchased ............................ (64,119,789) (98,730,173) --------------- --------------- Increase in net assets resulting from capital stock transactions .............................................. 136,494,060 322,747,604 --------------- --------------- TOTAL INCREASE IN NET ASSETS ................................. 386,024,041 1,038,455,298 NET ASSETS: Beginning of period .......................................... 3,482,654,823 2,444,199,525 --------------- --------------- End of period (including undistributed net investment income of $526,556 and $377,911) .................................. $ 3,868,678,864 $ 3,482,654,823 =============== =============== CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold ................................. 5,303,538 12,118,343 Shares issued for distributions reinvested ................... 622,269 1,806,919 Shares of capital stock repurchased .......................... (1,975,116) (3,279,150) --------------- --------------- Increase in shares outstanding ............................. 3,950,691 10,646,112 Shares outstanding: Beginning of period ........................................ 104,333,547 93,687,435 --------------- --------------- End of period .............................................. 108,284,238 104,333,547 =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ MIDCAP INDEX FUND - STATEMENT OF NET ASSETS 12 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ------------ COMMON STOCKS - 98.00% ADVERTISING - 0.25% 53,000* Snyder Communications, Inc............................ $ 1,884,813 ------------ AEROSPACE/DEFENSE - 1.01% 32,480 Gencorp Inc........................................... 799,820 49,100* SCI Systems, Inc...................................... 2,387,488 8,000* Sequa Corp. Class A................................... 509,000 51,674 Sunstrand Corp........................................ 2,790,396 30,320 Teleflex Inc.......................................... 1,288,600 ------------ 7,775,304 ------------ AIRLINES - 0.22% 22,021* Alaska Air Group, Inc................................. 824,411 24,574 ASA Holdings, Inc..................................... 833,980 ------------ 1,658,391 ------------ APPAREL & PRODUCTS - 1.55% 49,900* Abercrombie and Fitch Co.............................. 2,794,400 87,206 Cintas Corp........................................... 4,796,330 40,971 Claire's Stores, Inc.................................. 696,507 27,224* Land's End, Inc....................................... 614,241 41,500 Ross Stores, Inc...................................... 1,509,563 60,700 Warnaco Group Inc. Class A............................ 1,502,325 ------------ 11,913,366 ------------ APPLIANCES/FURNISHINGS - 0.88% 44,959 Heilig-Meyers Co...................................... 314,713 37,801 Lancaster Colony Corp................................. 1,039,528 161,852 Leggett & Platt, Inc.................................. 3,672,017 80,156 Herman Miller, Inc.................................... 1,703,315 ------------ 6,729,573 ------------ AUTO - CARS - 0.87% 135,040 Harley-Davidson, Inc.................................. 5,646,360 56,700 Meritor Automotive, Inc............................... 1,002,881 ------------ 6,649,241 ------------ AUTO - ORIGINAL EQUIPMENT - 1.28% 20,125 Arvin Industries, Inc................................. 845,250 24,700 Carlisle Cos Inc...................................... 1,094,519 39,036 Donaldson Co., Inc.................................... 780,720 43,270 Federal-Mogul Corp.................................... 2,455,573 60,700* Lear Corp............................................. 2,344,538 50,245 Mark IV Industries, Inc............................... 847,884 24,928 Modine Manufacturing Co............................... 909,872
NUMBER MARKET OF SHARES VALUE --------- ------------ AUTO - ORIGINAL EQUIPMENT - Continued 23,200 Superior Industries International, Inc................ $ 603,200 ------------ 9,881,556 ------------ AUTO - REPLACEMENT PARTS - 0.37% 31,642 Kaydon Corp........................................... 1,117,358 29,500* SPX Corp.............................................. 1,711,000 ------------ 2,828,358 ------------ BANKS - OTHER - 0.70% 115,804 First Tennessee National Corp......................... 3,879,434 116,900 Sovereign Bancorp, Inc................................ 1,497,781 ------------ 5,377,215 ------------ BANKS - REGIONAL - 6.49% 53,600 Associated Banc-Corp.................................. 1,829,100 33,700 CCB Financial Corp.................................... 1,828,225 38,455 City National Corp.................................... 1,437,256 98,572 Crestar Financial Corp................................ 6,542,717 153,511 First Security Corp................................... 3,089,409 41,762 First Virginia Banks, Inc............................. 1,874,070 84,700 GreenPoint Financial Corp............................. 3,223,894 122,700 Hibernia Corp. Class A................................ 2,070,562 86,948 Marshall & Ilsley Corp................................ 4,428,914 58,934 Mercantile Bankshares Corp............................ 2,070,057 132,550 North Fork Bancorporation Inc......................... 2,791,834 85,859 Old Kent Financial Corp............................... 3,691,937 65,968 Pacific Century Financial Corp........................ 1,410,066 35,000 Provident Financial Group............................. 1,417,500 138,930 SouthTrust Corp....................................... 5,105,677 79,800 TCF Financial Corp.................................... 1,930,163 28,178 Wilmington Trust Corp................................. 1,634,324 67,800 Zions Bancorporation.................................. 3,423,900 ------------ 49,799,605 ------------ BROADCASTING - 0.56% 100,456 A.H. Belo Corp........................................ 1,896,107 26,592* Chris-Craft Industries, Inc........................... 1,229,880 40,632 TCA Cable TV, Inc..................................... 1,158,012 ------------ 4,283,999 ------------ BUILDING MATERIALS - 1.64% 18,566 CalMat Co............................................. 570,905 36,800 Fastenal Co........................................... 1,518,000 49,050 Hon Industries Inc.................................... 1,164,938 43,600 Martin Marietta Materials............................. 2,114,600
NUMBER MARKET OF SHARES VALUE --------- ------------ BUILDING MATERIALS - Continued 80,556 RPM, Inc.............................................. $ 1,319,104 34,900 Southdown, Inc........................................ 2,032,925 30,500 Vulcan Materials Co................................... 3,823,938 ------------ 12,544,410 ------------ CHEMICAL - MAJOR - 0.51% 36,345 Albemarle Corp........................................ 676,926 19,400 Borg-Warner Automotive, Inc........................... 967,575 99,500 Solutia Inc........................................... 2,226,312 ------------ 3,870,813 ------------ CHEMICAL - MISCELLANEOUS - 1.71% 53,200 Airgas, Inc........................................... 538,650 63,437 Crompton & Knowles Corp............................... 1,229,092 36,000* Cytec Industries, Inc................................. 812,250 19,368 Dexter Corp........................................... 620,987 66,900 Ethyl Corp............................................ 388,856 36,170 Ferro Corp............................................ 1,010,499 11,264 H.B. Fuller Co........................................ 489,984 26,933 Georgia Gulf Corp..................................... 504,994 50,436 M.A. Hanna Co......................................... 709,256 31,393 Lawter International, Inc............................. 258,992 52,719 Lubrizol Corp......................................... 1,430,003 72,678 Lyondell Chemical Co.................................. 1,353,628 18,500 Minerals Technologies Inc............................. 811,688 5,955 NCH Corp.............................................. 333,480 40,442 Olin Corp............................................. 1,236,009 32,025 Rollins, Inc.......................................... 546,427 38,073 A. Schulman, Inc...................................... 813,810 ------------ 13,088,605 ------------ CONGLOMERATES - 1.48% 39,698 Alexander & Baldwin, Inc.............................. 913,054 94,100 Dial Corp............................................. 2,470,125 40,300* Litton Industries, Inc................................ 2,465,856 7,900* MAXXAM, Inc........................................... 385,619 45,900 Ogden Corp............................................ 1,219,219 81,300 Viad Corp............................................. 1,895,306 87,600 Whitman Corp.......................................... 1,981,950 ------------ 11,331,129 ------------ CONTAINERS - PAPER - 0.43% 17,414 Chesapeake Corp....................................... 604,048
================================================================================ MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED NOVEMBER 30, 1998 (UNAUDITED) 13 ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ------------ CONTAINERS - PAPER - Continued 88,979 Sonoco Products Co.................................... $ 2,663,809 ------------ 3,267,857 ------------ DRUGS - 5.04% 25,000* Agouron Pharmaceuticals, Inc.......................... 1,090,625 45,280 Bergen Brunswig Corp. Class A......................... 2,818,680 64,252 Biogen, Inc........................................... 4,875,121 38,046 Carter-Wallace Inc.................................... 675,317 62,688* Centocor, Inc......................................... 2,538,864 147,280 Chiron Corp........................................... 3,332,210 53,425* Covance Inc........................................... 1,335,625 69,982* Forest Laboratories, Inc.............................. 3,262,911 71,042* Genzyme Corp.......................................... 2,988,204 7,680* Genzyme Corp.......................................... 26,879 57,700 ICN Pharmaceuticals, Inc.............................. 1,456,925 109,736* IVAX Corp............................................. 1,042,492 79,700 McKesson Corp......................................... 5,673,644 107,634* Mylan Laboratories Inc................................ 3,572,103 74,200* Watson Pharmaceuticals, Inc........................... 3,997,525 ------------ 38,687,125 ------------ ELECTRIC PRODUCTS - MISCELLANEOUS - 0.06% 26,716 CMP Group Inc......................................... 479,218 ------------ ELECTRICAL EQUIPMENT - 1.99% 84,186* American Power Conversion............................. 3,483,196 29,031 AMETEK, Inc........................................... 602,393 93,600* FORE Systems, Inc..................................... 1,415,700 55,070 Hubbell Inc. Class B.................................. 2,220,009 129,657 Molex Inc............................................. 4,675,756 68,746* Teradyne, Inc......................................... 2,204,169 37,800* UCAR International, Inc............................... 687,487 ------------ 15,288,710 ------------ ELECTRONIC INSTRUMENTS - 1.15% 80,552* Arrow Electronics, Inc................................ 1,752,006 33,250* Imation Corp.......................................... 540,313 66,400 Integrated Device Technology.......................... 390,100 25,621* MagnaTek, Inc......................................... 291,439 33,800 Pittston Brink's Group................................ 1,014,000 60,979* Sensormatic Electronics Corp.......................... 495,454 52,813 Symbol Technologies, Inc.............................. 2,574,634 24,616 Varian Associates, Inc................................ 973,871
NUMBER MARKET OF SHARES VALUE --------- ------------ ELECTRONIC INSTRUMENTS - Continued 55,513* Vishay Intertechnology, Inc........................... $ 787,591 ------------ 8,819,408 ------------ ENTERTAINMENT - 0.11% 34,100* GTECH Holdings Corp................................... 854,631 ------------ FERTILIZERS - 0.28% 92,946 IMC Global, Inc....................................... 2,126,140 ------------ FINANCE COMPANIES - 0.68% 71,000 Finova Group, Inc..................................... 3,749,688 44,600 Keystone Financial, Inc............................... 1,443,925 ------------ 5,193,613 ------------ FOODS - 3.16% 35,382 Dean Foods Co......................................... 1,609,881 49,209 Dole Food Co., Inc.................................... 1,556,235 27,036 Dreyer's Grand Ice Cream, Inc......................... 368,366 89,404 Flowers Industries, Inc............................... 2,039,529 62,500 Hormel Foods Corp..................................... 1,847,656 84,100 IBP, Inc.............................................. 2,134,037 15,012 International Multifoods Corp......................... 381,868 60,100 Interstate Bakeries Corp.............................. 1,577,625 32,971 Lance, Inc............................................ 649,117 68,778 McCormick & Co., Inc.................................. 2,295,466 22,871 J.M. Smucker Co. Class A.............................. 531,751 35,521 Trinity Industries, Inc............................... 1,374,219 192,486 Tyson Foods, Inc. Class A............................. 3,982,054 42,400* U. S. Foodservices.................................... 1,947,750 44,258 Universal Foods Corp.................................. 1,098,152 37,500* Vlasic Foods Int'l Inc................................ 810,937 ------------ 24,204,643 ------------ FOOTWEAR - 0.27% 28,800* Nine West Group, Inc.................................. 360,000 34,500* Payless ShoeSource, Inc............................... 1,681,875 ------------ 2,041,875 ------------ FREIGHT - 0.30% 47,846 Airborne Freight Corp................................. 1,276,890 29,300 J.B. Hunt Transport Services.......................... 556,700 30,271 Overseas Shipholding Group Inc........................ 478,660 ------------ 2,312,250 ------------ FUNERAL SERVICES - 0.26% 90,400 Stewart Enterprises Inc............................... $ 2,017,050 ------------ HEALTHCARE - 3.95% 98,800 Allegiance Corp....................................... 3,982,875 53,900* Apria Healthcare Group, Inc........................... 377,300 426* Coram Healthcare Corp................................. 799 52,372* First Health Group Corp............................... 834,679 99,649* Foundation Health Systems Class A..................... 1,376,402 208,200* Health Management Assoc............................... 4,515,337 53,500* Lincare Holdings Inc.................................. 1,845,750 49,391* NovaCare, Inc......................................... 154,347 79,300* Omnicare, Inc......................................... 2,269,962 66,300* Oxford Health Plans, Inc.............................. 733,444 40,574* PacifiCare Health System, Inc. Class B................ 3,055,730 67,400* Quintiles Transnational Corp.......................... 3,361,575 73,500* Quorum Health Group Inc............................... 1,221,937 55,000* Steris Corp........................................... 1,474,687 80,200* Sybron International Corp............................. 1,994,975 65,000* Total Renal Care Holdings............................. 1,726,563 36,300* Trigon Healthcare, Inc................................ 1,345,369 ------------ 30,271,731 ------------ HEAVY DUTY TRUCKS/PARTS - 0.23% 18,600 Bandag, Inc........................................... 657,975 45,904 Federal Signal Corp................................... 1,121,779 ------------ 1,779,754 ------------ HOME BUILDERS - 0.20% 97,425 Clayton Homes, Inc.................................... 1,510,088 ------------ HOSPITAL MANAGEMENT - 0.18% 85,200* Beverly Enterprises, Inc.............................. 489,900 58,400* Concentra Managed Care, Inc........................... 689,850 64,600* Medaphis Corp......................................... 185,725 ------------ 1,365,475 ------------ HOSPITAL SUPPLIES - 1.44% 29,835* Acuson Corp........................................... 417,690 27,533 Beckman Coulter Inc................................... 1,328,467 52,500 DENTSPLY International Inc............................ 1,410,937 56,400 Hillenbrand Industries, Inc........................... 3,204,225 63,800* PSS World Medical, Inc................................ 1,323,850 1* SonoSight, Inc........................................ 10
================================================================================ MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 14 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ------------ HOSPITAL SUPPLIES - Continued 78,982 Stryker Corp.......................................... $ 3,336,990 ------------ 11,022,169 ------------ HOUSEHOLD PRODUCTS - 0.95% 123,300* Bed Bath & Beyond, Inc................................ 3,845,419 16,014 Church & Dwight Co., Inc.............................. 553,484 32,446 First Brands Corp..................................... 1,214,697 50,800 Premark International Inc............................. 1,704,975 ------------ 7,318,575 ------------ HUMAN RESOURCES - 1.02% 31,303 Kelly Services Inc. Class A........................... 909,743 66,400 Manpower Inc.......................................... 1,477,400 90,500* Modis Professional Services........................... 1,080,344 66,650 Olsten Corp........................................... 499,875 82,700* Robert Half International, Inc........................ 3,886,900 ------------ 7,854,262 ------------ INFORMATION PROCESSING - 0.30% 40,400* Comverse Technology, Inc.............................. 2,323,000 ------------ INFORMATION PROCESSING - BUSINESS SOFTWARE - 0.69% 37,200* Citrix Systems, Inc................................... 3,087,600 149,700* Informix Corp......................................... 809,316 79,900* Platinum Technology, Inc.............................. 1,413,231 ------------ 5,310,147 ------------ INFORMATION PROCESSING - COMPUTER HARDWARE SYSTEMS - 1.00% 56,800* Lexmark Intl Group, Inc............................... 4,338,100 16,971 OEA, Inc.............................................. 221,684 140,492* Quantum Corp.......................................... 3,108,385 ------------ 7,668,169 ------------ INFORMATION PROCESSING - COMPUTER SERVICES - 5.18% 375,600* America Online, Inc................................... 32,888,475 54,000* Cambridge Technology Partner.......................... 1,127,250 82,852* Sterling Commerce Inc................................. 3,003,386 84,400* SunGard Data Systems, Inc............................. 2,700,800 ------------ 39,719,911 ------------ INFORMATION PROCESSING - CONSUMER SOFTWARE - 1.13% 49,500* Intuit................................................ $ 2,864,813 113,550* Networks Associates, Inc.............................. 5,776,856 ------------ 8,641,669 ------------ INFORMATION PROCESSING - DATA SERVICES - 6.31% 47,073 A.C. Nielson.......................................... 1,297,450 122,016 Comdisco, Inc......................................... 2,226,792 154,900* Compuware Corp........................................ 9,642,525 56,551 Diebold, Inc.......................................... 1,943,941 54,800* Electronic Arts....................................... 2,308,450 73,096* Fiserv, Inc........................................... 3,229,930 23,768* Information Resources, Inc............................ 199,057 57,600* Keane, Inc............................................ 1,656,000 53,407* Mentor Graphics Corp.................................. 460,635 90,073* NCR Corp.............................................. 3,355,219 62,400* NOVA Corp............................................. 1,985,100 30,036* Policy Management Systems............................. 1,535,590 71,808 Reynolds and Reynolds Co. Class A..................... 1,516,944 35,025* Sequent Computer Systems, Inc......................... 446,569 78,900* Siebel Systems, Inc................................... 1,913,325 100,300* Solectron Corp........................................ 6,638,606 70,800* Sterling Software, Inc................................ 1,823,100 87,780* Storage Technology Corp............................... 3,072,300 27,695 Structural Dynamic Research Corp...................... 482,931 46,212* Symantec Corp......................................... 924,240 43,800* Tech Data Corp........................................ 1,762,950 ------------ 48,421,654 ------------ INSURANCE - CASUALTY - 0.25% 48,333 American Financial Group, Inc......................... 1,900,091 ------------ INSURANCE - MISCELLANEOUS - 1.10% 63,700 AMBAC Financial Group Inc............................. 3,885,700 23,799 HSB Group Inc......................................... 984,684 47,700 Protective Life Corp.................................. 1,857,319 30,800 PMI Group Inc......................................... 1,684,375 ------------ 8,412,078 ------------ INSURANCE - MULTILINE - 1.88% 225,250 AFLAC Inc............................................. 8,306,094 108,500 Old Republic International Corp....................... 2,312,406 81,300 Reliastar Financial Corp.............................. 3,821,100 ------------ 14,439,600 ------------ LEISURE TIME - 0.53% 61,300 Callaway Golf Co...................................... $ 819,887 77,925* Circus Circus Enterprises............................. 901,008 100,402 International Game Technology......................... 2,315,521 ------------ 4,036,416 ------------ LODGING - 0.31% 70,457* Promus Hotel Corp..................................... 2,351,503 ------------ MACHINERY - AGRICULTURE - 0.05% 49,000 AGCO Corp............................................. 401,188 ------------ MACHINERY - CONSTRUCTION & CONTRACTS - 0.20% 22,456 Granite Construction, Inc............................. 725,610 21,268* Jacobs Engineering Group, Inc......................... 801,537 ------------ 1,527,147 ------------ MACHINERY - INDUSTRIAL/SPECIALTY - 1.17% 24,818 Albany International Corp. Class A ................... 471,542 60,000* American Standard Companies........................... 2,055,000 29,822 Cordant Technologies Inc.............................. 1,198,472 38,218 Flowserve Corp........................................ 678,369 33,000 Newport News Shipbuilding............................. 928,125 16,514 Nordson Corp.......................................... 788,543 26,133 Stewart & Stevenson Services.......................... 259,697 17,900 Tecumseh Products Co. Class A......................... 886,050 55,292 Tidewater, Inc........................................ 1,275,172 22,224 Watts Industries, Inc. Class A........................ 420,867 ------------ 8,961,837 ------------ MERCHANDISE - DRUG - 0.07% 63,000* Perrigo Co............................................ 527,625 ------------ MERCHANDISE - SPECIALTY - 2.89% 30,686* BJ's Wholesale Club Inc............................... 1,183,329 56,200* Barnes & Noble, Inc................................... 1,861,625 84,500* Best Buy Co., Inc..................................... 4,869,313 74,900* CompUSA, Inc.......................................... 1,109,456 13,764 Enesco Group Inc...................................... 332,056 68,100* General Nutrition Cos., Inc........................... 1,208,775 29,500* Micro Warehouse, Inc.................................. 807,562 204,837* Office Depot, Inc..................................... 6,657,203 121,700* OfficeMax, Inc........................................ 1,293,063 45,311 Sotheby's Holdings, Inc. Class A...................... 1,268,708 34,236 Tiffany & Co.......................................... 1,495,685
================================================================================ MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED NOVEMBER 30, 1998 (UNAUDITED) 15 ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ------------ MERCHANDISE - SPECIALTY - Continued 19,515 US Office Products, Co................................ $ 107,333 ------------ 22,194,108 ------------ MERCHANDISING - DEPARTMENT - 0.62% 63,600* Borders Group, Inc.................................... 1,542,300 117,004* Saks Holding, Inc..................................... 3,217,610 ------------ 4,759,910 ------------ MERCHANDISING - FOOD - 0.31% 34,700 Hannaford Bros. Co.................................... 1,622,225 37,300 Ruddick Corp.......................................... 729,681 ------------ 2,351,906 ------------ MERCHANDISING - MASS - 0.69% 54,200* Dollar Tree Stores Inc................................ 2,459,325 140,920 Family Dollar Stores, Inc............................. 2,827,208 ------------ 5,286,533 ------------ METALS - MISCELLANEOUS - 0.19% 24,406 Kennametal, Inc....................................... 520,153 22,050 Precision Castparts Corp.............................. 974,334 ------------ 1,494,487 ------------ METALS - STEEL - 0.52 49,000 AK Steel Holding Corp................................. 940,188 16,910 Carpenter Technology Corp............................. 597,134 9,257 Cleveland-Cliffs Inc.................................. 352,345 41,542 Harsco Corp........................................... 1,344,922 24,885 Inland Steel Industries, Inc.......................... 455,707 21,123 Oregon Steel Mills, Inc............................... 267,998 ------------ 3,958,294 ------------ MISCELLANEOUS - 0.17% 64,100* Corrections Corp. of America.......................... 1,314,052 ------------ MULTIMEDIA - 1.00% 177,656* Cadence Design Systems, Inc........................... 4,996,575 56,300* Synopsys Inc.......................................... 2,667,213 ------------ 7,663,788 ------------ NATURAL GAS-DIVERSIFIED - 0.92% 103,600 El Paso Energy Corp................................... 3,535,350 41,500 K N Energy, Inc....................................... 1,815,625 67,486 Questar Corp.......................................... 1,294,888
NUMBER MARKET OF SHARES VALUE --------- ------------ NATURAL GAS-DIVERSIFIED - Continued 52,032* Seagull Energy Corp................................... $ 426,012 ------------ 7,071,875 ------------ OIL - INTEGRATED DOMESTIC - 0.06% 32,214 Quaker State Corp..................................... 461,063 ------------ OIL - INTEGRATED INTERNATIONAL - 0.19% 37,246 Murphy Oil Corp....................................... 1,485,184 ------------ OIL - SERVICE - PRODUCTS - 0.55% 67,142 BJ Services Co........................................ 927,399 107,700* Noble Drilling Corp................................... 1,245,281 65,525* Parker Drilling Co.................................... 245,719 52,472* Varco International, Inc.............................. 357,465 79,667* Weatherford International Inc......................... 1,453,923 ------------ 4,229,787 ------------ OIL - SERVICES - 1.18% 116,700 ENSCO International, Inc.............................. 1,115,944 140,415* Global Marine Inc..................................... 1,316,391 82,739* Nabors Industries, Inc................................ 1,096,292 40,346* Smith International, Inc.............................. 973,347 90,300 Transocean Offshore, Inc.............................. 2,229,281 47,146 Witco Corp............................................ 898,720 34,000 York International Corp............................... 1,428,000 ------------ 9,057,975 ------------ OIL/GAS PRODUCERS - 1.10% 55,580 Cabot Corp............................................ 1,674,348 52,235 Noble Affiliates, Inc................................. 1,322,198 92,870* Ocean Energy, Inc..................................... 754,569 86,200 Pioneer Natural Resources Corp........................ 1,142,150 92,766* Ranger Oil Ltd........................................ 440,639 82,480 Ultramar Diamond Shamrock............................. 2,123,860 45,391 Valero Energy Corp.................................... 953,210 ------------ 8,410,974 ------------ PAPER/FOREST PRODUCTS - 1.41% 48,939 Bowater Inc........................................... 1,933,091 73,670 Consolidated Papers, Inc.............................. 1,883,189 85,800 Georgia-Pacific Corp. Timber Group.................... 1,973,400 33,300 P. H. Glatfelter Co................................... 428,737 42,639 Longview Fibre Co..................................... 482,354 31,176 Pentair Inc........................................... 1,174,946 23,100 Rayonier Inc.......................................... 981,750
NUMBER MARKET OF SHARES VALUE --------- ------------ PAPER/FOREST PRODUCTS - Continued 23,370 Standard Register Co.................................. $ 687,954 57,116 Unisource Worldwide, Inc.............................. 449,789 48,861 Wausau-Mosinee Paper Corp............................. 824,530 ------------ 10,819,740 ------------ POLLUTION CONTROL - 0.85% 149,100* Allied Waste Industries, Inc.......................... 3,037,912 33,033 Calgon Carbon Corp.................................... 239,489 147,212 US Filter Corp........................................ 3,257,066 ------------ 6,534,467 ------------ PUBLISHING - NEWS - 0.86% 36,100 Lee Enterprises, Inc.................................. 1,010,800 22,168 Media General, Inc. Class A........................... 1,051,595 8,561 Washington Post Co. Class B........................... 4,556,057 ------------ 6,618,452 ------------ PUBLISHING/PRINTING - 0.44% 24,486 Banta Corp............................................ 651,940 29,232 Houghton Mifflin Co................................... 1,224,091 13,300* Scholastic Corp....................................... 633,413 37,028 Wallace Computer Services, Inc........................ 830,817 ------------ 3,340,261 ------------ RAILROAD - 0.90% 43,324 GATX Corp............................................. 1,638,189 105,696 Kansas City Southern Ind.............................. 4,511,898 41,800* Wisconsin Central Transport........................... 757,625 ------------ 6,907,712 ------------ RESTAURANTS - 1.30% 36,633 Bob Evans Farms, Inc.................................. 886,061 53,855* Brinker International, Inc............................ 1,369,937 36,732* Buffets, Inc.......................................... 431,601 56,466 Cracker Barrel , Inc.................................. 1,312,835 33,100* Lone Star Steakhouse & Saloon......................... 252,388 46,600* Outback Steakhouse Inc................................ 1,654,300 16,888* Sbarro, Inc........................................... 439,088 78,800* Starbucks Corp........................................ 3,634,650 ------------ 9,980,860 ------------ SAVINGS & LOAN - 0.90% 142,065 Charter One Financial, Inc............................ 4,217,555
================================================================================ MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 16 November 30, 1998 (Unaudited) ================================================================================
NUMBER MARKET OF SHARES VALUE --------- ----------- SAVINGS & LOAN - Continued 99,700 Dime Bancorp, Inc. ...................... $ 2,648,281 ----------- 6,865,836 ----------- SECURITIES RELATED - 1.27% 115,514 A.G. Edwards, Inc. ...................... 4,259,579 133,300 Paine Webber Group Inc. ................. 5,448,637 ----------- 9,708,216 ----------- SEMICONDUCTOR EQUIPMENT - 0.20% 43,400* Microchip Technology, Inc. .............. 1,510,863 ----------- SEMICONDUCTORS - 3.13% 81,040* Altera Corp. ............................ 3,976,025 133,238* Analog Devices, Inc. .................... 2,723,045 81,700* Atmel Corp. ............................. 990,613 36,788 Avnet, Inc. ............................. 2,140,602 56,136* Cirrus Logic, Inc. ...................... 691,175 87,982* Cypress Semiconductor Corp. ............. 896,317 68,054 Linear Technology Corp. ................. 4,768,033 116,500* Maxim Integrated Products ............... 4,572,625 64,681* Xilinx, Inc. ............................ 3,282,561 ----------- 24,040,996 ----------- TELECOMMUNICATIONS - 1.19% 111,628* ADC Communications, Inc. ................ 3,334,886 48,242 COMSAT Corp. ............................ 1,718,621 61,500* QUALCOMM, Inc. .......................... 3,374,813 30,540 Vanguard Cellular Systems Class A ....... 702,420 ----------- 9,130,740 ----------- TEXTILE - PRODUCTS - 0.98% 47,600 Burlington Industries, Inc. ............. 496,825 88,700* Jones Apparel Group, Inc. ............... 2,056,731 112,423 Shaw Industries Inc. .................... 2,276,566 52,229* Unifi, Inc. ............................. 1,005,408 24,984 Wellman, Inc. ........................... 302,931 47,000 WestPoint Stevens Inc. Class A .......... 1,410,000 ----------- 7,548,461 ----------- TOBACCO - 0.13% 28,935 Universal Corp. ......................... 1,018,150 ----------- TRUCKERS - 0.23% 26,114 Arnold Industries, Inc. ................. 372,125
NUMBER MARKET OF SHARES VALUE --------- ----------- TRUCKERS - Continued 39,500 CNF Transportation, Inc. ................ $ 1,409,656 ----------- 1,781,781 ----------- UTILITIES - COMMUNICATION - 1.43% 28,818 Aliant Communications, Inc. ............. 821,313 74,875 Century Telephone Enterprises ........... 4,267,875 111,600 Cincinnati Bell, Inc. ................... 3,515,400 12 SBC Communications, Inc. ................ 575 54,391 Telephone and Data Systems .............. 2,325,216 ----------- 10,930,379 ----------- UTILITIES - ELECTRIC - 9.26% 111,514 Allegheny Energy, Inc. .................. 3,763,598 16,279 Black Hills Corp. ....................... 401,888 18,459 Cleco Corp. ............................. 631,067 91,164 CMS Energy Corp. ........................ 4,444,245 58,800* Calenergy, Inc. ......................... 1,841,175 87,838 Conectiv, Inc. .......................... 2,020,274 139,000 DPL Inc. ................................ 2,780,000 53,821 Energy East Corp. ....................... 2,855,877 89,062 Florida Progress Corp. .................. 3,807,400 24,166 Hawaiian Electric Industries ............ 940,964 30,823 Idacorp Inc. ............................ 1,074,952 58,800 Illinova Corp. .......................... 1,591,275 22,479 Indiana Energy, Inc. .................... 508,580 62,616 Interstate Energy Corp. ................. 1,901,961 39,464 IPALCO Enterprises, Inc. ................ 1,978,133 59,019 Kansas City Power & Light Co. ........... 1,752,126 117,642 LG&E Energy Corp. ....................... 3,293,976 76,334 MidAmerican Energy Holdings Co. ......... 1,984,684 33,818 Minnesota Power Inc. .................... 1,414,015 51,357 Montana Power Co. ....................... 2,603,158 102,144 NIPSCO Industries, Inc. ................. 2,994,096 37,633 Nevada Power Co. ........................ 891,432 52,617 New England Electrical System ........... 2,196,760 104,133* Northeast Utilities ..................... 1,640,095 66,192 OGE Energy Corp. ........................ 1,849,239 73,823 Pinnacle West Capital Corp. ............. 3,363,560 101,364 Potomac Electric Power Co. .............. 2,641,799 34,237 Public Service Co. of New Mexico ........ 665,482 69,062 Puget Sound Energy Inc. ................. 1,873,307 87,688 Scana Corp. ............................. 2,860,821 104,520 TECO Energy, Inc. ....................... 2,808,975 43,488 UtiliCorp United Inc. ................... 1,530,234 35,724 Washington Gas Light Co. ................ 910,962
NUMBER MARKET OF SHARES VALUE --------- ----------- UTILITIES - ELECTRIC - Continued 103,552 Wisconsin Energy Corp. .................. $ 3,203,640 ------------ 71,019,750 ------------ UTILITIES - GAS, DISTRIBUTION-1.48% 45,536 AGL Resources, Inc. ..................... 981,870 140,805 Keyspan Energy Corp. .................... 4,180,148 72,468 MCN Energy Group Inc. ................... 1,372,364 31,178 National Fuel Gas Co. ................... 1,432,240 128,946 Tosco Corp. ............................. 3,368,713 ------------ 11,335,335 ------------ WATER SERVICES - 0.26% 65,200 American Water Works Co., Inc. .......... 2,017,125 ------------ TOTAL COMMON STOCKS (Cost $582,878,594) ..................... 751,522,047 ------------
PAR MARKET VALUE VALUE - ---------- ----------- CORPORATE SHORT TERM COMMERCIAL PAPER - 2.12% FINANCE COMPANIES - 1.46% $2,600,000 Ford Motor Credit Co., 5.05% due 12/02/98 ..................... 2,599,635 1,058,000 General Electric Capital Services, Inc. 4.95% due 12/03/98 ..................... 1,057,709 7,564,000 General Motors Acceptance Corp., 4.86% due 12/01/98 ..................... 7,564,000 ------------ 11,221,344 ------------ UTILITIES - ELECTRIC - 0.66% 5,076,000 Conagra., 5.22% due 12/04/98 ..................... 5,073,792 ------------ TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $16,295,136) ...................... 16,295,136 ------------ UNITED STATES GOVERNMENT - SHORT TERM - 0.11% U. S. TREASURY BILLS - .011% 875,000 United States Treasury Bills, 4.20% due 12/31/98 ..................... 870,100 ------------
================================================================================ MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED November 30, 1998 (Unaudited) 17 ================================================================================ PAR MARKET VALUE VALUE - ---------- ------------- TOTAL UNITED STATES GOVERNMENT SHORT TERM (Cost $870,100) ....................... $ 870,100 ------------- TOTAL INVESTMENTS (Cost $600,043,830) - 100.23% ......... 768,687,283 Other assets less liabilities, net - (0.23)% ........................ (1,690,783) ------------- NET ASSETS (equivalent to $24.79 per share on 30,941,583 shares outstanding) - 100% .................. $ 766,996,500 ============= * Non-income producing
UNREALIZED CONTRACTS DEPRECIATION - --------- ------------- FUTURES CONTRACTS PURCHASED(1) (Delivery month/Value at 11/30/98) 78 (2) S&P MidCap 400 Index Futures (December/$354.70)..................... $ (139,545) ============= (1)U.S.Treasury Bills with a market value of approximately $750,000 were maintained in a segregated account with a portion placed as collateral for futures contracts (2)Per 500
NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 30,941,583 shares outstanding ................... $ 309,416 Additional paid in capital ........................ 451,691,775 Accumulated net realized gain on securities ....... 146,455,252 Undistributed net investment income ............... 36,149 Unrealized appreciation (depreciation) of: Investments .................. $ 168,643,453 Futures ...................... (139,545) 168,503,908 ------------- ------------- NET ASSETS APPLICABLE TO SHARES OUTSTANDING ....... $ 766,996,500 =============
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ MIDCAP INDEX FUND - FINANCIAL STATEMENTS (Unaudited) 18 ================================================================================ STATEMENT OF OPERATIONS For the six months ended November 30, 1998 INVESTMENT INCOME: Dividends ...................................................................... $ 4,633,094 Interest ....................................................................... 323,201 ------------ Total investment income ...................................................... 4,956,295 ------------ EXPENSES: Advisory fees .................................................................. 1,181,632 Custodian and accounting services .............................................. 89,099 Reports to shareholders ........................................................ 59,692 Audit fees and tax services .................................................... 12,968 Directors' fees and expenses ................................................... 10,874 Miscellaneous .................................................................. 30,865 ------------ Total expenses ............................................................... 1,385,130 ------------ NET INVESTMENT INCOME .......................................................... 3,571,165 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES: Net realized gain (loss) on: Investments ..................................................... $ 80,067,104 Futures contracts ............................................... (1,347,612) 78,719,492 ------------ Net unrealized depreciation during the period: Investments ..................................................... (96,218,028) Futures contracts ............................................... (98,820) (96,316,848) ------------ ------------ Net realized and unrealized loss on securities during the period ............ (17,597,356) ------------ DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................... $(14,026,191) ============
STATEMENT OF CHANGES IN NET ASSETS
For the For the six months ended fiscal year ended November 30,1998 May 31, 1998 ---------------- ----------------- OPERATIONS: Net investment income ............................................. $ 3,571,165 $ 6,901,224 Net realized gain on securities ................................... 78,719,492 68,478,713 Net unrealized appreciation (depreciation) of securities during the period ............................................ (96,316,848) 104,095,928 ------------- ------------- Increase (decrease) in net assets resulting from operations ..... (14,026,191) 179,475,865 ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ............................................. 3,577,363 (6,915,741) Net realized gain on securities ................................... -- (39,892,715) ------------- ------------- Decrease in net assets resulting from distributions to shareholders .............................................. (3,577,363) (46,808,456) ------------- ------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold .................................. 17,273,125 54,227,081 Proceeds from capital stock issued for distributions reinvested ... 3,577,363 46,808,456 ------------- ------------- 20,850,488 101,035,537 Cost of capital stock repurchased ................................. (40,568,063) (36,446,663) ------------- ------------- Increase (decrease) in net assets resulting from capital stock transactions ................................... (19,717,575) 64,588,874 ------------- ------------- TOTAL INCREASE (DECREASE) IN NET ASSETS ........................... (37,321,129) 197,256,283 NET ASSETS: Beginning of period ............................................... 804,317,629 607,061,346 ------------- ------------- End of period (including undistributed net investment income of $36,149 and $42,347) ...................................... $ 766,996,500 $ 804,317,629 ============= ============= CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold ...................................... 714,310 2,234,398 Shares issued for distributions reinvested ........................ 152,128 1,997,359 Shares of capital stock repurchased ............................... (1,754,748) (1,539,198) ------------- ------------- Increase (decrease) in shares outstanding ....................... (888,310) 2,692,559 Shares outstanding: Beginning of period ............................................. 31,829,893 29,137,334 ------------- ------------- End of period ................................................... 30,941,583 31,829,893 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS NOVEMBER 30, 1998 (UNAUDITED) 19 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- COMMON STOCK - 97.72% ADVERTISING - 0.60% 6,625* ADVO, Inc. ................................ $ 171,422 5,100* Catalina Marketing Corp. .................. 297,075 2,600* Doubleclick, Inc. ......................... 105,300 7,500* Getty Images, Inc. ........................ 129,375 300 Grey Advertising, Inc. .................... 108,000 4,525* HA-LO Industries, Inc. .................... 144,517 7,300* NFO Worldwide Inc. ........................ 92,163 1,700* TMP Worldwide Inc. ........................ 54,400 6,800* Westwood One, Inc. ........................ 180,200 ---------- 1,282,452 ---------- AEROSPACE/DEFENSE - 0.55% 3,200* Alliant Techsystems, Inc. ................. 243,800 6,700* Aviall, Inc. .............................. 81,237 1,280* Banner Aerospace, Inc. .................... 11,360 6,600 BE Aerospace, Inc. ........................ 156,750 2,200 Cubic Corp. ............................... 45,100 4,393* Fairchild Corp. Class A ................... 70,562 8,400 Gencorp Inc. .............................. 206,850 2,500 HEICO Corp. ............................... 61,094 3,100* Moog Inc. ................................. 89,900 5,100* Remec, Inc. ............................... 70,763 1,600* Sequa Corp. Class A ....................... 101,800 6,100* Trimble Navigation Ltd. ................... 54,519 ---------- 1,193,735 ---------- AIRLINES - 0.73% 10,600* Airtran Holdings Inc. ..................... 42,400 5,400* Alaska Air Group, Inc. .................... 202,162 11,600 American West Holdings Corp. .............. Class B .................................. 163,850 2,300* Amtran Inc. ............................... 50,600 5,600 ASA Holdings, Inc. ........................ 190,050 3,400* Atlas Air, Inc. ........................... 157,250 3,300 Circle International Group, Inc. .......... 56,925 6,300 Expeditors International of WA ............ 242,550 10,900* Mesa Airlines, Inc. ....................... 87,200 1,050* Mesaba Holdings, Inc. ..................... 19,687 3,650 Midwest Express Holdings, Inc. ............ 101,288 6,300 SkyWest, Inc. ............................. 170,494 16,600 Transport World Airlines, Inc. ............ 84,038 ---------- 1,568,494 ----------
NUMBER MARKET OF SHARES VALUE - --------- ---------- APPAREL & PRODUCTS - 1.35% 4,100* American Eagle Outfitters ................. $ 244,975 6,700* Ann Taylor Stores Corp. ................... 220,681 5,600 Authentic Fitness Corp. ................... 89,600 2,500* Brylane Inc. .............................. 39,688 2,900* Buckle, Inc. .............................. 74,313 11,925 Claire's Stores, Inc. ..................... 202,725 6,100* Dress Barn, Inc. .......................... 89,975 7,700* Footstar Inc. ............................. 187,687 2,900* Gadzooks, Inc. ............................ 21,387 3,200* Goodys Family Clothing Inc. ............... 36,000 10,200* Guess? Inc. ............................... 38,250 6,200* Gymboree Corp. ............................ 41,462 13,500* Hartmarx Corp. ............................ 79,313 5,000* Jo-ann Stores Inc. ........................ 78,750 5,450 Kellwood Co. .............................. 147,150 5,300* Land's End, Inc. .......................... 119,581 6,150* Mens Wearhouse, Inc. ...................... 155,672 8,900 Nautica Enterprises, Inc. ................. 175,219 4,900 Oakley Inc. ............................... 47,775 6,200 OshKosh B'Gosh, Inc. Class A .............. 148,800 900 Oxford Industries Inc. .................... 25,988 5,925* Pacific Sunwear of California ............. 87,764 6,000 Phillips-Van Heusen Corp. ................. 42,000 4,300 St. John Knits, Inc. ...................... 86,000 6,800* Stage Stores, Inc. ........................ 78,200 4,400 Talbots, Inc. ............................. 112,200 2,400 UniFirst Corp. ............................ 52,800 2,400* Urban Outfitters, Inc. .................... 33,900 4,800* Value City Dept. Stores Inc. .............. 49,200 3,700* Wet Seal, Inc. ............................ 102,675 ---------- 2,909,730 ---------- APPLIANCES/FURNISHINGS - 0.87% 6,400 Aaron Rents, Inc. ......................... 100,000 3,850 Bassett Furniture Industries .............. 97,213 5,000* CORT Business Services Corp. .............. 113,438 8,797* Griffon Corp. ............................. 84,671 4,600 Haverty Furniture Cos, Inc. ............... 89,700 15,400 Heilig-Meyers Co. ......................... 107,800 5,800* Helen Of Troy, Ltd. ....................... 97,150 5,200 Hunt Corp. ................................ 71,175 11,500 Hussmann International, Inc. .............. 189,750 9,300 Kimball International, Inc. Class B ....... 179,025 12,000 La-Z-Boy Chair Co. ........................ 201,000 13,185* Metromedia International Group ............ 58,508
NUMBER MARKET OF SHARES VALUE - --------- ---------- APPLIANCES/FURNISHINGS - Continued 3,800 National Presto Industries ................ $ 156,988 4,650 Oneida Ltd. ............................... 84,862 4,700* Renters Choice, Inc. ...................... 113,387 3,750* SLI, Inc. ................................. 82,500 6,500* Windmere Corp. ............................ 39,813 ---------- 1,866,980 ---------- AUTO - CARS - 0.15% 8,800* Avis Rent A Car Inc. ...................... 185,350 6,500* Budget Group, Inc. ........................ 81,250 4,000* United Auto Group, Inc. ................... 53,750 ---------- 320,350 ---------- AUTO - ORIGINAL EQUIPMENT - 0.77% 7,100* Allen Telecom, Inc. ....................... 49,256 5,900 Arvin Industries, Inc. .................... 247,800 6,800* Breed Technologies, Inc. .................. 45,900 10,200 Donaldson Co., Inc. ....................... 204,000 6,200* Hayes Lemmerz International, Inc. ......... 195,300 13,300 Mark IV Industries, Inc. .................. 224,438 14,550* Miller Industries, Inc. ................... 70,022 5,700 Modine Manufacturing Co. .................. 208,050 5,300 Superior Industries International, Inc..... 137,800 11,800* Tower Automotive, Inc. .................... 268,450 ---------- 1,651,016 ---------- AUTO - REPLACEMENT PARTS - 0.91% 5,100 A.O. Smith Corp. .......................... 126,863 5,100* Aftermarket Technology Corp. .............. 29,325 15,100* Collins & Aikman Corp. .................... 80,219 3,800* CSK Auto Corp. ............................ 105,925 3,900* Discount Auto Parts, Inc. ................. 97,256 5,400 Furon Co. ................................. 92,813 8,500 Kaydon Corp. .............................. 300,156 3,300 Midas Inc. ................................ 102,919 6,957 Myers Industries, Inc. .................... 156,532 2,200* O'Reilly Automotive, Inc. ................. 99,825 5,350 Simpson Industries, Inc. .................. 56,175 6,400* SPX Corp. ................................. 371,200 4,700 Standard Motor Products, Inc. ............. 107,218 4,450 Standard Products Co. Class A ............. 82,881 6,468 Wynn's International, Inc. ................ 143,509 ---------- 1,952,816 ----------
================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 20 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- BANKS - OTHER - 0.55% 600 Alabama National Bancorp .................. $ 15,600 10,400 First Bancorp/Puerto Rico ................. 284,700 5,400 First Merchants Corp. ..................... 153,900 3,000 Irwin Financial Corp. ..................... 85,875 11,200 Republic Security Financial Co. ........... 125,300 200 Signal Corp. .............................. 6,850 9,965 Sky Financial Group Inc. .................. 302,683 2,100* Sterling Bancshares, Inc. ................. 33,338 12,000 Westernbank Puerto Rico ................... 159,000 ---------- 1,167,246 ---------- BANKS - REGIONAL - 6.77% 7,350 AMCORE Financial, Inc. .................... 173,184 7,700 Anchor BanCorp Wisconsin, Inc. ............ 154,963 2,400 BancFirst Corp. ........................... 97,800 10,400 BancorpSouth, Inc. ........................ 198,900 3,800 Bancwest Corp. ............................ 164,350 3,700 Bank Atlantic Bancorp Class B ............. 29,600 2,931 Bank of Granite Corp. ..................... 83,534 6,100 Banknorth Group, Inc. ..................... 203,588 1,243* BOK Financial Corp. ....................... 59,052 400 BT Financial Corp. ........................ 11,200 3,150 Capital City Bank Group, Inc. ............. 92,138 1,700 Carolina First Corp. ...................... 42,394 3,200 Cathay Bancorp Inc. ....................... 121,000 4,110 Chemical Financial Corp. .................. 174,675 6,350 Citizens Banking Corp. .................... 205,184 6,587 CNB Bancshares, Inc. ...................... 285,711 7,261 Commerce Bancorp, Inc. .................... 346,713 17,044 Commercial Federal Corp. .................. 390,947 7,900 Commonwealth Bancorp, Inc. ................ 120,475 15,000 Community First Bankshares ................ 319,688 1,960 Community Trust Bancorp ................... 45,080 3,750 Corus Bankshares, Inc. .................... 136,172 5,740 Cullen/Frost Bankers, Inc. ................ 307,808 2,860 F & M Bancorporation, Inc. ................ 90,805 8,142 F & M National Corp. ...................... 245,278 2,800 Farmers Capital Bank Corp. ................ 98,350 1 Fifth Third Bancorp ....................... 50 14,358 First American Financial Corp. Class A .................................. 439,714 1,850 First Citizens BancShares, Inc. Class A .................................. 158,175 4,900 First Commerce Bancshares, Inc. Class B .................................. 142,100
NUMBER MARKET OF SHARES VALUE - --------- ---------- BANKS - REGIONAL - Continued 5,600 First Commonwealth Financial .............. $ 137,200 7,744 First Financial Bancorp ................... 259,908 2,200 First Financial Bankshares ................ 81,400 2,931 First Financial Corp. ..................... 130,430 8,168 First Midwest Bancorp, Inc. ............... 318,041 4,800 First Source Corp. ........................ 156,000 2,900 First United Bancshares ................... 57,275 5,208 First Western Bancorp, Inc. ............... 164,052 5,410 FNB Corp. ................................. 152,833 8,700* Friedman Billings Ramsey Class A .......... 52,200 1,100* Frontier Financial Corp. .................. 53,350 5,900 GBC Bancorp ............................... 146,763 5,700 Harbor Florida Bancshares ................. 61,988 2,546 Harleysville National Corp. ............... 93,566 4,500 Harris Financial, Inc. .................... 65,812 800 Horizon Bancorp, Inc. ..................... 29,600 5,998 HUBCO, Inc. ............................... 161,946 10,339* Imperial Bancorp .......................... 160,255 21,500 Independence Community Bank ............... 303,687 1,700 International Bancshares Corp. ............ 91,800 2,100 InterWest Bancorp, Inc. ................... 50,663 3,166 JeffBanks, Inc. ........................... 71,630 6,996 KeyCorp ................................... 214,690 3,400 MainStreet Financial Corp. ................ 146,200 2,400 Mississippi Valley Bancshares, Inc. ....... 87,900 6,195 N B T Bancorp, Inc. ....................... 155,649 6,500 National Bancorp of Alaska ................ 201,500 4,553 National City Bancshares, Inc. ............ 173,006 3,276 National Penn Bancshares, Inc. ............ 106,674 6,200 Ocean Financial Corp. ..................... 98,037 6,846 Old National Bancorp Indiana .............. 355,992 2,400 Omega Financial Corp. ..................... 71,850 8,458 One Valley Bancorp of West Va ............. 278,585 2,900 Park National Corp. ....................... 278,400 6,700 Peoples Bancorp, Inc. ..................... 67,000 6,300* PFF Bancorp, Inc. ......................... 96,862 2,400 Premier Bancshares, Inc. .................. 56,100 6,000 Prime Bancorp ............................. 114,000 3,100* Republic Bancshares, Inc. ................. 54,831 6,200 Riggs National Corp. ...................... 130,200 10,800 Roslyn Bancorp, Inc. ...................... 201,150 7,380 S&T Bancorp, Inc. ......................... 196,493 1,800 Santa Barbara Bancorp ..................... 45,000 4,900* Silicon Valley Bancshares ................. 122,500 9,200* Southwest Bancorporation of TX ............ 165,600
NUMBER MARKET OF SHARES VALUE - --------- ---------- BANKS - REGIONAL - Continued 11,950 St. Paul Bancorp, Inc. .................... $ 252,444 3,100 Sterling Financial Corp. .................. 127,875 8,718 Susquehanna Bancshares, Inc. .............. 193,975 5,400 Texas Regional Bancshares Class A ......... 147,825 4,950 Triangle Bancorp, Inc. .................... 94,978 6,700 Trust Co. of New Jersey ................... 160,800 6,890 TrustCo Bank Corp. NY ..................... 192,920 4,200 U.S.B. Holding Co., Inc. .................. 67,200 3,792 UMB Financial Corp. ....................... 167,796 9,700 United Bankshares Inc. WV ................. 277,056 3,600 USBANCORP, Inc. ........................... 70,875 13,100 UST Corp. ................................. 324,225 6,300 Vermont Financial Services ................ 148,050 8,600 Webster Financial Corp. ................... 238,650 12,361 Westamerica Bankcorporation ............... 446,541 6,794 Westcorp .................................. 58,173 2,900 Western Bancorp ........................... 94,612 7,200 Whitney Holding Corp. ..................... 266,400 ----------- 14,487,641 ----------- BEVERAGE - BREWERS/DISTRIBUTORS - 0.44% 9,100 Adolph Coors Class B ...................... 452,725 3,900 Beringer Wine Estates-B ................... 142,838 3,700* Boston Beer, Inc. Class A ................. 31,450 5,000* Canandaigua Brands, Inc. Class A .......... 248,750 2,000 Robert Mondavi Corp. Class A .............. 73,250 ----------- 949,013 ----------- BEVERAGE - SOFT DRINKS - 0.03% 1,400 Coca-Cola Bottling Co. .................... 81,288 ----------- BROADCASTING - 0.77% 3,900 Ackerley Group, Inc. ...................... 69,469 4,100 Adelphia Communications Corp. ............. Class A .................................. 143,244 7,900 American Mobile Satellite Corp. ........... 36,538 8,800* ANTEC Corp. ............................... 162,800 2,000* CD Radio Inc. ............................. 76,750 11,100* Century Communications Corp. .............. Class A .................................. 271,256 1,500* Cox Radio, Inc. Class A ................... 57,281 3,100* Emmis Communications Corp. ................ Class A .................................. 106,756 2,300* Jones Intercable, Inc. .................... 71,444 2,500 Paxson Communications Corp. ............... 18,125
================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED NOVEMBER 30, 1998 (UNAUDITED) 21 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- BROADCASTING - Continued 13,200* United International Holdings Class A .................................... $ 222,750 1,800 United Television, Inc. ..................... 198,000 12,100 US Satellite Broadcasting, Inc. ............. Class A .................................... 93,775 3,600* Young Broadcasting Inc. Class A ............. 128,250 ---------- 1,656,438 ---------- BUILDING MATERIALS - 0.93% 1,100 Ameron, Inc. ................................ 40,425 7,200 Apogee Enterprises, Inc. .................... 89,100 1,650 Butler Manufacturing Co. .................... 38,363 5,200 CalMat Co. .................................. 159,900 3,000 Centex Construction Production .............. 106,500 9,500* Comfort Systems USA, Inc. ................... 178,125 3,400* Cooper Companies, Inc. ...................... 72,250 12,800* Dal-Tile International, Inc. ................ 110,400 3,450 Elcor Corp. ................................. 106,519 13,700 Fedders USA Inc. ............................ 76,206 3,400 Florida Rock Industries, Inc. ............... 99,663 2,800* Giant Cement Holding, Inc. .................. 67,200 11,900 Interface, Inc. Class A ..................... 148,750 2,700 Lone Star Industries, Inc. .................. 204,356 6,000* NCI Building Systems, Inc. .................. 147,000 1,100 Puerto Rican Cement Co., Inc. ............... 40,700 5,500 Texas Industries, Inc. ...................... 159,156 8,400 Watsco, Inc. ................................ 150,675 ---------- 1,995,288 ---------- CHEMICAL - MAJOR - 0.38% 5,600 Albemarle Corp. ............................. 104,300 4,400* Borg-Warner Automotive, Inc. ................ 219,450 5,000 Chemed Corp. ................................ 169,375 6,009 Hexcel Corp. ................................ 55,208 6,900* Polymer Group, Inc. ......................... 73,312 4,500* Synetic, Inc. ............................... 190,688 ---------- 812,333 ---------- CHEMICAL - MISCELLANEOUS - 1.82% 9,400 A. Schulman, Inc. ........................... 200,925 8,300* Agribiotech, Inc. ........................... 107,900 12,400* Airgas, Inc. ................................ 125,550 5,450 Brady Corp. ................................. 140,338 8,300 Cambrex Corp. ............................... 232,400 7,900 ChemFirst, Inc. ............................. 149,113
NUMBER MARKET OF SHARES VALUE - --------- ---------- CHEMICAL - MISCELLANEOUS - Continued 5,900 Dexter Corp. ................................ $ 189,169 6,400 Ethyl Corp. ................................. 37,200 9,600 Ferro Corp. ................................. 268,200 9,300* Fisher Scientific International, Inc. ....... 172,050 4,500 Foamex International, Inc. .................. 51,469 4,500 General Chemical Group, Inc. ................ 76,500 5,900 Geon, Co. ................................... 131,275 8,100 Georgia Gulf Corp. .......................... 151,875 4,600 H.B. Fuller Co. ............................. 200,100 9,800 Lawter International, Inc. .................. 80,850 4,950 LeaRonal, Inc. .............................. 111,994 11,500 M.A. Hanna Co. .............................. 161,719 2,900 MacDermid, Inc. ............................. 106,937 1,900* McWhorter Technologies, Inc. ................ 44,887 5,200 Minerals Technologies Inc. .................. 228,150 1,200 NCH Corp. ................................... 67,200 5,600 NL Industries, Inc. ......................... 74,550 5,800 OM Group, Inc. .............................. 209,887 8,500 Rollins, Inc. ............................... 145,031 2,000 Stepan Co. .................................. 55,875 3,400* TETRA Technologies, Inc. .................... 42,925 5,550* VWR Scientific Products Corp. ............... 173,437 4,900 WD-40 Co. ................................... 151,900 ---------- 3,889,406 ---------- COAL - 0.07% 1,634 NACCO Industries, Inc. Class A .............. 142,260 ---------- CONGLOMERATES - 0.17% 7,400 Alexander & Baldwin, Inc. ................... 170,200 2,100* MAXXAM, Inc. ................................ 102,506 3,600* PEC Israel Economic Corp. ................... 86,625 ---------- 359,331 ---------- CONSUMER FINANCE - 0.77% 15,400* AmeriCredit Corp. ........................... 212,712 14,300* Arcadia Financial Ltd. ...................... 50,943 6,875 Chittenden Corp. ............................ 207,969 10,600 Eaton Vance Corp. ........................... 257,712 1,250 Fund American Enterprises ................... 177,188 11,100* IMC Mortgage Co. ............................ 6,938 5,797 Metris Companies Inc. ....................... 193,475 4,300* SEI Investments Co. ......................... 396,675 5,350 WesBanco, Inc. .............................. 147,125 ---------- 1,650,737 ----------
NUMBER MARKET OF SHARES VALUE - --------- ---------- CONTAINERS - METAL/GLASS - 0.47% 8,000 AptarGroup, Inc. ............................ $ 223,500 7,900 Ball Corp. .................................. 337,725 6,450 CLARCOR, Inc. ............................... 121,341 1,800* CSS Industries, Inc. ........................ 53,212 5,000 Greif Brothers Corp. Class A ................ 161,250 4,000* Silgan Holdings, Inc. ....................... 110,000 ---------- 1,007,028 ---------- CONTAINERS - PAPER - 0.26% 4,900 Chesapeake Corp. ............................ 169,969 13,000* Gaylord Container Corp. Class A ............. 68,250 3,000* Ivex Packaging Corp. ........................ 58,500 7,390 Rock-Tenn Co. Class A ....................... 120,549 9,000* Shorewood Packaging Corp. ................... 133,313 ---------- 550,581 ---------- COSMETICS/TOILETRIES - 0.07% 9,400* Playtex Products, Inc. ...................... 145,700 ---------- DRUGS - 3.35% 4,500 A.L. Pharma Inc. Class A .................... 162,000 8,800* Agouron Pharmaceuticals, Inc. ............... 383,900 2,600* Algos Pharmaceuticals Corp. ................. 70,525 6,100* Alkermes, Inc. .............................. 112,088 6,200* AmeriSource Health Corp. Class A ............ 396,800 2,300* Barr Laboratories, Inc. ..................... 97,175 4,100 Bindley Western Industries .................. 158,363 6,900 Carter-Wallace Inc. ......................... 122,475 7,900* Cephalon, Inc. .............................. 58,756 10,900* Columbia Laboratories, Inc. ................. 40,875 7,900* COR Therapeutics, Inc. ...................... 92,825 4,000* Coulter Pharmaceutical, Inc. ................ 113,500 17,000* Covance Inc. ................................ 425,000 10,200* Dura Pharmaceuticals, Inc. .................. 131,963 7,200* Fuisz Technologies, Ltd. .................... 87,300 4,500* GelTex Pharmaceuticals, Inc. ................ 107,438 28,800* Gensia, Inc. ................................ 133,200 5,700* Guilford Pharmaceuticals, Inc. .............. 80,513 3,000 Herbalife International, Inc. Class A ....... 35,438 5,600* Human Genome Sciences, Inc. ................. 175,000 10,100* ICOS Corp. .................................. 219,044 4,400* IDEC Pharmaceuticals Corp. .................. 147,950 7,800* Immune Response Corp. ....................... 101,400 6,900* Incyte Pharmaceuticals, Inc. ................ 215,625 4,100* Inhale Therapeutic Systems Inc. ............. 132,738
================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 22 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- DRUGS - Continued 21,700* IVAX Corp. .................................. $ 206,150 5,900 Jones Pharma Inc. ........................... 212,400 3,150 Life Technologies, Inc. ..................... 116,944 12,458* Ligand Pharmaceuticals, Inc. Class B ........ 123,801 4,800* Medicis Pharmaceutical Class A .............. 302,400 9,700* Millennium Pharmaceuticals .................. 197,637 2,200* Miravant Medical Technologies ............... 33,550 3,830* Natures Sunshine Products, Inc. ............. 59,843 4,900* Neurogen Corp. .............................. 84,218 7,600* NeXstar Pharmaceuticals, Inc. ............... 76,000 7,100* Parexel International Corp. ................. 185,043 5,300* Pathogenesis Corp. .......................... 254,400 11,100* P-Com, Inc. ................................. 41,278 6,600* Regeneron Pharmaceuticals Inc. .............. 54,450 5,300* Roberts Pharmaceutical Corp. ................ 129,850 5,200* SangStat Medical Corp. ...................... 124,800 2,400* Schein Pharmaceutical, Inc. ................. 32,100 7,900* Sepracor Inc. ............................... 655,700 11,200* SEQUUS Pharmaceuticals, Inc. ................ 221,200 6,500* Vertex Pharmaceuticals Inc. ................. 153,968 8,800* Vivus Inc. .................................. 26,675 4,100* Zonagen, Inc. ............................... 78,925 ---------- 7,173,223 ---------- ELECTRIC PRODUCTS - MISCELLANEOUS - 0.23% 8,500 CMP Group Inc. .............................. 152,469 5,900* Jabil Circut, Inc. .......................... 342,200 ---------- 494,669 ---------- ELECTRICAL EQUIPMENT- 1.58% 1,900* Advanced Lighting Technologies .............. 16,625 8,500 AMETEK, Inc. ................................ 176,375 14,700* AMKOR Technologies, Inc. .................... 92,794 4,000* Amphenol Corp. Class A ...................... 131,250 5,557* BancTec, Inc. ............................... 73,283 6,700 Belden, Inc. ................................ 113,063 1,500* C & D Technologies, Inc. .................... 43,500 9,300* Cable Design Technologies ................... 171,469 4,300* California Microwave, Inc. .................. 52,138 3,500* Dbt Online, Inc. ............................ 59,719 9,900* Digital Microwave Corp. ..................... 58,163 6,450* Electro Rent Corp. .......................... 77,400 2,900* Electro Scientific Industries ............... 86,819 6,600* Esterline Technologies Corp. ................ 137,775
NUMBER MARKET OF SHARES VALUE - --------- ---------- ELECTRICAL EQUIPMENT - Continued 7,500 General Cable Corp. ......................... $ 142,500 1,676 General Electric Co. ........................ 151,714 7,400* GenRad, Inc. ................................ 120,250 2,800* Holophane Corp. ............................. 64,050 5,100* Hutchinson Technology, Inc. ................. 157,781 15,100* Intergraph Corp. ............................ 98,150 7,000 Juno Lighting, Inc. ......................... 163,625 10,000* Kemet Corp. ................................. 141,250 7,100* Kent Electronics Corp. ...................... 100,731 5,700 Kuhlman Corp. ............................... 158,888 5,100* Littelfuse, Inc. ............................ 119,850 10,000* Mail-Well, Inc. ............................. 129,375 4,100* Plexus Corp. ................................ 123,000 4,900 Standex International Corp. ................. 114,537 1,200* Thermo Ecotek Corp. ......................... 12,600 5,850 Thomas Industries Inc. ...................... 100,912 2,300* Triumph Group, Inc. ......................... 77,337 7,900* Vicor Corp. ................................. 70,112 4,600 X-Rite, Inc. ................................ 40,250 ---------- 3,377,285 ---------- ELECTRONIC INSTRUMENTS - 2.29% 1,950 Analogic Corp. .............................. 69,225 7,000 BMC Industries .............................. 43,313 8,800* C-Cube Microsystems, Inc. ................... 230,450 11,500* Checkpoint Systems, Inc. .................... 154,531 8,300* Cognex Corp. ................................ 137,469 12,400* Commscope Inc. .............................. 188,325 5,300 CTS Corp. ................................... 186,825 4,300 Daniel Industries, Inc. ..................... 47,031 8,200* Dionex Corp. ................................ 254,200 2,400* Evans & Sutherland Computer ................. 46,800 18,400* Gentex Corp. ................................ 338,100 6,500 Gerber Scientific, Inc. ..................... 164,531 3,400* HADCO Corp. ................................. 119,000 4,575 Harman International Industries ............. 195,295 10,400* Imation Corp. ............................... 169,000 21,000* Integrated Device Technology ................ 123,375 12,600* InterDigital Communication .................. 59,850 4,700* Lattice Semiconductor Corp. ................. 173,313 7,000* LoJack Corp. ................................ 64,750 7,700* MagnaTek, Inc. .............................. 87,588 4,200* Marshall Industries ......................... 109,200 12,750 Methode Electronics, Inc. Class A ........... 173,719 2,300* Metromedia Fiber Network, Inc. .............. 119,313
NUMBER MARKET OF SHARES VALUE - --------- ---------- ELECTRONIC INSTRUMENTS - Continued 8,500* Mettler-Toledo International ................ $ 223,125 9,800 National Computer Systems, Inc. ............. 322,175 2,400* Optical Cable Corp. ......................... 33,300 2,700 Park Electrochemical Corp. .................. 51,806 4,700* Performance Food Group Co. .................. 115,150 6,937 Pioneer-Standard Electronics ................ 75,440 5,200 Pittston Bax Group .......................... 45,175 14,700* Read-Rite Corp. ............................. 197,531 14,000* Sensormatic Electronics Corp. ............... 113,750 4,900 Technitrol, Inc. ............................ 147,918 5,000* Telxon Corp. ................................ 135,000 4,100* Thermedics, Inc. ............................ 42,793 10,800* Vishay Intertechnology, Inc. ............... 153,225 ---------- 4,911,591 ---------- ENTERTAINMENT - 0.92% 3,600* AMC Entertainment, Inc. ..................... 60,300 11,700 Aztar Corp. ................................. 59,231 4,100* Carmike Cinemas, Inc. Class A ............... 82,000 9,100* Florida Panthers Holdings, Inc. ............. 101,806 4,100* Gaylord Entertainment Co. ................... 120,181 1,900* GC Companies, Inc. .......................... 76,475 9,100* GTECH Holdings Corp. ........................ 228,069 9,200* Hollywood Entertainment Corp. ............... 220,800 5,800 International Speedway Corp. ................ 205,900 5,900* Marvel Enterprises Inc. ..................... 36,138 6,946* Midway Games Inc. ........................... 70,762 4,800* N2K Inc. .................................... 78,000 4,000* Playboy Enterprises, Inc. ................... 61,750 3,300* Primadonna Resorts, Inc. .................... 24,750 1,100* Recoton Corp. ............................... 20,556 6,200* SFX Entertainment Inc. Class A .............. 310,775 11,400* Spelling Entertainment Group ................ 83,363 15,900* TCI Satellite Entertainment Inc. Class A .................................... 17,888 2,800* Trans World Entertainment Corp. ............. 64,750 3,400* Trendwest Resorts, Inc. ..................... 48,875 ---------- 1,972,369 ---------- FERTILIZERS - 0.07% 6,604 Mississippi Chemical Corp. .................. 104,013 8,400 Terra Industries, Inc. ...................... 45,675 ---------- 149,688 ----------
================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED NOVEMBER 30, 1998 (UNAUDITED) 23 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- FINANCE COMPANIES - 0.42% 8,800 Aames Financial Corp. ....................... $ 16,500 2,600 Capital Factors Holdings, Inc. .............. 44,850 9,000* Credit Acceptance Corp. ..................... 59,625 3,300* Delta Financial Corp. ....................... 18,150 8,000 Doral Financial Corp. ....................... 143,000 3,900* First Sierra Financial Inc. ................. 35,100 4,100* Franchise Mortgage Acceptance Co. ........... 39,462 9,734* Imperial Credit Industries .................. 98,557 2,166 Oriental Financial Group .................... 66,605 16,000* Phoenix Investment Partners, Ltd ............ 136,000 5,300* Southern Pacific Funding .................... 319 2,400 Student Loan Corp. .......................... 108,900 2,300 Triad Guaranty, Inc. ........................ 51,750 8,800* UniCapital Corp. ............................ 72,600 ---------- 891,418 ---------- FINANCIAL SERVICES - 0.37% 4,100 Advanta Corp. ............................... 42,793 5,000 Conning Corp. ............................... 85,625 5,000 D & N Financial Corp. ....................... 115,313 10,700 EVEREN Capital Corp. ........................ 274,868 1,200 First Liberty Financial Corp. ............... 26,100 2,300* HealthCare Financial Partners ............... 75,613 2,200* International Telecom. Data Systems Inc. ............................... 54,175 3,600 Resource America, Inc. ...................... 43,425 4,900 Richmond Count Financial Corp. .............. 80,544 ---------- 798,456 ---------- FOODS - 1.32% 3,900* Agribrands International Inc. ............... 118,462 5,600* American Italian Pasta Co. Class A .......... 141,400 6,100 Chiquita Brands International ............... 68,625 7,500 Corn Products International, Inc. ........... 210,468 6,400 Dreyer's Grand Ice Cream, Inc. .............. 87,200 10,000 Earthgrains Co. ............................. 321,250 4,400 International Multifoods Corp. .............. 111,925 3,600 Interpool, Inc. ............................. 52,200 6,800 J.M. Smucker Co. Class A .................... 158,100 6,000 Lance, Inc. ................................. 118,125 3,500 Michael Foods, Inc. ......................... 87,937 15,600* NBTY, Inc. .................................. 95,550 3,800 Pilgrims Pride Corp. ........................ 92,150
NUMBER MARKET OF SHARES VALUE - --------- ---------- FOODS - Continued 8,840* Ralcorp Holdings, Inc. ...................... $ 154,700 12,200 Richfood Holdings, Inc. ..................... 226,463 4,300 Riviana Foods ............................... 86,538 1,000* United Natural Foods, Inc. .................. 24,375 16,800 Universal Foods Corp. ....................... 416,850 9,500* Vlasic Foods International Inc. ............. 205,438 1,700* Wild Oats Markets, Inc. ..................... 48,450 ---------- 2,826,206 ---------- FOOTWEAR - 0.38% 7,400 Brown Group, Inc. ........................... 132,738 6,800* Genesco, Inc. ............................... 37,825 7,250* Just For Feet, Inc. ......................... 164,031 4,300 Justin Industries, Inc. ..................... 55,363 3,600 Kenneth Cole Productions, Inc. Class A .................................... 65,475 4,600* Nine West Group, Inc. ....................... 57,500 12,100 Stride Rite Corp. ........................... 107,388 1,800* Timberland Co. Class A ...................... 73,687 8,500 Wolverine World Wide, Inc. .................. 115,812 ---------- 809,819 ---------- FREIGHT - 0.46% 8,950 Air Express International Corp. ............. 199,138 2,800* Eagle USA Airfreight, Inc. .................. 53,200 15,400* Greyhound Lines, Inc. ....................... 92,400 7,900 J.B. Hunt Transport Services, Inc. .......... 150,100 5,512* Kirby Corp. ................................. 109,551 14,000* OMI Corp. ................................... 43,750 10,200 Overseas Shipholding Group, Inc. ............ 161,287 3,500* SEACOR Holdings, Inc. ....................... 167,125 ---------- 976,551 ---------- GOLD MINING - 0.18% 53,900 Battle Mountain Gold Co. .................... 252,656 8,230* Getchell Gold Corp. ......................... 134,766 ---------- 387,422 ---------- HARDWARE & TOOLS - 0.12% 3,900 Barnes Group Inc. ........................... 120,656 5,900 Barnett, Inc. ............................... 73,750 2,700 Lawson Products, Inc. ....................... 62,100 ---------- 256,506 ----------
NUMBER MARKET OF SHARES VALUE - --------- ---------- HEALTHCARE - 2.06% 5,500 Access Health, Inc. ......................... $ 197,313 9,500* Advanced Tissue Sciences, Inc. .............. 27,906 4,000* Alternative Living Services ................. 107,500 7,300* American Oncology Resources ................. 81,669 10,900* Apria Healthcare Group, Inc. ................ 76,300 3,514 Block Drug Co., Inc. Class A ................ 131,789 3,800* CareMatrix Corp. ............................ 106,400 3,500* Curative Technologies, Inc. ................. 100,625 11,000* Genesis Health Ventures, Inc. ............... 105,188 6,100* Hanger Orthopedic Group, Inc. ............... 146,400 4,900 HealthPlan Services Corp. ................... 49,000 6,900 Henry Schein, Inc. .......................... 244,950 1,900 Hooper Holmes, Inc. ......................... 44,413 7,000 Invacare Corp. .............................. 167,563 28,000* Laboratory Corp. of America ................. 36,750 580* LTC Healthcare Inc. ......................... 1,668 29,673* Mariner Post-Acute Network Inc. ............. 127,965 5,600* Medquist, Inc. .............................. 170,100 6,200 Mentor Corp. ................................ 114,700 3,600* NCS HealthCare, Inc. Class A ................ 72,900 15,800* NovaCare, Inc. .............................. 49,375 22,900* Oxford Health Plans, Inc. ................... 253,331 5,575* Patterson Dental Co. ........................ 232,059 6,199* Pharmaceutical Product Development, Inc. .......................... 177,446 15,700* PhyCor, Inc. ................................ 96,162 2,200* Priority Healthcare Corp. ................... 80,575 3,300* Province Healthcare Co. ..................... 105,600 9,675* Renal Care Group, Inc. ...................... 260,015 9,896* Respironics Inc. ............................ 186,787 4,400* Rural/Metro Corp. ........................... 45,100 6,100* Sierra Health Services, Inc. ................ 139,537 11,088 Sun Healthcare Group, Inc. .................. 58,212 8,300* Sunrise Medical Inc. ........................ 105,825 2,400* Superior Consultant Holdings Corp. .......... 87,600 20,000* Vencor Inc. ................................. 90,000 4,000* VISX, Inc. .................................. 291,500 2,300* Vital Signs, Inc. ........................... 39,100 ---------- 4,409,323 ----------
================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 24 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- HEAVY DUTY TRUCKS/PARTS - 0.28% 1,800 Bandag, Inc. ................................ $ 63,675 2,200* Detroit Diesel Corp. ........................ 45,513 9,000 Federal Signal Corp. ........................ 219,938 2,900* Terex Corp. ................................. 81,200 7,900 Titan International, Inc. ................... 78,506 5,850 Wabash National Corp. ....................... 109,687 ---------- 598,519 ---------- HOME BUILDERS - 0.83% 5,100* American Homestar Corp. ..................... 83,513 8,605 D R Horton, Inc. ............................ 162,419 6,000 Del Webb Corp. .............................. 159,000 11,700* Fairfield Communities, Inc. ................. 126,506 10,800 Kaufman & Broad Home Corp. .................. 272,025 3,400* NVR, Inc. ................................... 133,875 6,281* Palm Harbor Homes, Inc. ..................... 162,521 6,600 Pulte Corp. ................................. 167,888 4,000 Ryland Group, Inc. .......................... 106,250 9,500 Standard Pacific Corp. ...................... 92,625 7,400* Toll Brothers, Inc. ......................... 179,913 3,770 U.S. Home Corp. ............................. 120,168 ---------- 1,766,703 ---------- HOSPITAL MANAGEMENT - 0.52% 7,400* ABR Information Services, Inc. .............. 125,800 11,829* Concentra Managed Care, Inc. ................ 139,730 12,200* Coventry Health Care Inc. ................... 90,737 7,900* Magellan Health Services, Inc. .............. 74,062 18,100* Medaphis Corp. .............................. 52,038 9,300* Orthodontic Centers of America .............. 177,863 3,100* Pediatrix Medical Group ..................... 166,431 3,600* Sunrise Assisted Living Inc. ................ 155,250 11,600* Ventas Inc. ................................. 139,200 ---------- 1,121,111 ---------- HOSPITAL SUPPLIES - 0.91% 5,700* Acuson Corp. ................................ 79,800 4,700 Arrow International, Inc. ................... 133,950 7,500 Ballard Medical Products .................... 163,125 12,400* Bio-Technology General Corp. ................ 83,700 2,600* Closure Medical Corp. ....................... 59,800 5,800* Coherent, Inc. .............................. 73,225 3,600* CONMED Corp. ................................ 98,100 4,700* Datascope Corp. ............................. 103,988 3,000 Diagnostic Products Corp. ................... 77,625
NUMBER MARKET OF SHARES VALUE - --------- ---------- HOSPITAL SUPPLIES - Continued 9,800* Isis Pharmaceuticals, Inc. .................. $ 111,475 2,100 Landauer, Inc. .............................. 59,850 1,600* MiniMed, Inc. ............................... 114,000 7,850 Owens & Minor, Inc. ......................... 134,431 17,275* PSS World Medical, Inc. ..................... 358,456 4,600* TECHE Corp. ................................. 86,250 7,800* Theragenics Corp. ........................... 107,738 3,574 West Co., Inc. .............................. 108,560 ---------- 1,954,073 ---------- HOUSEHOLD PRODUCTS - 0.51% 6,900 Church & Dwight Co., Inc. ................... 238,481 10,200 First Brands Corp. .......................... 381,863 4,500 Libbey, Inc. ................................ 138,656 10,700* Linens `N Things, Inc. ...................... 327,688 ---------- 1,086,688 ---------- HUMAN RESOURCES - 0.68% 2,900* Data Processing Resources ................... 68,875 10,300* Interim Services Inc. ....................... 213,725 7,100* Labor Ready, Inc. ........................... 154,869 7,300* Metamor Worldwide, Inc. ..................... 172,919 6,200 Norrell Corp. ............................... 98,813 10,900* Novacare Employee Services Inc. ............. 66,762 21,800 Olsten Corp. ................................ 163,500 8,400* Personnel Group of America .................. 138,600 2,100* Probusiness Services Inc. ................... 92,400 3,000* Remedytemp, Inc. ............................ 43,500 6,000* SCB Computer Technology ..................... 48,750 4,600* SOS Staffing Services, Inc. ................. 34,213 3,000* Staff Leasing, Inc. ......................... 27,000 4,200* Staffmark, Inc. ............................. 97,650 3,700* Westaff Inc. ................................ 24,512 ---------- 1,446,088 ---------- INFORMATION PROCESSING - 1.65% 15,980* Acxiom Corp. ................................ 377,528 2,500* Administaff, Inc. ........................... 67,656 2,400* Advent Software, Inc. ....................... 91,800 10,800* American Management Systems ................. 318,600 2,400* CDW Computer Centers, Inc. .................. 194,400 9,750* CHS Electronics, Inc. ....................... 144,421 4,500* ChoicePoint Inc. ............................ 261,562 3,400* Complete Business Solutions ................. 83,725 4,700* Decisionone Holdings Corp. .................. 35,837
NUMBER MARKET OF SHARES VALUE - --------- ---------- INFORMATION PROCESSING - Continued 4,800* InfoUSA Inc. Class B ........................ $ 27,600 6,400* International Network Services .............. 349,600 10,500* Lycos, Inc. ................................. 619,500 6,900 M D C Holdings Inc. ......................... 126,788 3,800* Micrel, Inc. ................................ 154,138 5,900* Paymentech, Inc. ............................ 93,663 2,800* Pegasystems, Inc. ........................... 18,375 7,200* Safeguard Scientifics, Inc. ................. 203,850 3,700* Sipex Corp. ................................. 119,325 20,600* Sybase Inc. ................................. 149,350 2,500* Veeco Instruments, Inc. ..................... 91,250 ---------- 3,528,968 ---------- INFORMATION PROCESSING - BUSINESS SOFTWARE - 1.06% 4,400* Alydaar Software Corp. ...................... 40,425 3,400 Aspect Development, Inc. .................... 113,688 5,000* AXENT Technologies, Inc. .................... 130,313 2,918* Baan Co. NV ................................. 34,651 6,000* Cerner Corp. ................................ 157,500 6,200* Clarify, Inc. ............................... 111,600 1,200* Engineering Animation, Inc. ................. 46,950 4,300* First Consulting Group, Inc. ................ 101,050 4,800* H.T.E., Inc. ................................ 43,200 6,500* Harbinger Corp. ............................. 56,062 6,500* HNC Software, Inc. .......................... 214,500 42,500* Informix Corp. .............................. 229,765 2,500* Metro Information Services, Inc. ............ 65,000 1,300* Peregrine Systems, Inc. ..................... 48,018 6,300* Platinum Software Corp. ..................... 66,938 4,400* Quadramed Corp. ............................. 105,600 2,900* Sanchez Computer Associates ................. 88,088 2,400* SCM Microsystems, Inc. ...................... 143,100 8,800 Software AG Systems, Inc. ................... 169,400 3,700* SS&C Technologies Inc. ...................... 43,013 7,800 TAVA Technologies, Inc. ..................... 44,850 6,200* Visio Corp. ................................. 219,325 ---------- 2,273,036 ---------- INFORMATION PROCESSING - COMPUTER HARDWARE SYSTEMS - 0.73% 11,194* Artesyn Technologies, Inc. .................. 187,500 15,100* Electronics for Imaging, Inc. ............... 404,869 18,600* Komag, Inc. ................................. 134,850 8,000* MEMC Electronic Materials ................... 75,500
================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED NOVEMBER 30, 1998 (UNAUDITED) 25 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- INFORMATION PROCESSING - COMPUTER HARDWARE SYSTEMS - Continued 12,000* Micron Electronics Inc. ..................... $ 273,000 6,700 OEA, Inc. ................................... 87,520 4,400* Rambus Inc. ................................. 389,675 ---------- 1,552,914 ---------- INFORMATION PROCESSING - COMPUTER SERVICES - 1.20% 6,800* BA Merchants Services, Inc. ................. 113,900 12,600 Checkfree Holdings Corp. .................... 204,750 5,000* CMG Information Services .................... 387,500 1,600* C-Net Inc. .................................. 84,900 8,425* Computer Horizons Corp. ..................... 189,563 5,900 Computer Task Group, Inc. ................... 159,300 2,600* Concord Communications, Inc. ................ 115,375 4,200* Cotelligent Inc. ............................ 76,913 3,000* Intelligroup, Inc. .......................... 48,000 3,700* Mastech Corp. ............................... 98,512 7,500 National Data Corp. ......................... 280,312 4,700* Nichols Research Corp. ...................... 100,462 5,100* Presstek Inc. ............................... 39,206 20,843* Rationale Software Corp. .................... 472,876 8,100* Security Dynamics Technologies .............. 123,525 7,900* Vantive Corp. ............................... 67,150 ---------- 2,562,244 ---------- INFORMATION PROCESSING - CONSUMER SOFTWARE - 0.63% 2,300* Advantage Learning Systems, Inc. ............ 127,075 6,000* BroadVision Inc. ............................ 159,750 3,900* Imrglobal Corp. ............................. 82,875 5,500* Infoseek Corp. .............................. 187,344 10,200* Macromedia, Inc. ............................ 284,962 3,200* Mindspring Enterprises, Inc. ................ 206,600 9,400* MTI Technology .............................. 37,013 6,900* Open Market Inc. ............................ 119,025 5,400* QAD Inc. .................................... 23,962 3,300* Realnetworks, Inc. .......................... 127,050 ---------- 1,355,656 ---------- INFORMATION PROCESSING - DATA SERVICES - 5.19% 5,033* ADAC Laboratories ........................... 130,858 7,100 Analysts International Corp. ................ 119,813 8,800 Anixter Internationall, Inc. ................ 145,200
NUMBER MARKET OF SHARES VALUE - --------- ---------- INFORMATION PROCESSING - DATA SERVICES - Continued 2,120* Applied Graphics Technology ................. $ 27,163 5,400* Aspen Technology, Inc. ...................... 75,938 8,208* Avant! Corp. ................................ 136,971 2,550 Barra, Inc. ................................. 66,300 14,400* Bea Systems, Inc. ........................... 172,800 4,100* Bell & Howell Co. ........................... 138,375 6,100* BISYS Group, Inc. ........................... 293,563 4,300 Black Box Corp. ............................. 151,038 9,137* Boole & Babbage, Inc. ....................... 288,958 2,268* BRC Holdings, Inc. .......................... 43,232 6,500* CCC Information Services .................... 71,500 1,950* Computer Management Sciences ................ 34,491 6,900* CSG Systems International, Inc. ............. 432,975 15,200* Data General Corp. .......................... 275,500 3,800* Data Transmission Network ................... 103,788 2,900* Davox Corp. ................................. 20,663 2,600* Dialogic Corp. .............................. 58,500 13,400* Diamond Multimedia Systems .................. 87,938 3,700* Documentum, Inc. ............................ 155,631 5,400* Envoy Corp. ................................. 215,325 2,600 Fair Issac & Co., Inc. ...................... 104,650 8,900* FileNet Corp. ............................... 76,206 7,300* GT Interactive Software Corp. ............... 43,800 3,250 Henry Jack & Associates ..................... 163,313 9,700* HMT Technology Corp. ........................ 110,338 9,310* Hyperion Solutions Corp. .................... 301,411 2,100* IDX Systems Corp. ........................... 86,231 6,900* Industri-Matematik International Corp ....................................... 43,125 10,100* Information Resources, Inc. ................. 84,588 6,600 Innovex, Inc. ............................... 105,600 17,900* Inprise Corp. ............................... 99,569 4,700 Integrated Systems, Inc. .................... 47,294 6,150* JDA Software Group, Inc. .................... 49,200 2,100* Kronos, Inc. ................................ 90,825 3,000* Learning Tree International ................. 24,938 10,500* Legato Systems, Inc. ........................ 502,031 4,500* Manugistics Group, Inc. ..................... 39,375 15,800* Mentor Graphics Corp. ....................... 136,275 5,100* Mercury Interactive Corp. ................... 233,963 4,200* MICROS Systems, Inc. ........................ 119,700 8,000 MTS Systems Corp. ........................... 103,500 4,050 National Instruments Corp. .................. 117,450 7,700* Network Appliance, Inc. ..................... 578,462
NUMBER MARKET OF SHARES VALUE - --------- ---------- INFORMATION PROCESSING - DATA SERVICES - Continued 1,800* Network Solutions, Inc. ..................... $ 118,125 15,850* NOVA Corp. .................................. 504,228 17,100* Oak Technology, Inc. ........................ 67,865 9,045* Paxar Corp. ................................. 94,972 7,500* Physician Computer Network .................. 468 5,285* Primark Corp. ............................... 132,125 6,150* Progress Software Corp. ..................... 156,056 2,300* Project Software & Development .............. 69,287 11,000* PsiNet, Inc. ................................ 206,250 3,000* QRS Corp. ................................... 126,375 3,520* Renaissance Worldwide Inc. .................. 25,080 13,200* S3, Inc. .................................... 70,950 4,800* Sandisk Corp. ............................... 57,000 3,400* Sapient Corp. ............................... 157,250 11,200* Sequent Computer Systems, Inc. .............. 142,800 8,300* SMART Modular Technologies .................. 173,262 3,500* Splash Technology Holdings .................. 30,187 9,300 Structural Dynamic Research ................. 162,168 3,100* Sykes Enterprises, Inc. ..................... 62,775 14,700* Symantec Corp. .............................. 294,000 12,850* System Software Associates .................. 88,343 10,000* Systems & Computer Technology ............... 182,500 10,125* Technology Solutions Co. .................... 94,289 6,000* Transaction Systems Architects Class A .................................... 228,000 5,300* Transition Systems, Inc. .................... 53,000 7,000* USCS International, Inc. .................... 225,750 11,200* Vanstar Corp. ............................... 133,700 5,000* Viasoft, Inc. ............................... 36,250 2,800* Volt Information Sciences, Inc. ............. 65,275 9,800* Wang Laboratories, Inc. ..................... 249,900 5,450* Wind River Systems Inc. ..................... 254,106 5,900* Xircom, Inc. ................................ 178,106 4,800* Zebra Technologies Corp. Class A ............ 161,100 ----------- 11,109,906 ----------- INFORMATION PROCESSING - NETWORKING - 0.90% 5,100* Concentric Network Corp. .................... 144,713 4,200* Earthlink Network, Inc. ..................... 255,413 7,400* Excite, Inc. ................................ 362,138 2,200* Exodus Communications, Inc. ................. 74,250 13,300* Picturetel Corp. ............................ 94,762 7,700* PMC-Sierra, Inc. ............................ 414,837
================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 26 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- INFORMATION PROCESSING - NETWORKING - Continued 6,000* Remedy Corp. ................................ $ 62,625 7,100* Shiva Corp. ................................. 41,268 9,100* USWeb Corp. ................................. 207,025 4,100* Verio Inc. .................................. 77,900 5,700* Visual Networking, Inc. ..................... 198,075 ---------- 1,933,006 ---------- INSURANCE - CASUALTY - 0.89% 5,000* Acceptance Insurance Co., Inc. .............. 98,438 4,700 Baldwin & Lyons, Inc. Class B ............... 99,875 2,600 Citizens Corp. .............................. 85,962 5,100 Commerce Group, Inc. ........................ 174,675 4,500 E.W. Blanch Holdings, Inc. .................. 180,281 8,217 Frontier Insurance Group, Inc. .............. 116,579 9,700 HCC Insurance Holdings, Inc. ................ 180,056 3,500* Highlands Insurance Group ................... 44,625 2,800 Midland Co. ................................. 69,650 3,900 NAC Re Corp. ................................ 186,225 1,100 Nymagic, Inc. ............................... 23,100 6,300* Risk Capital Holdings, Inc. ................. 135,450 2,000 RLI Corp. ................................... 72,375 7,200 Selective Insurance Group ................... 135,900 900 Stewart Information Services Corp. .......... 44,494 3,350* Trenwick Group Inc. ......................... 106,363 3,505 United Fire & Casualty Co. .................. 129,247 5,300 Vesta Insurance Group, Inc. ................. 30,806 ---------- 1,914,101 ---------- INSURANCE - LIFE - 0.69% 4,100* American Heritage Life Investment Corp ....................................... 100,706 2,900 American Medical Security Group ............. 41,506 4,400 Arm Financial Group Inc., Class A ........... 94,600 600 Kansas City Life Insurance Co. .............. 49,500 9,400 Life USA Holding, Inc. ...................... 119,850 500* National Western Life Ins. Co. Class A .................................... 59,250 9,100 Presidential Life Corp. ..................... 163,800 6,550 Reinsurance Group of America ................ 429,025 7,600 UICI ........................................ 151,050 7,570* United Companies Financial .................. 30,753 6,850 W.R. Berkley ................................ 229,475 ---------- 1,469,515 ----------
NUMBER MARKET OF SHARES VALUE - --------- ---------- INSURANCE - MISCELLANEOUS - 1.26% 6,000* Amerin Corp. ................................ $ 148,125 4,100 Arthur J. Gallaher & Co. .................... 190,138 5,600 Capital Re Corp. ............................ 110,600 2,900 Chicago Title Corp. ......................... 135,575 6,400 CMAC Investment Corp. ....................... 308,800 9,000 Crawford & Co. Class B ...................... 137,250 3,600 Executive Risk, Inc. ........................ 194,400 5,864 Fidelity National Financial ................. 192,412 4,600 Foremost Corp. of America ................... 94,012 3,200 Harleysville Group .......................... 68,800 7,550 HSB Group Inc. .............................. 312,381 2,747 Liberty Corp. ............................... 133,230 12,000* Mid Atlantic Medical Services, Inc. ......... 106,500 4,200 MMI Companies, Inc. ......................... 68,513 4,387 Poe & Brown Inc. ............................ 153,545 4,200 SCPIE Holdings, Inc. ........................ 128,625 8,300 TIG Holdings, Inc. .......................... 116,719 4,100 Zenith National Insurance Corp. ............. 99,937 ---------- 2,699,562 ---------- INSURANCE - MULTILINE - 0.87% 4,650 Alfa Corp. .................................. 101,719 4,878 American Annuity Group, Inc. ................ 112,194 4,553 AmerUs Life Holdings, Inc. .................. 100,451 4,400 Argonaut Group, Inc. ........................ 110,000 5,600 CNA Surety Corp. ............................ 82,250 3,565* Delphi Financial Group, Inc. Class A ........ 166,436 10,100 FBL Financial Group, Inc. Class A ........... 247,450 4,700 LandAmerica Financial Group ................. 288,169 3,100 Life Re Corp. ............................... 291,981 1,050* Markel Corp. ................................ 175,350 1,500 Meadowbrook Insurance Group ................. 23,719 5,491 Medical Assurance, Inc. ..................... 165,416 6,200* PennCorp Financial Group, Inc. .............. 6,975 ---------- 1,872,110 ---------- LEISURE TIME - 1.09% 16,900* Acclaim Entertainment, Inc. ................. 161,606 3,700* Action Performance Co., Inc. ................ 135,050 2,100* Anchor Gaming ............................... 107,100 7,100* Bally Total Fitness Holding Corp. ........... 168,181 9,300* Boyd Gaming Corp. ........................... 33,713 5,600* Family Golf Centers, Inc. ................... 115,150 10,400* Grand Casinos Inc. .......................... 98,800 8,500* Handleman Co. ............................... 102,000
NUMBER MARKET OF SHARES VALUE - --------- ---------- LEISURE TIME - Continued 5,100* Hollywood Park, Inc. ........................ $ 48,768 7,000 Polaris Industries, Inc. .................... 244,125 15,000* Premier Parks, Inc. ......................... 406,875 7,100* Rio Hotel & Casino Inc. ..................... 110,494 4,800* Scotts Co. Class A .......................... 173,700 5,400* Station Casinos, Inc. ....................... 44,550 6,450* Sunterra Corp. .............................. 75,384 6,800* Vail Resorts Inc. ........................... 171,700 3,300* Vistana, Inc. ............................... 46,613 7,200 Winnebago Industries, Inc. .................. 86,400 ---------- 2,330,209 ---------- LODGING - 0.53% 13,400* Choice Hotels International Inc. ............ 153,263 4,100 Deltic Timber Corp. ......................... 82,000 14,400 Extended Stay America, Inc. ................. 144,000 7,500* Host Marriott Services Corp. ................ 82,031 6,039 Marcus Corp. ................................ 91,340 15,280 Meristar Hospitality Corp. .................. 297,005 8,900* NS Group, Inc. .............................. 48,393 12,800* Prime Hospitality Corp. ..................... 112,000 7,100* Red Roof Inns, Inc. ......................... 120,700 ---------- 1,130,732 ---------- MACHINE - CONTRACT - 0.04% 4,200* Rental Service Corp. ........................ 88,988 ---------- MACHINE TOOLS - 0.40% 3,450* Chase Industries, Inc. ...................... 40,322 8,800* Gilead Sciences, Inc. ....................... 273,900 3,200 Gleason Corp. ............................... 61,200 9,700 Milacron Inc. ............................... 196,425 5,000 OmniQuip International, Inc. ................ 67,344 2,900* PRI Automation Inc. ......................... 69,600 8,000 Roper Industries, Inc. ...................... 148,500 ---------- 857,291 ---------- MACHINERY - AGRICULTURE - 0.09% 2,700 Allied Products Corp. ....................... 19,913 5,400 Lindsay Manufacturing Co. ................... 81,000 3,500 Toro Co. .................................... 92,750 ---------- 193,663 ----------
================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED NOVEMBER 30, 1998 (UNAUDITED) 27 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- MACHINERY - CONSTRUCTION & CONTRACTS - 0.91% 1,100* Astec Industries Inc. ....................... $ 57,063 6,400 Blount, Inc. Class A ........................ 148,000 6,400* Calpine Corp. ............................... 153,600 4,700 CDI Corp. ................................... 126,019 4,700 Columbus McKinnon Corp. ..................... 85,481 8,100 Foster Wheeler Corp. ........................ 138,713 4,950 Granite Construction, Inc. .................. 159,946 8,500 Insituform Technologies, Inc. Class A .................................... 111,562 3,900 J. Ray Mcdermott S.A ........................ 95,550 7,700 Jacobs Engineering Group, Inc. .............. 290,193 5,900 Kaman Corp. Class A ......................... 95,875 4,822* Morrison Knudsen Corp. ...................... 46,412 3,400 Stone & Webster, Inc. ....................... 115,600 5,200 TJ International Inc. ....................... 122,850 7,542* United Rentals, Inc. ........................ 197,978 ---------- 1,944,842 ---------- MACHINERY - INDUSTRIAL/ SPECIALTY - 2.57% 7,350 AAR Corp. ................................... 185,588 4,646 Albany International Corp. Class A .......... 88,274 6,075 Applied Industrial Tech., Inc. .............. 85,050 10,180 Applied Power, Inc. Class A ................. 362,663 6,873 Baldor Electric Co. ......................... 137,030 5,000 Briggs & Stratton Corp. ..................... 252,188 7,280 Burlington Coat Factory Warehouse Corp ....................................... 105,560 8,900* DII Group, Inc. ............................. 185,788 4,600 Exide Corp. ................................. 80,213 12,500 Flowserve Corp. ............................. 221,875 2,000 Franklin Electric Co., Inc. ................. 130,500 5,200* Gardner Denver Inc. ......................... 82,550 1,275 General Binding Corp. ....................... 47,813 6,650 Graco, Inc. ................................. 184,537 5,200* Halter Marine Group, Inc. ................... 36,075 4,400 Helix Technology Corp. ...................... 53,900 4,800 Hughes Supply, Inc. ......................... 133,200 9,350 IDEX Corp. .................................. 253,034 4,700 Integrated Process Equipment ................ 49,056 5,600* Ionics, Inc. ................................ 176,050 10,400 JLG Industries, Inc. ........................ 170,950 6,000* Kulicke & Soffa Industries .................. 102,375 5,850 Lilly Industries, Inc. Class A .............. 109,321
NUMBER MARKET OF SHARES VALUE - --------- ---------- MACHINERY - INDUSTRIAL/ SPECIALTY - Continued 11,200 Lincoln Electric Holdings ................... $ 263,200 4,375 Manitowoc Co., Inc. ......................... 173,906 9,100 Newport News Shipbuilding ................... 255,937 3,600 Nordson Corp. ............................... 171,900 4,840* Oak Industries Inc. ......................... 149,435 5,300 Regal-Beloit Corp. .......................... 132,500 2,400 Robbins & Myers, Inc. ....................... 48,000 3,400 SPS Technologies, Inc. ...................... 194,650 5,200 Scotsman Industries Inc. .................... 106,925 4,400* Specialty Equipment Companies ............... 103,950 8,100* Stewart & Stevenson Services, Inc. .......... 80,494 5,100* Stillwater Mining Co. ....................... 186,469 3,700 Tecumseh Products Co. Class A ............... 183,150 2,700 Tennant Co. ................................. 93,150 5,600 Watts Industries, Inc. Class A .............. 106,050 3,300* Zoltek Companies, Inc. ...................... 35,475 ---------- 5,518,781 ---------- MEDICAL TECHNOLOGY - 1.36% 4,900* Affymetrix, Inc. ............................ 122,500 15,200* Alaris Medical Inc. ......................... 79,800 4,400* Aviron ...................................... 94,600 4,300* Bio-Rad Laboratories, Inc. Class A .......... 91,375 2,700 Biomatrix, Inc. ............................. 131,119 5,600* Cytyc Corp. ................................. 110,950 3,800* Dendrite International, Inc. ................ 73,150 7,875* Enzo Biochem, Inc. .......................... 103,852 5,900* Haemonetics Corp. ........................... 133,119 3,900* Hologic, Inc. ............................... 50,944 9,100* Idexx Laboratories, Inc. .................... 236,600 2,000* IGEN International, Inc. .................... 54,250 3,000* Kendle International Inc. ................... 67,125 14,500* Liposome, Inc. .............................. 131,406 2,200* Maxxim Med Inc. ............................. 59,950 1,500* On Assignment, Inc. ......................... 53,343 9,118* Organogenesis, Inc. ......................... 121,953 1,800* Perclose, Inc. .............................. 47,700 16,500* Pharmerica Inc. ............................. 68,062 6,300* Protein Design Labs, Inc. ................... 138,600 7,800 Quest Diagnostics Inc. ...................... 139,425 2,400* ResMed Inc. ................................. 81,900 2,800* Sabratek Corp. .............................. 47,250 13,124 Scios Nova Inc. ............................. 99,250 7,275* Serologicals Corp. .......................... 213,703
NUMBER MARKET OF SHARES VALUE - --------- ---------- MEDICAL TECHNOLOGY - Continued 4,200* Thermo Cardiosystems, Inc. .................. $ 48,825 6,900* Thermolase Corp. ............................ 35,363 3,400* ThermoTrex Corp. ............................ 35,700 4,300* Transkaryotic Therapies, Inc. ............... 96,750 6,400 US Bioscience, Inc. ......................... 48,400 2,300* Ventana Medical Systems, Inc. ............... 49,450 1,300* Xomed Surgical Products Inc. ................ 56,875 ---------- 2,923,289 ---------- MERCHANDISE - DRUG - 0.72% 1,800* Andrex Corp. ................................ 71,100 3,700* Duane Reade, Inc. ........................... 148,463 8,600* Express Scripts, Inc. Class A ............... 473,000 8,000 Longs Drug Stores Corp. ..................... 285,000 6,000* Medimmune, Inc. ............................. 401,250 16,900* Perrigo Co. ................................. 141,538 4,600 Weider Nutrition International .............. 30,187 ---------- 1,550,538 ---------- MERCHANDISE - SPECIALTY - 2.75% 1,700* Advanced Energy Industries .................. 30,813 6,900* Ames Department Stores, Inc. ................ 163,875 9,100* APAC Teleservices, Inc. ..................... 59,150 6,818 Arctic Cat, Inc. ............................ 71,589 5,600* Avid Technology, Inc. ....................... 133,700 1,600* Bush Boake Allen, Inc. ...................... 54,600 13,500 Caseys General Stores, Inc. ................. 187,313 8,567 Cash America International .................. 144,568 7,500* Central Garden & Pet Co. .................... 120,703 33,200* Charming Shoppes, Inc. ...................... 136,950 4,800* Cole National Corp. Class A ................. 74,100 5,600* Compucom Systems, Inc. ...................... 21,700 1,000* Copart, Inc. ................................ 23,125 24,400* Corporate Express, Inc. ..................... 143,350 4,200* Daisytek International Corp. ................ 65,100 4,900* Department 56, Inc. ......................... 168,744 8,400* Eagle Hardware & Garden, Inc. ............... 236,775 9,800* Earthshell Corp. ............................ 134,138 4,500 Enesco Group Inc. ........................... 108,563 13,500 Fingerhut Companies, Inc. ................... 150,188 3,150* Fossil, Inc. ................................ 87,216 5,200* Franklin Covey Co. .......................... 97,500 5,000* Friedman's, Inc. Class A .................... 50,000 5,950* Garden Ridge Corp. .......................... 46,856 4,400* Gibson Greetings, Inc. ...................... 48,400
================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 28 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- MERCHANDISE - SPECIALTY - Continued 2,700* Guitar Center, Inc. ......................... $ 61,763 6,700 Hancock Fabrics, Inc. ....................... 56,531 4,005 Hancock Holding Co. ......................... 180,225 15,100* Homebase, Inc. .............................. 86,825 3,300* Inacom Corp. ................................ 68,475 2,800* JLK Direct Distribution Inc. ................ 30,625 8,200 Jostens, Inc. ............................... 192,187 3,578 K2, Inc. .................................... 40,700 2,100* Keystone Automotive Industries .............. 40,031 5,400* Knoll, Inc. ................................. 145,800 2,600 LabOne, Inc. ................................ 37,050 6,600* Michaels Stores, Inc. ....................... 118,800 9,000* Micro Warehouse, Inc. ....................... 246,375 5,200 MicroAge, Inc. .............................. 91,000 5,400* Petco Animal Supplies, Inc. ................. 54,000 33,400* Petsmart Inc. ............................... 285,988 4,963 Price Enterprises Inc. ...................... 27,296 3,700* Rent-Way, Inc. .............................. 100,362 2,700* Russ Berrie and Co. Inc. .................... 61,087 8,300 Seitel, Inc. ................................ 111,012 14,100* Sitel Corp. ................................. 35,250 9,500 Sotheby's Holdings, Inc. Class A ............ 266,000 1,914 South Jersey Industries, Inc. ............... 49,405 7,400* Spiegel, Inc. Class A ....................... 29,137 8,050* Sports Authority, Inc. ...................... 52,325 2,300* SportsLine USA, Inc. ........................ 39,675 5,100 Sturm, Ruger & Co. Inc. ..................... 64,706 16,000 Sunglass Hut International .................. 96,000 5,700 The Finish Line ............................. 52,013 5,700* Twinlab Corp. ............................... 94,763 8,600* United Stationers Inc. ...................... 227,900 2,400* West Marine, Inc. ........................... 27,300 9,100* Zale Corp. .................................. 260,487 ---------- 5,890,109 ---------- MERCHANDISING - DEPARTMENT - 0.12% 1,300* Alexander's, Inc. ........................... 103,594 3,300* K&G Men's Center, Inc. ...................... 31,350 2,900* Maxim Group, Inc. ........................... 56,731 7,500* Stein Mart, Inc. ............................ 64,453 ---------- 256,128 ---------- MERCHANDISING - FOOD - 0.50% 4,800* CEC Entertainment, Inc. ..................... 142,200 75 Farmer Bros. Co. ............................ 14,850
NUMBER MARKET OF SHARES VALUE - --------- ---------- MERCHANDISING - FOOD - Continued 9,800 Fleming Companies, Inc. ..................... $ 98,613 4,600 Great Atlantic & Pacific Tea Co., Inc. ...... 125,638 3,200* IHOP Corp. .................................. 127,200 2,300 Ingles Markets, Inc. Class A ................ 27,600 10,800 Ruddick Corp. ............................... 211,275 3,000 Smart & Final Inc. .......................... 31,875 8,500* Smithfield Foods, Inc. ...................... 224,718 7,200* Zapata Corp. ................................ 56,700 ---------- 1,060,669 ---------- MERCHANDISING - MASS - 0.26% 3,800* Coldwater Creek, Inc. ....................... 45,600 4,500* Global Directmail Corp. ..................... 88,312 3,700* Insight Enterprises, Inc. ................... 155,863 8,400* ShopKo Stores, Inc. ......................... 270,900 ---------- 560,675 ---------- METALS - ALUMINUM - 0.22% 6,100* ACX Technologies, Inc. ...................... 77,775 7,000 Century Aluminum Co. ........................ 59,500 5,000 Commonwealth Industries, Inc. ............... 48,125 4,400 IMCO Recycling, Inc. ........................ 65,725 5,500* Kaiser Aluminum Corp. ....................... 36,094 7,500 Tredegar Industries, Inc. ................... 175,312 ---------- 462,531 ---------- METALS - COPPER - 0.12% 7,600 ASARCO Inc. ................................. 147,250 4,800* Wolverine Tube, Inc. ........................ 107,700 ---------- 254,950 ---------- METALS - MISCELLANEOUS - 0.42% 3,337 A.M. Castle & Co. ........................... 64,237 4,400 Brush Wellman Inc. .......................... 70,950 4,033 Commercial Metals Co. ....................... 102,085 14,500* Hecla Mining Co. ............................ 60,719 5,000 Precision Castparts Corp. ................... 220,938 4,500* RTI International Metals .................... 67,781 4,500* Ryerson Tull, Inc. Class A .................. 49,781 9,700 Steel Dynamics, Inc. ........................ 132,163 5,900 Titanium Metals Corp. ....................... 58,631 1,900 Tremont Corp. ............................... 68,163 ---------- 895,448 ----------
NUMBER MARKET OF SHARES VALUE - --------- ---------- METALS - STEEL - 1.17% 13,000 AK Steel Holding Corp. ...................... $ 249,438 24,800* Armco Inc. .................................. 97,650 29,495* Bethlehem Steel Corp. ....................... 243,334 8,200 Birmingham Steel Corp. ...................... 39,975 4,500 Carpenter Technology Corp. .................. 158,906 5,300* Citation Corp. .............................. 73,538 4,200 Cleveland-Cliffs Inc. ....................... 159,863 3,550 Commercial Intertech Corp. .................. 56,134 2,300* Gibraltar Steel Corp. ....................... 45,713 10,649 Inland Steel Industries, Inc. ............... 195,010 7,200 Intermet Corp. .............................. 98,550 3,800 J & L Specialty Steel, Inc. ................. 23,750 20,600 LTV Corp. ................................... 113,300 8,600* Metals USA, Inc. ............................ 80,088 9,800* Mueller Industries, Inc. .................... 223,563 8,500 National Steel Corp. Class B ................ 62,156 5,400 Oregon Steel Mills, Inc. .................... 68,512 5,500 Quanex Corp. ................................ 98,656 2,500 Reliance Steel & Aluminum Co. ............... 76,562 6,000 Rohn Industries, Inc. ....................... 16,875 3,300 Shiloh Industries, Inc. ..................... 48,056 7,700 Valmont Industries, Inc. .................... 124,162 3,400* WHX Corp. ................................... 35,912 7,400* Wyman-Gordon Co. ............................ 115,625 ---------- 2,505,328 ---------- MISCELLANEOUS - 3.58% 2,200* Abacus Direct Corp. ......................... 126,638 6,700* Alternative Resources Corp. ................. 64,488 6,700 AMCOL International Corp. ................... 71,188 4,300 AMERCO, Inc. ................................ 98,900 4,600 Arch Coal, Inc. ............................. 88,263 7,000* Associated Group, Inc. Class A .............. 262,500 3,000* Aviation Sales Co. .......................... 111,000 2,800* Avondale Industries, Inc. ................... 77,350 4,600* Bacou U.S.A., Inc. .......................... 86,250 8,500* Billing Concepts Corp. ...................... 108,375 5,500 Borg-Warner Security Corp. .................. 100,719 1,800* Boron LePore & Associates, Inc. ............. 55,350 13,350* Brightpoint, Inc. ........................... 200,250 6,600* Building One Services Corp. ................. 112,200 9,200 C. H. Robinson Worldwide, Inc. .............. 207,575 3,400 Cabot Industrial Trust ...................... 71,188 5,800 Cadiz Inc. .................................. 52,200 1,400* Capital Senior Living Corp. ................. 17,325
================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED NOVEMBER 30, 1998 (UNAUDITED) 29 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- MISCELLANEOUS - Continued 4,600* Caribiner International, Inc. ............... $ 42,838 10,700* Catalytica Inc. ............................. 192,433 2,150* Central Parking Corp. ....................... 63,156 10,200* Century Business Services ................... 137,700 4,600* Championship Auto Racing Teams .............. 128,800 4,800* Coach USA, Inc. ............................. 136,200 1,800* Coinmach Laundry Corp. ...................... 29,363 5,600* Computer Learning Centers ................... 36,050 14,000* DeVry, Inc. ................................. 369,250 1,100* Education Management Corp. .................. 50,325 4,100* Equity Corp. International .................. 106,089 5,353 Equity Residential Properties ............... 226,499 3,758* Gemstar Group Ltd. .......................... 228,299 6,000* Hvide Marine, Inc. Class A .................. 36,000 3,175* ITT Educational Services, Inc. .............. 104,378 3,000* Iron Mountain, Inc. ......................... 87,750 2,400* Lason, Inc. ................................. 147,300 4,200 Matthews International Corp. Class A ........ 126,000 2,000* MemberWorks Inc. ............................ 48,750 2,600* Metzler Group, Inc. ......................... 107,900 7,200* Musicland Stores Corp. ...................... 121,950 1,700* ONSALE, Inc. ................................ 104,550 2,550* Pinkerton's, Inc. ........................... 51,000 6,400* Prepaid Legal Services, Inc. ................ 166,400 2,800 The Profit Recovery Group ................... 94,500 7,900 Protection Onc Inc. ......................... 76,038 5,600* Rayovac Corp. ............................... 129,500 4,700 Regis Corp. ................................. 157,450 7,500* Romac International, Inc. ................... 104,532 1,504* Samsonite Corp. ............................. 9,776 7,500* Scott Technologies Inc. - Class A ........... 116,250 2,100* Service Experts, Inc. ....................... 62,213 6,300* Sola International, Inc. .................... 100,013 49,700* Southland Corp. ............................. 100,954 9,225* Sylvan Learning Systems, Inc. ............... 268,101 4,200* Triangle Pharmaceuticals, Inc. .............. 46,200 8,200 Valhi, Inc. ................................. 90,200 5,800* Veritas DGC Inc. ............................ 84,825 5,300* Veterinary Centers of America ............... 97,388 5,000 Wackenhut Corp. ............................. 121,563 3,900* Wackenhut Corrections Corp. ................. 105,300 16,700 Washington Water Power Co. .................. 305,818 4,600* Wesley Jessen VisionCare .................... 108,100 6,000* West Teleservices Corp. ..................... 66,750 3,600* Westell Technologies, Inc. Class A .......... 21,825
NUMBER MARKET OF SHARES VALUE - --------- ---------- MISCELLANEOUS - Continued 4,900 Westinghouse Air Brake Co. .................. $ 107,800 6,200* Whittman-Hart, Inc. ......................... 136,787 4,100 Woodward Governor Co. ....................... 102,500 5,500* World Access, Inc. .......................... 111,718 9,600* Xylan Corp. ................................. 174,000 ---------- 7,660,840 ---------- MOBILE HOMES - 0.42% 10,552 Champion Enterprises, Inc. .................. 235,441 4,400 Coachmen Industries, Inc. ................... 99,000 2,500 McGrath Rentcorp ............................ 50,625 3,900* National R.V. Holdings, Inc. ................ 103,350 12,400 Oakwood Homes Corp. ......................... 185,225 4,200 Skyline Corp. ............................... 136,500 3,875 Thor Industries, Inc. ....................... 92,516 ---------- 902,657 ---------- NATURAL GAS-DIVERSIFIED - 0.88% 8,050 Atmos Energy Corp. .......................... 246,531 3,600 Bay State Gas Co. ........................... 142,200 5,200 Eastern Enterprises ......................... 210,925 6,100* Hanover Compressor Co. ...................... 138,013 4,500 Laclede Gas Co. ............................. 112,781 4,500 New Jersey Resources Corp. .................. 175,219 13,500* Seagull Energy Corp. ........................ 110,531 4,568* Southern Union Co. .......................... 92,777 7,200 Southwest Gas Corp. ......................... 171,000 8,500* UGI Corp. ................................... 207,188 9,500 WICOR, Inc. ................................. 207,813 6,600 Western Gas Resources, Inc. ................. 61,462 ---------- 1,876,440 ---------- OIL - INTEGRATED DOMESTIC - 0.26% 1,800* Belco Oil and Gas Corp. ..................... 10,125 7,875 Cross Timbers Oil Co. ....................... 89,578 12,300 Quaker State Corp. .......................... 176,043 21,100* Santa Fe Energy Resources, Inc. ............. 162,206 9,100* Tesoro Petroleum Corp. ...................... 121,143 ---------- 559,095 ---------- OIL - SERVICE - PRODUCTS - 0.36% 8,150* Barrett Resources Corp. ..................... 199,166 2,700* Drill Quip .................................. 38,981 3,100 Getty Realty Corp. .......................... 40,493 5,700* Global Industrial Technologies .............. 47,737
NUMBER MARKET OF SHARES VALUE - --------- ---------- OIL - SERVICE - PRODUCTS - Continued 3,600* Gulf Island Fabrication, Inc. ............... $ 27,000 32,300* Kelley Oil & Gas Corp. ...................... 30,281 8,000* Lone Star Technologies, Inc. ................ 78,000 2,700* Maverick Tube Corp. ......................... 15,356 22,200* Parker Drilling Co. ......................... 83,250 12,800* Pride International, Inc. ................... 96,800 6,300* TransMontaigne Inc. ......................... 94,500 5,200* Trico Marine Services, Inc. ................. 28,600 ---------- 780,164 ---------- OIL - SERVICES - 0.48% 4,100 Cliffs Drilling Co. ......................... 64,831 4,700* Key Energy Group, Inc. ...................... 29,375 14,000* Marine Drilling Companies, Inc. ............. 121,625 7,900 Mascotech, Inc. ............................. 127,388 6,500* Oceaneering International, Inc. ............. 80,844 6,800* Offshore Logistics, Inc. .................... 84,575 3,000* OMNI Energy Services Corp. .................. 29,813 5,350 Pennsylvania Enterprises, Inc. .............. 132,078 5,400* Pool Energy Services Co. .................... 60,750 6,400 Range Resources Corp. ....................... 26,800 11,500* Tuboscope Inc. .............................. 95,594 5,300* UTI Energy Corp. ............................ 44,387 7,700* Unova Inc. .................................. 130,418 ---------- 1,028,478 ---------- OIL/GAS PRODUCERS - 1.29% 3,200* Atwood Oceanics, Inc. ....................... 60,000 8,300* Benton Oil and Gas Co. ...................... 31,125 4,800 Berry Petroleum Co. Class A ................. 62,400 7,000 Cabot Oil & Gas Corp. Class A ............... 108,063 22,016* Chesapeake Energy Corp. ..................... 30,272 6,400* Comstock Resources, Inc. .................... 23,600 5,800 Devon Energy Corp. .......................... 191,038 27,900* EEX Corp. ................................... 99,394 10,100 Equitable Resources, Inc. ................... 297,319 4,000* Forcenergy, Inc. ............................ 16,250 7,400* Forest Oil Corp. ............................ 62,900 27,800* Grey Wolf, Inc. ............................. 27,800 31,700 Harken Energy Corp. ......................... 89,156 11,300 Helmerich & Payne, Inc. ..................... 194,925 1,400 Holly Corp. ................................. 22,750 12,300* Input/Output, Inc. .......................... 100,706 6,500 KCS Energy, Inc. ............................ 26,000 5,000* Louis Dreyfus Natural Gas Corp. ............. 64,688
================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 30 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- OIL/GAS PRODUCERS - Continued 2,300 Mitchell Energy & Development Corp. Class A .................................... $ 29,900 8,300* Newfield Exploration Co. .................... 161,850 6,700* Nuevo Energy Co. ............................ 99,244 8,100* Patterson Energy, Inc. ...................... 37,969 6,400* Plains Resources, Inc. ...................... 113,600 7,700 Pogo Producing Co. .......................... 89,512 3,800* Rutherford-Moran Oil Corp. .................. 7,837 11,400* Snyder Oil Corp. ............................ 146,775 3,400 St. Mary Land & Exploration ................. 64,600 4,100* Stone Energy Corp. .......................... 123,512 5,610* Swift Energy Co. ............................ 52,243 4,000 The Houston Exploration Co. ................. 70,000 7,300* Titan Exploration, Inc. ..................... 53,837 9,700 Tom Brown, Inc. ............................. 97,000 10,800 Vintage Petroleum, Inc. ..................... 111,375 ---------- 2,767,640 ---------- PAPER/FOREST PRODUCTS - 0.76% 7,200* Buckeye Technologies Inc. ................... 140,400 6,300 Caraustar Industries, Inc. .................. 167,344 13,300 Longview Fibre Co. .......................... 150,456 10,700 P. H. Glatfelter Co. ........................ 137,763 5,700 Potlatch Corp. .............................. 215,531 5,700 Rayonier Inc. ............................... 242,250 4,000 Schweitzer-Mauduit Inc. ..................... 73,000 3,500 Standard Register Co. ....................... 103,031 13,200 Unisource Worldwide, Inc. ................... 103,950 2,300 Universal Forest Products ................... 45,712 14,834 Wausau-Mosinee Paper Corp. .................. 250,324 ---------- 1,629,761 ---------- PHOTOGRAPHY - 0.13% 2,520 CPI Corp. ................................... 53,865 6,100 Photronics Inc. ............................. 122,000 5,400* Ultratech Stepper, Inc. ..................... 100,575 ---------- 276,440 ---------- POLLUTION CONTROL - 0.63% 6,765* Allied Waste Industries, Inc. ............... 137,837 61,800* Aqua Alliance Inc. .......................... 123,600 546 Arcadis N.V ................................. 4,368 9,000 Calgon Carbon Corp. ......................... 65,250 6,150* Cuno, Inc. .................................. 91,866 9,200 Dames & Moore, Inc. ......................... 117,875
NUMBER MARKET OF SHARES VALUE - --------- ---------- POLLUTION CONTROL - Continued 6,500* Eastern Environmental Services, Inc. ........ $ 141,375 1,225 Mine Safety Appliances Co. .................. 79,625 737* NCS Corp. ................................... 483 18,900* Newpark Resources, Inc. ..................... 139,388 42,340* Safety Kleen ................................ 145,543 5,800* Superior Services, Inc. ..................... 106,575 9,750* Tetra Tech, Inc. ............................ 204,750 ---------- 1,358,535 ---------- PUBLISHING - NEWS - 0.36% 5,900 Hollinger International, Inc. ............... 76,331 9,100 Lee Enterprises, Inc. ....................... 254,800 6,000 Media General, Inc. Class A ................. 284,625 7,400* Network Equipment Technologies .............. 82,325 3,500* Petersen Companies, Inc. .................... 83,781 ---------- 781,862 ---------- PUBLISHING/PRINTING - 1.50% 7,000 American Business Products .................. 155,750 7,750 Banta Corp. ................................. 206,344 2,200* Berlitz International, Inc. ................. 65,313 6,000* Big Flower Holdings, Inc. ................... 146,625 12,400 Bowne & Co., Inc. ........................... 207,700 2,800* Consolidated Graphics, Inc. ................. 161,175 8,100 Houghton Mifflin Co. ........................ 339,187 9,500 John H. Harland Co. ......................... 144,875 6,600 John Wiley & Sons, Inc. Class A ............. 228,113 5,900* Journal Register Co. ........................ 95,506 5,975 McClatchy Company Class A ................... 196,428 4,700 Merrill Corp. ............................... 79,900 4,700 New England Business Service ................ 150,400 3,400* Scholastic Corp. ............................ 161,925 2,800* Scientific Games Holdings ................... 53,200 8,300* Valassis Communications, Inc. ............... 355,862 8,900 Wallace Computer Services, Inc ............. 199,694 9,100* World Color Press, Inc. ..................... 270,725 ---------- 3,218,722 ---------- RAILROAD - 0.23% 4,300 Florida East Coast Industries ............... 147,275 4,600* Motivepower Industries, Inc. ................ 140,012 11,100* Wisconsin Central Transport ................. 201,188 ---------- 488,475 ----------
NUMBER MARKET OF SHARES VALUE - --------- ---------- REAL ESTATE - 0.68% 2,300* Avatar Holdings, Inc. ....................... $ 36,800 5,900 Brandywine Realty Trust ..................... 106,200 7,900 Capital Automotive REIT ..................... 105,663 3,330* Castle & Cooke, Inc. ........................ 52,031 4,400* CB Richard Ellis Services ................... 78,100 4,300 CCA Prison Realty Trust ..................... 104,275 6,475 Cousins Properties, Inc. .................... 199,916 4,000 Forest City Enterprises, Inc. Class A ....... 98,000 7,200* Grubb & Ellis Co. ........................... 60,750 5,200 Insignia Financial Group Inc. ............... 70,525 3,200* LaSalle Partners, Inc. ...................... 91,200 7,100 LNR Property Corp. .......................... 138,450 9,333 Republic Bancorp Inc. ....................... 154,578 2,700 SL Green Realty Corp. ....................... 57,713 2,300 Tejon Ranch Co. ............................. 46,287 3,000* Tower Realty Trust, Inc. .................... 56,437 ---------- 1,456,925 ---------- REAL ESTATE INVESTMENT TRUSTS - 6.64% 500 Alexandria Real Estate Equities, Inc. ....... 15,438 5,700 American Health Properties Com-Core Group ............................. 129,319 6,600 Amli Residential Properties ................. 143,138 2,044 Apartment Investment & Management Co. Class A ..................... 69,993 3,400 Associated Estates Realty ................... 42,925 3,200 Bedford Property Investors, Inc. ............ 56,800 9,200* Berkshire Reality Co., Inc. ................. 87,400 5,373 Bradley Real Estate, Inc. ................... 111,154 10,030 BRE Properties, Inc. Class A ................ 241,974 3,500 Burnham Pacific Properties .................. 45,063 14,741 Camden Property Trust ....................... 378,659 17,850* Capstead Mortgage Corp. ..................... 59,128 9,500 CBL & Associates Properties ................. 238,688 4,500 CenterPoint Properties Corp. ................ 153,000 5,400 Charles E. Smith Reality, Inc. .............. 159,638 8,900 Chateau Communities, Inc. ................... 254,763 3,900 Chelsea GCA Properties ...................... 131,869 8,400 Colonial Properties Trust ................... 227,325 7,600 Commercial Net Lease Realty ................. 108,300 9,400 Cornerstone Reality Income .................. 99,288 7,800 Criimi Mae, Inc. ............................ 28,763 6,100 Crown American Realty Trust ................. 48,419 14,600 Developers Diversified Realty ............... 281,963 17,200* Dynex Capital, Inc. ......................... 80,625
================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED NOVEMBER 30, 1998 (UNAUDITED) 31 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- REAL ESTATE INVESTMENT TRUSTS - Continued 4,200 EastGroup Properties, Inc. .................. $ 77,963 12,400 Equity Inns, Inc. ........................... 126,325 3,800 Essex Property Trust, Inc. .................. 117,563 10,300 Federal Reality Investment Trust ............ 246,556 16,881 Felcor Lodging Trust, Inc. .................. 401,979 9,800 First Industrial Reality Trust .............. 237,037 4,300 First Union Real Estate ..................... 24,994 9,600 Franchise Finance Corp. ..................... 235,800 8,800 Gables Residential Trust .................... 218,350 9,200 General Growth Properties ................... 348,450 9,400 Glenborough Reality Trust, Inc. ............. 200,925 6,100 Glimcher Reality Trust ...................... 102,938 500 Great Lakes REIT ............................ 7,875 9,600 Health Care Property Investors .............. 303,000 8,400 Health Care REIT, Inc. ...................... 190,050 9,925 Healthcare Realty Trust, Inc. ............... 228,275 6,800 Home Properties of NY, Inc. ................. 167,450 8,900 Hospitality Properties Trust ................ 231,400 5,800 Imperial Credit Commercial Mortgage Investment Corp. ................. 57,275 4,600 Innkeepers USA Trust ........................ 50,888 9,500 IRT Property Co. ............................ 95,000 4,800 Irvine Apartment Communities ................ 128,700 12,300 JDN Reality Corp. ........................... 254,456 3,300 JP Reality, Inc. ............................ 73,631 4,400 Kilroy Reality Corp. ........................ 98,450 1,692 Kimco Reality Corp. Class D ................. 43,464 6,900 Koger Equity, Inc. .......................... 109,538 5,800* LTC Properties, Inc. ........................ 97,150 4,700 Macerich Co. ................................ 125,137 8,200 Manufactured Home Communities ............... 200,900 7,900 Meridian Industry. Trust, Inc. .............. 190,587 505* Merry Land Properties Inc. .................. 2,083 3,200 MGI Properties .............................. 89,000 4,900 Mid-Amer Apartment Communities .............. 119,437 8,200 Mills Corp. ................................. 175,788 4,300 National Golf Properties, Inc. .............. 124,163 5,600 National Health Investors, Inc. ............. 148,400 10,800 Nationwide Health Properties ................ 241,650 19,600 New Plan Excel Realty Trust ................. 428,750 6,300 Ocwen Asset Investment Corp. ................ 34,650 4,786 Omega Healthcare Investors .................. 145,375 8,100 Pacific Gulf Properties, Inc. ............... 155,925 1,100 Parkway Properties, Inc. .................... 33,206 4,500 Pennsylvania Real Estate Inv ................ 90,000
NUMBER MARKET OF SHARES VALUE - --------- ---------- REAL ESTATE INVESTMENT TRUSTS - Continued 10,300 Prentiss Properties Trust ................... $ 224,025 16,322 Prime Retail, Inc. .......................... 172,401 1,900 PS Business Parks, Inc. ..................... 44,175 6,500 Realty Income Corp. ......................... 164,125 10,200 Reckson Associates Realty Corp. ............. 235,237 5,800* Redwood Trust, Inc. ......................... 83,737 5,300 Regency Realty Corp. ........................ 123,556 9,000 RFS Hotel Investors, Inc. ................... 128,813 8,500* Security Capital Group ...................... 125,375 7,300 Shurgard Storage Centers, Inc. Class A .................................... 192,081 3,100 Sovran Self Storage, Inc. ................... 79,050 5,800 Storage Trust Realty ........................ 130,137 7,100 Storage USA, Inc. ........................... 225,425 5,600 Summit Properties, Inc. ..................... 98,000 7,000 Sun Communities, Inc. ....................... 227,937 8,100 Sunstone Hotel Investors, Inc. .............. 86,063 7,700 Taubman Centers, Inc. ....................... 106,837 5,600 Thornburg Mortgage Asset Corp. .............. 49,000 9,900 Town & Country Trust ........................ 149,737 6,200* Trammell Crow Co. ........................... 148,800 5,300 TriNet Corporate Realty Trust ............... 142,106 20,600 United Dominion Realty Trust ................ 222,737 6,100 Urban Shopping Centers, Inc. ................ 200,537 5,400 Walden Residential Properties ............... 111,375 8,600 Washington Real Estate Inv .................. 150,500 7,200 Weeks Corp. ................................. 206,100 5,100 Weingarten Realty Investors ................. 231,731 7,200* Wellsford Real Properties, Inc. ............. 65,700 4,400 Western Investment Real Estate .............. 51,425 4,100 Westfield America Inc. ...................... 71,750 ----------- 14,222,637 ----------- RESTAURANTS - 1.12% 6,900* Advantica Restaurant Corp. .................. 44,419 7,750 Applebees International, Inc. ............... 159,359 10,662 Avado Brands Inc. ........................... 81,964 10,700 Bob Evans Farms, Inc. ....................... 258,806 11,780* Buffets, Inc. ............................... 138,415 4,200* Consolidated Products, Inc. ................. 86,888 9,900* Foodmaker, Inc. ............................. 191,813 7,100* Landrys Seafood Restaurants ................. 57,688 7,900* Lone Star Steakhouse & Saloon ............... 60,238 10,000 Luby's Cafeterias, Inc. ..................... 158,750 2,900* NPC International, Inc. ..................... 32,988
NUMBER MARKET OF SHARES VALUE - --------- ---------- RESTAURANTS - Continued 5,225* Papa Johns International, Inc. .............. $ 219,123 2,500* PJ America, Inc. ............................ 48,906 8,500* Rainforest Cafe, Inc. ....................... 58,968 7,500 Ruby Tuesday, Inc. .......................... 139,687 15,600* Ryan's Family Steak Houses .................. 177,450 3,500* Sbarro, Inc. ................................ 91,000 7,125* Sonic Corp. ................................. 139,828 8,900 TCBY Enterprises Inc. ....................... 68,975 4,200 The Cheesecake Factory ...................... 109,200 5,000* Triarc Companies Inc. Class A ............... 80,625 ----------- 2,405,090 ----------- SAVINGS & LOAN - 1.13% 4,820 ALBANK Financial Corp. ...................... 326,555 6,000 Bay View Capital Corp. ...................... 126,750 5,200* Coast Federal Litigation-CVF ................ 47,450 5,200 Dime Community Bancshares ................... 140,400 5,155 Downey Financial Corp. ...................... 134,030 3,500 First Financial Holdings, Inc. .............. 66,500 4,000 First Indiana Corp. ......................... 76,500 8,113 First Source Bancorp Inc. ................... 64,904 9,000 FirstFed Financial Corp. .................... 159,750 2,900 JSB Financial, Inc. ......................... 152,975 8,900* Local Financial Corp. ....................... 75,650 5,898 MAF Bancorp, Inc. ........................... 151,136 7,625 Provident Bankshares Corp. .................. 204,922 5,622* Queens County Bancorp, Inc. ................. 168,660 2,500 Reliance Bancorp, Inc. ...................... 72,813 10,000 Staten Island Bancorp, Inc. ................. 208,125 6,600 TR Financial Corp. .......................... 246,675 2,400* Wilshire Financial Services Group ........... 2,325 ----------- 2,426,120 ----------- SECURITIES RELATED - 0.67% 4,100 Dain Rauscher Corp. ......................... 152,725 9,000* E*Trade Group, Inc. ......................... 243,563 6,200 Enhanced Financial Services ................. 182,125 5,500* Hambrecht & Quist Group ..................... 133,375 2,300* Investment Technology Group ................. 120,175 1,699 Investors Financial Services ................ 95,568 4,800 Jefferies Group, Inc. ....................... 222,600 9,150 Morgan Keegan, Inc. ......................... 183,000 5,700* Pioneer Group, Inc. ......................... 104,025 ----------- 1,437,156 -----------
================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED 32 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- SEMICONDUCTOR EQUIPMENT - 0.67% 3,000* ATMI Inc. ................................... $ 57,375 8,100* LAM Research Corp. .......................... 144,788 12,000* Microchip Technology, Inc. .................. 417,750 9,800* Novellus Systems, Inc. ...................... 486,325 3,200* QLogic Corp. ................................ 328,400 ---------- 1,434,638 ---------- SEMICONDUCTORS - 1.39% 5,300* Actel Corp. ................................. 89,769 4,500* Applied Micro Circuits Corp. ................ 150,750 8,500* Burr Brown Corp. ............................ 200,813 14,599* Cirrus Logic, Inc. .......................... 179,750 3,100 Cohu, Inc. .................................. 70,525 7,150* Credence Systems Corp. ...................... 140,318 9,000* Cymer Inc. .................................. 135,000 21,200* Cypress Semiconductor Corp. ................. 215,975 10,800* DSP Communications, Inc. .................... 161,325 6,000 Dallas Semiconductor Corp. .................. 226,500 7,800* Electroglas, Inc. ........................... 113,100 5,700* Etec Systems, Inc. .......................... 187,388 6,200* FSI International, Inc. ..................... 48,437 2,900* Fusion Systems Corp. ........................ 0 17,600* International Rectifier Corp. ............... 165,000 10,000* Level One Communications, Inc. .............. 309,375 5,900* MRV Communications, Inc. .................... 38,719 4,950* SDL, Inc. ................................... 110,447 7,200* Silicon Valley Group Inc. ................... 88,650 2,700* Siliconix, Inc. ............................. 51,975 1,900* Speedfam International, Inc. ................ 28,856 9,500* Unitrode Corp. .............................. 160,906 9,200* VLSI Technology, Inc. ....................... 105,225 ---------- 2,978,803 ---------- TELECOMMUNICATIONS - 3.33% 5,400 ABM Industries, Inc. ........................ 179,888 6,400* Adtran, Inc. ................................ 157,200 4,600* Aerial Communications, Inc. ................. 18,256 22,570* American Tower Corp. - Class A .............. 521,931 14,500* Aspect Telecommunications Co. ............... 274,594 12,800* CellNet Data Systems, Inc. .................. 75,200 8,400* CellStar Corp. .............................. 54,075 3,200* Cellular Communication of Puerto Rico ............................. 47,600 4,650* Cellular Communications International .............................. 290,044
NUMBER MARKET OF SHARES VALUE - --------- ---------- TELECOMMUNICATIONS - Continued 4,800* Centennial Cellular Corp. Class A ........... $ 192,000 2,400* CKS Group, Inc. ............................. 80,400 8,500* CommNet Cellular, Inc. ...................... 89,250 3,200* CoreComm Inc. ............................... 47,600 2,800* Diamond Tech Partners, Inc. ................. 39,200 2,200* Dycom Industries, Inc. ...................... 86,488 10,400* E. Spire Communication, Inc. ................ 83,850 2,200* EchoStar Communications Corp. Class A .................................... 85,388 3,100* Excel Switching Corp. ....................... 80,988 17,000* General Communication, Inc. ................. 69,063 8,900* General Magic Inc. .......................... 47,281 7,000* Geotel Communications Corp. ................. 192,500 15,700* Glenayre Technologies, Inc. ................. 97,144 10,500* ICG Communications, Inc. .................... 241,500 7,400 Inter-Tel, Inc. ............................. 177,600 11,700* ITC Deltacom, Inc. .......................... 183,544 3,100* Itron, Inc. ................................. 20,731 5,800* IXC Communications, Inc. .................... 158,775 4,750* MasTec, Inc. ................................ 110,437 4,000* MGC Communications, Inc. .................... 22,750 2,794* Millicom International Cellular S.A ......... 93,250 6,200* MMC Networks, Inc. .......................... 80,988 4,600* Natural Microsystems Corp. .................. 50,887 2,000 North Pittsburgh Systems .................... 28,000 9,766* NTL Inc. .................................... 543,844 9,300* Omnipoint Corp. ............................. 82,537 2,100* Pacific Gateway Exchange, Inc. .............. 93,975 12,800* PageMart Wireless, Inc. Class A ............. 76,800 15,900* Pairgain Technologies Inc. .................. 160,987 4,400* Plantronics, Inc. ........................... 289,300 6,000* Powertel Inc. ............................... 81,000 3,000* Powerwave Technologies Inc. ................. 42,750 5,500* Premier Technologies, Inc. .................. 27,156 6,700* Premisys Communications Inc. ................ 99,662 7,600* RCN Corp. ................................... 129,200 14,200* Skytel Communications Inc. .................. 296,425 1,300 Superior Telecom Inc. ....................... 56,550 8,600* Tekelec ..................................... 133,300 5,500* Telegroup, Inc. ............................. 12,375 8,600* Tel-Save.Com Inc. ........................... 102,662 4,100* Transaction Network Services ................ 98,913 2,000* US LEC Corp. ................................ 22,750 9,900* USN Communications, Inc. .................... 4,331 8,200* Vanguard Cellular Systems Class A ........... 188,600
NUMBER MARKET OF SHARES VALUE - --------- ---------- TELECOMMUNICATIONS - Continued 19,500* Western Wireless Corp Class A ............... $ 353,437 9,600* WinStar Communications, Inc. ................ 267,600 ---------- 7,142,556 ---------- TEXTILE - PRODUCTS - 0.55% 14,200 Burlington Industries, Inc. ................. 148,213 6,100* Cone Mills Corp. ............................ 27,831 5,700* Dan River Inc - Class A ..................... 46,313 4,850 G & K Services, Inc. Class A ................ 244,925 7,650 Guilford Mills, Inc. ........................ 110,447 6,600* Lydall, Inc. ................................ 83,737 10,400 Russell Corp. ............................... 247,650 4,700 Springs Industries, Inc. Class A ............ 183,006 7,800 Wellman, Inc. ............................... 94,575 ---------- 1,186,697 ---------- TOBACCO - 0.21% 2,800* Cons Cigar Holdings Inc. .................... 31,850 12,100 DIMON, Inc. ................................. 99,068 6,001 General Cigar Holdings, Inc. ................ 58,885 7,300 Universal Corp. ............................. 256,869 ---------- 446,672 ---------- TRUCKERS - 0.81% 7,500* American Freightways Corp. .................. 67,500 5,150 Arnold Industries, Inc. ..................... 73,388 7,800* Consolidated Freightways Corp. .............. 97,988 4,532* Heartland Express, Inc. ..................... 77,611 750* Knight Transportation, Inc. ................. 14,625 3,200* Landstar System, Inc. ....................... 131,200 2,300* M.S. Carriers, Inc. ......................... 56,350 4,200 Roadway Express, Inc. ....................... 62,475 17,862 Rollins Truck Leasing Corp. ................. 214,344 6,900* Swift Transportation Co., Inc. .............. 151,368 6,700 USFreightways Corp. ......................... 180,063 5,875 Varlen Corp. ................................ 154,953 10,587 Werner Enterprises, Inc. .................... 174,024 3,900 Xtra Corp. .................................. 185,493 6,500* Yellow Corp. ................................ 104,812 ---------- 1,746,194 ---------- UTILITIES - COMMUNICATION - 0.30% 9,200 Aliant Communications, Inc. ................. 262,200 3,300 CFW Communications Co. ...................... 68,888
================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED NOVEMBER 30, 1998 (UNAUDITED) 33 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- UTILITIES - COMMUNICATION - Continued 3,966* Commonwealth Telephone Enterprises, Inc. .......................... $ 107,578 5,178 PXRE Corp. .................................. 114,886 6,200 The Alpine Group, Inc. ...................... 97,650 ------------ 651,202 ------------ UTILITIES - ELECTRIC - 2.13% 5,400 Black Hills Corp. ........................... 133,313 5,700 Cleco Corp. ................................. 194,869 3,400 CILCORP, Inc. ............................... 205,700 4,600 Commonwealth Energy System Co. .............. 177,100 6,000 Eastern Utilities Associates ................ 148,125 15,100* El Paso Electric Co. ........................ 139,675 4,400 Empire District Electric Co. ................ 96,250 10,500 Hawaiian Electric Industries ................ 408,844 7,500 Idacorp Inc. ................................ 261,563 7,467 Indiana Energy, Inc. ........................ 168,933 7,425 Madison Gas & Electric Co. .................. 171,703 11,000 Minnesota Power Inc. ........................ 459,938 11,600 Nevada Power Co. ............................ 274,775 7,800 Northwestern Corp. .......................... 184,275 2,875 Otter Tail Power Co. ........................ 114,281 10,700 Public Service Co. of New Mexico ............ 207,981 10,100 Rochester Gas & Electric Corp. .............. 310,575 5,950 SIG Corp, Inc. .............................. 200,813 2,800 TNP Enterprises, Inc. ....................... 106,400 8,020* Unisource Energy Corp. ...................... 119,798 3,700 United Illuminating Co. ..................... 185,693 11,200 Washington Gas Light Co. .................... 285,600 ------------ 4,556,204 ------------ UTILITIES - GAS, DISTRIBUTION - 0.63% 14,700 AGL Resources, Inc. ......................... 316,969 2,200 Colonial Gas Co. ............................ 76,175 2,400 Connecticut Energy Corp. .................... 67,050 8,600 Energen Corp. ............................... 154,800 6,300 Northwest Natural Gas Co. ................... 178,763 1,200* NUI Corp. ................................... 29,175 7,500 Piedmont Natural Gas Co., Inc. .............. 262,500 5,300 Public Service Co. of NC .................... 128,856 7,500 Southwestern Energy Co. ..................... 56,250 2,650 Yankee Energy Systems, Inc. ................. 77,181 ------------ 1,347,719 ------------
NUMBER MARKET OF SHARES VALUE - --------- ---------- UTILITIES - GAS, PIPELINE - 0.33% 2,600 North Carolina Natural Gas .................. $ 83,850 9,900 ONEOK Inc. .................................. 344,644 7,300 Peoples Energy Corp. ........................ 275,119 ------------ 703,613 ------------ UTILITIES - MISCELLANEOUS - 0.68% 4,400 Central Hudson Gas & Electric ............... 177,925 3,800* Group Maintenance America Corp. ............. 50,825 12,075 MDU Resources Group, Inc. ................... 305,648 3,500 Orange and Rockland Utilities ............... 196,875 7,700 Sierra Pacific Resources .................... 277,200 8,300 WPS Resources Corp. ......................... 280,125 11,000* Walter Industries, Inc. ..................... 157,438 ------------ 1,446,036 ------------ WATER SERVICES - 0.27% 3,000 Aquarion Co. ................................ 112,688 2,900 California Water Service Group .............. 75,581 2,000 E'Town Corp. ................................ 84,250 6,300 Philadelphia Suburban Corp. ................. 159,469 6,900 United Water Resources ...................... 143,175 ------------ 575,163 ------------ TOTAL COMMON STOCKS (Cost $202,714,796) ......................... 209,235,294 ------------ PREFERRED STOCKS - 0.04% 5,900 Price Enterprises Inc. ...................... 79,650 778 Prime-Retail, Inc. .......................... 13,858 ------------ 93,508 ------------ TOTAL PREFERRED STOCKS (Cost $91,185) .............................. 93,508 ------------
PAR MARKET VALUE VALUE - --------- ---------- CORPORATE SHORT TERM COMMERCIAL PAPER - 2.15% SECURITIES RELATED - 1.34% $2,872,000 Merrill Lynch & Co., Inc., 5.00% due 12/01/1998 2,872,000 ------------
PAR MARKET VALUE VALUE - --------- ---------- UTILITIES - ELECTRIC - 0.81% $1,729,000 Conagra, 5.52% due 12/02/1998 ..................... $ 1,728,735 ------------- TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $4,600,735) ......................... 4,600,735 ------------- UNITED STATES GOVERNMENT SHORT TERM - 0.20% U. S. TREASURY BILLS - 0.20% United States Treasury Bills: 275,000 4.00% due 12/24/1998 ..................... 274,080 150,000 3.75% due 12/10/1998 ..................... 149,859 ------------- 423,939 ------------- TOTAL UNITED STATES GOVERNMENT SHORT TERM (Cost $423,939) ........................... 423,939 ------------- TOTAL INVESTMENTS (Cost $207,830,655) - 100.11% ............ 214,353,476 Other assets less liabilities, net - (0.11)% ............................ (250,171) ------------- NET ASSETS (equivalent to $15.67 per share on 13,660,212 shares outstanding) - 100% ...................... $ 214,103,305 ============= * Non-income producing
================================================================================ SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS 34 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
UNREALIZED CONTRACTS APPRECIATION - --------- ------------- FUTURES CONTRACTS PURCHASED(1) (Delivery month/Value at 11/30/98) 22 (2) Russell 2000 Index Futures (December/$400.80).......................... $ 1,562 ============= (1)U.S.Treasury Bills with a market value of approximately $275,000 were maintained in a segregated account with a portion placed as collateral for futures contracts. (2)Per 500
NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 13,660,212 shares outstanding.......................... $ 136,602 Additional paid in capital............................... 172,805,715 Accumulated net realized gain on securities.............. 34,597,991 Undistributed net investment income...................... 38,614 Unrealized appreciation of: Investments........................... $ 6,522,821 Futures .............................. 1,562 6,524,383 ----------- ------------ NET ASSETS APPLICABLE TO SHARES OUTSTANDING............................................. $214,103,305 ============
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ SMALL CAP INDEX FUND - FINANCIAL STATEMENTS (Unaudited) 35 ================================================================================ STATEMENT OF OPERATIONS For the six months ended November 30, 1998 INVESTMENT INCOME: Dividends ........................................................................... $ 1,611,718 Interest ............................................................................ 210,818 ------------ Total investment income ........................................................... 1,822,536 ------------ EXPENSES: Advisory fees ....................................................................... 377,238 Custodian and accounting services ................................................... 25,809 Reports to shareholders ............................................................. 19,085 Audit fees and tax services ......................................................... 3,635 Directors' fees and expenses ........................................................ 3,314 Miscellaneous ....................................................................... 11,044 ------------ Total expenses .................................................................... 440,125 ------------ NET INVESTMENT INCOME ............................................................... 1,382,411 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES: Net realized gain (loss) on: Investments ...................................................... $ 16,829,951 Futures contracts ................................................ (928,766) 15,901,185 ------------ Net unrealized appreciation (depreciation) during the period: Investments ...................................................... (47,404,096) Futures contracts ................................................ 312,787 (47,091,309) ------------ ------------ Net realized and unrealized loss on securities during the period ................. (31,190,124) ------------ DECREASE IN NET ASSETS RESULTING FROM OPERATIONS .................................... $(29,807,713) ============
STATEMENT OF CHANGES IN NET ASSETS
For the For the six months ended fiscal year ended November 30, 1998 May 31, 1998 ----------------- ----------------- OPERATIONS: Net investment income .............................................. $ 1,382,411 $ 2,380,770 Net realized gain on securities .................................... 15,901,185 19,072,915 Net unrealized appreciation (depreciation) of securities during the period ................................................ (47,091,309) 19,625,858 --------------- --------------- Increase (decrease) in net assets resulting from operations ...... (29,807,713) 41,079,543 --------------- --------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income .............................................. (1,375,696) (2,367,516) Net realized gain on securities .................................... -- (17,477,319) --------------- --------------- Decrease in net assets resulting from distributions to shareholders ................................................. (1,375,696) (19,844,835) --------------- --------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold ................................... 19,427,789 39,604,509 Proceeds from capital stock issued for distributions reinvested .... 1,375,696 19,844,835 --------------- --------------- 20,803,485 59,449,344 Cost of capital stock repurchased .................................. (22,699,329) (25,960,237) --------------- --------------- Increase (decrease) in net assets resulting from capital stock transactions .............................................. (1,895,844) 33,489,107 --------------- --------------- TOTAL INCREASE (DECREASE) IN NET ASSETS ............................ (33,079,253) 54,723,815 NET ASSETS: Beginning of period ................................................ 247,182,538 192,458,743 --------------- --------------- End of period (including undistributed net investment income of $38,614 and $31,899) .......................................... $ 214,103,305 $ 247,182,558 =============== =============== CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold ....................................... 1,249,840 2,173,506 Shares issued for distributions reinvested ......................... 88,275 1,157,942 Shares of capital stock repurchased ................................ (1,454,820) (1,447,855) --------------- --------------- Increase (decrease) in shares outstanding ........................ (116,705) 1,883,593 Shares outstanding: Beginning of period .............................................. 13,776,917 11,893,324 --------------- --------------- End of period .................................................... 13,660,212 13,776,917 =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS 36 November 30, 1998 (Unaudited) ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- COMMON STOCKS - 99.56% AIRLINES - 0.62% 4,100 British Airways PLC - ADR ................... $ 285,462 40,000* Japan Air Lines Co. Ltd. .................... 101,299 10,000 Lufthansa AG ................................ 218,692 60,000 Malay Airline System BHD .................... 39,158 35,000 Singapore Airlines .......................... 244,013 ----------- 888,624 ----------- APPAREL & PRODUCTS - 0.17% 20,000 Onward Kashiyama Co., Ltd. .................. 247,565 ----------- APPLIANCES/FURNISHINGS - 1.42% 4,200 Matsushita Electric Industrial Co. Ltd. - ADR ................................. 684,338 10,000 Philips Electronics NV ...................... 632,663 33,000 Sanyo Electric Co. Ltd. ..................... 93,214 3,400 Sanyo Electric Co. Ltd. - ADR ............... 49,300 7,970 Sony Corp - ADR ............................. 582,806 ----------- 2,042,321 ----------- AUTO - CARS - 3.89% 16,582 Daimler Chrysler AG Stuttgart ............... 1,520,362 50,000 Fiat S.P.A .................................. 153,297 16,500 Fiat S.P.A. - ADR ........................... 252,656 10,000 Honda Motor Co., Ltd. - ADR ................. 725,000 500 Peugeot Citroen SA .......................... 79,097 78,000 Toyota Motor Corp. .......................... 1,975,325 5,000 Volkswagen AG ............................... 406,732 20,000 Volvo AB .................................... 464,487 ----------- 5,576,956 ----------- AUTO - ORIGINAL EQUIPMENT - 0.05% 25,000 Calsonic Corp. .............................. 67,979 ----------- AUTO - REPLACEMENT PARTS - 0.97% 26,000 Bridgestone Corp. ........................... 607,792 5,550 Denso Corp. ................................. 429,840 8,191 Michelin (CGDE) Class B ..................... 353,458 ----------- 1,391,090 ----------- BANKS - OTHER - 13.27% 60,000 AMMB Holdings BHD ........................... 61,263 50,000 Asahi Bank Ltd. ............................. 190,747 3,190 Asahi Bank Ltd. - ADR ....................... 121,973 106,000 Bank of Tokyo - Mitsubishi .................. 1,152,922
NUMBER MARKET OF SHARES VALUE - --------- ---------- BANKS - OTHER - Continued 68,000 Bank of Yokohama Ltd. ....................... $ 143,507 2,296 Bank of Yokohama Ltd. - ADR ................. 48,565 38,893 Barclays PLC ................................ 882,083 50,000 Bco Bilbao Vizcaya .......................... 789,747 11,977 Bco Comm Portugues .......................... 364,821 4,000* Bco Espir Santo ............................. 123,979 51,142 Bco Santander SA ............................ 1,045,160 40,000 Chiba Bank Ltd. ............................. 150,649 108,000 Commerce Asset Holding ...................... 77,589 11,250 Commerce Asset Holding (Warrants) ................................. 1,688 250,000 DCB Holdings BHD ............................ 135,526 50,000 DCB Holdings BHD (Warrants) ................. 8,947 6,300 Den Danske Bank AF 1871 - ADR ............... 813,469 24,500 Deutsche Bank AG - ADR ...................... 1,589,592 13,000 Development Bank of Singapore Ltd. .......... 98,515 14,987 Development Bank of Singapore Ltd. - ADR ...................................... 454,984 17,000 Dresdner Bank AG - ADR ...................... 787,270 10,000 Foreningssparbk ............................. 280,167 25,000 Hang Seng Bank .............................. 220,360 2,180 HSBC Holdings PLC - ADR ..................... 558,866 15,000 Industrial Bank of Japan Ltd. ............... 80,966 48,000 Joyo Bank ................................... 175,325 134,101 Lloyds TSB Group PLC ........................ 1,863,549 60,000 Malayan Bk BHD .............................. 94,737 35,000* Merita Oyj .................................. 203,548 32,154 National Australia Bank Ltd. ................ 481,258 9,319 National Australia Bank Ltd. - ADR .......... 695,430 10,746 National Westminster Bank PLC ............... 196,036 2,500* Paribas ..................................... 222,791 20,743 Royal Bank Scot Group ....................... 312,379 98,000 Sakura Bank Ltd. ............................ 249,773 25,000* Sao Paolo Imi SPA ........................... 410,031 30,000 Shizuoka Bank ............................... 325,081 74,000 Sumitomo Bank ............................... 822,289 26,000 Tokai Bank .................................. 131,477 2,225 Tokai Bank - ADR ............................ 225,541 6,653 Ubs AG ...................................... 2,001,189 13,300 Westpac Banking Corp. Ltd. - ADR ............ 444,719 ----------- 19,038,508 ----------- BANKS - REGIONAL - 0.49% 21,161* Istituto Bancario San Paolo ................. 698,313 -----------
NUMBER MARKET OF SHARES VALUE - --------- ---------- BEVERAGE - BREWERS/ DISTRIBUTORS - 1.39% 34,642 Bass ........................................ $ 477,692 60,500 Diageo ...................................... 677,585 16,000 Kirin Brewery Co., Ltd. ..................... 165,974 12,000 LVMH ( Moet Hennessy Louis Vuitton) - ADR ............................. 468,000 45,000 Sapporo Breweries ........................... 199,067 ----------- 1,988,318 ----------- BROADCASTING - 0.32% 764 Canal Plus .................................. 175,516 40,000 Mediaset .................................... 282,185 ----------- 457,701 ----------- BUILDING MATERIALS - 1.90% 20,000 Asahi Glass Co. Ltd. ........................ 116,234 1,223 Cie De St Gobain ............................ 180,574 31,216 CRH PLC ..................................... 473,253 2,505 Fletcher Challenge Building Division ........ 31,469 2,700 Glaverbel SA ................................ 348,004 525 Holderbank Finance Glarus ................... 607,606 40,000 Inax Corp. .................................. 219,480 4,459 Lafarge SA .................................. 420,098 23,797 Rexam ....................................... 77,719 15,000 Tostem Corp. ................................ 249,594 ----------- 2,724,031 ----------- CHEMICAL - MAJOR - 1.24% 25,000 BASF AG ..................................... 946,093 10,000 Bayer AG .................................... 410,269 10,000 Bayer AG - ADR .............................. 428,205 ----------- 1,784,567 ----------- CHEMICAL - MISCELLANEOUS - 1.68% 15,303 Air Liquide - ADR ........................... 521,864 10,200 Akzo Nobel N V- ADR ......................... 416,925 23,420 BOC Group PLC ............................... 340,138 7,500 Degussa AG .................................. 373,574 6,000 Imperial Chemical Industries PLC - ADR ...................................... 227,250 13,100 Shin Etsu Chemical Co. ...................... 292,411 50,000 Toray Industries Inc. ....................... 237,419 ----------- 2,409,581 -----------
================================================================================ INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED November 30, 1998 (Unaudited) 37 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- CONGLOMERATES - 1.17% 6,890 Broken Hill Proprietary Co. Ltd. - ADR ...................................... $ 108,518 34,942 BTR ......................................... 71,468 15,408 BTR PLC ..................................... 126,145 30,000 Hutchison Whampoa ........................... 214,064 3,300 Itochu Corp. - ADR .......................... 63,090 71,250 Keppel Corp. Ltd. ........................... 187,466 26,875 Keppel Corp. Ltd. - ADR ..................... 141,639 8,157 Lagardere Groupe ............................ 331,918 22,000 Mitsubishi Corp. ............................ 141,071 50,000 Mitsui & Co. ................................ 285,308 6,400* Wharf Hldgs (Warrants) ...................... 752 ---------- 1,671,439 ---------- CONSUMER FINANCE - 0.05% 37,000 Nippon Shinpan Co. .......................... 67,573 ---------- COSMETICS/TOILETRIES - 1.28% 1,100 Loreal Co. .................................. 684,648 7,900 Loreal Co. - ADR ............................ 986,523 14,490 Shiseido Ltd. - ADR ......................... 165,153 ---------- 1,836,324 ---------- DRUGS - 8.73% 26,666 Astra AB .................................... 488,232 44,900 Glaxo Wellcome PLC - ADR .................... 2,851,150 7,700 Kissei Pharmaceutical Co. ................... 113,875 1,400 Novartis AG ................................. 2,626,943 5,000 Ono Pharmaceutical .......................... 138,799 3,500 Rhone Poulenc SA ............................ 174,409 200 Roche Holdings AG ........................... 2,349,065 10,000 Sankyo Co. Ltd. ............................. 227,273 149,642 Smithkline Beecham .......................... 1,836,392 25,000 Takeda Chemical Industries Ltd. ............. 842,127 20,900 Zeneca Group PLC - ADR ...................... 879,106 ----------- 12,527,371 ----------- ELECTRICAL EQUIPMENT - 1.59% 1,000 Barco ....................................... 267,783 15,000 Fanuc ....................................... 474,838 84,000 General Electric PLC ........................ 686,534 10,400 General Electric PLC - ADR .................. 85,274 10,000 Murata Manufacturing Co. .................... 391,234
NUMBER MARKET OF SHARES VALUE - --------- ----------- ELECTRICAL EQUIPMENT - Continued 3,400 Sumitomo Electric Industries Ltd. - ADR ...................................... $ 370,647 ----------- 2,276,310 ----------- ELECTRONIC INSTRUMENTS - 1.92% 50,000 Hitachi Ltd. ................................ 300,730 5,050 Hitachi Ltd. - ADR .......................... 297,950 6,000 Kyocera Corp. ............................... 282,955 50,000 Racal Electronics PLC ....................... 260,613 7,110 Schneider SA ................................ 436,783 8,000 Siemens AG .................................. 556,456 7,000 Siemens AG - ADR ............................ 497,226 25,000 Yokogawa Electric ........................... 124,188 ----------- 2,756,901 ----------- FINANCE COMPANIES - 3.35% 30,000 Abbey National .............................. 608,647 44,427 ABN Amro Holdings NV ........................ 915,222 38,879 Allied Zurich ............................... 554,715 9,907 Allied Zurich Plc ........................... 285,842 126 Credit Local de France ...................... 18,892 8,286 Fortis Amev NV .............................. 608,707 20,578 ING Groep NV ................................ 1,178,160 3,984 Societe Generale ............................ 627,446 ----------- 4,797,631 ----------- FOODS - 3.19% 25,000 Ajinomoto Inc. .............................. 226,867 22,222 Cadbury Schweppes PLC ....................... 333,552 3,929 Cadbury Schweppes PLC - ADR ................. 237,213 10,000 Daiei, Inc. ................................. 26,705 11,500 Daiei, Inc. - ADR ........................... 58,937 100,000 Golden Hope Plantations ..................... 82,105 1,000 Groupe Danone ............................... 291,781 30,000 Nestle SA - ADR ............................. 3,126,144 30,750 Tate & Lyle PLC ............................. 193,753 ---------- 4,577,057 ---------- FOOTWEAR - 0.11% 1,500 Adidas AG ................................... 163,577 ---------- FREIGHT - 0.68% 98,000 Mitsui Osk Lines Ltd. ....................... 158,296 40,000 Nippon Yusen Kabushiki Kaish ................ 121,753 8,570 Nippon Yusen Kabushiki Kaish - ADR .......... 261,450
NUMBER MARKET OF SHARES VALUE - --------- ---------- FREIGHT - Continued 35,178 P & O Steam Navigation ...................... $ 426,479 ---------- 967,978 ---------- HOME BUILDERS - 0.32% 214 Sekisui Homes Ltd. - ADR .................... 20,857 20,000 Sekisui House, Ltd. ......................... 194,480 9,000 Skanska AB .................................. 249,939 ---------- 465,276 ---------- HOUSEHOLD PRODUCTS - 0.95% 7,000 Katokichi Co. ............................... 100,682 16,400 Unilever N V- ADR ........................... 1,267,925 ---------- 1,368,607 ---------- INFORMATION PROCESSING - 1.16% 1,200* Cap Gemini .................................. 175,490 14,000 Fujitsu Ltd. ................................ 161,591 7,200 Fujitsu Ltd. - ADR .......................... 416,466 2,000 SAP AG ...................................... 905,420 ---------- 1,658,967 ---------- INSURANCE - CASUALTY - 0.31% 25,000 Mitsui Marine & Fire ........................ 126,015 50,000 Nippon Fire & Marine Insurance .............. 171,266 25,000 Sumitomo Marine & Fire ...................... 149,148 ---------- 446,429 ---------- INSURANCE - LIFE - 1.43% 67,514* Irish Life PLC .............................. 561,560 2,500* Mundial Confianca ........................... 81,769 15,240 Prudential PLC - ADR ........................ 1,119,404 20,000* Skandia Forsakring .......................... 283,854 ---------- 2,046,587 ---------- INSURANCE - MULTILINE - 4.01% 3,088 Allianz AG .................................. 1,111,276 27,313 Assic Generali .............................. 1,019,512 10,962 AXA ......................................... 1,416,204 1,560 Munchener Ruckvers .......................... 717,263 60* Munchener Ruckvers .......................... 2,511 56,462 Royal Sun Alliance .......................... 471,244 400 Swiss Reinsurance AG ........................ 1,010,671 ---------- 5,748,681 ----------
================================================================================ INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED 38 November 30, 1998 (Unaudited) ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ---------- LEISURE TIME - 1.08% 20,000 Canon, Inc. - ADR ........................... $ 443,750 15,000 Fuji Photo .................................. 560,065 54,585 Ladbroke Group PLC .......................... 211,133 90,053 Rank Group .................................. 337,180 ---------- 1,552,128 ---------- LODGING - 0.24% 297,916 Hong Kong & Shanghai Hotels ................. 246,243 22,916* Hong Kong & Shanghai Hotels (Warrants) ................................. 30 180,000 Hotel Properties ............................ 94,392 ---------- 340,665 ---------- MACHINE TOOLS - 0.43% 35,000 Amada Co., Ltd. ............................. 174,716 16,000 Makita Corp. - ADR .......................... 179,000 25,000 Minebea Co. Ltd. ............................ 268,466 ---------- 622,182 ---------- MACHINERY - CONSTRUCTION & CONTRACTS - 0.82% 3,501 Algeco ...................................... 296,611 2,000 Groupe Gtm .................................. 225,691 2,000 Jean Lefebvre SA ............................ 183,154 52,000 Kajima Corp. ................................ 138,442 2,340 Kajima Corp. - ADR .......................... 62,441 16,000* Kumagai Gumi Co (Warrants) .................. 1,467 80,000 Kumagai Gumi Co. ............................ 35,903 70,000 Shimizu Corp. ............................... 230,114 ---------- 1,173,823 ---------- MACHINERY - INDUSTRIAL/ SPECIALTY - 2.38% 10,000 Atlas Copco AB Series A ..................... 227,943 125 Bobst SA .................................... 170,092 61,837 British Aerospace ........................... 531,404 8,000 Ebara Corp. ................................. 67,013 2,530 Ebara Corp. - ADR ........................... 212,411 100,000 Halma PLC ................................... 194,635 50,000 Kawasaki Heavy Industries ................... 123,377 70,000 Kubota Corp. ................................ 161,364 1,350 Kubota Corp. - ADR .......................... 63,112 750 Man AG ...................................... 212,650 10,000 Mannesmann AG ............................... 1,081,671 612 Rauma Oy .................................... 8,601
NUMBER MARKET OF SHARES VALUE - --------- ---------- MACHINERY - INDUSTRIAL/ SPECIALTY - Continued 101,468 Siebe PLC ................................... $ 365,277 ---------- 3,419,550 ---------- MEDICAL TECHNOLOGY - 0.02% 20,000* Instrumentation Laboratory S. P. A .......... 22,500 ---------- MERCHANDISE - SPECIALTY - 1.38% 43,020 BAA PLC ..................................... 475,427 10,000 Esselte AB Series B ......................... 156,058 35,000 Great Universal Stores PLC .................. 363,992 10,000 Hennes and Mauritz .......................... 738,511 1,500* Herlitz AG .................................. 58,402 3,000 Metro AG .................................... 187,008 ---------- 1,979,398 ---------- MERCHANDISING - DEPARTMENT - 0.94% 500 Karstadt AG ................................. 234,313 15,311 Marks & Spencer PLC ......................... 104,049 15,033 Marks & Spencer PLC - ADR ................... 621,950 16,000 Marui Co., Ltd. ............................. 285,065 36,000 Mitsukoshi Ltd. ............................. 100,227 200 Mitsukoshi Ltd. - ADR ....................... 5,581 ---------- 1,351,185 ---------- MERCHANDISING - FOOD - 1.84% 16,078 Ahold Kon Nv ................................ 557,356 1,550 Carrefour SA ................................ 1,096,595 10,000 Delhaize-Le Lion, SA ........................ 820,211 15,000 Melco International Development Limited .................................... 1,395 10,000 Uny Co. Ltd. ................................ 167,208 ---------- 2,642,765 ---------- MERCHANDISING - MASS - 0.86% 4,356 Familymart Co. .............................. 211,082 10,200 Ito-Yokado Co. Ltd. - ADR ................... 633,675 6,500 Jeronimo Martins SGPS ....................... 318,714 20,000 Seiyu Ltd. .................................. 66,396 ---------- 1,229,867 ---------- METALS - MISCELLANEOUS - 1.04% 200* Alusuisse Lonza Holdings .................... 252,095 113,049 North Ltd. .................................. 211,682
NUMBER MARKET OF SHARES VALUE - --------- ---------- METALS - MISCELLANEOUS - Continued 8,062 Rio Tinto Limited ........................... $ 415,690 13,132 Rio Tinto PLC ............................... 396,926 67,410 Western Mining .............................. 212,590 ---------- 1,488,983 ---------- METALS - STEEL - 0.50% 500 Bekaert SA .................................. 268,640 36,700 British Steel PLC ........................... 59,324 2,000 British Steel PLC - ADR ..................... 34,250 78,000 Sumitomo Metal Industries Ltd. .............. 93,068 50,000 Sumitomo Metal Mining ....................... 180,195 2,000 Vallourec Usin .............................. 81,031 ---------- 716,508 ---------- MISCELLANEOUS - 0.69% 8,000 Secom Co. ................................... 591,558 15,718 Tnt Post Groep NV ........................... 395,303 ---------- 986,861 ---------- OIL - INTEGRATED INTERNATIONAL - 5.35% 27,866 British Petroleum Co. PLC - ADR ............. 2,567,155 16,946 Elf Aquitaine SA - ADR ...................... 1,054,889 225,000 Eni S.P.A ................................... 1,395,074 10,000 Repsol SA - ADR ............................. 561,250 20,392 Royal Dutch Pete Co. ........................ 958,424 9,207 Total ....................................... 1,140,922 ---------- 7,677,714 ---------- OIL/GAS PRODUCERS - 0.45% 2,505 Fletcher Challenge Energy Division .......... 51,196 3,500 Norsk Hydro A/S - ADR ....................... 128,187 3,000 OMV AG ...................................... 282,794 62,500 Santos Ltd. ................................. 181,240 ---------- 643,417 ---------- PAPER/FOREST PRODUCTS - 0.73% 150,801 Fletcher Challenge Forest Ltd. .............. 57,149 4,326 Fletcher Challenge Ltd. - ADR ............... 16,493 5,010 Fletcher Challenge Paper Division ........... 31,939 22,000 New Oji Paper Co., Ltd. ..................... 98,750 300 New Oji Paper Co., Ltd. - ADR ............... 13,496 60,000 Nippon Paper Industries ..................... 256,656
================================================================================ INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED November 30, 1998 (Unaudited) 39 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ----------- PAPER/FOREST PRODUCTS - Continued 22,000 UPM - Kymmene Corp. ......................... $ 575,749 ----------- 1,050,232 ----------- PUBLISHING - NEWS - 0.71% 51,211 Independent Newspapers PLC .................. 183,783 22,500 News Corp Ltd. - ADR ........................ 630,000 21,379 United News & Media PLC ..................... 206,468 ----------- 1,020,251 ----------- PUBLISHING/PRINTING - 0.68% 43,333 Reuters Group ............................... 418,489 20,000 Trelleborg AB ............................... 168,346 2,040 Wolters Kluwer NV ........................... 388,790 ----------- 975,625 ----------- RAILROAD - 0.65% 30,000 Fukuyama Transporting Co. ................... 135,390 9,218 Nagoya Railroad Co. Ltd. - ADR .............. 307,466 101,970 Odakyu Electric Railway Co. Ltd. ............ 331,072 60,000 Tokyu Corp. ................................. 157,305 ----------- 931,233 ----------- REAL ESTATE - 1.54% 6,000* Asticus AB .................................. 50,872 12,000 Diligentia .................................. 80,364 9,000* Drott AB .................................... 71,332 35,000 Great Portland Est .......................... 111,132 42,102 Hammerson PLC ............................... 268,058 240,000 Hang Lung Development Co. ................... 277,412 43,000 Mitsubishi Estate Co. Ltd. .................. 410,454 35,000 Mitsui Fudosan .............................. 268,182 26,634 New World Development Co. ................... 64,667 83,597 Sun Hung Kai Properties Ltd. ................ 599,204 ----------- 2,201,677 ----------- SECURITIES RELATED - 0.33% 25,000 Daiwa Securities Co. Ltd. ................... 89,083 2,137 Garban ...................................... 8,354 3,800 Nomura Securities Co. Ltd. - ADR ............ 370,045 160,000* Peregrine Investment Holdings Ltd. .......... 0 6,000* Yamaichi Securities Co. Ltd. - ADR .......... 0 ----------- 467,482 -----------
NUMBER MARKET OF SHARES VALUE - --------- ----------- TELECOMMUNICATIONS - 11.81% 3,000 Alcatel Alst Cge ............................ $ 396,541 36,037 British Telecommunications PLC .............. 493,666 11,379 British Telecommunications PLC - ADR ...................................... 1,573,147 46,602 Cable & Wireless PLC ........................ 591,881 40,000 Deutsche Telekom ............................ 1,122,344 15,000 France Telecom .............................. 1,041,447 30,600 Hong Kong Telecommunications Ltd. - ADR ...................................... 575,662 15,621 Kon Kpn NV .................................. 673,829 5,000* Netcom Asa .................................. 130,217 300 Nippon Tel+Tel Cp ........................... 2,240,260 12,000 Nokia Ab Oy ................................. 1,174,760 18* Ntt Mobile Communications ................... 686,688 2,600 Telecom Corp. of New Zealand Ltd. - ADR ...................................... 87,262 250,000 Telecom Italia Mobile ....................... 1,637,148 106,111 Telecom Italia SPA .......................... 859,438 20,400 Telefonaktiebolage & LM Ericsson Class B - ADR .............................. 563,550 14,000 Telefonica de Espana ........................ 657,568 6,290 Telefonica de Espana - ADR .................. 876,669 115,000 Telekom Malaysia Berhad ..................... 225,461 9,000 Vodafone Group PLC - ADR .................... 1,329,187 ----------- 16,936,725 ----------- TEXTILE - PRODUCTS - 0.26% 20,000 Courtaulds Textiles PLC ..................... 51,133 15,000 Marzotto & Figli S.P.A ...................... 155,380 15,000 Wacoal Corp. ................................ 169,359 ------------ 375,872 ------------ TOBACCO - 0.45% 38,879 British America Tobacco ..................... 356,396 9,908 British American Tobacco PLC ................ 185,775 32,000 Swedish Match AB ............................ 108,135 ------------ 650,306 ------------ UTILITIES - COMMUNICATION - 0.20% 1,500 Telecel Comuni Pes .......................... 293,162 ------------ UTILITIES - ELECTRIC - 3.87% 55,000 Clp Holdings ................................ 289,100 48,000 Endesa SA ................................... 1,248,000 6,500 Hidroel Cantabrico .......................... 314,306
NUMBER MARKET OF SHARES VALUE - --------- ------------ UTILITIES - ELECTRIC - Continued 30,000 Iberdrola SA ................................ $ 496,709 16,600 Kansai Electric Power Co. Inc. .............. 332,808 62,265 National Power .............................. 529,947 2,000 Oesterreichisch Elektrizitatswirt Schafts - AG Class A ....................... 311,701 10,000 RWE AG - ADR ................................ 533,482 48,488 Scottish Power PLC .......................... 514,262 95,000 Tenaga Nasional Berhad ...................... 126,250 25,200 Tokyo Electric Power ........................ 574,773 5,000 VEBA AG ..................................... 277,049 ------------ 5,548,387 ------------ UTILITIES - GAS, DISTRIBUTION - 0.47% 44,117 Bg .......................................... 302,354 127,000 Osaka Gas Co. ............................... 371,104 ------------ 673,458 ------------ UTILITIES - MISCELLANEOUS - 0.18% 1,500* Tractebel Inv Intl .......................... 257,209 ------------ WATER SERVICES - 2.00% 6,349 Eaux (Cie Generale) ......................... 1,435,143 10,196* Eaux (Cie Generale) (Warrants) ............. 20,610 22,242 Hyder PLC ................................... 299,000 24,186 Thames Water ................................ 462,367 45,184 United Utilities PLC ........................ 658,087 ------------ 2,875,207 ------------ TOTAL COMMON STOCKS (Cost $110,042,347) ........................ 142,796,634 ------------
================================================================================ INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED 40 November 30, 1998 (Unaudited) ================================================================================
PAR MARKET VALUE VALUE - --------- ------------ UNITED STATES GOVERNMENT - SHORT TERM - 0.24% U.S. TREASURY BILLS - 0.24% United States Treasury Bills, $ 25,000 4.20% due 12/31/98 ......................... $ 24,912 200,000 4.17% due 1/14/99 .......................... 198,981 125,000 4.00% due 12/24/98 ......................... 124,680 ------------ 348,573 ------------ TOTAL UNITED STATES GOVERNMENT - SHORT TERM (Cost $348,573) ............................. 348,573 ------------ TOTAL INVESTMENTS (Cost $110,390,920) - 99.80% ................ 143,145,207 Other assets less liabilities, net - 0.20% ................................ 281,881 ------------ NET ASSETS (equivalent to $11.84 per share on 12,109,576 shares outstanding) - 100% ........................ $143,427,088 ============ * Non-income producing
UNREALIZED CONTRACTS APPRECIATION - --------- ------------ FUTURES CONTRACTS PURCHASED(1) (Delivery month/Value at 11/30/98) 10 (2) Nikkei 225 Futures (December/$119.52)............ $ 38,504 ============ (1)U.S.Treasury Bills with a market value of approximately $315,000 were maintained in a segregated account with a portion placed as collateral for futures contracts. (2)Per 500
NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 12,109,576 shares outstanding ....................... $ 121,096 Additional paid in capital ............................ 96,372,480 Accumulated net realized gain on securities ........... 13,830,664 Undistributed net investment income ................... 304,432 Unrealized appreciation of: Investments ............................ $ 32,754,287 Futures ................................ 38,504 ------------ Foreign currency translation ........... 5,625 32,798,416 ------------ ------------ NET ASSETS APPLICABLE TO SHARES OUTSTANDING ......................................... $143,427,088 ============
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ INTERNATIONAL EQUITIES FUND - FINANCIAL STATEMENTS (Unaudited) 41 ================================================================================ STATEMENT OF OPERATIONS For the six months ended November 30, 1998 INVESTMENT INCOME: Dividends (net of foreign withholding taxes of $130,620) ............................ $ 1,213,679 Interest ............................................................................ 576,660 ------------ Total investment income ........................................................... 1,790,339 ------------ EXPENSES: Advisory fees ....................................................................... 251,837 Custodian and accounting services ................................................... 17,433 Reports to shareholders ............................................................. 12,299 Audit fees and tax services ......................................................... 2,076 Directors' fees and expenses ........................................................ 2,101 Miscellaneous ....................................................................... 10,982 ------------ Total expenses .................................................................... 296,728 ------------ NET INVESTMENT INCOME ............................................................... 1,493,611 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES AND FOREIGN CURRENCIES: Net realized gain (loss) on: Investments ........................................................ $ 3,402,683 Foreign currency transactions ...................................... 89,625 Futures contracts .................................................. (254,834) 3,237,474 ------------ Net unrealized appreciation (depreciation) during the period: Investments ........................................................ (4,904,562) Foreign currency translation ....................................... 23,673 Futures contracts .................................................. 159,813 (4,721,076) ------------ ------------ Net realized and unrealized loss on securities and foreign currencies during the period ............................................ (1,483,602) ------------ INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .................................... $ 10,009 ============
STATEMENT OF CHANGES IN NET ASSETS
For the For the six months ended fiscal year ended November 30, 1998 May 31, 1998 ----------------- ----------------- OPERATIONS: Net investment income ..................................................... $ 1,493,611 $ 3,180,171 Net realized gain on securities and foreign currency transactions ......... 3,237,474 10,927,955 Net unrealized appreciation (depreciation) of securities and translation of foreign currencies during the period ...................... (4,721,076) 1,477,313 ------------- ------------- Increase in net assets resulting from operations ....................... 10,009 15,585,439 ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ..................................................... (1,657,996) (3,388,878) Net realized gain on securities ........................................... -- (4,595,687) ------------- ------------- Decrease in net assets resulting from distributions to shareholders ........................................................ (1,657,996) (7,984,565) ------------- ------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold .......................................... 30,621,540 58,848,665 Proceeds from capital stock issued for distributions reinvested ........... 1,657,996 7,984,565 ------------- ------------- 32,279,536 66,833,230 Cost of capital stock repurchased ......................................... (42,673,628) (100,401,920) ------------- ------------- Decrease in net assets resulting from capital stock transactions ........ (10,394,092) (33,568,690) ------------- ------------- TOTAL DECREASE IN NET ASSETS .............................................. (12,042,079) (25,967,816) NET ASSETS: Beginning of period ....................................................... 155,469,167 181,436,983 ------------- ------------- End of period (including undistributed net investment income of $304,432 and $468,817) ............................................... $ 143,427,088 $ 155,469,167 ------------- ------------- CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold .............................................. 2,661,161 5,111,681 Shares issued for distributions reinvested ................................ 144,082 728,332 Shares of capital stock repurchased ....................................... (3,704,943) (8,688,179) ------------- ------------- Decrease in shares outstanding .......................................... (899,700) (2,848,166) Shares outstanding: Beginning of period ..................................................... 13,009,276 15,857,442 ------------- ------------- End of period ........................................................... 12,109,576 13,009,276 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS. =============================================================================== GROWTH FUND - STATEMENT OF NET ASSETS 42 November 30, 1998 (Unaudited) ===============================================================================
NUMBER MARKET OF SHARES VALUE - ------------ ------------- COMMON STOCKS - 94.47% ADVERTISING - 4.93% 435,000* ADVO, Inc. ................................... $11,255,625 330,000* Catalina Marketing Corp. ..................... 19,222,500 900,000 Outdoor Systems Inc. ......................... 24,300,000 ----------- 54,778,125 ----------- APPAREL & PRODUCTS - 0.76% 150,000* Abercrombie and Fitch Co. .................... 8,400,000 ----------- AUTO - CARS - 1.18% 623,500* Avis Rent A Car Inc. ......................... 13,132,478 ----------- AUTO - REPLACEMENT PARTS - 1.73% 637,500* AutoZone, Inc. ............................... 19,204,687 ----------- BANKS - OTHER - 1.46% 450,000 Wells Fargo Co. .............................. 16,200,000 ----------- BROADCASTING - 8.04% 600,000* Chancellor Media Corp. Class A ............... 22,612,500 550,000 Comcast Corp. Class A Special ................ 26,743,750 285,000 Jacor Communications, Inc. ................... 16,583,437 580,000 Tele-Comm Liberty Media Group Class A .................................... 23,381,250 ----------- 89,320,937 ----------- ENTERTAINMENT - 2.98% 480,100 Carnival Corp. Class A ....................... 16,563,450 700,000* Fox Entertainment Group Class A .............. 16,537,500 ----------- 33,100,950 ----------- FINANCE COMPANIES - 1.65% 235,000 Associates First Capital Corp. ............... 18,300,625 ----------- FINANCIAL SERVICES - 2.32% 800,000 CIT Group Inc. ............................... 22,450,000 139,700 Waddell & Reed Financial, Inc. ............... 3,265,487 ----------- 25,715,487 ----------- FUNERAL SERVICES - 0.93% 275,000 Service Corp. International .................. 10,278,125 ----------- GOVERNMENT SPONSORED - 4.01% 465,000 Federal Home Loan Mortgage Corp .............. 28,132,500 225,000 Federal National Mortgage Association ........ 16,368,750 ----------- 44,501,250 -----------
NUMBER MARKET OF SHARES VALUE - ------------ ------------- HEALTHCARE - 3.43% 64,200 Cardinal Health, Inc. ........................ $ 4,405,725 490,000 Quorum Health Group Inc. ..................... 8,146,250 750,000* Total Renal Care Holdings .................... 19,921,875 125,000 United HealthCare Corp. ...................... 5,640,625 ----------- 38,114,475 ----------- HOSPITAL MANAGEMENT - 0.78% 735,000* Concentra Managed Care, Inc. ................. 8,682,188 ----------- HOUSEHOLD PRODUCTS - 0.21% 108,400 ServiceMaster Co. ............................ 2,330,600 ----------- HUMAN RESOURCES - 3.81% 700,000 Interim Services Inc. ........................ 14,525,000 630,000* Metamor Worldwide, Inc. ...................... 14,923,125 1,075,000* Modis Professional Services .................. 12,832,813 ----------- 42,280,938 ----------- INFORMATION PROCESSING - 1.49% 700,000* Acxiom Corp. ................................. 16,537,500 ----------- INFORMATION PROCESSING - COMPUTER SERVICES - 4.54% 500,000 First Data Corp. ............................. 13,343,750 525,000* Gartner Group, Inc. Class A .................. 11,353,125 200,000 Paychex, Inc. ................................ 9,950,000 492,800* SunGard Data Systems, Inc. ................... 15,769,600 ----------- 50,416,475 ----------- INFORMATION PROCESSING - DATA SERVICES - 8.32% 555,000* Affiliated Computer Services Class A ......... 21,263,438 420,000* BISYS Group, Inc. ............................ 20,212,500 1,625,000* Cendant Corp. ................................ 30,875,000 500,000 Galileo International Inc. ................... 20,000,000 ----------- 92,350,938 ----------- INSURANCE - MISCELLANEOUS - 1.76% 305,000 Ace Limited .................................. 9,760,000 222,500 MGIC Investment Corp. ........................ 9,776,094 ----------- 19,536,094 ----------- INSURANCE - MULTILINE - 0.70% 24,300* Fairfax Financial Holdings Ltd. .............. 7,772,175 -----------
NUMBER MARKET OF SHARES VALUE - ------------ ------------- LEISURE TIME - 1.47% 600,000* Premier Parks, Inc. .......................... $ 16,275,000 ----------- LODGING - 0.86% 950,000* Extended Stay America, Inc. .................. 9,500,000 ----------- MERCHANDISE - SPECIALTY - 11.96% 475,000 Circuit City Stores, Inc. .................... 17,189,063 555,000* Cole National Corp. Class A .................. 8,567,812 450,000* Corporate Express, Inc. ...................... 2,643,750 320,000* CostCo Companies, Inc. ....................... 20,080,000 850,000* General Nutrition Cos., Inc. ................. 15,087,500 420,000 Home Depot, Inc. ............................. 20,895,000 91,500* Kohl's Corp. ................................. 4,500,656 975,000* Office Depot, Inc. ........................... 31,687,500 411,900* Williams-Sonoma, Inc. ........................ 12,176,794 ----------- 132,828,075 ----------- MERCHANDISING - DEPARTMENT - 0.62% 250,000* Saks Inc. .................................... 6,875,000 ----------- MERCHANDISING - FOOD - 0.94% 198,500* Safeway, Inc. ................................ 10,483,281 ----------- MERCHANDISING - MASS - 1.83% 400,000 Fred Meyer, Inc. ............................. 20,350,000 ----------- MISCELLANEOUS - 2.36% 85,000* Apollo Group Inc Class A ..................... 2,741,250 313,300* Coach USA, Inc. .............................. 8,889,888 500,000* Sylvan Learning Systems, Inc. ................ 14,531,280 ----------- 26,162,418 ----------- OIL - SERVICES - 1.76% 304,700 Schlumberger Ltd. ............................ 13,616,281 245,000* Smith International, Inc. .................... 5,910,625 ----------- 19,526,906 ----------- POLLUTION CONTROL - 3.75% 634,000* Allied Waste Industries, Inc. ................ 12,917,750 670,000 Waste Management, Inc. ....................... 28,726,250 ----------- 41,644,000 ----------- PUBLISHING - NEWS - 1.18% 205,000 Tribune Co. .................................. 13,145,625 -----------
=============================================================================== GROWTH FUND - STATEMENT OF NET ASSETS November 30, 1998 (Unaudited) 43 ===============================================================================
NUMBER MARKET OF SHARES VALUE - ------------ --------------- RESTAURANTS - 1.59% 496,300* Outback Steakhouse Inc. ...................... $ 17,618,650 -------------- SECURITIES RELATED - 3.74% 580,000 Franklin Resources, Inc. ..................... 24,795,000 240,000 Morgan Stanley, Dean Witter, Discover and Co. ........................... 16,740,000 -------------- 41,535,000 -------------- TELECOMMUNICATIONS - 7.38% 540,000* Airtouch Communications, Inc. ................ 30,881,250 608,719* MCI Worldcom Inc. ............................ 35,914,421 540,900 Paging Network, Inc. ......................... 3,346,716 650,000 Western Wireless Corp. Class A ............... 11,781,250 -------------- 81,923,637 -------------- TOTAL COMMON STOCKS (Cost $810,057,645) .......................... 1,048,821,639 --------------
PAR MARKET VALUE VALUE - ------------ --------------- CORPORATE SHORT TERM COMMERCIAL PAPER - 5.11% CONGLOMERATES - 0.34% $3,788,000 PHH Corp., 5.40% due 12/07/1998 ....................... $ 3,784,590 -------------- FINANCE COMPANIES - 1.93% General Electric Capital Services Inc.: 7,446,000 4.80% due 12/02/1998 ....................... 7,445,006 14,007,000 4.75% due 12/01/1998 ....................... 14,007,000 -------------- 21,452,006 -------------- UTILITIES - ELECTRIC - 2.84% 5,000,000 Conagra, 5.52% due 12/02/1998 ....................... 14,997,700 Pacific Gas & Electric Co.: 11,000,000 5.06% due 12/03/1998 ....................... 10,996,907 5,500,000 5.06% due 12/04/1998 ....................... 5,497,635 -------------- 31,492,242 -------------- TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $56,728,838) ........................... 56,728,838 -------------- TOTAL INVESTMENTS (Cost $866,786,483) - 99.58% ................. 1,105,550,477 Other assets less liabilities, net - 0.42% ................................ 4,657,422 -------------- NET ASSETS (equivalent to $21.35 per share on 52,006,265 shares outstanding) - 100% ........................ $1,110,207,899 ============== * Non-income producing
NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 52,006,265 shares outstanding .............. $ 520,063 Additional paid in capital ................... 816,868,419 Accumulated net realized gain on securities .. 56,869,960 Accumulated net investment loss .............. (2,814,537) Unrealized appreciation of securities ........ 238,763,994 NET ASSETS APPLICABLE TO SHARES OUTSTANDING ................................ $ 1,110,207,899 ===============
SEE NOTES TO FINANCIAL STATEMENTS. =============================================================================== GROWTH FUND - FINANCIAL STATEMENTS (Unaudited) 44 =============================================================================== STATEMENT OF OPERATIONS For the six months ended November 30, 1998 INVESTMENT INCOME: Dividends ...................................................................... $ 1,517,518 Interest ....................................................................... 1,365,639 ------------ Total investment income ...................................................... 2,883,157 ------------ EXPENSES: Advisory fees .................................................................. 4,292,928 Custodian and accounting services .............................................. 128,931 Reports to shareholders ........................................................ 90,343 Audit fees and tax services .................................................... 20,532 Directors' fees and expenses ................................................... 15,363 Miscellaneous .................................................................. 33,815 ------------ Total expenses ............................................................... 4,581,912 ------------ NET INVESTMENT LOSS ............................................................ (1,698,755) ------------ REALIZED AND UNREALIZED GAIN(LOSS) ON SECURITIES: Net realized gain (loss) on: Investments ............................................... $ 5,531,209 Foreign currency translation .............................. (316,974) 5,214,235 Net unrealized depreciation of securities during the period: ------------ Investments ............................................... $(40,733,659) Foreign currency translation .............................. (672,665) (41,406,324) ------------ ------------ Net realized and unrealized loss on securities and foreign currencies during the period ........................................ (36,192,089) ------------ DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................... $(37,890,844) ============
STATEMENT OF CHANGES IN NET ASSETS
For the For the six months ended fiscal year ended November 30, 1998 May 31, 1998 ----------------- ----------------- OPERATIONS: Net investment loss .............................................. $ (1,698,755) $ (1,052,032) Net realized gain on securities .................................. 5,214,235 52,174,007 Net unrealized appreciation (depreciation) of securities during the period ............................................. (41,406,324) 165,960,273 --------------- --------------- Increase (decrease) in net assets resulting from operations .... (37,890,844) 217,082,248 --------------- --------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ............................................ -- (303,215) Net realized gain on securities .................................. -- (15,121,487) --------------- --------------- Decrease in net assets resulting from distributions to shareholders ............................................... -- (15,424,702) --------------- --------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold ................................. 60,159,807 155,432,936 Proceeds from capital stock issued for distributions reinvested .. -- 15,424,702 --------------- --------------- 60,159,807 170,857,638 Cost of capital stock repurchased ................................ (12,198,127) (20,032,134) --------------- --------------- Increase in net assets resulting from capital stock transactions 47,961,680 150,825,504 --------------- --------------- TOTAL INCREASE IN NET ASSETS ..................................... 10,070,836 352,483,050 NET ASSETS: Beginning of period .............................................. 1,100,137,063 747,654,013 --------------- --------------- End of period (including accumulated net investment loss of $(2,814,537) and $(1,115,782)) .............................. $ 1,110,207,899 $ 1,100,137,063 =============== =============== CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold ..................................... 2,805,115 7,600,994 Shares issued for distributions reinvested ....................... -- 769,312 Shares of capital stock repurchased .............................. (631,109) (959,921) --------------- --------------- Increase in shares outstanding ................................. 2,174,006 7,410,385 Shares outstanding: Beginning of period ............................................ 49,832,259 42,421,874 --------------- --------------- End of period .................................................. 52,006,265 49,832,259 --------------- ---------------
SEE NOTES TO FINANCIAL STATEMENTS. =============================================================================== GROWTH & INCOME FUND - STATEMENT OF NET ASSETS NOVEMBER 30, 1998 (UNAUDITED) 45 ===============================================================================
NUMBER MARKET OF SHARES VALUE - --------- ----------- COMMON STOCKS - 87.49% ADVERTISING - 1.58% 76,000 Omnicom Group, Inc........................... $ 4,061,250 ----------- AUTO - CARS - 1.06% 65,000 Harley-Davidson, Inc. ....................... 2,717,813 ----------- BANKS - NEW YORK CITY - 1.27% 65,000 Citigroup Inc. .............................. 3,262,188 ----------- BANKS - OTHER - 2.18% 60,000 Mellon Bank Corp. ........................... 3,776,250 50,000 Wells Fargo Co. ............................. 1,800,000 ----------- 5,576,250 ----------- BANKS - REGIONAL - 4.47% 30,000 Fifth Third Bancorp ......................... 1,991,250 54,000 Firstar Corp. ............................... 3,955,500 40,000 State Street Corp. .......................... 2,745,000 55,000 Zions Bancorporation ........................ 2,777,500 ----------- 11,469,250 ----------- BROADCASTING - 2.01% 110,000* Clear Channel Communications ................ 5,142,500 ----------- BUILDING MATERIALS - 0.66% 40,000 Lowe's Companies, Inc. ...................... 1,690,000 ----------- CHEMICAL - MAJOR - 0.01% 600 Hercules, Inc. .............................. 19,725 ----------- CONGLOMERATES - 1.36% 45,000 Dial Corp. .................................. 1,181,250 35,000 Tyco International Ltd. ..................... 2,303,438 ----------- 3,484,688 ----------- CONTAINERS - METAL/GLASS - 0.82% 65,000* Owens-Illinois, Inc. ........................ 2,088,125 ----------- DRUGS - 11.10% 60,000 Eli Lilly and Co. ........................... 5,381,250 50,000 McKesson Corp. .............................. 3,559,375 20,000 Merck & Co., Inc. ........................... 3,097,500 61,000 Pfizer, Inc. ................................ 6,809,125 30,000 Schering-Plough Corp. ....................... 3,191,250 60,000 Warner-Lambert Co. .......................... 4,530,000
NUMBER MARKET OF SHARES VALUE - --------- ----------- DRUGS - Continued 35,000* Watson Pharmaceuticals, Inc.................. $ 1,885,625 ----------- 28,454,125 ----------- ELECTRICAL EQUIPMENT - 1.41% 40,000 General Electric Co. ........................ 3,620,000 ----------- FINANCE COMPANIES - 2.52% 40,000 Finova Group, Inc. .......................... 2,112,500 55,000 SunAmerica, Inc. ............................ 4,358,750 ----------- 6,471,250 ----------- FOODS - 0.90% 50,000* U. S. Foodservice ........................... 2,296,875 ----------- GOVERNMENT SPONSORED - 1.49% 39,100 Federal Home Loan Mortgage Corp. ............ 2,365,550 20,000 Federal National Mortgage Association ............................... 1,455,000 ----------- 3,820,550 ----------- HEALTHCARE - 1.81% 67,500 Cardinal Health, Inc. ....................... 4,632,188 ----------- HOME BUILDERS - 1.39% 100,000 Centex Corp. ................................ 3,568,750 ----------- HOSPITAL SUPPLIES - 1.88% 30,000 Johnson & Johnson ........................... 2,437,500 35,000 Medtronic, Inc. ............................. 2,369,062 ----------- 4,806,562 ----------- HOUSEHOLD PRODUCTS - 2.95% 85,000* Bed Bath & Beyond, Inc. ..................... 2,650,937 25,000 Clorox Co. .................................. 2,776,562 25,000 Colgate-Palmolive Co. ....................... 2,140,625 ----------- 7,568,124 ----------- INFORMATION PROCESSING - BUSINESS SOFTWARE - 4.05% 100,000* BMC Software, Inc. .......................... 5,106,250 25,000* Microsoft Corp. ............................. 3,050,000 65,000* Oracle Corp. ................................ 2,226,250 ----------- 10,382,500 -----------
NUMBER MARKET OF SHARES VALUE - --------- ----------- INFORMATION PROCESSING - COMPUTER HARDWARE SYSTEMS - 3.39% 80,000 Compaq Computer Corp......................... $ 2,600,000 100,000* Dell Computer Corp. ......................... 6,081,250 ----------- 8,681,250 ----------- INFORMATION PROCESSING - COMPUTER SERVICES - 1.71% 50,000* America Online, Inc. ........................ 4,378,125 ----------- INFORMATION PROCESSING - DATA SERVICES - 7.65% 75,000 Computer Associates International 3,318,750 110,000* E M C Corp. ................................. 7,975,000 57,000* Electronic Arts ............................. 2,401,125 20,000 International Business Machine .............. 3,300,000 75,000* Storage Technology Corp. .................... 2,625,000 ----------- 19,619,875 ----------- INFORMATION PROCESSING - NETWORKING - 2.32% 78,750 Cisco Systems, Inc. ......................... 5,935,781 ----------- INSURANCE - LIFE - 0.52% 40,000 Conseco Inc. ................................ 1,325,000 ----------- INSURANCE - MULTILINE -1.10% 30,000 American International Group Inc ............ 2,820,000 ----------- MACHINERY - INDUSTRIAL/SPECIALTY - 1.62% 36,000 Illinois Tool Works Inc. .................... 2,288,250 40,000 Ingersoll-Rand Co. .......................... 1,872,500 ----------- 4,160,750 MEDICAL TECHNOLOGY - 1.34% 40,000 Guidant Corp. ............................... 3,432,500 ----------- MERCHANDISE - SPECIALTY - 5.77% 45,000* CostCo Companies, Inc. ...................... 2,823,750 40,000 Gap, Inc. ................................... 2,942,500 40,000 Home Depot, Inc. ............................ 1,990,000 45,000* Kohl's Corp. ................................ 2,213,438 100,000* Staples, Inc. ............................... 3,493,750
=============================================================================== GROWTH & INCOME FUND - STATEMENT OF NET ASSETS CONTINUED 46 NOVEMBER 30, 1998 (UNAUDITED) ===============================================================================
NUMBER MARKET OF SHARES VALUE - --------- ------------- MERCHANDISE - SPECIALTY - Continued 45,000* Williams-Sonoma, Inc. ....................... $ 1,330,312 ------------- 14,793,750 ------------- MERCHANDISING - DEPARTMENT - 2.00% 114,000 Dayton Hudson Corp. ......................... 5,130,000 ------------- MERCHANDISING - FOOD - 2.44% 45,000 Albertsons, Inc. ............................ 2,567,812 70,000* Safeway, Inc. ............................... 3,696,875 ------------- 6,264,687 ------------- MERCHANDISING - MASS - 1.03% 35,000 Wal-Mart Stores, Inc. ....................... 2,635,938 ------------- OIL - SERVICES - 0.72% 75,000 Transocean Offshore, Inc. ................... 1,851,563 ------------- SECURITIES RELATED - 1.21% 55,000 Charles Schwab Corp. ........................ 3,100,625 ------------- SEMICONDUCTORS - 1.26% 30,000 Intel Corp. ................................. 3,228,750 ------------- TELECOMMUNICATIONS - 5.62% 50,000* Airtouch Communications, Inc. ............... 2,859,375 20,000 Lucent Technologies, Inc. ................... 1,721,250 75,000* MCI Worldcom Inc. ........................... 4,425,000 100,000* Tellabs, Inc. ............................... 5,406,250 ------------- 14,411,875 ------------- TOBACCO - 1.09% 50,000 Philip Morris Cos Inc. ...................... 2,796,875 ------------- UTILITIES - ELECTRIC - 1.78% 100,000* AES Corp. ................................... 4,575,000 ------------- TOTAL COMMON STOCKS (Cost $150,626,195) ......................... 224,275,057 ------------- PREFERRED STOCK - 1.34% 20,000 IXC Communications, Inc. .................... 585,000 20,000 NEXTLINK Communications, Inc. ............... 865,000 20,000 QUALCOMM FINANCIAL .......................... 937,500
NUMBER MARKET OF SHARES VALUE - --------- ------------- PREFERRED STOCK - Continued 40,000 Intermedia Communications, Inc 7.00% Series 144A .......................... $ 645,000 20,000 Omnipoint Corp. 7.00% ....................... 412,500 ------------- 3,445,000 ------------- TOTAL PREFERRED STOCK (Cost $4,741,875) ........................... 3,445,000 -------------
PAR MARKET VALUE VALUE - --------- ------------- CONVERTIBLE BONDS - 4.97% ADVERTISING - 0.41% $1,000,000 Outdoor Systems Inc., 8.88% due 06/15/2007 ....................... 1,055,000 ------------- BANKS - REGIONAL - 0.32% 1,000,000 Bank Atlantic Bancorp., 5.63% due 12/01/2007 ....................... 820,000 ------------- BROADCASTING - 1.02% 1,000,000 Adelphia Communications Corp., 9.88% due 03/01/2007 ....................... 1,101,250 1,000,000 Chancellor Media Corp., 8.13% due 12/15/2007 ....................... 1,000,000 500,000 Clear Channel Communications, 2.63% due 04/01/2003 ....................... 510,000 ------------- 2,611,250 ------------- ENTERTAINMENT - 0.40% 1,000,000 Loews Cineplex Entertainment Corp., 8.88% due 08/01/2008 ....................... 1,035,000 ------------- LODGING - 0.37% 1,000,000 Hilton Hotels Corp., 5.00% due 05/15/2006 ....................... 940,000 ------------- MACHINERY - CONSTRUCTION & CONTRACTS - 0.36% 1,000,000 Columbus McKinnon Corp., 8.50% due 04/01/2008 ....................... 920,000 ------------- MERCHANDISING - MASS - 0.42% 1,000,000 Fred Meyer, Inc., 7.45% due 03/01/2008 ....................... 1,062,960 -------------
PAR MARKET VALUE VALUE - --------- ------------- OIL - SERVICES - 0.49% $2,000,000 Key Energy Group, Inc., 5.00% due 09/15/2004 ....................... $ 1,265,000 ------------- PUBLISHING/PRINTING - 0.37% 1,000,000 World Color Press, Inc., 6.00% due 10/01/2007 ....................... 951,250 ------------- TEXTILE - PRODUCTS - 0.40% 1,000,000 WestPoint Stevens Inc., 7.88% due 06/15/2008 ....................... 1,031,250 ------------- UTILITIES - ELECTRIC - 0.41% 1,000,000 AES Corp., 8.88% due 08/15/2005 ....................... 1,050,000 ------------- TOTAL CONVERTIBLE BONDS (Cost $13,633,847) .......................... 12,741,710 ------------- CORPORATE SHORT TERM COMMERCIAL PAPER - 6.21% BEVERAGE - SOFT DRINKS - 2.01% 5,151,000 PepsiCo, Inc., 4.80% due 12/01/1998 ....................... 5,151,000 ------------- FINANCE COMPANIES - 0.72% 1,838,000 General Electric Capital Services, 5.00% due 12/01/1998 ....................... 1,837,816 ------------- UTILITIES - ELECTRIC -3.48% 8,919,000 Conagra, 5.52% due 12/02/1998 ....................... 8,917,632 ------------- TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $15,906,448) .......................... 15,906,448 ------------- TOTAL INVESTMENTS (Cost $184,908,365) - 100.01% .............. 256,368,215 Other assets less liabilities, net - (0.01%) .............................. (14,386) ------------- NET ASSETS (equivalent $19.28 per share on 13,298,592 shares outstanding) - 100% ........................ $ 256,353,829 =============
=============================================================================== GROWTH & INCOME FUND - STATEMENT OF NET ASSETS CONTINUED NOVEMBER 30, 1998 (UNAUDITED) 47 =============================================================================== NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 13,298,592 shares outstanding ............. $ 132,986 Additional paid in capital .................. 178,264,935 Accumulated net realized gain on securities . 6,313,595 Undistributed net investment income ......... 182,463 Unrealized appreciation of securities ....... 71,459,850 NET ASSETS APPLICABLE TO SHARES OUTSTANDING ................................ $256,353,829
* Non-income producing SEE NOTES TO FINANCIAL STATEMENTS. =============================================================================== GROWTH & INCOME FUND - FINANCIAL STATEMENTS (Unaudited) 48 =============================================================================== STATEMENT OF OPERATIONS For the six months ended November 30, 1998 INVESTMENT INCOME: Dividends ...................................................................... $ 664,231 Interest ....................................................................... 850,991 ----------- Total investment income ...................................................... 1,515,222 ----------- EXPENSES: Advisory fees .................................................................. 959,662 Custodian and accounting fees .................................................. 30,131 Reports to shareholders ........................................................ 15,095 Audit fees and tax services .................................................... 4,303 Directors' fees and expenses ................................................... 2,800 Miscellaneous .................................................................. 9,081 ----------- Total expenses ............................................................... 1,021,072 ----------- NET INVESTMENT INCOME .......................................................... 494,150 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES: Net realized loss on securities ................................................ (13,647,563) Net unrealized appreciation on securities during the period .................... 4,219,510 ----------- Net realized and unrealized loss on securities during the period ............ (9,428,053) ----------- DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................... $(8,933,903) ===========
STATEMENT OF CHANGES IN NET ASSETS
For the For the six months ended fiscal year ended November 30, 1998 May 31, 1998 ----------------- ----------------- OPERATIONS: Net investment income .......................................................... $ 494,150 $ 1,096,169 Net realized gain (loss) on securities ......................................... (13,647,563) 20,112,463 Net unrealized appreciation of securities during the period .................... 4,219,510 21,794,919 ------------- ------------- Increase (decrease) in net assets resulting from operations .................. (8,933,903) 43,003,551 ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income .......................................................... (485,096) (1,084,032) Net realized gain on securities ................................................ -- (2,863,622) ------------- ------------- Decrease in net assets resulting from distributions to shareholders ............................................................. (485,096) (3,947,654) ------------- ------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold ............................................... 6,196,491 31,809,939 Proceeds from capital stock issued for distributions reinvested ................ 485,096 3,947,654 ------------- ------------- 6,681,587 35,757,593 Cost of capital stock repurchased .............................................. (12,067,757) (13,199,616) ------------- ------------- Increase (decrease) in net assets resulting from capital stock transactions .......................................................... (5,386,170) 22,557,977 ------------- ------------- TOTAL INCREASE (DECREASE) IN NET ASSETS ........................................ (14,805,169) 61,613,874 NET ASSETS: Beginning of period ............................................................ 271,158,998 209,545,124 ------------- ------------- End of period (including undistributed net investment income of $182,463 and $173,409) .................................................... $ 256,353,829 $ 271,158,998 ============= ============= CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold ................................................... 323,625 1,662,136 Shares issued for distributions reinvested ..................................... 26,247 209,426 Shares of capital stock repurchased ............................................ (669,839) (675,465) ------------- ------------- Increase (decrease) in shares outstanding .................................... (319,967) 1,196,397 Shares outstanding: Beginning of period .......................................................... 13,618,559 12,422,162 ------------- ------------- End of period ................................................................ 13,298,592 13,618,559 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS. =============================================================================== SCIENCE & TECHNOLOGY FUND - STATEMENT OF NET ASSETS November 30, 1998 (Unaudited) 49 ===============================================================================
NUMBER MARKET OF SHARES VALUE --------- ----------- COMMON STOCKS - 92.71% AEROSPACE/DEFENSE - 1.64% 390,000* SCI Systems, Inc. ........................... $ 18,963,750 ------------ AUTO - CARS - 0.48% 145,000 General Motors Corp. Class H ............... 5,510,000 ------------ ELECTRONIC INSTRUMENTS - 0.47% 115,000* Cognex Corp. ................................ 1,904,688 43,000 Lattice Semiconductor Corp. ................. 1,585,625 30,000* Marshall Industries ......................... 780,000 55,000* Sawtek Inc. ................................. 1,196,250 ------------ 5,466,563 ------------ INFORMATION PROCESSING - 4.33% 85,000* Micrel, Inc. ................................ 3,447,810 2,740,000* Parametric Technology Corp. ................. 46,580,000 ------------ 50,027,810 ------------ INFORMATION PROCESSING - BUSINESS SOFTWARE - 7.79% 575,000* BMC Software, Inc. .......................... 29,360,937 42,000* Great Plains Software, Inc. ................. 1,648,500 345,000* Microsoft Corp. ............................. 42,090,000 645,000* Platinum technology, inc .................... 11,408,438 152,000* Visio Corp. ................................. 5,377,000 ------------ 89,884,875 ------------ INFORMATION PROCESSING - COMPUTER HARDWARE SYSTEMS - 4.34% 35,000 Cyberian Outpost, Inc. ...................... 892,500 170,000* Dell Computer Corp. ......................... 10,338,125 345,000* Electronics for Imaging, Inc. ............... 9,250,313 400,000 Sun Microsystems, Inc. ...................... 29,625,000 ------------ 50,105,938 ------------ INFORMATION PROCESSING - COMPUTER SERVICES - 8.95% 290,000* America Online, Inc. ........................ 25,393,125 145,000 Automatic Data Processing, Inc. ............. 11,165,000 290,000 Checkfree Holdings Corp. .................... 4,712,500 860,000 First Data Corp. ............................ 22,951,250 760,000* Gartner Group, Inc. Class A ................. 16,435,000 215,000 National Data Corp. ......................... 8,035,625 350,700 Security Dynamics Technology ................ 5,348,175 145,000* Sterling Commerce Inc. ...................... 5,256,250
NUMBER MARKET OF SHARES VALUE --------- ----------- INFORMATION PROCESSING - COMPUTER SERVICES - Continued 100,000* VeriSign, Inc. .............................. $ 4,012,500 ------------ 103,309,425 ------------ INFORMATION PROCESSING - CONSUMER SOFTWARE - 4.98% 145,000* Intuit ...................................... 8,391,875 965,000* Networks Associates, Inc. ................... 49,094,375 ------------ 57,486,250 ------------ INFORMATION PROCESSING - DATA SERVICES - 27.38% 650,000* Adobe Systems Inc. .......................... 29,087,500 114,000* Affiliated Computer Services Class A ........ 4,367,625 571,000 Anixter Internationall, Inc. ................ 9,421,500 720,000* Ascend Communications Inc. .................. 40,455,000 345,000 Avant! Corp. ................................ 5,757,187 57,000* BISYS Group, Inc. ........................... 2,743,125 385,000* CBT Group PLC ADR ........................... 4,042,500 505,000* Cisco Systems, Inc. ......................... 38,064,375 650,000 Computer Associates International ........... 28,762,500 475,000* E M C Corp. ................................. 34,437,500 260,000* Electronic Arts ............................. 10,952,500 70,100* Envoy Corp. ................................. 2,795,237 390,000 Hewlett Packard Co. ......................... 24,472,500 55,000 Integrated Systems, Inc. .................... 553,438 820,000* Learning Co., Inc. .......................... 23,831,250 115,000 National Instruments Corp. .................. 3,335,000 360,000* Netscape Communications Corp. ............... 13,320,000 570,000* PsiNet, Inc. ................................ 10,687,500 140,000* Renaissance Worldwide Inc. .................. 997,500 245,000* Solectron Corp. ............................. 16,215,938 290,000* Tech Data Corp. ............................. 11,672,500 ------------ 315,972,175 ------------ MERCHANDISE - SPECIALTY - 0.06% 40,000* SportsLine USA, Inc. ........................ 690,000 ------------ MISCELLANEOUS - 0.49% 200,000* Brightpoint, Inc. ........................... 3,000,000 140,000* Preview Travel Inc. ......................... 2,660,000 ------------ 5,660,000 ------------
NUMBER MARKET OF SHARES VALUE --------- ------------- MULTIMEDIA - 2.95% 720,000 Synopsys Inc. ............................... $ 34,110,000 -------------- SECURITIES RELATED - 1.08% 460,000 E*Trade Group, Inc. ......................... 12,448,750 -------------- SEMICONDUCTOR EQUIPMENT - 0.50% 171,000* Galileo Technology Ltd. ..................... 2,821,500 85,000* Microchip Technology, Inc. .................. 2,959,063 -------------- 5,780,563 -------------- SEMICONDUCTORS - 15.01% 460,000* Altera Corp. ................................ 22,568,750 1,440,000* Analog Devices, Inc. ........................ 29,430,000 130,000* Applied Micro Circuits Corp. ................ 4,355,000 260,000* Burr Brown Corp. ............................ 6,142,500 215,000 Intel Corp. ................................. 23,139,375 950,000* Maxim Integrated Products ................... 37,287,500 230,000 Texas Instruments Inc. ...................... 17,566,250 645,000* Xilinx, Inc. ................................ 32,733,750 -------------- 173,223,125 -------------- TELECOMMUNICATIONS - 11.38% 345,000 Airtouch Communications, Inc. ............... 19,729,688 490,000 ICG Communications, Inc. .................... 11,270,000 575,000* Intermedia Communications, Inc. ............. 9,918,750 580,000* MCI Worldcom Inc. ........................... 34,220,000 170,000 Nokia Corp - ADR Series A ................... 16,660,000 285,000* PanAmSat Corp. .............................. 9,583,125 210,000* Premisys Communications Inc. ................ 3,123,750 200,000 QUALCOMM, Inc. .............................. 10,975,000 315,000* Sanmina Corp. ............................... 15,690,938 15,000* Sprint Corp. ................................ 240,000 -------------- 131,411,251 -------------- UTILITIES - COMMUNICATION - 0.88% 686,000* Vodafone Group Plc .......................... 10,141,824 -------------- TOTAL COMMON STOCKS (Cost $862,796,437) ......................... 1,070,192,299 --------------
================================================================================ SCIENCE & TECHNOLOGY FUND - STATEMENT OF NET ASSETS CONTINUED 50 November 30, 1998 (Unaudited) ================================================================================
PAR MARKET VALUE VALUE - ----------- --------------- CORPORATE SHORT TERM COMMERCIAL PAPER - 7.32% BEVERAGE - SOFT DRINKS - 0.66 PepsiCo, Inc., $ 7,555,000 4.80% due 12/01/1998 ....................... $ 7,555,000 --------------- CONGLOMERATES - 2.86% PHH Corp., 33,022,000 5.40% due 12/08/1998 ....................... 32,987,322 --------------- CONSUMER FINANCE - 1.30% Sears Roebuck Acceptance Corp., 15,000,000 4.87% due 12/02/1998 ....................... 14,997,969 --------------- FINANCE COMPANIES - 2.50% 7,296,000 Ford Credit Europe PLC, 4.95% due 12/04/1998 ....................... 7,292,988 14,161,000 General Electric Capital Services Inc., 4.95% due 12/07/1998 ....................... 14,149,311 7,465,000 General Motors Acceptance Corp., 4.86% due 12/03/1998 ....................... 7,462,982 --------------- 28,905,281 --------------- TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $84,445,572) .......................... 84,445,572 --------------- TOTAL INVESTMENTS (Cost $947,242,009) - 100.03% ............... 1,154,637,871 Other assets less liabilities, net - (0.03%) .............................. (354,811) --------------- NET ASSETS (equivalent to $24.22 per share on 47,650,971 shares outstanding) - 100% ........................ $ 1,154,283,060 ===============
* Non-income producing NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 47,650,971 shares outstanding ............. $ 476,510 Additional paid in capital .................. 845,123,742 Accumulated net realized gain on securities . 104,163,798 Accumulated net investment loss ............. (2,876,852) Unrealized appreciation of investments ...... 207,395,862 --------------- NET ASSETS APPLICABLE TO SHARES OUTSTANDING ............................... $ 1,154,283,060 ===============
SEE NOTES TO FINANCIAL STATEMENTS. =============================================================================== SCIENCE & TECHNOLOGY FUND - FINANCIAL STATEMENTS (Unaudited) 51 =============================================================================== STATEMENT OF OPERATIONS For the six months ended November 30, 1998 INVESTMENT INCOME: Dividends ...................................................................... $ 346,950 Interest ....................................................................... 1,551,824 ------------ Total investment income ...................................................... 1,898,774 ------------ EXPENSES: Advisory fees .................................................................. 4,532,323 Custodian and accounting services .............................................. 115,404 Reports to shareholders ........................................................ 76,185 Audit fees and tax services .................................................... 15,920 Directors' fees and expenses ................................................... 13,779 Miscellaneous .................................................................. 22,015 ------------ Total expenses ............................................................... 4,775,626 ------------ NET INVESTMENT LOSS ............................................................ (2,876,852) ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES AND FOREIGN CURRENCIES: Net realized gain (loss) on: Investments .................................................... $ 9,612,939 Foreign currency transactions .................................. (20,302) 9,592,637 ------------- Net unrealized appreciation (depreciation) during the year: Investments .................................................... 97,127,945 Foreign currency transactions .................................. (329,583) 96,798,362 ------------- ------------ Net realized and unrealized gain on securities during the period ............. 106,390,999 ------------ INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................... $103,514,147 ============
STATEMENT OF CHANGES IN NET ASSETS
For the For the six months ended fiscal year ended November 30, 1998 May 31, 1998 ----------------- ----------------- OPERATIONS: Net investment loss .................................................. $ (2,876,852) $ (4,399,764) Net realized gain on securities and foreign currency transactions ............................................... 9,592,637 111,229,008 Net unrealized appreciation (depreciation) of securities during the period ................................................... 96,798,362 (16,698,726) ----------------- ----------------- Increase in net assets resulting from operations .................. 103,514,147 90,130,518 ----------------- ----------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ................................................ -- -- Net realized gain on securities ...................................... -- -- Decrease in net assets resulting from distributions ----------------- ----------------- to shareholders .................................................. -- -- ----------------- ----------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold ..................................... 66,426,237 217,275,229 Proceeds from capital stock issued for distributions reinvested ............................................ -- -- ----------------- ----------------- 66,426,237 217,275,229 Cost of capital stock repurchased .................................... (38,798,263) (89,246,756) ----------------- ----------------- Increase in net assets resulting from capital stock transactions ............................................... 27,627,974 128,028,473 ----------------- ----------------- TOTAL INCREASE IN NET ASSETS ......................................... 131,142,121 218,158,991 NET ASSETS: Beginning of period .................................................. 1,023,140,939 804,981,947 ----------------- ----------------- End of period (including accumulated net investment loss of $(2,876,852) and $0) ............................................. $ 1,154,283,060 $ 1,023,140,938 ================= ================= CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold ......................................... 3,120,246 10,004,608 Shares issued for distributions reinvested ........................... -- -- Shares of capital stock repurchased .................................. (1,824,435) (4,133,577) ----------------- ----------------- Increase in shares outstanding ..................................... 1,295,811 5,871,031 Shares outstanding: Beginning of period ................................................ 46,355,160 40,484,129 ----------------- ----------------- End of period ...................................................... 47,650,971 46,355,160 ================= =================
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS 52 November 30, 1998 (Unaudited) ================================================================================
NUMBER MARKET OF SHARES VALUE - ---------- ----------- COMMON STOCKS - 98.49% ADVERTISING - 0.22% 6,982 Interpublic Group Cos., Inc. .......................... $ 480,013 7,561 Omnicom Group, Inc. ................................... 404,041 ------------ 884,054 ------------ AEROSPACE/DEFENSE - 0.12% 967 Crane Co. ............................................. 31,246 11,558 Goodrich (B.F.) Co. ................................... 438,482 ------------ 469,728 ------------ AIRLINES - 0.31% 9,636* AMR Corp. ............................................. 635,374 5,366 Delta Air Lines, Inc. ................................. 288,087 11,932 Southwest Airlines Co. ................................ 256,538 1,737* US Airways Group, Inc. ................................ 90,324 ------------ 1,270,323 ------------ APPLIANCES/FURNISHINGS - 0.10% 3,075 Maytag Corp. .......................................... 166,434 4,021 Whirlpool Corp. ....................................... 225,176 ------------ 391,610 ------------ AUTO - CARS - 0.34% 14,357 Daimlerchrysler AG .................................... 1,316,357 2,839 Meritor Automotive, Inc. .............................. 50,215 ------------ 1,366,572 ------------ AUTO - ORIGINAL EQUIPMENT - 0.03% 155 Arvin Industries, Inc. ................................ 6,510 944 Danaher Corp. ......................................... 43,070 903 Federal-Mogul Corp. ................................... 51,245 1,006 Modine Manufacturing Co. .............................. 36,719 ------------ 137,544 ------------ AUTO - REPLACEMENT PARTS - 0.19% 22,878 Genuine Parts Co. ..................................... 753,544 ------------ BANKS - NEW YORK CITY - 1.87% 40,342 Bank of New York Co., Inc. ............................ 1,381,714 105,346 Citigroup Inc. ........................................ 5,287,052 8,534 J. P. Morgan & Co. Inc. ............................... 912,071 ----------- 7,580,837 -----------
NUMBER MARKET OF SHARES VALUE - ---------- ----------- BANKS - OTHER - 4.08% 86,158 BankAmerica Corp. ..................................... $ 5,616,425 12,391 BankBoston Corp. ...................................... 515,775 256 Bankers Trust Corp. ................................... 22,272 54,272 First Union Corp. ..................................... 3,297,024 28,311 Fleet Financial Group, Inc. ........................... 1,180,215 11,807 Mellon Bank Corp. ..................................... 743,103 21,346 National City Corp. ................................... 1,435,519 5,429 Providian Financial Corp. ............................. 498,450 89,438 Wells Fargo Co. ....................................... 3,219,767 ------------ 16,528,550 ------------ BANKS - REGIONAL - 3.18% 65,801 Bank One Corp. ........................................ 3,376,414 44,828 Chase Manhattan Corp. ................................. 2,843,776 5,595 Comerica Inc. ......................................... 360,878 13,723 Fifth Third Bancorp ................................... 910,864 23,409 KeyCorp ............................................... 718,364 2,245 Northern Trust Corp. .................................. 181,284 13,874 PNC Bank Corp. ........................................ 715,378 2,486 State Street Corp. .................................... 170,602 3,649 Summit Bancorporation ................................. 152,574 13,197 SunTrust Banks, Inc. .................................. 921,316 38,504 U.S. Bancorp .......................................... 1,417,429 12,963 Wachovia Corp. ........................................ 1,131,832 ------------ 12,900,711 ------------ BEVERAGE - BREWERS/DISTRIBUTORS - 1.02% 918 Adolph Coors Class B .................................. 45,671 44,346 Anheuser-Busch Companies, Inc. ........................ 2,688,476 6,702 Brown-Forman Corp Class B ............................. 487,571 26,459 Seagram Co. Ltd. ...................................... 907,874 ------------ 4,129,592 ------------ BEVERAGE - SOFT DRINKS - 3.19% 131,103 Coca-Cola Co. ......................................... 9,185,404 18,520 Coca Cola Enterprises, Inc. ........................... 700,288 79,083 PepsiCo, Inc. ......................................... 3,059,524 ------------ 12,945,216 ------------ BROADCASTING - 1.59% 9,819* Clear Channel Communications .......................... 459,038 18,756 Comcast Corp. Class A Special ......................... 912,011 25,059* Media One Group Inc. .................................. 1,014,890 25,926 Tele-Comm Liberty Media Group Class A .............................................. 1,095,374
NUMBER MARKET OF SHARES VALUE - ---------- ----------- BROADCASTING - Continued 29,737 U S WEST, Inc. ........................................ $1,851,128 17,037* Viacom, Inc Class B ................................... 1,134,025 ------------ 6,466,466 ------------ BUILDING MATERIALS - 0.37% 3,313 Armstrong World Inds. Inc. ............................ 220,729 15,466 Lowe's Companies, Inc. ................................ 653,439 9,620 Sherwin-Williams Co. .................................. 272,968 2,834 Vulcan Materials Co. .................................. 355,313 ------------ 1,502,449 ------------ CHEMICAL - MAJOR - 0.62% 6,899 Albemarle Corp. ....................................... 128,494 7,756 Morton International, Inc. ............................ 228,317 22,959 PPG Industries, Inc. .................................. 1,404,804 22,104 Rohm and Haas Co. ..................................... 772,259 ------------ 2,533,874 ------------ CHEMICAL - MISCELLANEOUS - 0.38% 666 Dexter Corp. .......................................... 21,354 9,884 Ecolab Inc. ........................................... 305,786 15,662 Ethyl Corp. ........................................... 91,035 943 Ferro Corp. ........................................... 26,345 3,023 Great Lakes Chemical Corp. ............................ 120,731 6,386 Lawter International, Inc. ............................ 52,685 5,822 Lubrizol Corp. ........................................ 157,922 5,496 Nalco Chemical Co. .................................... 183,773 9,440 Praxair, Inc. ......................................... 360,490 6,820 Sigma Aldrich Corp. ................................... 219,093 ------------ 1,539,214 ------------ CONGLOMERATES - 0.76% 2,893 Alexander & Baldwin, Inc. ............................. 66,539 4,733 Ogden Corp. ........................................... 125,720 19,389 Tenneco Inc. .......................................... 690,733 33,633 Tyco International Ltd. ............................... 2,213,473 ------------ 3,096,465 ------------ CONSUMER FINANCE - 0.32% 3,276 Capital One Financial Corp. ........................... 360,360 41,367 MBNA Corp. ............................................ 938,514 ------------ 1,298,874 ------------ CONTAINERS - METAL/GLASS - 0.22% 15,643 Corning Inc. .......................................... 627,675
================================================================================ SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED November 30, 1998 (Unaudited) 53 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ----------- CONTAINERS - METAL/GLASS - Continued 8,280* Owens-Illinois, Inc. .................................. $ 265,995 ----------- 893,670 ----------- CONTAINERS - PAPER - 0.13% 4,457 Bemis Co., Inc. ....................................... 168,530 867 Chesapeake Corp. ...................................... 30,074 1,901* Sealed Air Corp. ...................................... 83,874 7,590 Sonoco Products Co. ................................... 227,227 ----------- 509,705 ----------- COSMETICS/TOILETRIES - 0.92% 10,847 Avon Products, Inc. ................................... 440,659 64,597 Gillette Co. .......................................... 2,967,425 7,478 International Flavors & Fragrances, Inc. ..................................... 313,142 ----------- 3,721,226 ----------- DRUGS - 7.95% 4,843 Allergan, Inc. ........................................ 294,818 3,659* ALZA Corp. ............................................ 191,183 75,268 American Home Products Corp. .......................... 4,008,021 15,548* Amgen Inc. ............................................ 1,169,987 610 Bausch & Lomb Inc. .................................... 33,855 62,325 Bristol Myers Squibb Co. .............................. 7,638,708 1,041 McKesson Corp. ........................................ 74,106 67,196 Merck & Co., Inc. ..................................... 10,406,981 45,471 Schering-Plough Corp. ................................. 4,836,978 47,217 Warner-Lambert Co. .................................... 3,564,885 ----------- 32,219,522 ----------- ELECTRICAL EQUIPMENT - 0.96% 22,443 AMP Inc. .............................................. 1,085,680 39,566 Emerson Electric Co. .................................. 2,571,790 1,647 Thomas & Betts Corp. .................................. 71,337 4,163 W. W. Grainger Inc. ................................... 175,888 ----------- 3,904,695 ----------- ELECTRONIC INSTRUMENTS - 0.04% 1,288 Integrated Device Technology .......................... 7,568 1,458 Perkin-Elmer Corp. .................................... 135,959 ----------- 143,527 ----------- ENTERTAINMENT - 1.82% 5,228 Hasbro, Inc. .......................................... 183,307 13,552 Mattel, Inc. .......................................... 468,391
NUMBER MARKET OF SHARES VALUE - --------- ----------- ENTERTAINMENT - Continued 33,342 Time Warner Inc........................................ $ 3,525,917 99,916 Walt Disney Co......................................... 3,216,047 ----------- 7,393,662 ----------- FINANCE COMPANIES - 0.99% 22,600 Associates First Capital Corp. ........................ 1,759,975 38,686 Household International, Inc. ......................... 1,513,590 9,181 SunAmerica, Inc. ...................................... 727,595 ----------- 4,001,160 ----------- FINANCIAL SERVICES - 0.95% 33,175 American Express Co. .................................. 3,319,573 4,508 Countrywide Credit Ind Inc. ........................... 223,147 6,816 H & R Block Inc. ...................................... 306,294 ----------- 3,849,014 ----------- FOODS - 3.04% 20,839 BestFoods ............................................. 1,211,267 28,610 Campbell Soup Co. ..................................... 1,634,346 28,676 ConAgra, Inc. ......................................... 901,502 13,796 General Mills, Inc. ................................... 1,041,598 27,854 H J Heinz Co. ......................................... 1,624,236 8,089 Hershey Foods Corp. ................................... 543,985 29,038 Kellogg Co. ........................................... 1,063,517 927 Lance, Inc. ........................................... 18,250 14,219 Pioneer Hi-Bred International, Inc. ................... 425,681 7,596 Quaker Oats Co. ....................................... 466,205 21,527 Ralston Purina Co. .................................... 749,409 31,440 Sara Lee Corp. ........................................ 1,835,310 8,996 Wm. Wrigley Jr. Co. ................................... 792,774 ----------- 12,308,080 ----------- FOOTWEAR - 0.15% 15,203 NIKE, Inc. Class B .................................... 608,120 ----------- FREIGHT - 0.10% 5,943* FDX Corp. ............................................. 385,552 ----------- GOLD MINING - 0.28% 29,612 Barrick Gold Corp. .................................... 592,240 24,548 Battle Mountain Gold Co. .............................. 115,069 10,410 Homestake Mining Co. .................................. 111,908 22,615 Placer Dome Inc. ...................................... 329,332 ----------- 1,148,549 -----------
NUMBER MARKET OF SHARES VALUE - --------- ----------- GOVERNMENT SPONSORED - 2.07% 44,547 Federal Home Loan Mortgage Corp. ...................... $ 2,695,094 71,684 Federal National Mortgage Association .......................................... 5,215,012 11,078 SLM Holding Corp. ..................................... 487,432 ----------- 8,397,538 ----------- FUNERAL SERVICES - 0.17% 18,716 Service Corp. International ........................... 699,511 ----------- HARDWARE & TOOLS - 0.07% 4,919 Black & Decker Corp. .................................. 266,548 396 Stanley Works ......................................... 12,104 ----------- 278,652 ----------- HEALTHCARE - 0.50% 11,570 Cardinal Health, Inc. ................................. 793,992 16,462* HealthSouth Corp. ..................................... 221,208 4,828* Humana Inc. ........................................... 95,655 6,952 IMS Helath Inc. ....................................... 461,439 9,668 United HealthCare Corp. ............................... 436,269 ----------- 2,008,563 ----------- HEAVY DUTY TRUCKS/PARTS - 0.25% 18,485 Dana Corp. ............................................ 720,915 6,394 PACCAR Inc. ........................................... 290,927 ----------- 1,011,842 ----------- HOSPITAL MANAGEMENT - 0.27% 31,951 Columbia/HCA Healthcare Corp. ......................... 786,794 9,822* Tenet Healthcare Corp. ................................ 290,364 ----------- 1,077,158 ----------- HOSPITAL SUPPLIES - 3.95% 102,012 Abbott Laboratories ................................... 4,896,576 20,733 Baxter International Inc. ............................. 1,317,842 14,699 Becton, Dickinson and Co. ............................. 624,708 2,614 Biomet, Inc. .......................................... 99,986 7,927* Boston Scientific Corp. ............................... 392,388 2,290 Hillenbrand Industries, Inc. .......................... 130,101 80,389 Johnson & Johnson ..................................... 6,531,606 29,249 Medtronic, Inc. ....................................... 1,979,793 888 St. Jude Medical, Inc. ................................ 25,808 ----------- 15,998,808 -----------
================================================================================ SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED 54 November 30, 1998 (Unaudited) ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ----------- HOUSEHOLD PRODUCTS - 3.09% 5,356 Clorox Co.............................................. $ 594,851 18,357 Colgate-Palmolive Co. ................................. 1,571,819 4,593 Newell Co. ............................................ 203,240 78,261 Procter & Gamble Co. .................................. 6,857,620 2,717 Rubbermaid, Inc. ...................................... 89,832 41,215 Unilever N V - ADR .................................... 3,186,435 ----------- 12,503,797 ----------- INFORMATION PROCESSING - BUSINESS SOFTWARE - 3.78% 6,811* BMC Software, Inc. .................................... 347,787 110,589* Microsoft Corp. ....................................... 13,491,858 41,590* Oracle Corp. .......................................... 1,424,458 2,227* Peoplesoft Inc. ....................................... 45,793 ----------- 15,309,896 ----------- INFORMATION PROCESSING - COMPUTER HARDWARE SYSTEMS - 1.81% 4,855* Apple Computer, Inc. .................................. 155,057 75,429 Compaq Computer Corp. ................................. 2,451,443 55,978* Dell Computer Corp. ................................... 3,404,162 402 OEA, Inc. ............................................. 5,251 17,799 Sun Microsystems, Inc. ................................ 1,318,238 ----------- 7,334,151 ----------- INFORMATION PROCESSING - COMPUTER SERVICES - 0.88% 582* America Online, Inc. .................................. 50,961 21,283 Automatic Data Processing, Inc. ....................... 1,638,791 28,235 Electronic Data Systems Corp. ......................... 1,101,165 18,728 First Data Corp. ...................................... 499,804 5,849 Paychex, Inc. ......................................... 290,988 ----------- 3,581,709 ----------- INFORMATION PROCESSING - COMPUTER SOFTWARE - 0.14% 18,150 HBO & Co. ............................................. 452,616 6,713* Parametric Technology Corp. ........................... 114,121 ----------- 566,737 ----------- INFORMATION PROCESSING - DATA SERVICES - 4.59% 214* Adobe Systems Inc. .................................... 9,577 29,335* Cendant Corp. ......................................... 557,365 3,872 Comdisco, Inc. ........................................ 70,664
NUMBER MARKET OF SHARES VALUE - --------- ----------- INFORMATION PROCESSING - DATA SERVICES - Continued 24,771 Computer Associates International ..................... $ 1,096,117 5,653* Computer Sciences Corp. ............................... 322,928 22,783* E M C Corp. ........................................... 1,651,768 5,970* Gateway 2000, Inc. .................................... 335,066 52,143 Hewlett Packard Co. ................................... 3,271,973 45,095 International Business Machine ........................ 7,440,675 2,183* Novell, Inc ........................................... 36,156 20,235 Pitney Bowes Inc. ..................................... 1,133,160 9,167* Seagate Technology .................................... 270,427 10,621* Unisys Corp. .......................................... 302,699 19,579 Xerox Corp. ........................................... 2,104,743 ----------- 18,603,318 ----------- INFORMATION PROCESSING - NETWORKING - 1.59% 7,938* Ascend Communications Inc. ............................ 446,016 69,912* Cisco Systems, Inc. ................................... 5,269,617 5,053* General Insturment Corp. .............................. 142,116 15,240* 3Com Corp. ............................................ 589,598 ----------- 6,447,347 ----------- INSURANCE - CASUALTY - 0.41% 7,669 Chubb Corp. ........................................... 537,309 3,031 Progressive Corp. ..................................... 449,725 3,366 SAFECO Corp. .......................................... 144,528 14,868 St. Paul Companies, Inc. .............................. 524,097 ----------- 1,655,659 ----------- INSURANCE - LIFE - 0.65% 8,261 Aetna Inc. ............................................ 638,679 12,315 Conseco Inc. .......................................... 407,934 3,331 Jefferson-Pilot Corp. ................................. 227,341 8,032 Lincoln National Corp. ................................ 672,178 2,856 Torchmark Corp. ....................................... 108,528 5,626 Transamerica Corp. .................................... 597,763 ----------- 2,652,423 ----------- INSURANCE - MISCELLANEOUS -0.32% 4,696 General Re Corp. ...................................... 1,096,516 3,865 UNUM Corp. ............................................ 208,227 ----------- 1,304,743 ----------- INSURANCE - MULTILINE - 2.85% 521 AFLAC Inc. ............................................ 19,212
NUMBER MARKET OF SHARES VALUE - --------- ----------- INSURANCE - MULTILINE - Continued 47,656 Allstate Corp. ........................................ $ 1,941,982 57,545 American International Group, Inc. .................... 5,409,230 18,684 Aon Corp. ............................................. 1,076,666 14,197 CIGNA Corp. ........................................... 1,104,704 4,572 Cincinnati Financial Corp. ............................ 178,594 10,892 Hartford Financial Services Group ..................... 601,102 21,178 Marsh & McLennan Companies Inc. ....................... 1,232,295 ----------- 11,563,785 ----------- LEISURE TIME - 0.01% 2,483 Brunswick Corp. ....................................... 54,626 ----------- LODGING - 0.05% 3,716 Hilton Hotels Corp. ................................... 80,823 4,542 Marriott International Inc. ........................... 133,421 ----------- 214,244 ----------- MACHINERY - AGRICULTURE - 0.14% 1,089 Case Corp. ............................................ 26,408 15,791 Deere & Co. ........................................... 551,698 ----------- 578,106 ----------- MACHINERY - CONSTRUCTION & CONTRACTS - 0.32% 25,989 Caterpillar Inc. ...................................... 1,284,831 178 Foster Wheeler Corp. .................................. 3,048 ----------- 1,287,879 ----------- MACHINERY - INDUSTRIAL/SPECIALTY - 0.95% 1,530 Aeroquip-Vickers, Inc. ................................ 55,654 1,790 Albany International Corp. Class A .................... 34,010 12,247 Cooper Industries, Inc. ............................... 601,634 14,995 Dover Corp. ........................................... 534,197 21,581 Illinois Tool Works Inc. .............................. 1,371,742 9,643 Ingersoll-Rand Co. .................................... 451,413 7,015 Johnson Controls, Inc. ................................ 405,993 6,135 Newport News Shipbuilding ............................. 172,547 4,445 Pall Corp. ............................................ 103,346 1,704 Tidewater, Inc. ....................................... 39,299 4,319 Timken Co. ............................................ 83,141 ----------- 3,852,976 ----------- MEDICAL TECHNOLOGY - 0.16% 7,674 Guidant Corp. ......................................... 658,525 -----------
================================================================================ SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED November 30, 1998 (Unaudited) 55 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ----------- MERCHANDISE - DRUG - 0.63% 16,609 CVS Corp............................................... $ 820,069 9,062 Rite Aid Corp. ........................................ 420,250 24,751 Walgreen Co. .......................................... 1,328,819 ---------- 2,569,138 ---------- MERCHANDISE - SPECIALTY - 1.66% 2,323 American Greetings Corp. Class A ...................... 98,292 7,442* CostCo Companies, Inc. ................................ 466,986 784 Dollar General Corp. .................................. 18,669 19,841 Fortune Brands, Inc. .................................. 675,834 16,375 Gap, Inc. ............................................. 1,204,586 69,921 Home Depot, Inc. ...................................... 3,478,570 2,378 Ikon Office Solutions Inc. ............................ 23,186 1,256* Kohl's Corp. .......................................... 61,780 4,585 Limited, Inc. ......................................... 132,678 1,741 Nordstrom, Inc. ....................................... 64,852 8,063* Staples, Inc. ......................................... 281,701 852 Tandy Corp. ........................................... 38,393 5,368 TJX Companies, Inc. ................................... 137,555 1,477* Toys "R" Us, Inc. ..................................... 29,171 ---------- 6,712,253 ---------- MERCHANDISING - DEPARTMENT - 0.36% 18,846 Dayton Hudson Corp. ................................... 848,070 1,473* Federated Dept Stores, Inc ............................ 61,406 9,407 May Department Stores Co. ............................. 567,360 ---------- 1,476,836 ---------- MERCHANDISING - FOOD - 0.95% 13,905 Albertsons, Inc. ...................................... 793,454 11,529 American Stores Co. ................................... 386,942 12,063 Kroger Co. ............................................ 640,093 24,303* Safeway, Inc. ......................................... 1,283,502 15,689 SYSCO Corp. ........................................... 422,622 7,888 Winn-Dixie Stores, Inc. ............................... 317,985 ---------- 3,844,598 ---------- MERCHANDISING - MASS - 2.50% 3,008 Fred Meyer, Inc. ...................................... 153,032 18,996* KMart Corp. ........................................... 289,689 14,083 J.C. Penney Co., Inc. ................................. 774,565 20,895 Sears Roebuck and Co. ................................. 991,207 105,190 Wal-Mart Stores, Inc. ................................. 7,922,122 ---------- 10,130,615 ----------
NUMBER MARKET OF SHARES VALUE - --------- ----------- METALS - ALUMINUM - 0.19% 28,390 Alcan Aluminium Ltd.................................... 755,884 --------- METALS - COPPER - 0.02% 4,739 Newmont Mining Corp. .................................. 94,188 --------- METALS - MISCELLANEOUS - 0.17% 7,437 Engelhard Corp. ....................................... 143,627 622* Freeport-McMoRan Copper & Gold Class B .............................................. 8,125 29,208 Inco Limited .......................................... 337,718 4,188 Precision Castparts Corp. ............................. 185,057 --------- 674,527 --------- METALS - STEEL- 0.03% 1,127 Cleveland-Cliffs Inc. ................................. 42,896 4,705 Oregon Steel Mills, Inc. .............................. 59,695 1,948 Worthington Industries, Inc. .......................... 23,741 --------- 126,332 --------- MOBILE HOMES - 0.02% 1,840 Fleetwood Enterprises, Inc. ........................... 61,985 --------- MISCELLANEOUS - 0.11% 1,815 BB & T Corp. .......................................... 67,042 8,755 Equifax Inc. .......................................... 363,333 --------- 430,375 --------- MULTIMEDIA - 0.01% 629 Meredith Corp. ........................................ 24,413 --------- NATURAL GAS-DIVERSIFIED - 0.26% 3,832 Eastern Enterprises ................................... 155,436 6,901 El Paso Energy Corp. .................................. 235,497 5,980* Seagull Energy Corp. .................................. 48,961 20,348 Sonat Inc. ............................................ 604,081 --------- 1,043,975 --------- OIL - INTEGRATED DOMESTIC - 1.62% 17,015 Amerada Hess Corp. .................................... 944,332 9,366 Ashland Oil, Inc. ..................................... 455,421 33,552* Burlington Resources, Inc. ............................ 1,195,290 17,387 Oryx Energy Co. ....................................... 240,158 12,661 Pennzoil Co. .......................................... 470,040 50,279 Phillips Petroleum Co. ................................ 2,111,718
NUMBER MARKET OF SHARES VALUE - --------- ----------- OIL - INTEGRATED DOMESTIC - Continued 40,022 USX-Marathon Group .................................... $1,135,624 ---------- 6,552,583 ---------- OIL - INTEGRATED INTERNATIONAL - 1.35% 22,340 Murphy Oil Corp. ...................................... 890,807 79,434 Texaco Inc. ........................................... 4,572,420 ---------- 5,463,227 ---------- OIL - SERVICES - 0.89% 31,126 Baker Hughes Inc. ..................................... 569,994 39,382 Halliburton Co. ....................................... 1,156,846 494 McDermott International, Inc. ......................... 13,245 40,349 Schlumberger Ltd. ..................................... 1,803,095 484* Smith International, Inc. ............................. 11,677 2,002 Transocean Offshore, Inc. ............................. 49,424 ---------- 3,604,281 ---------- OIL/GAS PRODUCERS - 0.64% 16,319 Anadarko Petroleum Corp. .............................. 459,991 18,577 Apache Corp. .......................................... 427,271 6,387 Helmerich & Payne, Inc. ............................... 110,176 9,231 Noble Affiliates, Inc. ................................ 233,659 9,623* Ocean Energy, Inc. .................................... 78,186 14,437 Pioneer Natural Resources Corp. ....................... 191,290 3,155* Ranger Oil Ltd. ....................................... 14,986 8,873 Sunoco Inc. ........................................... 300,572 8,908 Ultramar Diamond Shamrock ............................. 229,381 39,531 Union Pacific Resources Group Inc. .................... 442,253 4,686 Valero Energy Corp. ................................... 98,406 ---------- 2,586,171 ---------- PAPER/FOREST PRODUCTS - 0.87% 9,409 Avery Dennison Corp. .................................. 451,043 44,025 Kimberly-Clark Corp. .................................. 2,316,815 9,697 Longview Fibre Co. .................................... 109,697 6,736 Louisiana Pacific Corp. ............................... 114,512 5,086 Rayonier Inc. ......................................... 216,155 8,529 Willamette Industries, Inc. ........................... 297,981 ---------- 3,506,203 ---------- POLLUTION CONTROL - 0.31% 7,181 Browning-Ferris Industries Inc. ....................... 211,839 24,596 Waste Management, Inc. ................................ 1,054,553 ---------- 1,266,392 ----------
================================================================================ SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED 56 November 30, 1998 (Unaudited) ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ----------- PUBLISHING - NEWS - 0.66% 3,550 Dow Jones & Co., Inc. ................................. $ 169,734 21,631 Gannett Co., Inc. ..................................... 1,396,551 2,042 Knight-Ridder, Inc. ................................... 105,035 12,670 New York Times Co. Class A ............................ 393,562 3,357 Times Mirror Co. ...................................... 196,804 4,887 Tribune Co. ........................................... 313,379 221 Washington Post Co. Class B ........................... 117,613 ---------- 2,692,678 ---------- PUBLISHING/PRINTING - 0.41% 12,865 Deluxe Corp. .......................................... 447,058 11,572 Dun & Bradstreet Corp. ................................ 349,329 9,560 McGraw-Hill, Inc. ..................................... 855,620 ---------- 1,652,007 ---------- RAILROAD - 1.00% 30,788 Burlington Northern Santa Fe .......................... 1,046,792 19,301 CSX Corp. ............................................. 804,610 36,210 Norfolk Southern Corp. ................................ 1,099,878 22,861 Union Pacific Corp. ................................... 1,111,616 ---------- 4,062,896 ---------- RESTAURANTS - 0.76% 41,208 McDonald's Corp. ...................................... 2,887,136 3,962* Tricon Global Restaurants, Inc. ....................... 180,518 ---------- 3,067,654 ---------- SAVINGS & LOAN - 0.27% 1,631 Golden West Financial Corp. ........................... 154,435 24,630 Washington Mutual, Inc. ............................... 954,412 ---------- 1,108,847 ---------- SECURITIES RELATED - 1.15% 11,720 Charles Schwab Corp. .................................. 660,715 13,873 Franklin Resources, Inc. .............................. 593,070 1,764 Lehman Brothers Holdings, Inc. ........................ 88,090 16,058 Merrill Lynch & Co., Inc. ............................. 1,204,350 30,014 Morgan Stanley, Dean Witter, Discover and Co. ..................................... 2,093,480 ---------- 4,639,705 ---------- SEMICONDUCTOR EQUIPMENT - 0.14% 13,858* Applied Materials, Inc. ............................... 536,997
NUMBER MARKET OF SHARES VALUE - --------- ----------- SEMICONDUCTOR EQUIPMENT - Continued 314* KLA-Tencor Corp. ...................................... $ 10,696 ----------- 547,693 ----------- SEMICONDUCTORS - 2.56% 2,230* Advanced Micro Devices, Inc. .......................... 61,743 78,086 Intel Corp. ........................................... 8,404,005 2,966* LSI Logic Corp. ....................................... 45,973 8,484* Micron Technology, Inc. ............................... 350,495 3,301* National Semiconductor Corp. .......................... 47,451 19,103 Texas Instruments Inc. ................................ 1,458,992 ----------- 10,368,659 ----------- TELECOMMUNICATIONS - 3.35% 20,520* Airtouch Communications, Inc. ......................... 1,173,487 12,745 ALLTEL Corp. .......................................... 675,485 61,855 Lucent Technologies, Inc. ............................. 5,323,396 75,986* MCI Worldcom Inc. ..................................... 4,483,174 1,203* Nextel Communications, Inc. Class A ................... 25,865 30,524 Northern Telecom Ltd. ................................. 1,425,089 832 Scientific-Atlanta, Inc. .............................. 16,120 8,219* Tellabs, Inc. ......................................... 444,340 ----------- 13,566,956 ----------- TEXTILE - PRODUCTS - 0.07% 5,513 V F Corp. ............................................. 270,482 ----------- UTILITIES - COMMUNICATION - 6.08% 58,182 Ameritech Corp. ....................................... 3,149,101 89,928 A T & T Corp. ......................................... 5,603,638 84,720 Bell Atlantic Corp. ................................... 4,712,550 55,868 BellSouth Corp. ....................................... 4,874,483 95,035 SBC Communications, Inc. .............................. 4,555,740 21,687 Sprint Corp. FON Group ................................ 1,577,729 10,844 Sprint Corp. PCS Group ................................ 173,496 ----------- 24,646,737 ----------- UTILITIES - ELECTRIC - 2.49% 6,280* AES Corp. ............................................. 287,310 22,975 Allegheny Energy, Inc. ................................ 775,406 29,604 Cinergy Corp. ......................................... 1,023,188 3,383 Cleco Corp. ........................................... 115,656 6,006 Hawaiian Electric Industries .......................... 233,859 7,014 Idacorp Inc. .......................................... 244,613 5,481 Indiana Energy, Inc. .................................. 124,015 1,790 IPALCO Enterprises, Inc. .............................. 89,724
NUMBER MARKET OF SHARES VALUE - --------- ----------- UTILITIES - ELECTRIC - Continued 4,302 Kansas City Power & Light Co. ......................... $ 127,716 24,336 LG&E Energy Corp. ..................................... 681,408 6,329 Minnesota Power Inc. .................................. 264,631 10,315 Montana Power Co. ..................................... 522,841 9,560 Nevada Power Co. ...................................... 226,453 20,879 New Century Energies, Inc. ............................ 1,003,497 22,287 NIPSCO Industries, Inc. ............................... 653,288 15,157 OGE Energy Corp. ...................................... 423,449 55,779 PacifiCorp ............................................ 1,045,856 22,242 Potomac Electric Power Co. ............................ 579,682 15,868 Puget Sound Energy Inc. ............................... 430,420 24,709 TECO Energy, Inc. ..................................... 664,054 10,086 UtiliCorp United Inc. ................................. 354,901 8,187 Washington Gas Light Co. .............................. 208,768 ------------ 10,080,735 ------------ UTILITIES - GAS, DISTRIBUTION - 0.44% 10,694 AGL Resources, Inc. ................................... 230,589 24,486 Keyspan Energy Corp. .................................. 726,928 1,622 MCN Energy Group Inc. ................................. 30,716 11,619 National Fuel Gas Co. ................................. 533,747 6,130 NICOR Inc. ............................................ 257,843 296 Tosco Corp. ........................................... 7,733 ------------ 1,787,556 ------------ UTILITIES - GAS, PIPELINE - 1.21% 10,633 Columbia Energy Group ................................. 603,423 20,241 Consolidated Natural Gas Co. .......................... 1,099,339 34,124 Enron Corp. ........................................... 1,793,643 8,186 ONEOK Inc. ............................................ 284,975 6,624 Peoples Energy Corp. .................................. 249,642 30,930 Williams Companies, Inc. .............................. 891,171 ------------ 4,922,193 ------------ WATER SERVICES - 0.05% 6,927 American Water Works Co., Inc. ........................ 214,304 ------------ TOTAL COMMON STOCKS (Cost $336,510,956) ................................... 399,077,176 ------------
================================================================================ SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED November 30, 1998 (Unaudited) 57 ================================================================================
PAR MARKET VALUE VALUE - --------- ----------- CORPORATE SHORT TERM COMMERCIAL PAPER - 1.20% SECURITIES RELATED - 0.77% $3,128,000 Merrill Lynch & Co., Inc., 5.00% due 12/01/1998 .............................. $ 3,128,000 UTILITIES - ELECTRIC - 0.43% 1,725,000 Conagra, 5.52% due 12/02/1998 .............................. 1,724,735 ------------ TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $4,852,735) .................................. 4,852,735 ------------ UNITED STATES GOVERNMENT SHORT TERM - 0.21% U.S. TREASURY BILLS - 0.21% United States Treasury Bills: 50,000 4.17% due 01/14/1999 .............................. 49,745 800,000 3.75% due 12/10/1998 .............................. 799,246 ------------ 848,991 ------------ TOTAL UNITED STATES GOVERNMENT SHORT TERM (Cost $848,991) .................................... 848,991 ------------ TOTAL INVESTMENTS (Cost $342,212,682) - 99.90% ....................... 404,778,902 Other assets less liabilities, net - 0.10% ....................................... 412,235 ------------ NET ASSETS (equivalent to $23.60 per share on 17,167,122 shares outstanding) - 100%................................ $405,191,137 ============ * Non-income producing
NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 17,167,122 shares outstanding ...................... $ 171,671 Additional paid in capital ........................... 297,453,642 Accumulated net realized gain on securities .......... 44,746,911 Undistributed net investment income .................. 252,693 Unrealized appreciation of investments ............... 62,566,220 ------------ NET ASSETS APPLICABLE TO SHARES OUTSTANDING ........................................ $405,191,137 ============
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ 58 SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED ================================================================================ STATEMENT OF OPERATIONS For the six months ended November 30, 1998 INVESTMENT INCOME: Dividends ................................................................ $ 2,595,157 Interest ................................................................. 254,776 ----------- Total investment income ................................................ 2,849,933 ----------- EXPENSES: Advisory fees ............................................................ 895,023 Custodian and accounting services ........................................ 41,386 Reports to shareholders .................................................. 30,030 Audit fees and tax services .............................................. 7,090 Directors' fees and expenses ............................................. 4,612 Miscellaneous ............................................................ 10,787 ----------- Total expenses ......................................................... 988,928 ----------- NET INVESTMENT INCOME .................................................... 1,861,005 ----------- REALIZED AND UNREALIZED GAIN ON SECURITIES: Net realized gain on: Investments ................................................. $ 8,525,578 Futures contracts ........................................... 710,323 9,235,901 ----------- Net unrealized appreciation of securities during the period: Investments ................................................. 14,314,773 Futures contracts ........................................... 136,333 14,451,106 ----------- ----------- Net realized and unrealized gain on securities during the period:...... 23,687,007 ----------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ......................... $25,548,012 ===========
STATEMENT OF CHANGES IN NET ASSETS
For the For the six months ended fiscal year ended November 30, 1998 May 31, 1998 ----------------- ------------------ OPERATIONS: Net investment income ............................................ $ 1,861,005 $ 2,820,855 Net realized gain on securities .................................. 9,235,901 36,311,508 Net unrealized appreciation of securities during the period ..................................................... 14,451,106 21,289,379 ------------- ------------- Increase in net assets resulting from operations ............... 25,548,012 60,421,742 ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ............................................ (1,783,819) (2,737,376) Net realized gain on securities .................................. -- (9,562,689) ------------- ------------- Decrease in net assets resulting from distributions to shareholders ................................................... (1,783,819) (12,300,065) ------------- ------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold ................................. 49,005,457 120,526,570 Proceeds from capital stock issued for distributions reinvested .................................................... 1,783,819 12,300,065 ------------- ------------- 50,789,276 132,826,635 Cost of capital stock repurchased ................................ (3,529,682) (2,130,016) ------------- ------------- Increase in net assets resulting from capital stock transactions 47,259,594 130,696,619 ------------- ------------- TOTAL INCREASE IN NET ASSETS ..................................... 71,023,787 178,818,296 NET ASSETS: Beginning of period .............................................. 334,167,350 155,349,054 ------------- ------------- End of period (including undistributed net investment income of $252,693 and $175,507) ....................................... $ 405,191,137 $ 334,167,350 ------------- ------------- CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold ..................................... 2,176,823 5,891,588 Shares issued for distributions reinvested ....................... 79,799 618,253 Shares of capital stock repurchased .............................. (169,963) (106,789) ------------- ------------- Increase in shares outstanding ............................... 2,086,659 6,403,052 Shares outstanding: Beginning of period .......................................... 15,080,463 8,677,411 ------------- ------------- End of period ................................................ 17,167,122 15,080,463 ============= =============
================================================================================ ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS NOVEMBER 30, 1998 (UNAUDITED) 59 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ----------- COMMON STOCKS - 56.78% ADVERTISING - 0.11% 1,795 Interpublic Group Cos., Inc. ........................ $ 123,406 2,200 Omnicom Group, Inc. ................................. 117,563 ---------- 240,969 ---------- AEROSPACE/DEFENSE - 0.79% 13,411 Boeing Co. .......................................... 544,822 881 Crane Co. ........................................... 28,468 558 EG & G, Inc. ........................................ 15,589 1,654 General Dynamics Corp. .............................. 96,035 942 Goodrich (B.F.) Co. ................................. 35,737 2,583 Lockheed Martin Corp. ............................... 267,986 932 Northrop Grumman Corp. .............................. 75,725 4,518 Raytheon Co. Class B ................................ 250,184 1,578 TRW Inc. ............................................ 86,889 3,034 United Technologies Corp. ........................... 325,207 ---------- 1,726,642 ---------- AIRLINES - 0.19% 2,352* AMR Corp. ........................................... 155,085 2,014 Delta Air Lines, Inc. ............................... 108,127 4,414 Southwest Airlines Co. .............................. 94,901 1,213* US Airways Group, Inc. .............................. 63,076 ---------- 421,189 ---------- APPAREL & PRODUCTS - 0.02% 1,000* Fruit of the Loom, Inc. Class A ..................... 14,750 910 Liz Claiborne, Inc. ................................. 30,826 ---------- 45,576 ---------- APPLIANCES/FURNISHINGS - 0.06% 1,229 Maytag Corp. ........................................ 66,520 1,029 Whirlpool Corp. ..................................... 57,624 ---------- 124,144 ---------- AUTO - CARS - 0.91% 5,334 Daimlerchrysler AG .................................. 489,065 16,056 Ford Motor Co. ...................................... 887,094 8,678 General Motors Corp. ................................ 607,460 ---------- 1,983,619 ---------- AUTO - REPLACEMENT PARTS - 0.13% 2,008 AutoZone, Inc. ...................................... 60,491 1,000 Cooper Tire & Rubber Co. ............................ 19,563
NUMBER MARKET OF SHARES VALUE - --------- ----------- AUTO - REPLACEMENT PARTS - Continued 2,326 Genuine Parts Co. ................................... $ 76,613 2,076 Goodyear Tire & Rubber Co. .......................... 117,813 882 Pep Boys-Manny, Moe & Jack .......................... 12,457 ---------- 286,937 ---------- BANKS - NEW YORK CITY - 0.97% 10,016 Bank of New York Co., Inc. .......................... 343,048 30,309 Citigroup Inc. ...................................... 1,521,133 2,384 J. P. Morgan & Co. Inc. ............................. 254,790 ---------- 2,118,971 ---------- BANKS - OTHER - 1.98% 23,114 BankAmerica Corp. ................................... 1,506,744 3,966 BankBoston Corp. .................................... 165,085 12,927 First Union Corp. ................................... 785,315 7,676 Fleet Financial Group, Inc. ......................... 319,993 3,488 Mellon Bank Corp. ................................... 219,526 4,397 National City Corp. ................................. 295,698 1,274 Providian Financial Corp. ........................... 116,969 1,510 Republic of New York Corp. .......................... 70,593 1,700 Union Planters Corp. ................................ 80,963 21,536 Wells Fargo & Co. ................................... 775,296 ---------- 4,336,182 ---------- BANKS - REGIONAL - 1.75% 15,599 Bank One Corp. ...................................... 800,424 11,358 Chase Manhattan Corp. ............................... 720,523 2,130 Comerica Inc. ....................................... 137,385 3,557 Fifth Third Bancorp ................................. 236,096 2,920 Huntington Bancshares, Inc. ......................... 86,505 5,980 KeyCorp ............................................. 183,511 2,100 Mercantile Bancorporation Inc. ...................... 92,531 1,500 Northern Trust Corp. ................................ 121,125 4,073 PNC Bank Corp. ...................................... 210,014 2,900 Regions Financial Corp. ............................. 112,375 2,200 State Street Corp. .................................. 150,975 2,400 Summit Bancorporation ............................... 100,350 2,785 SunTrust Banks, Inc. ................................ 194,428 3,500 Synovus Financial Corp. ............................. 77,219 9,921 U.S. Bancorp ........................................ 365,217 2,752 Wachovia Corp. ...................................... 240,284 ---------- 3,828,962 ---------- BEVERAGE - BREWERS/DISTRIBUTORS - 0.29% 478 Adolph Coors Class B ................................ 23,781
NUMBER MARKET OF SHARES VALUE - --------- ----------- BEVERAGE - BREWERS/DISTRIBUTORS - Continued 6,396 Anheuser-Busch Companies, Inc. ...................... $ 387,757 933 Brown-Forman Corp. Class B .......................... 67,876 4,625 Seagram Co. Ltd. .................................... 158,695 ---------- 638,109 ---------- BEVERAGE - SOFT DRINKS - 1.48% 32,599 Coca-Cola Co. ....................................... 2,283,967 5,400 Coca Cola Enterprises, Inc. ......................... 204,188 19,461 PepsiCo, Inc. ....................................... 752,897 ---------- 3,241,052 ---------- BROADCASTING - 0.92% 9,502* CBS Corp. ........................................... 283,278 3,300* Clear Channel Communications, Inc. .................. 154,275 4,884 Comcast Corp. Class A Special ....................... 237,484 8,063* Media One Group Inc. ................................ 326,552 6,967 Tele-Comm Liberty Media Group Class A ............................................ 294,356 6,609 U S WEST, Inc. ...................................... 411,410 4,750* Viacom, Inc Class B ................................. 316,172 ---------- 2,023,527 ---------- BUILDING MATERIALS - 0.19% 505 Armstrong World Industries, Inc. .................... 33,646 4,684 Lowe's Companies, Inc. .............................. 197,899 4,534 Masco Corp. ......................................... 130,919 2,268 Sherwin-Williams Co. ................................ 64,354 ---------- 426,818 ---------- CHEMICAL - MAJOR - 0.88% 3,019 Dow Chemical Co. .................................... 293,975 14,962 E.I. du Pont de Nemours and Co. ..................... 879,018 1,253 Hercules, Inc. ...................................... 41,192 7,908 Monsanto Co. ........................................ 358,331 1,710 Morton International, Inc. .......................... 50,339 2,335 PPG Industries, Inc. ................................ 142,873 2,329 Rohm and Haas Co. ................................... 81,369 1,820 Union Carbide Corp. ................................. 81,445 ---------- 1,928,542 ---------- CHEMICAL - MISCELLANEOUS - 0.21% 3,022 Air Products and Chemicals, Inc. .................... 115,214 1,088 Eastman Chemical Co. ................................ 63,036 1,706 Ecolab Inc. ......................................... 52,779 400* FMC Corp. ........................................... 23,250
================================================================================ ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS 60 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ----------- CHEMICAL - MISCELLANEOUS - Continued 731 Great Lakes Chemical Corp. .......................... $ 29,194 573 Millipore Corp. ..................................... 16,116 904 Nalco Chemical Co. .................................. 30,228 2,086 Praxair, Inc. ....................................... 79,659 1,336 Sigma Aldrich Corp. ................................. 42,919 1,000 W.R. Grace & Co. .................................... 16,500 ---------- 468,895 ---------- COAL - 0.01% 100 NACCO Industries, Inc. Class A ...................... 8,706 ---------- CONGLOMERATES - 0.68% 7,460 Allied Signal Inc. .................................. 328,240 1,600 ITT Industries, Inc. ................................ 57,600 1,581 Loews Corp. ......................................... 158,100 4,400 RJR Nabisco Holdings Corp. .......................... 126,775 2,251 Tenneco Inc. ........................................ 80,192 2,156 Textron Inc. ........................................ 167,494 8,545 Tyco International Ltd. ............................. 562,368 ---------- 1,480,769 ---------- CONSUMER FINANCE - 0.15% 900 Capital One Financial Corp. ......................... 99,000 10,061 MBNA Corp. .......................................... 228,259 ---------- 327,259 ---------- CONTAINERS - METAL/GLASS - 0.13% 400 Ball Corp. .......................................... 17,100 3,092 Corning Inc. ........................................ 124,067 1,693 Crown Cork & Seal Co., Inc. ......................... 57,138 700 Owens Corning ....................................... 26,119 2,000* Owens-Illinois, Inc. ................................ 64,250 ---------- 288,674 ---------- CONTAINERS - PAPER - 0.05% 700 Bemis Co., Inc. ..................................... 26,469 1,082* Sealed Air Corp. .................................... 47,743 800 Temple-Inland Inc. .................................. 42,950 ---------- 117,162 ---------- COSMETICS/TOILETRIES - 0.41% 699 Alberto-Culver Co. Class B .......................... 17,912 3,514 Avon Products, Inc. ................................. 142,756 14,892 Gillette Co. ........................................ 684,102
NUMBER MARKET OF SHARES VALUE - --------- ----------- COSMETICS/TOILETRIES - Continued 1,471 International Flavors & Fragrances, Inc. ................................... $ 61,598 ---------- 906,368 ---------- DRUGS - 4.95% 875 Allergan, Inc. ...................................... 53,266 1,114* ALZA Corp. .......................................... 58,206 17,456 American Home Products Corp. ........................ 929,532 3,326* Amgen Inc. .......................................... 250,281 792 Bausch & Lomb Inc. .................................. 43,956 13,214 Bristol Myers Squibb Co. ............................ 1,619,541 14,560 Eli Lilly and Co. ................................... 1,305,850 15,737 Merck & Co., Inc. ................................... 2,437,268 6,711 Pharmacia & Upjohn, Inc. ............................ 349,391 17,342 Pfizer, Inc. ........................................ 1,935,801 9,754 Schering-Plough Corp. ............................... 1,037,582 10,854 Warner-Lambert Co. .................................. 819,477 ---------- 10,840,151 ---------- ELECTRICAL EQUIPMENT - 2.10% 2,872 AMP Inc. ............................................ 138,933 2,184* Cabletron Systems, Inc. ............................. 30,576 5,788 Emerson Electric Co. ................................ 376,220 43,102 General Electric Co. ................................ 3,900,731 510 National Service Industries, Inc. ................... 19,699 1,096 Raychem Corp. ....................................... 37,333 750 Thomas & Betts Corp. ................................ 32,484 1,296 W. W. Grainger Inc. ................................. 54,756 ---------- 4,590,732 ---------- ELECTRONIC INSTRUMENTS - 0.05% 606 Perkin-Elmer Corp. .................................. 56,510 650 Tektronix, Inc. ..................................... 17,428 2,176* Thermo Electron Corp. ............................... 36,720 ---------- 110,658 ---------- ENTERTAINMENT - 0.89% 1,339* Harrah's Entertainment, Inc. ........................ 20,838 1,766 Hasbro, Inc. ........................................ 61,920 936* King World Productions, Inc. ........................ 25,506 3,861 Mattel, Inc. ........................................ 133,446 7,963 Time Warner Inc. .................................... 842,087 27,112 Walt Disney Co. ..................................... 872,668 ---------- 1,956,465 ----------
NUMBER MARKET OF SHARES VALUE - --------- ----------- FINANCE COMPANIES - 0.38% 4,639 Associates First Capital Corp. ...................... $ 361,262 6,576 Household International, Inc. ....................... 257,286 2,800 SunAmerica, Inc. .................................... 221,900 ---------- 840,448 ---------- FINANCIAL SERVICES - 0.35% 6,121 American Express Co. ................................ 612,483 1,359 H & R Block Inc. .................................... 61,070 1,500 Countrywide Credit Industries, Inc. ................. 74,250 117 Waddell & Reed Financial, Inc. ...................... Class A ............................................ 2,793 506* Waddell & Reed Financial, Inc. ...................... Class B ............................................ 11,828 ---------- 762,424 ---------- FOODS - 1.15% 7,923 Archer Daniels Midland Co. .......................... 145,585 3,838 BestFoods ........................................... 223,084 5,950 Campbell Soup Co. ................................... 339,894 6,482 ConAgra, Inc. ....................................... 203,778 2,034 General Mills, Inc. ................................. 153,567 4,834 H J Heinz Co. ....................................... 281,883 1,844 Hershey Foods Corp. ................................. 124,009 5,432 Kellogg Co. ......................................... 198,947 3,216 Pioneer Hi - Bred International Inc. ................ 96,279 1,819 Quaker Oats Co. ..................................... 111,640 4,100 Ralston Purina Co. .................................. 142,731 6,196 Sara Lee Corp. ...................................... 361,692 1,576 Wm. Wrigley Jr. Co. ................................. 138,885 ---------- 2,521,974 ---------- FOOTWEAR - 0.07% 3,831 NIKE, Inc. Class B .................................. 153,240 700* Reebok International Ltd. ........................... 11,156 ---------- 164,396 ---------- FREIGHT - 0.07% 1,954* FDX Corp. ........................................... 126,766 963 Ryder System, Inc. .................................. 27,505 ---------- 154,271 ---------- FUNERAL SERVICES - 0.06% 3,445 Service Corp. International ......................... 128,757 ----------
================================================================================ ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS NOVEMBER 30, 1998 (UNAUDITED) 61 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ----------- GOLD MINING - 0.09% 4,983 Barrick Gold Corp. .................................. $ 99,660 3,100 Battle Mountain Gold Co. ............................ 14,532 2,871 Homestake Mining Co. ................................ 30,863 3,279 Placer Dome Inc. .................................... 47,750 ---------- 192,805 ---------- GOVERNMENT SPONSORED - 0.76% 9,080 Federal Home Loan Mortgage Corp. .................... 549,340 13,825 Federal National Mortgage Association ........................................ 1,005,769 2,300 SLM Holding Corp. ................................... 101,200 ---------- 1,656,309 ---------- HARDWARE & TOOLS - 0.06% 1,184 Black & Decker Corp. ................................ 64,158 784 Snap-on Inc. ........................................ 26,656 1,188 Stanley Works ....................................... 36,308 ---------- 127,122 ---------- HEALTHCARE - 0.28% 2,650 Cardinal Health, Inc. ............................... 181,856 1,400 HCR Manor Care Inc. ................................. 44,450 5,568 HealthSouth Corp. ................................... 74,820 2,169 Humana Inc. ......................................... 42,974 2,201 IMS Health Inc. ..................................... 146,091 2,605 United HealthCare Corp. ............................. 117,551 ---------- 607,742 ---------- HEAVY DUTY TRUCKS/PARTS - 0.11% 500 Cummins Engine Co., Inc. ............................ 18,562 2,153 Dana Corp. .......................................... 83,967 978 Eaton Corp. ......................................... 66,810 927 Navistar International Corp. ........................ 23,986 1,088 PACCAR Inc. ......................................... 49,504 ---------- 242,829 ---------- HOME BUILDERS - 0.03% 832 Centex Corp. ........................................ 29,692 500 Kaufman & Broad Home Corp. .......................... 12,594 600 Pulte Corp. ......................................... 15,262 ---------- 57,548 ---------- HOSPITAL MANAGEMENT - 0.16% 8,536 Columbia/HCA Healthcare Corp. ....................... 210,199 400 Shared Medical Systems Corp. ........................ 20,950
NUMBER MARKET OF SHARES VALUE - --------- ----------- HOSPITAL MANAGEMENT - Continued 4,081 Tenet Healthcare Corp. .............................. $ 120,645 ---------- 351,794 ---------- HOSPITAL SUPPLIES - 1.61% 20,348 Abbott Laboratories ................................. 976,704 719 Bard (C. R.), Inc. .................................. 32,939 3,810 Baxter International Inc. ........................... 242,173 3,294 Becton, Dickinson and Co. ........................... 139,995 1,500 Biomet, Inc. ........................................ 57,375 2,573 Boston Scientific Corp. ............................. 127,363 17,848 Johnson & Johnson ................................... 1,450,150 1,022 Mallinckrodt, Inc. .................................. 33,023 6,232 Medtronic, Inc. ..................................... 421,829 1,147 St. Jude Medical, Inc. .............................. 33,335 ---------- 3,514,886 ---------- HOUSEHOLD PRODUCTS - 1.51% 1,348 Clorox Co. .......................................... 149,712 3,916 Colgate-Palmolive Co. ............................... 335,308 5,343 Minnesota Mining & Manufacturing .................... Co ................................................. 429,110 2,110 Newell Co. .......................................... 93,368 17,738 Procter & Gamble Co. ................................ 1,554,292 1,990 Rubbermaid, Inc. .................................... 65,794 800 Tupperware Corp. .................................... 13,950 8,432 Unilever N V - ADR .................................. 651,899 ---------- 3,293,433 ---------- INFORMATION PROCESSING - 0.09% 5,700 HBO & Co. ........................................... 142,144 3,556 Parametric Technology Corp. ......................... 60,452 ---------- 202,596 ---------- INFORMATION PROCESSING - BUSINESS SOFTWARE - 2.11% 2,700 BMC Software, Inc. .................................. 137,869 32,614 Microsoft Corp. ..................................... 3,978,908 12,920 Oracle Corp. ........................................ 442,510 3,000 Peoplesoft Inc. ..................................... 61,687 ---------- 4,620,974 ----------
NUMBER MARKET OF SHARES VALUE - --------- ----------- INFORMATION PROCESSING - COMPUTER HARDWARE SYSTEMS - 1.00% 1,828 Apple Computer, Inc. ................................ $ 58,382 22,072 Compaq Computer Corp. ............................... 717,324 16,756 Dell Computer Corp. ................................. 1,018,974 2,499 Silicon Graphics, Inc. .............................. 30,613 4,978 Sun Microsystems, Inc. .............................. 368,683 ---------- 2,193,976 ---------- INFORMATION PROCESSING - COMPUTER SERVICES - 0.41% 4,029 Automatic Data Processing, Inc. ..................... 310,233 932 Ceridian Corp. ...................................... 60,638 6,500 Electronic Data Systems Corp. ....................... 253,500 5,898 First Data Corp. .................................... 157,403 2,200 Paychex, Inc. ....................................... 109,450 ---------- 891,224 ---------- INFORMATION PROCESSING - DATA SERVICES - 2.43% 900 Adobe Systems Inc. .................................. 40,275 635 Autodesk, Inc. ...................................... 23,098 11,396 Cendant Corp. ....................................... 216,524 7,433 Computer Associates International, Inc ................................................ 328,910 2,070 Computer Sciences Corp. ............................. 118,249 700 Data General Corp. .................................. 12,688 6,622 E M C Corp. ......................................... 480,095 2,100 Gateway 2000, Inc. .................................. 117,862 13,765 Hewlett Packard Co. ................................. 863,754 1,665 Honeywell Inc. ...................................... 133,096 12,374 International Business Machines ..................... 2,041,710 4,684 Novell, Inc. ........................................ 77,579 3,606 Pitney Bowes Inc. ................................... 201,936 3,218 Seagate Technology .................................. 94,931 3,400 Unisys Corp. ........................................ 96,900 4,383 Xerox Corp. ......................................... 471,172 ---------- 5,318,779 ---------- INFORMATION PROCESSING - NETWORKING - 0.89% 2,900 Ascend Communications Inc. .......................... 162,944 20,574 Cisco Systems, Inc. ................................. 1,550,765 1,947 General Insturment Corp. ............................ 54,759 4,744 3Com Corp. .......................................... 183,534 ---------- 1,952,002 ----------
================================================================================ ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS 62 NOVEMBER 30, 1998 (UNAUDITED) ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ----------- INSURANCE - CASUALTY - 0.23% 2,184 Chubb Corp. ......................................... $ 153,016 1,000 Progressive Corp. ................................... 148,375 1,953 SAFECO Corp. ........................................ 83,857 3,168 St. Paul Companies, Inc. ............................ 111,672 ---------- 496,920 ---------- INSURANCE - LIFE - 0.32% 1,997 Aetna Inc. .......................................... 154,393 4,307 Conseco Inc. ........................................ 142,669 1,596 Jefferson-Pilot Corp. ............................... 108,927 1,440 Lincoln National Corp. .............................. 120,510 2,070 Torchmark Corp. ..................................... 78,660 887 Transamerica Corp. .................................. 94,244 ---------- 699,403 ---------- INSURANCE - MISCELLANEOUS - 0.23% 997 General Re Corp. .................................... 232,799 1,344 MBIA, Inc. .......................................... 87,024 1,506 MGIC Investment Corp. ............................... 66,170 2,014 UNUM Corp. .......................................... 108,504 ---------- 494,497 ---------- INSURANCE - MULTILINE - 1.22% 11,092 Allstate Corp. ...................................... 451,999 13,935 American International Group, Inc. .................. 1,309,890 2,352 Aon Corp. ........................................... 135,534 2,929 CIGNA Corp. ......................................... 227,913 2,200 Cincinnati Financial Corp. .......................... 85,937 3,206 Hartford Financial Servics Group .................... 176,931 3,426 Marsh & McLennan Companies Inc. ..................... 199,350 2,000 Provident Companies Inc. ............................ 76,875 ---------- 2,664,429 ---------- LEISURE TIME - 0.03% 1,343 Brunswick Corp. ..................................... 29,546 2,400* Mirage Resorts, Inc. ................................ 35,700 ---------- 65,246 ---------- LODGING - 0.08% 3,510 Hilton Hotels Corp. ................................. 76,342 3,288 Marriott International Inc. ......................... 96,585 ---------- 172,927 ---------- MACHINERY - AGRICULTURE - 0.06% 1,011 Case Corp. .......................................... 24,517
NUMBER MARKET OF SHARES VALUE - --------- ----------- MACHINERY - AGRICULTURE - Continued 3,270 Deere & Co. ......................................... $ 114,245 ---------- 138,762 ---------- MACHINERY - CONSTRUCTION & CONTRACTS - 0.14% 4,840 Caterpillar Inc. .................................... 239,277 1,003 Fluor Corp. ......................................... 42,941 526 Foster Wheeler Corp. ................................ 9,008 700 Harnischfeger Industries Inc. ....................... 7,000 ---------- 298,226 ---------- MACHINERY - INDUSTRIAL/SPECIALTY - 0.31% 400 Aeroquip-Vickers, Inc. .............................. 14,550 300 Briggs & Stratton Corp. ............................. 15,131 1,507 Cooper Industries, Inc. ............................. 74,031 2,920 Dover Corp. ......................................... 104,025 3,260 Illinois Tool Works Inc. ............................ 207,214 2,134 Ingersoll-Rand Co. .................................. 99,898 1,087 Johnson Controls, Inc. .............................. 62,910 1,595 Pall Corp. .......................................... 37,084 1,504 Parker Hannifin Corp. ............................... 52,264 800 Timken Co. .......................................... 15,400 ---------- 682,507 ---------- MACHINE TOOLS - 0.01% 544 Milacron Inc. ....................................... 11,016 ---------- MEDICAL TECHNOLOGY - 0.08% 2,006 Guidant Corp. ....................................... 172,140 ---------- MERCHANDISE - DRUG - 0.36% 5,178 CVS Corp. ........................................... 255,664 497 Longs Drug Stores Corp. ............................. 17,706 3,462 Rite Aid Corp. ...................................... 160,550 6,604 Walgreen Co. ........................................ 354,552 ---------- 788,472 ---------- MERCHANDISE - SPECIALTY - 1.11% 889 American Greetings Corp. Class A .................... 37,616 1,351 Circuit City Stores, Inc. ........................... 48,889 1,500* Consolidated Stores Corp. ........................... 32,250 2,866* CostCo Companies, Inc. .............................. 179,841 2,475 Dollar General Corp. ................................ 58,936 2,257 Fortune Brands, Inc. ................................ 76,879 5,147 Gap, Inc. ........................................... 378,626
NUMBER MARKET OF SHARES VALUE - --------- ----------- MERCHANDISE - SPECIALTY - Continued 19,412 Home Depot, Inc. .................................... $ 965,747 1,806 Ikon Office Solutions Inc. .......................... 17,608 491 Jostens, Inc. ....................................... 11,508 2,100* Kohl's Corp. ........................................ 103,294 3,044 Limited, Inc. ....................................... 88,086 1,966 Nordstrom, Inc. ..................................... 73,233 3,800* Staples, Inc. ....................................... 132,763 4,156 TJX Companies, Inc. ................................. 106,498 1,282 Tandy Corp. ......................................... 57,770 3,433* Toys "R" Us, Inc. ................................... 67,802 ---------- 2,437,346 ---------- MERCHANDISING - DEPARTMENT - 0.28% 5,852 Dayton Hudson Corp. ................................. 263,340 1,430 Dillards, Inc. Class A .............................. 49,157 2,816* Federated Department Stores, Inc. ................... 117,392 3,057 May Department Stores Co. ........................... 184,375 ---------- 614,264 ---------- MERCHANDISING - FOOD - 0.34% 3,203 Albertsons, Inc. .................................... 182,771 3,642 American Stores Co. ................................. 122,235 500 Great Atlantic & Pacific Tea Co., Inc. .............. 13,656 3,342 Kroger Co. .......................................... 177,335 1,592 Supervalu Inc. ...................................... 41,093 4,414 SYSCO Corp. ......................................... 118,902 1,979 Winn-Dixie Stores, Inc. ............................. 79,778 ---------- 735,770 ---------- MERCHANDISING - MASS - 1.31% 2,000 Fred Meyer, Inc. .................................... 101,750 3,348 J.C. Penney Co., Inc. ............................... 184,140 6,576* KMart Corp. ......................................... 100,284 5,196 Sears Roebuck and Co. ............................... 246,485 1,861* Venator Group, Inc. ................................. 14,656 29,574 Wal-Mart Stores, Inc. ............................... 2,227,292 ---------- 2,874,607 ---------- METALS - ALUMINUM - 0.15% 3,043 Alcan Aluminium Ltd. ................................ 81,020 2,490 Aluminum Co. of America ............................. 184,571 942 Reynolds Metals Co. ................................. 51,692 ---------- 317,283 ----------
================================================================================ ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS NOVEMBER 30, 1998 (UNAUDITED) 63 ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ----------- METALS - COPPER - 0.05% 600 ASARCO Inc. ......................................... $ 11,625 2,273 Newmont Mining Corp. ................................ 45,176 759 Phelps Dodge Corp. .................................. 43,026 ---------- 99,827 ---------- METALS - MISCELLANEOUS - 0.05% 1,366 Cyprus Amax Minerals Co. ............................ 15,539 1,874 Engelhard Corp. ..................................... 36,192 2,453* Freeport-McMoRan Copper & Gold Inc. Class B ....................................... 32,042 2,207 Inco Limited ........................................ 25,518 ---------- 109,291 ---------- METALS - STEEL - 0.08% 2,579 Allegheny Teldyne Inc. .............................. 53,030 1,400* Armco Inc. .......................................... 5,512 1,695* Bethlehem Steel Corp. ............................... 13,984 1,167 Nucor Corp. ......................................... 49,014 1,215 USX-US Steel Group, Inc. ............................ 29,692 1,300 Worthington Industries, Inc. ........................ 15,844 ---------- 167,076 ---------- MOBILE HOMES - 0.01% 500 Fleetwood Enterprises, Inc. ......................... 16,844 ---------- MISCELLANEOUS - 0.10% 3,900 BB & T Corp. ........................................ 144,056 2,000 Equifax Inc. ........................................ 83,000 ---------- 227,056 ---------- MULTIMEDIA - 0.01% 702 Meredith Corp. ...................................... 27,246 ---------- NATURAL GAS-DIVERSIFIED - 0.07% 2,762 Coastal Corp. ....................................... 96,325 300 Eastern Enterprises ................................. 12,169 1,441 Sonat Inc. .......................................... 42,779 ---------- 151,273 ---------- OIL - INTEGRATED DOMESTIC - 0.80% 1,164 Amerada Hess Corp. .................................. 64,602 12,588 Amoco Corp. ......................................... 741,905 962 Ashland Oil, Inc. ................................... 46,777 4,308 Atlantic Richfield Co. .............................. 286,482
NUMBER MARKET OF SHARES VALUE - --------- ----------- OIL - INTEGRATED DOMESTIC - Continued 2,363 Burlington Resources, Inc. .......................... $ 84,182 667 Kerr-McGee Corp. .................................... 26,346 4,707 Occidental Petroleum Corp. .......................... 95,317 1,373* Oryx Energy Co. ..................................... 18,965 632 Pennzoil Co. ........................................ 23,463 3,384 Phillips Petroleum Co. .............................. 142,128 3,811 USX-Marathon Group .................................. 108,137 3,160 Unocal Corp. ........................................ 107,045 ---------- 1,745,349 ---------- OIL - INTEGRATED INTERNATIONAL - 2.64% 8,659* Chevron Corp. ....................................... 724,109 32,228 Exxon Corp. ......................................... 2,419,115 10,300 Mobil Corp. ......................................... 887,731 28,392 Royal Dutch Pete Co. - ADR .......................... 1,334,424 7,074 Texaco Inc. ......................................... 407,197 ---------- 5,772,576 ---------- OIL - SERVICES - 0.27% 4,220 Baker Hughes Inc. ................................... 77,279 5,791 Halliburton Co. ..................................... 170,111 781 McDermott International, Inc. ....................... 20,941 1,129* Rowan Companies, Inc. ............................... 11,078 7,202 Schlumberger Ltd. ................................... 321,839 ---------- 601,248 ---------- OIL/GAS PRODUCERS - 0.08% 1,600 Anadarko Petroleum Corp. ............................ 45,100 1,300 Apache Corp. ........................................ 29,900 700 Helmerich & Payne, Inc. ............................. 12,075 1,204 Sunoco Inc. ......................................... 40,785 3,311 Union Pacific Resources Group Inc. .................. 37,042 ---------- 164,902 ---------- PAPER/FOREST PRODUCTS - 0.58% 1,563 Avery Dennison Corp. ................................ 74,926 766 Boise Cascade Corp. ................................. 24,273 1,307 Champion International Corp. ........................ 54,322 2,938 Fort James Corp. .................................... 114,949 1,233 Georgia-Pacific Corp. ............................... 69,973 4,062 International Paper Co. ............................. 176,443 7,234 Kimberly-Clark Corp. ................................ 380,689 1,443 Louisiana Pacific Corp. ............................. 24,531 1,368 Mead Corp. .......................................... 41,468
NUMBER MARKET OF SHARES VALUE - --------- ----------- PAPER/FOREST PRODUCTS - Continued 415 Potlatch Corp. ...................................... $ 15,692 1,358 Smurfit-Stone Container Corp. ....................... 19,101 944 Union Camp Corp. .................................... 61,065 1,321 Westvaco Corp. ...................................... 37,153 2,644 Weyerhaeuser Co. .................................... 132,530 1,478 Willamette Industries, Inc. ......................... 51,638 ---------- 1,278,753 ---------- PHOTOGRAPHY - 0.15% 4,234 Eastman Kodak Co. ................................... 307,230 646 Polaroid Corp. ...................................... 13,727 ---------- 320,957 ---------- POLLUTION CONTROL - 0.20% 2,259 Browning-Ferris Industries, Inc. .................... 66,640 4,400 Laidlaw Inc. ........................................ 43,725 7,562 Waste Management, Inc. .............................. 324,221 ---------- 434,586 ---------- PUBLISHING - NEWS - 0.27% 1,227 Dow Jones & Co., Inc. ............................... 58,666 3,738 Gannett Co., Inc. ................................... 241,334 996 Knight-Ridder, Inc. ................................. 51,232 2,458 New York Times Co. Class A .......................... 76,352 1,167 Times Mirror Co. .................................... 68,415 1,601 Tribune Co. ......................................... 102,664 ---------- 598,663 ---------- PUBLISHING/PRINTING - 0.17% 1,100 Deluxe Corp. ........................................ 38,225 2,286 Dun & Bradstreet Corp ............................... 69,009 971 Harcourt General, Inc. .............................. 50,249 1,278 McGraw-Hill, Inc. ................................... 114,381 1,196 Moore Corp. Ltd. .................................... 13,081 1,796 R R Donnelley and Son ............................... 76,218 ---------- 361,163 ---------- RAILROAD - 0.29% 6,299 Burlington Northern Santa Fe ........................ 214,166 2,876 CSX Corp. ........................................... 119,893 5,005 Norfolk Southern Corp. .............................. 152,027 3,246 Union Pacific Corp. ................................. 157,837 ---------- 643,923 ----------
================================================================================ ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED 64 November 30, 1998 (Unaudited) ================================================================================
NUMBER MARKET OF SHARES VALUE - --------- ----------- RESTAURANTS - 0.36% 1,857 Darden Restaurants, Inc. ........................... $ 29,364 9,061 McDonald's Corp. ................................... 634,836 1,976* Tricon Global Restaurants, Inc. .................... 90,032 1,700 Wendy's International, Inc. ........................ 34,000 ----------- 788,232 ----------- SAVINGS & LOAN - 0.18% 825 Golden West Financial Corp. ........................ 78,117 7,958 Washington Mutual, Inc. ............................ 308,373 ----------- 386,490 ----------- SECURITIES RELATED - 0.63% 1,500 Bear Stearns Co., Inc. ............................. 63,000 3,500 Charles Schwab Corp. ............................... 197,313 3,400 Franklin Resources, Inc. ........................... 145,350 1,600 Lehman Brothers Holdings, Inc. ..................... 79,900 4,630 Merrill Lynch & Co., Inc. .......................... 347,250 7,812 Morgan Stanley, Dean Witter, Discover and Co. .................................. 544,887 ----------- 1,377,700 ----------- SEMICONDUCTOR EQUIPMENT - 0.10% 4,866* Applied Materials, Inc. ............................ 188,557 1,100* KLA-Tencor Corp. ................................... 37,469 ----------- 226,026 ----------- SEMICONDUCTORS - 1.66% 1,957* Advanced Micro Devices, Inc. ....................... 54,184 22,202 Intel Corp. ........................................ 2,389,490 1,910* LSI Logic Corp. .................................... 29,605 2,844* Micron Technology, Inc. ............................ 117,493 7,890 Motorola, Inc. ..................................... 489,180 2,237* National Semiconductor Corp. ....................... 32,157 2,517 Rockwell International Corp. ....................... 123,176 5,128 Texas Instruments Inc. ............................. 391,651 ----------- 3,626,936 ----------- TELECOMMUNICATIONS - 1.96% 7,549* Airtouch Communications, Inc. ...................... 431,708 3,584 ALLTEL Corp. ....................................... 189,952 1,124* Andrew Corp. ....................................... 17,984 2,278 Frontier Corp. ..................................... 68,625 1,100 Harris Corp. ....................................... 41,731 17,408 Lucent Technologies, Inc. .......................... 1,498,176 23,529* MCI Worldcom Inc. .................................. 1,388,211
NUMBER MARKET OF SHARES VALUE - --------- ----------- TELECOMMUNICATIONS - Continued 3,800* Nextel Communications, Inc. ........................ Class A............................................ $ 81,700 8,583 Northern Telecom Ltd. .............................. 400,719 1,081 Scientific-Atlanta, Inc. ........................... 20,944 2,604* Tellabs, Inc. ...................................... 140,779 ----------- 4,280,529 ----------- TEXTILE - PRODUCTS - 0.05% 500 Russell Corp. ...................................... 11,907 300 Springs Industries, Inc. Class A ................... 11,681 1,600 V F Corp. .......................................... 78,500 ----------- 102,088 ----------- TOBACCO - 0.86% 32,229 Philip Morris Cos Inc. ............................. 1,802,810 2,427 UST Inc. ........................................... 84,338 ----------- 1,887,148 ----------- UTILITIES - COMMUNICATION - 3.23% 23,954 AT & T Corp. ....................................... 1,492,634 14,618 Ameritech Corp. .................................... 791,199 20,590 Bell Atlantic Corp. ................................ 1,145,319 13,027 BellSouth Corp. .................................... 1,136,606 12,787 GTE Corp. .......................................... 792,794 25,914 SBC Communications, Inc. ........................... 1,242,252 5,720 Sprint Corp. FON Group ............................. 416,130 2,860 Sprint Corp. PCS Group ............................. 45,760 ----------- 7,062,694 ----------- UTILITIES - ELECTRIC - 1.45% 2,300* AES Corp. .......................................... 105,225 1,825 Ameren Corp. ....................................... 75,167 2,549 American Electric Power, Inc. ...................... 118,210 1,998 Baltimore Gas and Electric Co. ..................... 61,314 2,006 Carolina Power & Light Co. ......................... 93,028 2,892 Central & South West Corp. ......................... 79,530 2,118 Cinergy Corp. ...................................... 73,203 3,099 Consolidated Edison, Inc. .......................... 157,468 1,893 DTE Energy Co. ..................................... 82,582 2,608 Dominion Resources, Inc. ........................... 120,457 4,804 Duke Energy Corp. .................................. 300,550 4,717 Edison International ............................... 129,718 3,327 Entergy Corp. ...................................... 97,523 2,370 FPL Group, Inc. .................................... 145,163 3,126 FirstEnergy Corp. .................................. 96,711
NUMBER MARKET OF SHARES VALUE - --------- ----------- UTILITIES - ELECTRIC - Continued 1,654 GPU Inc. ........................................... $ 72,466 3,989 Houston Industries, Inc. ........................... 126,152 1,500 New Century Energies, Inc. ......................... 72,094 2,400* Niagara Mohawk Power Corp. ......................... 36,900 1,968 Northern States Power Co. .......................... 53,505 5,035 P G & E Corp. ...................................... 155,770 2,046 P P & L Resources Inc. ............................. 55,881 4,045 PacifiCorp ......................................... 75,844 2,977 Peco Energy Co. .................................... 119,452 3,081 Public Services Enterprise Group ................... 120,159 9,208 Southern Co. ....................................... 271,636 3,694 Texas Utilities Co. ................................ 164,614 2,900 Unicom Corp. ....................................... 109,293 ----------- 3,169,615 ----------- UTILITIES - GAS, DISTRIBUTION - 0.01% 590 NICOR Inc. ......................................... 24,817 ----------- UTILITIES - GAS, PIPELINE - 0.29% 1,130 Columbia Energy Group .............................. 64,127 1,295 Consolidated Natural Gas Co. ....................... 70,335 4,347 Enron Corp. ........................................ 228,489 400 ONEOK Inc. ......................................... 13,925 500 Peoples Energy Corp. ............................... 18,844 3,234 Sempra Energy ...................................... 81,052 5,626 Williams Companies, Inc. ........................... 162,099 ----------- 638,871 ----------- TOTAL COMMON STOCKS (Cost $76,707,605) ................................. 124,219,061 -----------
PAR MARKET VALUE VALUE - ---------- ----------- CORPORATE BONDS - 10.97% AIRLINES - 1.42% $3,001,000 Continental Airlines, 7.08% due 11/01/2004............................... 3,104,234 ----------- BANKS - OTHER - 0.67% 1,500,000 Santander Finance Issuance, 6.38% due 02/15/2011............................... 1,474,065 -----------
================================================================================ ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED November 30, 1998 (Unaudited) 65 ================================================================================
PAR MARKET VALUE VALUE - ----------- ----------- BANKS - REGIONAL - 0.39% $ 850,000 First Union National, 5.80% due 12/01/2008............................... $ 856,970 ----------- BEVERAGE - SOFT DRINKS - 0.23% 475,000 Coca Cola Enterprises, Inc., 7.88% due 02/01/2002 .............................. 505,329 ----------- CONSUMER FINANCE - 0.47% 1,000,000 Associates Corp. of North America, 6.25% due 11/01/2008 .............................. 1,031,370 ----------- FINANCE COMPANIES - 0.95% 1,500,000 Finova Capital Corp., 9.13% due 02/27/2002 .............................. 1,627,110 455,000 Markel Cap Trust I, 8.71% due 01/01/2046 .............................. 460,496 ----------- 2,087,606 ----------- INFORMATION PROCESSING - DATA SERVICES - 0.37% 800,000 Cendant Corp., 7.75% due 12/01/2003 .............................. 799,840 ----------- LODGING - 0.41% 900,000 Marriott International, Inc., 6.88% due 11/15/2005 .............................. 903,547 ----------- MERCHANDISE - SPECIALTY - 1.69% 2,000,000 Goodrich (B.F.), 7.10% due 11/15/2027 .............................. 2,161,700 1,500,000 Tandy Corp., 6.95% due 09/01/2007 .............................. 1,540,380 ----------- 3,702,080 ----------- OIL - INTEGRATED DOMESTIC - 0.95% 2,000,000 Union Oil Co. California, 7.20% due 05/15/2005 .............................. 2,071,300 ----------- SECURITIES RELATED - 0.42% 925,000 Paine Webber Group Inc., 6.45% due 12/01/2003 .............................. 915,658 ----------- TELECOMMUNICATIONS - 1.71% 1,500,000 Tele-Communications Inc., 7.25% due 08/01/2005 .............................. 1,630,515
PAR MARKET VALUE VALUE - ----------- ----------- TELECOMMUNICATIONS - Continued $2,000,000 360 Communications Co., 7.13% due 03/01/2003................................ $ 2,104,900 ----------- 3,735,415 ----------- UTILITIES - ELECTRIC - 0.58% 1,240,646 Texas Utilities Electric, 6.62% due 07/01/2001............................... 1,266,045 ----------- UTILITIES - GAS, PIPELINE - 0.71% 1,500,000 Consolidated Natural Gas Co., 6.00% due 10/15/2010............................... 1,547,250 ----------- TOTAL CORPORATE BONDS (Cost $23,240,912).................................. 24,000,709 ----------- UNITED STATES GOVERNMENT - LONG TERM- 27.47% GOVERNMENT SPONSORED - 18.17% Federal Home Loan Mortgage Corp: 5,000,000 5.50% due 12/15/2028............................... 4,929,688 3,000,000 5.50% due 08/13/2001............................... 3,044,070 3,000,000 5.13% due 10/15/2008............................... 2,950,770 Federal Home Loan Mortgage Corp, (Pools/REMICS) 139,049 7.50% due 09/01/2025............................... 142,829 347,218 7.50% due 09/01/2025............................... 356,655 281,718 7.50% due 09/01/2025............................... 289,375 429,465 7.50% due 09/01/2025............................... 441,138 Federal National Mortgage Association: 10,000,000 8.50% due 12/10/2028............................... 10,437,500 5,000,000 7.50% due 12/10/2028............................... 5,140,625 5,000,000 7.00% due 12/10/2028............................... 5,101,565 2,000,000 7.00% due 05/10/2001............................... 2,015,940 940,000 5.53% due 12/01/2003............................... 942,938 4,000,000 4.63% due 10/15/2001............................... 3,973,760 ----------- 39,766,853 ----------- UNITED STATES BONDS & NOTES - 9.30% United States Treasury Bonds, 1,500,000 8.13% due 08/15/2019............................... 2,017,965 United States Treasury Notes: 4,000,000 6.50% due 08/15/2005............................... 4,405,640 2,000,000 6.25% due 02/28/2002............................... 2,094,680 1,500,000 6.25% due 02/15/2003............................... 1,588,830 1,000,000 5.75% due 08/15/2003............................... 1,045,470
PAR MARKET VALUE VALUE - ----------- ----------- UNITED STATES BONDS & NOTES - Continued United States Treasury Notes: $1,000,000 5.75% due 11/30/2002............................... $ 1,039,060 2,000,000 5.63% due 05/15/2008............................... 2,127,500 1,000,000 5.50% due 04/15/2000............................... 1,011,560 1,000,000 5.50% due 02/15/2008............................... 1,055,940 4,000,000 4.25% due 11/15/2003............................... 3,957,500 ----------- 20,344,145 ----------- TOTAL UNITED STATES GOVERNMENT LONG TERM (Cost $58,695,437).................................. 60,110,998 ----------- CORPORATE SHORT TERM COMMERCIAL PAPER - 18.71% AEROSPACE/DEFENSE - 4.20% 9,200,000 Lockheed Martin Corp., 5.63% due 12/10/1998............................... 9,187,012 ----------- CONSUMER FINANCE - 3.65% 8,000,000 Commercial Credit Co., 5.15% due 12/10/1998............................... 7,989,672 ----------- FINANCE COMPANIES - 3.32% 5,000,000 Ford Credit Europe PLC, 4.94% due 12/01/1998............................... 5,000,000 2,265,000 General Electric Capital Services, Inc., 4.95% due 12/04/1998............................... 2,264,065 ----------- 7,264,065 ----------- METALS - MISCELLANEOUS - 1.06% 2,311,000 Engelhard Corp., 5.50% due 12/01/1998............................... 2,311,000 ----------- SECURITIES RELATED - 4.20% 9,200,000 Merrill Lynch & Co., 5.15% due 12/10/1998............................... 9,188,123 ----------- UTILITIES - COMMUNICATION - 2.28% 4,988,000 Cincinnati Bell, Inc., 5.10% due 12/03/1998............................... 4,986,586 ----------- TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $41,126,107).................................. 40,926,458 -----------
================================================================================ ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED 66 November 30, 1998 (Unaudited) ================================================================================
PAR MARKET VALUE VALUE - ----------- ----------- UNITED STATES GOVERNMENT - SHORT TERM - 0.09% UNITED STATES TREASURY BILLS - 0.09% United States Treasury Bills: $ 100,000 4.00% due 12/24/1998............................... $ 99,744 100,000 3.75% due 12/10/1998............................... 99,906 ----------- 199,650 ----------- TOTAL UNITED STATES GOVERNMENT - SHORT TERM (Cost $199,650)..................................... 199,650 ----------- TOTAL INVESTMENTS (Cost $199,969,711) - 114.02%....................... 249,456,876 Other assets less liabilities, net - (14.02%)..................................... (30,670,410) ----------- NET ASSETS (equivalent to $14.51 per share on 15,078,692 shares outstanding) - 100%................................ $218,786,466 ============ * Non-income producing
MARKET VALUE ----------- NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 15,078,692 shares outstanding..................... $ 150,787 Additional paid in capital.......................... 154,572,443 Accumulated net realized gain on securities......... 14,509,047 Undistributed net investment income................. 67,024 Unrealized appreciation of securities............... 49,487,165 ------------ NET ASSETS APPLICABLE TO SHARES OUTSTANDING....................................... $218,786,466 ============
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ ASSET ALLOCATION FUND - FINANCIAL STATEMENTS (Unaudited) 67 ================================================================================ STATEMENT OF OPERATIONS For the six months ended November 30, 1998 INVESTMENT INCOME: Dividends ................................................................... $ 905,705 Interest .................................................................... 2,632,687 ------------ Total investment income ................................................... 3,538,392 ------------ EXPENSES: Advisory fees ............................................................... 513,771 Custodian and accounting services ........................................... 24,172 Reports to shareholders ..................................................... 17,269 Audit fees and tax services ................................................. 3,455 Directors' fees and expenses ................................................ 2,735 Miscellaneous ............................................................... 9,918 ------------ Total expenses ............................................................ 571,320 ------------ NET INVESTMENT INCOME ....................................................... 2,967,072 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES: Net realized gain (loss) on: Investments ................................................ $ 2,713,977 Futures contracts .......................................... (904,875) 1,809,102 ------------ Net unrealized appreciation during the period: Investments ................................................ 5,308,798 Futures contracts .......................................... 68,925 5,377,723 ------------ ------------ Net realized and unrealized gain during the period ....................... 7,186,825 ------------ INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................ $ 10,153,897 ------------
STATEMENT OF CHANGES IN NET ASSETS
For the For the six months ended fiscal year ended November 30, 1998 May 31, 1998 ----------------- ----------------- OPERATIONS: Net investment income ............................................ $ 2,967,072 $ 5,684,679 Net realized gain on securities .................................. 1,809,102 13,272,397 Net unrealized appreciation of securities during the period ...... 5,377,723 18,286,139 ------------- ------------- Increase in net assets resulting from operations ............... 10,153,897 37,243,215 ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ............................................ (2,951,844) (5,673,369) Net realized gain on securities .................................. -- (10,552,054) ------------- ------------- Decrease in net assets resulting from distributions to shareholders ............................................... (2,951,844) (16,225,423) ------------- ------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold ................................. 12,127,662 6,643,565 Proceeds from capital stock issued for distributions reinvested... 2,951,844 16,225,423 ------------- ------------- 15,079,506 22,868,988 Cost of capital stock repurchased ................................ (3,593,905) (21,134,651) ------------- ------------- Increase in net assets resulting from capital stock transactions ............................................ 11,485,601 1,734,337 ------------- ------------- TOTAL INCREASE IN NET ASSETS ..................................... 18,687,654 22,752,129 NET ASSETS: Beginning of period .............................................. 200,098,812 177,346,683 ------------- ------------- End of period (including undistributed net investment income of $67,024 and $51,796) ........................................ $ 218,786,466 $ 200,098,812 ============= ============= CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold ..................................... 858,130 488,059 Shares issued for distributions reinvested ....................... 208,946 1,231,303 Shares of capital stock repurchased .............................. (257,864) (1,556,774) ------------- ------------- Increase in shares outstanding ................................. 809,212 162,588 Shares outstanding: Beginning of period ............................................ 14,269,480 14,106,892 ------------- ------------- End of period .................................................. 15,078,692 14,269,480 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ CAPITAL CONSERVATION FUND - STATEMENT OF NET ASSETS 68 November 30, 1998 (Unaudited) ================================================================================
PAR MARKET VALUE VALUE - ----------- ----------- CORPORATE BONDS - 87.68% AIRLINES - 2.75% $ 1,500,000 Delta Air Lines, Inc., 9.75% due 5/15/2021................................ $ 1,823,025 ----------- AUTO - CARS - 2.25% 1,500,000 Hertz Corp., 6.00% due 01/15/2003............................... 1,489,740 ----------- BANKS - OTHER - 5.42% 1,000,000 BankAmerica Corp., 7.20% due 04/15/2006............................... 1,077,790 1,500,000 Santander Finance Issuance, 7.25% due 11/01/2015............................... 1,512,570 1,000,000 Toronto Dominion Bank, 6.13% due 11/01/2008............................... 999,430 ----------- 3,589,790 ----------- BANKS - REGIONAL - 6.63% 1,500,000 Bank Boston Capital Trust I, 8.25% due 12/15/2026............................... 1,620,675 1,500,000 Barnett Capital Trust I, 8.06% due 12/01/2026............................... 1,673,070 1,000,000 SouthTrust Corp., 7.63% due 05/01/2004............................... 1,090,730 ----------- 4,384,475 ----------- BUILDING MATERIALS - 3.02% 2,000,000 CSR America, Inc., 6.88% due 07/21/2005............................... 1,995,360 ----------- DRUGS - 3.05% 2,000,000 Akzo Nobel Inc. 6.00% due 11/15/2003............................... 2,016,200 ----------- FINANCE COMPANIES - 8.76% 2,000,000 Capital One Bank, 8.13% due 03/01/2000............................... 2,034,960 1,000,000 C.I.T. Group Holdings, Inc., 8.38% due 11/01/2001............................... 1,074,100 2,000,000 Finova Capital Corp., 9.13% due 02/27/2002............................... 2,169,480 500,000 Ford Motor Credit Co., 6.38% due 11/05/2008............................... 520,290 ----------- 5,798,830 -----------
PAR MARKET VALUE VALUE - ----------- ----------- HEALTHCARE - 2.05% $1,500,000 Columbia Healthcare Corp., 7.50% due 12/15/2023............................... $ 1,355,460 ----------- HEAVY DUTY TRUCKS/PARTS - 2.26% 1,500,000 Dana Corp., 7.00% due 03/15/2028............................... 1,494,300 ----------- INFORMATION PROCESSING - DATA SERVICES - 2.99% 2,000,000 Comdisco, Inc., 6.13% due 08/01/2001............................... 1,975,660 ----------- MERCHANDISE - DRUG - 0.75% 500,000 Imcera Group, Inc., 6.00% due 10/15/2003............................... 496,390 ----------- MERCHANDISING - DEPARTMENT - 7.42% 2,000,000 Associated Dry Goods Corp., 8.85% due 03/01/2006............................... 2,331,780 2,500,000 Federated Department Stores, Inc., 6.79% due 07/15/2027............................... 2,577,275 ----------- 4,909,055 ----------- MERCHANDISING - MASS - 2.27% 1,500,000 ShopKo Stores, Inc., 6.50% due 08/15/2003............................... 1,504,935 ----------- METALS - STEEL - 2.69% 2,000,000 Pohang Iron & Steel Limited, 7.50% due 08/01/2002............................... 1,782,860 ----------- PAPER/FOREST PRODUCTS - 3.74% 2,000,000 Georgia-Pacific Corp., 9.50% due 12/01/2011............................... 2,475,300 ----------- POLLUTION CONTROL - 2.24% 1,500,000 US Filter Corp., 6.38% due 05/15/2001............................... 1,484,100 ----------- PUBLISHING - NEWS - 3.45% 2,000,000 News America Holdings, 8.25% due 08/10/2018............................... 2,280,860 ----------- RAILROAD - 3.06% 2,000,000 Union Pacific Corp., 6.79% due 11/09/2007............................... 2,027,340 -----------
PAR MARKET VALUE VALUE - ----------- ----------- TELECOMMUNICATIONS - 6.41% $2,000,000 Airtouch Communications, Inc., 7.50% due 07/15/2006............................... $ 2,138,900 2,000,000 360 Communications Co., 7.13% due 03/01/2003............................... 2,104,900 ----------- 4,243,800 ----------- UTILITIES - COMMUNICATION - 6.35% 2,500,000 Century Telephone Enterprises, Inc., 7.20% due 12/01/2025............................... 2,660,750 1,500,000 GTE South, Inc., 6.00% due 02/15/2008............................... 1,539,195 ----------- 4,199,945 ----------- UTILITIES - ELECTRIC - 2.08% 2,000,000 Tenaga Nasional Berhad, 7.88% due 06/15/2004............................... 1,377,820 ----------- UTILITIES - GAS, DISTRIBUTION - 1.67% 1,000,000 Tosco Corp., 9.63% due 03/15/2002............................... 1,103,830 ----------- UTILITIES - GAS, PIPELINE - 6.37% 2,000,000 Columbia Energy Group, 7.62% due 11/28/2025............................... 2,087,700 2,000,000 Enron Corp., 7.63% due 09/10/2004............................... 2,128,300 ----------- 4,216,000 ----------- TOTAL CORPORATE BOND (Cost $57,598,948).................................. 58,025,075 ----------- UNITED STATES GOVERNMENT LONG TERM - 8.40% FEDERAL AGENCIES - 0.37% Government National Mortgage Association (Pools/REMICS) 41,244 9.50% due 05/15/2018............................... 44,548 2,516 9.50% due 06/15/2018............................... 2,717 1,230 9.50% due 06/15/2018............................... 1,329 150,136 9.50% due 07/15/2018............................... 162,164 18,035 9.50% due 08/15/2018............................... 19,480 10,587 9.50% due 10/15/2018............................... 11,435 ----------- 241,673 -----------
================================================================================ CAPITAL CONSERVATION FUND - STATEMENT OF NET ASSETS CONTINUED November 30, 1998 (Unaudited) 69 ================================================================================
PAR MARKET VALUE VALUE - ----------- ----------- GOVERNMENT SPONSORED - 7.18% Federal Home Loan Mortgage Corp., $ 845,299 6.50% due 06/01/2012............................... $ 857,708 1,000,000 5.75% due 12/15/2016............................... 1,000,000 Federal National Mortgage Association, (Pool/REMICS) 714,213 7.00% due 60/01/2011............................... 730,504 689,319 7.50% due 07/01/2026............................... 708,268 700,410 7.00% due 05/01/2011............................... 716,387 722,430 7.00% due 05/01/2011............................... 738,909 ----------- 4,751,776 ----------- UNITED STATES NOTES - 0.85% 500,000 United States Treasury Notes, 6.88% due 05/15/2006............................... 564,685 ----------- TOTAL UNITED STATES GOVERNMENT - LONG TERM (Cost $5,352,899)......................... 5,558,134 ----------- FOREIGN GOVERNMENT BONDS - 0.80% CANADA - 0.80% 500,000 New Brunswick, Province 7.13% due 10/01/2002 (Cost $499,259).................................... 531,920 ----------- CORPORATE SHORT TERM COMMERCIAL PAPER - 0.80% CONGLOMERATES - 0.80% 530,000 CSW Corp 5.65% due 12/01/1998 (Cost $530,000) 530,000 ----------- TOTAL INVESTMENTS (Cost $63,981,106) - 97.68%......................... 64,645,129 Other assets less liabilities, net - 2.32%........................................ 1,533,769 ----------- NET ASSETS (equivalent to $9.64 per share on 6,868,287 shares outstanding - 100%................................. $66,178,898 ===========
UNREALIZED CONTRACTS APPRECIATION - ----------- ------------ FUTURES CONTRACTS PURCHASED(1) (Delivery month/Value at 11/30/98) 10 (2) U.S. Treasury 30 Year Notes (March/$130.22).................................... $ 21,100 ============ (1)U.S.Treasury Notes with a market value of approximately $100,000 were maintained in a segregated account with a portion placed as collateral for futures contracts. (2)Per 1,000
NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 6,868,287 shares outstanding................................... $ 68,683 Additional paid in capital....................................... 65,663,586 Accumulated net realized loss on securities...................... (285,441) Undistributed net investment income.............................. 46,947 Unrealized appreciation of: Investments........................................ $ 664,023 Futures ........................................... 21,100 685,123 ---------- ----------- NET ASSETS APPLICABLE TO SHARES OUTSTANDING..................................................... $66,178,898 ===========
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ 70 CAPITAL CONSERVATION FUND - FINANCIAL STATEMENTS (Unaudited) ================================================================================ STATEMENT OF OPERATIONS For the six months ended November 30, 1998 INVESTMENT INCOME: Interest ............................................................................. $ 2,241,122 ----------- EXPENSES: Advisory fees ........................................................................ 163,510 Custodian and accounting services .................................................... 7,746 Reports to shareholders .............................................................. 5,522 Audit fees and tax services .......................................................... 975 Directors' fees and expenses ......................................................... 877 Miscellaneous ........................................................................ 2,133 ----------- Total expenses ..................................................................... 180,763 ----------- NET INVESTMENT INCOME ................................................................ 2,060,359 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES: Net realized gain on: Investments ......................................................... $ 151,807 Futures contracts ................................................... 79,936 231,743 ----------- Net unrealized appreciation (depreciation) during the period: Investments ......................................................... (580,459) Futures contracts ................................................... 21,202 (559,257) ----------- ----------- Net realized and unrealized loss on securities during the period ... (327,514) ----------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ...................... $ 1,732,845 ===========
STATEMENT OF CHANGES IN NET ASSETS
For the For the six months ended fiscal year ended November 30, 1998 May 31, 1998 ----------------- ----------------- OPERATIONS: Net investment income ............................................ $ 2,060,359 $ 4,230,852 Net realized gain on securities .................................. 231,743 259,260 Net unrealized appreciation (depreciation) of securities during the period .............................................. (559,257) 2,346,983 ------------ ------------ Increase in net assets resulting from operations .............. 1,732,845 6,837,095 ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ............................................ (2,048,014) (4,220,237) ------------ ------------ CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold ................................. 7,245,051 11,469,948 Proceeds from capital stock issued for distributions reinvested .. 2,048,014 4,220,237 ------------ ------------ 9,293,065 15,690,185 Cost of capital stock repurchased ................................ (6,452,550) (21,400,947) ------------ ------------ Increase (decrease) in net assets resulting from capital stock transactions ............................................ 2,840,515 (5,710,762) ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS .......................... 2,525,346 (3,093,904) NET ASSETS: Beginning of period .............................................. 63,653,552 66,747,456 ------------ ------------ End of period (including undistributed net investment income of $46,947 and $34,604) ........................................ $ 66,178,898 $ 63,653,552 ============ ============ CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold ..................................... 749,791 1,185,836 Shares issued for distributions reinvested ....................... 212,701 439,548 Shares of capital stock repurchased .............................. (671,216) (2,216,430) ------------ ------------ Increase (decrease) in shares outstanding ...................... 291,276 (591,046) Shares outstanding: Beginning of period ............................................ 6,577,011 7,168,057 ------------ ------------ End of period .................................................. 6,868,287 6,577,011 ============ ============
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ GOVERNMENT SECURITIES FUND - STATEMENT OF NET ASSETS November 30, 1998 (Unaudited) 71 ================================================================================
PAR MARKET VALUE VALUE - ----------- ----------- UNITED STATES GOVERNMENT - LONG TERM - 97.90% FEDERAL AGENCIES - 10.37% Tennessee Valley Authority: $2,000,000 6.75% due 11/01/2025............................... $ 2,134,060 2,500,000 6.38% due 06/15/2005............................... 2,799,675 3,000,000 6.00% due 03/15/2013............................... 3,125,610 3,500,000 5.38% due 11/13/2008............................... 3,501,085 ----------- 11,560,430 ----------- GOVERNMENT SPONSORED - 55.45% 1,500,000 Federal Farm Credit Banks, 6.92% due 05/13/2002................................ 1,589,295 Federal Home Loan Banks: 1,155,000 7.26% due 09/06/2001................................ 1,220,685 1,150,000 7.10% due 11/02/2002................................ 1,236,434 2,000,000 6.38% due 12/20/2000................................ 2,052,180 5,000,000 6.12% due 08/26/2008................................ 5,081,250 3,000,000 6.11% due 06/19/2003................................ 3,007,500 3,000,000 5.91% due 03/27/2008................................ 3,099,840 1,145,000 5.81% due 01/21/2005................................ 1,177,381 3,000,000 5.70% due 12/19/2000................................ 3,037,980 Federal Home Loan Mortgage Corp.: 1,500,000 7.09% due 06/01/2005................................ 1,521,795 3,500,000 6.71% due 11/09/2005................................ 3,530,625 1,500,000 6.37% due 01/23/2006................................ 1,520,625 Federal Home Loan Mortgage Corp. (Pools/REMICS): 88,093 7.50% due 09/01/2025................................ 90,488 339,726 7.50% due 09/01/2025................................ 348,960 175,092 7.50% due 09/01/2025................................ 179,851 2,000,000 7.00% due 06/01/2019................................ 2,064,360 2,113,248 6.50% due 06/01/2012................................ 2,144,270 175,000 5.50% due 02/25/2019................................ 174,069 Federal National Mortgage Association: 1,000,000 9.05% due 04/10/2000................................ 1,051,410 2,000,000 7.27% due 08/24/2005................................ 2,042,180 3,000,000 7.00% due 08/27/2012................................ 3,202,980 2,000,000 6.85% due 09/12/2005................................ 2,022,180 2,000,000 6.62% due 06/25/2007................................ 2,160,620 2,000,000 6.41% due 03/08/2006................................ 2,131,880 4,000,000 6.25% due 12/13/2002................................ 4,026,880 1,475,000 6.15% due 07/02/2008................................ 1,500,576 3,000,000 6.06% due 05/07/2003................................ 3,037,980
PAR MARKET VALUE VALUE - ----------- ----------- GOVERNMENT SPONSORED - Continued $2,000,000 5.74% due 12/23/1999............................... $ 2,013,120 2,500,000 5.50% due 09/29/2003............................... 2,498,000 2,000,000 4.63% due 10/15/2001............................... 1,986,880 1,000,000 Student Loan Marketing Association, 7.50% due 03/08/2000............................... 1,029,370 ----------- 61,781,644 ----------- UNITED STATES BONDS, NOTES & STRIPS - 32.08% United States Treasury Bonds: 1,800,000 9.00% due 11/15/2018............................... 2,607,462 4,000,000 8.75% due 08/15/2020............................... 5,736,240 3,500,000 8.50% due 02/15/2020............................... 4,890,690 3,500,000 7.25% due 08/15/2022............................... 4,391,940 2,000,000 6.75% due 08/15/2026............................... 2,410,320 United States Treasury Notes: 2,500,000 6.75% due 04/30/2000............................... 2,571,100 1,000,000 6.38% due 01/15/2000............................... 1,017,970 6,000,000 5.88% due 11/15/1999............................... 6,065,640 3,000,000 5.75% due 08/15/2003............................... 3,136,410 2,000,000 5.50% due 01/31/2003............................... 2,061,880 United States Treasury Strips, 1,500,000 due 11/15/2009..................................... 852,465 ----------- 35,742,117 ----------- TOTAL UNITED STATES GOVERNMENT - LONG TERM (Cost $103,905,695)................................. 109,084,191 ----------- CORPORATE SHORT TERM COMMERCIAL PAPER - 0.44% CONGLOMERATES - 0.44% 495,000 CSW Corp., 5.65 % due 12/01/1998............................... 495,000 ----------- TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $495,000)..................................... 495,000 -----------
MARKET VALUE ------------ TOTAL INVESTMENTS (Cost $104,400,695) - 98.34%......................... $109,579,191 Other assets less liabilities, net - 1.66%......................................... 1,848,639 ------------ NET ASSETS (equivalent to $10.36 per share on 10,757,636 shares outstanding) - 100% ................................ $111,427,830 ============
NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 10,757,636 shares outstanding ................................ $ 107,576 Additional paid in capital ..................................... 107,527,062 Accumulated net realized loss on securities .................... (1,451,447) Undistributed net investment income ............................ 66,143 Unrealized appreciation of investments ......................... 5,178,496 ------------- NET ASSETS APPLICABLE TO SHARES OUTSTANDING ........................................... $ 111,427,830 =============
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ 72 GOVERNMENT SECURITIES FUND - FINANCIAL STATEMENTS (Unaudited) ================================================================================ STATEMENT OF OPERATIONS For the six months ended November 30, 1998 INVESTMENT INCOME: Interest ........................................................................... $3,076,031 ---------- EXPENSES: Advisory fees ...................................................................... 255,786 Custodian and accounting services .................................................. 11,756 Reports to shareholders ............................................................ 8,575 Audit fees and tax services ........................................................ 1,625 Directors' fees and expenses ....................................................... 1,325 Miscellaneous ...................................................................... 2,786 ---------- Total expenses ................................................................... 281,853 ---------- NET INVESTMENT INCOME .............................................................. 2,794,178 ---------- REALIZED AND UNREALIZED GAIN ON SECURITIES: Net realized gain on: Investments ........................................................ $ 52,463 Futures contracts .................................................. 230,297 282,760 ---------- Net unrealized appreciation during the period: Investments ........................................................ 2,162,474 Futures contracts .................................................. 133 2,162,607 ---------- ---------- Net realized and unrealized gain on securities during the period ................... 2,445,367 ---------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ..................................... $5,239,545 ==========
STATEMENT OF CHANGES IN NET ASSETS
For the For the six months ended fiscal year ended November 30, 1998 May 31, 1998 ----------------- ----------------- OPERATIONS: Net investment income ............................................. $ 2,794,178 $ 5,097,779 Net realized gain on securities ................................... 282,760 358,401 Net unrealized appreciation of securities during the period ....... 2,162,607 3,271,061 ------------- ------------- Increase in net assets resulting from operations ............... 5,239,545 8,727,241 ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ............................................. (2,775,508) (5,081,964) ------------- ------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold .................................. 32,249,130 17,280,167 Proceeds from capital stock issued for distributions reinvested ... 2,775,508 5,081,964 ------------- ------------- 35,024,638 22,362,131 Cost of capital stock repurchased ................................. (18,181,062) (17,713,793) ------------- ------------- Increase in net assets resulting from capital stock transactions ............................................. 16,843,576 4,648,338 ------------- ------------- TOTAL INCREASE IN NET ASSETS ...................................... 19,307,613 8,293,615 NET ASSETS: Beginning of period ............................................... 92,120,217 83,826,602 ------------- ------------- End of period (including undistributed net investment income of $66,143 and $47,473) ......................................... $ 111,427,830 $ 92,120,217 ============= ============== CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold ...................................... 3,124,242 1,716,427 Shares issued for distributions reinvested ........................ 269,549 509,952 Shares of capital stock repurchased ............................... (1,765,652) (1,769,096) ------------- ------------- Increase in shares outstanding .................................. 1,628,139 457,283 Shares outstanding: Beginning of period ............................................. 9,129,497 8,672,214 ------------- ------------- End of period ................................................... 10,757,636 9,129,497 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ INTERNATIONAL GOVERNMENT BOND FUND - INVESTMENT PORTFOLIO November 30, 1998 (Unaudited) 73 ================================================================================
PAR MARKET VALUE VALUE - ----------- ----------- GOVERNMENT BONDS - 83.84% AUSTRALIA - 1.09% Commonwealth: A$ 500,000 9.75% due 3/15/02................................ $ 362,756 A$ 500,000 9.00% due 9/15/04................................ 379,712 A$ 500,000 8.75% due 1/15/01................................ 340,556 A$ 500,000 7.50% due 7/15/05................................ 359,982 A$ 500,000 7.50% due 9/15/09................................ 376,067 ---------- 1,819,073 ---------- AUSTRIA - 2.75% Republic of Austria: DM 1,000,000 7.25% due 5/3/07.................................. 712,370 As 2,000,000 7.125% due 7/12/04................................ 193,975 As 1,500,000 7.00% due 2/14/00................................ 130,776 As 2,200,000 7.00% due 1/20/03................................ 207,105 As 2,000,000 7.00% due 5/16/05................................ 195,400 As 2,000,000 6.875% due 4/19/02................................ 184,507 As 2,000,000 6.50% due 11/17/05................................ 191,881 As 6,000,000 6.25% due 5/31/06................................ 571,344 As 3,000,000 5.625% due 7/15/07................................ 276,509 As 2,000,000 5.50% due 1/18/04................................ 180,566 Ff11,000,000 5.50% due 1/18/04................................ 2,082,908 Y. 100MM 4.75% due 12/20/04............................... 1,001,421 Y. 50MM 4.50% due 9/28/05................................ 503,754 As 3,000,000 4.375% due 2/28/02............................... 257,656 ---------- 6,690,172 ---------- BELGIUM - 3.58% Kingdom of Belgium: Bf 10,000,000 8.75% due 6/25/02................................. 334,686 Bf 10,000,000 8.00% due 12/24/12................................ 390,529 Bf 10,000,000 8.00% due 3/28/15................................. 396,531 Bf 10,000,000 7.75% due 12/22/00................................ 310,223 Bf 25,000,000 7.75% due 10/15/04................................ 860,078 Bf 20,000,000 7.50% due 7/29/08................................. 716,984 Bf 15,000,000 7.00% due 5/15/06................................. 509,574 Bf 20,000,000 6.50% due 3/31/05................................. 653,940 Bf 20,000,000 6.25% due 3/28/07................................. 655,140 Bf 20,000,000 5.00% due 3/28/01................................. 591,695 Bf 20,000,000 4.00% due 1/22/00................................. 575,588 ---------- 5,994,968 ---------- CANADA - 4.27% Government of Canada: C$ 550,000 9.50% due 6/1/10.................................. 497,442
PAR MARKET VALUE VALUE - ----------- ----------- CANADA - CONTINUED C $ 500,000 9.00% due 12/1/04................................. $ 395,877 C $ 500,000 9.00% due 6/1/25.................................. 494,378 C $1,000,000 8.75% due 12/1/05................................. 800,236 C $1,000,000 8.50% due 4/1/02.................................. 727,216 C $1,000,000 8.00% due 6/1/23.................................. 891,440 C $ 500,000 7.50% due 9/1/00.................................. 341,709 C $1,000,000 7.50% due 3/1/01.................................. 691,145 C $1,000,000 7.25% due 6/1/03.................................. 716,510 C $1,000,000 7.00% due 12/1/06................................. 741,200 C $ 500,000 6.50% due 6/1/04.................................. 352,260 C $ 750,000 5.50% due 2/1/00.................................. 494,971 ---------- 7,144,384 ---------- DENMARK - 2.35 Kingdom of Denmark: DK 5,000,000 8.00% due 11/15/01................................ 860,289 DK 2,500,000 8.00% due 5/15/03................................. 449,411 DK 3,000,000 8.00% due 3/15/06................................. 571,763 DK 5,500,000 7.00% due 12/15/04................................ 982,222 DK 1,250,000 7.00% due 11/10/24................................ 243,991 DK 5,000,000 6.00% due 11/15/02................................ 830,361 ---------- 3,938,037 ---------- FINLAND - 2.44% Republic of Finland: FIM 2,000,000 10.00% due 9/15/01................................ 453,458 FIM 3,000,000 9.50% due 3/15/04................................. 737,238 FIM 3,000,000 7.25% due 4/18/06................................. 697,127 Ff 5,000,000 7.00% due 6/15/04................................. 1,013,433 Y. 100MM 6.00% due 1/29/02................................. 952,719 FIM 1,000,000 6.00% due 4/25/08................................. 219,870 ---------- 4,073,845 ---------- FRANCE - 4.60% Government of France: Ff 4,600,000 9.50% due 1/25/01................................. 910,588 Ff 3,500,000 8.50% due 11/25/02................................ 726,860 Ff 1,500,000 8.50% due 12/26/12................................ 377,162 Ff 7,000,000 6.75% due 10/25/03................................ 1,399,828 Ff 2,000,000 6.50% due 10/25/06................................ 412,888 Ff 8,500,000 6.00% due 10/25/25................................ 1,733,108 Ff 2,000,000 5.50% due 4/25/04................................. 384,413 Ff 4,000,000 5.50% due 4/25/07................................. 779,371 Ff 3,000,000 5.50% due 4/25/29................................. 579,703
FRANCE - Continued Ff 2,000,000 5.25% due 4/25/08................................. $ 383,534 ---------- 7,687,455 ---------- GERMANY - 10.64% Federal Republic of Germany: DM 2,000,000 7.50% due 9/9/04.................................. 1,404,344 DM 3,100,000 7.125% due 12/20/02............................... 2,074,585 DM 3,000,000 6.50% due 3/15/00................................. 1,837,897 DM 3,000,000 6.50% due 7/15/03................................. 1,985,735 DM 3,000,000 6.50% due 10/14/05................................ 2,043,385 DM 1,000,000 6.25% due 4/26/06................................. 676,413 DM 2,000,000 6.25% due 1/4/24.................................. 1,415,898 DM 1,000,000 6.00% due 1/5/06.................................. 663,916 DM 3,000,000 6.00% due 1/4/07.................................. 2,007,309 DM 2,000,000 6.00% due 6/20/16................................. 1,403,755 DM 3,750,000 4.50% due 8/19/02................................. 2,287,202 ---------- 17,800,439 ---------- IRELAND - 0.66% Republic of Ireland: Ilb 100,000 8.25% due 8/18/15................................. 206,537 Ilb 100,000 8.00% due 8/18/06................................. 183,539 Ilb 150,000 6.50% due 10/18/01................................ 237,517 Ilb 150,000 6.25% due 4/1/99.................................. 221,544 Ilb 150,000 6.25% due 10/18/04................................ 247,075 ---------- 1,096,212 ---------- ITALY - 9.77% Republic of Italy: Lit 1,000MM 12.00% due 6/1/01................................. 711,951 Lit 1,000MM 12.00% due 1/1/02................................. 737,610 Lit 1,000MM 10.50% due 7/15/00................................ 659,265 Lit 500MM 10.50% due 4/1/05................................. 404,495 Lit 500MM 10.50% due 9/1/05................................. 409,912 Lit 3,400MM 10.00% due 8/1/03................................. 2,554,023 Lit 500MM 9.50% due 1/1/05.................................. 384,878 Lit 500MM 9.50% due 2/1/06.................................. 396,487 Lit 2,000MM 9.00% due 11/1/23................................. 1,845,513 Lit 1,000MM 8.50% due 4/1/04.................................. 726,775 Lit 1,500MM 8.50% due 8/1/04.................................. 1,096,324 Lit 1,000MM 7.75% due 9/15/01................................. 660,872 Lit 1,500MM 6.75% due 2/1/07.................................. 1,047,031 Lit 500MM 6.25% due 3/1/02.................................. 321,566 Lit 2,000MM 5.75% due 9/15/02................................. 1,279,000 Lit 3,000MM 5.50% due 9/15/00................................. 1,848,757
================================================================================ INTERNATIONAL GOVERNMENT BOND FUND - INVESTMENT PORTFOLIO CONTINUED 74 November 30, 1998 (Unaudited) ================================================================================
PAR MARKET VALUE VALUE - ------------------ ----------- ITALY - CONTINUED Lit 2,000MM 5.00% due 5/1/08............................ $ 1,266,617 ------------ 16,351,076 ------------ JAPAN - 19.49% Government of Japan: Y. 250MM 6.60% due 6/20/01............................ 2,345,576 Y. 105MM 6.00% due 12/20/01........................... 993,665 Y. 365MM 5.50% due 3/20/02............................ 3,442,317 Y. 120MM 5.00% due 12/20/02........................... 1,143,994 Y. 100MM 5.00% due 9/21/09............................ 1,116,940 Y. 100MM 5.00% due 3/20/15............................ 1,192,322 Y. 127MM 4.50% due 6/20/03............................ 1,205,985 Y. 75MM 4.50% due 12/20/04........................... 738,738 Y. 150MM 4.40% due 9/22/03............................ 1,428,166 Y. 200MM 4.20% due 9/21/15............................ 2,206,039 Y. 150MM 4.10% due 6/21/04............................ 1,434,375 Y. 100MM 3.90% due 6/21/04............................ 947,321 Y. 100MM 3.80% due 9/20/16............................ 1,059,773 Y. 250MM 3.50% due 3/21/16............................ 2,553,348 Y. 100MM 3.30% due 6/20/06............................ 946,266 Y. 200MM 3.20% due 3/20/06............................ 1,874,351 Y. 250MM 3.00% due 9/20/05............................ 2,301,339 Y. 150MM 2.90% due 12/20/05........................... 1,376,055 Y. 100MM 2.70% due 3/20/07............................ 917,175 Y. 150MM 2.00% due 12/20/07........................... 1,312,232 Y. 250MM 1.10% due 10/22/01........................... 2,064,083 ------------ 32,600,060 ------------ NETHERLANDS - 4.09% Government of the Netherlands: NG 1,000,000 8.75% due 9/15/01............................ 595,017 NG 500,000 8.25% due 2/15/02............................ 298,293 NG 500,000 8.25% due 6/15/02............................ 301,430 NG 500,000 8.25% due 2/15/07............................ 336,462 NG 1,500,000 7.75% due 3/1/05............................. 951,740 NG 500,000 7.50% due 4/15/10............................ 338,422 NG 750,000 7.50% due 1/15/23............................ 540,770 NG 2,000,000 6.50% due 4/15/03............................ 1,165,460 NG 1,500,000 6.00% due 1/15/06............................ 883,898 NG 2,000,000 5.75% due 1/15/04............................ 1,145,591 NG 500,000 5.75% due 2/15/07............................ 292,934 ------------ 6,850,017 ------------
PAR MARKET VALUE VALUE - ------------------ ----------- PORTUGAL - 0.92% Republic Of Portugal: Ff 3,000,000 6.625% due 5/13/08........................... $ 619,396 PTE75,000,000 5.375% due 6/23/08........................... 466,741 PTE75,000,000 4.812% due 4/23/03........................... 448,508 ----------- 1,534,645 ----------- SPAIN - 4.62% Government of Spain: Pst 50MM 10.50% due 10/30/03........................... 449,827 Pst 100MM 10.30% due 6/15/02............................ 845,307 Pst 50MM 10.00% due 2/28/05............................ 460,218 Pst 70MM 8.20% due 2/28/09............................. 635,456 Pst 80MM 8.00% due 5/30/04............................. 668,292 Ff 2,000,000 6.50% due 6/20/01............................. 376,810 Pst 236MM 6.00% due 1/31/08............................. 1,845,670 Pst 100MM 6.00% due 1/31/29............................. 782,979 Pst 67MM 5.25% due 1/31/03............................. 496,588 Pst 163MM 5.00% due 1/31/01............................. 1,165,247 ----------- 7,726,394 ----------- SWEDEN - 2.23% Kingdom of Sweden: SK 3,000,000 10.25% due 5/5/00............................ 401,340 SK 6,000,000 10.25% due 5/5/03............................ 923,593 SK 3,000,000 9.00% due 4/20/09............................ 508,688 SK 3,000,000 8.00% due 8/15/07............................ 466,559 C $ 500,000 6.75% due 12/31/01........................... 341,738 SK 2,000,000 6.50% due 10/25/06........................... 281,671 SK 6,000,000 6.00% due 2/9/05............................. 809,587 ----------- 3,733,176 ----------- SWITZERLAND - 0.70% Government of Switzerland: Chf 500,000 4.50% due 7/8/02............................. 391,463 Chf 500,000 4.50% due 4/8/06............................. 413,056 Chf 500,000 4.00% due 4/8/28............................. 370,973 ----------- 1,175,492 ----------- UNITED KINGDOM - 6.95% Government of United Kingdom: L 250,000 9.75% due 8/27/02............................ 477,722 L 400,000 9.00% due 10/13/08........................... 881,202 L 250,000 9.00% due 7/12/11............................ 577,720 L 750,000 8.75% due 8/25/17............................ 1,864,290 L 500,000 8.50% due 12/7/05............................ 1,004,514
PAR MARKET VALUE VALUE - ------------------ ----------- UNITED KINGDOM - CONTINUED L 500,000 8.00% due 9/25/09........................... $ 1,030,906 L 500,000 8.00% due 12/7/15........................... 1,149,006 L 750,000 8.00% due 6/7/21............................ 1,829,033 L 1,000,000 7.50% due 12/7/06........................... 1,947,999 L 500,000 7.00% due 11/6/01........................... 868,023 ----------- 11,630,415 ----------- UNITED STATES - 1.45% DM 4,000,000 Federal National Mortgage Association, 5.00% due 2/16/01............................ 2,433,022 ----------- TOTAL GOVERNMENT BONDS (Cost $133,207,822)........................... 140,278,882 ----------- SUPRANATIONAL - 5.95% Ff 1,600,000 Eurofima: 9.25% due 12/18/03........................... 349,785 European Investment Bank: Lit 1,100MM 10.50% due 2/7/02........................... 787,047 L 250,000 9.00% due 5/14/02........................... 455,660 Ff 2,000,000 6.125% due 10/8/04.......................... 391,971 L 1,000,000 6.00% due 11/26/04.......................... 1,705,118 Y. 100MM 4.625% due 2/26/03.......................... 949,675 L 100,000,000 3.00% due 9/20/06........................... 932,427 International Bank for Reconstruction & Development: Lit 150MM 10.80% due 11/13/01.......................... 106,902 Lit 200MM 9.45% due 8/11/03............................ 147,046 L 400,000 9.25% due 7/20/07............................ 833,384 Y. 250MM 5.25% due 3/20/02............................ 2,350,092 Y. 100MM 4.50% due 3/20/03............................ 948,154 ----------- TOTAL SUPRANATIONAL (Cost $10,124,302)............................ 9,957,261 ----------- CORPORATE BONDS - 4.18% FRANCE - 3.94% Credit Local de France: Lit 1,000MM 9.00% due 6/14/01............................ 670,487 Ff 5,000,000 8.875% due 6/10/02........................... 1,025,621 Ff 8,000,000 6.25% due 9/27/05............................ 1,588,976 Ff 4,000,000 6.00% due 11/15/01........................... 747,029 Ff 10,000,000 Elf Aquitaine SA, 7.125% due 8/11/03........................... 1,990,614
================================================================================ INTERNATIONAL GOVERNMENT BOND FUND - INVESTMENT PORTFOLIO CONTINUED November 30, 1998 (Unaudited) 75 ================================================================================
PAR MARKET VALUE VALUE - ------------------ ------------ FRANCE - CONTINUED FF3,000,000 Toyota Motor Credit, 6.25% due 4/11/02........................... $ 565,216 ------------ 6,587,943 ------------ UNITED KINGDOM - 0.25% L 250,000 Sudwestdeutsche Lbank Cap, 0.00% due................................... 412,156 ------------ TOTAL CORPORATE BONDS (Cost $7,391,954)............................ 7,000,099 ------------ TOTAL INVESTMENTS (Cost $150,724,078) - 93.98%................. 157,236,242 Other assets less liabilities, net - 6.02%.................................. 10,075,800 ------------ NET ASSETS (equivalent to $12.50 per share on 13,382,708 shares outstanding) - 100%.......................... $167,312,042 ============
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ 76 INTERNATIONAL GOVERNMENT BOND FUND - FINANCIAL STATEMENTS (Unaudited) ================================================================================ STATEMENT OF ASSETS AND LIABILITIES November 30, 1998 ASSETS: Investments (cost $150,724,078) ......................................... $157,236,242 Cash .................................................................... 955,982 Foreign currencies ...................................................... 1,907,707 Receivables: Investment securities sold ............................................ 457,120 Investment income ..................................................... 3,780,122 Capital stock sold .................................................... 3,159,291 Foreign withholding taxes ............................................. 20,415 Prepaid expenses ........................................................ 1,483 ------------ Total assets .......................................................... 167,518,362 ------------ LIABILITIES: Advisory fees ........................................................... 139,491 Foreign tax withholding ................................................. 37,278 Shareholder reports ..................................................... 14,503 Custodian fees .......................................................... 5,526 Other liabilities ....................................................... 9,522 ------------ Total liabilities ..................................................... 206,320 ------------ NET ASSETS APPLICABLE TO CAPITAL SHARES OUTSTANDING .................................................... $167,312,042 ------------ NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 13,382,708 at 11/30/98 and 13,645,599 at 5/31/98 shares outstanding ... $ 133,827 Additional paid in capital .............................................. 158,190,288 Accumulated net realized gain on securities ............................. 783,420 Undistributed net investment income ..................................... 1,628,030 Unrealized appreciation of: Investments ........................................................... 6,512,164 Foreign currency transactions ......................................... 64,313 ------------ TOTAL NET ASSETS APPLICABLE TO CAPITAL SHARES OUTSTANDING .................................................... $167,312,042 ============
STATEMENT OF OPERATIONS For the six months ended November 30, 1998 INVESTMENT INCOME: Interest (net of foreign withholding taxes of $45,345) ....................... $ 3,924,225 ------------ EXPENSES: Advisory fees ................................................................ 396,707 Custodian and accounting services ............................................ 18,240 Reports to shareholders ...................................................... 13,014 Audit fees and tax services .................................................. 2,215 Directors' fees and expenses ................................................. 2,243 Miscellaneous ................................................................ 5,908 ------------ Total expenses ............................................................. 438,327 ------------ NET INVESTMENT INCOME ........................................................ 3,485,898 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES AND FOREIGN CURRENCIES: Net realized gain (loss) on: Investments .................................................. $ (263,729) Foreign currency translation ................................. 61,786 Futures contracts ............................................ 326,660 124,717 ------------ Net unrealized appreciation (depreciation) during the year: Securities ................................................... 13,071,652 Foreign currency transactions ................................ 83,756 Futures contracts ............................................ (214,063) 12,941,345 ------------ ------------ Net realized and unrealized gain on securities and foreign currencies during the period ..................................... 13,066,062 ------------ INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............................. $ 16,551,960 ============
================================================================================ INTERNATIONAL GOVERNMENT BOND FUND - FINANCIAL STATEMENTS CONTINUED 77 ================================================================================ STATEMENT OF CHANGES IN NET ASSETS
For the For the six months ended fiscal year ended November 30, 1998 May 31, 1998 ----------------- ----------------- OPERATIONS: Net investment income ............................................. $ 3,485,898 $ 7,923,140 Net realized gain (loss) on securities and foreign currency transactions ................................... 124,717 (3,852,314) Net unrealized appreciation of securities and translation of foreign currencies during the period ............. 12,941,345 241,624 ------------- ------------- Increase in net assets resulting from operations ............... 16,551,960 4,312,450 ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ............................................. (2,319,997) (3,034,869) Net realized gain on securities ................................... -- (136,607) ------------- ------------- Decrease in net assets resulting from distributions to shareholders ................................................ (2,319,997) (3,171,476) ------------- ------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold .................................. 35,386,864 30,361,915 Proceeds from capital stock issued for distributions reinvested ... 2,319,997 3,171,476 ------------- ------------- 37,706,861 33,533,391 Cost of capital stock repurchased ................................. (40,409,665) (56,600,279) ------------- ------------- Decrease in net assets resulting from capital stock transactions ..................................... (2,702,804) (23,066,888) ------------- ------------- TOTAL INCREASE (DECREASE) IN NET ASSETS ........................... 11,529,159 (21,925,914) NET ASSETS: Beginning of period ............................................... 155,782,883 177,708,797 ------------- ------------- End of period (including undistributed net investment income of $1,628,030 and $462,129) ..................................... $ 167,312,042 $ 155,782,883 ============= ============= CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold ...................................... 2,919,958 2,685,573 Shares issued for distributions reinvested ........................ 188,737 279,556 Shares of capital stock repurchased ............................... (3,371,586) (4,999,093) ------------- ------------- Decrease in shares outstanding .................................. (262,891) (2,033,964) Shares outstanding: Beginning of period ............................................. 13,645,599 15,679,563 ------------- ------------- End of period ................................................... 13,382,708 13,645,599 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS. ================================================================================ MONEY MARKET FUND - STATEMENT OF NET ASSETS 78 November 30, 1998 (Unaudited) ================================================================================
PAR MARKET VALUE VALUE - ------------ ------------ CORPORATE SHORT TERM COMMERCIAL PAPER - 85.96% AEROSPACE/DEFENSE - 0.95% $2,200,000 Lockheed Martin Corp., 5.60% due 02/16/1999........................... $ 2,173,649 ------------ BEVERAGE - SOFT DRINKS - 0.69% 1,577,000 Coca Cola Co., 5.07% due 12/15/1998........................... 1,573,891 ------------ CHEMICAL - MAJOR - 3.30% E.I. du Pont de Nemours and Co.: 2,700,000 5.19% due 12/08/1998........................... 2,697,275 1,300,000 5.10% due 01/13/1999........................... 1,292,081 1,050,000 4.98% due 01/26/1999........................... 1,036,928 2,584,000 4.94% due 03/04/1999........................... 2,550,014 ------------ 7,576,298 ------------ CONSUMER FINANCE - 15.81% Associates Corp. of North America: 1,500,000 7.82% due 10/21/1999........................... 1,537,630 1,000,000 6.38% due 08/15/1999........................... 1,008,336 1,800,000 5.20% due 12/23/1998........................... 1,794,280 1,500,000 5.14% due 02/19/1999........................... 1,482,867 3,858,000 5.09% due 02/26/1999........................... 3,810,543 Commercial Credit Co.: 2,300,000 5.25% due 02/10/1999........................... 2,276,185 1,072,000 5.17% due 02/02/1999........................... 1,062,301 4,000,000 5.09% due 12/14/1998........................... 3,992,648 2,848,000 5.08% due 12/09/1998........................... 2,844,785 Countrywide Home Loans: 2,200,000 5.20% due 01/27/1999........................... 2,181,887 3,000,000 5.20% due 01/29/1999........................... 2,974,433 1,300,000 5.20% due 02/05/1999........................... 1,287,607 Sears Roebuck Acceptance Corp.: 1,000,000 6.54% due 05/06/1999........................... 1,004,497 3,000,000 5.20% due 01/22/1999........................... 2,977,467 650,000 5.15% due 03/02/1999........................... 641,538 940,000 5.06% due 01/26/1999........................... 932,601 1,300,000 5.07% due 03/22/1999........................... 1,279,678 1,400,000 5.00% due 02/24/1999........................... 1,383,472 1,800,000 5.00% due 03/08/1999........................... 1,775,750 ------------ 36,248,505 ------------
PAR MARKET VALUE VALUE - ------------ ------------ DRUGS - 0.97% $2,228,000 Schering Corp., 5.00% due 12/02/1998........................... $ 2,227,691 ------------ ELECTRICAL EQUIPMENT - 0.65% 1,500,000 General Electric Co., 5.15% due 12/01/1998........................... 1,500,000 ------------ ENTERTAINMENT - 6.02% Mattel Inc.: 3,500,000 5.37% due 12/10/1998........................... 3,495,301 3,000,000 5.28% due 12/21/1998........................... 2,991,200 Walt Disney: 1,600,000 5.13% due 01/12/1999........................... 1,590,424 4,000,000 5.08% due 01/05/1999........................... 3,980,244 1,770,000 5.00% due 02/17/1999........................... 1,750,825 ------------ 13,807,994 ------------ FINANCE COMPANIES - 21.13% 1,957,000 Bell Atlantic Financial Services Inc., 5.35 % due 0.00 12/01/1998.... 1,957,000 2,000,000 Caterpillar Financial Service Corp, 6.80% due 06/15/1999........................... 2,011,155 Ciesco L P: 1,200,000 5.20% due 12/01/1998........................... 1,200,000 2,000,000 5.20% due 12/04/1998........................... 1,999,133 2,000,000 5.15% due 01/06/1999.......................... 1,989,700 2,500,000 5.13% due 01/20/1999.......................... 2,482,205 CIT Group Holdings Inc.: 2,000,000 6.13% due 01/14/1999........................... 2,001,115 1,000,000 5.33% due 12/14/1998........................... 998,075 1,200,000 5.10% due 12/28/1998........................... 1,195,410 1,500,000 5.07% due 12/24/1998........................... 1,495,141 1,825,000 5.03% due 12/16/1998........................... 1,821,175 2,400,000 5.00% due 02/01/1999.......................... 2,379,333 2,500,000 Ford Motor Credit Co., 5.03% due 01/28/1999.......................... 2,479,740 Ford Motor Credit Europe: 1,700,000 5.05% due 01/19/1999........................... 1,688,315 2,000,000 5.03% due 02/03/1999........................... 1,982,116 1,592,000 5.02% due 01/21/1999........................... 1,580,678 2,068,000 5.02% due 02/04/1999........................... 2,049,256 General Electric Capital Corp.: 2,000,000 5.13% due 02/22/1999.......................... 1,976,345 1,900,000 5.04% due 03/29/1999.......................... 1,868,612
PAR MARKET VALUE VALUE - ------------ ------------ FINANCE COMPANIES - Continued General Electric Capital Services: $1,600,000 5.33% due 12/21/1998........................... $ 1,595,262 2,300,000 5.06% due 02/08/1999........................... 2,277,694 900,000 5.03% due 02/10/1999.......................... 891,072 General Motors Acceptance Corp.: 2,250,000 8.40% due 10/15/1999........................... 2,314,312 1,560,000 7.38% due 05/26/1999........................... 1,571,826 750,000 6.50% due 04/16/1999........................... 751,673 1,000,000 6.45% due 05/24/1999........................... 1,004,895 900,000 5.18% due 01/05/1999........................... 895,467 1,500,000 5.18% due 01/27/1999........................... 1,487,698 500,000 International Lease Finance Corp., 6.63% due 04/01/1999........................... 502,338 ------------ 48,446,741 ------------ FOODS - 4.31% Archer Daniels Midland Co.: 3,000,000 5.43% due 12/03/1998........................... 2,999,095 2,500,000 5.43% due 12/03/1998........................... 2,499,246 2,000,000 4.93% due 02/25/1999........................... 1,976,446 2,409,000 Kellogg Co., 5.16% due 12/22/1998........................... 2,401,749 ------------ 9,876,536 ------------ HOSPITAL SUPPLIES - 1.70% Abbott Labs: 3,000,000 4.88% due 12/30/1998........................... 2,988,207 922,000 4.76% due 12/28/1998........................... 918,708 ------------ 3,906,915 ------------ HOUSEHOLD PRODUCTS - 0.87% 2,000,000 Colgate-Palmolive Co., 5.15% due 12/11/1998........................... 1,997,139 ------------ INFORMATION PROCESSING - COMPUTER HARDWARE SYSTEMS - 2.17% IBM Corp.: 2,000,000 5.20% due 12/09/1998........................... 1,997,688 3,000,000 5.05% due 01/07/1999........................... 2,984,429 ------------ 4,982,117 ------------ INFORMATION PROCESSING - DATA SERVICES- 0.87% 2,000,000 International Business Machine Corp., 5.12% due 12/29/1998........................... 1,992,036 ------------
=============================================================================== MONEY MARKET FUND - STATEMENT OF NET ASSETS continued November 30, 1998 (Unaudited) 79 ===============================================================================
PAR MARKET VALUE VALUE - ------------ ------------ INSURANCE - MULTILINE - 3.38% Marsh & McLennan Companies Inc.: $2,500,000 5.23% due 12/17/1998........................... $ 2,494,189 3,348,000 5.18% due 03/24/1999........................... 3,293,563 2,000,000 5.06% due 03/26/1999........................... 1,967,672 ------------ 7,755,424 ------------ MACHINERY - INDUSTRIAL/SPECIALTY - 2.17% Dover Corp.: 2,500,000 5.22% due 01/15/1999........................... 2,483,688 2,500,000 5.18% due 01/04/1999........................... 2,487,769 ------------ 4,971,457 ------------ MERCHANDISE - SPECIALTY - 1.08% 2,500,000 Fortune Brands, 5.30% due 01/11/1999........................... 2,484,910 ------------ OIL - INTEGRATED DOMESTIC - 0.86% 2,000,000 Atlantic Richfield Co., 4.95% due 04/05/1999........................... 1,965,625 ------------ OIL - INTEGRATED INTERNATIONAL - 1.18% 2,705,000 Shell Oil Co., 6.95% due 12/15/1998........................... 2,706,273 ------------ SECURITIES RELATED - 12.59% Bear Stearns Co. Inc.: 1,000,000 6.08% due 10/06/1999........................... 1,006,779 3,000,000 Floating rate note due 06/07/1999, 5.56188% at 11/30/98........................... 3,000,000 2,000,000 Floating rate note due 04/06/1999, 5.2525% at 11/30/98............................ 2,000,000 3,000,000 Floating rate note due 04/30/1999, 5.15969% at 11/30/98........................... 3,000,000 Merrill Lynch & Co. Inc.: 650,000 5.44% due 12/11/1998........................... 649,018 400,000 5.18% due 01/15/1999........................... 397,410 900,000 5.16% due 03/11/1999........................... 887,100 1,300,000 5.16% due 03/15/1999........................... 1,280,621 2,000,000 5.16% due 03/16/1999........................... 1,969,900 350,000 5.13% due 01/04/1999........................... 348,304 225,000 5.13% due 01/29/1999........................... 223,108 305,000 5.13% due 03/19/1999........................... 300,306 1,025,000 5.07% due 01/15/1999........................... 1,018,504 2,500,000 5.06% due 01/25/1999........................... 2,480,674
PAR MARKET VALUE VALUE - ------------ ------------ Morgan Stanley, Dean Witter, Discover: $3,000,000 5.63% due 03/01/1999........................... $ 2,999,072 2,500,000 5.35% due 01/11/1999........................... 2,484,767 850,000 5.35% due 01/12/1999........................... 844,695 2,000,000 5.29% due 02/26/1999........................... 1,974,432 1,300,000 5.10% due 02/12/1999........................... 1,286,556 725,000 5.08% due 02/05/1999........................... 718,248 ------------ 28,869,494 ------------ UTILITIES - COMMUNICATION - 5.26% BellSouth Telecomm: 4,119,000 5.07% due 02/23/1999........................... 4,070,272 368,000 5.00% due 01/27/1999........................... 365,087 GTE Corp.: 1,900,000 5.50% due 02/09/1999........................... 1,879,681 1,600,000 5.47% due 02/12/1999........................... 1,582,253 1,700,000 5.40% due 01/26/1999.......................... 1,685,720 2,500,000 5.40% due 02/11/1999........................... 2,473,000 ------------ 12,056,013 ------------ TOTAL CORPORATE SHORT TERM COMMERCIAL PAPER (Cost $197,118,708).............................. 189,118,708 ------------ FOREIGN GOVERNMENT BONDS - 0.54% CANADA - 0.54% 1,250,000 British Columbia Province, 5.02% due 12/21/1998........................... 1,246,514 ------------ TOTAL FOREIGN GOVERNMENT BONDS (Cost $1,246,514)........................... 1,246,514 ------------ UNITED STATES GOVERNMENT SHORT TERM - 13.03% 1,000,000 Federal Farm Credit Bank, 5.50% due 04/01/1999........................... 999,428 Federal Home Loan Bank: 1,000,000 5.60% due 03/10/1999........................... 1,000,014 1,000,000 5.56% due 03/25/1999........................... 999,664 1,000,000 5.50% due 03/26/1999........................... 999,669 1,000,000 5.48% due 12/07/1998........................... 999,980 2,000,000 5.09% due 11/05/1999........................... 2,000,000 3,000,000 5.03% due 10/29/1999........................... 3,000,000
PAR MARKET VALUE VALUE - ------------ ------------ UNITED STATES GOVERNMENT SHORT TERM-Continued Federal Home Loan Mortgage Corp.: $4,000,000 5.04% due 12/07/1998........................... $ 3,996,640 2,000,000 5.02% due 11/05/1999........................... 2,000,000 Federal National Mortgage Association: 1,000,000 5.65% due 04/09/1999........................... 999,905 1,000,000 5.63% due 05/05/1999........................... 999,622 2,000,000 5.57% due 05/07/1999........................... 1,998,486 2,000,000 5.29% due 12/18/1998........................... 1,995,004 3,000,000 5.00% due 01/08/1999........................... 2,984,167 4,946,000 4.87% due 02/05/1999........................... 4,901,840 ------------ 29,874,419 ------------ TOTAL UNITED STATES GOVERNMENT SHORT TERM (Cost $29,874,419)............................... 29,874,419 ------------ TOTAL INVESTMENTS (Cost $228,239,641) - 99.53%.. 228,239,641 Other assets less liabilities, net - 0.47%..................................... 1,084,524 ------------ NET ASSETS (equivalent to $1.00 per share on 229,324,165 shares outstanding) - 100%............................. $229,324,165 ============ NET ASSETS REPRESENTED BY: Capital stock, $.01 par value per share, 1,000,000,000 shares authorized, 229,324,165 shares outstanding............................. 2,293,242 Additional paid in capital................................... 227,030,923 ------------ NET ASSETS APPLICABLE TO SHARES OUTSTANDING.................................................. $229,324,165 ============
SEE NOTES TO FINANCIAL STATEMENTS. =============================================================================== 80 MONEY MARKET FUND - FINANCIAL STATEMENTS (Unaudited) =============================================================================== STATEMENT OF OPERATIONS For the six months ended November 30, 1998 INVESTMENT INCOME: Interest .................................................. $5,994,442 ---------- EXPENSES: Advisory fees ............................................. 540,476 Custodian and accounting services ......................... 24,429 Reports to shareholders ................................... 15,616 Audit fees and tax services ............................... 3,783 Directors' fees and expenses .............................. 2,631 Miscellaneous ............................................. 5,892 ---------- Total expenses .......................................... 592,827 ---------- NET INVESTMENT INCOME ..................................... 5,401,615 ---------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,401,615 ==========
STATEMENT OF CHANGES IN NET ASSETS
For the For the six months ended fiscal year ended November 30, 1998 May 31, 1998 ----------------- ---------------- OPERATIONS: Net investment income .............................. $ 5,401,615 $ 7,739,732 ------------- ------------- Increase in net assets resulting from operations.. 5,401,615 7,739,732 ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income .............................. (5,401,615) (7,739,732) ------------- ------------- CAPITAL STOCK TRANSACTIONS: Proceeds from capital stock sold ................... 164,453,163 331,782,891 Proceeds from capital stock issued for distributions reinvested ........................ 5,401,615 7,739,732 ------------- ------------- 169,854,778 339,522,623 Cost of capital stock repurchased .................. (131,506,063) (276,671,818) ------------- ------------- Increase in net assets resulting from capital stock transactions ............................. 38,348,715 62,850,805 ------------- ------------- TOTAL INCREASE IN NET ASSETS ....................... 38,348,715 62,850,805 NET ASSETS: Beginning of period ................................ 190,975,450 128,124,645 ------------- ------------- End of period ...................................... $ 229,324,165 $ 190,975,450 ============= ============= CHANGE IN SHARES OUTSTANDING: Shares of capital stock sold ....................... 164,453,164 331,782,891 Shares issued for distributions reinvested ......... 5,401,615 7,739,732 Shares of capital stock repurchased ................ (131,506,064) (276,671,818) ------------- ------------- Increase in shares outstanding ................... 38,348,715 62,850,805 Shares outstanding: Beginning of period .............................. 190,975,450 128,124,645 ------------- ------------- End of period .................................... 229,324,165 190,975,450 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS. =============================================================================== NOTES TO FINANCIAL STATEMENTS (Unaudited) 81 =============================================================================== NOTE 1 -- ORGANIZATION The American General Series Portfolio Company (the "Series") consists of thirteen separate investment portfolios (the "Funds"): Stock Index Fund MidCap Index Fund Small Cap Index Fund International Equities Fund Growth Fund Growth & Income Fund Science & Technology Fund Social Awareness Fund Asset Allocation Fund (formerly Timed Opportunity Fund) Capital Conservation Fund Government Securities Fund International Government Bond Fund Money Market Fund The Series is registered under the Investment Company Act of 1940 (the "1940 Act"), as amended, as an open-end management investment company. Each Fund is diversified with the exception of International Government Bond Fund which is non-diversified as defined by the 1940 Act. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"). GAAP requires accruals which occasionally are based upon management estimates. The following is a summary of significant accounting policies consistently followed by each Fund in the preparation of its financial statements. A. INVESTMENT VALUATION Securities listed or traded on a national exchange are valued daily at their last reported sale price. In the absence of any exchange sales on that day and for unlisted issues, securities are valued at the last sale price on the NASDAQ National Market System. In the absence of any National Market System sales on that day, securities are valued at the last reported bid price. However, options written for which other over-the-counter market quotations are readily available are valued at the last reported asked price, in the absence of any National Market System sales on that day. Futures contracts, options thereon, and options on stock indexes are valued at the amount which would be received upon a current disposition of such investments (i.e., their fair market value), in the absence of any sales on that day. Short term debt securities for which market quotations are readily available are valued at the last reported bid price. However, any short term security with a remaining maturity of 60 days or less and all investments of the Money Market Fund are valued by the amortized cost method which approximates fair market value. Investments for which market quotations are not readily available are valued at fair value as determined in good faith by, or under authority delegated by, the Series' Board of Directors. B. OPTIONS AND FUTURES CALL AND PUT OPTIONS. When a Fund writes a call or a put option, an amount equal to the premium received is recorded as a liability. The liability is "marked to market" daily to reflect the current market value of the option written. When a written option expires, the Fund realizes a gain in the amount of the premium originally received. If the Fund enters into a closing purchase transaction, the Fund realizes a gain or loss in the amount of the original premium less the cost of the closing transaction. If a written call option is exercised, the Fund realizes a gain or loss from the sale of the underlying security, and the proceeds from such sale are increased by the premium originally received. If a written put option is exercised, the amount of the premium originally received reduces the cost of the security which the Fund purchases upon exercise of the option. Purchased options are recorded as investments. If a purchased option expires, the Fund realizes a loss in the amount of the cost of the option. If the Fund enters into a closing transaction, it realizes a gain (or loss), to the extent that the proceeds from the sale are greater (or less) than the cost of the option. If the Fund exercises a put option, it realizes a gain or loss from the sale of the underlying security by adjusting the proceeds from such sale by the amount of the premium originally paid. If the Fund exercises a call option, the cost of the security purchased upon exercise is increased by the premium originally paid. FUTURES CONTRACTS. The initial margin deposit made upon entering into a futures contract is held by the custodian, in a segregated account, in the name of the broker (the Fund's agent in acquiring the futures position). During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments are received or made daily, as unrealized gains or losses are incurred. When the contract is closed, the Fund realizes a gain or loss in the amount of the cost of or proceeds from the closing transaction less the Fund's basis in the contract. C. REPURCHASE AGREEMENTS The seller of a repurchase agreement collateralizes the agreement with securities delivered to the Fund's custodian bank. The Adviser determines, on a daily basis, that the seller maintains collateral of at least 100% of the repurchase proceeds due to the Fund at maturity. D. FOREIGN CURRENCY TRANSLATION The accounting records of each Fund are maintained in U.S. dollars. Transactions denominated in foreign currencies ("local currencies") are translated into U.S. dollars at prevailing exchange rates on transaction date. Net realized gains or losses on foreign currency transactions include exchange rate gains and losses from disposition of foreign currencies, currency gains and losses realized between trade and settlement dates of security transactions, and currency gains and losses realized on settlement of other assets and liabilities settled in local currencies. In determining realized and unrealized gains or losses on foreign securities for the period, the Funds do not isolate exchange rate fluctuations from local security price fluctuations. Foreign currencies and other assets and liabilities denominated in local currencies are marked-to-market daily to reflect fluctuations in foreign exchange rates. E. FEDERAL INCOME TAXES Each Fund intends to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code and to distribute all of its taxable net investment income and taxable net realized capital gains, in excess of any available capital loss carryovers. Therefore no federal income tax provision is required. =============================================================================== 82 NOTES TO FINANCIAL STATEMENTS (Unaudited) CONTINUED =============================================================================== F. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME Investment transactions are accounted for on the trade date. Realized gains and losses are determined on the basis of identified cost. Dividend income is recorded on the ex-dividend date, except for dividend income on certain foreign securities which is recorded when the Fund becomes aware of the dividend. interest income on investments is accrued daily. G. DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders are recorded on the record date. The Funds declare distributions from net investment income monthly, except for the Money Market Fund, which declares daily. Capital gains distributions are declared annually. Investment income and capital gains and losses are recognized in accordance with generally accepted accounting principles ("book"). Distributions from net investment income and realized capital gains are based on earnings as determined in accordance with federal tax regulations ("tax") which may differ from book basis earnings. At the end of the year, offsetting adjustments to undistributed net investment income and undistributed net realized gains (losses) are made to eliminate permanent book/tax differences arising in the current year. NOTE 3 -- ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES VALIC (the "adviser") serves as investment adviser to the Series. VALIC is an indirect wholly-owned subsidiary of American General Corporation, Houston, Texas. On May 1, 1992, the Adviser entered into a sub-advisory agreement with Bankers Trust Company ("Bankers Trust"), a wholly-owned subsidiary of Bankers Trust New York Corporation, to serve as investment sub-adviser to Stock Index Fund, Midcap Index Fund, and Small Cap Index Fund. On April 29, 1994, the Adviser entered into sub-advisory agreements with T. Rowe Price Associates, Inc. to serve as investment sub-adviser to Growth Fund and Science & Technology Fund, and with Value Line, Inc., to serve as investment sub-adviser to Growth & Income Fund. Sub-advisers are compensated for such services by the Adviser. The Adviser receives from the Series a monthly fee based on each Fund's average daily net asset value at the following annual rates: for Stock Index Fund, Midcap Index Fund, Small Cap Index Fund and International Equities Fund .35% on the first $500 million and .25% on the excess over $500 million; for Social Awareness Fund, Asset Allocation Fund, Capital Conservation Fund, Government Securities Fund, International Government Bond Fund, and Money Market Fund, .50%; for Growth & Income Fund, .75%; for Growth Fund, .80%; for Science & Technology Fund, .90%. To the extent that any Fund's accrued expenses for a given month exceed, on an annualized basis, 2% of the fund's average daily net assets, the Adviser will voluntarily reduce expenses of any such Fund by the amount of the excess. The Adviser may withdraw this voluntary undertaking upon 30 days written notice to the Series. On October 31, 1996, the Series entered into an accounting services agreement with VALIC which appointed VALIC as Accounting Services Agent. Under the agreement VALIC will provide, or cause to be provided, certain accounting and administrative services to the Series. During the period ended November 30, 1998, the Series paid VALIC $495,993 for such services provided directly by VALIC. VALIC provided to the Series, at cost, certain services associated with the printing of reports to shareholders. During the six months ended November 30, 1998, the Series paid $2,280 for such services. During the six months ended November 30, 1998, security transactions were affected between the following Funds at the then current market price with no brokerage commissions incurred:
SELLER PURCHASER COST TO PURCHASER NET GAIN TO SELLER - ---------------- ---------------- ----------------- ------------------ MIDCAP INDEX FUND STOCK INDEX FUND $40,645,652 $18,297,519
At November 30, 1998, VALIC Separate Account A (a registered separate account of VALIC) owned over five percent of the outstanding shares of the following Funds:
VALIC SEPARATE ACCOUNT A -------------- Stock Index Fund ............................................... 97.13% MidCap Index Fund .............................................. 99.97 Small Cap Index Fund ........................................... 100.00 International Equities Fund .................................... 99.92 Growth Fund .................................................... 97.99 Growth & Income Fund ........................................... 100.00 Science & Technology Fund ...................................... 100.00 Social Awareness Fund .......................................... 99.99 Asset Allocation Fund .......................................... 99.95 Capital Conservation Fund ...................................... 100.00 Government Securities Fund ..................................... 100.00 International Government Bond Fund ............................. 100.00 Money Market Fund .............................................. 99.64
Certain officers and directors of the Series are officers and directors of VALIC or American General Corporation. NOTE 4 -- INVESTMENT ACTIVITY The information in the following table is presented on the basis of cost for federal income tax purposes at November 30,1998.
IDENTIFIED COST GROSS GROSS OF INVESTMENTS UNREALIZED UNREALIZED NET UNREALIZED OWNED APPRECIATION DEPRECIATION APPRECIATION -------------- -------------- -------------- -------------- Stock Index Fund ............. $1,851,439,873 $2,063,434,110 $ 50,953,121 $2,012,480,989 MidCap Index Fund ............ 601,706,069 235,879,807 68,898,592 166,981,215 Small Cap Index Fund ......... 207,883,140 41,540,212 35,059,131 6,481,081 International Equities Fund... 110,429,424 54,935,052 22,219,252 32,715,800 Growth Fund .................. 867,758,005 287,925,726 52,464,502 235,461,224 Growth & Income Fund ......... 185,222,633 74,780,958 3,635,376 71,145,582 Science & Technology Fund .... 966,287,292 252,274,629 64,470,250 187,804,379 Social Awareness Fund ........ 343,844,974 75,195,214 14,261,286 60,933,928 Asset Allocation Fund ........ 200,281,075 51,943,955 2,777,942 49,166,013 Capital Conservation Fund .... 64,002,206 1,956,026 1,292,003 664,023 Government Securities Fund ... 104,400,695 5,266,488 87,992 5,178,496 International Government Bond Fund ................. 150,724,078 11,363,283 4,840,270 6,523,013 Money Market Fund ............ 228,239,641 0 0 0
The following net realized capital loss carryforwards at November 30, 1998, may be utilized to offset future capital gains.
CAPITAL LOSS CARRYFORWARD EXPIRATION THROUGH -------------------------- ------------------- Capital Conservation Fund .... 517,286 May 31, 2003 Government Securities Fund ... 1,734,344 May 31, 2003 Money Market Fund ............ 3,017 May 31, 2004
=============================================================================== NOTES TO FINANCIAL STATEMENTS (Unaudited) CONTINUED 83 =============================================================================== During the six months, the cost of purchases and proceeds from sales of securities, excluding short term securities were:
COST OF PROCEEDS FROM SECURITIES SECURITIES SOLD PURCHASED OR MATURED --------------- --------------- Stock Index Fund .................... $ 290,835,805 $ 161,687,086 MidCap Index Fund ................... 135,204,099 167,282,088 Small Cap Index Fund ................ 77,192,326 76,074,185 International Equities Fund ......... 4,691,686 13,707,849 Growth Fund ......................... 334,101,094 295,641,866 Growth & Income Fund ................ 162,069,566 181,071,524 Science & Technology Fund ........... 573,915,502 611,537,625 Social Awareness Fund ............... 204,940,524 154,565,004 Asset Allocation Fund ............... 92,469,552 78,843,111 Capital Conservation Fund ........... 18,812,422 19,891,523 Government Securities Fund .......... 31,857,589 14,165,988 International Government Bond Fund... 13,986,924 20,767,444
NOTE 5 -- PORTFOLIO SECURITIES LOANED To realize additional income, a Fund may lend portfolio securities with a value of up to 30% (33 1/3% in the case of Growth Fund and Science & Technology Fund) of its total assets. Any such loans will be continuously secured by collateral consisting of cash or U.S. Government securities, maintained in a segregated account, at least equal to the market value of the securities loaned. The risks in lending portfolio securities, as with other extensions of secured credit, consist of possible 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. Loans by a Fund will only be made to broker-dealers deemed by the Custodian to be creditworthy and will not be made unless, in the judgment of the Adviser, the consideration to be earned from such loans would justify the risk. Each Fund receives income earned on the securities loaned during the lending period and a portion of the earnings or rebate earned on the collateral received. Portfolio securities on loan at November 30, 1998 are summarized as follows:
MARKET VALUE COLLATERAL VALUE --------------- ---------------- Stock Index Fund.............. $ 11,653,552 $ 12,026,772 MidCap Index Fund............. 10,692,871 11,095,596 Small Cap Index Fund.......... 13,532,183 14,183,643 International Equities Fund... 9,627,963 9,920,840 Growth & Income Fund.......... 1,471,088 1,504,900 Science & Technology Fund..... 51,246,976 53,163,005 Social Awareness Fund......... 1,497,850 1,545,600 Asset Allocation Fund......... 2,146,653 2,192,900 Capital Conservation Fund..... 2,076,192 2,119,000 Total ..................... $ 103,945,328 $ 107,752,256 --------------- ----------------
NOTE 6 -- INVESTMENT CONCENTRATION A significant portion of Government Securities Fund's investments may be in U.S. Government sponsored securities. No assurance can be given that the U.S. Government will provide support to such U.S. Government sponsored agencies or instrumentalities in the future since it is not required to do so by law. As a result of the Fund's concentration in such investments, it may be subject to risks associated with U.S. Government sponsored securities. At November 30, 1998, Government Securities Fund had 55.45% of its net assets invested in such securities. At November 30, 1998, International Government Bond Fund had 19.49% of its net assets invested in securities issued by the Government of Japan and an additional 4% in issues of companies located in Japan and/or denominated in Japanese Yen. Future economic and political developments in a foreign country could adversely affect the liquidity and value of foreign securities or the currency exchange rates from which foreign currencies are translated. NOTE 7 -- SUBSEQUENT EVENTS On December 30, 1998, annual distributions from undistributed net realized gains on investments were declared payable on December 31, 1998, to shareholders of record December 30, 1998, as follows:
RATE PER SHARE --------- Stock Index Fund ................................. 0.1472 MidCap Index Fund ................................ 2.2617 Small Cap Index Fund ............................. 1.3602 International Equities Fund ...................... 0.9050 Growth Fund ...................................... 1.0129 Growth & Income Fund ............................. 1.5339 Social Awareness Fund ............................ 2.1153 Asset Allocation Fund ............................ 0.8532 International Government Bond Fund ............... 0.0662
On January 19, 1999, the Board of Directors of the Series approved the termination of Value Line, Inc., as sub-adviser of the Growth & Income Fund. VALIC expects to re-assume direct management of the Fund's investment portfolio on February 22, 1999. NOTE 8 -- YEAR 2000 VALIC is in the process of modifying its systems to achieve Year 2000 readiness. This endeavor is directed and managed by VALIC and monitored by the parent company, American General Corporation. VALIC has developed clearly defined and documented plans that have been implemented to minimize the risk of significant negative impact on its operations. These plans include the following activities: (1) perform an inventory of VALIC's information technology and non-information technology systems; (2) assess which items in the inventory may expose VALIC to business interruptions due to Year 2000 issues; (3) test systems for Year 2000 readiness; (4) reprogram or replace systems that are not Year 2000 ready; and (5) return the systems to operation. VALIC expects to complete the forgoing activities for all critical business systems relevant to the Series by December 1998. In addition, the Series and VALIC have business relationships with various third parties, each of which must also be Year 2000 ready. Therefore, VALIC's plans also include assessing and attempting to mitigate the risks associated with the potential failure of third parties, as well as contingency plans for any identified risks or shortcomings, to achieve Year 2000 readiness. Due to the various stages of the third parties' Year 2000 readiness, VALIC's efforts in this regard will extend through 1999. Through October 31, 1998, VALIC has incurred and expensed $18.8 million (pretax) related to Year 2000 readiness, including $12.3 million incurred during the first ten months of 1998. VALIC currently anticipates that it will incur future costs of $7.9 million (pretax) for additional internal staff, third party vendors, and other expenses for the remainder of 1998 to achieve Year 2000 readiness. As of this date, VALIC has completed the inventory, assessment, testing, reprogramming and implementation phases of the plan with respect to its critical systems. VALIC believes its comprehensive plan and resource commitment will allow it to meet its Year 2000 objectives. However, the Year 2000 issue remains complex and the risks, uncertainties, and unforeseen circumstances associated with the Year 2000 issue could have a material adverse impact on VALIC and the Series. =============================================================================== 84 FINANCIAL HIGHLIGHTS (Unaudited) =============================================================================== Per share data is for a share of capital stock outstanding throughout the period. Total return includes reinvestment of dividends on the reinvestment date. Total returns and ratios for periods of less than one year are not annualized. The average commission rate paid on investment equity securities (on a per share basis) is presented for the periods beginning June 1, 1996. STOCK INDEX FUND
FOR THE SIX MONTHS ENDED FISCAL YEAR ENDED MAY 31, NOVEMBER 30, ----------------------------------------------- 1998 1998 1997 1996 ----------- ----------- ----------- ----------- PER SHARE DATA Net asset value at beginning of period ................................ $ 33.38 $ 26.09 $ 20.69 $ 16.81 ----------- ----------- ----------- ----------- Income from investment operations: Net investment income ................. 0.20 0.40 0.39 0.39 Net realized and unrealized gain on securities ....................... 2.35 7.44 5.57 4.26 ----------- ----------- ----------- ----------- Total income from investment operations .......................... 2.55 7.84 5.96 4.65 ----------- ----------- ----------- ----------- Distributions: Distributions from net investment income .............................. (0.20) (0.40) (0.39) (0.38) Distributions from net realized gain on securities ....................... -- (0.15) (0.17) (0.39) ----------- ----------- ----------- ----------- Total distributions ................... (0.20) (0.55) (0.56) (0.77) ----------- ----------- ----------- ----------- Net asset value at end of period ........ $ 35.73 $ 33.38 $ 26.09 $ 20.69 =========== =========== =========== =========== TOTAL RETURN ............................ 7.67% 30.30% 29.24% 28.17% =========== =========== =========== =========== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets ............................ 0.16% 0.31% 0.34% 0.35% Ratio of net investment income to average net assets .................... 0.60% 1.33% 1.76% 2.05% Portfolio turnover rate ................. 5% 3% 3% 3% Number of shares outstanding at end of period (000's) ................. 108,284 104,334 93,687 85,117 Net assets at end of period (000's) ..... $ 3,868,679 $3,482,655 $ 2,444,200 $ 1,760,786 Average net assets during the period (000's) ........................ $ 3,531,045 $ 2,968,059 $ 2,019,826 $ 1,498,398 Average commission rate paid ............ $ 0.0257 $ 0.0283 $ 0.0281 n/a
FISCAL YEAR ENDED MAY 31, ----------------------------- 1995 1994 ----------- ----------- PER SHARE DATA Net asset value at beginning of period ................................ $ 14.39 $ 14.36 ------------- ------------- Income from investment operations: Net investment income ................. 0.37 0.35 Net realized and unrealized gain on securities ....................... 2.45 0.12 ------------- ------------- Total income from investment operations .......................... 2.82 0.47 ------------- ------------- Distributions: Distributions from net investment income .............................. (0.37) (0.35) Distributions from net realized gain on securities ....................... (0.03) (0.09) ------------- ------------- Total distributions ................... (0.40) (0.44) ------------- ------------- Net asset value at end of period ........ $ 16.81 $ 14.39 ============= ============= TOTAL RETURN ............................ 19.98% 3.29% ============= ============= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets ............................ 0.38% 0.39% Ratio of net investment income to average net assets .................... 2.44% 2.44% Portfolio turnover rate ................. 14% 3% Number of shares outstanding at end of period (000's) ................. 75,451 75,494 Net assets at end of period (000's) ..... $ 1,267,992 $ 1,086,459 Average net assets during the period (000's) ........................ $ 1,140,085 $ 1,030,581 Average commission rate paid ............ n/a n/a
MIDCAP INDEX FUND FOR THE SIX MONTHS ENDED FISCAL YEAR ENDED MAY 31, NOVEMBER 30, ------------------------------------------------------------------------- 1998 1998 1997 1996 1995 1994 ------------ --------- --------- --------- --------- --------- PER SHARE DATA Net asset value at beginning of period .............................. $ 25.27 $ 20.83 $ 19.09 $ 15.68 $ 14.54 $ 14.38 --------- --------- --------- --------- --------- --------- Income from investment operations: Net investment income ............... 0.11 0.23 0.24 0.24 0.26 0.23 Net realized and unrealized gain (loss) on securities .............. (0.48) 5.80 2.95 4.06 1.59 0.28 --------- --------- --------- --------- --------- --------- Total income (loss) from investment operations ............. (0.37) 6.03 3.19 4.30 1.85 0.51 --------- --------- --------- --------- --------- --------- Distributions: Distributions from net investment income ............................ (0.11) (0.23) (0.24) (0.24) (0.26) (0.23) Distributions from net realized gain on securities ................ -- (1.36) (1.21) (0.65) (0.45) (0.12) --------- --------- --------- --------- --------- --------- Total distributions ................. (0.11) (1.59) (1.45) (0.89) (0.71) (0.35)) --------- --------- --------- --------- --------- --------- Net asset value at end of period ...... $ 24.79 $ 25.27 $ 20.83 $ 19.09 $ 15.68 $ 14.54 ========= ========= ========= ========= ========= ========= TOTAL RETURN .......................... (1.42)% 29.62% 17.48% 28.10% 13.26% 3.52% ========= ========= ========= ========= ========= ========= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .......................... 0.19% 0.36% 0.40% 0.41% 0.44% 0.46% Ratio of net investment income to average net assets .................. 0.48% 0.95% 1.24% 1.36% 1.73% 1.62% Portfolio turnover rate ............... 18% 26% 19% 21% 23% 17% Number of shares outstanding at end of period (000's) ............... 30,942 31,830 29,137 28,322 25,988 24,001 Net assets at end of period (000's) ... $ 766,997 $ 804,318 $ 607,061 $ 540,688 $ 407,557 $ 349,041 Average net assets during the period (000's) ...................... $ 741,052 $ 722,652 $ 554,397 $ 477,372 $ 376,486 $ 285,247 Average commission rate paid .......... $ 0.0239 $ 0.0278 $ 0.0277 n/a n/a n/a
SEE NOTES TO FINANCIAL STATEMENTS. =============================================================================== FINANCIAL HIGHLIGHTS (Unaudited) continued 85 =============================================================================== Per share data is for a share of capital stock outstanding throughout the period. Total return includes reinvestment of dividends on the reinvestment date. Total returns and ratios for periods of less than one year are not annualized. The average commission rate paid on investment equity securities (on a per share basis) is presented for the periods beginning June 1, 1996.
SMALL CAP INDEX FUND FOR THE SIX MONTHS ENDED FISCAL YEAR ENDED MAY 31, NOVEMBER 30, ------------------------------------------------------------------------- 1998 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- --------- PER SHARE DATA Net asset value at beginning of period .............................. $ 17.94 $ 16.18 $ 16.25 $ 12.49 $ 11.52 $ 11.28 --------- --------- --------- --------- --------- --------- Income from investment operations: Net investment income ............... 0.10 0.19 0.19 0.20 0.17 0.13 Net realized and unrealized gain (loss) on securities .............. (2.27) 3.17 0.93 4.04 0.97 0.58 --------- --------- --------- --------- --------- --------- Total income (loss) from investment operations ............. (2.17) 3.36 1.12 4.24 1.14 0.71 --------- --------- --------- --------- --------- --------- Distributions: Distributions from net investment income ............................ (0.10) (0.19) (0.19) (0.20) (0.17) (0.13) Distributions from net realized gain on securities ................ -- (1.41) (1.00) (0.28) -- (0.34) --------- --------- --------- --------- --------- --------- Total distributions ................. (0.10) (1.60) (1.19) (0.48) (0.17) (0.47) --------- --------- --------- --------- --------- --------- Net asset value at end of period ...... $ 15.67 $ 17.94 $ 16.18 $ 16.25 $ 12.49 $ 11.52 ========= ========= ========= ========= ========= ========= TOTAL RETURN .......................... (12.09)% 21.34% 7.51% 34.50% 9.98% 6.18% ========= ========= ========= ========= ========= ========= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .......................... 0.20% 0.39% 0.41% 0.41% 0.44% 0.47% Ratio of net investment income to average net assets .................. 0.64% 1.05% 1.34% 1.36% 1.44% 1.10% Portfolio turnover rate ............... 36% 36% 42% 31% 34% 16% Number of shares outstanding at end of period (000's) ............... 13,660 13,777 11,893 11,129 10,136 9,381 Net assets at end of period (000's) ... $ 214,103 $ 247,183 $ 192,459 $ 180,785 $ 126,567 $ 108,050 Average net assets during the period (000's) ...................... $ 216,147 $ 227,757 $ 178,368 $ 150,448 $ 120,298 $ 70,690 Average commission rate paid .......... $ 0.0078 $ 0.0162 $ 0.0297 n/a n/a n/a
INTERNATIONAL EQUITIES FUND FOR THE SIX MONTHS ENDED FISCAL YEAR ENDED MAY 31, NOVEMBER 30, ------------------------------------------------------------------------- 1998 1998 1997 1996 1995 1994 ------------ --------- --------- --------- --------- --------- PER SHARE DATA Net asset value at beginning of period .............................. $ 11.95 $ 11.44 $ 11.15 $ 10.42 $ 10.14 $ 8.99 --------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income ............... 0.14 0.23 0.20 0.17 0.15 0.11 Net realized and unrealized gain (loss) on securities and foreign currencies ................ (0.12) 0.85 0.63 0.97 0.34 1.17 --------- --------- --------- --------- --------- --------- Total income from investment operations ........................ 0.02 1.08 0.83 1.14 0.49 1.28 --------- --------- --------- --------- --------- --------- Distributions: Distributions from net investment income ............................ (0.13) (0.24) (0.19) (0.17) (0.15) (0.11) Distributions from net realized gain on securities ................ -- (0.33) (0.35) (0.24) (0.06) (0.02) --------- --------- --------- --------- --------- --------- Total distributions ................. (0.13) (0.57) (0.54) (0.41) (0.21) (0.13) --------- --------- --------- --------- --------- --------- Net asset value at end of period ...... $ 11.84 $ 11.95 $ 11.44 $ 11.15 $ 10.42 $ 10.14 ========= ========= ========= ========= ========= ========= TOTAL RETURN .......................... 0.23% 9.92% 7.74% 11.14% 4.92% 14.31% ========= ========= ========= ========= ========= ========= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .......................... 0.21% 0.40% 0.42% 0.42% 0.45% 0.47% Ratio of net investment income to average net assets .................. 1.04% 1.92% 1.75% 1.65% 1.47% 1.43% Portfolio turnover rate ............... 3% 9% 12% 20% 14% 7% Number of shares outstanding at end of period (000's) ............... 12,110 13,009 15,857 18,497 20,074 17,273 Net assets at end of period (000's) ... $ 143,427 $ 155,469 $ 181,437 $ 206,259 $ 209,091 $ 175,183 Average net assets during the period (000's) ...................... $ 143,621 $ 165,984 $ 191,117 $ 204,792 $ 199,235 $ 117,264 Average commission rate paid .......... $ 0.0258 $ 0.0332 $ 0.0236 n/a n/a n/a
SEE NOTES TO FINANCIAL STATEMENTS. =============================================================================== 86 FINANCIAL HIGHLIGHTS (Unaudited) continued =============================================================================== Per share data is for a share of capital stock outstanding throughout the period. Total return includes reinvestment of dividends on the reinvestment date. Total returns and ratios for periods of less than one year are not annualized. The average commission rate paid on investment equity securities (on a per share basis) is presented for the periods beginning June 1, 1996. GROWTH FUND
FOR THE SIX MONTHS ENDED FISCAL YEAR ENDED MAY 31, NOVEMBER 30, ------------------------------------------------------------- 1998 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- PER SHARE DATA Net asset value at beginning of period .............................. $ 22.08 $ 17.62 $ 16.49 $ 11.43 $ 9.87 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income ............. (0.07) (0.02) 0.02 0.11 0.04 Net realized and unrealized gain (loss) on securities ............ (0.66) 4.82 1.45 5.27 1.56 ---------- ---------- ---------- ---------- ---------- Total income (loss) from investment operations ............ (0.73) 4.80 1.47 5.38 1.60 ---------- ---------- ---------- ---------- ---------- Distributions: Distributions from net investment income ............................ -- (0.01) (0.01) (0.09) (0.04) Distributions from net realized gain on securities ................ -- (0.33) (0.33) (0.23) -- ---------- ---------- ---------- ---------- ---------- Total distributions ................. -- (0.34) (0.34) (0.32) (0.04) ---------- ---------- ---------- ---------- ---------- Net asset value at end of period ...... $ 21.35 $ 22.08 $ 17.62 $ 16.49 $ 11.43 ========== ========== ========== ========== ========== TOTAL RETURN .......................... (3.31)% 27.41% 9.00% 47.46% 16.25% ========== ========== ========== ========== ========== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .......................... 0.43% 0.84% 0.86% 0.83% 0.91% Ratio of net investment income to average net assets .................. (0.16)% (0.11)% 0.09% 0.89% 0.41% Portfolio turnover rate ............... 29% 43% 40% 36% 61% Number of shares outstanding at end of period (000's) ............... 52,006 49,832 42,422 25,826 8,800 Net assets at end of period (000's) ... $1,110,208 $1,100,137 $ 747,654 $ 425,787 $ 100,614 Average net assets during the period (000's) ...................... $1,072,354 $ 946,335 $ 588,056 $ 238,228 $ 42,232 Average commission rate paid .......... $ 0.0544 $ 0.0474 $ 0.0499 n/a n/a
GROWTH & INCOME FUND
FOR THE SIX MONTHS ENDED FISCAL YEAR ENDED MAY 31, NOVEMBER 30, ------------------------------------------------------------- 1998 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- PER SHARE DATA Net asset value at beginning of period .............................. $ 19.91 $ 16.87 $ 14.78 $ 11.09 $ 9.87 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income ............... 0.06 0.08 0.10 0.08 0.09 Net realized and unrealized gain (loss) on securities ......... (0.65) 3.25 2.38 3.77 1.22 ---------- ---------- ---------- ---------- ---------- Total income (loss) from investment operations ............. (0.59) 3.33 2.48 3.85 1.31 ---------- ---------- ---------- ---------- ---------- Distributions: Distributions from net investment income ............................ (0.04) (0.08) (0.10) (0.07) (0.09) Distributions from net realized gain on securities ................ -- (0.21) (0.29) (0.09) -- ---------- ---------- ---------- ---------- ---------- Total distributions ................. (0.04) (0.29) (0.39) (0.16) (0.09) ---------- ---------- ---------- ---------- ---------- Net asset value at end of period ...... $ 19.28 $ 19.91 $ 16.87 $ 14.78 $ 11.09 ========== ========== ========== ========== ========== TOTAL RETURN .......................... (2.97)% 19.87% 17.08% 34.85% 13.35% ========== ========== ========== ========== ========== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .......................... 0.40% 0.80% 0.81% 0.79% 0.86% Ratio of net investment income to average net assets .................. 0.19% 0.43% 0.70% 0.63% 0.93% Portfolio turnover rate ............... 67% 78% 45% 64% 97% Number of shares outstanding at end of period (000's) ................... 13,299 13,619 12,422 7,685 3,867 Net assets at end of period (000's) ... $ 256,354 $ 271,159 $ 209,545 $ 113,546 $ 42,867 Average net assets during the period (000's) ...................... $ 253,895 $ 252,647 $ 161,226 $ 75,158 $ 21,910 Average commission rate paid .......... $ 0.050 $ 0.0500 $ 0.0500 n/a n/a
SEE NOTES TO FINANCIAL STATEMENTS. =============================================================================== FINANCIAL HIGHLIGHTS (Unaudited) continued 87 =============================================================================== Per share data is for a share of capital stock outstanding throughout the period. Total return includes reinvestment of dividends on the reinvestment date. Total returns and ratios for periods of less than one year are not annualized. The average commission rate paid on investment equity securities (on a per share basis) is presented for the periods beginning June 1, 1996. SCIENCE & TECHNOLOGY FUND
FOR THE SIX MONTHS ENDED FISCAL YEAR ENDED MAY 31, NOVEMBER 30,------------------------------------------------------------------ 1998 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- PER SHARE DATA Net asset value at beginning of period .............................. $ 22.07 $ 19.88 $ 20.48 $ 14.43 $ 9.83 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income ............... (0.16) (0.09) -- -- 0.03 Net realized and unrealized gain (loss) on securities .............. 2.31 2.28 0.33 8.08 4.72 ---------- ---------- ---------- ---------- ---------- Total income (loss) from investment operations ............... 2.15 2.19 0.33 8.08 4.75 ---------- ---------- ---------- ---------- ---------- Distributions: Distributions from net investment income ............................ -- -- -- -- (0.02) Distributions from net realized gain on securities ................ -- -- (0.93) (2.03) (0.13) ---------- ---------- ---------- ---------- ---------- Total distributions ................. -- -- (0.93) (2.03) (0.15) ---------- ---------- ---------- ---------- ---------- Net asset value at end of period ...... $ 24.22 $ 22.07 $ 19.88 $ 20.48 $ 14.43 ========== ========== ========== ========== ========== TOTAL RETURN .......................... 9.74% 10.85% 1.81% 58.28% 48.61% ========== ========== ========== ========== ========== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .......................... 0.47% 0.95% 0.96% 0.94% 1.00% Ratio of net investment income to average net assets .................. (0.29)% (0.46)% (0.29)% (0.07)% 0.36% Portfolio turnover rate ............... 60% 128% 122% 116% 121% Number of shares outstanding at end of period (000's) ................... 47,651 46,355 40,484 27,696 11,550 Total net assets at end of period (000's) ............... $1,154,283 $1,023,141 $ 804,982 $ 567,187 $ 166,683 Average net assets during the period (000's) ...................... $1,007,553 $ 949,947 $ 664,608 $ 363,087 $ 64,974 Average commission rate paid .......... $ 0.0455 $ 0.0455 $ 0.0393 n/a n/a
SOCIAL AWARENESS FUND
FOR THE SIX MONTHS ENDED FISCAL YEAR ENDED MAY 31, NOVEMBER 30,----------------------------------------------------------------------------- 1998 1998 1997 1996 1995 1994 ------------ --------- --------- --------- --------- --------- PER SHARE DATA Net asset value at beginning of period .............................. $ 22.16 $ 17.90 $ 15.49 $ 13.02 $ 11.98 $ 12.12 --------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income ............... 0.11 0.23 0.24 0.26 0.27 0.26 Net realized and unrealized gain (loss) on securities .............. 1.44 5.07 4.19 3.37 1.75 (0.02) --------- --------- --------- --------- --------- --------- Total income from investment operations .......................... 1.55 5.30 4.43 3.63 2.02 0.24 --------- --------- --------- --------- --------- --------- Distributions: Distributions from net investment income ............................ (0.11) (0.23) (0.24) (0.25) (0.27) (0.26) Distributions from net realized gain on securities ................ -- (0.81) (1.78) (0.91) (0.71) (0.12) --------- --------- --------- --------- --------- --------- Total distributions ................. (0.11) (1.04) (2.02) (1.16) (0.98) (0.38) --------- --------- --------- --------- --------- --------- Net asset value at end of period ...... $ 23.60 $ 22.16 $ 17.90 $ 15.49 $ 13.02 $ 11.98 ========= ========= ========- ========= ========= ========= TOTAL RETURN .......................... 7.02% 30.34% 30.48% 28.85% 18.19% 1.97% ========= ========= ========- ========= ========= ========= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .......................... 0.28% 0.54% 0.56% 0.56% 0.58% 0.60% Ratio of net investment income to average net assets .................. 0.52% 1.17% 1.53% 1.80% 2.22% 2.19% Portfolio turnover rate ............... 45% 120% 109% 117% 148% 83% Number of shares outstanding at end of period (000's) ................... 17,167 15,080 8,677 5,220 4,143 3,817 Total net assets at end of period (000's) ............... $405,191 $334,167 $155,349 $ 80,887 $ 53,927 $ 45,729 Average net assets during the period (000's) ...................... $355,436 $240,782 $106,139 $ 66,888 $ 47,942 $ 41,002 Average commission rate paid .......... $ 0.0353 $ 0.0431 $ 0.0400 n/a n/a n/a
SEE NOTES TO FINANCIAL STATEMENTS. =============================================================================== 88 FINANCIAL HIGHLIGHTS (Unaudited) continued =============================================================================== Per share data is for a share of capital stock outstanding throughout the period. Total return includes reinvestment of dividends on the reinvestment date. Total returns and ratios for periods of less than one year are not annualized. The average commission rate paid on investment equity securities (on a per share basis) is presented for the periods beginning June 1, 1996. ASSET ALLOCATION FUND
FOR THE SIX MONTHS ENDED FISCAL YEAR ENDED MAY 31, NOVEMBER 30, ------------------------------------------------------------------------- 1998 1998 1997 1996 1995 1994 ------------ --------- --------- --------- --------- --------- PER SHARE DATA Net asset value at beginning of period .............................. $ 14.02 $ 12.57 $ 12.55 $ 11.24 $ 10.84 $ 11.18 --------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income ............... 0.20 0.41 0.77 0.44 0.44 0.37 Net realized and unrealized gain (loss) on securities .............. 0.49 2.24 1.44 1.53 0.82 (0.15) --------- --------- --------- --------- --------- --------- Total income from investment operations .......................... 0.69 2.65 2.21 1.97 1.26 0.22 --------- --------- --------- --------- --------- --------- Distributions: Distributions from net investment income ............................ (0.20) (0.41) (0.78) (0.44) (0.44) (0.37) Distributions from net realized gain on securities ................ -- (0.79) (1.41) (0.22) (0.42) (0.19) --------- --------- --------- --------- --------- --------- Total distributions ................. (0.20) (1.20) (2.19) (0.66) (0.86) (0.56) --------- --------- --------- --------- --------- --------- Net asset value at end of period ...... $ 14.51 $ 14.02 $ 12.57 $ 12.55 $ 11.24 $ 10.84 ========= ========= ========- ========= ========= ========= TOTAL RETURN .......................... 4.98% 21.94% 15.89% 17.90% 12.43% 1.86% ========= ========= ========- ========= ========= ========= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .......................... 0.28% 0.54% 0.57% 0.57% 0.58% 0.59% Ratio of net investment income to average net assets .................. 1.45% 3.02% 3.26% 3.62% 4.03% 3.24% Portfolio turnover rate ............... 42% 24% 103% 119% 133% 76% Number of shares outstanding at end of period (000's) ................... 15,079 14,269 14,107 15,142 16,319 17,956 Total net assets at end of period (000's) ............... $218,786 $200,099 $177,347 $190,024 $183,393 $194,576 Average net assets during the period (000's) ...................... $204,483 $188,184 $179,615 $187,576 $186,487 $185,036 Average commission rate paid .......... $ 0.0359 $ 0.0205 $ 0.0401 n/a n/a n/a
CAPITAL CONSERVATION FUND
FOR THE SIX MONTHS ENDED FISCAL YEAR ENDED MAY 31, NOVEMBER 30, ------------------------------------------------------------------------- 1998 1998 1997 1996 1995 1994 ------------ --------- --------- --------- --------- --------- PER SHARE DATA Net asset value at beginning of period .............................. $ 9.68 $ 9.31 $ 9.23 $ 9.52 $ 9.13 $ 9.87 --------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income ............... 0.31 0.61 0.62 0.62 0.63 0.61 Net realized and unrealized gain (loss) on securities .............. (0.05) 0.37 0.08 (0.29) 0.39 (0.69) --------- --------- --------- --------- --------- --------- Total income (loss) from 0.26 0.98 0.70 0.33 1.02 (0.08) investment operations ............... --------- --------- --------- --------- --------- --------- Distributions: Distributions from net investment income ............................ (0.30) (0.61) (0.62) (0.62) (0.63) (0.61) Distributions from net realized gain on securities ................ -- -- -- -- -- (0.05) --------- --------- --------- --------- --------- --------- Total distributions ................. (0.30) (0.61) (0.62) (0.62) (0.63) (0.66) --------- --------- --------- --------- --------- --------- Net asset value at end of period ...... $ 9.64 $ 9.68 $ 9.31 $ 9.23 $ 9.52 $ 9.13 ========= ========= ========- ========= ========= ========= TOTAL RETURN .......................... 2.65% 10.76% 7.75% 3.41% 11.80% (1.13)% ========= ========= ========- ========= ========= ========= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .......................... 0.28% 0.54% 0.57% 0.57% 0.58% 0.59% Ratio of net investment income to average net assets .................. 3.16% 6.32% 6.59% 6.47% 6.88% 6.24% Portfolio turnover rate ............... 30% 14% 45% 80% 100% 55% Number of shares outstanding at end of period (000's) ................... 6,868 6,577 7,168 7,604 6,935 6,712 Total net assets at end of period (000's) ............... $ 66,179 $ 63,654 $ 66,747 $ 70,212 $ 66,031 $ 61,305 Average net assets during the period (000's) ...................... $ 65,243 $ 66,996 $ 69,352 $ 70,271 $ 61,568 $ 59,210
SEE NOTES TO FINANCIAL STATEMENTS. =============================================================================== FINANCIAL HIGHLIGHTS (Unaudited) continued 89 =============================================================================== Per share data is for a share of capital stock outstanding throughout the period. Total return includes reinvestment of dividends on the reinvestment date. Total returns and ratios for periods of less than one year are not annualized. The average commission rate paid on investment equity securities (on a per share basis) is presented for the periods beginning June 1, 1996. GOVERNMENT SECURITIES FUND
FOR THE SIX MONTHS ENDED FISCAL YEAR ENDED MAY 31, NOVEMBER 30,----------------------------------------------------------------------------- 1998 1998 1997 1996 1995 1994 ------------ --------- --------- --------- --------- --------- PER SHARE DATA Net asset value at beginning of period .............................. $ 10.09 $ 9.67 $ 9.61 $ 9.89 $ 9.55 $ 10.30 --------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income ............... 0.28 0.58 0.59 0.61 0.60 0.55 Net realized and unrealized gain (loss) on securities .............. 0.27 0.42 0.06 (0.28) 0.35 (0.59) --------- --------- --------- --------- --------- --------- Total income (loss) from investment operations ............... 0.55 1.00 0.65 0.33 0.95 (0.04) --------- --------- --------- --------- --------- --------- Distributions: Distributions from net investment income ............................ (0.28) (0.58) (0.59) (0.61) (0.61) (0.55) Distributions from net realized gain on securities ................ -- -- -- -- -- (0.16) --------- --------- --------- --------- --------- --------- Total distributions ................. (0.28) (0.58) (0.59) (0.61) (0.61) (0.71) --------- --------- --------- --------- --------- --------- Net asset value at end of period ...... $ 10.36 $ 10.09 $ 9.67 $ 9.61 $ 9.89 $ 9.55 ========= ========= ========- ========= ========= ========= TOTAL RETURN .......................... 5.49% 10.60% 6.94% 3.32% 10.43% (0.66)% ========= ========= ========- ========= ========= ========= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .......................... 0.28% 0.54% 0.56% 0.56% 0.58% 0.59% Ratio of net investment income to average net assets .................. 2.74% 5.82% 6.11% 6.21% 6.36% 5.44% Portfolio turnover rate ............... 14% 24% 38% 36% 229% 85% Number of shares outstanding at end of period (000's) ................... 10,758 9,129 8,672 8,164 5,478 4,544 Total net assets at end of period (000's) ............... $ 111,428 $ 92,120 $ 83,827 $ 78,423 $ 54,174 $ 43,401 Average net assets during the period (000's) ...................... $ 102,045 $ 87,574 $ 83,293 $ 68,017 $ 45,200 $ 41,596
INTERNATIONAL GOVERNMENT BOND FUND
FOR THE SIX MONTHS ENDED FISCAL YEAR ENDED MAY 31, NOVEMBER 30,----------------------------------------------------------------------------- 1998 1998 1997 1996 1995 1994 ------------ --------- --------- --------- --------- --------- PER SHARE DATA Net asset value at beginning of period .............................. $ 11.42 $ 11.33 $ 11.79 $ 12.72 $ 10.97 $ 11.16 --------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income ............... (0.05) 0.56 0.63 0.65 0.65 0.62 Net realized and unrealized gain (loss) on securities .............. 1.31 (0.26) (0.49) (0.89) 1.80 (0.20) --------- --------- --------- --------- --------- --------- Total income (loss) from investment operations ............... 1.26 0.30 0.14 (0.24) 2.45 0.42 --------- --------- --------- --------- --------- --------- Distributions: Distributions from net investment income ............................ (0.18) (0.20) (0.58) (0.68) (0.70) (0.60) Distributions from net realized gain on securities ................ -- (0.01) (0.02) (0.01) -- (0.01) --------- --------- --------- --------- --------- --------- Total distributions ................. (0.18) (0.21) (0.60) (0.69) (0.70) (0.61) --------- --------- --------- --------- --------- --------- Net asset value at end of period ...... $ 12.50 $ 11.42 $ 11.33 $ 11.79 $ 12.72 $ 10.97 ========= ========= ========- ========= ========= ========= TOTAL RETURN .......................... 11.05% 2.65% 1.13% (1.91)% 23.23% 3.87% ========= ========= ========- ========= ========= ========= RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .......................... 0.28% 0.55% 0.56% 0.56% 0.59% 0.48% Ratio of net investment income to average net assets .................. 2.20% 4.70% 5.13% 5.45% 5.83% 5.87% Portfolio turnover rate ............... 9% 17% 4% 11% 6% 3% Number of shares outstanding at end of period (000's) ................... 13,383 13,646 15,680 12,073 6,111 3,741 Total net assets at end of period (000's) ............... $ 167,312 $ 155,783 $ 177,709 $ 142,383 $ 77,734 $ 41,028 Average net assets during the period (000's) ...................... $ 158,516 $ 168,439 $ 166,147 $ 114,693 $ 51,451 $ 33,561
SEE NOTES TO FINANCIAL STATEMENTS. =============================================================================== 90 FINANCIAL HIGHLIGHTS (Unaudited) continued =============================================================================== Per share data is for a share of capital stock outstanding throughout the period. Total return includes reinvestment of dividends on the reinvestment date. Total returns and ratios for periods of less than one year are not annualized. MONEY MARKET FUND
FOR THE SIX MONTHS ENDED FISCAL YEAR ENDED MAY 31, NOVEMBER 30,----------------------------------------------------------------------------- 1998 1998 1997 1996 1995 1994 ------------ --------- --------- --------- --------- --------- PER SHARE DATA Net asset value at beginning of period .............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 --------- --------- --------- -------- -------- -------- Income from investment operations: Net investment income ............... 0.03 0.05 0.05 0.05 0.05 0.03 --------- --------- --------- -------- -------- -------- Distributions: Distributions from net investment income ............................ (0.03) (0.05) (0.05) (0.05) (0.05) (0.03) --------- --------- --------- -------- -------- -------- Net asset value at end of period ...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ========= ========= ========= ======== ======== ======== TOTAL RETURN .......................... 2.53% 5.25% 5.02% 5.26% 4.90% 2.83% ========= ========= ========= ======== ======== ======== RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets .......................... 0.28% 0.54% 0.57% 0.57% 0.57% 0.58% Ratio of net investment income to average net assets .................. 2.54% 5.14% 4.95% 5.14% 4.75% 2.78% Number of shares outstanding at end of period (000's) ................... 229,324 190,975 128,125 83,618 82,255 50,533 Total net assets at end of period (000's) ............... $ 229,324 $ 190,975 $ 128,125 $ 83,618 $ 82,255 $ 50,533 Average net assets during the period (000's) ...................... $ 212,761 $ 150,625 $ 113,882 $ 84,271 $ 67,021 $ 46,222
=============================================================================== SUPPLEMENTAL INFORMATION (Unaudited) =============================================================================== ANNUAL MEETING OF SHAREHOLDERS PROXY VOTING RESULTS The Annual Meeting of Shareholders of American General Series Portfolio Company was held on November 10, 1998. Shareholders of the Funds voted on proposals to elect twelve members of the Board of Directors and to ratify the selection of Ernst & Young LLP as independent auditors for the Series for the fiscal year ending on May 31, 1999. The results of the proposals voted on by shareholders of each Fund were as follows: ASSET ALLOCATION FUND ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING Dr. Judith L. Craven 14,649,479 23,463 14,672,942 Dr. Timothy J. Ebner 14,649,479 23,463 14,672,942 Judge Gustavo E. Gonzales, Jr. 14,648,183 24,759 14,672,942 John A. Graf 14,649,479 23,463 14,672,942 Dr. Norman Hackerman 14,530,149 142,793 14,672,942 Dr. John Wm. Lancaster 14,626,880 46,062 14,672,942 Ben H. Love 14,648,183 24,759 14,672,942 Dr. John E. Maupin, Jr. 14,648,183 24,759 14,672,942 Dr. F. Robert Paulsen 14,626,880 46,062 14,672,942 Craig R. Rodby 14,649,479 23,463 14,672,942 Dr. R. Miller Upton 14,530,149 142,793 14,672,942 Thomas L. West 14,649,479 23,463 14,672,942
Ratify the selection of Ernst & Young LLP as independent auditors for the Company for the fiscal year ending on May 31, 1999:
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING 14,616,084 49,085 7,773 14,672,942
SEE NOTES TO FINANCIAL STATEMENTS. =============================================================================== SUPPLEMENTAL INFORMATION (Unaudited) continued 91 =============================================================================== CAPITAL CONSERVATION FUND ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING Dr. Judith L. Craven 6,649,981 159,645 6,809,626 Dr. Timothy J. Ebner 6,649,981 159,645 6,809,626 Judge Gustavo E. Gonzales, Jr. 6,649,981 159,645 6,809,626 John A. Graf 6,649,981 159,645 6,809,626 Dr. Norman Hackerman 6,374,777 434,849 6,809,626 Dr. John Wm. Lancaster 6,374,777 434,849 6,809,626 Ben H. Love 6,649,981 159,645 6,809,626 Dr. John E. Maupin, Jr. 6,649,981 159,645 6,809,626 Dr. F. Robert Paulsen 6,374,777 434,849 6,809,626 Craig R. Rodby 6,649,981 159,645 6,809,626 Dr. R. Miller Upton 6,374,777 434,849 6,809,626 Thomas L. West 6,649,981 159,645 6,809,626
Ratify the selection of Ernst & Young LLP as independent auditors for the Company for the fiscal year ending on May 31, 1999:
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDINg 6,192,488 503,316 113,822 6,809,626
GOVERNMENT SECURITIES FUND ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING Dr. Judith L. Craven 10,078,999 191,780 10,270,779 Dr. Timothy J. Ebner 10,078,999 191,780 10,270,779 Judge Gustavo E. Gonzales, Jr. 10,078,999 191,780 10,270,779 John A. Graf 10,078,999 191,780 10,270,779 Dr. Norman Hackerman 9,874,674 396,105 10,270,779 Dr. John Wm. Lancaster 10,078,999 191,780 10,270,779 Ben H. Love 10,078,999 191,780 10,270,779 Dr. John E. Maupin, Jr. 10,078,999 191,780 10,270,779 Dr. F. Robert Paulsen 10,078,999 191,780 10,270,779 Craig R. Rodby 10,078,999 191,780 10,270,779 Dr. R. Miller Upton 9,939,504 331,275 10,270,779 Thomas L. West 10,078,999 191,780 10,270,779
Ratify the selection of Ernst & Young LLP as independent auditors for the Company for the fiscal year ending on May 31, 1999:
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING 8,353,780 1,767,971 149,028 10,270,779
GROWTH FUND ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING Dr. Judith L. Craven 50,464,412 1,104,476 51,568,888 Dr. Timothy J. Ebner 50,875,139 693,749 51,568,888 Judge Gustavo E. Gonzales, Jr. 50,823,327 745,561 51,568,888 John A. Graf 50,803,151 765,737 51,568,888 Dr. Norman Hackerman 50,510,267 1,058,621 51,568,888 Dr. John Wm. Lancaster 50,495,968 1,072,920 51,568,888 Ben H. Love 50,647,834 921,054 51,568,888 Dr. John E. Maupin, Jr. 50,875,139 693,749 51,568,888 Dr. F. Robert Paulsen 50,527,525 1,041,363 51,568,888 Craig R. Rodby 50,803,151 765,737 51,568,888 Dr. R. Miller Upton 50,503,364 1,065,524 51,568,888 Thomas L. West 50,809,561 759,327 51,568,888
Ratify the selection of Ernst & Young LLP as independent auditors for the Company for the fiscal year ending on May 31, 1999:
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING 49,862,302 502,017 1,204,569 51,568,888
GROWTH & INCOME FUND ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING Dr. Judith L. Craven 13,099,393 333,647 13,433,040 Dr. Timothy J. Ebner 13,376,038 57,002 13,433,040 Judge Gustavo E. Gonzales, Jr. 13,366,494 66,546 13,433,040 John A. Graf 13,362,571 70,469 13,433,040 Dr. Norman Hackerman 13,309,328 123,712 13,433,040 Dr. John Wm. Lancaster 13,315,604 117,436 13,433,040 Ben H. Love 13,378,652 54,388 13,433,040 Dr. John E. Maupin, Jr. 13,376,038 57,002 13,433,040 Dr. F. Robert Paulsen 13,315,604 117,436 13,433,040 Craig R. Rodby 13,362,571 70,469 13,433,040 Dr. R. Miller Upton 13,318,219 114,821 13,433,040 Thomas L. West 13,362,571 70,469 13,433,040
Ratify the selection of Ernst & Young LLP as independent auditors for the Company for the fiscal year ending on May 31, 1999:
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING 13,137,961 63,147 231,932 13,433,040
=============================================================================== 92 SUPPLEMENTAL INFORMATION (Unaudited) continued =============================================================================== INTERNATIONAL EQUITIES FUND ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING Dr. Judith L. Craven 12,173,665 183,750 12,357,415 Dr. Timothy J. Ebner 12,198,915 158,500 12,357,415 Judge Gustavo E. Gonzales, Jr. 12,198,915 158,500 12,357,415 John A. Graf 12,198,915 158,500 12,357,415 Dr. Norman Hackerman 11,324,474 1,032,941 12,357,415 Dr. John Wm. Lancaster 11,324,474 1,032,941 12,357,415 Ben H. Love 11,988,097 369,318 12,357,415 Dr. John E. Maupin, Jr. 12,198,915 158,500 12,357,415 Dr. F. Robert Paulsen 11,324,474 1,032,941 12,357,415 Craig R. Rodby 12,198,915 158,500 12,357,415 Dr. R. Miller Upton 11,324,474 1,032,941 12,357,415 Thomas L. West 12,198,915 158,500 12,357,415
Ratify the selection of Ernst & Young LLP as independent auditors for the Company for the fiscal year ending on May 31, 1999:
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING 12,103,715 104,986 148,714 12,357,415
INTERNATIONAL GOVERNMENT BOND FUND ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING Dr. Judith L. Craven 12,843,749 120,509 12,964,258 Dr. Timothy J. Ebner 12,840,310 123,948 12,964,258 Judge Gustavo E. Gonzales, Jr. 12,840,310 123,948 12,964,258 John A. Graf 12,776,106 188,152 12,964,258 Dr. Norman Hackerman 12,383,880 580,378 12,964,258 Dr. John Wm. Lancaster 12,425,536 538,722 12,964,258 Ben H. Love 12,755,215 209,043 12,964,258 Dr. John E. Maupin, Jr. 12,840,310 123,948 12,964,258 Dr. F. Robert Paulsen 12,480,949 483,309 12,964,258 Craig R. Rodby 12,776,106 188,152 12,964,258 Dr. R. Miller Upton 12,473,051 491,207 12,964,258 Thomas L. West 12,822,093 142,165 12,964,258
Ratify the selection of Ernst & Young LLP as independent auditors for the Company for the fiscal year ending on May 31, 1999:
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING 12,561,204 240,763 162,291 12,964,258
MIDCAP INDEX FUND ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING Dr. Judith L. Craven 30,469,705 746,102 31,215,807 Dr. Timothy J. Ebner 30,579,048 636,759 31,215,807 Judge Gustavo E. Gonzales, Jr. 30,421,619 794,188 31,215,807 John A. Graf 30,570,166 645,641 31,215,807 Dr. Norman Hackerman 30,148,110 1,067,697 31,215,807 Dr. John Wm. Lancaster 30,146,885 1,068,922 31,215,807 Ben H. Love 30,552,095 663,712 31,215,807 Dr. John E. Maupin, Jr. 30,554,852 660,955 31,215,807 Dr. F. Robert Paulsen 30,304,313 911,494 31,215,807 Craig R. Rodby 30,579,048 636,759 31,215,807 Dr. R. Miller Upton 30,015,490 1,200,317 31,215,807 Thomas L. West 30,579,048 636,759 31,215,807
Ratify the selection of Ernst & Young LLP as independent auditors for the Company for the fiscal year ending on May 31, 1999:
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING 30,405,080 522,822 287,905 31,215,807
MONEY MARKET FUND ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING Dr. Judith L. Craven 218,186,667 10,266,408 228,453,075 Dr. Timothy J. Ebner 218,186,667 10,266,408 228,453,075 Judge Gustavo E. Gonzales, Jr. 218,186,667 10,266,408 228,453,075 John A. Graf 218,186,667 10,266,408 228,453,075 Dr. Norman Hackerman 218,186,667 10,266,408 228,453,075 Dr. John Wm. Lancaster 218,186,667 10,266,408 228,453,075 Ben H. Love 218,186,667 10,266,408 228,453,075 Dr. John E. Maupin, Jr. 218,186,667 10,266,408 228,453,075 Dr. F. Robert Paulsen 218,186,667 10,266,408 228,453,075 Craig R. Rodby 218,186,667 10,266,408 228,453,075 Dr. R. Miller Upton 218,186,667 10,266,408 228,453,075 Thomas L. West 218,186,667 10,266,408 228,453,075
Ratify the selection of Ernst & Young LLP as independent auditors for the Company for the fiscal year ending on May 31, 1999:
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING 223,392,848 98,960 4,961,267 228,453,075
=============================================================================== SUPPLEMENTAL INFORMATION (Unaudited) continued 93 =============================================================================== SCIENCE & TECHNOLOGY FUND ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING Dr. Judith L. Craven 46,066,407 1,141,485 47,207,892 Dr. Timothy J. Ebner 46,495,443 712,449 47,207,892 Judge Gustavo E. Gonzales, Jr. 46,277,221 930,671 47,207,892 John A. Graf 46,371,479 836,413 47,207,892 Dr. Norman Hackerman 46,059,997 1,147,895 47,207,892 Dr. John Wm. Lancaster 45,993,176 1,214,716 47,207,892 Ben H. Love 46,308,345 899,547 47,207,892 Dr. John E. Maupin, Jr. 46,492,678 715,214 47,207,892 Dr. F. Robert Paulsen 46,188,109 1,019,783 47,207,892 Craig R. Rodby 46,377,009 830,883 47,207,892 Dr. R. Miller Upton 45,898,244 1,309,648 47,207,892 Thomas L. West 46,376,087 831,805 47,207,892
Ratify the selection of Ernst & Young LLP as independent auditors for the Company for the fiscal year ending on May 31, 1999:
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING 45,188,726 936,875 1,082,292 47,207,892
SMALL CAP INDEX FUND ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING Dr. Judith L. Craven 13,256,839 242,035 13,498,874 Dr. Timothy J. Ebner 13,256,839 242,035 13,498,874 Judge Gustavo E. Gonzales, Jr. 13,256,839 242,035 13,498,874 John A. Graf 13,249,461 249,413 13,498,874 Dr. Norman Hackerman 13,040,761 458,113 13,498,874 Dr. John Wm. Lancaster 13,032,328 466,546 13,498,874 Ben H. Love 13,115,993 382,881 13,498,874 Dr. John E. Maupin, Jr. 13,256,839 242,035 13,498,874 Dr. F. Robert Paulsen 13,040,761 458,113 13,498,874 Craig R. Rodby 13,256,839 242,035 13,498,874 Dr. R. Miller Upton 13,040,761 458,113 13,498,874 Thomas L. West 13,256,839 242,035 13,498,874
Ratify the selection of Ernst & Young LLP as independent auditors for the Company for the fiscal year ending on May 31, 1999:
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING 13,339,318 36,496 123,060 13,498,874
SOCIAL AWARENESS FUND ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING Dr. Judith L. Craven 16,227,886 222,643 16,450,529 Dr. Timothy J. Ebner 16,227,886 222,643 16,450,529 Judge Gustavo E. Gonzales, Jr. 16,022,091 428,438 16,450,529 John A. Graf 16,201,085 249,444 16,450,529 Dr. Norman Hackerman 16,189,783 260,746 16,450,529 Dr. John Wm. Lancaster 16,198,502 252,027 16,450,529 Ben H. Love 15,992,707 457,822 16,450,529 Dr. John E. Maupin, Jr. 16,227,886 222,643 16,450,529 Dr. F. Robert Paulsen 16,211,579 238,950 16,450,529 Craig R. Rodby 16,201,085 249,444 16,450,529 Dr. R. Miller Upton 16,189,783 260,746 16,450,529 Thomas L. West 16,201,085 249,444 16,450,529
Ratify the selection of Ernst & Young LLP as independent auditors for the Company for the fiscal year ending on May 31, 1999:
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING 15,969,078 336,629 144,822 16,450,529
STOCK INDEX FUND ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING Dr. Judith L. Craven 105,248,388 1,493,854 106,742,242 Dr. Timothy J. Ebner 105,651,394 1,090,848 106,742,242 Judge Gustavo E. Gonzales, Jr. 105,392,900 1,349,342 106,742,242 John A. Graf 105,373,564 1,368,678 106,742,242 Dr. Norman Hackerman 104,560,429 2,181,813 106,742,242 Dr. John Wm. Lancaster 105,034,673 1,707,569 106,742,242 Ben H. Love 105,087,593 1,654,649 106,742,242 Dr. John E. Maupin, Jr. 105,693,119 1,049,123 106,742,242 Dr. F. Robert Paulsen 105,134,407 1,607,835 106,742,242 Craig R. Rodby 105,488,563 1,253,679 106,742,242 Dr. R. Miller Upton 104,623,526 2,118,716 106,742,242 Thomas L. West 105,370,511 1,371,731 106,742,242
Ratify the selection of Ernst & Young LLP as independent auditors for the Company for the fiscal year ending on May 31, 1999:
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING 104,182,327 615,322 1,944,593 106,742,242
=============================================================================== AMERICAN GENERAL SERIES PORTFOLIO COMPANY =============================================================================== BOARD OF DIRECTORS Judith L. Craven Timothy J. Ebner Gustavo E. Gonzales, Jr. John A. Graf Norman Hackerman John W. Lancaster Ben H. Love John E. Maupin, Jr. F. Robert Paulsen Craig R. Rodby R. Miller Upton Thomas L. West, Jr. DISTRIBUTOR The Variable Annuity Marketing Company (VAMCO) 2929 Allen Parkway Houston, Texas 77019 CUSTODIAN State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 INVESTMENT ADVISER The Variable Annuity Life Insurance Company (VALIC) 2929 Allen Parkway Houston, Texas 77019 INVESTMENT SUB-ADVISERS Bankers Trust Company 1 Bankers Trust Plaza New York, New York 10006 T. Rowe Price Associates, Inc. 100 East Pratt Street Baltimore, Maryland 21202 Value Line, Inc. 220 East 42nd Street New York, New York 10017-5891 INDEPENDENT AUDITORS Ernst & Young LLP 1221 McKinney Houston, Texas 77010 SHAREHOLDER SERVICE AGENT The Variable Annuity Life Insurance Company (VALIC) 2929 Allen Parkway Houston, Texas 77019 OFFICERS Thomas L. West, Jr., Chairman John A. Graf, President Craig R. Rodby, Executive Vice President Michael G. Atnip, Executive Vice President John E. Arant, Executive Vice President Joe C. Osborne, Executive Vice President Peter V. Tuters, Senior Vice President Brent C. Nelson, Vice President Maruti D. More, Vice President - Investments Teresa S. Moro, Vice President and Investment Officer Leon A. Olver, Vice President and Investment Officer William Trimbur, Jr., Vice President and Investment Officer Cynthia A. Toles, Vice President and Secretary Gregory R. Seward, Treasurer Kathryn A. Pearce, Controller Nori L. Gabert, Vice President and Assistant Secretary Jaime M. Sepulveda, Assistant Treasurer Earl E. Allen, Jr., Assistant Treasurer Donna L. Hathaway, Assistant Controller Heriberto Valdez, Assistant Controller Cynthia A. Gibbons, Assistant Vice President This report is for the information of the shareholders and variable contract owners participating in the American General Series Portfolio Company. It is authorized for distribution to other persons only when preceded or accompanied by an effective prospectus which contains information on how to purchase shares and other pertinent information. If you would like further information about this material or products issued by VALIC or American General Life Insurance Company, please contact your account representative. "Standard & Poor's(R)", "Standard & Poor's MidCap 400 Index" and "S&P 500(R)" are trademarks of Standard & Poor's Corporation. The Stock Index Fund and MidCap Index Fund are not sponsored, endorsed, sold or promoted by S&P and S&P makes no representation regarding the advisability of investing in the funds. The Russell 2000(R) Index is a trademark / service mark of the Frank Russell Company. Russell(TM) is a trademark of the Frank Russell Company. [VALIC LOGO] AMERICAN GENERAL SERIES PORTFOLIO COMPANY Bulk Rate U.S. Postage P.O. Box 3206 PAID Houston, Texas 77253-3206 Permit No. 6748 Houston, Texas [BACK COVER] [VALIC LOGO] VA 4873 VER 11/98 Recycled Paper PART C OTHER INFORMATION ITEM 15. INDEMNIFICATION FRANKLIN LIFE VARIABLE ANNUITY FUND A ("FUND A") Fund A's Rules and Regulations provide as follows: ARTICLE V. INDEMNIFICATION The Fund shall indemnify each of the members of its Board of Managers and officers (and his heirs, executors and administrators) against all liabilities and expenses, including but not limited to amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, reasonably incurred by him in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or legislative body, in which he may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while in office or thereafter, by reason of his being or having been such a member or officer, except with respect to any matter as to which he shall have been finally adjudicated in any such action, suit or other proceeding not to have acted in good faith in the reasonable belief that his action was in the best interests of the Fund; and except that no member of the Board of Managers or officer shall be indemnified hereunder or by any provision or arrangement against any liability to the Fund or its Contract Owners to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Expenses, including counsel fees so incurred by any such member or officer (but excluding amounts paid in satisfaction of judgments, in compromise or as fines or penalties) may be paid from time to time by the Fund in advance of the final disposition of any such action, suit or proceeding upon receipt of an undertaking by or on behalf of such member or officer, secured by an appropriate deposit or a surety bond approved by independent legal counsel for the Fund, to repay the amounts so paid to the Fund if it is ultimately determined that indemnification of such expenses is not authorized under this Article V. Any indemnification under this Article V shall be made only upon (1) a final decision on the merits by a court or other body of competent jurisdiction before which such proceeding is brought that the member of the Board of Managers or officer to be indemnified is not liable by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office; or (2) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the member of the Board of Managers or officer to be indemnified was not liable by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office by (a) the vote of a majority of a quorum of directors who are neither 'interested persons' (as defined in Section 2(a)(19) of the Investment Company Act of 1940) of the Fund or the Company nor parties to the proceeding or (b) independent legal counsel in a written opinion. Approval of indemnification by the Board of Managers pursuant to clause 2(a) or clause 2(b) above shall not prevent the recovery from any member of the Board of Managers or officer of any amount paid to him in accordance with such clause if such member of the Board of Managers or officer is subsequently adjudicated by a court of competent jurisdiction (i) not to have acted in good faith in the reasonable belief that his actions was in the best interests of the Fund or (ii) to have been liable to the Fund or its Contract Owners by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. The right of indemnification hereby provided shall not be exclusive of or affect any other rights to which any member of the Board of Managers or officer may be entitled, provided, however, that no such indemnification shall be inconsistent with the provisions of Section 17(h) of the Investment Company Act of 1940. Nothing contained in this Article shall affect any rights to indemnification to which personnel other than members of the Board of Managers and officers may be entitled by contract or otherwise under law, provided, however, that no such indemnification shall be effected in violation of the Investment Company Act of 1940. Notwithstanding any other provisions of this Article, in the event that a claim for indemnification with respect to liabilities arising under the Securities Act of 1933 is asserted by any member of the Board of Managers or officer of the Fund, the Fund will, unless in the opinion of its counsel the matter has been settled by controlling precedent and such member or officer is not liable by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against the public policy as expressed in the Securities Act of 1933 and the Investment Company Act of 1940, and whether such member or officer is liable by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office, and the party claiming such indemnification and the Fund will be governed by the final adjudication of such judgment. Any adjudication that such indemnification is against such public policy, or that such member or officer is so liable, shall preclude any indemnification by the Fund. By contract or other agreement with the Fund, the Company may agree to bear or guarantee the cost of expense of the indemnification provided in this Article, or any part of it. The Franklin Life Insurance Company (referred to as "the Company" in the immediately preceding quoted paragraph) has agreed to bear the expense of such indemnification pursuant to the Administration Agreement dated June 30, 1971, between The Franklin Life Insurance Company and Registrant. * * * Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to members of the Board of Managers of Fund A pursuant to the foregoing provisions or otherwise, Fund A has been advised that in the opinion of the SEC 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 payment by Fund A of expenses incurred or paid by a member of the Board of Managers in the successful defense of any action, suit or proceeding) is asserted by such member of the Board of Managers in connection with the securities being registered, Fund A 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 16 EXHIBITS (1) (a) Resolution of The Franklin Life Insurance Company's Board of Directors creating Franklin Life Variable Annuity Fund A.*** (b) Articles of Incorporation for American General Series Portfolio Company.* (c) Articles Supplementary to the Articles of Incorporation for American General Series Portfolio Company, effective April 10, 1990.* (d) Articles Supplementary to the Articles of Incorporation for American General Series Portfolio Company, effective September 28, 1990.* (e) Amendment One to the Articles of Incorporation for American General Series Portfolio Company, effective October 1, 1991.* (f) Amendment Two to the Articles of Incorporation for American General Series Portfolio Company, effective May 1, 1992.* (g) Articles Supplementary to the Articles of Incorporation for American General Series Portfolio Company, effective May 1, 1992.* (h) Articles Supplementary to the Articles of Incorporation for American General Series Portfolio Company, effective January 20, 1994.* (i) Articles Supplementary to the Articles of Incorporation for American General Series Portfolio Company, effective February 4, 1994.* (j) Articles Supplementary to the Articles of Incorporation for American General Series Portfolio Company, effective May 1, 1995.* (k) Articles of Amendment to the Articles of Incorporation for American General Series Portfolio Company, effective October 1, 1997.** (2) (a) Rules and Regulations of Franklin Life Variable Annuity Fund A.*** (b) By-Laws of American General Series Portfolio Company.* (3) Copies of any voting trust agreement affecting more than 5 percent of any class of equity securities. Not applicable. (4) Form of Agreement and Plan of Reorganization is incorporated herein by reference to Appendix A of the Proxy Statement/Prospectus forming Part A of this Registration Statement. (5) (a) Specimen copy of Form 1170, deferred periodic payment variable annuity contract.*** (b) Specimen copy of Form 1171, single payment deferred variable annuity contract.*** (c) Specimen copy of Form 1172, single payment immediate life variable annuity contract.*** (d) Specimen copy of Form 1173, single payment immediate life variable annuity contract with guaranteed period.*** (e) Specimen copy of Form 1174, single payment immediate joint and last survivor life variable annuity contract.*** (f) Specimen copy of endorsement to Forms 1170, 1171, 1172, 1173 and 1174 when such contracts are issued to variable annuitants in the State of Texas.*** (6) (a) Investment Management Agreement between Franklin Life Variable Annuity Fund A and The Franklin Life Insurance Company dated January 31, 1995.*** (b) Amended and Restated Investment Advisory Agreement between American General Series Portfolio Company and The Variable Annuity Life Insurance Company.* (c) Investment Advisory Agreement (Form ii) between American General Series Portfolio Company and The Variable Annuity Life Insurance Company.* (d) Investment Sub-Advisory Agreement between The Variable Annuity Life Insurance Company and Bankers Trust Company.* (e) Amendment No. 1 to Investment Sub-Advisory Agreement between The Variable Annuity Life Insurance Company and Bankers Trust Company.* (7) (a) Sales Agreement between Franklin Life Variable Annuity Fund A and Franklin Financial Services Corporation dated January 31, 1995.*** (b) Form of Agreement among The Franklin Life Insurance Company, Franklin Financial Services Corporation and agents.*** (c) Amended and Restated Distribution Agreement between American General Series Portfolio Company and The Variable Annuity Marketing Company, effective June 1, 1996.** (8) Copies of all bonus, profit sharing, pension or other similar contracts for the benefit of directors or officers. Not applicable. (9) (a) Custodian Agreement dated April 17, 1995 between The Franklin Life Insurance Company and State Street Bank and Trust Company is incorporated herein by reference to Exhibit 3 to Post-Effective Amendment No. 42 to Franklin Life Variable Annuity Fund A's Registration Statement on Form N-3, filed April 30, 1996 (File No. 2-36394). (b) Custodian Contract between American General Series Portfolio Company and State Street Bank and Trust Company.* (c) Custodian Fee Schedule between American General Series Portfolio Company and State Street Bank and Trust Company.** (d) Amendment to Custodian Contract between American General Series Portfolio Company and State Street Bank and Trust Company.** (e) Custodian Fee Schedule between American General Series Portfolio Company and State Street Bank and Trust Company.** (10) Copies of any plans entered into pursuant to Rule 12b-1 or Rule 18f-3 under the Investment Company Act of 1940. Not Applicable. (11) (a) Opinion and consent of counsel as to the legality of the Franklin Life Variable Annuity Fund A securities being registered.*** (b) Opinion and consent of counsel as to the legality of the American General Series Portfolio Company securities being registered.*** (12) Opinion and consent of Elizabeth E. Arthur, Esq. as to tax matters.*** (13) (a) Administration Agreement between Franklin Life Variable Annuity Fund A and The Franklin Life Insurance Company dated June 30, 1971.*** (b) Agreement between The Franklin Life Insurance Company and Franklin Financial Services Corporation dated June 30, 1971.*** (c) Transfer Agency and Service Agreement between American General Series Portfolio Company and The Variable Annuity Life Insurance Company.* (d) Accounting Services Agreement between American General Series Portfolio Company and The Variable Annuity Life Insurance Company.** (14) Consents of Independent Auditors. (15) Financial statements omitted pursuant to Item 14(a)(1). None. (16) Powers of Attorney for any signatures to the registration statement.*** (17) Any additional exhibits. None. * Incorporated herein by reference to Post-Effective Amendment Number 26 to the American General Series Portfolio Company's Form N-1A Registration Statement filed with the Securities and Exchange Commission on September 22, 1998. ** Incorporated herein by reference to Post-Effective Amendment Number 25 to the American General Series Portfolio Company's Form N-1A Registration Statement filed with the Securities and Exchange Commission on July 31, 1997. *** Incorporated herein by reference to the initial filing of this registration statement with the Securities and Exchange Commission on January 20, 1999 (File No. 333-70813). ITEM 17. UNDERTAKINGS (1) The undersigned registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this registration statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933 [17 CFR 230.145c], the reoffering prospectus will contain the information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) The undersigned registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the Securities Act of 1933, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them. SIGNATURES As required by the Securities Act of 1933, this registration statement has been signed on behalf of Franklin Life Variable Annuity Fund A, in the City of Springfield, and State of Illinois, on February 19, 1999. Franklin Life Variable Annuity Fund A By: /s/ Elizabeth E. Arthur ------------------------------------- Elizabeth E. Arthur Secretary, Board of Managers As required by the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Clifford L. Greenwalt* - ------------------------- Clifford L. Greenwalt Member, Board of Managers --------------- /s/ Robert C. Spencer* - ------------------------- Robert C. Spencer Member, Board of Managers --------------- /s/ Robert G. Spencer* - ------------------------- Robert G. Spencer Chairman, Board of Managers --------------- /s/ James W. Voth* - ------------------------- James W. Voth Member, Board of Managers --------------- /s/ Elizabeth E. Arthur - ------------------------- Elizabeth E. Arthur Secretary, Board of Managers --------------- /s/ Elizabeth E. Arthur Dated February 19, 1999. - ------------------------- * By Elizabeth E. Arthur, Attorney-in-Fact SIGNATURES As required by the Securities Act of 1933, this registration statement has been signed on behalf of American General Series Portfolio Company, in the City of Houston, and State of Texas, on February 19, 1999. American General Series Portfolio Company By: /s/ Thomas L. West, Jr. -------------------------------- Thomas L. West, Jr. Chairman of the Board of Directors As required by the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ Thomas L. West, Jr. February 19, 1999 - ------------------------- ----------------- Thomas L. West, Jr. Chairman of the Board of Directors - ------------------------- ----------------- John A. Graf Director and President - ------------------------- ----------------- Craig R. Rodby Director and Executive Vice President /s/ Gregory R. Seward February 19, 1999 - ------------------------- ----------------- Gregory R. Seward Treasurer * - ------------------------- ----------------- Norman Hackerman Director * - ------------------------- ----------------- John Wm. Lancaster Director * - ------------------------- ----------------- Ben H. Love Director * - ------------------------- ----------------- F. Robert Paulsen Director * - ------------------------- ----------------- R. Miller Upton Director * - ------------------------- ----------------- Dr. Judith L. Craven Director * - ------------------------- ----------------- Dr. Timothy J. Ebner Director * - ------------------------- ----------------- Judge Gustavo E. Gonzales, Jr. Director * - ------------------------- ----------------- Dr. John E. Maupin, Jr. Director By: /s/ David M. Leahy February 19, 1999 ---------------------- ----------------- *David M. Leahy Attorney-in-Fact
EX-99.14 2 CONSENT OF INDEPENDENT AUDITORS Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 30, 1998, with respect to the financial statements and supplementary information of Franklin Life Variable Annuity Fund A for the year ended December 31, 1997, and our report dated February 23, 1998, with respect to the consolidated financial statements of Franklin Life Insurance Company for the year ended December 31, 1997, included in the Statement of Additional Information of Franklin Life Variable Annuity Fund A dated April 30, 1998. This Statement of Additional Information is included in the Registration Statement (Form N-14) and related proxy statement/prospectus of Franklin Life Variable Annuity Fund A for the reorganization of Franklin Life Variable Annuity Fund A. We also consent to the use of our report dated January 29, 1999 with respect to the financial statements and supplementary information of Franklin Life Variable Annuity Fund A for the year ended December 31, 1998 included in the Registration Statement (Form N-14) and related proxy statement/prospectus of Franklin Life Variable Annuity Fund A for the reorganization of Franklin Life Variable Annuity Fund A. /s/ Ernst & Young LLP Chicago, Illinois March 1, 1999 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Financial Highlights", "Independent Auditors", and "Financial Statements" and to the use of our report dated July 2, 1998, in Post-Effective Amendment No. 26 to the Registration Statement (Form N-1A No. 2-83631) and related Prospectus of Stock Index Fund, MidCap Index Fund, Small Cap Index Fund, International Equities Fund, Growth Fund, Growth & Income Fund, Science & Technology Fund, Social Awareness Fund, Asset Allocation Fund (formerly Timed Opportunity Fund), Capital Conservation Fund, Government Securities Fund, International Government Bond Fund, and Money Market Fund of American General Series Portfolio Company. This Post-Effective Amendment No. 26 to the Registration Statement (Form N-1A No. 2-83631) and related Prospectus is included in the Registration Statement (Form N-14) and related proxy statement/prospectus of Franklin Life Variable Annuity Fund A for the reorganization of Franklin Life Variable Annuity Fund A. /s/ Ernst & Young LLP ERNST & YOUNG LLP Houston, Texas February 24, 1999 -----END PRIVACY-ENHANCED MESSAGE-----