<PAGE>
File Nos. 333-22467, 811-08073
As filed with the Securities and Exchange Commission on November 25, 1997
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
Registration Statement Under the Securities Act of 1933 [_]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. ____ [_]
and
Registration Statement Under the Investment Company Act of 1940 [_]
Amendment No. 1 [X]
(Check appropriate box or boxes.)
______________________________________
STATE FARM VARIABLE PRODUCT TRUST
One State Farm Plaza
Bloomington, Illinois 61710-0001
(309) 766-2029
(Registrant's Exact Name, Address and Telephone Number)
Patricia L. Dysart, Esq.
State Farm Life Insurance Company
One State Farm Plaza
Bloomington, Illinois 61710-0001
(Name and Address of Agent for Service)
Copy to:
Stephen E. Roth, Esq.
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D. C. 20004-2404
Approximate Date of Proposed Public Offering:
As soon as practicable after effectiveness of the Registration Statement.
____________________________________________
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
declares that an indefinite amount of securities is being registered under the
Securities Act of 1933.
____________________________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
SHALL DETERMINE.
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Showing Location of Information Required by Form N-1A
in Part A (Prospectus) and Part B (Statement of
Additional Information) of the Registration Statement
__________________________________________________________________
<TABLE>
<CAPTION>
Caption(s) in the Statement
Item of Form N-1A Caption(s) in the Prospectus of Additional Information
----------------- ------------------------ -------------------------
<S> <C> <C>
PART A: INFORMATION REQUIRED IN A PROSPECTUS
1. Cover Page Cover page
2. Synopsis N/A
3. Condensed Financial N/A
Information
4. General Description of About the Trust
Registrant
5. Management of the Fund Management of the Trust;
Investment Objectives and
Policies; Investment
Techniques
5A. Management's N/A
Discussion of Fund
Performance
6. Capital Stock and Other Additional Information --
Securities About the Shares
7. Purchase of Securities Offering, Purchase and
Being Offered Redemption of Shares
8. Redemption or Offering, Purchase and
Repurchase Redemption of Shares
9. Pending Legal Additional Information --
Proceedings Legal Matters
PART B: INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and N/A
History
13. Investment Objectives Investment Techniques and
Policies Restrictions
14. Management of the Fund Management of the Trust
15. Control Persons and Additional Information -- Shares
Principal Holders of
Securities
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Caption(s) in the Statement
Item of Form N-1A Caption(s) in the Prospectus of Additional Information
----------------- ---------------------------- -------------------------
<S> <C> <C>
16. Investment Advisory and Management of the Trust --
Other Services Investment Advisory Agreements;
Additional Information -- Service
Providers
17. Brokerage Allocation Portfolio Brokerage Portfolio Transactions and
Other Practices Brokerage
18. Capital Stock and Other Additional Information -- Shares
Securities
19. Purchase, Redemption Determination of Net Asset Value;
and Pricing of Securities Redemption of Shares
Being Offered
20. Tax Status Dividends, Distributions and Taxes
-- Taxes
21. Underwriters Additional Information -- Service
Providers
22. Calculation of Performance Information
Performance Data
23. Financial Statements Audited Financial Statements
</TABLE>
PART C: OTHER INFORMATION
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this registration statement.
<PAGE>
STATE FARM VARIABLE PRODUCT TRUST
One State Farm Plaza
Bloomington, Illinois 61710-0001
(309) 766-2029
PROSPECTUS
________, 1997
State Farm Variable Product Trust is an investment company consisting of six
separate investment portfolios or funds (the "Funds"), each of which has
different investment objectives.
The MONEY MARKET FUND seeks to maximize current income to the extent consistent
with the preservation of capital and maintenance of liquidity. This Fund will
pursue its objective by investing exclusively in high quality money market
instruments. AN INVESTMENT IN THE MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. This Fund will attempt to maintain a stable
net asset value of $1.00 per share, BUT THERE CAN BE NO ASSURANCE THAT THE FUND
WILL BE ABLE TO DO SO.
The LARGE CAP EQUITY INDEX FUND seeks to match the performance of the Standard &
Poor's Composite Index of 500 Stocks (the "S&P 500"). This Fund will pursue its
objective by investing primarily on a capitalization-weighted basis in the
securities comprising the index.
The SMALL CAP EQUITY INDEX FUND seeks to match the performance of the Russell
2000 Small Stock Index (the "Russell 2000"). This Fund will pursue its objective
by investing primarily in a representative sample of stocks found in the index.
The INTERNATIONAL EQUITY INDEX FUND seeks to match the performance of the Morgan
Stanley Capital International Europe, Australia and Far East Free Index (the
"EAFE Free"). This Fund will pursue its objective by investing primarily in a
representative sample of stocks found in the index.
The BOND FUND seeks to realize over a period of years the highest yield
consistent with prudent investment management through current income and capital
gains. This Fund will pursue its objective by investing primarily in high
quality debt securities.
The STOCK AND BOND BALANCED FUND seeks long-term growth of capital, balanced
with current income. This Fund will pursue its objective by investing primarily
in the Trust's Large Cap Equity Index Fund and Bond Fund.
These Funds are available to the public only through the purchase of certain
variable annuity and variable life insurance contracts issued by State Farm Life
Insurance Company and State Farm Life and Accident Assurance Company.
This prospectus provides vital information about the Trust. For your own benefit
and protection, you should read it thoroughly before investing and keep it on
hand for future reference. A Statement of Additional Information containing
additional information about the Trust has been filed with the Securities and
Exchange Commission, and may be obtained without charge by sending a written
request to the Trust at the above address or calling the telephone number shown.
The Statement of Additional Information is considered part of this prospectus,
and is incorporated herein by reference.
SHARES OF THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. AN INVESTMENT IN ANY OF THE FUNDS INVOLVES INVESTMENT RISK INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES & EXCHANGE COMMISSION, NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ABOUT THE TRUST..........................................................
INVESTMENT OBJECTIVES AND POLICIES.......................................
The Money Market Fund...............................................
The Equity Index Funds..............................................
The Bond Fund.......................................................
The Stock and Bond Balanced Fund....................................
INVESTMENT TECHNIQUES....................................................
Loans of Portfolio Securities.......................................
Short-term Money Market Instruments.................................
Foreign Investments.................................................
Foreign Investments Generally..................................
Investments in ADRs, EDRs and GDRs.............................
Stock Index Futures Contracts and Options on Such Contracts.........
Restricted Securities And Illiquid Investments......................
Borrowing...........................................................
Investments in Securities of Small Capitalization Issuers...........
Investments in Other Investment Companies...........................
PERFORMANCE INFORMATION..................................................
DETERMINATION OF NET ASSET VALUE.........................................
OFFERING, PURCHASE AND REDEMPTION OF SHARES..............................
DIVIDENDS, DISTRIBUTIONS AND TAXES.......................................
Dividends And Distributions.........................................
Taxes...............................................................
General Tax Information........................................
Taxation of Foreign Investments................................
Additional Tax Considerations..................................
MANAGEMENT OF THE TRUST..................................................
Board of Trustees...................................................
Investment Adviser..................................................
Investment Sub-adviser..............................................
The Bond Fund and the Stock and Bond Balanced Fund Managers.........
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ADDITIONAL INFORMATION...................................................
About The Shares....................................................
Contract Owner Voting Rights........................................
Annual and Semi-annual Reports......................................
Service Providers...................................................
Legal Matters.......................................................
</TABLE>
<PAGE>
STATE FARM VARIABLE PRODUCT TRUST
ABOUT THE TRUST
State Farm Variable Product Trust (the "Trust") is an open-end management
investment company organized as a business trust under the laws of the State of
Delaware on February 21, 1997. The Trust consists of six separate investment
portfolios (the "Funds" or a "Fund"), each of which is, in effect, a separate
mutual fund. The Trust issues a separate series of shares of beneficial interest
for each Fund representing fractional undivided interests in that Fund. By
investing in a Fund, you become entitled to a pro-rata share of all dividends
and distributions arising from the net income and capital gains on the
investments of that Fund. Likewise, you share pro-rata in any losses of that
Fund.
Pursuant to investment advisory agreements and subject to the authority of the
Trust's Board of Trustees, State Farm Investment Management Corp. ("SFIM")
serves as the Trust's investment adviser and conducts the business and affairs
of the Trust. SFIM has engaged Barclays Global Fund Advisors ("BGFA") as the
investment sub-adviser to provide day-to-day portfolio management for the Large
Cap, Small Cap, and International Equity Index Funds. (The term "investment
adviser" in this prospectus may mean either SFIM or BGFA, as appropriate.)
The Trust currently offers the shares of each Fund to separate accounts of State
Farm Life Insurance Company as funding vehicles for certain variable annuity and
life insurance contracts (the "Contracts") issued by State Farm Life Insurance
Company through such separate accounts. The Trust also intends to offer shares
of each Fund to separate accounts of State Farm Life and Accident Assurance
Company as funding vehicles for certain variable annuity and life insurance
contracts issued by State Farm Life and Accident Assurance Company through such
separate accounts. (State Farm Life Insurance Company and State Farm Life and
Accident Assurance Company are collectively referred to herein as "State Farm";
the variable annuity and variable life insurance contracts issued by State Farm
are collectively referred to herein as the "Contracts"; and the State Farm
separate accounts are collectively referred to as the "Accounts"). The Trust
does not offer its shares directly to the general public. The Accounts, like the
Trust, are registered as investment companies with the SEC and separate
prospectuses, one of which accompanies this prospectus, describe each Account
and the Contract being offered through that Account. The Trust may, in the
future, offer its shares to other registered and unregistered separate accounts
of State Farm and its affiliates supporting other variable annuity or variable
life insurance contracts and, subject to obtaining required regulatory
approvals, to qualified pension and retirement plans.
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has one or more investment objectives and related investment policies
and uses various investment techniques to pursue these objectives and policies.
THERE CAN BE NO ASSURANCE THAT ANY OF THE FUNDS WILL ACHIEVE ITS INVESTMENT
OBJECTIVE OR OBJECTIVES. You should not consider any one Fund alone to be a
complete investment program. All of the Funds are subject to the risk of
changing economic conditions. The Bond Fund and Stock and Bond Balanced Fund are
also subject to the risk inherent in the ability of the Fund's investment
adviser to make changes in the composition of the Fund in anticipation of
changes in economic, business, and financial conditions. As with any
security,
<PAGE>
a risk of loss is inherent in an investment in the shares of any of the Funds.
In addition to these general risks, the different types of securities,
investments, and investment techniques used by each Fund all have attendant
risks of varying degrees. With respect to equity securities, there can be no
assurance of capital appreciation and there is a substantial risk of decline.
With respect to debt instruments, there exists the risk that the issuer of the
security may not be able to meet its obligations on interest or principal
payments at the time required by the instrument. In addition, the value of debt
instruments generally rises and falls inversely with prevailing current interest
rates. Moreover, foreign investments and investments in small capitalization
issuers entail special additional risks. For a more detailed explanation of the
risks associated with and a definition of "foreign investments," see "Foreign
Investments" in this prospectus and the statement of additional information
("SAI").
Certain types of investments and investment techniques common to one or more
Funds are described in greater detail, including the risks of each, under
"Investment Techniques" in this prospectus and in the SAI.
The investment objective or objectives of each Fund are fundamental and may not
be changed without the approval of a majority of the outstanding voting shares
of the series related to that Fund. Certain investment restrictions also are
fundamental and cannot be changed without shareholder approval. In contrast,
certain other investment restrictions as well as the investment policies and
techniques of each Fund are not fundamental and may be changed by the Trust's
Board of Trustees without shareholder approval. These investment objectives,
restrictions, policies and techniques are described below and in more detail in
the SAI.
THE MONEY MARKET FUND
The Money Market Fund seeks to maximize current income to the extent consistent
with the preservation of capital and maintenance of liquidity. This Fund will
pursue its objective by investing exclusively in the following high quality
money market instruments:
1. U.S. Government securities (as defined in the SAI) and related custody
receipts;
2. obligations issued or guaranteed by U.S. banks (including certificates
of deposit, bank notes, loan participation interests, commercial
paper, unsecured promissory notes, time deposits, and bankers'
acceptances) that have more than $1 billion in total assets at the
time of purchase as well as debt obligations of U.S. subsidiaries of
such banks and, certificates of deposit and promissory notes issued by
Canadian affiliates of such banks, provided that such obligations are
guaranteed as to principal and interest by such banks;
<PAGE>
3. commercial paper (unsecured promissory notes including variable amount
master demand notes) issued or guaranteed by U.S. corporations or
other entities that are, at the time of purchase, rated in the two
highest rating categories for short-term debt obligations of at least
one nationally recognized statistical rating organization
("NRSRO");
4. asset-backed securities (including interests in pools of assets such
as motor vehicle installment purchase obligations and credit card
receivables);
5. other short-term obligations issued or guaranteed by U.S.
corporations, state and municipal governments or other entities;
6. unrated notes, paper, obligations or other instruments that SFIM
determines to be of comparable high quality; and
7. repurchase agreements with banks and government securities dealers
that are recognized as primary dealers by the Federal Reserve System,
provided that:
(a) at the time that the repurchase agreement is entered into, and
throughout the duration of the agreement, the collateral has a
market value at least equal to the value of the repurchase
agreement; and
(b) the collateral consists of U.S. Government securities or
instruments that are rated in the highest rating category by the
requisite NRSROs (as defined below).
The Money Market Fund may acquire any of the above securities on a forward
commitment or when-issued basis, and may lend portfolio securities and invest in
other investment companies. See "Investment Techniques" in this prospectus for
more detailed information.
The Money Market Fund will only invest in instruments denominated in U.S.
dollars that SFIM, under the supervision of the Trust's Board of Trustees,
determines present minimal credit risk and meet, at the time of acquisition,
certain minimum credit rating requirements described in the SAI.
The Money Market Fund will invest at least 95% of its total assets in securities
that are rated in the highest category by the requisite NRSROs or unrated
securities of comparable investment quality. Of securities not rated in the
highest category (or not of comparable quality), the Fund will not invest more
than the greater of 1% of its total assets or $1 million in the securities of
any single issuer. The Fund is diversified. Except as explained in the SAI, the
Fund will not invest more than 5% of its net assets in securities of any single
issuer
<PAGE>
(except U.S. Government securities or repurchase agreements collateralized by
such securities).
All portfolio instruments owned by the Money Market Fund will mature within 13
months or less of the time that they are acquired. The average maturity of the
portfolio securities owned by the Fund based on their dollar value will not
exceed 90 days at the time of each investment. If the disposition of a portfolio
security results in a dollar-weighted average portfolio maturity in excess of 90
days, the Money Market Fund will invest its available cash in such manner as to
reduce its dollar-weighted average portfolio maturity to 90 days or less as soon
as is reasonably practicable.
See Appendix A to the SAI for additional information on the types of money
market instruments in which the Money Market Fund may invest.
NRSROs include S&P, Moody's, Fitch Investors Service, Inc., Duff & Phelps, Inc.,
IBCA Limited and its affiliate IBCA Inc., and Thompson BankWatch. See Appendix B
to the SAI for a description of each NRSRO's rating categories.
THE EQUITY INDEX FUNDS
The Large Cap, Small Cap, and International Equity Index Funds are equity index
Funds that invest mostly in stocks, although each may also invest in stock index
futures contracts and options on such futures contracts. By investing in a broad
range of stocks within a specific index (a "benchmark index"), each of these
Funds avoids the risks of individual stock selection and instead, seeks to match
the performance of its benchmark index, whether that index goes up or down.
These Funds do not have, and will not adopt, a defensive investment strategy in
times of generally declining stock prices, and you bear the risk of such a
market decline with an investment in any of these Funds.
What is an index? An index is a grouping of securities, such as stocks, bonds or
commodities, used to measure and report changes in a particular market. An index
may be comprised of many securities and designed to be representative of the
overall market, or made up of a smaller number of securities and designed to
reflect a particular industry or market sector. The composition and weighting of
securities in an index can, and often does, change.
Which indices do these Funds follow? While there are more than a hundred
different indices, each of the equity index Funds try to match the performance
of a very prominent stock index. Each equity index Fund has the fundamental
investment objective of seeking to match the investment return of its benchmark
index.
<PAGE>
The Large Cap Equity Index Fund's benchmark index is the S&P 500./1/ This Fund
will pursue its objective of seeking to match the return of that index by
investing primarily on a capitalization-weighted basis in the securities
comprising the index, i.e., by purchasing each of the stocks comprising the S&P
-----
500 in the same weighted proportions that such stocks have in the index. The S&P
500 tracks the common stock performance of large U.S. companies in the
manufacturing, utilities, transportation, and financial industries. It also
tracks the performance of common stocks issued by foreign and smaller U.S.
companies in similar industries. In total, the S&P 500 is comprised of 500
common stocks.
Like the S&P 500, the Large Cap Equity Index Fund will hold both dividend paying
and non-dividend paying common stocks.
The Small Cap Equity Index Fund's benchmark index is the Russell 2000./2/ This
Fund will pursue its objective of seeking to match the return of that index by
investing primarily in a diversified portfolio of common stocks that will
reflect, as a group, the total investment return of that index. The Russell 2000
tracks the common stock performance of the 2,000 smallest U.S. companies in the
Russell 3000 Index, which represents approximately 10% of the total
capitalization of the Russell 3000 Index. The Frank Russell Company created the
Russell 2000 in the 1980s to give investors an idea of how the stocks of smaller
companies generally perform. As of the latest reconstitution of the Russell
2000, the average market capitalization was approximately $421 million, the
median market capitalization was approximately $352 million, and the largest
company in the index had an approximate market capitalization of $1.0 billion.
The stocks comprising the Russell 2000 are updated annually because many of the
companies in the index either outgrow the index or fall in value.
___________________________
/1/The Standard & Poor's Composite Index of 500 Stocks ("S&P 500").
"Standard & Poor's," "S&P," and "S&P 500" are trademarks of Standard & Poor's
("S&P"). S&P's only relationship to the Trust is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 which is determined,
composed and calculated by S&P without regard to the Trust. S&P has no
obligation to take your needs or the needs of the Trust into consideration in
determining, composing or calculating the S&P 500. S&P is not responsible for
and has not participated in the determination of the prices or composition of
the Large Cap Equity Index Fund or the timing of the issuance or sale of the
shares of that Fund. The Large Cap Equity Index Fund is not sponsored, endorsed,
sold or promoted by S&P, and S&P makes no representation regarding the
advisability of investment in this Fund.
/2/The Russell 2000 Small Stock Index and the Russell 3000 Index are
trademarks/service marks of the Frank Russell Trust Company. The Small Cap
Equity Index Fund is not promoted, sponsored or endorsed by, nor in any way
affiliated with the Frank Russell Company. The 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.
<PAGE>
The International Equity Index Fund's benchmark index is the EAFE Free./3/ This
Fund will pursue its objective of seeking to match the return of that index by
investing primarily in a diversified portfolio of common stocks that will
reflect, as a group, the total investment return of that index. The EAFE Free is
a diversified index developed by Morgan Stanley Capital International in 1970.
As of December 31, 1995, the EAFE Free included the common stocks (or equity
securities having investment characteristics of common stocks) of over 1,100
companies. The EAFE Free currently measures the performance of stock markets of
Europe (Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the
Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom),
Australia, New Zealand, and the Far East (Hong Kong, Japan, Malaysia, and
Singapore). Unlike MSCI's standard indices, the Free indices take into account
local market restrictions on share ownership by foreigners. EAFE Free is meant
to reflect actual opportunities for foreign investors in a local market.
Since EAFE Free is an index of international stocks, BGFA may invest up to 100%
of the International Equity Index Fund's total assets in foreign stocks (listed
and over-the-counter) that comprise the EAFE Free.
How are the index Funds managed? BGFA does not manage the equity index Funds
according to traditional methods of "active" investment management, which
involve the buying and selling of securities based upon economic, financial and
market analysis and investment judgment. Instead, BGFA utilizes a "passive" or
indexing investment approach for each equity index Fund, attempting to
approximate the investment performance of the appropriate benchmark index
through quantitative analytical procedures. Stocks are selected for inclusion in
an equity index Fund's portfolio in order to have aggregate investment
characteristics (based on market capitalization and industry weightings),
fundamental characteristics (such as return variability, earnings valuation and
yield) and liquidity measures similar to those of the benchmark index taken in
its entirety.
________________________
/3/The Morgan Stanley Capital International Europe, Australia and Far East
Free Index ("EAFE Free"). EAFE Free is the property of Morgan Stanley & Co.
Incorporated ("Morgan Stanley"). Morgan Stanley Capital International ("MSCI")
is a service mark of Morgan Stanley and has been licensed for use by the Trust.
The International Equity Index Fund is not sponsored, endorsed, sold or promoted
by Morgan Stanley. Morgan Stanley makes no representation or warranty, express
or implied, to the owners of shares of the International Equity Index Fund or
any member of the public regarding the advisability of investing in securities
generally or in the shares of the International Equity Index Fund particularly
or the ability of EAFE Free to track general stock market performance. EAFE Free
is determined, composed and calculated without regard to the International
Equity Index Fund or the Trust, and Morgan Stanley does not have any obligation
to take the needs of the issuer of the International Equity Index Fund or the
Trust into consideration in determining, composing, calculating, or
disseminating, the EAFE Free index.
<PAGE>
Each equity index Fund will attempt to remain as fully invested as practicable
in a pool of equity securities the performance of which is expected to
approximate the performance of its benchmark index taken in its entirety. An
equity index Fund will normally invest at least 90% of its total assets in
stocks that are represented in its benchmark index and will at all times invest
a substantial portion of its total assets in such stocks.
Do the index Funds hold every stock in their indices? The Large Cap Equity Index
Fund will generally hold every stock in the S&P 500. However, each of the Small
Cap and International Equity Index Funds generally will not hold all of the
issues that comprise its benchmark index, due in part to the costs involved and,
in certain instances, the potential illiquidity of certain securities. Instead,
the Small Cap Equity Index Fund will attempt to hold a representative sample of
the securities in its benchmark index, which will be selected by BGFA utilizing
quantitative analytical models in a technique known as "portfolio sampling."
Under this technique, each stock is considered for inclusion in the Fund based
on its contribution to certain capitalization, industry and fundamental
investment characteristics. The International Equity Index Fund will hold
securities which will be selected by BGFA utilizing a quantitative model known
as minimum variance optimization. Under this technique, stocks are selected for
inclusion if the fundamental investment characteristics of the security reduce
the portfolio's predicted tracking error against the benchmark index. BGFA will
seek to construct the portfolio of each of the Small Cap and International
Equity Index Funds so that, in the aggregate, its capitalization, industry and
fundamental investment characteristics perform like those of its benchmark
index. Over time, the portfolio composition of these two Funds may be altered
(or "rebalanced") to reflect changes in the characteristics of its benchmark
index or with a view to bringing the performance and characteristics of the
equity index Fund more in line with that of its benchmark index. Such
rebalancings will require the equity index Fund to incur transaction costs and
other expenses. Each of the Small Cap and International Equity Index Funds
reserves the right to invest in all of the securities in the benchmark
index.
What other investments do the index Funds make? An equity index Fund may invest
any assets not invested in stocks that are represented in its benchmark index
(its "remaining assets") in the same type of short-term high quality debt
securities in which the Money Market Fund invests (described above), stock index
futures contracts, options on such futures contracts, and/or cash. Such
investments may be made to invest uncommitted cash balances and to assist in
meeting shareholder redemptions. The International Equity Index Fund may also
enter into foreign currency forward and foreign currency futures contracts to
facilitate settlements in local markets, in connection with stock index futures
positions, and to protect against currency exposure in connection with its
distributions to shareholders, but may not enter into such contracts for
speculative purposes or as a way of protecting against anticipated adverse
changes in exchange rates between foreign currencies and the U.S. dollar. A
foreign currency forward contract is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. An equity index Fund will not invest its remaining assets as
part of a temporary defensive strategy to protect against potential stock market
declines.
When and why are these futures contracts and options on futures contracts used?
An equity index Fund may purchase stock index futures contracts on its benchmark
index or a comparable stock index to simulate investment in its benchmark index.
This may be done to rapidly gain exposure to the securities comprising its
benchmark index in anticipation of purchasing such securities over time, to
reduce transaction costs, or to gain exposure to such securities at a lower cost
than by making direct investments in the cash market. If an equity index Fund
cannot sell a futures contract that it holds, it may write call and buy put
options on the contract to effectively close out or offset the contract. The
equity index Funds will not use futures contracts or options on futures
contracts
<PAGE>
to leverage net assets. See "Financial Futures Contracts and Options on Such
Contracts" in this prospectus for more detailed information.
How closely can an index Fund match the performance of its benchmark index? All
three equity index Funds attempt to match the performance of their benchmark
indices, although the Trust cannot guarantee that any of the Funds will be able
to do so. Due to the use of the portfolio sampling and optimization techniques
described above, the Small Cap and International Equity Index Funds are not
expected to track their benchmark indicies with the same degree of accuracy as
would an investment vehicle that invested in every component security of its
benchmark index. BGFA expects that, over time, the "expected tracking error" of
an equity index Fund relative to the performance of its benchmark index will be
less than 5%. BGFA will monitor the tracking error of each equity index Fund on
an ongoing basis and will seek to minimize tracking error to the extent
possible. There can be no assurance that any equity index Fund will achieve any
particular level of tracking error relative to the performance of the relevant
benchmark index. For an explanation of "expected tracking error" and more
information on this subject, see the SAI.
What are some of the other risks associated with the index Funds? The Small Cap
Equity Index Fund invests in many small U.S. companies, which entail special
risks. For a discussion of the risks of investing in small capitalization
issuers, see "Investments in Securities of Small Capitalization Issuers," in
this prospectus. In addition, the Large Cap Equity Index and International
Equity Index Funds may make foreign investments, which may present the potential
for certain benefits not generally present in domestic equity investments, but
are also subject to special risks. See "Foreign Investments" for a definition
of, and more details on the benefits and risks of, foreign investments.
THE BOND FUND
The Bond Fund seeks to realize over a period of years the highest yield
consistent with prudent investment management through current income and capital
gains. This Fund will pursue its objective by investing primarily in debt
securities rated A or better by Standard & Poor's or A or better by Moody's and
in U.S. Government securities. Under normal circumstances, at least 65% of the
Fund's total assets will be invested in debt securities that are rated A or
better or that are unrated but of equivalent quality.
The Bond Fund generally seeks to maintain a dollar weighted average portfolio
duration of less than six years. Duration represents the weighted average
maturity of expected cash flows on a debt obligation, discounted to present
value. The longer the duration of a debt obligation, the more sensitive its
value is to changes in interest rates. Maturity measures only the time final
payment is due on a bond or other debt security; it takes no account of the
pattern of a
<PAGE>
security's cash flows over time. In computing the duration of its portfolio, the
Bond Fund will have to estimate the duration of debt obligations that are
subject to prepayment or redemption by the issuer.
From time to time, up to 20% of the Bond Fund's total assets may be invested
in debt securities which are rated lower than A by Standard & Poor's or Moody's
or comparable unrated debt securities or in convertible debt securities,
convertible preferred stocks and nonconvertible preferred stocks rated within
the three highest grades of Standard & Poor's or Moody's applicable to such
securities. To the extent that the Bond Fund invests in such securities, the
Bond Fund's investment portfolio will be subject to relatively greater risk of
loss of income and principal. Securities rated BBB or lower by Standard & Poor's
or Baa or lower by Moody's are considered by those rating agencies to have
varying degrees of speculative characteristics. Consequently, although they can
be expected to provide higher yields, such securities may be subject to greater
market value fluctuations and greater risk of loss of income and principal than
lower-yielding, higher-rated fixed-income securities.
The Bond Fund will not directly purchase common stocks. However, it may retain
common stocks acquired either by conversion of debt securities or by the
exercise of warrants attached to debt securities.
When appropriate, in SFIM's opinion, based upon prevailing market or economic
conditions, the Bond Fund for temporary defensive purposes may invest up to
100% of its total assets in other types of securities, including securities in
which the Money Market Fund may invest, or it may retain funds in cash. See the
description of the Money Market Fund above and Appendix A to the SAI.
Although, in SFIM's opinion, the risk of loss of principal should be lessened by
the quality of the investments in which the Bond Fund will primarily invest, the
Bond Fund may be subject to substantial price changes resulting from market
yield fluctuations with respect to holdings of longer maturities that typically
provide the best yields.
THE STOCK AND BOND BALANCED FUND
The Stock and Bond Balanced Fund seeks long-term growth of capital, balanced
with current income. This Fund will pursue its objective by investing primarily
in shares of the Trust's Large Cap Equity Index Fund and Bond Fund
(collectively, the "underlying Funds").
Under normal circumstances, the Stock and Bond Balanced Fund will attempt to
maintain approximately 60% of its net assets in shares of the Large Cap Equity
Index Fund and approximately 40% of its net assets in shares of the Bond Fund.
The Stock and Bond Balanced Fund will never invest more than 75% of its net
assets in either underlying Fund. Though the Stock and Bond
<PAGE>
Balanced Fund is not an asset allocation or market timing fund, it will, over
time, adjust the amount of its net assets invested in each underlying Fund
within the limits prescribed above as economic, market and financial conditions
warrant.
The Stock and Bond Balanced Fund may hold a portion of its assets in U.S.
Government securities, short-term paper, or may invest in the Money Market Fund
to provide flexibility in meeting redemptions, expenses, and the timing of new
investments, and serves as a short-term defense during periods of unusual
volatility. For temporary defensive purposes, the Stock and Bond Balanced Fund
may invest without limitation in such securities.
Special Risk Considerations. To the extent that the Stock and Bond Balanced Fund
invests in shares of other Funds, the risks associated with those other Funds
are also associated with an investment in the Stock and Bond Balanced Fund.
Also, since the Stock and Bond Balanced Fund's investments are concentrated in
the underlying Funds, the Stock and Bond Balanced Fund's performance is directly
related to the performance of the underlying Funds. The investment objectives,
restrictions, investment techniques and risks associated with each of the
underlying Funds are described elsewhere in this prospectus and in the SAI.
Diversification. The Stock and Bond Balanced Fund is a "nondiversified"
investment company for purposes of the Investment Company Act of 1940 because it
invests in the securities of a limited number of mutual funds. However, the
underlying Funds themselves are diversified investment companies, and the Stock
and Bond Balanced Fund intends to qualify as a diversified investment company
for the purposes of Subchapter M of the Internal Revenue Code.
INVESTMENT TECHNIQUES
In pursuing their investment objectives, the Funds may engage in the following
investment techniques.
LOANS OF PORTFOLIO SECURITIES
Each Fund may from time to time lend securities it holds to brokers, dealers,
and financial institutions, up to a maximum of 33% of the total value of that
Fund's assets. Such loans will be secured by collateral in the form of cash or
U.S. Treasury securities, which will be maintained in an amount at least equal
to the current market value of the loaned securities. Each Fund will continue to
receive interest and dividends on the loaned securities during the term of its
loans, and, in addition, will receive either a fee from the borrower or interest
earned from the investment of cash collateral in short-term securities. Each
Fund also will receive any gain or loss in the market value of its loaned
securities and of securities in which cash collateral is invested during the
term of the loan. The primary risk involved in lending
<PAGE>
securities is that the borrower will fail financially and return the loaned
securities at a time when the collateral is insufficient to replace the full
amount of the loan. In order to minimize this risk, each Fund will make loans of
securities only to firms determined by its investment adviser (under the
supervision of the Board of Trustees) to be creditworthy.
SHORT-TERM MONEY MARKET INSTRUMENTS
All of the Funds may, to varying degrees, invest in short-term money market
instruments, including repurchase agreements, and when-issued and delayed-
delivery securities. A repurchase agreement is a transaction in which a Fund
buys a security at one price and simultaneously agrees to sell that same
security back to the original owner at a higher price. Each Fund's investment
adviser (under the supervision of the Board of Trustees) reviews the
creditworthiness of the other party to the agreement and must find it
satisfactory before engaging in a repurchase agreement. In the event of the
bankruptcy of the other party, the Fund could experience delays in recovering
its money, may realize only a partial recovery or even no recovery, and may also
incur disposition costs. When-issued and delayed delivery securities are
discussed in "Investment Techniques" in the SAI.
FOREIGN INVESTMENTS
Investing in the securities of companies organized outside the United States or
of companies whose securities are principally traded outside the United States
("foreign issuers") or investments in securities denominated or quoted in
foreign currency ("non-dollar securities") involves certain special
considerations, including those set forth below, which are not typically
associated with investing in securities of domestic issuers or U.S. dollar
denominated securities.
Each of the Large Cap Equity Index and International Equity Index Funds may
invest in non-dollar securities and the securities of foreign issuers
(collectively, "foreign investments"). These Funds will generally not
concentrate their investments in any particular foreign country, except to the
extent that the Fund's benchmark index concentrates in such foreign country. The
Large Cap Equity Index Fund may invest up to 20% of its total assets in foreign
securities. The International Equity Index Fund may invest all of its assets in
non-dollar securities and the securities of foreign issuers.
<PAGE>
Foreign Investments Generally
Foreign investments may offer potential benefits not available from investments
solely in securities of domestic issuers. Such benefits may include the
opportunity to invest in foreign issuers that appear to offer better opportunity
for long-term capital appreciation or current earnings than investments in
domestic issuers, the opportunity to invest in foreign countries with economic
policies or business cycles different from those of the United States and the
opportunity to reduce fluctuations in portfolio value by taking advantage of
foreign securities markets that do not necessarily move in a manner parallel to
U.S. markets.
Making foreign investments involves significant risks that are not typically
associated with investing in securities of domestic issuers. Such investments
may be affected by changes in currency rates, changes in foreign or U.S. laws or
restrictions applicable to such investments and in exchange control regulations.
For example, a decline in the currency exchange rate may reduce the value of
certain portfolio investments. Many foreign stock markets may have substantially
less volume than, for example, the New York Stock Exchange and securities of
some foreign issuers may be less liquid than securities of comparable domestic
issuers. Commissions and dealer mark-ups on transactions in foreign securities
may be higher than for similar transactions in the U.S. In addition, clearance
and settlement procedures may be different in foreign countries and, in certain
markets, on certain occasions, such procedures have been unable to keep pace
with the volume of securities transactions, thus making it difficult to conduct
such transactions. For example, delays in settlement could result in temporary
periods when a portion of the assets of a Fund are uninvested and no return is
earned thereon. The inability of a Fund to make intended investments due to
settlement problems could cause it to miss attractive investment opportunities.
Inability to dispose of portfolio securities or other investments due to
settlement problems could result either in losses to a Fund due to subsequent
declines in value of the portfolio investment or, if the Fund has entered into a
contract to sell the investment, could result in possible liability for the
Fund.
Foreign issuers are not generally subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. There may be less publicly available information about a foreign
issuer than about a domestic one. In addition, there is generally less
government regulation of stock exchanges, brokers, and listed and unlisted
issuers in foreign countries than in the United States. Furthermore, with
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, imposition of withholding taxes on dividend or interest
payments, limitations on the removal of portfolios or other assets of the Fund,
or political or social instability or diplomatic
<PAGE>
developments which could affect investments in those countries. Individual
foreign economies also may differ favorably or unfavorably from the United
States economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
For more information on foreign investments, see "Foreign Investments" in the
SAI.
Investments in ADRS, EDRS and GDRS
Many securities of foreign issuers are represented by sponsored or unsponsored
American depository receipts ("ADRs"), European depository receipts ("EDRs"),
and global depository receipts ("GDRs"). ADRs are receipts typically issued by a
U.S. bank or trust company which evidence ownership of underlying securities of
foreign corporate issuers. EDRs and GDRs are receipts issued by non-U.S.
financial institutions evidencing arrangements similar to ADRs. Generally, ADRs
are in registered form and are designed for trading in U.S. markets while EDRs
are in bearer form and are designed for trading in European securities markets.
GDRs are issued in either registered or bearer form and are designed for trading
on a global basis.
The Large Cap Equity Index Fund may invest in ADRs and the International Equity
Index Fund may invest in ADRs, EDRs and GDRs. ADRs represent the right to
receive securities of foreign issuers deposited in a domestic bank or a foreign
correspondent bank. Prices of ADRs are quoted in U.S. dollars, and ADRs are
traded in the U.S. on exchanges or over-the-counter and are sponsored and issued
by domestic banks. ADRs do not eliminate all the risk inherent in investing in
the securities of foreign issuers. To the extent that a Fund acquires ADRs
through banks which do not have a contractual relationship with the foreign
issuer of the security underlying the ADR to issue and service such ADRs, there
may be an increased possibility that the Fund would not become aware of and be
able to respond to corporate actions such as stock splits or rights offerings
involving the foreign issuer in a timely manner. In addition, the lack of
information may result in inefficiencies in the valuation of such instruments.
However, by investing in ADRs rather than directly in the stock of foreign
issuers, a Fund will avoid currency risks during the settlement period for
either purchases or sales. In general, there is a large, liquid market in the
U.S. for ADRs quoted on a national securities exchange or the NASD's national
market system. The information available for ADRs is subject to the accounting,
auditing and financial reporting standards of the domestic market or exchange on
which they are traded, which standards are more uniform and more exacting than
those to which many foreign issuers may be subject.
EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank
similar to that for ADRs and are designed for use in non-U.S. securities
markets. EDRs and GDRs are not necessarily quoted in the same currency as the
underlying security.
Forward Currency Contracts
As described above, the International Equity Index Fund may enter into foreign
currency forward and foreign currency futures contracts. Such contracts are
subject to special risks. For example, contracts to sell foreign currency could
limit any potential gain which might be realized by the Fund if the value of the
hedged currency increased. In addition, forward contracts are subject to the
risk that the counterparty to such contract will default on its obligations.
Since a forward foreign currency exchange contract is not guaranteed by an
exchange or clearinghouse, a default on the contract would deprive the Fund of
unrealized profits, transaction costs or the benefits of a currency hedge or
force the Fund to cover its purchase or sale commitments, if any, at the current
market price.
<PAGE>
STOCK INDEX FUTURES CONTRACTS AND OPTIONS ON SUCH CONTRACTS
Each equity index Fund may purchase and sell futures contracts on its benchmark
stock index or a similar stock index as a way to gain exposure to the securities
in the benchmark index or to simulate full investment in the underlying
benchmark equities. A stock index futures contract is a contract to buy or sell
a specified amount of securities comprising the index to which it relates at a
future time for a fixed price.
An equity index Fund may write covered call options and purchase options on
futures contracts to offset futures contracts held by the Fund that become
illiquid. An option to sell a financial futures contract gives the purchaser
thereof the right to sell a position in the underlying futures contract, and,
therefore, can serve the same function as selling the futures contract directly.
When used to offset a futures contract already owned by a Fund, an option can
effectively close out the Fund's position with regard to that futures contract.
The Stock and Bond Balanced Fund may indirectly hold these types of securities
by virtue of its investment in the Large Cap Equity Index Fund.
None of the equity index Funds 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 margin to secure its obligations under open
futures contracts, plus the amount of premiums paid by the Fund for outstanding
options to purchase futures contracts, would exceed 5% of the market value of
the Fund's total assets.
The use of futures contracts by these Funds entails certain risks, including but
not limited to the following: no assurance that futures contract transactions
can be offset at favorable prices; possible reduction of a Fund's income due to
their use; possible reduction in value of the futures contract; possible lack of
liquidity due to daily limits on price fluctuations; imperfect correlation
between the futures contract and the securities held in the Fund or the
securities comprising the benchmark index; and potential losses in excess of the
amount initially invested in the futures contracts themselves. The use of
futures contracts and options on futures contracts requires special skills in
addition to those needed to select portfolio securities. A further discussion of
futures contracts and their associated risks is contained in the SAI.
RESTRICTED SECURITIES AND ILLIQUID INVESTMENTS
Each Fund's adviser is responsible for determining the liquidity of investments
held by that Fund. Investments may be illiquid because of the absence of a
trading market, making it difficult to value them or dispose of them promptly at
an acceptable price. The Large Cap Equity Index, Small Cap Equity Index,
International Equity Index, and Money Market Funds will each not purchase or
otherwise acquire any investment if, as a result, more than 15% (10% in the case
of the Money Market Fund) of its net assets (taken at current value) would be
invested in instruments that are illiquid, except as described below.
<PAGE>
Illiquid investments include most repurchase agreements maturing in more than
seven days, currency swaps, time deposits with a notice or demand period of more
than seven days, certain over-the-counter option contracts (and segregated
assets used to cover such options), participation interests in loans, and
restricted securities. A restricted security is one that has a contractual
restriction on resale or cannot be resold publicly until it is registered under
the Securities Act of 1933.
The foregoing illiquid security investment restrictions do not apply to
purchases of restricted securities eligible for sale to qualified institutional
purchasers in reliance upon Rule 144A under the Securities Act of 1933 that are
determined to be liquid by the Trust's Board of Trustees or by a Fund's
investment adviser under board-approved procedures. Such guidelines would take
into account trading activity for such securities and the availability of
reliable pricing information, among other factors. To the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities, a Fund's holdings of those securities may become
illiquid. The foregoing investment restrictions also do not apply to purchases
by the International Equity Index Fund of securities of foreign issuers offered
and sold outside the United States in reliance upon the exemption from
registration provided by Regulation S under the Securities Act of 1933.
BORROWING
From time to time, each Fund may borrow money from a bank or through reverse
repurchase agreements in amounts up to 33 1/3% of its total assets (including
the amount borrowed). Each Fund may also borrow up to an additional 5% of its
total assets (including the amount borrowed), but only for temporary purposes
(e.g., to facilitate distributions to shareholders or to meet redemption
requests prior to the settlement of securities already sold or in the process of
being sold by the Fund). Each Fund may also obtain such short-term credits as
may be necessary for clearance of purchases and sales of portfolio securities.
INVESTMENTS IN SECURITIES OF SMALL CAPITALIZATION ISSUERS
The Small Cap and International Equity Index Funds may invest in securities
issued by small capitalization companies. Some of these companies often do not
have the financial strength needed to do well in difficult times.
<PAGE>
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.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
Each Fund other than the Stock and Bond Balanced Fund may invest up to 5% of its
total assets in the securities of any single investment company and up to 10% of
its total assets in the securities of other investment companies in the
aggregate. However, no Fund (other than the Stock and Bond Balanced Fund) may
hold more than 3% of the total outstanding voting stock of any single investment
company.
The Stock and Bond Balanced Fund may invest 100% of its total assets in the
securities of other investment companies.
PERFORMANCE INFORMATION
From time to time the Trust may publish average annual total return figures for
one or more of the Funds in advertisements and communications to shareholders or
sales literature. Average annual total return is determined by computing the
annual percentage change in value of $1,000 invested for specified periods
ending with the most recent calendar quarter, assuming reinvestment of all
dividends and distributions at net asset value. The average annual total return
calculation assumes a complete redemption of the investment at the end of the
relevant period.
The Trust also may from time to time publish year-by-year total return,
cumulative total return and yield information for the Funds in advertisements,
communications to shareholders or sales literature. These may be provided for
various specified periods by means of quotations, charts, graphs or schedules.
Year-by-year total return and cumulative total return for a specified period are
each derived by calculating the percentage rate required to make a $1,000
investment in a Fund (assuming all distributions are reinvested) at the
beginning of such period equal to the actual total value of such investment at
the end of such period.
Yield is computed by dividing net investment income earned during a recent 30
day period by the product of the average daily number of shares outstanding and
entitled to receive dividends during the period and the price per share on the
last day of the relevant period. The results are compounded on a bond equivalent
(semi-annual) basis and then annualized. Net investment income is equal to the
dividends and interest earned during the period, reduced by accrued expenses for
the period. The calculation of net investment income for these purposes may
differ from the net investment income determined for accounting purposes.
<PAGE>
In addition, the Trust may from time to time publish performance of its Funds
relative to certain performance rankings and indices.
The investment results of the Funds will fluctuate over time and any
presentation of investment results for any prior period should not be considered
a representation of what an investment may earn or what a Fund's performance may
be in any future period.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund is determined as of the time of the close of
trading on the New York Stock Exchange, (currently at 4:00 PM, New York City
time) on each day when the New York Stock Exchange is open except as noted
below. The New York Stock Exchange is scheduled to be open Monday through Friday
throughout the year, except for certain federal and other holidays. The net
asset value of each Fund will not be calculated on the Friday following
Thanksgiving or on December 26, 1997. The net asset value of a Fund is
determined by adding the values of all securities, cash and other assets
(including accrued but uncollected interest and dividends) of that Fund and
subtracting all liabilities (including accrued expenses but excluding capital
and surplus). The net asset value of a share is determined by dividing the net
asset value of a Fund by the number of outstanding shares of that Fund. Except
for the securities and assets of the Money Market Fund and short-term debt
securities with remaining maturities of 60 days or less other than U.S. Treasury
bills, portfolio securities generally will be valued based upon their market
value. All of the securities and assets of the Money Market Fund and short-term
debt securities having remaining maturities of 60 days or less, other than U.S.
Treasury bills, held by any of the other Funds are valued by the amortized cost
method, which approximates market value. Expenses, including the investment
advisory fee payable to SFIM, are accrued daily.
The net asset value per share of the Stock and Bond Balanced Fund will be based,
in part, on the net asset value per share of each of the underlying Funds in
which it invests. Thus, while the net asset value per share of the Stock and
Bond Balanced Fund will be determined as described above, the pricing of the
Stock and Bond Balanced Fund's securities cannot occur until the net asset
values per share of the underlying Funds are determined.
OFFERING, PURCHASE AND REDEMPTION OF SHARES
Pursuant to an underwriting agreement, SFIM acts without remuneration as the
Trust's underwriter in the distribution of the shares of each Fund. See
"Investment Adviser" and "Service Providers" in this prospectus for more
information.
Shares of the Funds are sold in a continuous offering and are authorized to be
offered to the Accounts to support the Contracts. Net purchase payments under
the Contracts are placed in one or more subaccounts of the Accounts and the
assets of each subaccount are invested in the
<PAGE>
shares of the Fund corresponding to that subaccount. The Accounts purchase and
redeem shares of the Funds for their subaccounts at net asset value without
sales or redemption charges.
For each day on which a Fund's net asset value is calculated, the Accounts
transmit to the Trust any orders to purchase or redeem shares of the Fund(s)
based on the purchase payments, redemption (surrender) requests, and transfer
requests from Contract owners, annuitants and beneficiaries that have been
processed that day. The Accounts purchase and redeem shares of each Fund at the
Fund's net asset value per share calculated as of that same day although such
purchases and redemptions may be executed the next morning.
Please refer to the separate prospectuses for the Contracts and the Accounts for
a more detailed description of the procedures whereby a Contract owner,
annuitant or beneficiary may allocate his or her interest in the Account to a
subaccount using the shares of one of the Funds as an underlying investment
medium.
In the future, the Trust may offer shares of one or more of the Funds (including
new funds that might be added to the Trust) to other registered or unregistered
separate accounts of State Farm or its life insurance company affiliates to
support variable annuity or variable life insurance contracts (other than the
Contracts). Likewise, the Trust may also, in the future and subject to obtaining
required regulatory approvals, offer shares of one or more of the Funds directly
to qualified pension and retirement plans.
Because shares of the Funds are offered to Accounts supporting variable annuity
Contracts and Accounts supporting variable life insurance Contracts, a potential
for certain conflicts may exist between the interests of owners of variable
annuity Contracts and owners of variable life insurance Contracts. Likewise, in
the event that shares of any Fund are offered to qualified pension and
retirement plans, a potential for certain conflicts may exist between the
interests of variable annuity contract owners, variable life insurance contract
owners and plan participants. The Trust does not currently foresee any
disadvantage to owners of either variable annuity Contracts or variable life
insurance Contracts arising from the fact that shares of any Fund might be held
by such entities. The Trust's Board of Trustees, however, will monitor the Funds
in order to identify any material irreconcilable conflicts of interest which may
possibly arise, and to determine what action, if any, should be taken in
response to such conflicts.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Trust's intention to distribute, as dividends, substantially all of
the net investment income, if any, from each of the Funds. All dividends of a
Fund are subsequently reinvested
<PAGE>
in additional shares of that Fund at net asset value, subject to redemption
rights discussed above.
The Bond Fund and the Money Market Fund intend to declare dividends from their
net investment income every day. Each of these Funds will distribute such
dividends quarterly by reinvesting them in additional Fund shares at net asset
value.
TAXES
General Tax Information
The Trust intends that each of the Funds will qualify as a regulated investment
company under Subchapter M of Chapter 1 of the Internal Revenue Code of 1986
(the "Code"). If each of the Funds qualifies as a regulated investment company
and the Trust distributes substantially all of its net income and gains to its
shareholders (which it intends to do), then under the provisions of
Subchapter M, the Trust should have little or no income taxable to it under the
Code.
Each Fund of the Trust must meet several requirements to maintain its status as
a regulated investment company. These requirements include the following: (1) at
least 90% of the Fund's gross income must be derived from dividends, interest,
payments with respect to securities loaned, and gains from the sale or
disposition of securities; and (2) at the close of each quarter of the Fund's
taxable year, (a) at least 50% of the value of the Fund's total assets must
consist of cash, U.S. Government securities and other securities (no more than
5% of the value of the Fund may consist of such other securities of any one
issuer, and the Fund must not hold more than 10% of the outstanding voting stock
of any issuer), and (b) the Fund must not invest more than 25% of the value of
its total assets in the securities of any one issuer (other than U.S. Government
securities).
In order to maintain the qualification of a Fund's status as a regulated
investment company, the Trust may, in its business judgment, restrict a Fund's
ability to enter into stock index futures contracts or options on such futures
contracts or engage in short-term trading and transactions in securities
(including stock index futures contracts and options on such futures contracts).
For the same reason, the Trust may, in its business judgment, require a Fund to
defer the closing out of a contract beyond the time when it might otherwise be
advantageous to do so.
Each of the Funds also intends to comply with section 817(h) of the Code and the
regulations issued thereunder, which impose certain investment diversification
requirements on life insurance companies' separate accounts (such as the
Accounts) that are used to fund benefits under variable life insurance and
variable annuity contracts. These requirements are in
<PAGE>
addition to the requirements of subchapter M and of the Investment Company Act
of 1940, and may affect the securities in which a Fund may invest. In order to
comply with the current or future requirements of section 817(h) (or related
provisions of the Code), the Trust may be required, e.g., to alter the
investment objectives of one or more of the Funds. No such change of investment
objectives will take place without notice to the shareholders of an affected
Fund, the approval of a majority of the outstanding voting shares, and the
approval of the Securities and Exchange Commission, to the extent legally
required.
Taxation of Foreign Investments
Funds investing in foreign securities or currencies may be required to pay
withholding or other taxes to foreign governments. Foreign tax withholding from
dividends and interest, if any, is generally at a rate between 10% and 35%. The
investment yield of any Fund that invests in foreign securities or currencies
will be reduced by these foreign taxes. Shareholders will bear the cost of any
foreign tax withholding, but may not be able to claim a foreign tax credit or
deduction for these foreign taxes. Funds investing in securities of passive
foreign investment companies may be subject to U.S. Federal income taxes and
interest charges, and the investment yield of a Fund making such investments
will be reduced by these taxes and interest charges. Shareholders will bear the
cost of these taxes and interest charges, but will not be able to claim a
deduction for these amounts.
Additional Tax Considerations
If a Fund failed to qualify as a regulated investment company, owners of
variable life insurance and annuity contracts based on the Fund (1) might be
taxed currently on the investment earnings under their contracts and thereby
lose the benefit of tax deferral, and (2) the Fund might incur additional taxes.
In addition, if a Fund failed to comply with the diversification requirements of
section 817(h) of the Code and the regulations thereunder, owners of variable
life insurance and annuity contracts based on the Fund would be taxed on the
investment earnings under their contracts and thereby lose the benefit of tax
deferral. Accordingly, compliance with the above rules is carefully monitored by
the Funds' investment advisers and it is intended that each Fund will comply
with these rules as they exist or as they may be modified from time to time.
Compliance with the tax requirements described above may result in a reduction
in the return under a Fund, since, to comply with the above rules, the
investments utilized (and the time at which such investments are entered into
and closed out) may be different from what the Fund's investment adviser might
otherwise believe to be desirable.
It is not feasible to comment on all of the federal tax consequences concerning
the Funds. Since the shareholders of the Funds are currently limited to the
Accounts, no further discussion of those consequences is included herein. For
information concerning the federal
<PAGE>
income tax consequences to the owners of variable life insurance and annuity
contracts, see the prospectuses for the contracts.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The Trust has a Board of Trustees, the members of which are elected by the
shareholders. The Trustees are responsible for the overall management of the
Trust and their duties include reviewing the results of each of the Funds,
monitoring investment activities and techniques, and receiving and acting upon
future plans for the Trust.
It is possible that the interests of the Stock and Bond Balanced Fund could
diverge from the interests of one or more of the underlying Funds in which it
invests. If such interests were ever to become divergent, it is possible that a
conflict of interest could arise and affect how the Trustees and officers
fulfill their fiduciary duties to each Fund. The Trustees believe they have
structured each Fund to avoid these concerns. However, conceivably, a situation
could occur where proper action for the Stock and Bond Balanced Fund could be
adverse to the interests of an underlying Fund, or the reverse could occur. If
such a possibility arises, the affected Funds' investment adviser(s) and the
Trustees and officers of the Trust will carefully analyze the situation and take
all steps they believe reasonable to minimize and, where possible, eliminate the
potential conflict. Moreover, close and continuous monitoring will be exercised
to avoid, insofar as possible, these concerns.
INVESTMENT ADVISER
Pursuant to an investment advisory and management services agreement with the
Trust and subject to the authority of the Trust's Board of Trustees, SFIM serves
as the Trust's investment adviser and conducts the business and affairs of the
Trust. It is registered under the Investment Advisers Act of 1940 and its
principal office is located at One State Farm Plaza, Bloomington, Illinois
61710-0001. SFIM is wholly-owned by State Farm Mutual Automobile Insurance
Company ("SFMAIC"). Pursuant to a separate service agreement among SFMAIC, SFIM
and the Trust, SFMAIC provides SFIM with certain personnel, services and
facilities to enable SFIM to perform its obligations to the Trust.
Since its inception in 1967, SFIM's sole business has been to act as investment
adviser, principal underwriter, transfer agent and dividend disbursing agent for
the State Farm mutual funds. SFIM also provides all executive, administrative,
clerical and other personnel necessary to operate the Trust and pays the
salaries and other costs of employing all these persons. SFIM furnishes the
Trust with office space, facilities, and equipment and pays the day-to-day
expenses related to the operating and maintenance of such office space,
facilities
<PAGE>
and equipment. All expenses incurred in the organization of the Trust or of any
new Funds of the Trust, including legal and accounting expenses and certain
costs of registering securities of the Trust under federal and state securities
laws, are also paid by SFIM.
The Trust is responsible for payment of all expenses it may incur in its
operation and all of its general administrative expenses except those expressly
assumed by SFIM as described in the preceding paragraphs. These include (by way
of description and not of limitation), any share redemption expenses, expenses
of portfolio transactions, shareholder servicing costs, pricing costs, interest
on borrowings by the Trust, charges of the custodians and transfer agent, if
any, cost of auditing services, non-interested Trustees' fees, all taxes and
fees, investment advisory fees (other than subadvisory fees), certain insurance
premiums, cost of maintenance of corporate existence, investor services
(including allocable personnel and telephone expenses), costs of printing and
mailing updated Trust prospectuses to shareholders and contractholders,
preparing, printing and mailing proxy statements and shareholder reports to
shareholders and contractholders, the cost of paying dividends and capital gains
distributions, costs of Trustee and shareholder meetings, dues to trade
organizations, and any extraordinary expenses, including litigation costs in
legal actions involving the Trust, or costs related to indemnification of
Trustees, officers and employees of the Trust. SFIM reimburses SFMAIC for such
costs, direct and indirect, as are fairly attributable to the services performed
and the facilities provided by SFMAIC under the separate service agreement.
Accordingly, the Trust makes no payment to SFMAIC under the service agreement.
The Trust pays SFIM monthly compensation in the form of an investment advisory
fee. The fee is based upon average daily net assets and is accrued daily and
paid to SFIM quarterly at the following annual rates for each of the Funds:
Large Cap Equity Index .26% of net assets
Small Cap Equity Index .40% of net assets
International Equity Index .55% of net assets
Bond .50% of net assets
Money Market .40% of net assets
Stock and Bond Balanced None
SFIM has agreed not to be paid an investment advisory fee for performing its
services for the Stock and Bond Balanced Fund and has agreed to bear any other
expenses incurred by the Stock and Bond Balanced Fund. (This expense limitation
arrangement is voluntary and may be eliminated by SFIM at any time.) However,
SFIM will receive investment advisory fees from managing the underlying Funds in
which the Stock and Bond Balanced Fund invests.
With respect to each of the Funds other than the Stock and Bond Balanced Fund
and the International Equity Index Fund, SFIM has agreed to bear the expenses
incurred by the Fund, other than the investment advisory fee, that exceed .10%
of such Fund's average daily net assets. With respect to the International
Equity Index Fund, SFIM has agreed to bear the expenses incurred by the Fund,
other than the investment advisory fee, that exceed .20% of the Fund's average
daily net assets. These expense limitation arrangements are voluntary and may be
eliminated by SFIM at any time.
<PAGE>
INVESTMENT SUB-ADVISER
SFIM has engaged BGFA as the investment sub-adviser to provide day-to-day
portfolio management for the Large Cap, Small Cap, and International Equity
Index Funds. BGFA was created by the reorganization of Wells Fargo Nikko
Investment Advisors with and into an affiliate of Wells Fargo Institutional
Trust Company, N.A. BGFA is an indirect subsidiary of Barclays Bank PLC and is
located at 45 Fremont Street, San Francisco, California 94105. As of April 30,
1997, BGFA and its affiliates provided investment advisory services for over
$429 billion of assets.
BGFA determines which securities to buy and sell for each of these Funds,
selects the brokers and dealers to effect the transactions, and negotiates
commissions. For its services, SFIM pays BGFA an investment sub-advisory fee
equal to a percentage of the average daily net assets of each index Fund at the
rates set forth below less certain credits also described below. The fee is
accrued daily and paid to BGFA quarterly. The rates upon which the fee is based
are as follows:
Large Cap Equity Index Fund .15% of the next $50,000,000 of net assets
--------------------------- .10% of the next $50,000,000 of net assets
.08% thereafter
Small Cap Equity Index Fund .20% of the next $50,000,000 of net assets
--------------------------- .15% of the next $50,000,000 of net assets
.12% thereafter
International Equity Index Fund .35% of the next $50,000,000 of net assets
------------------------------- .30% of the next $50,000,000 of net assets
.20% thereafter
The quarterly fee payable by SFIM to BGFA with respect to each index Fund will
be reduced by certain credits. The fee with respect to the Large Cap Equity,
Index Fund and Small Cap Equity Index Fund will be reduced by $875 and $2,875
per quarter, respectively. The fee with respect to the International Equity
Index Fund will be reduced by $3,750 per quarter and an additional amount based
upon such Fund's international custody charges.
THE BOND FUND AND THE STOCK AND BOND BALANCED FUND MANAGERS
The Bond Fund's portfolio is managed by a team consisting of Kurt Moser
and Duncan Funk. The Stock and Bond Balanced Fund's portfolio is managed by a
team consisting of Kurt Moser, John Concklin, and Duncan Funk.
Mr. Moser is a Director and, since 1997, a Senior Vice President of SFIM (prior
to 1997, Mr. Moser was a Director and a Vice President of SFIM). Mr. Moser is
also a Vice President of the Trust. In addition to his offices with SFIM and the
Trust, Mr. Moser has held the following positions during the past five years:
Vice President of State Farm Growth Fund, Inc., State Farm Balanced Fund, Inc.,
State Farm Interim Fund, Inc., and State Farm Municipal Bond Fund, Inc.,
Director of State Farm VP Management Corp. since 1997; Vice President --
Investments of SFMAIC, State Farm County Mutual Insurance Company of Texas,
State Farm Lloyds, Inc., and State Farm International Services, Inc., Director
and Vice President -- Investments of State Farm Life Insurance Company, State
Farm Fire and Casualty Company ("SFFCC"), State Farm General Insurance Company,
State Farm Annuity and Life Insurance Company, and State Farm Life and Accident
Assurance Company; Investment Officer of State Farm Indemnity Company; and
Underwriter of State Farm Lloyds.
Mr. Conklin is an Investment Officer of SFIM. Mr. Conklin is also a Vice
President of the Trust. In addition to his offices with SFIM and the Trust, Mr.
Conklin has held the following positions during the last five years: Vice
President -- Common Stocks of SFMAIC, State Farm Life Insurance Company, and
SFFCC since 1997; Vice President of State Farm Balanced Fund, Inc., and State
Farm Interim Fund, Inc., since 1995; Vice President -- Fixed Income of SFMAIC,
State Farm Life Insurance Company, and SFFCC from 1995 to 1997; and Investment
Officer of SFMAIC, State Farm Life Insurance Company, and SFFCC until 1995.
<PAGE>
Mr. Funk is an Investment Analyst for SFMAIC. Mr. Funk has held this position
for the last five years.
USE OF CERTAIN BROKERS
SFIM or BGFA may use brokerage firms that are affiliated with State Farm or BGFA
to execute portfolio trades for the funds, but only when SFIM or BGFA, as
appropriate, believes that no other firm offers a better combination of quality
execution (i.e., timeliness and completeness), favorable price and value of
research services.
ADDITIONAL INFORMATION
ABOUT THE SHARES
The Trust is currently issuing six series of shares, each representing
beneficial interests in one of the six Funds. Each share (including fractional
shares) is entitled to one vote for each dollar of net asset value represented
by that share on all matters to which the holder of that share is entitled to
vote. All shares have equal proportional rights with regard to redemptions,
dividends, distributions, and liquidations with respect to the Fund in which
they represent an interest. When issued, shares are fully paid and
nonassessable and do not have preemptive or conversion rights or cumulative
voting rights.
CONTRACT OWNER VOTING RIGHTS
With regard to matters for which the Investment Company Act of 1940 requires a
shareholder vote, State Farm, as the legal owner of shares held by the Accounts,
typically votes Trust shares held by the Accounts in accordance with
instructions received from owners of Contracts (or annuitants or beneficiaries
thereunder) having a voting interest in the Accounts. Each share has one vote
for each dollar of net asset value represented by that share and votes are
counted on an aggregate basis except as to matters where the interests of Funds
differ (such as approval of an investment advisory agreement or a change in the
fundamental investment policies). In such a case, the voting is on a Fund-by-
Fund basis. Fractional shares are counted proportionally. Shares held by
Accounts for which no instructions are received are generally voted by State
Farm for or against any proposition, or in abstention, in the same proportion as
the shares for which instructions have been received. You should refer to the
separate prospectus, which accompanies this prospectus, describing your Contract
and the Account through which it is offered for more information on your voting
rights.
<PAGE>
ANNUAL AND SEMI-ANNUAL REPORTS
The Trust's annual and semi-annual reports to shareholders contain additional
performance information that will be made available upon request and without
charge.
SERVICE PROVIDERS
In addition to its role as investment adviser and fund accountant for certain
Funds (listed below), SFIM acts as underwriter for the Trust. See "Investment
Adviser" for more information on SFIM.
The following companies provide custody and/or fund accounting services to the
Trust:
<TABLE>
<CAPTION>
Fund Custodian Fund Accountant
- ---- --------- ---------------
<S> <C> <C>
Money Market Chase Manhattan Trust SFIM
Company of Illinois (1)
Large Cap Equity Index Barclays Global Investors (2) SFIM
Small Cap Equity Index Barclays Global Investors (2) SFIM
International Equity Index Investors Bank and Trust
Company (3) Investors Bank and Trust Company (3)
Bond Chase Manhattan Trust
Company of Illinois (1) SFIM
Stock and Bond Balanced Chase Manhattan Trust
Company of Illinois (1) SFIM
</TABLE>
(1) c/o Chase Manhattan Bank, North American Insurance Securities Services,
3 Chase MetroTech Center, 6th Floor, Brooklyn, New York 11245.
(2) 45 Fremont Street, San Francisco, California 94105.
(3) 200 Clarendon Street, Boston, Massachusetts 02116.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP of Washington, D.C. is counsel for the Trust.
There are no material legal proceedings in which the Trust is a party.
<PAGE>
STATE FARM VARIABLE PRODUCT TRUST
One State Farm Plaza
Bloomington, Illinois 61710-0001
(309) 766-2029
STATEMENT OF ADDITIONAL INFORMATION
_________, 1997
This Statement of Additional Information is not a prospectus. Much of the
information contained in this Statement expands upon matters discussed in the
Prospectus and should, therefore, be read in conjunction with the Prospectus.
To obtain a copy of a Prospectus with the same date as this Statement of
Additional Information, contact State Farm Investment Management Corp., One
State Farm Plaza, Bloomington, Illinois 61710-0001, (309) 766-2029.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT TECHNIQUES AND RESTRICTIONS..............................................
Investment Techniques.....................................................
The Money Market Fund................................................
When-Issued and Delayed Delivery Securities..........................
Loans of Portfolio Securities........................................
Convertible Securities...............................................
Warrants.............................................................
U.S. Government Securities...........................................
Foreign Investments..................................................
Financial Futures Contracts..........................................
Options on Stock Index Futures Contracts.............................
Certain Additional Risks of Futures Contracts and
Options on Futures Contracts.....................................
Borrowing............................................................
Investment Restrictions...................................................
Fundamental Restrictions.............................................
Non-fundamental Restrictions.........................................
Industry Concentrations..............................................
MANAGEMENT OF THE TRUST.............................................................
Trustees and Officers.....................................................
Investment Advisory Agreements............................................
Between the Trust and SFIM...........................................
Between SFIM and BGFA................................................
Tracking Error............................................................
Securities Activities of the Investment Advisers..........................
PORTFOLIO TRANSACTIONS AND BROKERAGE................................................
Portfolio Turnover........................................................
DETERMINATION OF NET ASSET VALUE....................................................
PERFORMANCE INFORMATION.............................................................
DIVIDENDS AND DISTRIBUTIONS.........................................................
REDEMPTION OF SHARES................................................................
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ADDITIONAL INFORMATION..............................................................
Service Providers.........................................................
Code of Ethics............................................................
Independent Auditors......................................................
Legal Counsel.............................................................
Shares....................................................................
Voting Rights.............................................................
Other Information.........................................................
AUDITED FINANCIAL STATEMENTS........................................................
APPENDIX A -- Description of Money Market Securities................................
APPENDIX B -- Ratings...............................................................
</TABLE>
<PAGE>
INVESTMENT TECHNIQUES AND RESTRICTIONS
INVESTMENT TECHNIQUES
The objectives, policies, and certain techniques by which the Funds will pursue
their objectives are generally set forth in the Prospectus. This section is
intended to augment the explanation found in the Prospectus.
The Money Market Fund
The Money Market Fund will only invest in instruments denominated in U.S.
dollars that SFIM, under the supervision of the Trust's Board of Trustees,
determines present minimal credit risk and are, at the time of acquisition,
either:
1. rated in one of the two highest rating categories for short-term debt
obligations assigned by at least two NRSROs, or by only one NRSRO if
only one NRSRO has issued a rating with respect to the instrument
("requisite NRSROs"); or
2. in the case of an unrated instrument, that SFIM determines, under the
supervision of the Trust's Board of Trustees, to be of comparable
quality to the instruments described in paragraph 1 above; or
3. issued by an issuer that has received a rating of the type described
in paragraph 1 above on other securities that are comparable in
priority and security to the instrument.
Pursuant to Rule 2a-7 under the Investment Company Act of 1940 (the "Act"),
securities which are rated (or that have been issued by an issuer that has been
rated with respect to a class of short-term debt obligations, or any security
within that class, comparable in priority and quality with such security) in the
highest short-term rating category by at least two NRSROs are designated "First
Tier Securities." Securities rated in the top two short-term rating categories
by at least two NRSROs, but which are not rated in the highest short-term
category by at least two NRSROs, are designated "Second Tier Securities."
NRSROs are listed in the Prospectus and a description of their ratings are found
in Appendix A herein.
Pursuant to Rule 2a-7, the Money Market Fund may not invest more than 5% of its
assets taken at amortized cost in the securities of any one issuer (except the
U.S. Government, including repurchase agreements collateralized by U.S.
Government securities (defined below)). The Fund may, however, invest more than
5% of its assets in the First Tier Securities of a single issuer for a period of
up to three business days after the purchase thereof, although the Fund may not
make more than one such investment at any time.
<PAGE>
Further, the Fund will not invest more than the greater of (i) 1% of its total
assets; or (ii) one million dollars in the securities of a single issuer that
were Second Tier Securities when acquired by the Fund. In addition, the Fund
may not invest more than 5% of its total assets in securities which were Second
Tier Securities when acquired.
The foregoing policies are more restrictive than the fundamental investment
restriction number 1 set forth below, which would give the Fund the ability to
invest, with respect to 25% of its assets, more than 5% of its assets in any one
issuer. The Fund will operate in accordance with these policies to comply with
Rule 2a-7.
When-issued And Delayed Delivery Securities
From time to time, in the ordinary course of business, each Fund may purchase
securities on a when-issued basis or delayed-delivery basis, i.e., delivery and
payment can take place a month or more after the date of the transaction. The
securities so purchased are subject to market fluctuation, and no interest
accrues to the purchaser during this period. At the time a Fund makes the
commitment to purchase securities on a when-issued or delayed-delivery basis,
the Trust will record the transaction and thereafter reflect the value, each
day, of such security in determining the net asset value of that Fund. At the
time of delivery of the securities, the value may be more or less than the
purchase price. Each Fund will also segregate cash or cash equivalents or other
liquid portfolio securities equal in value, marked to market on a daily basis,
to commitments for such when-issued or delayed-delivery securities. As a general
matter each Fund will hold less than 5% of its total assets in commitments to
purchase securities on a delayed-delivery or when-issued basis and will not,
under any circumstances, purchase securities on a when-issued or delayed-
delivery basis if, as a result, more than 10% of the net assets of the Fund
would be so invested.
Loans Of Portfolio Securities
Each Fund may from time to time lend securities that it holds to brokers,
dealers and financial institutions, up to a maximum of 33% of the total value of
each Fund's assets. This percentage may not be increased without approval of a
majority of the outstanding voting securities of the respective Funds. See
"Fundamental Restrictions" on page 10. Such loans will be secured by
collateral in the form of cash or United States Treasury securities, or other
liquid securities as permitted by the Securities and Exchange Commission
("Commission"), which at all times while the loan is outstanding, will be
maintained in an amount at least equal to the current market value of the loaned
securities. The Fund making the loan will continue to receive interest and
dividends on the loaned securities during the term of the loan, and, in
addition, will receive a fee from the borrower or interest earned from the
investment of cash collateral in short-term securities. The Fund will also
receive any gain or loss in the market
<PAGE>
value of loaned securities and of securities in which cash collateral is
invested during the term of the loan.
The right to terminate a loan of securities, subject to appropriate notice, will
be given to either party. When a loan is terminated, the borrower will return
the loaned securities to the appropriate Fund. No Fund will have the right to
vote securities on loan, but each would terminate a loan and regain the right to
vote if the Trust's Board of Trustees deems it to be necessary in a particular
instance.
For tax purposes, the dividends, interest and other distributions which a Fund
receives on loaned securities may be treated as other than qualified income for
the 90% test discussed under "Taxes" in the Prospectus. Each Fund intends to
lend portfolio securities only to the extent that this activity does not
jeopardize its, or the Trust's, status as a regulated investment company under
the Internal Revenue Code of 1986 (the "Code").
The primary risk involved in lending securities is that the borrower will fail
financially and return the loaned securities at a time when the collateral is
insufficient to replace the full amount of the loan. The borrower would be
liable for the shortage, but the Fund making the loan would be an unsecured
creditor with respect to such shortage and might not be able to recover all or
any of it. In order to minimize this risk, each Fund will make loans of
securities only to firms SFIM or, when appropriate, BGFA (under the supervision
of the Board of Trustees) deems creditworthy.
Convertible Securities
The Bond Fund may invest up to 20% of its total assets in convertible
securities. Convertible securities may include corporate notes or preferred
stock but are ordinarily a long-term debt obligation of the issuer convertible
at a stated exchange rate into common stock of the issuer. As with all debt
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates decline.
Convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price
of the common stock underlying a convertible security exceeds the conversion
price, the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
Convertible securities generally rank senior to common stocks in an issuer's
capital structure and are consequently of higher quality and entail less risk of
declines in market value than the issuer's common stock. However, the extent to
which such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed-income security. In
evaluating a convertible security, SFIM usually gives primary emphasis to the
<PAGE>
attractiveness of the underlying common stock. The convertible debt securities
in which the Bond Fund may invest are subject to the same rating criteria as its
investment in non-convertible debt securities.
Because the Stock and Bond Balanced Fund invests a portion of its assets in the
Bond Fund, the Stock and Bond Balanced Fund is subject to the same risks with
regard to investments in convertible securities.
Warrants
The Bond Fund and, indirectly, the Stock and Bond Balanced Fund, may invest in
warrants or rights (other than those acquired in units or attached to other
securities) which entitle the purchaser to buy equity securities at a specific
price for a specific period of time. Warrants and rights have no voting rights,
receive no dividends and have no rights with respect to the assets of the
issuer. The Bond Fund may retain up to 10% of the value of its total assets in
common stocks acquired by the exercise of warrants attached to debt securities.
U.S. Government Securities
All of the Funds may purchase securities issued or guaranteed as to principal
and interest by the U.S. Government, its agencies, authorities or
instrumentalities ("U.S. Government Securities"). Some U.S. Government
Securities, such as Treasury bills, notes and bonds, which differ only in their
interest rates, maturities and times of issuance, are supported by the full
faith and credit of the United States. Others, such as obligations issued or
guaranteed by U.S. Government agencies, authorities or instrumentalities are
supported either by (a) the full faith and credit of the U.S. Government (such
as securities of the Small Business Administration), (b) the right of the issuer
to borrow from the Treasury (such as securities of the Federal Home Loan Banks),
(c) the discretionary authority of the U.S. Government to purchase the agency's
obligations (such as securities of the Federal National Mortgage Association),
or (d) only the credit of the issuer. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government agencies,
authorities or instrumentalities in the future. U.S. Government Securities may
also include zero coupon bonds.
Securities guaranteed as to principal and interest by the U.S. Government, its
agencies, authorities or instrumentalities are considered to include (a)
securities for which the payment of principal and interest is backed by a
guarantee of or an irrevocable letter of credit issued by the U.S. Government,
its agencies, authorities or instrumentalities and (b) participation in loans
made to foreign governments or their agencies that are so guaranteed. The
secondary market for certain of these participations is limited. Such
participations may therefore be regarded as illiquid.
<PAGE>
Foreign Investments
Investing in the securities of companies organized outside the United States or
of companies whose securities are principally traded outside the United States
("foreign issuers") or investments in securities denominated or quoted in
foreign currency ("non-dollar securities") involves certain special
considerations, including those set forth below, which are not typically
associated with investing in securities of domestic issuers or U.S. dollar
denominated securities.
Each of the Large Cap and International Equity Index Funds may invest in non-
dollar securities and the securities of foreign issuers (collectively, "foreign
investments").
Investments in foreign issuers may involve currencies of foreign countries.
Since a Fund may temporarily hold funds in bank deposits in foreign currencies
during completion of investment programs, it may be subject to currency exposure
independent of its securities positions and may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations.
Accordingly, it may incur costs in connection with conversions between various
currencies.
Since foreign issuers are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. issuers, there may be less publicly available information
about a foreign issuer than about a domestic issuer. Volume and liquidity in
most foreign securities markets are less than in the United States and
securities of many foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although a Fund making investments in securities of foreign issuers
will endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
securities exchanges, brokers, dealers and listed and unlisted issuers than in
the United States. Mail service between the United States and foreign countries
may be slower or less reliable than within the United States, thus increasing
the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of a Fund making an investment on such a
market are uninvested and no return is earned on such assets. The inability of
such a Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Moreover, inability
to dispose of portfolio investments due to settlement problems could result
either in losses to the Fund due
<PAGE>
to subsequent declines in value of the portfolio securities or, if the Fund has
entered into a contract to sell the securities, could result in possible
liability for the Fund. In addition, with respect to certain foreign countries,
there is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect a Fund's
investments in those countries. Also, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position.
Financial Futures Contracts
The Large Cap, Small Cap, and International Equity Index Funds and, indirectly,
the Stock and Bond Balanced Fund may purchase and sell stock index futures
contracts and options on such futures contracts as described in the Prospectus.
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. Each Fund may purchase and
sell stock index futures contracts on its benchmark index or similar index.
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 are usually liquidated in this manner, a Fund may instead make
or take delivery of underlying securities whenever it appears economically
advantageous 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 the exchange, the sale and purchase
obligations will be performed with regard to all positions that remain open at
the termination of the contract.
When 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 futures commission merchant ("FCM")
an initial margin of cash or U.S. Treasury bills equaling as much as 5% to 10%
or more of the contract settlement price. The nature of
<PAGE>
initial margin requirements in futures transactions differs from traditional
margin payments made in securities transactions in that initial margins for
futures contracts do not involve the borrowing of funds by the customer to
finance the transaction. Instead, a customer's initial margin on a futures
contract represents a good faith deposit securing the customer's contractual
obligations under the futures contract. The initial margin deposit is returned,
assuming these obligations have been met, when the 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 or stock index 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."
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, a
Fund 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 Stock Index Futures Contracts
The equity index Funds and, indirectly, the Stock and Bond Balanced Fund may
also purchase call and put options and write covered call and put options on
stock index futures contracts of the type which the particular Fund is
authorized to enter into. Covered put and call options on futures contracts
will be covered in the same manner as covered options on securities and
securities indices. The Funds may invest in such options for the purpose of
closing out a futures position that has become illiquid.
Options on futures contracts are traded on exchanges that are licensed and
regulated by the CFTC. A call option on a futures contract gives the purchaser
the right in return for the premium paid, to purchase a 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 right, in return for the premium
paid, to sell a futures contract (assume a "short" position), for a specified
exercise price, at any time before the option expires.
Unlike entering into a futures contract itself, purchasing options on futures
contracts allows a buyer to decline to exercise the option, thereby avoiding any
loss beyond forgoing the purchase price (or "premium") paid for the options.
Whether, in order to achieve a particular objective, the Fund enters into a
stock index futures contract, on the one hand, or an option contract on a stock
index futures contract, on the other, will depend on all the circumstances,
including the relative costs, liquidity, availability and capital requirements
of such futures and options contracts. Each Fund 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.
<PAGE>
Certain Additional Risks Of Futures Contracts And Options On Futures Contracts
In addition to the risks described in the Prospectus, the use of stock index
futures contracts and options on such futures contracts may entail the following
risks. First, although such instruments when used by a Fund are intended to
correlate with the Fund's portfolio securities, in many cases the futures
contracts or options on futures contracts used may be based on stock indices the
components of which are not identical to the portfolio securities owned or
intended to be acquired by the Fund. Second, due to supply and demand
imbalances and other market factors, the price movements of stock index futures
contracts and options thereon may not necessarily correspond exactly to the
price movements of the 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 these
strategies. For example, where price movements in a futures 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 futures contracts which is
greater than the amount of such portfolio securities. Similarly, where the
price movement of a futures 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 the value of a Fund's securities is particularly relevant to
futures contracts. A Fund, in entering into a futures purchase contract,
potentially could lose any or all of the contract's settlement price. In
addition, because stock index futures contracts require delivery at a future
date of 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 index
and the potential cost of settlement to a Fund. A small increase or decrease in
the value of the underlying index can, therefore, result in a much greater
increase or decrease in the cost to the Fund.
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 they seek to "close out" (i.e. terminate) a
particular stock index futures contract position. Trading in such instruments
could be interrupted, for example, because of a lack of either buyers or
sellers. In addition, the futures exchanges may suspend trading after the price
of such instruments has risen or fallen more than the maximum amount specified
by the
<PAGE>
exchange. 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 futures 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 the
Funds' assets posted as margin in connection with these transactions as
permitted under the Act. 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 the Fund could effect such recovery.
The success of any Fund in using these techniques depends, among other things,
on BGFA's ability to predict the direction and volatility of price movements in
the futures markets as well as the securities markets and on its ability to
select the proper type, time, and duration of futures contracts. There can be
no assurance that these techniques will produce their intended results. In any
event, BGFA will use stock index futures contracts and options thereon only when
it believes the overall effect is to reduce, rather than increase, the risks to
which the Fund is exposed. These transactions also, of course, may be more,
rather than less, favorable to a Fund than originally anticipated.
<PAGE>
INVESTMENT RESTRICTIONS
FUNDAMENTAL RESTRICTIONS
The Funds are subject to certain fundamental restrictions on their investments.
These restrictions may not be changed without the approval of the holders of a
majority of the outstanding voting shares of the Funds affected by the change.
1. Diversification. No Fund will make any investment inconsistent with
---------------
the Fund's classification as a diversified company under the Act. This
restriction does not apply to any Fund classified as a non-diversified
company under the Act.
2a. Industry Concentration -- Bond Fund. The Bond Fund will not invest
-----------------------------------
more than 25% of its total assets (taken at market value at the time
of each investment) in the securities of issuers primarily engaged in
the same industry (excluding the U.S. Government or any of its
agencies or instrumentalities).
2b. Industry Concentration -- Money Market Fund. The Money Market Fund
-------------------------------------------
will not invest more than 25% of its assets (taken at market value at
the time of each investment) other than U.S. Government securities,
obligations (other than commercial paper) issued or guaranteed by U.S.
banks and U.S. branches of foreign banks, and repurchase agreements
and securities loans collateralized by U.S. Government securities or
such bank obligations, in the securities of issuers primarily engaged
in the same industry.
2c. Industry Concentration -- Equity Index Funds. The Large Cap, Small
--------------------------------------------
Cap, and International Equity Index Funds will concentrate their
investments in an industry or industries if, and to the extent that,
their benchmark indices concentrate in such industry or industries,
except where the concentration of the relevant index is the result of
a single stock.
3. Interests in Real Estate. No Fund will purchase real estate or any
------------------------
interest therein, except through the purchase of corporate or certain
government securities (including securities secured by a mortgage or a
leasehold interest or other interest in real estate). A security
issued by a real estate or mortgage investment trust is not treated as
an interest in real estate.
4. Underwriting. No Fund will underwrite securities of other issuers
------------
except insofar as the Trust may be deemed an underwriter under the
Securities Act of
<PAGE>
1933 in selling portfolio securities.
5. Borrowing. No Fund will borrow money, except that: (a) a Fund may
---------
borrow from banks (as defined in the Act) or through reverse
repurchase agreements in amounts up to 33 1/3% of its total assets
(including the amount borrowed), taken at market value at the time of
the borrowing; (b) a Fund may, to the extent permitted by applicable
law, borrow up to an additional 5% of its total assets (including the
amount borrowed), taken at market value at the time of the borrowing,
for temporary purposes; and (c) a Fund may obtain such short-term
credits as may be necessary for clearance of purchases and sales of
portfolio securities.
6. Lending. No Fund will lend any security or make any other loan,
-------
except through: (a) the purchase of debt obligations in accordance
with the Fund's investment objective or objectives and policies; (b)
repurchase agreements with banks, brokers, dealers, and other
financial institutions; and (c) loans of securities as permitted by
applicable law.
7. Commodities. No Fund will purchase or sell commodities or commodity
-----------
contracts, except that a Fund may invest in currency and financial
instruments and contracts that are commodities or commodities
contracts.
8. Senior Securities. No Fund will issue senior securities to the extent
-----------------
such issuance would violate applicable law.
9. Investments -- Stock and Bond Balanced Fund. The Stock and Bond
-------------------------------------------
Balanced Fund will not invest in securities other than securities of
other registered investment companies or registered unit investment
trusts that are part of the State Farm group of investment companies
(as defined in the Act), U.S. Government securities, or short-term
paper.
For the purposes of the restrictions relating to industry concentration, state
and municipal governments and their agencies, authorities, and instrumentalities
are not deemed to be industries; utilities will be divided according to their
services (for example, gas, gas transmission, electric and telephone each will
be considered a separate industry); personal credit finance companies and
business credit finance companies are deemed to be separate industries; and
wholly-owned finance companies are considered to be in the industry of their
parents if their activities are primarily related to financing the activities of
their parents.
NON-FUNDAMENTAL RESTRICTIONS
The Trust has also adopted the following additional investment restrictions
applicable (except as noted) to all Funds. These are not fundamental and may be
changed by the Board of
<PAGE>
Trustees without shareholder approval. Under these restrictions, no Fund
may:
1. Financial Futures Contracts. No Fund may 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. Margin Purchases. No Fund may purchase any securities on margin
----------------
except in connection with investments of certain Funds in futures
contracts or options on futures contracts.
3. Pledging Assets. No Fund may mortgage, pledge, hypothecate or in any
---------------
manner transfer, as security for indebtedness, any securities owned or
held by such Fund except: (a) as may be necessary in connection with
borrowings mentioned in fundamental restriction number 5 above, and
then such mortgaging, pledging or hypothecating may not exceed 10% of
the Fund's total assets, taken at market value at the time thereof, or
(b) in connection with investments of certain Funds in futures
contracts or options on futures contracts.
4a. Illiquid Securities and Repurchase Agreements. No Fund may purchase
---------------------------------------------
securities or enter into a repurchase agreement if, as a result, more
than 15% of its net assets would be invested in any combination of:
(i) repurchase agreements not entitling the holder to payment of
principal and interest within seven days, and (ii) securities that are
illiquid by virtue of legal or contractual restrictions on resale or
the absence of a readily available market.
4b. Illiquid Securities and Repurchase Agreements -- Money Market Fund.
------------------------------------------------------------------
In addition to the non-fundamental restriction in 4a above, the Money
Market Fund will not invest in illiquid securities, including certain
repurchase agreements or time deposits maturing in more than seven
days, if, as a result thereof, more than 10% of the value of its total
assets would be invested in assets that are either illiquid or are not
readily marketable.
5. Investments in Other Investment Companies. No Fund may invest more
-----------------------------------------
than 5% of its total assets in the securities of any single investment
company or more
<PAGE>
than 10% of its total assets in the securities of other investment
companies in the aggregate, or hold more than 3% of the total outstanding
voting stock of any single investment company. These restrictions do not
apply to the Stock and Bond Balanced Fund.
State insurance laws and regulations may impose additional limitations on
borrowing, lending, and the use of futures contracts, options on futures
contracts and other derivative instruments. In addition, such laws and
regulations may require a Fund's investments in foreign securities to meet
additional diversification and other requirements.
INDUSTRY CONCENTRATIONS
The Stock and Bond Balanced Fund, because of its investment objective and
policies, will concentrate more than 25% of its total assets in the mutual fund
industry.
As a result of the equity index Funds' policy on concentration, each equity
index Fund will maintain at least 25% of the value of its total assets in
securities of issuers in each industry for which its benchmark index has a
concentration of more than 25% (except where the concentration of the index is
the result of a single stock). No equity index Fund will concentrate its
investments otherwise. If the benchmark index for an equity index Fund has a
concentration of more than 25% because of a single stock (i.e., if one stock in
the benchmark index accounts for more than 25% of the index and it is the only
stock in the index in its industry), the equity index Fund will invest less than
25% of its total assets in such stock and will reallocate the excess to stocks
in other industries. Changes in an equity index Fund's concentration (if any)
and non-concentration would be made "passively" -- that is, any such changes
would be made solely as a result of changes in the concentrations of the
benchmark index's constituents. Since the concentration of each equity index
Fund is based on that of its benchmark index, changes in the market values of
the equity index Fund's portfolio securities will not necessarily trigger
changes in the portfolio of such equity index Fund.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust and their principal occupations for the
last five years are set forth below. Unless otherwise noted, the address of
each Trustee and officer is One State Farm Plaza, Bloomington, Illinois
61710.
<PAGE>
<TABLE>
<CAPTION>
Position(s)
Held Principal Occupation(s)
Name, Age and Address with the Trust During Past Five Years
- -------------------------- -------------- -------------------------------
<S> <C> <C>
Edward B. Rust, Jr.*, Trustee and Chairman of the Board, President
Age 47 President and CEO - State Farm Mutual
Automobile Insurance Company,
State Farm Life and Accident
Assurance Company, State Farm
Annuity and Life Insurance
Company, State Farm Investment
Management Corp., State Farm
Growth Fund, Inc., State Farm
Balanced Fund, Inc., State Farm
Interim Fund, Inc., and State Farm
Municipal Bond Fund, Inc.,
President, CEO and Director -State
Farm VP Management Corp. (since
1997); President and CEO - State
Farm Fire and Casualty Company and
State Farm General Insurance
Company; President - State Farm
County Mutual Insurance Company of
Texas; Director - State Farm
Lloyds, Inc. and State Farm
International Services, Inc.;
Chairman of the Board, President
and Treasurer - State Farm
Companies Foundation.
Albert R. Hoopes, Trustee Attorney
Age 82
102 S. East Street
Suite 350
Bloomington, IL 61701
Roger S. Joslin*, Trustee, Vice Director, Senior Vice President
Age 61 President and and Treasurer, State Farm Mutual
Treasurer Automobile Insurance Company;
Director - State Farm Life
Insurance Company, State Farm Life
and Accident Assurance Company,
and State Farm Annuity and Life
Insurance Company; Director, Vice
President and Treasurer- State
Farm Investment Management Corp.,
State Farm Growth Fund, Inc.,
State Farm Balanced Fund, Inc.,
State Farm Interim Fund, Inc.,
State Farm Municipal Bond Fund,
Inc., State Farm General Insurance
Company, State Farm Lloyds, Inc.,
and State Farm International
Services, Inc.; Director, Vice
President and Treasurer - State
Farm VP Management Corp. (since
1997); Director, Chairman of the
Board, and Treasurer - State Farm
Fire and Casualty Company;
Treasurer -State Farm County
Mutual Insurance Company of Texas;
Assistant Treasurer - State Farm
Companies Foundation.
Davis U. Merwin, Trustee Investor
Age 69
P.O. Box 8
Bloomington, IL 61702
James A. Shirk, Trustee Director and President, Beer
Age 53 Nuts, Inc.
103 N. Robinson
Bloomington, IL 61701
Kurt G. Moser, Vice Vice President -- Investments -
Age 52 President State Farm Mutual Automobile
Insurance Company; Director and
Vice President -- Investments -
State Farm Life Insurance Company,
State Farm Life and Accident
Assurance Company, State Farm
Annuity and Life Insurance
Comapny, State Farm Fire and
Casualty Company, and State Farm
General Insurance Company;
Director and Senior Vice
President - State Farm Investment
Management Corp. (since 1997:
prior to 1997, Director and Vice
President); Vice President - State
Farm Growth Fund, Inc., State Farm
Balanced Fund, Inc., State Farm
Interim Fund, Inc., and State Farm
Municipal Bond Fund, Inc.;
Director - State Farm VP
Management Corp. (since 1997);
Vice President -- Investments -
State Farm County Mutual Insurance
Company of Texas, State Farm
Lloyds, Inc., and State Farm
International Services, Inc.;
Investment Officer - State Farm
Indemnity Company; Underwriter -
State Farm Lloyds.
Paul N. Eckley Vice Vice President -- Common Stocks -
Age 42 President State Farm Mutual Automobile
Insurance Company, and State
Farm Fire and Casualty Company
(since 1995: prior to 1995,
Investment Officer); Senior Vice
President - State Farm Investment
Management Corp. (since 1997:
prior to 1997, Investment
Officer); Vice President - State
Farm Growth Fund, Inc., and State
Farm Balanced Fund, Inc. (since
1995).
John S. Concklin Vice Vice President -- Common Stocks -
Age 51 President State Farm Mutual Automobile
Insurance Company, State Farm Life
Insurance Company, and State Farm
Fire and Casualty Company (since
1997; from 1995 - 1997, Vice
President --Fixed Income and prior
to 1995, Investment Officer);
Investment Officer - State Farm
Investment Management Corp. (since
1995); Vice President - State Farm
Balanced Fund, Inc. and State Farm
Interim Fund, Inc. (since
1995).
David R. Grimes Assistant Assistant Vice President of
Age 55 Vice Accounting - State Farm Mutual
President and Automobile Insurance Company;
Secretary Assistant Vice President and
Secretary - State Farm Investment
Management Corp., State Farm
Growth Fund, Inc., State Farm
Balanced Fund, Inc., State Farm
Interim Fund, Inc., and State Farm
Municipal Bond Fund, Inc. (since
1994); Assistant Vice President
and Secretary - State Farm VP
Management Corp. (since 1997).
Michael L.Tipsord Assistant Assistant Controller - State Farm
Age 38 Secretary Mutual Automobile Insurance
Company (since 1996: from 1995 -
1996, Director of Accounting and
prior to 1995, Staff Associate);
Assistant Secretary - State Farm
Investment Management Corp., State
Farm Growth Fund, Inc., State Farm
Balanced Fund, Inc., and State
Farm Municipal Bond Fund, Inc.;
Treasurer - Insurance Placement
Services, Inc. (since 1996).
Jerel S. Chevalier Assistant Director of Mutual Funds - State
Age 59 Secretary- Farm Mutual Automobile Insurance
Treasurer Company; Assistant Secretary-
Treasurer - State Farm Investment
Management Corp., State Farm
Growth Fund, Inc., State Farm
Balanced Fund, Inc., State Farm
Interim Fund, Inc., and State Farm
Municipal Bond Fund, Inc. (since
1994).
Patricia L. Dysart Assistant Assistant Counsel - State Farm
Age 34 Secretary Mutual Automobile Insurance
Company; Assistant Secretary -
State Farm Investment Management
Corp., State Far, Growth Fund,
Inc., State Farm Balanced Fund,
Inc., State Farm Interim Fund,
Inc., and State Farm Municipal
Bond Fund, Inc. (since 1995);
Assistant Secretary - State Farm
VP Management Corp. (since
1997).
</TABLE>
* Trustee who is an "interested person" of the Trust or SFIM, as defined in the
1940 Act.
Trustees or officers who are interested persons of the Trust do not receive any
compensation from the Trust for their services to the Trust. The Trustees who
are not interested persons of the Trust receive compensation from the Trust at a
rate of $300 per meeting, per Fund. In addition, Trustees who are not
interested persons of the Trust are reimbursed for any out-of-pocket expenses
incurred in connection with affairs of the Trust.
Trustees and officers of the Trust do not receive any benefits from the Trust
upon retirement nor does the Trust accrue any expenses for pension or retirement
benefits.
<TABLE>
<CAPTION>
Aggregate Total Compensation From the Trust
Compensation and Other State Farm Funds(2)
Name from the Trust(1) During Past Five Years
- --------------------- ------------------- ---------------------------------
<S> <C> <C>
Edward B. Rust, Jr. None(3) None(3)
Albert H. Hoopes $5,400 $12,000
Roger S. Joslin None(3) None(3)
Davis U. Merwin $5,400 $12,000
James A. Shirk $5,400 $12,000
</TABLE>
(1) Estimated compensation for the fiscal year ending December 31, 1997.
(2) The "other State Farm Funds" are State Farm Growth Fund, Inc., State Farm
Balanced Fund, Inc., State Farm Interim Fund, Inc., and State Farm
Municipal Bond Fund, Inc.
(3) Non-compensated interested trustee.
INVESTMENT ADVISORY AGREEMENTS
Between The Trust And SFIM
The duties and responsibilities of SFIM are specified in the Investment Advisory
and Management Services Agreement between the Trust and SFIM and the separate
Service Agreement among the Trust, SFIM and State Farm Mutual Automobile
Insurance Company ("SFMAIC") (collectively, the "Management Agreements"). The
Management Agreements were approved for each Fund by the Board of Trustees of
the Trust (including a majority of Trustees who are not parties to the Agreement
or interested persons, as defined by the Act, of any such party) at a meeting
held for that purpose on September 12, 1997 and the shareholders of each Fund at
a meeting held on _________. The Management Agreements are not assignable and
each may be terminated without penalty upon 60 days written notice at the option
of the Trust, SFIM or SFMAIC, as appropriate, or by a vote of shareholders. Each
Management Agreement provides that it shall continue in effect for two years and
can thereafter be continued for each Fund from year to year so long as such
continuance is specifically approved annually (a) by the Board of Trustees of
the Trust or by a majority of the outstanding voting shares of the Fund and (b)
by a majority vote of the Trustees who are not parties to the Agreement, or
interested persons of any such party, cast in person at a meeting held for that
purpose.
<PAGE>
SFIM (under the supervision of the Board of Trustees) continuously furnishes an
investment program for the Funds other than the Large Cap, Small Cap, and
International Equity Index Funds, is responsible for the actual managing of the
investments of such Funds and has responsibility for making decisions governing
whether to buy, sell or hold any particular security. In carrying out its
obligations to manage the investment and reinvestment of the assets of these
Funds, SFIM performs research and obtains and evaluates pertinent economic,
statistical and financial data relevant to the investment policies of these
Funds.
As described below, SFIM has engaged Barclays Global Fund Advisors ("BGFA") as
the investment sub-adviser to provide day-to-day portfolio management for the
Large Cap, Small Cap, and International Equity Index Funds.
SFIM is responsible for payment of all expenses it may incur in performing the
services described. These expenses include costs incurred in providing
investment advisory services, compensating and furnishing office space for
officers and employees of SFIM connected with investment and economic research,
trading and investment management of the Trust and the payment of any fees to
interested Trustees of the Trust. SFIM provides all executive, administrative,
clerical and other personnel necessary to operate the Trust and pays the
salaries and other employment related costs of employing those persons. SFIM
furnishes the Trust with office space, facilities and equipment and pays the
day-to-day expenses related to the operation and maintenance of such office
space facilities and equipment. All other expenses incurred in the organization
of the Trust or of new Funds of the Trust, including legal and accounting
expenses and costs of registering securities of the Trust under federal and
state securities laws, are also paid by SFIM.
Pursuant to the Service Agreement, SFMAIC provides SFIM with certain personnel,
services and facilities to enable SFIM to perform its obligations to the Trust.
SFIM reimburses SFMAIC for such costs, direct and indirect, as are fairly
attributable to the services performed and the facilities provided by SFMAIC
under the separate service agreement. Accordingly, the Trust makes no payment to
SFMAIC under the Service Agreement.
The Trust is responsible for payment of all expenses it may incur in its
operation and all of its general administrative expenses except those expressly
assumed by SFIM as described in the preceding paragraphs. These include (by way
of description and not of limitation), any share redemption expenses, expenses
of portfolio transactions, shareholder servicing costs, pricing costs (including
the daily calculation of net asset value), interest on borrowings by the Trust,
charges of the custodian and transfer agent, if any, cost of auditing services,
non-interested Trustees' fees, legal expenses, all taxes and fees, investment
advisory fees, certain insurance premiums, cost of maintenance of corporate
existence, investor services (including allocable personnel and telephone
expenses), costs of printing and mailing updated Trust prospectuses to
shareholders and contractholders, costs of preparing, printing, and mailing
proxy statements and shareholder reports to shareholders and contractholders,
the cost of paying dividends and
<PAGE>
capital gains distribution, capital stock certificates, costs of Trustee and
shareholder meetings, dues to trade organizations, and any extraordinary
expenses, including litigation costs in legal actions involving the Trust, or
costs related to indemnification of Trustees, officers and employees of the
Trust.
The Board of Trustees of the Trust determines the manner in which expenses are
allocated among the Funds of the Trust.
The Agreement also provides that SFIM shall not be liable to the Trust or to any
shareholder or contract owner for any error of judgment or mistake of law or for
any loss suffered by the Trust or by any shareholder in connection with matters
to which the such Agreements relate, except for a breach of fiduciary duty or a
loss resulting from willful misfeasance, bad faith, gross negligence, or
reckless disregard on the part of SFIM in the performance of its duties
thereunder.
Between SFIM And BGFA
Pursuant to the separate sub-advisory agreement described below (the "Sub-
advisory Agreement"), SFIM has engaged BGFA as the investment sub-adviser to
provide day-to-day portfolio management for the Large Cap, Small Cap, and
International Equity Index Funds.
The Sub-Advisory Agreement was approved for each Fund by the Board of Trustees
of the Trust (including a majority of Trustees who are not parties to such
Agreements or interested persons, as defined by the Act, of any such party) at a
meeting held for that purpose on September 12, 1997 and the shareholders of each
Fund at a meeting held on _________. The Sub-advisory Agreement is not
assignable and may be terminated without penalty upon 60 days written notice at
the option of SFIM or BGFA, or by the Board of Trustees of the Trust or by a
vote of a majority of the outstanding shares of the class of stock representing
an interest in the appropriate Fund. The Sub-advisory Agreement provides that it
shall continue in effect for two years and can thereafter be continued for each
Fund from year to year so long as such continuance is specifically approved
annually (a) by the Board of Trustees of the Trust or by a majority of the
outstanding shares of the Fund and (b) by a majority vote of the Trustees who
are not parties to the Agreement, or interested persons of any such party, cast
in person at a meeting held for that purpose.
BGFA manages the investments of the Large Cap, Small Cap, and International
Equity Index Funds, respectively, determining which securities or other
investments to buy and sell for each, selecting the brokers and dealers to
effect the transactions, and negotiating commissions. In placing orders for
securities transactions, BGFA follows SFIM's policy of seeking to obtain the
most favorable price and efficient execution available.
<PAGE>
TRACKING ERROR
SFIM and BGFA use the "expected tracking error" of an equity index Fund as a way
to measure the Funds' performance relative to the performance of its benchmark
index. An expected tracking error of 5% means that there is a 68% probability
that the net asset value of the equity index Fund will be between 95% and 105%
of the subject index level after one year, without rebalancing the portfolio
composition. A tracking error of 0% would indicate perfect tracking, which would
be achieved when the net asset value of the equity index Fund increases or
decreases in exact proportion to changes in its benchmark index. Factors such as
expenses of the Fund, taxes, the need to comply with the diversification and
other requirements of the Code and other requirements may adversely impact the
tracking of the performance of an equity index Fund to that of its benchmark
index. In the event that tracking error exceeds 5%, the Board of Trustees of the
Trust will consider what action might be appropriate to reduce the tracking
error.
SECURITIES ACTIVITIES OF THE INVESTMENT ADVISERS
Securities held by the Trust may also be held by separate accounts or mutual
funds for which SFIM or BGFA acts as an adviser, some of which may be affiliated
with SFIM or BGFA. Because of different investment objectives or other factors,
a particular security may be bought by SFIM or BGFA for one or more of its
clients, when one or more other clients are selling the same security. If
purchases or sales of securities for a Fund or other client of SFIM or BGFA
arise for consideration at or about the same time, transactions in such
securities will be allocated as to amount and price, insofar as feasible, for
the Fund and other clients in a manner deemed equitable to all. To the extent
that transactions on behalf of more than one client of SFIM or BGFA during the
same period may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price. It is the
opinion of the Trustees of the Trust, however, that the benefits available to
the Trust outweigh any possible disadvantages that may arise from such
concurrent transactions.
On occasions when SFIM or BGFA (under the supervision of the Board of Trustees)
deems the purchase or sale of a security to be in the best interests of the
Trust as well as other accounts or companies, it may, to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Trust with those to be sold or
purchased for other accounts or companies in order to obtain favorable execution
and low brokerage commissions. In that event, allocation of the securities
purchased or sold, as well as the expenses incurred in the transaction, will be
made by SFIM or BGFA in the manner it considers to be most equitable and
consistent with its fiduciary obligations to the Trust and to such other
accounts or companies. In some cases this procedure may adversely affect the
size of the position obtainable for a Fund.
<PAGE>
In performing their functions, neither SFIM nor BGFA will execute private sales
of securities among the Funds or between a Fund and any other investment account
it manages.
PORTFOLIO TRANSACTIONS AND BROKERAGE
As described above, either SFIM or BGFA determines which securities to buy and
sell for the Funds, selects brokers and dealers to effect the transactions, and
negotiates commissions. Transactions in equity securities will usually be
executed through brokers who will receive a commission paid by the Fund. Fixed
income securities are generally traded with dealers acting as principals for
their own accounts without a stated commission. The dealer's margin is reflected
in the price of the security. Money market obligations may be traded directly
with the issuer. Underwritten offerings of stock may be purchased at a fixed
price including an amount of compensation to the underwriter.
In placing orders for securities transactions, SFIM's policy (followed by BGFA)
is to attempt to obtain the most favorable price and efficient execution
available. These entities, subject to the review of the Trust's Board of
Trustees, may pay higher than the lowest possible commission in order to obtain
better than average execution of transactions and/or valuable investment
research information described below, if, in their opinion, improved execution
and investment research information will benefit the performance of each of the
Funds.
When selecting broker-dealers to execute portfolio transactions, SFIM considers
factors including the rate of commission or size of the broker-dealer's
"spread", the size and difficulty of the order, the nature of the market for the
security, the willingness of the broker-dealer to position, the reliability,
financial condition and general execution and operational capabilities of the
broker-dealer, and the research, statistical and economic data furnished by the
broker-dealer to SFIM. In some cases, SFIM may use such information to advise
other investment accounts that it advises. Brokers or dealers which supply
research may be selected for execution of transactions for such other accounts,
while the data may be used by SFIM in providing investment advisory services to
the Trust. In addition, SFIM may select broker-dealers to execute portfolio
transactions who are affiliated with the Trust or SFIM. However, all such
directed brokerage will be subject to SFIM's policy to attempt to obtain the
most favorable price and efficient execution possible.
PORTFOLIO TURNOVER
There are no fixed limitations regarding the portfolio turnover rate for either
the Bond Fund or Money Market Fund, and securities initially satisfying the
<PAGE>
objectives and policies of one of these Funds may be disposed of when they are
no longer deemed suitable. Consistent with each equity index Fund's investment
objective, the Large Cap, Small Cap, and International Equity Index Funds will
attempt to minimize portfolio turnover. The Stock and Bond Balanced Fund's
portfolio turnover is expected to be low. The Stock and Bond Balanced Fund will
purchase or sell securities to: (i) accommodate purchases and sales of its
shares; (ii) change the percentages of its assets invested in each of the
underlying Funds in response to market conditions; and (iii) maintain or modify
the allocation of its assets among the underlying Funds within the percentage
limits described in the Prospectus.
Since short term instruments are excluded from the calculation of a portfolio
turnover rate, no meaningful portfolio turnover rate can be estimated or
calculated for the Money Market Fund. Turnover rates may vary greatly from year
to year as well as within a particular year and may also be affected by cash
requirements for redemptions of a Fund's shares and by requirements, the
satisfaction of which enable the Trust to receive certain favorable tax
treatment.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund is determined as of the time of the close of
regular session trading on the New York Stock Exchange, (currently at 4:00 PM,
New York City time) on each day when the New York Stock Exchange is open except
as noted below. The New York Stock Exchange is scheduled to be open Monday
through Friday throughout the year, except for certain federal and other
holidays. The net asset value of each Fund will not be calculated on the Friday
following Thanksgiving or on December 26, 1997. The net asset value per share is
computed by dividing the difference between the value of the Fund's assets and
liabilities by the number of shares outstanding. Interest earned on portfolio
securities and expenses, including fees payable to SFIM, are accrued daily.
Equity securities (including common stocks, preferred stocks, convertible
securities and warrants) and call options written on all portfolio securities,
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
are valued at the last sale price on the Nasdaq (National Association of
Securities Dealers Automated Quotations) National Market. In the absence of any
National Market sales on that day, equity securities are valued at the last
reported bid price.
Debt securities traded on a national exchange are valued at their last sale
price on that exchange prior to the time when assets are valued, or, lacking any
sales, at the last reported bid price. Debt securities other than money market
instruments traded in the over-the-counter market are valued at the last
reported bid price or at yield equivalent as obtained from one or more dealers
that make markets in the securities.
<PAGE>
If the market quotations described above are not available, debt securities,
other than short-term debt securities, may be valued at fair value as determined
by one or more independent pricing services (each, a "Service"). The Service may
use available market quotations and employ electronic data processing techniques
and/or a matrix system to determine valuations. Each Service's procedures are
reviewed by the officers of the Trust under the general supervision of the Board
of Trustees.
Debt instruments held with a remaining maturity of 60 days or less (other than
U.S. Treasury bills) are generally valued on an amortized cost basis. Under the
amortized cost basis method of valuation, the security is initially valued at
its purchase price (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),
and thereafter by amortizing any premium or discount uniformly to maturity. If
for any reason the Trustees believe the amortized cost method of valuation
does not fairly reflect the fair value of any security, fair value will be
determined in good faith by or under the direction of the Board of Trustees of
the Trust as in the case of securities having a maturity of more than 60
days.
Securities that are primarily traded on foreign securities exchanges are
generally valued at the last sale price on the exchange where they are primarily
traded. All foreign securities traded on the over-the-counter market are valued
at the last sale quote, if market quotes are available, or the last reported bid
price if there is no active trading in a particular security on a given day.
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. Forward currency contracts are valued at the current cost of
offsetting the contract. Because of the need to value foreign securities (other
than American Depositary Receipts) 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 foreign securities may not take place
contemporaneously with the valuation of such foreign securities in such Funds.
In addition, foreign securities held by the Large Cap and International Equity
Index Funds may be traded actively in securities markets which are open for
trading on days when those Funds do not calculate their net asset value.
Accordingly, there may be occasions when the Large Cap or International Equity
Index Fund does not calculate its net asset value but when the value of such
Fund's portfolio securities is affected by such trading activity.
Securities for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Trustees of the Trust, including valuations provided by a Service retained for
this purpose.
Exchange listed put options written and options purchased are valued on the
primary exchange on which they are traded. Over-the-counter options written or
purchased by a Fund are valued
<PAGE>
based upon prices provided by market-makers in such securities. Exchange-traded
financial futures contracts are valued at their settlement price established
each day by the board of trade or exchange on which they are traded.
All of the assets of the Money Market Fund are valued on the basis of amortized
cost in an effort to maintain a constant net asset value of $1.00 per share. The
Board of Trustees of the Trust (the "Board") has determined this to be in the
best interests of the Money Market Fund and its shareholders. Under the
amortized cost method of valuation, securities are valued at cost on the date of
their acquisition, and thereafter as adjusted for amortization of premium or
accretion of discount, 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 the Fund would receive if it sold the
security. During such periods, the quoted 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 Board has established procedures reasonably designed, taking into account
current market conditions and the Money Market Fund's investment objectives, 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.
PERFORMANCE INFORMATION
The Trust may from time to time quote or otherwise use average annual total
return information for the Funds in advertisements, shareholder reports or sales
literature. Average annual total return values are computed pursuant to
equations specified by the Commission.
Average annual total return for a specified period is derived by calculating the
actual dollar amount of the investment return on a $1,000 investment in a Fund
made at the beginning of the period, and then calculating the annual compounded
rate of return which would produce that amount, assuming a redemption at the end
of the period. This calculation assumes a
<PAGE>
complete redemption of the investment. It also assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period.
The Trust also may from time to time quote or otherwise use year-by-year total
return, cumulative total return and yield information for the Funds in
advertisements, shareholder reports or sales literature. Year-by-year total
return and cumulative total return for a specified period are each derived by
calculating the percentage rate required to make a $1,000 investment in a Fund
(assuming that all distributions are reinvested) at the beginning of such period
equal to the actual total value of such investment at the end of such period.
Yield is computed by dividing net investment income earned during a recent 30
day period by the product of the average daily number of shares outstanding and
entitled to receive dividends during the period and the price per share on the
last day of the relevant period. The results are compounded on a bond equivalent
(semi-annual) basis and then annualized. Net investment income is equal to the
dividends and interest earned during the period, reduced by accrued expenses for
the period. The calculation of net investment income for these purposes may
differ from the net investment income determined for accounting purposes.
Any performance data quoted for a Fund will represent historical performance and
the investment return and principal value of an investment will fluctuate so
that shares, when redeemed, may be worth more or less than original cost.
From time to time the Trust may publish an indication of the Funds' past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Incorporated, Weisenberger Investment Companies
Service, Donoghue's Money Fund Report, Barron's, Business Week, Changing Times,
Financial World, Forbes, Fortune, Money, Personal Investor, Sylvia Porter's
Personal Finance and The Wall Street Journal. The Trust may also advertise
information which has been provided to the NASD for publication in regional and
local newspapers. In addition, the Trust may from time to time advertise its
performance relative to certain indices and benchmark investments, including (a)
the Lipper Analytical Services, Inc. Mutual Fund Performance Analysis, Fixed-
Income Analysis and Mutual Fund Indices (which measure total return and average
current yield for the mutual fund industry and rank mutual fund performance);
(b) the CDA Mutual Fund Report published by CDA Investment Technologies, Inc.
(which analyzes price, risk and various measures of return for the mutual fund
industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor
Statistics (which measures changes in the price of goods and services); (d)
Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which
provides historical performance figures for stocks, government securities and
inflation); (e) the Hambrecht & Quist Growth Stock Index; (f) the Nasdaq OTC
Composite Prime Return; (g) the Russell Midcap Index; (h) the Russell 2000
Index-Total Return; (i) the ValueLine Composite-Price Return; (j) the Wilshire
4600 Index; (k) the Salomon Brothers' World Bond Index (which
<PAGE>
measures the total return in U.S. dollar terms of government bonds, Eurobonds
and foreign bonds of ten countries, with all such bonds having a minimum
maturity of five years); (1) the Shearson Lehman Brothers Aggregate Bond Index
or its component indices (the Aggregate Bond Index measures the performance of
Treasury, US. Government agencies, mortgage and Yankee bonds); (m) the S&P Bond
indices (which measure yield and price of corporate, municipal and U.S.
Government bonds); (n) the J.P. Morgan Global Government Bond Index; (o)
Donoghue's Money Market Fund Report (which provides industry averages of 7-day
annualized and compounded yields of taxable, tax-free and U.S. Government money
market funds); (p) other taxable investments including certificates of deposit,
money market deposit accounts, checking accounts, savings accounts, money market
mutual funds and repurchase agreements; (q) historical investment data supplied
by the research departments of Goldman Sachs, Lehman Brothers, First Boston
Corporation, Morgan Stanley (including EAFE "Free"), Salomon Brothers, Merrill
Lynch, Donaldson Lufkin and Jenrette or other providers of such data; (r) the
FT-Actuaries Europe and Pacific Index; (s) mutual fund performance indices
published by Variable Annuity Research & Data Service; and (t) mutual fund
performance indices published by Morningstar, Inc. The composition of the
investments in such indices and the characteristics of such benchmark
investments are not identical to, and in some cases are very different from,
those of a Fund's portfolio. These indices and averages are generally unmanaged
and the items included in the calculations of such indices and averages may be
different from those of the equations used by the Trust to calculate a Fund's
performance figures.
The Trust may from time to time summarize the substance of discussions contained
in shareholder reports in advertisements and publish the Advisers' views as to
markets, the rationale for a Fund's investments and discussions of the Fund's
current asset allocation.
From time to time, advertisements or information may include a discussion of
certain attributes or benefits to be derived by an investment in a particular
Fund. Such advertisements or information may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
in the communication.
Such performance data will be based on historical results and will not be
intended to indicate future performance. The total return or yield of a Fund
will vary based on market conditions, portfolio expenses, portfolio investments
and other factors. The value of a Fund's shares will fluctuate and your shares
may be worth more or less than their original cost upon redemption.
DIVIDENDS AND DISTRIBUTIONS
It is the Trust's intention to distribute substantially all the net investment
income, if any, of a Fund. Dividends from net investment income of a Fund will
be paid at least semi-annually and are expected to be reinvested in additional
full and fractional shares of that Fund. Shares
<PAGE>
will begin accruing dividends on the day following the date on which the shares
are issued, the date of issuance customarily being the "settlement" date.
REDEMPTION OF SHARES
Shares are redeemed at the net asset value per share next determined after the
receipt of proper notice of redemption. Payment for redeemed shares will
generally occur within seven days of receipt of a proper notice of redemption.
The Trust reserves the right to redeem shares in kind.
The right to redeem shares or to receive payment with respect to any redemption
may be suspended for any period during which trading on the New York Stock
Exchange is restricted as determined by the Commission or when such Exchange is
closed (other than customary weekend and holiday closings) for any period during
which an emergency exists, as defined by the Commission, which makes disposal of
a Fund's securities or determination of the net asset value of a Fund not
reasonably practicable, and for any other periods as the Commission may by order
permit for the protection of shareholders of the Fund.
ADDITIONAL INFORMATION
SERVICE PROVIDERS
Pursuant to an underwriting agreement and in addition to its duties as
investment adviser, SFIM acts as principal underwriter for the Trust.
Chase Manhattan Trust Company of Illinois, c/o Chase Manhattan Bank, North
American Insurance Securities Services, 3 Chase MetroTech Center, 6th Floor,
Brooklyn, New York 11245 ("Chase Manhattan"), acts as custodian of the
assets of the Money Market Fund, Bond Fund, and Stock and Bond Balanced Fund.
Under its custody agreement with the Trust, Chase Manhattan maintains the
portfolio securities acquired by the Money Market, Bond, and Stock and Bond
Balanced Funds, administers the purchases and sales of portfolio securities,
collects interest and dividends and other distributions made on the securities
held in the portfolios of these Funds, and performs such other ministerial
duties as are included in the custody agreement, a copy of which is on file with
the Commission. Similarly, Barclays Global Investors, 45 Fremont Street, San
Francisco, California 94105 ("BGI"), is the Trust's custodian for the Large Cap
and Small Cap Equity Index Funds. Under its custody agreement with the Trust,
BGI maintains the portfolio securities acquired by the Large Cap and Small Cap
Equity Index Funds, administers the purchases and sales of portfolio securities,
collects interest and dividends and other distributions made on the securities
held in the portfolios of these Funds, and performs such other ministerial
duties as are included in the custody agreement, a copy of which is on file with
the Commission. Investors Bank and Trust Company, 200 Clarendon Street, Boston,
Massachusetts 02116 ("IBT"), is the Trust's custodian for the International
Equity Index Fund. Under its custody agreement with the Trust, IBT maintains the
portfolio securities acquired by the International Equity Index Funds,
administers the purchases and sales of portfolio securities, collects interest
and dividends and other distributions made on the securities held in the
portfolios of this Fund, and performs such other ministerial duties as are
included in the custody agreement, a copy of which is on file with the
Commission.
Chase Manhattan, BGI, and IBT (the "custodians") may hold securities of the
<PAGE>
Funds in amounts sufficient to cover put and call options written on futures
contracts in a segregated account by transferring (upon the Trust's
instructions) assets from a Fund's general (regular) custody account. The
custodians also will hold certain assets of certain of the Funds constituting
margin deposits with respect to financial futures contracts at the disposal of
FCMs through which such transactions are effected.
SFIM performs fund accounting services, including the valuation of portfolio
securities and the calculation of net asset value, for each of the Funds other
than the International Equity Index Fund. IBT performs fund accounting services
for the International Equity Index Fund.
CODE OF ETHICS
SFIM intends that: all of its activities function exclusively for the benefit of
the owners or beneficiaries of the assets it manages; assets under management or
knowledge as to current or prospective transactions in managed assets are not
utilized for personal advantage or for the advantage of anyone other than the
owners or beneficiaries of those assets; persons associated with SFIM and the
Trust avoid situations involving actual or potential conflicts of interest with
the owners or beneficiaries of managed assets; and situations appearing to
involve actual or potential conflicts of interest or impairment of objectivity
are avoided whenever doing so does not run counter to the interests of the
owners or beneficiaries of the managed assets. The Board of Trustees of the
Trust has adopted a Code of Ethics which imposes certain prohibitions,
restrictions, preclearance requirements and reporting rules on the personal
securities transactions of subscribers to the Code, who include the Trust's
officers and Trustees and the employees of SFIM. Barclays has adopted a similar
Code of Ethics relating to its employees, and the Board of Trustees of the Trust
has adopted Barclays' Code of Ethics insofar as it relates to Barclays'
employees' activities in connection with the Trust. The Board of Trustees
believes that the provisions of its Code of Ethics and Barclays' Code of Ethics
are reasonably designed to prevent subscribers from engaging in conduct that
violates these principles.
INDEPENDENT AUDITORS
Ernst & Young, LLP acts as independent auditors for the Trust. Its offices are
at 233 South Wacker Drive, Chicago, Illinois 60606. Ernst & Young, LLP performs
an audit of the financial statements of the Trust annually.
LEGAL COUNSEL
Sutherland, Asbill & Brennan LLP, 1275 Pennsylvania Avenue, NW, Washington, DC
20004-2404, is counsel for the Trust.
SHARES
The Trust was organized as a business trust pursuant to the laws of the State of
Delaware on February 21, 1997. The Trust is authorized to issue an unlimited
number of shares of beneficial interest in the Trust, all without par value.
Shares are divided into and may be issued in a designated series representing
beneficial interests in one of the Trust's Funds. There are currently six series
of shares.
<PAGE>
Each share of a series issued and outstanding is entitled to participate equally
in dividends and distributions declared by such series and, upon liquidation or
dissolution, in net assets allocated to such series remaining after satisfaction
of outstanding liabilities. The shares of each series, when issued, will be
fully paid and non-assessable and have no preemptive or conversion rights.
State Farm Life Insurance Company ("State Farm") provided the initial capital
for the Trust by purchasing $15,000,000, $30,000,000, $54,000,000, $10,000,000,
and $10,000,000 of shares in the Large Cap Equity Index, Small Cap Equity
Index, International Equity Index, Bond, and Money Market Funds, respectively.
Such shares were acquired for investment and can only be disposed of by
redemption.
VOTING RIGHTS
Each share (including fractional shares) is entitled to one vote for each dollar
of net asset value represented by that share on all matters to which the holder
of that share is entitled to vote. Only shares representing interests in a
particular Fund will be entitled to vote on matters affecting only that Fund.
The shares do not have cumulative voting rights. Accordingly, owners of variable
annuity or variable life insurance contracts having shares representing more
than 50% of the assets of the Trust voting for the election of Trustees could
elect all of the Trustees of the Trust if they choose to do so, and in such
event, contract owners or plan participants having voting interests in the
remaining shares would not be able to elect any Trustees.
Matters requiring separate shareholder voting by Fund shall have been
effectively acted upon with respect to any Fund if a majority of the outstanding
voting interests of that Fund vote for approval of the matter, notwithstanding
that: (1) the matter has not been approved by a majority of the outstanding
voting interests of any other Fund; or (2) the matter has not been approved by a
majority of the outstanding voting interests of the Trust.
OTHER INFORMATION
This Statement of Additional Information and the Prospectus for the Trust do not
contain all the information set forth in the registration statement and exhibits
relating thereto (the "Registration Statement"), which the Trust has filed with
the Commission, to which reference is hereby made.
AUDITED FINANCIAL STATEMENTS
The financial statements of the Trust appearing in the Registration Statement
have been audited by Ernst & Young, LLP, independent auditors, as set forth in
their reports thereon appearing in the registration statement, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
<PAGE>
APPENDIX A -- DESCRIPTION OF MONEY MARKET SECURITIES
The following information includes a description of certain money market
instruments in which a Fund may invest to the extent consistent with its
investment objective.
Bank Money Instruments. These include instruments, such as certificates of
deposit and bankers' acceptances. Certificates of deposit are generally
short-term, interest-bearing negotiable certificates issued by commercial banks
or savings and loan associations against funds deposited in the issuing
institution. A bankers' acceptance is a time draft drawn on a commercial bank by
a borrower usually in connection with an international commercial transaction
(to finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.
A Fund may not invest in any security issued by a commercial bank or a savings
and loan association unless the bank or association is organized and operating
in the United States, has total assets of at least one billion dollars and is a
member of the Federal Deposit Insurance Corporation, in the case of banks, or
the Federal Savings and Loan Insurance Corporation, in the case of savings and
loan associations provided that this limitation shall not prohibit investments
in foreign branches of banks which meet the foregoing requirements.
Government Agency Securities. These include debt securities issued by
government-sponsored enterprises, federal agencies or instrumentalities and
international institutions. Such securities are not direct obligations of the
U.S. Treasury but involve government sponsorship or guarantees. Thus the Trust
may not be able to assert a claim against the United States itself in the event
the agency or instrumentality does not meet its commitment.
U.S. Government Securities. These include marketable securities issued by the
U.S. Treasury, which consist of bills, notes and bonds. Such securities are
direct obligations of the U.S. government and differ mainly in the length of
their maturity. Treasury bills, the most frequently issued marketable government
security, have a maturity of up to one year and are issued on a discount basis.
Short-Term Corporate Debt Instruments. These include commercial paper (including
variable amount master demand notes), which refers to short-term unsecured
promissory notes issued by corporations to finance short-term credit needs.
Commercial paper is usually sold on a discount basis and has a maturity at the
time of issuance not exceeding nine months. Variable amount master demand notes
are demand obligations that permit the investment of fluctuating amounts at
varying market rates of interest pursuant to arrangements between the issuer and
a commercial bank acting as agent for the payees of such notes, whereby both
parties have the
<PAGE>
right to vary the amount of the outstanding indebtedness on the notes.
Because variable amount master notes are direct lending arrangements between the
lender and borrower, it is not generally contemplated that such instruments will
be traded and there is no secondary market for the notes. Typically, agreements
relating to such notes provide that the lender may not sell or otherwise
transfer the note without the borrower's consent. Such notes provide that the
interest rate on the amount outstanding is adjusted periodically, typically on a
daily basis in accordance with a stated short-term interest rate benchmark.
Since the interest rate of a variable amount master note is adjusted no less
often than every 60 days and since repayment of the note may be demanded at any
time, the Trust values such a note in accordance with the amortized cost basis
at the outstanding principal amount of the note. See "Determination of Net Asset
Value" on page 19.
Also included are nonconvertible corporate debt securities (e.g., bonds and
debentures) with no more than one year remaining to maturity at the date of
settlement. Corporate debt securities with a remaining maturity of less than one
year tend to become extremely liquid and are traded as money market securities.
Such issues with less than one year remaining to maturity tend to have greater
liquidity and considerably less market value fluctuations than longer term
issues.
Commercial paper investments at the time of purchase will be rated at least "A"
by Standard and Poor's or "Prime" by Moody's, or, if not rated, issued by
companies having an outstanding debt issue rated at least "A" by Standard and
Poor's or by Moody's. See "Corporate Bond Ratings" in Appendix B.
Repurchase Agreements. A repurchase agreement is an instrument under which the
purchaser (i.e., a Fund) acquires ownership of the obligation (debt security)
and the seller agrees, at the time of the sale, to repurchase the obligation at
a mutually agreed upon time and price, thereby determining the yield during the
purchaser's holding period. This results in a fixed rate of return insulated
from market fluctuations during such period. The underlying securities will
consist only of U.S. government or government agency securities, certificates of
deposit, commercial paper or bankers' acceptances.
Repurchase agreements usually are for short periods, such as under one week.
Repurchase agreements are considered to be loans under the Act, with the
security subject to repurchase, in effect, serving as "collateral" for the loan.
The Trust will require the seller to provide additional collateral if the market
value of the securities falls below the repurchase price at any time during the
term of the repurchase agreement. In the event of a default by the seller
because of bankruptcy or otherwise, the Trust may suffer time delays and incur
costs or losses in connection with the disposition of the collateral. Repurchase
agreements will be entered into with primary dealers for periods not to exceed
30 days and only with respect to
<PAGE>
underlying money market securities in which the Fund may otherwise invest.
Because a repurchase agreement maturing in more than seven days is deemed an
illiquid investment, investments in such repurchase agreements and other
illiquid assets cannot exceed 10% of the Fund's net assets.
<PAGE>
APPENDIX B -- RATINGS
DESCRIPTION OF CORPORATE BOND RATINGS
Moody's Investors Services, Inc.
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt-
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
<PAGE>
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a midrange ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A - Bonds rated A have 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.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB-B-CCC-CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
<PAGE>
The ratings from "AA" to "B" may be modified by the addition of a plus or
minus sign to relative standing within the major rating categories.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by Standard & Poor's 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. Relative strength or weakness of the
above factors determine whether the issuer's commercial paper is rated A-1, A-2
or A-3.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
(1) evaluation of the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
may be inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trends 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.
<PAGE>
PART C OTHER INFORMATION
- ------
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
--------------------
(b) Exhibits
--------
(1) Declaration of Trust*
(2) Bylaws*
(3) N/A
(4) N/A
(5)(a) Investment Advisory and Management Services Contract between
Registrant and State Farm Investment Management Corp.
(5)(b) Investment Sub-Advisory Agreement among Registrant, State Farm
Investment Management Corp., and Barclays Global Fund Advisors
(5)(c) Service Agreement among Registrant, State Farm Investment
Management Corp., and State Farm Mutual Automobile Insurance
Company
(6) Underwriting Agreement between Registrant and State Farm Investment
Management Corp.
(7) N/A
(8)(a) Custodial Agreement between Registrant and Chase Manhattan Trust
Company of Illinois**
(8)(b) Form of Custodial Agreement between Registrant and Barclays Global
Investors
(8)(c) Form of Custodial Agreement between Registrant and Investors Bank
and Trust Company
(9) Form of Participation Agreement between Registrant and State Farm
Life Insurance Company Separate Accounts
(10) Opinion and Consent of Sutherland, Asbill & Brennan LLP
(11) Consent of Ernst & Young, LLP**
<PAGE>
(12) N/A
(13) N/A
(14) N/A
(15) N/A
(16) N/A
(17) Financial Data Schedule**
(18) N/A
__________
*Incorporated by reference to the initial Registration Statement on Form N-1A
filed on behalf of the Registrant on February 27, 1997 (File Nos. 333-22467,
811-08073).
**To be filed by amendment.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The Registrant was organized as a business trust pursuant to the laws of
the State of Delaware on February 21, 1997. State Farm Life Insurance Company,
an insurance company domiciled in the State of Illinois, provided the initial
capital for the Registrant.
State Farm Life Insurance Company is a wholly-owned subsidiary of State
Farm Mutual Automobile Insurance Company. The following chart illustrates the
structure of State Farm Mutual Automobile Insurance Company and its
subsidiaries.
<TABLE>
<CAPTION>
----------------------------------
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY
A Mutual Insurance Company
Domiciled in the State of Illinois
----------------------------------
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------
100% OWNERSHIP 100% OWNERSHIP 100% OWNERSHIP 100% OWNERSHIP
- -------------------- ----------------------- -------------------- ------------------- -------------------
Various Other STATE FARM STATE FARM STATE FARM STATE FARM
Direct and Indirect LIFE INSURANCE COMPANY LIFE AND ACCIDENT INVESTMENT VP MANAGEMENT CORP.
Subsidiaries An Insurance Company ASSURANCE COMPANY MANAGEMENT CORP. A Corporation
- -------------------- Domiciled in the An Insurance Company A Corporation Domiciled in the
State of Illinois Domiciled in the Domiciled in the State of Delaware
--------------------------------------- State of Illinois State of Delaware
-------------------- ------------------- -------------------
100% 100%
OWNERSHIP Ownership
-------------------- -----------------
STATE FARM ANNUITY STATE FARM
AND LIFE INSURANCE VARIABLE PRODUCT
COMPANY TRUST
An Insurance Company A Delaware
Domiciled in the Business Trust
State of Illinois ----------------
--------------------
</TABLE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
Title of Class Number of Record Holders
-------------- ------------------------
Shares of Beneficial Interest 1
ITEM 27. INDEMNIFICATION
As a Delaware business trust, Registrant's operations are governed by its
Declaration of Trust dated February 21, 1997 (the Declaration of Trust).
Generally, Delaware business trust shareholders are not personally liable for
obligations of the Delaware business trust under Delaware law. The Delaware
Business Trust Act (the DBTA) provides that a shareholder of a trust shall be
entitled to the same limitation of liability extended to shareholders of private
for-profit Delaware corporations. Registrant's Declaration of Trust expressly
provides that it has been organized under the DBTA and that the Declaration of
Trust is to be governed by Delaware law. It is nevertheless possible that a
Delaware business trust, such as Registrant, might become a party to an action
in another state whose courts refuse to apply Delaware law, in which case
Registrant's shareholders could be subject to personal liability.
<PAGE>
To protect Registrant's shareholders against the risk of personal
liability, the Declaration of Trust: (i) contains an express disclaimer of
shareholder liability for acts or obligations of Registrant and provides that
notice of such disclaimer may be given in each agreement, obligation and
instrument entered into or executed by Registrant or its Trustees; (ii) provides
for the indemnification out of Trust property of any shareholders held
personally liable for any obligations of Registrant or any series of Registrant;
and (iii) provides that Registrant shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of Registrant
and satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss beyond his or her investment because of shareholder liability is
limited to circumstances in which all of the following factors are present: (i)
a court refuses to apply Delaware law; (ii) the liability arose under tort law
or, if not, no contractual limitation of liability was in effect; and (iii)
Registrant itself would be unable to meet its obligations. In the light of
Delaware law, the nature of Registrant's business and the nature of its assets,
the risk of personal liability to a shareholder is remote.
The Declaration of Trust further provides that Registrant shall indemnify
each of its Trustees and officers against liabilities and expenses reasonably
incurred by them, in connection with, or arising out of, any action, suit or
proceeding, threatened against or otherwise involving such Trustee or officer,
directly or indirectly, by reason of being or having been a Trustee or officer
of Registrant. The Declaration of Trust does not authorize Registrant to
indemnify any Trustee or officer against any liability to which he or she would
otherwise be subject by reason of or for willful misfeasance, bad faith, gross
negligence or reckless disregard of such person's duties.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to Trustees, officers and controlling persons, or
otherwise, Registrant has been advised that in the opinion of the Commission
such indemnification may be against public policy as expressed in the Act and
may be, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a Trustee, officer or controlling person of Registrant in
the successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The information in the statement of additional information under the caption
"Management of the Trust" is incorporated herein by reference. Other than its
status as investment adviser and principal underwriter to four other State Farm
mutual funds (see item 29 below), neither State Farm Investment Management
Corp., nor any of its directors or officers, has at any time during the past two
fiscal years engaged in any other business, profession, vocation or employment
of a substantial nature either for their own account or in the capacity of
director, officer, employee, partner or trustee.
Directors and Officers of State Farm Investment Management Corp.:
Edward B. Rust, Jr., Director and President*
Roger S. Joslin, Director, Vice President and Treasurer*
John J. Killian, Director. Vice President and Controller - State Farm Mutual
Automobile Insurance Company, State Farm Fire and Casualty Company, and State
Farm General Insurance Company; Underwriter - State Farm Lloyds; Controller -
State Farm Lloyds, Inc.; Vice President and Assistant Treasurer - State Farm
County Mutual Insurance Company of Texas; Assistant Treasurer - State Farm
Indemnity Company; Secretary and Assistant Treasurer - State Farm International
Services, Inc.; Director - Insurance placement Services, Inc. (since 1996).
Kurt G. Moser, Director and Senior Vice President*
Vincent J. Trosino, Director. Director, Vice Chairman of the Board, Executive
Vice President and Chief Operating Officer - State Farm Mutual Automobile
Insurance Company; Director and Vice President - State Farm Fire and Casualty
Company and State Farm General Insurance Company; Director - State Farm Lloyds,
Inc., State Farm International Services, Inc., State Farm Life Insurance
Company, State Farm Annuity and Life Insurance Company, and State Farm Life and
Accident Assurance Company; Assistant Secretary - State Farm Companies
Foundation.
Paul N. Eckley, Senior Vice President*
David R. Grimes, Assistant Vice President and Secretary*
Michael L. Tipsord, Assistant Secretary*
Jerel S. Chevalier, Assistant Secretary-Treasurer*
Patricia L. Dysart, Assistant Secretary*
* See the information contained in the statement of additional information
under the caption "Management of the Trust," incorporated herein by reference.
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
State Farm Investment Management Corp. serves as the principal underwriter to
the Registrant. Other than the Registrant, State Farm Investment Management
Corp. serves as investment adviser and principal underwriter to the following
investment companies: State Farm Growth Fund, Inc.; State Farm Balanced Fund,
Inc.; State Farm Interim Fund, Inc.; and State Farm Municipal Bond Fund, Inc.
The following table contains information concerning each director and officer of
State Farm Investment Management Corp. (unless otherwise indicated, the
principal business address for each person shown is One State Farm Plaza,
Bloomington, IL 61710-0001):
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
- ---------------- ---------------- ---------------
<S> <C> <C>
Edward B. Rust, Jr. Director and President Trustee and President
Roger S. Joslin Director, Vice President Trustee, Vice President
and Treasurer and Treasurer
John J. Killian Director None
Kurt G. Moser Director and Senior Vice President
Vice President
Vincent J. Trosino Director None
Paul N. Eckley Senior Vice President Vice President
David R. Grimes Assistant Vice President Assistant Vice President
and Secretary and Secretary
Michael L. Tipsord Assistant Secretary Assistant Secretary
Jerel S. Chevalier Assistant Secretary- Assistant Secretary-
Treasurer Treasurer
Patricia L. Dysart Assistant Secretary Assistant Secretary
</TABLE>
<TABLE>
<CAPTION>
Name of Net Underwriting Compensation on
Principal Discounts and Redemption and Brokerage Other
Underwriter Commissions Repurchase Commissions Compensation
----------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
State Farm N/A N/A N/A N/A
Investment
Management
Corp.
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
(a) Registrant
(b) State Farm Investment Management Corp.
One State Farm Plaza
Bloomington, Illinois 61710-0001
(c) Barclays Global Investors
45 Fremont Street
San Francisco, California 94105
(d) Investors Bank and Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
ITEM 31. MANAGEMENT SERVICES
All management-related service contracts under which services are provided
to the Registrant are discussed in Parts A and B of this Registration
Statement.
ITEM 32. UNDERTAKINGS
(a) Inapplicable
(b) The Registrant hereby undertakes to file a post-effective amendment,
using financial statements which need not be certified, within four to six
months from the effective date of this Registration Statement.
(c) The Registrant hereby undertakes to furnish, upon request and without
charge, to each person to whom a prospectus for any Fund (other than the Money
Market Fund) is delivered a copy of the Registrant's latest annual report to
shareholders.
(d) The Registrant hereby undertakes, if requested to do so by the holders
of at least 10% of the Registrant's outstanding shares, to call a meeting of
shareholders for the purpose of voting upon any question of removal of a trustee
or trustees, and to assist in communications with other shareholders as required
by Section 16(c) of the Investment Company Act of 1940, as amended.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant, State Farm Variable Product Trust,
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Bloomington and state of
Illinois, on the 12th day of September, 1997.
STATE FARM VARIABLE PRODUCT TRUST
By: /s/ Edward B. Rust, Jr.
-----------------------
Edward B. Rust, Jr.
President
Pursuant to the Securities Act of 1933, this registration statement has
been signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Edward B. Rust, Jr. Trustee, President and Chief September 12, 1997
- ------------------------- Executive Officer
Edward B. Rust, Jr. (principal executive officer)
/s/ Roger S. Joslin Trustee, Vice President, and September 12, 1997
- ------------------------- and Treasurer (principal
Roger S. Joslin financial and accounting
officer)
/s/ Davis U. Merwin Trustee September 12, 1997
- -------------------------
Davis U. Merwin
/s/ James A. Shirk Trustee September 12, 1997
- -------------------------
James A. Shirk
/s/ Albert H. Hoopes Trustee September 12, 1997
- -------------------------
Albert H. Hoopes
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
(5)(a) Investment Advisory and Management Services Contract between
Registrant and State Farm Investment Management Corp.
(5)(b) Investment Sub-Advisory Agreement among Registrant, State
Farm Investment Management Corp., and Barclays Global Fund
Advisors
(5)(c) Service Agreement among Registrant, State Farm Investment
Management Corp., and State Farm Mutual Automobile
Insurance Company
(6) Underwriting Agreement between Registrant and State Farm
Investment Management Corp.
(8)(b) Form of Custodial Agreement between Registrant and Barclays
Global Investors
(8)(c) Form of Custodial Agreement between Registrant and Investors
Bank and Trust Company
(9) Form of Participation Agreement between Registrant and State
Farm Life Insurance Company Separate Accounts
(10) Opinion and Consent of Sutherland, Asbill & Brennan LLP
</TABLE>
<PAGE>
EXHIBIT 5(a)
INVESTMENT ADVISORY AND MANAGEMENT
SERVICES AGREEMENT
THIS AGREEMENT is made and entered into this ____ day of __________, 1997,
by and between STATE FARM VARIABLE PRODUCT TRUST, a Delaware business trust (the
"Trust"), and STATE FARM INVESTMENT MANAGEMENT CORP., a Delaware corporation
(the "Adviser").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Trust issues shares of beneficial interest (the "Shares")
registered under the Securities Act of 1933, as amended (the "1933 Act")
pursuant to a registration statement initially filed with the Securities and
Exchange Commission on February 27, 1997, as amended from time to time (the
"Registration Statement");
WHEREAS, the Trust has established six separate series of Shares, each
corresponding to a separate investment portfolio having its own investment
objective, and may establish additional series of Shares in the future (such
existing and future series are collectively referred to herein as the "Funds");
WHEREAS, the Shares are sold exclusively to certain segregated asset
accounts (the "Accounts") of State Farm Life Insurance Company ("State Farm") or
its affiliated life insurance companies (collectively, "State Farm") to fund
certain variable annuity and/or life insurance contracts issued by State Farm
(the "Contracts");
WHEREAS, the Adviser is an investment adviser registered under the
Investment Advisers Act of 1940, as amended (the "Advisers Act") and all
applicable state securities laws, a broker-dealer registered under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and a member of
the National Association of Securities Dealers, Inc. (the "NASD");
WHEREAS, the Trust desires to retain the Adviser to render management and
investment advisory services to each Fund in the manner and on the terms and
conditions set forth below; and
WHEREAS, the Adviser is willing to provide management and investment
advisory services to each Fund in the manner and on the terms and conditions set
forth below;
NOW, THEREFORE, in consideration of their mutual promises, the Trust and
the Adviser agree as follows:
<PAGE>
ARTICLE 1
Employment of Adviser
1.1 The Trust hereby employs the Adviser to act as investment adviser
for and to manage, or arrange for the management of, the investment and
reinvestment of the assets of the Funds, and to administer, or arrange for the
administration of, its affairs to the extent requested by, and subject to the
supervision and control of, the Board of Trustees of the Trust for the period
and upon the terms herein set forth.
1.2 The Adviser accepts such employment and agrees during such period
at its own expense to render the services, or to arrange for the services to be
rendered, and to assume the obligations herein set forth for the compensation
herein provided. In connection therewith, the Adviser may retain one or more
sub-advisers to render such services and to assume the obligations set forth
herein, subject to the provisions of the 1940 Act and the Advisers Act.
1.3 The Adviser shall for all purposes be deemed to be an independent
contractor, and unless otherwise expressly provided or authorized shall have no
authority to act for or represent the Trust in any way or otherwise be deemed an
agent of the Trust. Notwithstanding the foregoing, the Adviser shall, for the
purposes of this agreement, have and exercise full investment discretion and
authority to act as agent for the Trust in buying, selling or otherwise
disposing of or managing the Trust's investments, subject to supervision by the
Board.
1.4 The services of the Adviser herein provided are not to be deemed
exclusive and the Adviser shall be free to render similar services or other
services to others so long as its services hereunder shall not be impaired
thereby.
ARTICLE 2
Duties of Adviser
2.1 General Management Services. The Adviser shall perform (or
---------------------------
arrange for the performance) the management and administrative services
necessary for the operation of the Trust, including processing shareholder
orders, administering shareholder accounts and handling shareholder relations.
The Adviser shall provide the Trust with office space, equipment, facilities and
such other services as the Adviser, subject to review by the Board, shall from
time to time determine to be necessary or useful to perform its obligations
under this agreement. The Adviser shall also, on behalf of the Trust, conduct
relations with custodians, depositories, transfer agents, dividend disbursing
agents, other shareholder service agents, accountants, attorneys, underwriters,
brokers and dealers, corporate fiduciaries, insurers, banks and such other
persons in any such other capacity deemed to be necessary or desirable. The
Adviser shall make reports to the Board of its performance of its obligations
<PAGE>
hereunder and furnish advice and recommendations with respect to such other
aspects of the business and affairs of the Trust as it shall determine to be
desirable.
2.2 Investment Management Services.
------------------------------
(a) The Adviser shall provide the Trust with such investment research,
advice and supervision as the latter may from time to time consider necessary
for the proper supervision of the assets of each Fund. In this regard, the
Adviser shall:
(i) perform research and obtain and evaluate pertinent economic,
statistical, and financial data relevant to the investment policies of each Fund
as set forth in the Registration Statement;
(ii) consult with the Board and furnish to the Board
recommendations with respect to an overall investment strategy for each Fund for
approval, modification, or rejection by the Board;
(iii) seek out and implement specific investment opportunities,
consistent with any investment strategies approved by the Board;
(iv) take such steps as are necessary to implement any overall
investment strategies approved by the Board for each Fund, including making and
carrying out day-to-day decisions to acquire or dispose of permissible
investments, management of investments and any other property of the Fund, and
providing or obtaining such services as may be necessary in managing, acquiring
or disposing of investments;
(v) regularly report to the Board with respect to the
implementation of any approved overall investment strategy and any other
activities in connection with management of the assets of each Fund including
furnishing, within 30 days after the end of each calendar quarter, a statement
of all purchases and sales during the quarter and a schedule of investments and
other assets of each Fund as of the end of the quarter;
(vi) maintain all required accounts, records, memoranda,
instructions or authorizations relating to the acquisition or disposition of
investments for each Fund and the Trust;
(vii) assist in determining each business day the net asset value
of the shares of each Fund in accordance with applicable law; and
(viii) enter into any advisory or sub-advisory contract with
another affiliated or unaffiliated entity pursuant to which such entity will
carry out some or all of the Adviser's responsibilities (as specified in such
advisory or sub-advisory contract) listed above.
<PAGE>
(b) The Adviser's services shall be subject always to the control and
supervision of the Board, the restrictions of the Declaration of Trust and
Bylaws of the Trust, as amended from time to time, the provisions of the 1940
Act, the statements relating to each Fund's investment objective or objectives,
investment policies and investment restrictions as set forth in the then-current
Registration Statement, appropriate state insurance laws, and any applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"). The
Trust has furnished or will furnish the Adviser with copies of the Registration
Statement, Declaration of Trust, and Bylaws as currently in effect and agrees
during the continuance of this agreement to furnish the Adviser with copies of
any amendments or supplements thereto before or at the time the amendments or
supplements become effective. The Adviser will be entitled to rely on all
documents furnished by the Trust.
(c) The Adviser represents that in performing investment advisory
services for each Fund, the Adviser shall make every effort to ensure that: (1)
each Fund shall comply with Section 817(h) of the Code, and the regulations
issued thereunder specifically Regulation Section 1.817-5, relating to the
diversification requirements for variable annuity, endowment, and life insurance
contracts, and any amendments or other modifications to such Section or
regulations; (2) each Fund continuously qualifies as a Regulated Investment
Company under Subchapter M of the Code or any successor provision; (3) each Fund
shall comply with any and all applicable state insurance law restrictions on
investments, and any changes thereto, that operate to limit or restrict the
investments that such Fund may otherwise make. Except as instructed by the
Board, the Adviser shall also make decisions for the Trust as to the manner in
which voting rights, rights to consent to corporate action and any other rights
pertaining to the Trust's portfolio securities shall be exercised. Should the
Board at any time make any determination as to investment policy and notify the
Adviser thereof, the Adviser shall be bound by such determination for the
period, if any, specified in such notice or until similarly notified that such
determination has been revoked.
(d) In connection with the acquisition or disposition of securities
described in Section 2.2(a)(iv), the Adviser may place orders for the purchase
or sale of portfolio investments for the account of each Fund with brokers or
dealers selected by it and, to that end, the Adviser is authorized as the agent
of the Trust to give instructions to the custodian of the Trust as to deliveries
of securities and payments of cash for the account of each Fund. In connection
with the selection of brokers or dealers and the placing of purchase and sale
orders with respect to assets of the Funds, the Adviser is directed at all times
to seek to obtain best execution and price within the policy guidelines
determined by the Board and set forth in the current Registration Statement.
Subject to this requirement and the provisions of the Advisers Act, the 1940
Act, the 1934 Act, and other applicable provisions of law, the Adviser may
select brokers or dealers with which it or the Trust is affiliated.
(e) In addition to seeking the best price and execution, the Adviser
may also take into consideration research and statistical information and wire
and other quotation services provided by brokers and dealers to the Adviser.
The Adviser is also authorized to effect individual securities transactions at
commission rates in excess of the
<PAGE>
minimum commission rates available, if the Adviser determines in good faith that
such amount of commission is reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or Adviser's overall
responsibilities with respect to each Fund. The policies with respect to
brokerage allocation, determined from time to time by the Board are those
disclosed in the Registration Statement. The execution of such transactions
shall not be deemed to represent an unlawful act or breach of any duty created
by this agreement or otherwise. The Adviser will periodically evaluate the
statistical data, research and other investment services provided to it by
brokers and dealers. Such services may be used by the Adviser in connection
with the performance of its obligations under this agreement or in connection
with other advisory or investment operations including using such information in
managing its own accounts.
(f) Nothing in this agreement shall preclude the aggregation of orders
for the sale or purchase of securities or other investments by two or more Funds
of the Trust or by the Trust and other separate accounts or other accounts
(collectively, "Advisory Clients") managed by the Adviser, provided that: (i)
the Adviser's actions with respect to the aggregation of orders for multiple
Advisory Clients, including the Trust, are consistent with the then-current
positions in this regard taken by the Securities and Exchange Commission or its
staff through releases, "no-action" letters, or otherwise; and (ii) the
Adviser's policies with respect to the aggregation of orders for multiple
Advisory Clients have been previously submitted and approved by the Board.
ARTICLE 3
Allocation of Charges and Expenses
3.1 Charges and Expenses Allocated to the Adviser.
---------------------------------------------
The Adviser shall provide all executive, administrative, clerical and
other personnel necessary to operate the Trust and shall pay the salaries and
other costs of employing all of these persons. The Adviser shall also furnish
the Trust with office space, facilities, and equipment and shall pay the day-to-
day expenses related to the operating and maintenance of such office space,
facilities and equipment. All expenses incurred in the organization of the
Trust or of any new Funds of the Trust, including legal and accounting expenses
and certain costs of registering securities of the Trust under federal and state
securities laws, shall also be paid by the Adviser.
3.2 Charges and Expenses Allocated to the Trust.
-------------------------------------------
(a) The Trust shall be responsible for payment of all expenses it may
incur in its operation and all of its general administrative expenses except
those expressly assumed by the Adviser as described in Section 3.1 above. These
include (by way of description and not of limitation), any share redemption
expenses, expenses of portfolio transactions, shareholder servicing costs,
pricing costs, interest on borrowings by the Trust,
<PAGE>
charges of the custodians and transfer agent, if any, cost of auditing services,
non-interested Trustees' fees, all taxes and fees, investment advisory fees
(other than subadvisory fees), certain insurance premiums, cost of maintenance
of corporate existence, investor services (including allocable personnel and
telephone expenses), costs of printing and mailing updated Trust prospectuses to
shareholders and contractholders, preparing, printing and mailing proxy
statements and shareholder reports to shareholders and contractholders, the cost
of paying dividends and capital gains distributions, costs of Trustee and
shareholder meetings, dues to trade organizations, and any extraordinary
expenses, including litigation costs in legal actions involving the Trust, or
costs related to indemnification of Trustees, officers and employees of the
Trust.
(b) The Trust shall be free to retain at its expense other persons to
furnish it with any services whatsoever, including, without limitation,
statistical, factual or technical information or advice.
ARTICLE 4
Compensation of the Adviser
4.1 (a) For the services to be rendered, the facilities to be
furnished and the payments to be made by the Adviser, as provided herein, the
Trust shall pay to the Adviser for each of the Trust's fiscal quarters on the
last day of each such quarter a fee based upon the average daily net assets of
each Fund, as determined pursuant to the Trust's Registration Statement and
Declaration of Trust, at the following annual rates:
Fund Rate
---- ----
Large Cap Equity Index Fund .26%
Small Cap Equity Index Fund .40%
International Equity Index Fund .55%
Bond Fund .50%
Money Market Fund .40%
Stock and Bond Balanced Fund .00%
(b) The Adviser acknowledges that it has agreed not to be paid an
investment advisory fee for performing its services for the Stock and Bond
Balanced Fund.
4.2 For the quarter and year in which this agreement becomes
effective or terminates there shall be an appropriate proration on the basis of
the number of days that the agreement is in effect during the quarter and year
respectively.
4.3 If, pursuant to the Trust's Registration Statement and
Declaration of Trust, the net asset value is not required to be determined on
any particular business day, then for the purpose of the foregoing computations,
the net asset value of a share as last determined shall be deemed to be the net
asset value of a share as of the close of business on that day.
<PAGE>
4.4 In connection with purchases or sales of portfolio securities for
the account of the Trust, neither the Adviser nor any officer, director,
shareholder or other affiliate of the Adviser nor any officer, trustee,
shareholder or other affiliate of the Trust shall: (i) act as agent and accept
any compensation other than its compensation provided for in this agreement,
except in the course of such person's business as an underwriter or broker; or
(ii) act as broker and accept any commission, fee, or other remuneration in
excess of the limits prescribed in the 1940 Act and the rules promulgated
thereunder.
4.5 The Adviser agrees that in all matters relating to the management
of the investment of the assets of the Trust and the administration of its
affairs, it will act in conformity with the Registration Statement, Declaration
of Trust, and Bylaws of the Trust then in effect. It is understood and agreed
that the Adviser, by virtue of a separate agreement with the Trust, may also act
as an underwriter for the Trust.
ARTICLE 5
Limitations of Liability
5.1 Limitation of Liability of Adviser. The Adviser shall give the
----------------------------------
Trust the benefit of the Adviser's best judgment and efforts in rendering
services under this agreement; provided, that the Adviser shall not be liable
for any error of judgment or import of law, or for any loss suffered by the
Trust in connection with the matters to which this agreement relates, except
loss resulting from: (i) willful misfeasance, bad faith or gross negligence on
the part of the Adviser in the performance of its obligations and duties under
this agreement; (ii) its reckless disregard of its obligations and duties under
this agreement; (iii) a breach of Section 2.2(c) of this agreement.
5.2 Limitation of Liability of Trust. The Adviser acknowledges that
--------------------------------
it has received notice of and accepts the limitations on the Trust's liability
as set forth in the Trust's Declaration of Trust, as amended from time to time.
In accordance therewith, the Adviser agrees that the Trust's obligations
hereunder shall be limited to the assets of the Funds, and with respect to each
Fund shall be limited to the assets of such Fund, and no party shall seek
satisfaction of any such obligation from any shareholder of the Trust, nor from
any trustee, officer, employee or agent of the Trust.
ARTICLE 6
Books and Records
6.1 The Adviser hereby undertakes and agrees to maintain, in the form
and for the period required, all records relating to the Trust's investments
that are required to be maintained by the Trust pursuant to applicable law.
<PAGE>
6.2 The Adviser agrees that all books and records which it maintains
for the Trust are the property of the Trust and further agrees to surrender
promptly to the Trust any such books, records or information upon the Trust's
request. All such books and records shall be made available, within five
business days of a written request, to the Trust's accountants or auditors
during regular business hours at the Adviser's offices. The Trust or its
authorized representative shall have the right to copy any records in the
possession of the Adviser which pertain to the Trust. Such books, records,
information or reports shall be made available to properly authorized government
representatives consistent with state and federal law and/or regulations. In
the event of the termination of this agreement, all such books, records or other
information shall be returned to the Trust free from any claim or assertion of
rights by the Adviser.
6.3 The Adviser further agrees that it will not disclose or use any
records or information obtained pursuant to this agreement in any manner
whatsoever except as authorized in this agreement and that it will keep
confidential any information obtained pursuant to this agreement and disclose
such information only if the Trust has authorized such disclosure, or if such
disclosure is required by federal or state regulatory authorities.
ARTICLE 7
Duration and Termination of this Agreement
7.1 Effective Date and Term. As to each Fund, this agreement shall
-----------------------
not become effective unless and until the later of the time at which it is
approved by the Trust's Board, including a majority of trustees who are not
parties to this agreement or interested persons of any such party to this
agreement, or the time at which it is approved by a majority of such Fund's
outstanding voting securities as required by the 1940 Act. This agreement shall
come into full force and effect on the later of such two dates, provided that it
shall not become effective as to any subsequently created Fund until it has been
approved by the Board specifically for such Fund. As to each Fund, the
agreement shall continue in effect for two years and shall thereafter continue
in effect from year to year so long as such continuance is specifically approved
for each Fund at least annually by: (i) the Board, or by the vote of a majority
of the Fund's outstanding voting securities; and (ii) a majority of those
trustees who are not parties to this agreement or interested persons of any such
party cast in person at a meeting called for the purpose of voting on such
approval.
7.2 Termination.
-----------
(a) As to each Fund, this agreement may be terminated at any time,
without penalty, by vote of the Board or by vote of the holders of a majority of
such Fund's outstanding voting securities, or by the Adviser, on sixty (60)
days' written notice to the other party.
<PAGE>
(b) This agreement may be terminated at any time without the payment
of any penalty by vote of the Board in the event that it shall have been
established by a court of competent jurisdiction that the Adviser or any officer
or director of the Adviser has taken any action which results in a breach of the
covenants of the Adviser set forth herein.
(c) This agreement shall automatically terminate in the event of its
assignment.
(d) The Trust agrees that upon the termination of this agreement at
any time or for any reason it shall, when so requested by State Farm or the
Adviser, eliminate all reference to the name "State Farm" from its corporate
name and thereafter refrain from using the name "State Farm" in connection with
its business or activities in any form or combination whatsoever.
ARTICLE 8
Amendments to this Agreement
8.1 This agreement may be amended as to each Fund by the parties only
if such amendment is specifically approved by: (i) the vote of a majority of
such Fund's outstanding voting securities; and (ii) a majority of those trustees
who are not parties to this agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on such approval.
ARTICLE 9
Notices
9.1 Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust:
State Farm Variable Product Trust
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn: _____________________
<PAGE>
If to the Adviser:
State Farm Investment Management Corp.
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn: _____________________
ARTICLE 10
Miscellaneous Provisions
10.1 Other Relationships. It is understood that the officers,
-------------------
directors, agents, shareholders and other affiliates of the Trust are or may be
interested in the Adviser as officers, directors, agents, shareholders,
affiliates or otherwise, and that the officers, directors, shareholders, agents
and other affiliates of the Adviser may be interested in the Trust otherwise
than as a shareholder.
10.2 Definitions of Certain Terms. The terms "assignment",
----------------------------
"affiliated person" and "interested person", when used in this agreement, shall
have the respective meanings specified in the 1940 Act. The term "majority of
the outstanding voting securities" means the lesser of: (a) 67% or more of the
votes attributable to Shares of a Fund or the Trust, as appropriate, 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 votes attributable to Shares
of a Fund or the Trust, as appropriate.
10.3 Applicable Law.
--------------
(a) This agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of Delaware without regard to
conflicts of law principles or precedents.
(b) This agreement shall be subject to the provisions of the
1933, 1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant and the terms hereof shall be interpreted and construed in accordance
therewith.
10.4 Severability. If any provision of this agreement shall be held
------------
or made invalid by a court decision, statute, rule or otherwise, the remainder
of this agreement shall not be affected thereby.
10.5 Captions. The captions in this agreement are included for
--------
convenience of reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
<PAGE>
10.6 Counterparts. This agreement may be executed simultaneously in
------------
multiple counterparts, each of which taken together shall constitute one and the
same instrument.
10.7 Cooperation with Authorities. Each party hereto shall cooperate
----------------------------
with the other party and all appropriate governmental authorities (including
without limitation the SEC, the NASD, and state insurance regulators) and shall
permit such authorities reasonable access to its books and records in connection
with any investigation or inquiry relating to this agreement or the transactions
contemplated hereby.
10.8 Cumulative Rights. The rights, remedies and obligations
-----------------
contained in this agreement are cumulative and are in addition to any and all
rights, remedies and obligations, at law or in equity, which the parties hereto
are entitled to under state and federal laws.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this agreement to
be executed in their names and on their behalf by their duly authorized officers
all on the day and year first above written.
STATE FARM INVESTMENT
MANAGEMENT CORP.
By:
--------------------------------------
Title:
-----------------------------------
STATE FARM VARIABLE PRODUCT TRUST
By:
--------------------------------------
Title:
-----------------------------------
<PAGE>
EXHIBIT 5(b)
INVESTMENT SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made and entered into this ____ day of __________, 1997,
by and among STATE FARM VARIABLE PRODUCT TRUST, a Delaware business trust (the
"Trust"), STATE FARM INVESTMENT MANAGEMENT CORP., a Delaware corporation (the
"Adviser"), and BARCLAYS GLOBAL FUND ADVISORS (the "Sub-Adviser").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Trust issues shares of beneficial interest (the "Shares")
registered under the Securities Act of 1933, as amended (the "1933 Act")
pursuant to a registration statement initially filed with the Securities and
Exchange Commission on February 27, 1997, as amended from time to time (the
"Registration Statement");
WHEREAS, the Trust has established six separate series of Shares, each
corresponding to a separate investment portfolio having its own investment
objective (the "Funds");
WHEREAS, pursuant to a separate investment advisory and management services
agreement between the Trust and the Adviser (the "Advisory Agreement"), the
Trust has retained the Adviser to render management and investment advisory
services to each Fund;
WHEREAS, the Sub-Adviser is an investment adviser registered under the
Investment Advisers Act of 1940, as amended (the "Advisers Act");
WHEREAS, the Adviser desires to retain the Sub-Adviser to provide
investment advisory services to certain Funds in the manner and on the terms and
conditions set forth below; and
WHEREAS, the Sub-Adviser is willing to provide investment advisory services
to certain Funds in the manner and on the terms and conditions set forth below;
NOW, THEREFORE, in consideration of their mutual promises, the Trust, the
Adviser, and the Sub-Adviser agree as follows:
ARTICLE 1
Employment of Sub-Adviser
1.1 The Adviser hereby employs the Sub-Adviser to act as investment sub-
adviser for and to invest and reinvest the assets of the Large Cap Equity Index
Fund, Small Cap Equity Index Fund, and International Equity Index Fund (the
"Index Funds"), subject to
<PAGE>
the supervision and control of the Board of Trustees of the Trust (the "Board")
for the period and upon the terms herein set forth.
1.2 The Sub-Adviser accepts such employment and agrees during such period
at its own expense to render the services set forth herein, or to arrange for
such services to be rendered, and to assume the obligations herein set forth for
the compensation herein provided.
1.3 The Sub-Adviser shall for all purposes be deemed to be an independent
contractor and, unless otherwise expressly provided or authorized, shall have no
authority to act for or represent the Trust or the Adviser in any way or
otherwise be deemed an agent of the Trust or the Adviser. Notwithstanding the
foregoing, the Sub-Adviser shall, for the purposes of this agreement, have and
exercise full investment discretion and authority to act as agent for the Trust
and the Adviser in buying, selling or otherwise disposing of the Index Funds'
investments, subject to supervision by the Board.
1.4 The services of the Sub-Adviser herein provided are not to be deemed
exclusive. The Sub-Adviser may act as an investment adviser to any other
person, firm or corporation, and may perform management and any other services
for any other person, association, corporation, firm or other entity pursuant to
any contract or otherwise, and take any action or do anything in connection
therewith or related thereto, except as prohibited by applicable law; and no
such performance of management or other services shall be in any manner
restricted or otherwise affected by any aspect of any relationship of the Sub-
Advisor to the Trust, the Index Funds or the Adviser except as otherwise imposed
by law or by this agreement.
ARTICLE 2
Duties of Sub-Adviser
2.1 Investment Advisory Services.
----------------------------
(a) Subject to the supervision of the Board and the Adviser, the Sub-
Adviser shall provide the Index Funds with such investment research, advice and
supervision as is necessary for the investment and proper supervision of the
assets of each Index Fund. In this regard, the Sub-Adviser shall:
(i) perform research and obtain and evaluate pertinent economic,
statistical, and financial data relevant to the investment policies of each
Index Fund as set forth in the Registration Statement;
(ii) at such times as shall be reasonably requested by the Board
or the Adviser, consult with the Board and furnish to the Board recommendations
with
<PAGE>
respect to an overall investment strategy for each Index Fund for approval,
modification, or rejection by the Board;
(iii) seek out and implement specific investment opportunities,
consistent with any investment strategies approved by the Board;
(iv) take such steps as are necessary to implement any overall
investment strategies approved by the Board for each Index Fund, including
making and carrying out day-to-day decisions to acquire or dispose of
permissible investments, management of investments and any other property of the
Index Fund, and providing or obtaining such services as may be necessary in
managing, acquiring or disposing of investments;
(v) regularly report to the Board with respect to the
implementation of any approved overall investment strategy and any other
activities in connection with management of the assets of each Index Fund
including furnishing, within 10 days after the end of each calendar quarter,
a statement of all purchases and sales during the quarter and a schedule of
investments and other assets of each Index Fund as of the end of the quarter;
(vi) maintain all accounts, records, memoranda, instructions or
authorizations required to be maintained by the Sub-Adviser pursuant to the
requirements of Rule 31a-1 under the 1940 Act, for the period required by Rule
31a-2 under the 1940 Act, with respect to transactions by the Sub-Adviser on
behalf of the Index Funds;
(vii) assist in determining each business day the net asset value
of the shares of each Index Fund in accordance with applicable law; and
(viii) provide the Adviser with a report of each portfolio
transaction no later than the close of the next business day following such
transaction.
(b) The Sub-Adviser's services shall be subject always to the control
and supervision of the Board and the Adviser, the restrictions of the
Declaration of Trust and Bylaws of the Trust, as amended from time to time, the
provisions of the 1940 Act, and each Index Fund's investment objective or
objectives, investment policies and investment restrictions as set forth in the
then-current Registration Statement. The Trust or the Adviser has furnished or
will furnish the Sub-Adviser with copies of the Registration Statement,
Declaration of Trust, and Bylaws as currently in effect and the Trust agrees
during the continuance of this agreement to furnish the Sub-Adviser with copies
of any amendments or supplements thereto before or at the time the amendments or
supplements become effective. The Sub-Adviser will be entitled to rely on all
documents and other information furnished by the Trust or the Adviser or the
representatives of either.
<PAGE>
(c) The Sub-Adviser represents that in performing investment
advisory services for each Index Fund, the Sub-Adviser shall use its best
efforts to ensure that: (1) each Index Fund shall comply with Section 817(h) of
the Internal Revenue Code of 1986, as amended ("Code"), and the regulations
issued thereunder, specifically Regulation Section 1.817-5, relating to the
diversification requirements for variable annuity, endowment, and life insurance
contracts, and any amendments or other modifications to such Section or
regulations; (2) each Index Fund continuously qualifies as a Regulated
Investment Company under Subchapter M of the Code or any successor provision;
(3) each Index Fund shall comply with any and all applicable state insurance law
restrictions on investments, and any changes thereto, that operate to limit or
restrict the investments that such Index Fund may otherwise make. The Sub-
Adviser shall be obligated for compliance under clauses (1) and (3) of this
Section 2.1(c) only to the extent that the Trust has provided the Sub-Adviser
with notice, in writing, of the diversification requirements or state insurance
law restrictions applicable to the Index Funds, including a description thereof.
Except as instructed by the Board, the Sub-Adviser shall also make decisions for
the Index Funds as to the manner in which voting rights, rights to consent to
corporate action and any other rights pertaining to the Index Funds' portfolio
securities shall be exercised. Should the Board at any time make any
determination as to investment policy and notify the Sub-Adviser thereof in
writing, the Sub-Adviser, upon receipt of such notice, shall be bound by such
determination for the period, if any, specified in such written notice or until
similarly notified that such determination has been revoked.
(d) In connection with the acquisition or disposition of securities
described in Section 2.1(a)(iv), the Sub-Adviser may place orders for the
purchase or sale of portfolio investments for the account of each Fund with
brokers or dealers selected by it and, to that end, the Sub-Adviser is
authorized as the agent of the Trust to give instructions to the custodians of
the Trust as to deliveries of securities and payments of cash for the account of
each Fund. In connection with the selection of brokers or dealers and the
placing of purchase and sale orders with respect to assets of the Funds, the
Sub-Adviser is directed at all times to seek to obtain best execution and price.
Subject to this requirement and the provisions of the Advisers Act, the 1940
Act, the 1934 Act, and other applicable provisions of law, the Sub-Adviser may
select brokers or dealers with which it or the Trust or the Adviser is
affiliated.
(e) In seeking the best price and execution, the Sub-Adviser may
also take into consideration research and statistical information and wire and
other quotation services provided by brokers and dealers to the Sub-Adviser.
The Sub-Adviser is authorized to effect individual securities transactions at
commission rates in excess of the minimum commission rates available, if the
Sub-Adviser determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that particular
transaction or Sub-Adviser's overall responsibilities with respect to the Index
Funds and its other clients and that the total commissions paid by each Index
Fund will be reasonable in relation to the benefits to the Index Fund over the
long term. The execution of such transactions shall not be deemed to represent
an unlawful act or breach of any duty created by this agreement or otherwise.
The Sub-Adviser will periodically evaluate the statistical data, research and
other investment
<PAGE>
services provided to it by brokers and dealers. Such services may be used by
the Sub-Adviser in connection with the performance of its obligations under this
agreement or in connection with other advisory or investment operations
including using such information in managing its own accounts.
(f) Nothing in this agreement shall preclude the aggregation of orders
for the sale or purchase of securities or other investments by two or more Funds
of the Trust or by the Trust and other separate accounts or other accounts
(collectively, "Advisory Clients") managed by the Sub-Adviser, provided that:
(i) the Sub-Adviser's actions with respect to the aggregation of orders for
multiple Advisory Clients, including the Trust, are consistent with the then-
current positions in this regard taken by the Securities and Exchange Commission
or its staff through releases, "no-action" letters, or otherwise; and (ii) the
Sub-Adviser's policies with respect to the aggregation of orders for multiple
Advisory Clients have been previously submitted and approved by the Board. The
Adviser and the Trust recognize that in some cases this procedure may adversely
affect the results obtained for an Index Fund.
2.2 The Adviser shall retain the authority to establish and modify, from
time to time, the investment strategies and approaches to be followed by the
Sub-Adviser with respect to any Fund, subject, in all respects, to the
supervision and direction of the Trust's Board of Trustees and subject to
compliance with the investment objectives, policies and restrictions applicable
to such Fund as set forth in the Registration Statement, provided, however, that
the Sub-Adviser's duty under this agreement to act in conformity with any
document, instruction or guidelines produced by the Adviser shall not arise
until such document, instruction or guideline has been delivered to the Sub-
Adviser in writing.
ARTICLE 3
Compensation of the Sub-Adviser
3.1 (a) For the services to be rendered, the facilities to be furnished
and the payments to be made, as provided herein, the parties hereto agree that
the Adviser shall pay to the Sub-Adviser for each of the Trust's fiscal quarters
on the last day of each such quarter:
(i) With respect to the Large Cap Equity Index Fund, a fee equal
to a percentage of the Large Cap Equity Index Fund's average daily net assets
during such quarter at the following rates minus $875:
-----
<PAGE>
.15% of the first $50,000,000 of net assets
.09% of the next $50,000,000 of net assets
.07% thereafter
(ii) With respect to the Small Cap Equity Index Fund, a fee equal
to a percentage of the Small Cap Equity Index Fund's average daily net assets
during such quarter at the following rates minus $2,875:
-----
.20% of the first $50,000,000 of net assets
.14% of the next $50,000,000 of net assets
.11% thereafter;
(iii) With respect to the International Equity Index Fund, a fee
equal to a percentage of the International Equity Index Fund's average daily net
assets during such quarter at the rates set forth below minus $3,750 and minus
-----
an amount equal to X minus Y, where: X is the amount of the Trust's
-----
international custody fees for such quarter and Y is equal to 0.02% of the
average daily net assets of the International Equity Index Fund during such
quarter plus $20 for each International Equity Index Fund portfolio transaction
during such quarter. If negative, the amount of such fee shall be carried over
to the following quarter and credited against the fee calculated pursuant to
this Section 3.1(a)(iii) for such quarter. The rates upon which the
International Equity Index Fund's fee shall be based are as follows:
.35% of the first $50,000,000 of net assets
.30% of the next $50,000,000 of net assets
.20% thereafter
(b) The Adviser shall be responsible for payment of, and the Sub-
Adviser agrees that it shall have no claim against the Trust or any Index Fund
respecting, the Sub-Adviser's compensation under this Agreement.
(c) During the term of this agreement, the Sub-Adviser will bear all
expenses incurred by it in connection with its services under this agreement.
The Sub-Adviser shall not be responsible for any expenses incurred by the Trust,
the Index Funds or the Adviser.
3.2 For the quarter and year in which this agreement becomes effective or
terminates there shall be a proration on the basis of the number of days that
the agreement is in effect during the quarter and year respectively.
3.3 If, pursuant to the Trust's Registration Statement and Declaration of
Trust, the net asset value is not required to be determined on any particular
business day, then for the purpose of the foregoing computations, the net asset
value of a share as last determined shall be deemed to be the net asset value of
a share as of the close of business on that day.
<PAGE>
3.4 In connection with purchases or sales of portfolio securities for the
account of the Index Funds, neither the Sub-Adviser nor any officer, director,
shareholder or other affiliate of the Sub-Adviser shall: (i) act as agent and
accept any compensation other than its compensation provided for in this
agreement, except in the course of such person's business as an underwriter or
broker; or (ii) act as broker and accept any commission, fee, or other
remuneration in excess of the limits prescribed in the 1940 Act and the rules
promulgated thereunder.
ARTICLE 4
Limitations of Liability; Indemnification
4.1 Limitation of Liability of Sub-Adviser. The Sub-Adviser shall not be
--------------------------------------
liable for any error of judgment or import of law, or for any loss suffered by
the Trust, any Index Fund or their shareholders in connection with the matters
to which this agreement relates, except loss resulting from: (i) willful
misfeasance, bad faith or gross negligence on the part of the Sub-Adviser in the
performance of its obligations and duties under this agreement; (ii) its
reckless disregard of its obligations and duties under this agreement; or
(iii) a breach of Section 2.1(c) of this agreement.
4.2 Limitation of Liability of Trust. The Sub-Adviser acknowledges that
--------------------------------
it has received notice of and accepts the limitations on the Trust's liability
as set forth in the Trust's Declaration of Trust, as amended from time to time.
In accordance therewith, the Sub-Adviser agrees that the Trust's obligations
hereunder shall be limited to the assets of the Index Funds and, with respect to
each Index Fund, shall be limited to the assets of such Index Fund, and no party
shall seek satisfaction of any such obligation from any shareholder of the
Trust, nor from any trustee, officer, employee or agent of the Trust.
4.3 Indemnification. Because the Sub-Adviser has been retained solely to
---------------
provide the investment advisory and related services described in this
agreement, the Adviser shall indemnify the Sub-Adviser to the fullest extent
permitted by law against any and all loss and expenses, including attorneys'
fees, incurred by the Sub-Adviser to the extent resulting, in whole or in part,
from any acts, or failures to act, of the Adviser or any affiliate of the
Adviser, or any employee or agent of the Adviser or any of its affiliates, in
connection with the marketing and distribution of the Shares, except to the
extent such loss or expense arises solely from: (i) willful misfeasance, bad
faith or gross negligence on the part of the Sub-Adviser in the performance of
its obligations and duties under this agreement, (ii) its reckless disregard of
its obligations and duties under this agreement; or (iii) a breach of Section
2.1(c) of this agreement.
ARTICLE 5
Books and Records
<PAGE>
5.1 The Sub-Adviser hereby undertakes and agrees to maintain, in the form
and for the period required, all records relating to the Index Funds'
investments that are required to be maintained by the Trust pursuant to the
requirements of Rule 31a-1 of the 1940 Act.
5.2 In compliance with Rule 31a-3 of the 1940 Act, the Sub-Adviser agrees
that all books and records which it maintains for the Index Funds are the
property of the Trust and further agrees to surrender promptly to the Trust any
such books, records or information upon the Trust's request. All such books and
records shall be made available, within five business days of a written request,
to the Trust's accountants or auditors during regular business hours at the Sub-
Adviser's offices. The Trust or its authorized representative shall have the
right to copy any records in the possession of the Sub-Adviser which pertain to
the Trust. Such books, records, information or reports shall be made available
to properly authorized government representatives consistent with state and
federal law and/or regulations. In the event of the termination of this
agreement, upon payment of any compensation due Sub-Adviser under Article 3
hereof, all such books, records or other information shall be returned to the
Trust.
5.3 The Sub-Adviser further agrees that it will not disclose or use any
records or information obtained pursuant to this agreement in any manner
whatsoever except as authorized in this agreement or as otherwise authorized by
the Trust or the Adviser and that it will keep confidential any information
obtained pursuant to this agreement and disclose such information only if the
Trust or the Adviser has authorized such disclosure, or if such disclosure is
required by federal or state regulatory authorities.
ARTICLE 6
Duration and Termination of this Agreement
6.1 Effective Date and Term. As to each Index Fund, this agreement shall
-----------------------
not become effective unless and until the later of the time at which it is
approved by the Trust's Board, including a majority of trustees who are not
parties to this agreement or interested persons of any such party to this
agreement, or the time at which it is approved by a majority of such Index
Fund's outstanding voting securities as required by the 1940 Act. This
agreement shall come into full force and effect on the later of such two dates.
As to each Index Fund, the agreement shall continue in effect for two years and
shall thereafter continue in effect from year to year so long as such
continuance is specifically approved for each Index Fund at least annually by:
(i) the Board, or by the vote of a majority of such Index Fund's outstanding
voting securities; and (ii) a majority of those trustees who are not parties to
this agreement or interested persons of any such party cast in person at a
meeting called for the purpose of voting on such approval.
6.2 Termination.
-----------
<PAGE>
(a) As to each Index Fund, this agreement may be terminated at any
time, without penalty, by vote of the Board, by vote of the holders of a
majority of such Index Fund's outstanding voting securities, or by the Adviser
or Sub-Adviser, on sixty (60) days' written notice to the other parties.
(b) This agreement may be terminated at any time without the
payment of any penalty by the Adviser or by vote of the Board in the event that
it shall have been established by a court of competent jurisdiction that the
Sub-Adviser or any officer or director of the Sub-Adviser has taken any action
which results in a breach of the covenants of the Sub-Adviser set forth herein.
(c) This agreement shall automatically terminate in the event of
its assignment.
ARTICLE 7
Amendments to this Agreement
7.1 This agreement may be amended as to each Index Fund by the parties
only if such amendment is specifically approved by: (i) the vote of a majority
of such Index Fund's outstanding voting securities; and (ii) a majority of those
trustees who are not parties to this agreement or interested persons of any such
party cast in person at a meeting called for the purpose of voting on such
approval (unless, in the case of (i), the Trust receives an order of the
Commission or "no-action" letter permitting it to modify the agreement without
such vote).
ARTICLE 8
Notices
8.1 Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust:
State Farm Variable Product Trust
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn: _____________________
<PAGE>
If to the Adviser:
State Farm Investment Management Corp.
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn: _____________________
If to the Sub-Adviser:
Barclays Global Fund Advisors
45 Fremont Street
San Francisco, CA 94105
Attn: _____________________
ARTICLE 9
Miscellaneous Provisions
9.1 Definitions of Certain Terms. The terms "assignment", "affiliated
----------------------------
person" and "interested person", when used in this agreement, shall have the
respective meanings specified in the 1940 Act. The term "majority of such Index
Fund's outstanding voting securities" means the lesser of: (a) 67% or more of
the votes attributable to such Shares of the Index Fund 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 votes attributable to Shares of the Index Fund.
9.2 Applicable Law.
--------------
(a) This agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of Delaware without regard to
conflicts of law principles or precedents.
(b) This agreement shall be subject to the provisions of the 1940 and
the Advisers Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant and the terms hereof shall be interpreted and construed in accordance
therewith.
9.3 Severability. If any provision of this agreement shall be held or
------------
made invalid by a court decision, statute, rule or otherwise, the remainder of
this agreement shall not be affected thereby.
9.4 "State Farm". The Sub-Adviser agrees that the name "State Farm,"
------------
which comprises a component of the Trust's name, is a property right of the
parent of the
<PAGE>
Adviser. The Sub-Adviser acknowledges that the use of the name "State Farm" by
the Trust is governed by the terms of the Advisory Agreement.
9.5 Captions. The captions in this agreement are included for convenience
--------
of reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
9.6 Counterparts. This agreement may be executed simultaneously in
------------
multiple counterparts, each of which taken together shall constitute one and the
same instrument.
9.7 Cooperation with Authorities. Each party hereto shall cooperate with
----------------------------
the other party and all appropriate governmental authorities (including without
limitation the SEC, the NASD, and state insurance regulators) and shall permit
such authorities reasonable access to its books and records in connection with
any investigation or inquiry relating to this agreement or the transactions
contemplated hereby.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed in their names and on their behalf by their duly authorized officers
all on the day and year first above written.
STATE FARM INVESTMENT MANAGEMENT
CORP.
By:
------------------------------
Title:
---------------------------
STATE FARM VARIABLE PRODUCT TRUST
By:
------------------------------
Title:
---------------------------
BARCLAY'S GLOBAL FUND ADVISORS
By:
------------------------------
Title:
---------------------------
<PAGE>
EXHIBIT 5(c)
SERVICE AGREEMENT
THIS AGREEMENT is made and entered into this ____ day of __________, 1997,
by and between STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, an Illinois
corporation (the "Auto Company"), STATE FARM INVESTMENT MANAGEMENT CORP., a
Delaware corporation and a wholly-owned subsidiary of Auto Company (the
"Adviser"), and STATE FARM VARIABLE PRODUCT TRUST, a Delaware business trust
(the "Trust").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Trust issues shares of beneficial interest (the "Shares")
registered under the Securities Act of 1933, as amended (the "1933 Act")
pursuant to a registration statement initially filed with the Securities and
Exchange Commission on February 27, 1997, as amended from time to time (the
"Registration Statement");
WHEREAS, the Trust has established six separate series of Shares, each
corresponding to a separate investment portfolio having its own investment
objective, and may establish additional series of Shares in the future (such
existing and future series are collectively referred to herein as the "Funds");
WHEREAS, the Shares are sold exclusively to certain segregated asset
accounts (the "Accounts") of State Farm Life Insurance Company (the "Life
Company") or its affiliated life insurance companies (collectively, "State
Farm") to fund certain variable annuity and/or life insurance contracts issued
by State Farm (the "Contracts");
WHEREAS, the Adviser is an investment adviser registered under the
Investment Advisers Act of 1940, as amended (the "Advisers Act") and all
applicable state securities laws, a broker-dealer registered under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and a member of
the National Association of Securities Dealers, Inc. (the "NASD");
WHEREAS, the Trust has retained the Adviser to render management and
investment advisory services to each Fund pursuant to an Investment Advisory and
Management Services Agreement dated _______________, 1997 (the "Management
Agreement");
WHEREAS, the Adviser wishes to utilize certain of the Auto Company's
personnel, services, and facilities to perform its services under the Management
Agreement in the manner and on the terms and conditions set forth below; and
WHEREAS, the Auto Company is willing to provide such personnel, services,
and facilities to the Adviser in the manner and on the terms and conditions set
forth below;
<PAGE>
NOW, THEREFORE, in consideration of their mutual promises, the Trust, the
Adviser, and the Auto Company agree as follows:
ARTICLE 1
Provision of Personnel, Services, and Facilities
1.1 The Adviser shall have the right to use, and Auto Company shall make
available for the use of the Adviser: (i) such part-time services of employees
of Auto Company engaged in its investment operations, and such services of
administrative and other employees of Auto Company, for periods to be agreed
upon by the Adviser and Auto Company; and (ii) such administrative, clerical,
stenographic and other support services and office supplies and equipment, as
may in each case be reasonably required by the Adviser in the performance of its
obligations as investment adviser to the Trust under the Management Agreement
and any agreements amending or superseding such agreement.
1.2 The Adviser shall have the right to use, and Auto Company shall
furnish for the use of the Adviser, such office space as is reasonably needed by
the Adviser in the performance of its obligations as investment adviser to the
Trust.
1.3 In performing services for the Adviser under this agreement, the
employees of Auto Company may, to the full extent that they deem appropriate,
have access to and utilize statistical and economic data, investment research
and reports and other information prepared for or contained in the files of the
Auto Company which are relevant to making investment decisions within the
investment objectives of the Trust, and may make such information available to
the Adviser; provided, that any such information prepared or obtained in
connection with a private placement or other nonpublic transaction need not be
made available to the Adviser if Auto Company deems such information
confidential.
ARTICLE 2
Compensation of the Auto Company
2.1 In consideration of the services to be rendered and the facilities to
be provided to the Adviser by Auto Company and its employees pursuant to this
agreement, the Adviser agrees to reimburse Auto Company for such costs, direct
and indirect, as may be fairly attributable to the services performed and the
facilities provided for the Adviser. Such costs shall include, but shall not be
limited to, an appropriate portion of salaries, employee benefits, general
overhead expense, and supplies and equipment, and a charge in the nature of rent
for the cost of space in the Auto Company offices fairly allocable to activities
of the Adviser under the Management Agreement with the Trust. In the event of
disagreement between the Adviser and Auto Company, as to a fair basis for
allocating or apportioning costs, such basis shall be fixed by independent
public accountants mutually selected by the Adviser and the Auto Company.
<PAGE>
ARTICLE 3
Limitations of Liability
3.1 Limitation of Liability of Trust. Each of the Adviser and the Auto
--------------------------------
Company acknowledge that it has received notice of and accepts the limitations
on the Trust's liability as set forth in the Trust's Declaration of Trust, as
amended from time to time. In accordance therewith, the Adviser and the Auto
Company agree that the Trust's obligations hereunder shall be limited to the
assets of the Funds, and with respect to each Fund shall be limited to the
assets of such Fund, and no party shall seek satisfaction of any such obligation
from any shareholder of the Trust, nor from any trustee, officer, employee or
agent of the Trust.
3.2 Limitation of Liability of Auto Company
---------------------------------------
(a) Employees of Auto Company performing services for the Adviser
pursuant hereto shall report and be responsible solely to the officers and
directors of the Adviser or persons designated by them. Auto Company shall have
no responsibility for investment recommendations and decisions of the Adviser
based upon information or advice given or obtained by or through such Auto
Company employees; provided, however, that the foregoing shall not be construed
to relieve Auto Company of any liability to the Trust, its shareholders, or the
Contract holders to which the Auto Company would otherwise be subject by reason
of its willful misfeasance, bad faith or gross negligence in the performance of
its duties hereunder or by reason of its reckless disregard of its obligations
and duties hereunder.
(b) All obligations of performance under the Management Agreement are
solely those of the Adviser and the Trust, for which Auto Company assumes no
responsibility except as otherwise expressly provided herein.
ARTICLE 4
Duration and Termination of this Agreement
4.1 Effective Date and Term. This agreement shall not become effective
-----------------------
unless and until it is approved by the Trust's Board (the "Board"), including a
majority of trustees who are not parties to this agreement or interested persons
of any such party to this agreement. This agreement shall come into full force
and effect on the date which it is so approved, provided that it shall not
became effective as to any subsequently created Fund until it has been approved
by the Board specifically for such Fund. As to each Fund, the agreement shall
continue in effect for two years and shall thereafter continue in effect from
year to year so long as such continuance is specifically approved for each Fund
at least annually by: (i) the Board, or by the vote of a majority of the
outstanding votes attributable to the shares representing an interest in the
Fund; and (ii) a majority of those trustees who are not parties to
<PAGE>
this agreement or interested persons of any such party cast in person at a
meeting called for the purpose of voting on such approval.
4.2 Termination.
-----------
(a) This agreement may be terminated at any time, without penalty, by
vote of the Board or by vote of the holders of a majority of the outstanding
shares of the Trust, or by the Adviser, on sixty (60) days' written notice to
the other party.
(b) This agreement may be terminated at any time without the payment
of any penalty by vote of the Board in the event that it shall have been
established by a court of competent jurisdiction that the Adviser or any officer
or director of the Adviser has taken any action which results in a breach of the
covenants of the Adviser set forth herein or in the Management Agreement.
(c) This agreement shall automatically terminate in the event of its
assignment.
ARTICLE 5
Amendments to this Agreement
5.1 This agreement may be amended at any time by mutual consent of the
parties; provided, that such amendment is specifically approved by: (i) the vote
of a majority of outstanding voting securities of the Trust; and (ii) a majority
of those trustees who are not parties to this agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
ARTICLE 6
Notices
6.1 Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust:
State Farm Variable Product Trust
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn: _____________________
<PAGE>
If to the Adviser:
State Farm Investment Management Corp.
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn: _____________________
If to the Auto Company:
State Farm Mutual Automobile Insurance Company
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn: _____________________
ARTICLE 7
Miscellaneous Provisions
7.1 Definitions of Certain Terms. The terms "assignment", "affiliated
----------------------------
person" and "interested person", when used in this agreement, shall have the
respective meanings specified in the 1940 Act. The term "majority of the
outstanding votes attributable to the Shares of a Fund" means the lesser of: (a)
67% or more of the votes attributable to such Shares of the Fund 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 votes attributable to Shares of the Fund.
7.2 Applicable Law.
--------------
(a) This agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of Delaware without regard to
conflicts of law principles or precedents.
(b) This agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant and the terms hereof shall be interpreted and construed in accordance
therewith.
7.3 Severability. If any provision of this agreement shall be held or
------------
made invalid by a court decision, statute, rule or otherwise, the remainder of
this agreement shall not be affected thereby.
7.4 Captions. The captions in this agreement are included for convenience
--------
of reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
<PAGE>
7.5 Counterparts. This agreement may be executed simultaneously in
------------
multiple counterparts, each of which taken together shall constitute one and the
same instrument.
7.6 Cooperation with Authorities. Each party hereto shall cooperate with
----------------------------
the other party and all appropriate governmental authorities (including without
limitation the SEC, the NASD, and state insurance regulators) and shall permit
such authorities reasonable access to its books and records in connection with
any investigation or inquiry relating to this agreement or the transactions
contemplated hereby.
7.7 Cumulative Rights. The rights, remedies and obligations contained in
-----------------
this agreement are cumulative and are in addition to any and all rights,
remedies and obligations, at law or in equity, which the parties hereto are
entitled to under state and federal laws.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed in their names and on their behalf by their duly authorized officers
all on the day and year first above written.
STATE FARM INVESTMENT MANAGEMENT CORP.
By:
---------------------------------------------
Title:
------------------------------------------
STATE FARM VARIABLE PRODUCT TRUST
By:
---------------------------------------------
Title:
------------------------------------------
STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY
By:
---------------------------------------------
Title:
------------------------------------------
<PAGE>
EXHIBIT 6
UNDERWRITING AGREEMENT
THIS AGREEMENT is made and entered into this ____ day of __________, 1997,
by and between STATE FARM VARIABLE PRODUCT TRUST, a Delaware business trust (the
"Trust"), and STATE FARM INVESTMENT MANAGEMENT CORP., a Delaware corporation
(the "Underwriter").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Trust issues shares of beneficial interest (the "Shares"), an
unlimited number of which are registered under the Securities Act of 1933, as
amended (the "1933 Act") pursuant to a registration statement initially filed
with the Securities and Exchange Commission (the "SEC") on February 27, 1997, as
amended from time to time (the "Registration Statement");
WHEREAS, the Trust has established six separate series of Shares, each
corresponding to a separate investment portfolio having its own investment
objective, and may establish additional series of Shares in the future (such
existing and future series are collectively referred to herein as the "Funds");
WHEREAS, the Shares are sold exclusively to certain segregated asset
accounts (the "Accounts") of State Farm Life Insurance Company or its affiliated
life insurance companies (collectively, "State Farm") to fund certain variable
annuity and/or life insurance contracts issued by State Farm (the "Contracts");
WHEREAS, the Underwriter is a broker-dealer registered under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and a member of the National
Association of Securities Dealers, Inc. (the "NASD");
WHEREAS, the Trust desires to retain the Underwriter to render certain
distribution services to each Fund in the manner and on the terms and conditions
set forth below; and
WHEREAS, the Underwriter is willing to provide such distribution services
to each Fund in the manner and on the terms and conditions set forth below;
NOW, THEREFORE, in consideration of their mutual promises, the Trust and
the Underwriter agree as follows:
<PAGE>
ARTICLE 1
Employment of Underwriter
1.1 The Trust hereby appoints the Underwriter its exclusive agent for
the distribution of the Shares of each Fund in jurisdictions wherein Shares may
legally be offered for sale and the Underwriter hereby accepts such appointment.
1.2 The Underwriter agrees: (a) that it will use its best efforts
with reasonable promptness to sell such Shares exclusively to the Accounts at a
price equal to the net asset value of such Shares determined in accordance with
the Registration Statement; and (b) that the Trust shall receive 100% of such
sales price.
1.3 Notwithstanding any other provision hereof, the Board of Trustees
of the Trust (the "Board") may refuse to sell shares of any Fund to the Company
and the Accounts, or suspend or terminate the offering of shares of any Fund if
such action is required by law or by regulatory authorities having jurisdiction
or is, in the sole discretion of the Board acting in good faith and in light of
its fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Fund.
1.4 The Trust will furnish to the Underwriter from time to time such
information with respect to the Trust and its Shares as the Underwriter may
reasonably request for use in connection with the sale of Shares. The
Underwriter agrees that it will not use or distribute or authorize the use,
distribution or dissemination by others in connection with the sale of Shares
any statements, other than those contained in the Registration Statement, except
such supplemental literature or advertising as shall be lawful under federal and
state securities laws and regulations, and that it will furnish the Trust with
copies of all such material.
1.5 The Underwriter shall order Shares from the Trust only to the
extent that it shall have received purchase orders therefor.
1.6 In selling Shares for the account of the Trust, the Underwriter
will in all respects materially conform to the requirements of all applicable
state and federal laws relating to such sale and will indemnify and save
harmless the Trust from any damage or expense on account of any wrongful act by
the Underwriter or any employee, representative or agent of the Underwriter,
subject to the provisions of Section 3.1 herein. The Underwriter will observe
and be bound by all the provisions of the Declaration or the Registration
Statement which at the time in any way require, limit, restrict, prohibit or
otherwise regulate any action on the part of the Underwriter.
ARTICLE 2
Allocation of Charges and Expenses
2.1 The Trust will pay or cause to be paid expenses (including the
fees and disbursements of its own counsel) of any registration of Shares under
the 1933 Act and
<PAGE>
expenses incident to the issuance of Shares, if any, such as the cost of
certificates, issue taxes, and the fees of any transfer agent.
2.2 All other expenses incident to the sale and distribution of the
Shares issued or sold hereunder shall be paid or caused to be paid by State
Farm, to the extent such expenses are allocated in one or more separate
participation agreements to State Farm, or the Underwriter.
ARTICLE 3
Limitations of Liability
3.1 Limitation of Liability of Underwriter. The Underwriter shall
--------------------------------------
give the Trust the benefit of the Underwriter's best judgment and efforts in
rendering services under this agreement; provided, that the Underwriter shall
not be liable for any error of judgment or import of law, or for any loss
suffered by the Trust in connection with the matters to which this agreement
relates, except loss resulting from: (i) willful misfeasance, bad faith or gross
negligence on the part of the Underwriter in the performance of its obligations
and duties under this agreement; (ii) its reckless disregard of its obligations
and duties under this agreement; (iii) the sale of Shares to persons other than
the Accounts.
3.2 Limitation of Liability of Trust. The Underwriter acknowledges
--------------------------------
that it has received notice of and accepts the limitations on the Trust's
liability as set forth in the Trust's Declaration of Trust, as amended from time
to time. In accordance therewith, the Underwriter agrees that the Trust's
obligations hereunder shall be limited to the assets of the Funds, and with
respect to each Fund shall be limited to the assets of such Fund, and no party
shall seek satisfaction of any such obligation from any shareholder of the
Trust, nor from any trustee, officer, employee or agent of the Trust.
ARTICLE 4
Duration and Termination of this Agreement
4.1 Effective Date and Term. This agreement shall not become
-----------------------
effective unless and until it is approved by the Board, including a majority of
trustees who are not parties to this agreement or interested persons of any such
party to this agreement. This agreement shall come into full force and effect
on the date which it is so approved, provided that it shall not became effective
as to any subsequently created Fund until it has been approved by the Board
specifically for such Fund. As to each Fund, the agreement shall continue in
effect for two years and shall thereafter continue in effect from year to year
so long as such continuance is specifically approved for each Fund at least
annually by: (i) the Board, or by the vote of a majority of the outstanding
votes attributable to the Shares representing an interest in the Fund; and (ii)
a majority of those trustees who are not parties to this agreement or interested
persons of any such party cast in person at a meeting called for the purpose of
voting on such approval.
<PAGE>
4.2 Termination.
-----------
(a) This agreement may be terminated at any time, without
penalty, by vote of the Board or by vote of the holders of a majority of the
outstanding shares of the Trust, or by the Underwriter, on sixty (60) days'
written notice to the other party.
(b) This agreement may be terminated at any time without the
payment of any penalty by vote of the Board in the event that it shall have been
established by a court of competent jurisdiction that the Underwriter or any
officer or director of the Underwriter has taken any action which results in a
breach of the covenants of the Underwriter set forth herein.
(c) This agreement shall automatically terminate in the event of
its assignment.
(d) The Trust agrees that upon the termination of this agreement
at any time or for any reason it shall, when so requested by State Farm or the
Underwriter, eliminate all reference to the name "State Farm" from its corporate
name and thereafter refrain from using the name "State Farm" in connection with
its business or activities in any form or combination whatsoever.
ARTICLE 5
Amendments to this Agreement
5.1 This agreement may be amended as to each Fund by the parties only
if such amendment is specifically approved by a majority of the trustees of the
Trust.
ARTICLE 6
Notices
6.1 Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust:
State Farm Variable Product Trust
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn: _____________________
<PAGE>
If to the Underwriter:
State Farm Investment Management Corp.
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn: _____________________
ARTICLE 7
Miscellaneous Provisions
7.1 Definitions of Certain Terms. The terms "assignment" and
----------------------------
"interested person" when used in this agreement shall have the respective
meanings specified in the 1940 Act. The term "majority of the outstanding votes
attributable to the Shares of a Fund" means the lesser of: (a) 67% or more of
the votes attributable to such Shares of the Fund 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 votes attributable to Shares of the Fund.
7.2 Applicable Law.
--------------
(a) This agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of Delaware without regard to
conflicts of law principles or precedents.
(b) This agreement shall be subject to the provisions of the
1933, 1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant and the terms hereof shall be interpreted and construed in accordance
therewith.
7.3 Severability. If any provision of this agreement shall be held
------------
or made invalid by a court decision, statute, rule or otherwise, the remainder
of this agreement shall not be affected thereby.
7.4 Captions. The captions in this agreement are included for
--------
convenience of reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
7.5 Counterparts. This agreement may be executed simultaneously in
------------
multiple counterparts, each of which taken together shall constitute one and the
same instrument.
7.6 Cooperation with Authorities. Each party hereto shall cooperate
----------------------------
with the other party and all appropriate governmental authorities (including
without limitation the SEC, the NASD, and state insurance regulators) and shall
permit such authorities reasonable access to its books and records in connection
with any investigation or inquiry relating to this agreement or the transactions
contemplated hereby.
<PAGE>
7.7 Cumulative Rights. The rights, remedies and obligations
-----------------
contained in this agreement are cumulative and are in addition to any and all
rights, remedies and obligations, at law or in equity, which the parties hereto
are entitled to under state and federal laws.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this agreement to
be executed in their names and on their behalf by their duly authorized officers
all on the day and year first above written.
STATE FARM INVESTMENT MANAGEMENT CORP.
By:
--------------------------------------------
Title:
-----------------------------------------
STATE FARM VARIABLE PRODUCT TRUST
By:
--------------------------------------------
Title:
-----------------------------------------
<PAGE>
EXHIBIT 8(b)
CUSTODIAN CONTRACT
between
State Farm Variable Annuity Product Trust
and
BARCLAYS GLOBAL INVESTORS, N.A.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Employment of Custodian.................................................. 1
2. Duties of the Custodian.................................................. 1
2.1 Holding Securities................................................. 1
2.2 Delivery of Securities............................................. 1
2.3 Registration of Securities......................................... 3
2.4 Bank Accounts...................................................... 4
2.5 Availability of Federal Funds...................................... 4
2.6 Collection of Income............................................... 4
2.7 Payment of Monies.................................................. 5
2.8 Acting Pursuant to Proper Instructions............................. 6
2.9 Appointment of Agents.............................................. 6
2.10 Deposit of Securities in U.S. Securities Systems................... 6
2.11 Segregated Account................................................. 7
2.12 Ownership Certificates for Tax Purposes............................ 7
2.13 Proxies............................................................ 7
2.14 Communications Relating to Trust Portfolio Securities.............. 8
2.15 Reports to Trust by Independent Public Accountants................. 8
3. Payments for Repurchase or Redemption and Sales of Shares of the Funds... 8
4. Proper Instructions...................................................... 9
5. Actions Permitted without Express Authority.............................. 9
6. Evidence of Authority.................................................... 9
7. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income............................10
8. Records..................................................................10
9. Opinion of Trust's Independent Accountants...............................10
10. Compensation of Custodian................................................10
11. Responsibility of Custodian..............................................10
12. Effective Period, Termination and Amendment..............................12
13. Successor Custodian......................................................12
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
14. Interpretive and Additional Provisions...................................13
15. California Law to Apply..................................................13
16. Prior Contracts..........................................................13
17. Reproduction of Documents................................................13
18. Shareholder Communications Election......................................13
19. Tax Law..................................................................14
20. Reimbursement of Advances................................................14
21. Representative Capacity and Binding Obligation...........................14
22. Several Obligations of the Portfolios....................................15
</TABLE>
<PAGE>
CUSTODIAN CONTRACT
This Contract between State Farm Variable Product Trust ("Trust"), a
business trust organized and existing under the laws of the State of Delaware,
having its principal place of business at One State Farm Plaza, Bloomington,
Illinois 61710, and Barclays Global Investors, N.A. ("Custodian") having its
principal place of business at 45 Fremont Street, San Francisco, CA 94105, is
dated as of ___________________, 1997.
WITNESSETH: In consideration of the mutual covenants and agreements
hereinafter contained, the parties agree as follows:
1. EMPLOYMENT OF CUSTODIAN
The Trust hereby employs the Custodian as the custodian of two of the
Trust's six separate investment portfolios: the large Cap Equity Index Fund and
the Small Cap Equity Index Fund (the "Funds" or the "Fund"). The Trust agrees
to deliver to the Custodian all securities and cash owned by each Fund, and all
payments of income, payments of principal or capital distributions received by
the Trust with respect to all securities owned by the Fund from time to time,
and the cash consideration received by the Trust for such new or treasury shares
of capital stock, $_____ per value ("Shares"), of the Fund as may be issued or
sold from time to time. The Custodian shall not be responsible for any property
of the Fund held or received by the Trust and not delivered to the Custodian.
2. DUTIES OF THE CUSTODIAN
2.1 Holding Securities. The Custodian shall hold and physically
------------------
segregate for the account Trust on behalf of each Fund all non-cash
property, including all investments owned by the Fund, other than (a)
securities which are maintained pursuant to Section 2.10 in a
clearing agency which acts as a securities depository or in a book-
entry system authorized by the U.S. Department of the Treasury and
certain federal agencies (each, a "U.S. Securities System").
2.2 Delivery of Securities. The Trust on behalf of each Fund, by Proper
----------------------
Instructions (which may be continuing instructions when deemed
appropriate by the parties), will direct Custodian to release and
deliver securities owned by each Fund held by the Custodian or in a
U.S. Securities System account of the Custodian only:
1) Upon sale of such securities and receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Trust
on behalf of the Fund;
3) In the case of a sale effected through a U.S. Securities System,
in accordance with the provisions of Section 2.10 hereof;
<PAGE>
4) To the depository agent in connection with tender or other
similar offers for securities;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable; provided
that, in any such case, the case or other consideration is to be
delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name
of the Trust on behalf of each Fund or into the name of any
nominee or nominees of the Custodian or into the name or nominee
name of any agent appointed pursuant to Section 2.9 or into the
name or nominee name of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate
face amount or number of units; provided that, in any such case,
the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account Trust on behalf
of the Fund, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery"
custom; provided that in any such case, the Custodian shall have
no responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for such
securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant
to provisions for conversion contained in such securities, or
pursuant to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be delivered
to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
10) For delivery in connection with any loans of securities made by
the Trust on behalf of the Fund, but only against receipt of
adequate collateral as agreed upon from time to time by the
Custodian and the Trust, which may be in the form of cash or
obligations issued by the United States government, its agencies
or instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of
2
<PAGE>
the Treasury, the Custodian will not be held liable or
responsible for the delivery of securities owned by the Fund
prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Trust on behalf of the Fund requiring a pledge of assets,
but only against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement
among the Trust on behalf of the Fund, the Custodian and broker-
dealer registered under the Securities Exchange Act of 1934
("Exchange Act") and a member of The National Association of
Securities Dealer, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Trust;
13) For delivery in accordance with the provisions of any agreement
among the Trust on behalf of the Fund, the Custodian, and a
Futures Commission Merchant registered under the Commodity
Exchange Act, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any Contract Market
or any similar organization or organizations, regarding account
deposits in connection with transactions by the Trust;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Trust on behalf of the Fund, for delivery to
such Transfer Agent or to the holders of shares in connection
with distributions in kind, as may be described from time to
time in the Trust's currently effective prospectus and statement
of additional information ("prospectus"), in satisfaction of
requests by holders of Shares for repurchase or redemption; and
15) For any other proper corporate purpose.
2.3 Registration of Securities. Securities held by the Custodian (other
--------------------------
than bearer securities) shall be registered in the name of Trust on
behalf of the Fund or in the name of any nominee of the Trust or of
any nominee to be used in common with other registered investment
companies having the same investment adviser as the Trust, or in the
name or nominee name of any agent appointed pursuant to Section 2.9
or in the name or nominee name of any sub-custodian appointed
pursuant to Article 1. All securities accepted by the Custodian on
behalf of the Trust under the terms of this Contract shall be in
"street name" or other good delivery form. If, however, the Trust
directs the Custodian to maintain securities in "street name", the
Custodian shall utilize its best efforts only to timely collect
income due the Trust on such securities and to notify the Trust on a
best efforts basis only
3
<PAGE>
of relevant corporate actions including, without limitation, pendency
of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate
-------------
bank account or accounts in the United States in the name of the
Trust on behalf of each Fund, subject only to drat or order by the
Custodian acting pursuant to the terms of this Contract, and shall
hold in such account or accounts, subject to the provisions hereof,
all cash received by it from or for the account of the Trust, other
than case maintained by the Trust in a bank account established and
used in accordance with Rule 17f-3 under the Investment Company Act
of 1940. Funds held by the Custodian for the Trust may be deposited
by it to its credit as Custodian in such other banks or trust
companies as it may in its discretion deem necessary or desirable;
provided, however, that every such bank or trust company shall be
qualified to act as a custodian under the Investment Company Act of
1940 and that each such bank or trust company and the funds to be
deposited with each such bank or trust company shall be approved by
vote of a majority of the Board of Trustees. Such funds shall be
deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between Trust
-----------------------------
on behalf of the Funds and the Custodian, the Custodian shall, upon
the receipt of Proper Instructions, make federal funds available to
the Trust as of specified times agreed upon from time to time by the
Trust and the Custodian in the amount of checks received in payment
for Shares of the Fund which are deposited into the Trust's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
--------------------
Custodian shall collect on a timely basis all income and other
payments with respect to United States registered securities held
hereunder to which the Trust on behalf of each Fund shall be entitled
either by law or pursuant to customs in the securities business, and
shall collect on a timely basis all income and other payments with
respect to United States bearer securities if, on the date of payment
by the issuer, such securities are held by the Custodian or its agent
thereof and shall credit such income, as collected, to the Trust's
custodian account. Without limiting the generality of the foregoing,
the Custodian shall detach and present for payment all coupons and
other income items requiring presentation as and when they become due
and shall collect interest when due on securities held hereunder.
Income due the Trust on United States securities loaned pursuant to
the provisions of Section 2.2(10) shall be the responsibility of the
Trust. The Custodian will have no duty or responsibility in
connection therewith, other than to provide the Trust with such
information or data as may be necessary to assist the Trust in
arranging for the timely delivery to the Custodian of the income to
which the Trust is properly entitled.
4
<PAGE>
2.7 Payment of Monies. The Trust, by Proper Instructions (which may be
-----------------
continuing instructions when deemed appropriate by the parties),
shall direct the Custodian to pay out monies of the Trust on behalf
of the Fund only:
1) Upon the purchase of securities, options, futures contracts or
options on futures contracts for the account of the Trust but
only (a) against the delivery of such securities, or evidence of
title to such options, futures contracts or options on futures
contracts, to the Custodian (or any bank, banking firm or trust
company doing business in the United States or abroad which is
qualified under the Investment Company Act of 1940, as amended,
to act as a custodian and has been designated by the Custodian
as its agent for this purpose) registered in the name of the
Trust or in the name of a nominee of the Custodian referred to
in Section 2.3 hereof or in proper form for transfer; (b) in the
case of a purchase effected through a U.S. Securities System, in
accordance with the conditions set forth in Section 2.10 hereof;
(c) in the case of repurchase agreements entered into between
the Trust and the Custodian, or another bank, or a broker-dealer
which is a member of NASD, (i) against delivery of the
securities either in certificate form or through an entry
crediting the Custodian's account at the Federal Reserve Bank
with such securities or (ii) against delivery of the receipt
evidencing purchase by the Trust of securities owned by the
Custodian along with written evidence of the agreement by the
Custodian to repurchase such securities from the Trust or (d)
for transfer to a time deposit account of the Trust in any bank
such transfer may be effected prior to receipt of a confirmation
from a broker and/or the applicable bank pursuant to Proper
Instructions from the Trust as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares as set forth in
Article 3 hereof;
4) For the payment of any expense or liability incurred by the
Trust on behalf of the Fund, including but not limited to the
following payments for the account of the Trust; interest,
taxes, management, accounting, transfer agent and legal fees,
and operating expenses whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents;
6) For payment of the amount of dividends received in respect of
securities sold shore; and
5
<PAGE>
7) For any other proper purpose.
2.8 Acting Pursuant to Proper Instructions. Provided that the Custodian
--------------------------------------
acts in accordance with Proper Instructions, it shall have no
liability for actions taken or declined to be taken.
2.9 Appointment of Agents. The Custodian may at any time or times in
---------------------
its discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the Investment Company
Act of 1940, as amended, to act as a custodian, as its agent to carry
out such of the provisions of this Article 2 as the Custodian may
from time to time direct; provided, however, that the appointment of
any agent shall not relieve the Custodian of its responsibilities or
liabilities hereunder.
2.10 Deposit of Securities in U.S. Securities Systems. Upon receipt
------------------------------------------------
of Proper Instructions, the Custodian may deposit and/or maintain
securities held by the Trust on behalf of each Fund in a clearing
agency registered with the Securities and Exchange Commission under
Section 17A of the Exchange Act, which acts as a securities
depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively
referred to herein as "U.S. Securities System" in accordance with
applicable Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject to the
following provisions:
1) The Custodian may keep securities in a U.S. Securities System
provided that such securities are represented in an account
("Account") of the Custodian in the U.S. Securities System which
shall not include any assets of the Custodian other than assets
held as a fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of the
Trust which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Trust;
3) The Custodian shall pay for securities purchased for the account
of the Trust on behalf of the Fund upon (i) receipt of advice
from the U.S. Securities System that such securities have been
transferred to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such payment and
transfer for the account of the Trust. The Custodian shall
transfer securities sold for the account of the Trust upon (i)
receipt of advice from the U.S. Securities System that payment
for such securities has been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Trust.
Copies of all advices from the U.S. Securities
6
<PAGE>
System of transfers of securties for the account of the Trust
shall identify the Trust, be maintained for the Trust by the
Custodian and be provided to the Trust at its request. Upon
request, the Custodian shall furnish the Trust confirmation of
each transfer to or from the account of the Trust in the form of
a written advice or notice and shall furnish to the Trust copies
of daily transaction sheets reflecting each day's transactions
in the U.S. Securities System for the account of the Trust;
4) The Custodian shall provide the Trust with any report obtained
by the Custodian on the U.S. Securities System's accounting
system, internal accounting control and procedures for
safeguarding securities deposited in the U.S. Securities System;
and
5) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Trust for any loss or damage to
the Trust resulting from the failure of the Custodian or any
agent to enforce effectively such rights as it may have against
the U.S. Securities System; at the election of the Trust, it
shall be entitled to be subrogated to the rights of the
Custodian with respect to any claim against the U.S. Securities
System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent that
the Trust has not been made whole for any such loss or damage.
2.11 Segregated Account. Upon receipt of Proper Instructions, the
------------------
Custodian shall establish and maintain a segregated account or
accounts for the Trust on behalf of each Fund in order to comply with
applicable federal securities or commodities laws. Upon receipt of
Proper Instructions, the Custodian shall transfer into such
segregated accounts such cash and/or securities, including securities
maintained in an account by the Custodian pursuant to Section 2.10
hereof, as it may be directed. In lieu of establishing a segregated
account or accounts, Custodian, upon receipt of Proper Instructions,
shall earmark cash or securities to comply with applicable federal
securities.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall
---------------------------------------
execute ownership and other certificates and affidavits for all
federal and state tax purposes in connection with receipt of income
or other payments with respect to the securities of the Trust held by
it and in connection with transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the securities held
-------
hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in
the name of the Trust or a nominee of the Trust, all proxies, without
indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Trust such proxies, all proxy
soliciting materials and all notices relating to such securities.
7
<PAGE>
2.14 Communications Relating to Trust Portfolio Securities. Subject to
-----------------------------------------------------
the provisions of Section 2.3, the Custodian shall transmit promptly
to the Trust all written information (including without limitation,
pendency of calls and maturities of securities and expirations of
rights in connection therewith and notices of exercise of call and
put options written by the Trust on behalf of the Fund and the
maturity of futures contracts purchased or sold by the Trust on
behalf of the Fund) received by the Custodian from issuers of the
securities being held for the Trust. With respect to tender or
exchange offers, the Custodian shall transmit promptly to the Trust
all written information, received by the Custodian from issuers of
the securities whose tender or exchange is sought and from the party
(or his agents) making the tender offer, exchange offer or any other
similar transaction, the Trust shall notify the Custodian at least
three business days prior to the date on which the Custodian is to
take such action.
2.15 Reports to Trust by Independent Public Accountants. The Custodian
--------------------------------------------------
shall provide the Trust, at such times as the Trust may reasonably
require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a U.S.
Securities System, relating to the services provided by the Custodian
under this Contract; such reports shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Trust to
provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such
inadequacies, the reports shall so state.
3. PAYMENTS FOR REPURCHASE OR REDEMPTION AND SALES OF SHARES OF THE FUNDS.
From such funds as may be available for the purpose, the Custodian shall,
upon receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares of the Fund who have delivered to the Transfer
Agent a request for redemption or repurchase of their Shares. In connection
with the redemption or repurchase of Shares of the Fund, the Custodian is
authorized upon receipt of instructions from the Transfer Agent to wire funds to
or through a commercial bank designated by the redeeming shareholders. In
connection with the redemption or repurchase of Shares of the Fund, the
Custodian shall honor checks drawn on the Custodian by a holder of Shares, which
checks have been furnished by the Trust to the holder of Shares, when presented
to the Custodian in accordance with such procedures and controls as are mutually
agreed upon from time to time between the Trust and the Custodian.
The Custodian shall receive from the distributor for each Fund's Shares or
from the Transfer Agent and deposit into the Trust's account such payments as
are received for Shares of the Fund issued or sold from time to time. The
Custodian will provide timely notification to the Trust and the Transfer Agent
of any receipt by it of payments for Shares of the Fund.
8
<PAGE>
4. PROPER INSTRUCTIONS.
Proper Instructions as used herein means a writing signed or initialed by
one or more person or persons as the Board of Trustees shall have from time to
time authorized. Each such writing shall set forth the specific transaction or
type of transaction involved, including a specific statement of the purpose for
which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Trust shall cause all oral instructions to be confirmed in
writing. Upon receipt of a certificate of the Secretary or an Assistant
Secretary as to the authorization by the Board of Trustees of the Trust
accompanied by a detailed description of procedures approved by the Board of
Trustees, Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the Board of
Trustees and the Custodian are satisfied that such procedures afford adequate
safeguard's for the Fund's assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account in
accordance with Section 2.11.
5. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from the
Trust:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to
the Trust;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Trust on behalf of the
Fund, checks, drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Trust except as
otherwise directed by the Board of Trustees.
6. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Trust. The
Custodian may receive and accept a certified copy of a vote of the Board of
Trustees as conclusive evidence (a) of the authority of any person to act in
accordance with such vote or (b) of any determination or of any action by the
Board of Trustees pursuant to the Declaration of Trust as described in such
vote, and such vote may be considered as in full force and effect until receipt
by the Custodian of written notice to the contrary.
9
<PAGE>
7. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND
CALCULATION OF NET ASSET VALUE AND NET INCOME
The Custodian shall have no obligation to keep the books of account Trust
and/or each Fund and no obligation to compute the net asset value per share of
the outstanding shares of each Fund. The Custodian shall, however, cooperate
with and supply necessary information to the entity or entities appointed by the
Board of Trustees to keep the books of account of the Trust and/or Fund and/or
compute the net asset value per share of the outstanding shares of the Fund.
8. RECORDS
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Trust under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Trust and shall at all reasonable
times during the regular business hours of the Custodian be open for inspection
by duly authorized officers, employees or agents of the Trust and employees and
agents of the Securities and Exchange Commission. The Custodian shall, at the
Trust's request, supply the Trust with a tabulation of securities owned by the
Fund and held by the Custodian and shall, when requested to do so by the Trust
and for such compensation as shall be agreed upon between the Trust and the
Custodian, include certificate numbers in such tabulations.
9. OPINION OF TRUST'S INDEPENDENT ACCOUNTANTS
The Custodian shall take such reasonable action, as the Trust may from time
to time request, to obtain from year to year favorable opinions from the Trust's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Trust's Form N-1A, and Form N-SAR or other annual
reports to the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable to reasonable compensation
for its services and expenses as Custodian, as agreed upon from time to time
between the Trust and the Custodian.
11. RESPONSIBILITY OF CUSTODIAN
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless by the Trust and/or each
Fund in acting upon any notice, request, consent, certificate or other
instrument reasonably believed by it to be genuine and to be signed by the
proper party or parties, including any futures commission merchant acting
pursuant to the terms of a three-party
10
<PAGE>
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract, but shall be
kept indemnified by and shall be without liability to the Trust and/or the Fund
for any action taken or omitted by it without negligence. It shall be entitled
to rely on and may act upon advice of counsel (who may be counsel for the Trust)
on all matters, and shall be without liability for any action reasonably taken
or omitted pursuant to such advice.
Except as may arise from the Custodian's own negligence or willful
misconduct, the Custodian shall be without liability to the Trust and/or each
Fund for any loss, liability, claim or expense resulting from or caused by; (i)
events or circumstances beyond the reasonable control of the Custodian or any
agent or nominee, including, without limitation, nationalization or
expropriation, imposition of currency controls or restrictions, the
interruption, suspension or restriction of trading on or the closure of any
securities market, power or other mechanical or technological failures or
interruptions, computer viruses or communications disruptions, acts of war or
terrorism, riots, revolutions, work stoppages, natural disasters or other
similar events or acts; (ii) errors by the Trust in its instructions to the
Custodian, (iii) the insolvency of or acts or omissions by a Securities System;
(iv) any delay or failure of any broker, agent or intermediary, central bank or
other commercially prevalent payment or clearing system to deliver to the
custodian's sub-custodian or agent securities purchased or in the remittance or
payment made in connection with securities purchased or in the remittance or
payment made in connection with securities sold; (v) any delay or failure of any
company, corporation, or other body in charge of registering or transferring
securities in the name of the Custodian, the Trust, the Custodian's sub-
custodians, nominees or agents or any consequential losses arising out of such
delay or failure to transfer such securities including non-receipt of bonus,
dividends and rights and other accretions or benefits; (vi) delays or inability
to perform its duties due to any disorder in market infrastructure with respect
to any particular security or Securities System; and (vii) any provision of any
present or future law or regulation or order of the United States of America, or
any state thereof, or any other country, or political subdivision thereof or of
any court of competent jurisdiction.
If the Trust request the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Trust being liable for the payment of money or incurring liability of some
other form, the Trust, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Trust requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities or provide conditional credit for any
purpose (including but not limited to securities settlements, and assumed
settlement) or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Trust shall be
security therefor and should the Trust fail to repay the
11
<PAGE>
Custodian promptly, the Custodian shall be entitled to utilize available cash
and to dispose of the Trust assets to the extent necessary to obtain
reimbursement.
In no event shall the Custodian be liable to the Trust and/or each Fund for
indirect, special or consequential damages.
12. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than thirty (30)
days after the date of such delivery or mailing; provided, however, that the
Trust shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Declaration of
Trust, and further provided, that the Trust may at any time by action of its
Board of Trustees (i) substitute another bank or trust company for the Custodian
by giving notice as described above to the custodian, or (ii) immediately
terminate this Contract in the event of the appointment of a conservator or
receiver for the Custodian by the comptroller of the currency or upon the
happening of a like event at the direction of an appropriate regulatory agency
or court of competent jurisdiction.
Upon termination of the Contract, the Trust shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
13. SUCCESSOR CUSTODIAN
If a successor custodian shall be appointed by the Board of Trustees, the
Custodian shall, upon termination, deliver to such successor custodian at the
office of the Custodian, duly endorsed and in the form for transfer, all
securities then held by it hereunder and shall transfer to an account of the
successor custodian all of the Trust's securities held in a Securities System.
If the Board of Trustees fails to appoint a successor custodian on or
before the date when termination of this Contract shall become effective, then
the Custodian shall have the right to deliver to a bank or trust company, which
is a "bank" as defined in the Investment Company act of 1940, doing business in
San Francisco, California, of its own selection, having an aggregate capital,
surplus, and undivided profits, as shown by its last published report, of not
less than $25,000,000, all securities, funds and other properties held by the
Custodian and all instruments held by the Custodian relative thereto and all
other property held by it under this Contract and to transfer to an account of
such successor custodian all of the Trust's securities held in any securities
System. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Contract.
12
<PAGE>
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Board of Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian retains possession of such securities, funds and other properties
and the provisions of this Contract relating to the duties and obligations of
the Custodian shall remain in full force and effect.
14. INTERPRETIVE AND ADDITIONAL PROVISIONS
In connection with the operation of this Contract, the Custodian and the
Trust may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Declaration of Trust. No interpretive or additional provisions made as
provided in the preceding sentence shall be deemed to be an amendment of this
Contract.
15. CALIFORNIA LAW TO APPLY
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with the laws of the State of California, without
application of principles of conflicts of law.
16. PRIOR CONTRACTS
This Contract supersedes and terminates, as of the date hereof, all prior
contracts and agreements between the Trust and the Custodian relating to the
custody of the Trust's assets.
17. REPRODUCTION OF DOCUMENTS
This Contract and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographics, photostatic, microfilm, micro-
card, miniature photographic or other similar process. The parties hereto each
agree that any such reproduction shall be admissible in evidence as the original
itself in any judicial or administrative proceeding, whether or not the original
is in existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
18. SHAREHOLDER COMMUNICATIONS ELECTION
Securities and Exchange Commission rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the
13
<PAGE>
beneficial owner has expressly objected to disclosure of this information. In
order to comply with the rule, the Custodian needs the Trust to indicate whether
it authorizes the Custodian to provide the trust's name, address, and share
position to requesting companies whose securities the Trust holds on behalf of
the Fund. If the Trust tells the Custodian "yes" or does not check either "yes"
or "no" below, the Custodian is required by the rule to treat the Trust as
consenting to disclosure of this information for all securities held by the
Trust on behalf of the Fund. For the Trust's protection, the rule prohibits the
requesting company from using the Trust's name and address for any purpose other
than corporate communications. Please indicate below whether the Trust consents
or objects by checking one of the alternatives below.
YES [_] The Custodian is authorized to
release the Trust's name, address,
and share positions.
NO [_] The Custodian is not authorized to
release the Trust's name, address,
and share positions.
19. TAX LAW
Custodian shall have no responsibility or liability for any obligations now
or hereafter imposed on the Trust or the Custodian as custodian by the tax law
of the United States of America or any state or political subdivision thereof.
It shall be the responsibility of the Trust to notify the Custodian of the
obligations imposed on the Trust by the tax law of jurisdictions other than
those mentioned in the above sentence, including responsibility for withholding
and other taxes, assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with regard to
such tax law shall be to use reasonable efforts to assist the Trust with respect
to any claim for exemption or refund under the tax law of jurisdictions for
which the Trust provided such information.
20. REIMBURSEMENT OF ADVANCES
If the Trust requires the Custodian to advance cash or securities or
provide conditional credit for any purpose or in the event that the Custodian or
its nominee shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the performance of this
Contract, except such as may arise from its or its nominee's own negligent
action, negligent failure to act or willful misconduct, any property at any time
held for the account of the Trust shall be security therefor and should the
Trust fail to repay the Custodian promptly, the Custodian shall be entitled to
utilize available cash and to dispose of the Trust's assets to the extent
necessary to obtain reimbursement.
21. REPRESENTATIVE CAPACITY AND BINDING OBLIGATION
A copy of the Declaration of Trust is on file with The Secretary of the
State of Delaware, and notice is hereby given that this Contract is not executed
on behalf of the Trustees of the
14
<PAGE>
Trust as individuals, and the obligations of this Contract are not binding upon
any of the Trustees, officers or shareholders of the Trust individually but are
binding only upon the assets and property of each Fund.
The Custodian agrees that no shareholder, trustee or officer of the Trust
may be held personally liable or responsible for any obligations of the Trust
arising out of this Contract.
22. SEVERAL OBLIGATIONS OF THE PORTFOLIOS
With respect to any obligations of the Trust on behalf of each Fund and
each of the related Accounts arising out of this Contract, the Custodian shall
look for payment or satisfaction of any obligation solely to the assets and
property of each Fund and such Accounts to which such obligation relates as
though the Trust had separately contracted with the Custodian by separate
written instrument with respect to each Fund and its related Accounts.
15
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the ____ day of _____________, 1997.
Attest: STATE FARM VARIABLE ANNUITY
PRODUCT TRUST
By:
- ------------------------------ -------------------------------
[Name] [Name]
Secretary [Title]
Attest: BARCLAYS GLOBAL INVESTORS, N.A.
By:
- ------------------------------ -------------------------------
[Name] [Name]
Secretary [Title]
16
<PAGE>
CUSTODIAN AGREEMENT
BETWEEN
STATE FARM VARIABLE PRODUCT TRUST
AND
INVESTORS BANK & TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Bank Appointed Custodian..................................................1
2. Definitions...............................................................1
2.1 Authorized Person...........................................1
2.2 Board.......................................................1
2.3 Security....................................................1
2.4 Portfolio Security..........................................2
2.5 Officers' Certificate.......................................2
2.6 Book-Entry System...........................................2
2.7 Depository..................................................2
2.8 Proper Instructions.........................................2
3. Separate Accounts.........................................................3
4. Certification as to Authorized Persons....................................3
5. Custody of Cash...........................................................3
5.1 Purchase of Securities......................................4
5.2 Redemptions.................................................4
5.3 Distributions and Expenses of Fund..........................4
5.4 Payment in Respect of Securities............................4
5.5 Repayment of Loans..........................................4
5.6 Repayment of Cash...........................................4
5.7 Foreign Exchange Transactions...............................4
5.8 Other Authorized Payments...................................5
5.9 Termination.................................................5
6. Securities................................................................5
6.1 Segregation and Registration................................5
6.2 Voting and Proxies..........................................6
6.3 Corporate Action............................................6
6.4 Book-Entry System...........................................7
6.5 Use of a Depository.........................................8
6.6 Use of Book-Entry System for Commercial Paper...............9
6.7 Use of Immobilization Programs.............................10
6.8 Eurodollar CDs.............................................10
6.9 Options and Futures Transactions...........................10
6.10 Segregated Account.........................................11
6.11 Interest Bearing Call or Time Deposits.....................12
6.12 Transfer of Securities.....................................13
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
7. Redemptions..............................................................15
8. Merger, Dissolution. etc. of Fund........................................15
9. Actions of Bank Without Prior Authorization..............................15
10. Collections and Defaults.................................................16
11. Maintenance of Records and Accounting Services...........................16
12. Fund Evaluation and Yield Calculation....................................17
12.1 Fund Evaluation............................................17
12.2 Yield Calculation..........................................17
13. Additional Services......................................................18
14. Duties of the Bank.......................................................18
14.1 Performance of Duties and Standard of Care.................18
14.2 Agents and Subcustodians with Respect to
Property of the Fund Held in the United States.............19
14.3 Duties of the Bank with Respect to Property of
the Fund Held Outside of the United States.................19
14.4 Insurance..................................................22
14.5 Fees and Expenses of the Bank..............................22
14.6 Advances by the Bank.......................................23
15. Limitation of Liability..................................................23
16. Termination..............................................................24
17. Confidentiality..........................................................26
18. Notices..................................................................26
19. Amendments...............................................................26
20. Parties..................................................................26
21. Governing Law............................................................27
22. Counterparts.............................................................27
23. Entire Agreement.........................................................27
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
24. Limitation of Liability..................................................27
25. Several Obligations of the Portfolios....................................27
<CAPTION>
APPENDICES
<S> <C>
Appendix A............................................Fee Schedule
Appendix B................................................Reserved
Appendix C.....................................Additional Services
</TABLE>
iii
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made of this __ day of ________, 1997, between STATE FARM
VARIABLE PRODUCT TRUST, a business trust organized under the laws of the state
of Delaware (the "Fund"), and INVESTORS BANK & TRUST COMPANY, a Massachusetts
trust company (the "Bank").
The Fund, an open-end management investment company, desires to place and
maintain all of its portfolio securities and cash in the custody of the Bank.
The Bank has at least the minimum qualifications required by Section 17(f)(1) of
the Investment Company Act of 1940 (the "1940 Act") to act as custodian of the
portfolio securities and cash of the Fund, and has indicated its willingness to
so act, subject to the terms and conditions of this Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual
agreements contained herein, the parties hereto agree as follows:
1. Bank Appointed Custodian. The Fund hereby appoints the Bank as
------------------------
custodian of its portfolio securities and cash delivered to the Bank as
hereinafter described and the Bank agrees to act as such upon the terms and
conditions hereinafter set forth. For the services rendered pursuant to this
Agreement the Fund agrees to pay to the Bank the fees set forth on Appendix A
----------
hereto.
2. Definitions. Whenever used herein, the terms listed below will have
-----------
the following meaning:
2.1 Authorized Person. Authorized Person will mean any of the
-----------------
persons duly authorized to give Proper Instructions or otherwise act on behalf
of the Fund by appropriate resolution of its Board, and set forth in a
certificate as required by Section 4 hereof.
2.2 Board. Board will mean the Board of Directors or the Board of
-----
Trustees of the Fund, as the case may be.
2.3 Security. The term security as used herein will have the same
--------
meaning assigned to such term in the Securities Act of 1933, as amended,
including, without limitation, any note, stock, treasury stock, bond, debenture,
evidence of indebtedness, certificate of interest or participation in any profit
sharing agreement, collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in oil,
gas, or other mineral rights, any put, call, straddle, option, or privilege on
any security, certificate of deposit, or group or index of securities (including
any interest therein or based on the value thereof), or any put, call, straddle,
option, or privilege entered into on a national securities exchange relating to
a foreign currency, or, in general, any interest or instrument commonly known as
a "security", or any certificate of interest or participation in, temporary or
interim certificate for, receipt for,
1
<PAGE>
guarantee of, or warrant or right to subscribe to, or option contract to
purchase or sell any of the foregoing, and futures, forward contracts and
options thereon.
2.4 Portfolio Security. Portfolio Security will mean any security
------------------
owned by the Fund.
2.5 Officers' Certificate. Officers' Certificate will mean, unless
---------------------
otherwise indicated, any request, direction, instruction, or certification in
writing signed by any two Authorized Persons of the Fund.
2.6 Book-Entry System. Book-Entry System shall mean the Federal
-----------------
Reserve-Treasury Department Book Entry System for United States government,
instrumentality and agency securities operated by the Federal Reserve Bank, its
successor or successors and its nominee or nominees.
2.7 Depository. Depository shall mean The Depository Trust Company
----------
("DTC"), a clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934 ("Exchange
Act"), its successor or successors and its nominee or nominees. The term
"Depository" shall further mean and include any other person authorized to act
as a depository under the 1940 Act, its successor or successors and its nominee
or nominees, specifically identified in a certified copy of a resolution of the
Board.
2.8 Proper Instructions. Proper Instructions shall mean (i)
-------------------
instructions regarding the purchase or sale of Portfolio Securities, and
payments and deliveries in connection therewith, given by an Authorized Person,
such instructions to be given in such form and manner as the Bank and the fund
shall agree upon from time to time, and (ii) instructions (which may be
continuing instructions) regarding other matters signed or initialed by an
Authorized Person. Oral instructions will be considered Proper Instructions if
the Bank reasonably believes them to have been given by an Authorized Person.
The Fund shall cause all oral instructions to be promptly confirmed in writing.
The Bank shall act upon and comply with any subsequent Proper Instruction which
modifies a prior instruction and the sole obligation of the Bank with respect to
any follow-up or confirmatory instruction shall be to make reasonable efforts to
detect any discrepancy between the original instruction and such confirmation
and to report such discrepancy to the Fund. The Fund shall be responsible, at
the Fund's expense, for taking any action, including any reprocessing, necessary
to correct any such discrepancy or error, and to the extent such action requires
the Bank to act, the Fund shall give the Bank specific Proper Instructions as to
the action required. Upon receipt by the Bank of an Officers' Certificate as to
the authorization by the Board accompanied by a detailed description of
procedures approved by the Fund, Proper Instructions may include communication
effected directly between electro-mechanical or electronic devices provided that
the Board and the Bank agree in writing that such procedures afford adequate
safeguards for the Fund's assets.
2
<PAGE>
3. Separate Accounts. If the Fund has more than one series or portfolio,
-----------------
the Bank will segregate the assets of each series or portfolio to which this
Agreement relates into a separate account for each such series or portfolio
containing the assets of such series or portfolio (and all investment earnings
thereon). Unless the context otherwise requires, any reference in this
Agreement to any actions to be taken by the Fund shall be deemed to refer to the
Fund acting on behalf of one or more of its series, any reference in this
Agreement to any assets of the Fund, including, without limitation, any
portfolio securities and cash and earnings thereon, shall be deemed to refer
only to assets of the applicable series, any duty or obligation of the Bank
hereunder to the Fund shall be deemed to refer to duties and obligations with
respect to such individual series and any obligation or liability of the Fund
hereunder shall be binding only with respect to such individual series, and
shall be discharged only out of the assets of such series.
4. Certification as to Authorized Persons. The Secretary or Assistant
--------------------------------------
Secretary of the Fund will at all times maintain on file with the Bank his or
her certification to the Bank, in such form as may be acceptable to the Bank, of
(i) the names and signatures of the Authorized Persons and (ii) the names of the
members of the Board, it being understood that upon the occurrence of any change
in the information set forth in the most recent certification on file (including
without limitation any person named in the most recent certification who is no
longer an Authorized Person as designated therein), the Secretary or Assistant
Secretary of the Fund will sign a new or amended certification setting forth the
change and the new, additional or omitted names or signatures. The Bank will be
entitled to rely and act upon any Officers' Certificate given to it by the Fund
which has been signed by Authorized Persons named in the most recent
certification received by the Bank.
5. Custody of Cash. As custodian for the Fund, the Bank will open and
---------------
maintain a separate account or accounts in the name of the Fund or in the name
of the Bank, as Custodian of the Fund, and will deposit to the account of the
Fund all of the cash of the Fund, except for cash held by a subcustodian
appointed pursuant to Sections 14.2 or 14.3 hereof, including borrowed funds,
delivered to the Bank, subject only to draft or order by the Bank acting
pursuant to the terms of this Agreement. Pursuant to the Bank's internal
policies regarding the management of cash accounts, the Bank may segregate
certain portions of the cash of the Fund into a separate savings deposit account
upon which the Bank reserves the right to require seven (7) days notice prior to
withdrawal of cash from such an account. Upon receipt by the Bank of Proper
Instructions (which may be continuing instructions) or in the case of payments
for redemptions and repurchases of outstanding shares of common stock of the
Fund, notification from the Fund's transfer agent as provided in Section 7,
requesting such payment, designating the payee or the account or accounts to
which the Bank will release funds for deposit, and stating that it is for a
purpose permitted under the terms of this Section 5, specifying the applicable
subsection, the Bank will make payments of cash held for the accounts of the
Fund, insofar as funds are available for that purpose, only as permitted in
subsections 5.1-5.9 below.
5.1 Purchase of Securities. Upon the purchase of securities for the
----------------------
Fund, against contemporaneous receipt of such securities by the Bank or against
delivery of such securities to the Bank in accordance with generally accepted
settlement practices and customs in
3
<PAGE>
the jurisdiction or market in which the transaction occurs registered in the
name of the Fund or in the name of, or properly endorsed and in form for
transfer to, the Bank, or a nominee of the Bank, or receipt for the account of
the Bank pursuant to the provisions of Section 6 below, each such payment to be
made at the purchase price shown on a broker's confirmation (or transaction
report in the case of Book Entry Paper (as that term is defined in Section 6.6
hereof)) of purchase of the securities received by the Bank before such payment
is made, as confirmed in the Proper Instructions received by the Bank before
such payment is made.
5.2 Redemptions. In such amount as may be necessary for the
-----------
repurchase or redemption of common shares of the Fund offered for repurchase or
redemption in accordance with Section 7 of this Agreement.
5.3 Distributions and Expenses of Fund. For the payment on the
----------------------------------
account of the Fund of dividends or other distributions to shareholders as may
from time to time be declared by the Board, interest, taxes, management or
supervisory fees, distribution fees, fees of the Bank for its services hereunder
and reimbursement of the expenses and liabilities of the Bank as provided
hereunder, fees of any transfer agent, fees for legal, accounting, and auditing
services, or other operating expenses of the Fund.
5.4 Payment in Respect of Securities. For payments in connection
--------------------------------
with the conversion, exchange or surrender of Portfolio Securities or securities
subscribed to by the Fund held by or to be delivered to the Bank.
5.5 Repayment of Loans. To repay loans of money made to the Fund,
------------------
but, in the case of final payment, only upon redelivery to the Bank of any
Portfolio Securities pledged or hypothecated therefor and upon surrender of
documents evidencing the loan.
5.6 Repayment of Cash. To repay the cash delivered to the Fund for
-----------------
the purpose of collateralizing the obligation to return to the Fund certificates
borrowed from the Fund representing Portfolio Securities, but only upon
redelivery to the Bank of such borrowed certificates.
5.7 Foreign Exchange Transactions.
-----------------------------
(a) For payments in connection with foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery
(collectively, "Foreign Exchange Agreements") which may be entered into by the
Bank on behalf of the Fund upon the receipt of Proper Instructions, such Proper
Instructions to specify the currency broker or banking institution (which may be
the Bank, or any other subcustodian or agent hereunder, acting as principal)
with which the contract or option is made, and the Bank shall have no duty with
respect to the selection of such currency brokers or banking institutions with
which the Fund deals or for their failure to comply with the terms of any
contract or option.
4
<PAGE>
(b) In order to secure any payments in connection with Foreign
Exchange Agreements which may be entered into by the Bank pursuant to Proper
Instructions, the Fund agrees that the Bank shall have a continuing lien and
security interest, to the extent of any payment due under any Foreign Exchange
Agreement, in and to any property at any time held by the Bank for the Fund's
benefit or in which the Fund has an interest and which is then in the Bank's
possession or control (or in the possession or control of any third party acting
on the Bank's behalf). The Fund authorizes the Bank, in the Bank's sole
discretion at any time to charge any such payment due under any Foreign Exchange
Agreement against any balance of account standing to the credit of the Fund on
the Bank's books.
5.8 Other Authorized Payments. For other authorized transactions of
-------------------------
the Fund, or other obligations of the Fund incurred for proper Fund purposes;
provided that before making any such payment the Bank will also receive a
certified copy of a resolution of the Board signed by an Authorized Person
(other than the Person certifying such resolution) and certified by its
Secretary or Assistant Secretary, naming the person or persons to whom such
payment is to be made, and either describing the transaction for which payment
is to be made and declaring it to be an authorized transaction of the Fund, or
specifying the amount of the obligation for which payment is to be made, setting
forth the purpose for which such obligation was incurred and declaring such
purpose to be a proper corporate purpose.
5.9 Termination. Upon the termination of this Agreement as
-----------
hereinafter set forth pursuant to Section 8 and Section 16 of this Agreement.
6. Securities.
----------
6.1 Segregation and Registration. Except as otherwise provided
-----------------------------
herein, and except for securities to be delivered to any subcustodian appointed
pursuant to Sections 14.2 or 14.3 hereof, the Bank as custodian will receive and
hold pursuant to the provisions hereof, in a separate account or accounts and
physically segregated at all times from those of other persons, any and all
Portfolio Securities which may nor or hereafter be delivered to it by or for the
account of the Fund. All such Portfolio Securities will be held or disposed of
by the Bank for, and subject at all times to, the instructions of the Fund
pursuant to the terms of this Agreement. Subject to the specific provisions
herein relating to Portfolio Securities that are not physically held by the
Bank, the Bank will register all Portfolio Securities (unless otherwise directed
by Proper Instructions or an Officers' Certificate), in the name of a registered
nominee of the Bank as defined in the Internal Revenue Code and any Regulations
of the Treasury Department issued thereunder, and will execute and deliver all
such certificates in connection therewith as may be required by such laws or
regulations or under the laws of any state.
The Fund will from time to time furnish to the Bank appropriate
instruments to enable it to hold or deliver in proper form for transfer, or to
register in the name of its registered nominee, any Portfolio Securities which
may from time to time be registered in the name of the Fund.
5
<PAGE>
6.2 Voting and Proxies. Neither the Bank nor any nominee of the Bank
------------------
will vote any of the Portfolio Securities held hereunder, except in accordance
with proper Instructions or an Officers' Certificate. The Bank will execute and
deliver, or cause to be executed and delivered, to the Fund all notices, proxies
and proxy soliciting materials delivered to the Bank with respect to such
Securities, such proxies to be executed by the registered holder of such
Securities (if registered otherwise than in the name of the Fund), but without
indicating the manner in which such proxies are to be voted.
6.3 Corporate Action. If at any time the Bank is notified that an
----------------
issuer of any Portfolio Security has taken or intends to take a corporate action
(a "Corporate Action") that affects the rights, privileges, powers, preferences,
qualifications or ownership of a Portfolio Security, including without
limitation, liquidation, consolidation, merger, recapitalization,
reorganization, reclassification, subdivision, combination, stock split or stock
dividend, which Corporate Action requires an affirmative response or action on
the part of the holder of such Portfolio Security (a "Response"), the Bank shall
notify the Fund promptly of the Corporate Action, the Response required in
connection with the Corporate Action and the bank's deadline for receipt from
the Fund of Proper Instructions regarding the Response (the "response
Deadline"). The Bank shall forward to the Fund via telecopier and/or overnight
courier all notices, information statements or other materials relating to the
corporate Action within twenty-four (24) hours of receipt of such materials by
the Bank.
(a) The Bank shall act upon a required Response only after
receipt by the Bank of proper Instructions from the Fund no later than 5:00 p.m.
on the date specified as the Response Deadline and only if the Bank (or its
agent or subcustodian hereunder) has actual possession of all necessary
Securities, consents and other materials no later than 5:00 p.m. on the date
specified as the Response Deadline.
(b) The Bank shall have no duty to act upon a required Response
if Proper Instructions relating to such Response and all necessary Securities,
consents and other materials are not received by and in the possession of the
Bank no later than 5:00 p.m. on the date specified as the Response Deadline.
Notwithstanding, the Bank may, in its sole discretion, use its best efforts to
act upon a Response for which Proper Instructions and/or necessary securities,
consents or other materials are received by the Bank after 5:00 p.m. on the date
specified as the Response Deadline, it being acknowledged and agreed by the
parties that any undertaking by the Bank to use its best efforts in such
circumstances shall in no way create any duty upon the Bank to complete such
Response prior to its expiration.
(c) In the event that the Fund notifies the Bank of a Corporate
Action requiring a Response and the Bank has received no other notice of such
Corporate Action, the Response Deadline shall be 48 hours prior to the Response
expiration time set by the depository processing such Corporate Action.
(d) Section 14.3(g) of this Agreement shall govern any Corporate
Action involving Foreign Portfolio Securities held by a Selected Foreign Sub-
Custodian.
6
<PAGE>
6.4 Book-Entry System. Provided (i) the Bank has received a
-----------------
certified copy of a resolution of the Board specifically approving deposits of
Fund assets in the Book-Entry System, and (ii) for any subsequent changes to
such arrangements following such approval, the Board has reviewed and approved
the arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval:
(a) The Bank may keep Portfolio Securities in the Book-Entry
System provided that such Portfolio Securities are represented in an account
("Account") of the Bank (or its agent) in such System which shall not include
any assets of the Bank (or such agent) other than assets held as a fiduciary,
custodian, or otherwise for customers;
(b) The records of the Bank (and any such agent) with respect to
the Fund's participation in the Book-Entry System through the Bank (or any such
agent) will identify by book entry the Portfolio Securities which are included
with other securities deposited in the Account and shall at all times during the
regular business hours of the Bank (or such agent) be open for inspection by
duly authorized officers, employees or agents of the Fund. Where securities are
transferred to the Fund's account, the Bank shall also, by book entry or
otherwise, identify as belonging to the Fund a quantity of securities in a
fungible bulk of securities (i) registered in the name of the Bank or its
nominee, or (ii) shown on the Bank's account on the books of the Federal Reserve
Bank;
(c) The Bank (or its agent) shall pay for securities purchased
for the account of the Fund or shall pay cash collateral against the return of
Portfolio Securities loaned by the Fund upon (i) receipt of advice from the
Book-Entry System that such Securities have been transferred to the Account, and
(ii) the making of an entry on the records of the Bank (or its agent) to reflect
such payment and transfer for the account of the Fund. The Bank (or its agent)
shall transfer securities sold or loaned for the account of the Fund upon
(i) receipt of advice from the Book-Entry System that
payment for securities sold or payment of the initial cash collateral against
the delivery of securities loaned by the Fund has been transferred to the
Account; and
(ii) the making of an entry on the records of the Bank (or
its agent) to reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Book-Entry System of transfers of securities for
the account of the Fund shall identify the Fund, be maintained for the Fund by
the Bank and shall be provided to the Fund at its request. The Bank shall send
the Fund a confirmation, as defined by Rule 17f-4 of the 1940 Act, of any
transfers to or from the account of the Fund;
(d) The Bank will promptly provide the Fund with any report
obtained by the Bank or its agent on the Book-Entry System's accounting system,
internal accounting control and procedures for safeguarding securities deposited
in the Book-Entry System;
7
<PAGE>
6.5 Use of a Depository. Provided (i) the Bank has received a
-------------------
certified copy of a resolution of the Board specifically approving deposits in
DTC or other such Depository and (ii) for any subsequent changes to such
arrangements following such approval, the Board has reviewed and approved the
arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval:
(a) The Bank may use a Depository to hold, receive, exchange,
release, lend, deliver and otherwise deal with Portfolio Securities including
stock dividends, rights and other items of like nature, and to receive and remit
to the Bank on behalf of the Fund all income and other payments thereon and to
take all steps necessary and proper in connection with the collection thereof;
(b) Registration of Portfolio Securities may be made in the name
of any nominee or nominees used by such Depository;
(c) Payment for securities purchased and sold may be made through
the clearing medium employed by such Depository for transactions of participants
acting through it. Upon any purchase of Portfolio Securities, payment will be
made only upon delivery of the securities to or for the account of the Fund and
the Fund shall pay cash collateral against the return of Portfolio Securities
loaned by the Fund only upon delivery of the Securities to or for the account of
the Fund; and upon any sale of Portfolio Securities, delivery of the Securities
will be made only against payment therefor or, in the event Portfolio Securities
are loaned, delivery of Securities will be made only against receipt of the
initial cash collateral to or for the account of the Fund; and
(d) The Bank shall use its best efforts to provide that:
(i) The Depository obtains replacement of any certificated
Portfolio Security deposited with it in the event such Security is lost,
destroyed, wrongfully taken or otherwise not available to be returned to the
Bank upon its request;
(ii) Proxy materials received by a Depository with respect
to Portfolio Securities deposited with such Depository are forwarded immediately
to the Bank for prompt transmittal to the Fund;
(iii) Such Depository promptly forwards to the Bank
confirmation of any purchase or sale of Portfolio Securities and of the
appropriate book entry made by such Depository to the Fund's account;
(iv) Such Depository prepares and delivers to the Bank such
records with respect to the performance of the Bank's obligations and duties
hereunder as may be necessary for the Fund to comply with the recordkeeping
requirements of Section 31 (a) of the 1940 Act and Rule 31 (a) thereunder; and
8
<PAGE>
(v) Such Depository delivers to the Bank all internal
accounting control reports, whether or not audited by an independent public
accountant, as well as such other reports as the Fund may reasonably request in
order to verify the Portfolio Securities held by such Depository.
6.6 Use of Book-Entry System for Commercial Paper. Provided (i) the
---------------------------------------------
Bank has received a certified copy of a resolution of the Board specifically
approving participation in a system maintained by the Bank for the holding of
commercial paper in book-entry form ("Book-Entry Paper") and (ii) for each year
following such approval the Board has received and approved the arrangements,
upon receipt of Proper Instructions and upon receipt of confirmation from an
Issuer (as defined below) that the Fund has purchased such Issuer's Book-Entry
Paper, the Bank shall issue and hold in book-entry form, on behalf of the Fund,
commercial paper issued by issuers with whom the Bank has entered into a book-
entry agreement (the "Issuers"). In maintaining procedures for Book-Entry Paper,
the Bank agrees that:
(a) The Bank will maintain all Book-Entry Paper held by the Fund
in an account of the Bank that includes only assets held by it for customers;
(b) The records of the Bank with respect to the Fund's purchase
of Book-Entry Paper through the Bank will identify, by book-entry, commercial
paper belonging to the Fund which is included in the Book-Entry System and shall
at all times during the regular business hours of the Bank be open for
inspection by duly authorized officers, employees or agents of the Fund;
(c) The Bank shall pay for Book-Entry Paper purchased for the
account of the Fund upon contemporaneous (i) receipt of advice from the Issuer
that such sale of Book-Entry Paper has been effected, and (ii) the making of an
entry on the records of the Bank to reflect such payment and transfer for the
account of the Fund;
(d) The Bank shall cancel such Book-Entry Paper obligation upon
the maturity thereof upon contemporaneous (i) receipt of advice that payment for
such Book-Entry Paper has been transferred to the Fund, and (ii) the making of
an entry on the records of the Bank to reflect such payment for the account of
the Fund; and
(e) The Bank will send to the Fund such reports on its system of
internal accounting control with respect to the Book-Entry Paper as the Fund may
reasonably request from time to time.
6.7 Use of Immobilization Programs. Provided (i) the Bank has
------------------------------
received a certified copy of a resolution of the Board specifically approving
the maintenance of Portfolio Securities in an immobilization program operated by
a bank which meets the requirements of Section 26(a)(1) of the 1940 Act, and
(ii) for each year following such approval the Board has reviewed and approved
the arrangement and has not delivered an Officer's Certificate to the
9
<PAGE>
Bank indicating that the Board has withdrawn its approval, the Bank shall enter
into such immobilization program with such bank acting as a subcustodian
hereunder.
6.8 Eurodollar CDs. Any Portfolio Securities which are Eurodollar
--------------
CDs may be physically held by the European branch of the U.S. banking
institution that is the issuer of such Eurodollar CD (a "European Branch"),
provided that such Portfolio Securities are identified on the books of the Bank
as belonging to the Fund and that the books of the Bank identify the European
Branch holding such Portfolio Securities. Notwithstanding any other provision of
this Agreement to the contrary, except as stated in the first sentence of this
subsection 6.8, the Bank shall be under no other duty with respect to such
Eurodollar CDs belonging to the Fund.
6.9 Options and Futures Transactions.
--------------------------------
(a) Puts and Calls Traded on Securities Exchanges, NASDAQ or Over-
the-Counter.
(i) The Bank shall take action as to put options ("puts") and
call options ("calls") purchased or sold (written) by the Fund regarding escrow
or other arrangements (i) in accordance with the provisions of any agreement
entered into upon receipt of Proper Instructions among the Bank, any broker-
dealer registered with the National Association of Securities Dealers, Inc. (the
"NASD"), and, if necessary, the Fund, relating to the compliance with the rules
of the Options Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations.
(ii) Unless another agreement requires it to do so, the Bank
shall be under no duty or obligation to see that the Fund has deposited or is
maintaining adequate margin, if required, with any broker in connection with any
option, nor shall the Bank be under duty or obligation to present such option to
the broker for exercise unless it receives Proper Instructions from the Fund.
The Bank shall have no responsibility for the legality of any put or call
purchased or sold on behalf of the Fund, the propriety of any such purchase or
sale, or the adequacy of any collateral delivered to a broker in connection with
an option or deposited to or withdrawn from a Segregated Account (as defined in
subsection 6.10 below). The Bank specifically, but not by way of limitation,
shall not be under any duty or obligation to: (i) periodically check or notify
the Fund that the amount of such collateral held by a broker or held in a
Segregated Account is sufficient to protect such broker or the Fund against any
loss; (ii) effect the return of any collateral delivered to a broker; or (iii)
advise the Fund that any option it holds, has or is about to expire. Such duties
or obligations shall be the sole responsibility of the Fund.
(b) Puts, Calls and Futures Traded on Commodities Exchanges
(i) The Bank shall take action as to puts, calls and futures
contracts ("Futures") purchased or sold by the Fund in accordance with the
provisions of any agreement entered into upon the receipt of Proper Instructions
among the Fund, the Bank and a
10
<PAGE>
Futures Commission Merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with transactions by the
Fund.
(ii) The responsibilities of the Bank as to futures, puts and
calls traded on commodities exchanges, any Futures Commission Merchant account
and the Segregated Account shall be limited as set forth in subparagraph (a)(2)
of this Section 6.9 as if such subparagraph referred to Futures Commission
Merchants rather than brokers, and Futures and puts and calls thereon instead of
options.
6.10 Segregated Account. The Bank shall upon receipt of Proper
------------------
Instructions establish and maintain a Segregated Account or Accounts for and on
behalf of the Fund.
(a) Cash and/or Portfolio Securities may be transferred into a
Segregated Account upon receipt of Proper Instructions in the following
circumstances:
(i) in accordance with the provisions of any agreement among
the Fund, the Bank and a broker-dealer registered under the Exchange Act and a
member of the NASD or any Futures Commission Merchant registered under the
Commodity Exchange Act, relating to compliance with the rules of the Options
Clearing Corporation and of any registered national securities exchange or the
Commodity Futures Trading Commission or any registered Contract Market, or of
any similar organizations regarding escrow or other arrangements in connection
with transactions by the Fund;
(ii) for the purpose of segregating cash or securities in
connection with options purchased or written by the Fund or commodity futures
purchased or written by the Fund;
(iii) for the deposit of liquid assets, such as cash,
U.S. Government securities or other high grade debt obligations, having a market
value (marked to market on a daily basis) at all times equal to not less than
the aggregate purchase price due on the settlement dates of all the Fund's then
outstanding forward commitment or "when-issued" agreements relating to the
purchase of Portfolio Securities and all the Fund's then outstanding commitments
under reverse repurchase agreements entered into with broker-dealer firms;
(iv) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange Commission
relating to the maintenance of Segregated Accounts by registered investment
companies;
(v) for other proper corporate purposes, but only, in the
case of this clause (e), upon receipt of, in addition to Proper Instructions, a
certified copy of a resolution of the Board, or of the executive committee of
the Board signed by an officer of the Fund and
11
<PAGE>
certified by the Secretary or an Assistant Secretary, setting forth the purpose
or purposes of such Segregated Account and declaring such purposes to be proper
corporate purposes.
(b) Cash and/or Portfolio Securities may be withdrawn from a
Segregated Account pursuant to Proper Instructions in the following
circumstances:
(i) with respect to assets deposited in accordance with the
provisions of any agreements referenced in (a)(i) or (a)(ii) above, in
accordance with the provisions of such agreements;
(ii) with respect to assets deposited pursuant to (a)(iii) or
(a)(iv) above, for sale or delivery to meet the Fund's obligations under
outstanding forward commitment or when-issued agreements for the purchase of
Portfolio Securities and under reverse repurchase agreements;
(iii) for exchange for other liquid assets of equal or greater
value deposited in the Segregated Account;
(iv) to the extent that the Fund's outstanding forward
commitment or when-issued agreements for the purchase of portfolio securities or
reverse repurchase agreements are sold to other parties or the Fund's
obligations thereunder are met from assets of the Fund other than those in the
Segregated Account;
(v) for delivery upon settlement of a forward commitment or
when-issued agreement for the sale of Portfolio Securities; or
(vi) with respect to assets deposited pursuant to (e) above,
in accordance with the purposes of such account as set forth in Proper
Instructions.
6.11 Interest Bearing Call or Time Deposits. The Bank shall, upon
--------------------------------------
receipt of Proper Instructions relating to the purchase by the Fund of interest-
bearing fixed-term and call deposits, transfer cash, by wire or otherwise, in
such amounts and to such bank or banks as shall be indicated in such Proper
Instructions. The Bank shall include in its records with respect to the assets
of the Fund appropriate notation as to the amount of each such deposit, the
banking institution with which such deposit is made (the "Deposit Bank"), and
shall retain such forms of advice or receipt evidencing the deposit, if any, as
may be forwarded to the Bank by the Deposit Bank. Such deposits shall be deemed
Portfolio Securities of the Fund and the responsibility of the Bank therefore
shall be the same as and no greater than the Bank's responsibility in respect of
other Portfolio Securities of the Fund.
6.12 Transfer of Securities. The Bank will transfer, exchange,
----------------------
deliver or release Portfolio Securities held by it hereunder, insofar as such
Securities are available for such purpose, provided that before making any
transfer, exchange, delivery or release under this Section only upon receipt of
Proper Instructions. The Proper Instructions shall state that such
12
<PAGE>
transfer, exchange or delivery is for a purpose permitted under the terms of
this Section 6.11, and shall specify the applicable subsection, or describe the
purpose of the transaction with sufficient particularity to permit the Bank to
ascertain the applicable subsection. After receipt of such Proper Instructions,
the Bank will transfer, exchange, deliver or release Portfolio Securities only
in the following circumstances:
(a) Upon sales of Portfolio Securities for the account of the
Fund, against contemporaneous receipt by the Bank of payment therefor in full,
or against payment to the Bank in accordance with generally accepted settlement
practices and customs in the jurisdiction or market in which the transaction
occurs, each such payment to be in the amount of the sale price shown in a
broker's confirmation of sale received by the Bank before such payment is made,
as confirmed in the Proper Instructions received by the Bank before such payment
is made;
(b) In exchange for or upon conversion into other securities alone
or other securities and cash pursuant to any plan of merger, consolidation,
reorganization, share split-up, change in par value, recapitalization or
readjustment or otherwise, upon exercise of subscription, purchase or sale or
other similar rights represented by such Portfolio Securities, or for the
purpose of tendering shares in the event of a tender offer therefor, provided,
however, that in the event of an offer of exchange, tender offer, or other
exercise of rights requiring the physical tender or delivery of Portfolio
Securities, the Bank shall have no liability for failure to so tender in a
timely manner unless such Proper Instructions are received by the Bank at least
two business days prior to the date required for tender, and unless the Bank (or
its agent or subcustodian hereunder) has actual possession of such Security at
least two business days prior to the date of tender;
(c) Upon conversion of Portfolio Securities pursuant to their
terms into other securities;
(d) For the purpose of redeeming in-kind shares of the Fund upon
authorization from the Fund;
(e) In the case of option contracts owned by the Fund, for
presentation to the endorsing broker;
(f) When such Portfolio Securities are called, redeemed or retired
or otherwise become payable;
(g) For the purpose of effectuating the pledge of Portfolio
Securities held by the Bank in order to collateralize loans made to the Fund by
any bank, including the Bank; provided, however, that such Portfolio Securities
will be released only upon payment to the Bank for the account of the Fund of
the moneys borrowed, provided further, however, that in cases where additional
collateral is required to secure a borrowing already made, and such fact is made
to appear in the Proper Instructions, Portfolio Securities may be released for
that purpose
13
<PAGE>
without any such payment. In the event that any pledged Portfolio Securities are
held by the Bank, they will be so held for the account of the lender, and after
notice to the Fund from the lender in accordance with the normal procedures of
the lender and any loan agreement between the fund and the lender that an event
of deficiency or default on the loan has occurred, the Bank may deliver such
pledged Portfolio Securities to or for the account of the lender;
(h) for the purpose of releasing certificates representing
Portfolio Securities, against contemporaneous receipt by the Bank of the fair
market value of such security, as set forth in the Proper Instructions received
by the Bank before such payment is made;
(i) for the purpose of delivering securities lent by the Fund to a
bank or broker dealer, but only against receipt in accordance with street
delivery custom except as otherwise provided herein, of adequate collateral as
agreed upon from time to time by the Fund and the Bank, and upon receipt of
payment in connection with any repurchase agreement relating to such securities
entered into by the Fund:
(j) for other authorized transactions of the Fund or for other
proper corporate purposes; provided that before making such transfer, the Bank
will also receive a certified copy of resolutions of the Board, signed by an
authorized officer of the Fund (other than the officer certifying such
resolution) and certified by its Secretary or Assistant Secretary specifying the
Portfolio Securities to be delivered, setting forth the transaction in or
purpose for which such delivery is to be made, declaring such transaction to be
an authorized transaction of the Fund or such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery of such certificates
shall be made; and
(k) upon termination of this Agreement as hereinafter set forth
pursuant to Section 8 and Section 16 of this Agreement.
As to any deliveries made by the Bank pursuant to this Section 6.12,
securities or cash receivable in exchange therefor shall be delivered to the
Bank.
7. Redemptions. In the case of payment of assets of the Fund held by the
-----------
Bank in connection with redemptions and repurchases by the Fund of outstanding
common shares, the Bank will rely on notification by the Fund's transfer agent
of receipt of a request for redemption and certificates, if issued, in proper
form for redemption before such payment is made. Payment shall be made in
accordance with the Articles of Incorporation or Declaration of Trust and By-
laws of the Fund (the "Articles"), from assets available for said purpose.
8. Merger, Dissolution. etc. of Fund. In the case of the following
---------------------------------
transactions, not in the ordinary course of business, namely, the merger of the
Fund into or the consolidation of the Fund with another investment company, the
sale by the Fund of all, or substantially all, of its assets to another
investment company, or the liquidation or dissolution of the Fund and
distribution of its assets, the Bank will deliver the Portfolio Securities held
by it under this
14
<PAGE>
Agreement and disburse cash only upon the order of the Fund set forth in an
Officers' Certificate, accompanied by a certified copy of a resolution of the
Board authorizing any of the foregoing transactions. Upon completion of such
delivery and disbursement and the payment of the fees, disbursements and
expenses of the Bank, this Agreement will terminate and the Bank shall be
released from any and all obligations hereunder.
9. Actions of Bank Without Prior Authorization. Notwithstanding anything
-------------------------------------------
herein to the contrary, unless and until the Bank receives an Officers'
Certificate to the contrary, the Bank will take the following actions without
prior authorization or instruction of the Fund or the transfer agent:
9.1 Endorse for collection and collect on behalf of and in the name of
the Fund all checks, drafts, or other negotiable or transferable instruments or
other orders for the payment of money received by it for the account of the Fund
and hold for the account of the Fund all income, dividends, interest and other
payments or distributions of cash with respect to the Portfolio Securities held
thereunder:
9.2 Present for payment all coupons and other income items held by it
for the account of the Fund which call for payment upon presentation and hold
the cash received by it upon such payment for the account of the Fund;
9.3 Receive and hold for the account of the Fund all securities
received as a distribution on Portfolio Securities as a result of a stock
dividend, share split-up, reorganization, recapitalization, merger,
consolidation, readjustment, distribution of rights and similar securities
issued with respect to any Portfolio Securities held by it hereunder.
9.4 Execute as agent on behalf of the Fund all necessary ownership and
other certificates and affidavits required by the Internal Revenue Code or the
regulations of the Treasury Department issued thereunder, or by the laws of any
state, now or hereafter in effect, inserting the Fund's name on such
certificates as the owner of the securities covered thereby, to the extent it
may lawfully do so and as may be required to obtain payment in respect thereof.
The Bank will execute and deliver such certificates in connection with Portfolio
Securities delivered to it or by it under this Agreement as may be required
under the provisions of the Internal Revenue Code and any Regulations of the
Treasury Department issued thereunder, or under the laws of any State;
9.5 Present for payment all Portfolio Securities which are called,
redeemed, retired or otherwise become payable, and hold cash received by it upon
payment for the account of the Fund; and
9.6 Exchange interim receipts or temporary securities for definitive
securities.
10. Collections and Defaults. The Bank will use reasonable efforts to
------------------------
collect any funds which may to its knowledge become collectible arising from
Portfolio Securities, including
15
<PAGE>
dividends, interest and other income, and to transmit to the Fund notice
actually received by it of any call for redemption, offer of exchange, right of
subscription, reorganization or other proceedings affecting such Securities. If
Portfolio Securities upon which such income is payable are in default or payment
is refused after due demand or presentation, the Bank will notify the Fund in
writing of any default or refusal to pay within two business days from the day
on which it receives knowledge of such default or refusal.
11. Maintenance of Records and Accounting Services. The Bank will maintain
----------------------------------------------
records with respect to transactions for which the Bank is responsible pursuant
to the terms and conditions of this Agreement, and in compliance with the
applicable rules and regulations of the 1940 Act. The books and records of the
Bank pertaining to its actions under this Agreement and reports by the Bank or
its independent accountants concerning its accounting system, procedures for
safeguarding securities and internal accounting controls will be open to
inspection and audit at reasonable times by officers of or auditors employed by
the Fund and will be preserved by the Bank in the manner and in accordance with
the applicable rules and regulations under the 1940 Act.
The Bank shall perform fund accounting and shall keep the books of account
and render statements or copies from time to time as reasonably requested by the
Treasurer or any executive officer of the Fund.
The Bank shall assist generally in the preparation of reports to
shareholders and others, audits of accounts, and other ministerial matters of
like nature.
12. Fund Evaluation and Yield Calculation
-------------------------------------
12.1 Fund Evaluation. The Bank shall compute and, unless otherwise
---------------
directed by the Board, determine as of the close of regular trading on the New
York Stock Exchange on each day on which said Exchange is open for unrestricted
trading and as of such other days, or hours, if any, as may be authorized by the
Board, the net asset value and the public offering price of a share of capital
stock of the Fund, such determination to be made in accordance with the
provisions of the Articles and By-laws of the Fund and the Prospectus and
Statement of Additional Information relating to the Fund, as they may from time
to time be amended, and any applicable resolutions of the Board at the time in
force and applicable; and promptly to notify the Fund, the proper exchange and
the NASD or such other persons as the Fund may request of the results of such
computation and determination. In computing the net asset value hereunder, the
Bank may rely in good faith upon information furnished to it by any Authorized
Person in respect of (i) the manner of accrual of the liabilities of the Fund
and in respect of liabilities of the Fund not appearing on its books of account
kept by the Bank, (ii) reserves, if any, authorized by the Board or that no such
reserves have been authorized, (iii) the source of the quotations to be used in
computing the net asset value, (iv) the value to be assigned to any security for
which no price quotations are available, and (v) the method of computation of
the public offering price on the basis of the net asset value of the shares and
the Bank shall not be responsible for any loss
16
<PAGE>
occasioned by such reliance or for any good faith reliance on any quotations
received from a source pursuant to (iii) above.
12.2 Yield Calculation. The Bank will compute the performance results
-----------------
of the Fund (the "Yield Calculation") in accordance with the provisions of
Release No. 33-6753 and Release No. IC-16245 (February 2, 1988) (the "Releases")
promulgated by the Securities and Exchange Commission, and any subsequent
amendments to, published interpretations of or general conventions accepted by
the staff of the Securities and Exchange Commission with respect to such
releases or the subject matter thereof ("Subsequent Staff Positions"), subject
to the terms set forth below:
(a) The Bank shall compute the Yield Calculation for the Fund for
the stated periods of time as shall be mutually agreed upon, and communicate in
a timely manner the result of such computation to the Fund.
(b) In performing the Yield Calculation, the Bank will derive the
items of data necessary for the computation from the records it generates and
maintains for the Fund pursuant Section 11 hereof. The Bank shall have no
responsibility to review, confirm, or otherwise assume any duty or liability
with respect to the accuracy or correctness of any such data supplied to it by
the Fund, any of the Fund's designated agents or any of the Fund's designated
third party providers.
(c) At the request of the Bank, the Fund shall provide, and the
Bank shall be entitled to rely on, written standards and guidelines to be
followed by the Bank in interpreting and applying the computation methods set
forth in the Releases or any Subsequent Staff Positions as they specifically
apply to the Fund. In the event that the computation methods in the Releases or
the Subsequent Staff Positions or the application to the Fund of a standard or
guideline is not free from doubt or in the event there is any question of
interpretation as to the characterization of a particular security or any aspect
of a security or a payment with respect thereto (e.g., original issue discount,
participating debt security, income or return of capital, etc.) or otherwise or
as to any other element of the computation which is pertinent to the Fund, the
Fund or its designated agent shall have the full responsibility for making the
determination of how the security or payment is to be treated for purposes of
the computation and how the computation is to be made and shall inform the Bank
thereof on a timely basis. The Bank shall have no responsibility to make
independent determinations with respect to any item which is covered by this
Section, and shall not be responsible for its computations made in accordance
with such determinations so long as such computations are mathematically
correct.
(d) The Fund shall keep the Bank informed of all publicly available
information and of any non-public advice, or information obtained by the Fund
from its independent auditors or by its personnel or the personnel of its
investment adviser, or Subsequent Staff Positions related to the computations to
be undertaken by the Bank pursuant to this Agreement and the Bank shall not be
deemed to have knowledge of such information (except as contained in the
Releases) unless it has been furnished to the Bank in writing.
17
<PAGE>
13. Additional Services. The Bank shall perform the additional services
-------------------
for the Fund as are set forth on Appendix C hereto. Appendix C may be amended
---------- ----------
from time to time upon agreement of the parties to include further additional
services to be provided by the Bank to the Fund, at which time fees set forth in
Appendix A shall be appropriately increased.
- ----------
14. Duties of the Bank
------------------
14.1 Performance of Duties and Standard of Care. In performing its
------------------------------------------
duties hereunder and any r duties listed on any Schedule hereto, if any, the
Bank will be entitled to receive and act upon the liability for any action taken
or thing done or omitted to be done in accordance with this Agreement in good
faith in conformity with such advice.
The Bank will be under no duty or obligation to inquire into and will not be
liable for:
(a) the validity of the issue of any Portfolio Securities
purchased by or for the Fund, the legality of the purchases thereof or the
propriety of the price incurred therefor;
(b) the legality of any sale of any Portfolio Securities by or for
the Fund or the propriety of the amount for which the same are sold;
(c) the legality of an issue or sale of any common shares of the
Fund or the efficiency of the amount to be received therefor;
(d) the legality of the repurchase or any common shares of the
Fund or the F propriety of the amount to be paid therefore;
(e) the legality of the declaration of any dividend by the Fund or
the legality of the distribution of any Portfolio Securities as payment in kind
of such dividend; and
(f) any property or moneys of the Fund unless and until received
by it, and any such property or moneys delivered or paid by it pursuant to the
terms hereof.
Moreover, the Bank will not be under any duty or obligation to ascertain
whether any Portfolio securities at any time delivered to or held by it for the
account of the Fund are such as may properly be held by the Fund under the
provisions of its Articles, By-laws, any federal or state statutes or any rule
or regulation of any governmental agency.
14.2 Agents and Subcustodians with Respect to Property of the Fund
-------------------------------------------------------------
Held in the United States. The Bank may employ agents in the performance of its
- -------------------------
duties hereunder and shall be responsible for the acts and omissions of such
agents as if performed by the Bank hereunder. Without limiting the foregoing,
certain duties of the Bank hereunder may be performed by one or more affiliates
of the Bank.
18
<PAGE>
Upon receipt of Proper Instructions, the Bank may employ subcustodians,
provided that any such custodian meets at least the minimum qualifications
required by Section 17(f)(1) of the 1940 Act to act as a custodian of the Fund's
assets with respect to property of the Fund held in the United States. Except
as may arise from the Bank's own negligence or willful misconduct or the
negligence or willful misconduct of a subcustodian or agent, the Bank shall have
no liability to the Fund or any other person by reason of any act or omission of
any subcustodian and the Fund shall indemnify the Bank and hold it harmless from
and against any and all actions, suits and claims, arising directly or
indirectly out of the performance of any subcustodian. Upon request of the
Bank, the Fund shall assume the entire defense of any action, suit, or claim
subject to the foregoing indemnity. The Fund shall pay all fees and expenses of
any subcustodian.
14.3 Duties of the Bank with Respect to Property of the Fund Held
------------------------------------------------------------
Outside of the United States.
- ----------------------------
(a) Appointment of Foreign Sub-Custodians. The Fund hereby
-------------------------------------
authorizes and instructs the Bank to employ as sub-custodians for the Fund's
Portfolio Securities and other assets designated on the Schedule attached hereto
(each, a "Selected Foreign Sub-Custodian"). Upon receipt of Proper Instructions,
together with a certified resolution of the Fund's Board of Trustees, the Bank
and the Fund may agree to designate additional foreign banking institutions and
foreign securities depositories to act as Selected Foreign Sub-Custodians
hereunder. Upon receipt of Proper Instructions, the Fund may instruct the Bank
to cease the employment of any one or more such Selected Foreign Sub-Custodians
for maintaining custody of the Fund's assets, and the Bank shall so cease to
employ such sub-custodian as soon as alternate custodial arrangements have been
implemented.
(b) Foreign Securities Depositories. Except as may otherwise be
-------------------------------
agreed upon in writing by the Bank and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as Selected Foreign Sub-
Custodians pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
subparagraph (d) hereof. Notwithstanding the foregoing, except as may otherwise
be agreed upon in writing by the Bank and the Fund, the Fund authorizes the
deposit in Euro-clear, the securities clearance and depository facilities
operated by Morgan Guaranty Trust Company of New York in Brussels, Belgium, of
Foreign Portfolio Securities eligible for deposit therein and the use of Euro-
clear in connection with settlements of purchases and sales of securities and
deliveries and returns of securities, until notified to the contrary pursuant to
subparagraph (a) hereunder.
(c) Segregation of Securities. The Bank shall identify on its
-------------------------
books as belonging to the Fund the Foreign Portfolio Securities held by each
Selected Foreign Sub-Custodian. Each agreement pursuant to which the Bank
employs a foreign banking institution shall require that such institution
establish a custody account for the Bank and hold in that account Foreign
Portfolio Securities and other assets of the Fund, and, in the event that such
19
<PAGE>
institution deposits Foreign Portfolio Securities in a foreign securities
depository, that it shall identify on its books as belonging to the Bank the
securities so deposited.
(d) Agreements with Foreign Banking Institutions. Each of the
--------------------------------------------
agreements pursuant to which a foreign banking institution holds assets of the
Fund (each, a "Foreign Sub-Custodian Agreement") shall be substantially in the
form provided to the Fund and shall provide that: (a) the Fund's assets will not
be subject to any right, charge, security interest, lien or claim of any kind in
favor of the foreign banking institution or its creditors or agent, except a
claim of payment for their safe custody or administration (including, without
limitation, any fees or taxes payable upon transfers or reregistration of
securities); (b) beneficial ownership of the Fund's assets will be freely
transferable without the payment of money or value other than for custody or
administration (including, without limitation, any fees or taxes payable upon
transfers or reregistration of securities); (c) adequate records will be
maintained identifying the assets as belonging to the Bank; (d) officers of or
auditors employed by, or other representatives of the Bank, including to the
extent permitted under applicable law, the independent public accountants for
the Fund, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the Bank, and (e)
assets of the Fund held by the Selected Foreign Sub-Custodian will be subject
only to the instructions of the Bank or its agents.
(e) Access of Independent Accountants of the Fund. Upon request
---------------------------------------------
of the Fund, the Bank will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of any
foreign banking institution employed as a Selected Foreign Sub-Custodian,
insofar as such books and records relate to the performance of such foreign
banking institution under its Foreign Sub-Custodian Agreement.
(f) Reports by Bank. The Bank will supply to the Fund from time
---------------
to time, as mutually agreed upon, statements in respect of the securities and
other assets of the Fund held by Selected Foreign Sub-Custodians, including but
not limited to an identification of entities having possession of the Foreign
Portfolio Securities and other assets of the Fund.
(g) Transactions in Foreign Custody Account. Transactions with
---------------------------------------
respect to the assets of the Fund held by a Selected Foreign Sub-Custodian shall
be effected pursuant to Proper Instructions from the Fund to the Bank and shall
be effected in accordance with the applicable Foreign Sub-Custodian Agreement.
If at any time any Foreign Portfolio Securities shall be registered in the name
of the nominee of the Selected Foreign Sub-Custodian, the Fund agrees to hold
any such nominee harmless from any liability by reason of the registration of
such securities in the name of such nominee.
Notwithstanding any provision of this Agreement to the contrary, settlement
and payment for Foreign Portfolio Securities received for the account of the
Fund and delivery of Foreign Portfolio Securities maintained for the account of
the Fund may be effected in accordance with the customary established securities
trading or securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
20
<PAGE>
delivering securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or dealer.
In connection with any action to be taken with respect to the Foreign
Portfolio Securities held hereunder, including, without limitation, the exercise
of any voting rights, subscription rights, redemption rights, exchange rights,
conversion rights or tender rights, or any other action in connection with any
other right, interest or privilege with respect to such Securities
(collectively, the "Rights"), the Bank shall promptly transmit to the Fund such
information in connection therewith as is made available to the Bank by the
Foreign Sub-Custodian, and shall promptly forward to the applicable Foreign Sub-
Custodian any instructions, forms or certifications with respect to such Rights,
and any instructions relating to the actions to be taken in connection
therewith, as the Bank shall receive from the Fund pursuant to Proper
Instructions. Notwithstanding the foregoing, the Bank shall have no further duty
or obligation with respect to such Rights, including, without limitation, the
determination of whether the Fund is entitled to participate in such Rights
under applicable U.S. and foreign laws, or the determination of whether any
action proposed to be taken with respect to such Rights by the Fund or by the
applicable Foreign Sub-Custodian will comply with all applicable terms and
conditions of any such Rights or any applicable laws or regulations, or market
practices within the market in which such action is to be taken or omitted.
(h) Liability of Selected Foreign Sub-Custodians. Each Foreign
--------------------------------------------
Sub-Custodian Agreement with a foreign banking institution shall require the
institution to exercise reasonable care in the performance of its duties and to
indemnify, and hold harmless, the Bank and each Fund from and against certain
losses, damages, costs, expenses, liabilities or claims arising out of or in
connection with the institution's performance of such obligations, all as set
forth in the applicable Foreign Sub-Custodian Agreement. The Fund acknowledges
that the Bank, as a participant in Euro-clear, is subject to the Terms and
Conditions Governing the Euro-Clear System, a copy of which has been made
available to the Fund. The Fund acknowledges that pursuant to such Terms and
Conditions, Morgan Guaranty Brussels shall have the sole right to exercise or
assert any and all rights or claims in respect of actions or omissions of, or
the bankruptcy or insolvency of, any other depository, clearance system or
custodian utilized by Euro-clear in connection with the Fund's securities and
other assets.
(i) Monitoring Responsibilities. The Bank shall furnish annually
---------------------------
to the Fund information concerning the Selected Foreign Sub-Custodians employed
hereunder for use by the Fund in evaluating such Selected Foreign Sub-Custodians
to ensure compliance with the requirements of Rule 17f-5 of the Act. In
addition, the Bank will promptly inform the Fund in the event that the Bank is
notified by a Selected Foreign Sub-Custodian that there appears to be a
substantial likelihood that its shareholders' equity will decline below US$200
million (or the equivalent thereof) or that its shareholders' equity has
declined below US$200 million (in each case computed in accordance with
generally accepted U.S. accounting principles) or any other capital adequacy
test applicable to it by exemptive order, or if the Bank has actual knowledge of
any material loss of the assets of the Fund held by a Foreign Sub-Custodian.
21
<PAGE>
(j) Tax Law. The Bank shall have no responsibility or liability
-------
for any obligations now or hereafter imposed on the Fund or the Bank as
custodian of the Fund by the tax laws of any jurisdiction, and it shall be the
responsibility of the Fund to notify the Bank of the obligations imposed on the
Fund or the Bank as the custodian of the Fund by the tax law of any non-U.S.
jurisdiction, including responsibility for withholding and other taxes,
assessments or other governmental charges, certifications and governmental
reporting. The sole responsibility of the Selected Foreign Sub-custodian with
regard to such tax law shall be to use reasonable efforts to assist the Fund
with respect to any claim for exemption or refund under the tax law of
jurisdictions for which the Fund has provided such information.
14.4 Insurance. The Bank shall use the same care with respect to the
---------
safekeeping of Portfolio Securities and cash of the Fund held by it as it uses
in respect of its own similar property but it need not maintain any special
insurance for the benefit of the Fund.
14.5 Fees and Expenses of the Bank. The Fund will pay or reimburse
-----------------------------
the Bank from time to time for any transfer taxes payable upon transfer of
Portfolio Securities made hereunder, and for all necessary proper disbursements,
expenses and charges made or incurred by the Bank in the performance of this
Agreement (including any duties listed on any Schedule hereto, if any) including
any indemnities for any loss, liabilities or expense to the Bank as provided
above. For the services rendered by the Bank hereunder, the Fund will pay to the
Bank such compensation or fees at such rate and at such times as shall be agreed
upon in writing by the parties from time to time. The Bank will also be entitled
to reimbursement by the Fund for all reasonable expenses incurred in conjunction
with termination of this Agreement.
14.6 Advances by the Bank. The Bank may, in its sole discretion,
--------------------
advance funds on behalf of the Fund to make any payment permitted by this
Agreement upon receipt of any proper authorization required by this Agreement
for such payments by the Fund. Should such a payment or payments, with advanced
funds, result in an overdraft (due to insufficiencies of the Fund's account with
the Bank, or for any other reason) this Agreement deems any such overdraft or
related indebtedness a loan made by the Bank to the Fund payable on demand. Such
overdraft shall bear interest at the current rate charged by the Bank for such
loans unless the Fund shall provide the Bank with agreed upon compensating
balances. The Fund agrees that the Bank shall have a continuing lien and
security interest to the extent of any overdraft or indebtedness, in and to any
property at any time held by it for the Fund's benefit or in which the Fund has
an interest and which is then in the Bank's possession or control (or in the
possession or control of any third party acting on the Bank's behalf). The Fund
authorizes the Bank, in the Bank's sole discretion, at any time to charge any
overdraft or indebtedness, together with interest due thereon, against any
balance of account standing to the credit of the Fund on the Bank's books.
22
<PAGE>
15. Limitation of Liability
-----------------------
15.1 Notwithstanding anything in this Agreement to the contrary, in no
event shall the Bank or any of its officers, directors, employees or agents
(collectively, the "Indemnified Parties") be liable to the Fund or any third
party, and the Fund shall indemnify and hold the Bank and the Indemnified
Parties harmless from and against any and all loss, damage, liability, actions,
suits, claims, costs and expenses, including legal fees, (a "Claim") arising as
a result of any act or omission of the Bank or any Indemnified Party under this
Agreement, except for any Claim resulting from the negligence, gross negligence,
willful misfeasance or bad faith of the Bank or any Indemnified Party. Without
limiting the foregoing, neither the Bank nor the Indemnified Parties shall be
liable for, and the Bank and the Indemnified Parties shall be indemnified
against, any Claim arising as a result of:
(a) Any act or omission by the Bank or any Indemnified Party in
good faith reliance upon the terms of this Agreement, any Officer's Certificate,
Proper Instructions, resolution of the Board, telegram, telecopier, notice,
request, certificate or other instrument reasonably believed by the Bank to
genuine;
(b) Any act or omission of any subcustodian selected by or at
the direction of the Fund:
(c) Any act or omission of a Selected Foreign Sub-Custodian for
to the extent which such Selected Foreign Sub-Custodian is not liable to the
Bank;
(d) Any Corporate Action requiring a Response for which the Bank
has not received Proper Instructions or obtained actual possession of all
necessary Securities, consents or other materials by 5:00 p.m. on the date
specified as the Response Deadline;
(e) Any act or omission of any European Branch of a U.S. banking
institution that is the issuer of Eurodollar CDs in connection with any
Eurodollar CDs held by such European Branch;
(f) Information relied on in good faith by the Bank and supplied
by any Authorized Person in connection with the calculation of (i) the net asset
value and public offering price of the shares of capital stock of the Fund or
(ii) the Yield Calculation; or
(g) Any acts of God, earthquakes, fires, floods, storms or other
disturbances of nature, epidemics, strikes, riots, nationalization,
expropriation, currency restrictions, acts of war, civil war or terrorism,
insurrection, nuclear fusion, fission or radiation, the interruption, loss or
malfunction of utilities, transportation or computers (hardware or software) and
computer facilities, the unavailability of energy sources and other similar
happenings or events.
23
<PAGE>
15.2 Notwithstanding anything to the contrary in this Agreement, in no
event shall the Bank or the Indemnified Parties be liable to the Fund or any
third party for lost profits or lost revenues or any special, consequential,
punitive or incidental damages of any kind whatsoever in connection with this
Agreement or any activities hereunder.
16. Termination.
-----------
16.1 The term of this Agreement shall be three years commencing upon
the effective date of the Fund's registration statement (the "Initial Term"),
unless earlier terminated as provided herein. After the expiration of the
Initial Term, the term of this Agreement shall automatically renew for
successive one-year terms (each a "Renewal Term") unless notice of non-renewal
is delivered by the non-renewing party to the other party no later than sixty
days prior to the expiration of the Initial Term or any Renewal Term, as the
case may be.
(a) Either party hereto may terminate this Agreement prior to
the expiration of the Initial Term in the event the other party violates any
material provision of this Agreement, provided that the non-violating party
gives written notice of such violation to the violating party and the violating
party does not cure such violation within 90 days of receipt of such notice.
(b) Either party may terminate this Agreement during any Renewal
Term upon sixty days written notice to the other party. Any termination pursuant
to this paragraph 16.1 (b) shall be effective upon expiration of such sixty
days, provided, however, that the effective date of such termination may be
postponed to a date not more than ninety days after delivery of the written
notice: (i) at the request of the Bank, in order to prepare for the transfer by
the Bank of all of the assets of the Fund held hereunder; or (ii) at the request
of the Fund, in order to give the Fund an opportunity to make suitable
arrangements for a successor custodian
16.2 In the event of the termination of this Agreement, the Bank will
immediately upon receipt or transmittal, as the case may be, of notice of
termination, commence and prosecute diligently to completion the transfer of all
cash and the delivery of all Portfolio Securities duly endorsed and all records
maintained under Section 11 to the successor custodian when appointed by the
Fund. The obligation of the Bank to deliver and transfer over the assets of the
Fund held by it directly to such successor custodian will commence as soon as
such successor is appointed and will continue until completed as aforesaid. If
the Fund does not select a successor custodian within ninety (90) days from the
date of delivery of notice of termination the Bank may, subject to the
provisions of subsection (16.3), deliver the Portfolio Securities and cash of
the Fund held by the Bank to a bank or trust company of the Bank's own selection
which meets the requirements of Section 17(f)(1) of the 1940 Act and has a
reported capital, surplus and undivided profits aggregating not less than
$2,000,000, to be held as the property of the Fund under terms similar to those
on which they were held by the Bank, whereupon such bank or trust company so
selected by the Bank will become the successor custodian of such assets of the
Fund with the same effect as though selected by the Board. Thereafter, the Bank
shall be released from any and all obligations under this Agreement.
24
<PAGE>
16.3 Prior to the expiration of ninety (90) days after notice of
termination has been given, the Fund may furnish the Bank with an order of the
Fund advising that a successor custodian cannot be found willing and able to act
upon reasonable and customary terms and that there has been submitted to the
shareholders of the Fund the question of whether the Fund will be liquidated or
will function without a custodian for the assets of the Fund held by the Bank.
In that event the Bank will deliver the Portfolio Securities and cash of the
Fund held by it, subject as aforesaid, in accordance with one of such
alternatives which may be approved by the requisite vote of shareholders, upon
receipt by the Bank of a copy of the minutes of the meeting of shareholders at
which action was taken, certified by the Fund's Secretary and an opinion of
counsel to the Fund in form and content satisfactory to the Bank. Thereafter,
the Bank shall be released from any and all obligations under this Agreement.
16.4 The Fund shall reimburse the Bank for any reasonable expenses
incurred by the Bank in connection with the termination of this Agreement.
16.5 At any time after the termination of this Agreement, the Fund
may, upon written request, have reasonable access to the records of the Bank
relating to its performance of its duties as custodian.
17. Confidentiality. Both parties hereto agree than any non-public
---------------
information obtained hereunder concerning the other party is confidential and
may not be disclosed without the consent of the other party, except as may be
required by applicable law or at the request of a governmental agency. The
parties further agree that a breach of this provision would irreparably damage
the other party and accordingly agree that each of them is entitled, in addition
to all other remedies at law or in equity to an injunction or injunctions
without bond or other security to prevent breaches of this provision.
18. Notices. Any notice or other instrument in writing authorized or
-------
required by this Agreement to be given to either party hereto will be
sufficiently given if addressed to such party and delivered via (i) United
States Postal Service registered mail, (ii) telecopier with written
confirmation, (iii) hand delivery with signature to such party at its office at
the address set forth below, namely:
(a) In the case of notices sent to the Fund to:
State Farm Variable Product Trust
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn:
-------------------------
(b) In the case of notices sent to the Bank to:
Investors Bank & Trust Company
25
<PAGE>
200 Clarendon Street
Boston, Massachusetts 02116
Attention: [Client Manager]
With a copy to: John E. Henry, General Counsel
or at such other place as such party may from time to time
designate in writing.
19. Amendments. This Agreement may not be altered or amended, except by an
----------
instrument in writing, executed by both parties.
20. Parties. This Agreement will be binding upon and shall inure to the
-------
benefit of the parties hereto and their respective successors and assigns;
provided, however, that this Agreement will not be assignable by the Fund
without the written consent of the Bank or by the Bank without the written
consent of the Fund, authorized and approved by its Board; and provided further
that termination proceedings pursuant to Section 16 hereof will not be deemed to
be an assignment within the meaning of this provision.
21. Governing Law. This Agreement and all performance hereunder will be
-------------
governed by the laws of the Commonwealth of Massachusetts, without regard to
conflict of laws provisions.
22. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
23. Entire Agreement. This Agreement, together with its Appendices,
----------------
constitutes the sole and entire agreement between the parties relating to the
subject matter herein and does not operate as an acceptance of any conflicting
terms or provisions of any other instrument and terminates and supersedes any
and all prior agreements and undertakings between the parties relating to the
subject matter herein.
24. Limitation of Liability. The Bank agrees that the obligations assumed
-----------------------
by the Fund hereunder shall be limited in all cases to the assets of the Fund
and that the Bank shall not seek satisfaction of any such obligation from the
officers, agents, employees, trustees, or shareholders of the Fund.
25. Several Obligations of the Portfolios. This Agreement is an agreement
-------------------------------------
entered into between the Bank and the Fund with respect to each Portfolio. With
respect to any obligation of the Fund on behalf of any Portfolio arising out of
this Agreement, the Bank shall look for payment or satisfaction of such
obligation solely to the assets of the Portfolio to which such obligation
relates as though the Bank had separately contracted with the Fund by separate
written instrument with respect to each Portfolio.
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers hereunto duly authorized as of the day
and year first written above.
STATE FARM VARIABLE PRODUCT TRUST
By:
--------------------------------
Name:
Title
INVESTORS BANK & TRUST COMPANY
By:
--------------------------------
Name:
Title
27
<PAGE>
DELEGATION AGREEMENT
--------------------
AGREEMENT, dated as of ______________, 1997 by and between Investors Bank &
Trust Company, a Massachusetts trust Company (the "Delegate"), and State Farm
Variable Product Trust, a Delaware business trust (the "Fund").
WHEREAS, pursuant to the provisions of Rule 17f-5(b) under the Investment
Company Act of 1940, and subject to the terms and conditions set forth herein,
the Board of Directors of the Fund desires to delegate to the Delegate, and the
Delegate hereby agrees to accept and assume certain responsibilities described
herein concerning Assets held outside of the United States.
NOW THEREFORE, in consideration of the premises and of the mutual
agreements contained herein, the parties hereto agree as follows:
1. Definitions
-----------
Capitalized terms in this Agreement have the following meanings--
a. Assets
------
Assets means any of Fund's investments (including foreign currencies)
for which the primary market is outside the United States, and such cash and
cash equivalents.
b. Authorized Representative
-------------------------
Authorized Representative means any one of the persons who are
empowered, on behalf of the parties to this Agreement, to receive notices from
the other party, to send notices to the other parts, to add or delete
jurisdictions pursuant to Article 4, and to otherwise bind the respective
parties with respect to the subject matter of this Agreement.
c. Board
-----
Board means the Board of Directors (or the body authorized to exercise
authority similar to that of the board of directors of a corporation) of Fund.
d. Compulsory Securities Depository
--------------------------------
Compulsory Securities Depository means a Securities Depository the use
of which is mandatory (i) by law or regulation; (ii) because securities cannot
be withdrawn from the depository; or (iii) because maintaining securities
outside the Securities Depository is not consistent with prevailing custodial
practices.
e. Country Risk
------------
<PAGE>
Country Risk means all factors reasonably related to the systemic risk
of holding assets in a particular country including, but not limited to, such
country's financial infrastructure (including any Securities Depositories
operating in such country); prevailing custody and settlement practices; and
laws applicable to the safekeeping and recovery of Assets held in custody.
f. Eligible Foreign Custodian
--------------------------
Eligible Foreign Custodian has the meaning set forth in Rule 17f-
5(a)(l).
g. Foreign Custody Manager
-----------------------
Foreign Custody Manager has the meaning set forth in Rule 17f-5(a)(2).
h. Monitor
-------
Monitor means to re-assess or re-evaluate, at reasonable intervals, a
decision or determination Previously made.
i. Permissible Foreign Custodian
-----------------------------
Permissible Foreign Custodian means any person with whom Assets may be
placed and maintained outside the United States under (i) the Investment Company
Act of 1940 or (ii) an order of the U.S. Securities and Exchange Commission,
without regard to Rule 17f-5.
j. Securities Depository
---------------------
Securities Depository has the meaning set forth in Rule 17f-5(a)(6).
2. Representations
---------------
a. Delegate's Representations
--------------------------
Delegate represents that it is a trust company chartered under the
laws of the Commonwealth of Massachusetts.
b. Fund's Representations
----------------------
Fund represents that the Board has determined that it is reasonable to
rely on Delegate to perform the responsibilities delegated by this Agreement.
3. Jurisdictions Covered
---------------------
a. Initial Jurisdictions
---------------------
2
<PAGE>
The authority delegated by this Agreement applies only with respect to
Assets held in the jurisdictions listed in Appendix A
----------
b. Added Jurisdictions
-------------------
Jurisdictions may be added to Appendix A by written agreement in the
--------
form of Appendix B. Delegate's responsibility and authority with respect to any
--------
jurisdiction so added will commence at the later of (i) the time that Delegate's
Authorized Representative and Board's Authorized Representative have both
executed a copy of Appendix B listing such jurisdiction, or (ii) the time that
--------
Delegate's Authorized Representative receives a copy of such fully executed
Appendix B.
- ----------
c. Withdrawn Jurisdictions
-----------------------
Board may withdraw its delegation with respect to any jurisdiction
upon written notice to Delegate. Delegate may withdraw its acceptance of
delegated authority with respect to any jurisdiction upon written notice to
Board, ten days (or such longer period as to which the parties agree) after
receipt of any such notice by the Authorized Representative of the party other
than the party giving notice. Delegate shall have no further responsibility or
authority under this Agreement with respect to the jurisdiction or jurisdictions
is to which authority is withdrawn.
4. Delegation of Authority to Act as Foreign Custody Manager
---------------------------------------------------------
a. Selection of Eligible Foreign Custodians
----------------------------------------
Subject to the provisions of this Agreement and the requirements of
Rule 17f-5 (and any other applicable law), Delegate is authorized and directed
to place and maintain Assets in the care of any Eligible Foreign Custodian or
Custodians selected by Delegate in each jurisdiction to which this Agreement
applies.
b. Contracts With Eligible Foreign Custodians
------------------------------------------
Subject to the provisions of this Agreement and the requirements of
Rule 17f-5 (and any other applicable law), Delegate is authorized to enter into,
on behalf of Fund, such written contracts governing Fund's foreign custody
arrangements with such Eligible Foreign Custodians as Delegate deems
appropriate.
5. Delegation of Authority to Place Assets With Permissible Foreign Custodians
---------------------------------------------------------------------------
Subject to the requirements of the Investment Company Act of 1940 (and any
other applicable law or order), Delegate is authorized to place and maintain
Assets in the care of any permissible Foreign Custodian or Custodians in each
jurisdiction to which this Agreement applies and to enter into, on behalf of
Fund, such written contracts governing Fund's foreign custody arrangements with
such Permissible Foreign Custodians as Delegate deems appropriate,
3
<PAGE>
Delegate's exercise of authority under this Article 5 shall be governed by the
terms of the Custodian Agreement between the Delegate and the Fund.
6. Monitoring of Eligible Foreign Custodians and Contracts
-------------------------------------------------------
In each case in which Delegate has exercised the authority delegated under
this Agreement to place Assets with an Eligible Foreign Custodian, Delegate is
authorized to, and shall, on behalf of Fund, establish a system to Monitor the
appropriateness of maintaining Assets with such Eligible Foreign Custodian. In
each case in which Delegate has exercised the authority delegated under this
Agreement to enter into a written contract governing Fund's foreign custody
arrangements, Delegate is authorized to, and shall, on behalf of Fund, establish
a system to Monitor the appropriateness of such contract.
7. Guidelines and Procedures for the Exercise of Delegated Authority
-----------------------------------------------------------------
a. Board's Conclusive Determination Regarding Country Risk
-------------------------------------------------------
In exercising its delegated authority under this Agreement, Delegate
may assume, for all purposes, that Board (or Fund's investment advisor, pursuant
to authority delegated by Board) has considered, and pursuant to its fiduciary
duties to Fund and Fund's shareholders, determined to accept, such Country Risk
as is incurred by placing and maintaining Assets in the jurisdictions to which
this Agreement applies. In exercising its delegated authority under this
Agreement, Delegate may also assume that Board (or Fund's investment advisor,
pursuant to authority delegated by Board) has, and will continue to, monitor
such Country Risk to the extent Board deems necessary or appropriate.
Nothing in this Agreement shall require Delegate to make any selection or
to engage in any monitoring on behalf of Fund that would entail consideration of
Country Risk.
b. Selection of Eligible Foreign Custodians
----------------------------------------
In exercising the authority delegated under this Agreement to place
Assets with an Eligible Foreign Custodian, Delegate shall determine that Assets
will be subject to reasonable care, based on the standards applicable to
custodians in the market in which the Assets will be held, after considering all
factors relevant to the safekeeping of such assets, including, without
limitation:
i. The Eligible Foreign Custodian's practices, procedures, and
internal controls, including, but not limited 10, the physical
protections available for certificated securities (if
applicable), the method of keeping custodial records, and the
security and data protection practices;
ii. Whether the Eligible Foreign Custodian has the financial
strength to provide reasonable care for Assets:
4
<PAGE>
iii. The Eligible Foreign Custodian's general reputation and standing
and, in the case of a Securities Depository, the Securities
Depositor's operating history and number of participants:
iv. Whether Fund will have jurisdiction over and be able to enforce
judgments against the Eligible Foreign Custodian, such as by
virtue of the existence of any offices of the Eligible Foreign
Custodian in the United States or the Eligible Foreign
Custodian's consent to service of process in the United States:
v. In the case of an Eligible Foreign Custodian that is a banking
institution or trust company, any additional factors and
criteria set forth in Appendix C to this Agreement; and
--------
vi. In the case of an Eligible Foreign Custodian that is a
Securities Depository, an additional factors and criteria set
forth in Appendix D to this Agreement.
--------
c. Evaluation of Written Contracts
-------------------------------
In exercising the authority delegated under this Agreement to enter
into written contracts governing Fund's foreign custody arrangements with an
Eligible Foreign Custodian, Delegate shall determine that such contracts (or, in
the case of a Securities Depository, such contract, the rules or established
practices or procedures of the depository, or any combination of the foregoing)
provide reasonable care for Assets based on the standards applicable to Eligible
Foreign Custodians in the relevant market. In making this determination,
Delegate ensure that the terms of such contracts comply with the provisions of
Rule 17f-i(c)(2).
d. Monitoring
----------
In exercising the authority delegated under this Agreement to
establish a system to Monitor the appropriateness of maintaining Assets with an
Eligible Foreign Custodian or the appropriateness of a written contract
governing Fund's foreign custody arrangements, Delegate shall consider any
factors and criteria set forth in Appendix E to this Agreement. If, as a result
--------
of its Monitoring of Eligible Foreign Custodian relationships hereunder or
otherwise, the Delegate determines in its sole discretion that it is in the best
interest of the safekeeping of the Assets to move such Assets to a different
Eligible Foreign Custodian, the Fund shall bear any expense related to such
relocation of Assets.
8. Standard of Care
----------------
In exercising the authority delegated under this Agreement, Delegate agrees
to exercise reasonable care, prudence and diligence such as a person having
responsibility for the
5
<PAGE>
safekeeping of assets of an investment company registered under the Investment
Company Act of 1940 would exercise.
9. Recording Requirements
----------------------
Delegate agrees to provide written reports notifying Board of the placement
of Assets with a particular Eligible Foreign Custodian or Permissible Foreign
Custodian and any of any material change in Fund's foreign custody arrangements.
Such reports shall be provided to Board quarterly for consideration at the next
regularly scheduled meeting of the Board or earlier if deemed necessary or
advisable by the Delegate in its sole discretion.
10. Provision of Information Regarding Country Risk
-----------------------------------------------
With respect to the jurisdictions listed in Appendix A, or added thereto
----------
pursuant to Article 4, Delegate agrees to provide annually to Board such
information relating to Country Risk, if available, as is specified in Appendix
---------
F to this Agreement.
- -
11. Limitation of Liability
-----------------------
a. Notwithstanding anything in this Agreement to the contrary, in no
event shall the Delegate or any of its officers, directors, employees or agents
(collectively, the "Indemnified Parties") be liable to the Fund or any third
party, and the Fund shall indemnify and hold the Delegate and the Indemnified
Parties harmless from and against any and all loss, damage, liability, actions,
suits, claims, costs and expenses, including legal fees, (a "Claim") arising as
a result of any act or omission of the Delegate or any Indemnified Party under
this Agreement, except for any Claim resulting from the negligence, willful
misfeasance or bad faith of the Delegate or any Indemnified Party. Without
limiting the foregoing, neither the Delegate nor the Indemnified Parties shall
be liable for, and the Delegate and the Indemnified Parties shall be indemnified
against, any Claim arising as a result of:
i. Any act or omission by the Delegate or any Indemnified Party in
reasonable good faith reliance upon the terms of this Agreement,
any resolution of the Board, telegram, telecopy, notice,
request, certificate or other instrument reasonably believed by
the Delegate to genuine:
ii. Any information which the Delegate provides or does not to
provide under Section 10 hereof:
iii. Any acts of God, earthquakes, fires, floods, storms or other
disturbances of nature, epidemics, strikes, riots,
nationalization, expropriation, currency restrictions, acts of
war, civil war or terrorism, insurrection, nuclear fusion,
fission or radiation, the interruption, loss or malfunction of
utilities, transportation or computers (hardware or software)
and computer
6
<PAGE>
facilities, the unavailability of energy sources and other
similar happenings or events.
b. Not withstanding anything to the contrary in this Agreement, in no
event shall the Delegate or the Indemnified Parties be liable to the Fund or any
third party for lost profits or lost revenues or any special, consequential,
punitive or incidental damages of any kind whatsoever in connection with this
Agreement or any activities hereunder.
17. Arbitration of Disputes
-----------------------
To the extent permitted by law, all disputes or claims arising under this
Agreement shall be resolved through arbitration. Arbitration under this Article
shall be conducted according to the Commercial Arbitration Rules of the American
Arbitration Association and shall take place in the City of Boston,
Massachusetts. This Article shall be enforced and interpreted exclusively in
accordance with applicable federal law, including the Federal Arbitration Act.
13. Effectiveness and Termination of Agreement
------------------------------------------
This Agreement shall be effective as of the later of the date of execution
on behalf of Board or Delegate and shall remain in effect until terminated as
provided herein. This Agreement may be terminated at any time, without penalty,
by written notice from the terminating party to the nonterminating party.
Termination shall become effective 30 days after receipt by the non-terminating
party of such notice.
14. Authorized Representatives and Notices
--------------------------------------
The respective Authorized Representatives of Fund and Board, and the
addresses to which notices and other documents under this Agreement are to be
sent to each, are as set forth in Appendix G. Any Authorized Representative of
----------
a party may add or delete persons from that party's list of Authorized
Representatives by written notice to an Authorized Representative of the other
party.
15. Governing Law
-------------
This Agreement shall be constructed in accordance with the laws of the
Commonwealth of Massachusetts without regard to principals of choice of law
[Remainder of Page Intentionally Left Blank]
7
<PAGE>
IN WITNESS WHEREOF, Authorized Representatives of Board and of Delegate
have affixed their signatures as of the date first written above.
INVESTORS BANK & TRUST COMPANY
By:
-------------------------------------
Name:
Title:
STATE FARM VARIABLE PRODUCT TRUST
By:
-------------------------------------
Name:
Title:
8
<PAGE>
<TABLE>
<CAPTION>
List of Appendices
- ------------------
<C> <S>
A -- Jurisdictions Covered
B -- Additional Jurisdictions Covered
C -- Additional Factors and Criteria To Be Applied in the Selection of
Eligible Foreign Custodians That Are Banking Institutions or Trust
Companies
D -- Additional Factors and Criteria To Be Applied in the Selection of
Eligible Foreign Custodians That Are Securities Depositories
E -- Factors and Criteria To Be Applied in Establishing Systems For the
Monitoring of Foreign Custody Arrangements and Contracts
F -- Information Regarding Country Risk
G -- Authorized Representatives
</TABLE>
9
<PAGE>
APPENDIX A
----------
Jurisdictions Covered
---------------------
[insert list|
A-1
<PAGE>
APPENDIX B
----------
Additional Jurisdictions Covered
--------------------------------
Pursuant to Article 4 of this Agreement, Delegate and Board agree that the
following jurisdictions shall be added to Appendix A:
[insert list|
INVESTORS BANK & TRUST COMPANY
By:________________________________________
Name:
Title:
STATE FARM VARIABLE PRODUCT TRUST
By:________________________________________
Name:
Title:
DATE:__________________________
A-2
<PAGE>
APPENDIX C
----------
Additional Factors and Criteria To Be Applied
in the Selection of Eligible Foreign Custodians
That Are Banking Institutions or Trust Companies
------------------------------------------------
In addition to the factors set forth in Rule l7f-5(c)(l), in selecting
Eligible Foreign Custodians that are banking institutions or trust companies,
Delegate shall consider the following factors, if such information is available
(check all that apply):
__________ None
__________ Other (list below):
A-3
<PAGE>
APPENDIX D
----------
Additional Factors and Criteria To Be
Applied in the Selection of Eligible Foreign
Custodians That Are Securities Depositories
-------------------------------------------
In addition to the factors set forth in Rule 17f-5(c)(1), in selecting
Eligible Foreign Custodians that are Securities Depositories, Delegate shall
consider the following factors, if such information is available (check all that
apply):
1. Whether use is voluntary or compulsory
2. Ownership
3. Operating History
4. Established rules, practices and procedures
5. Membership
6. Financial strength
7. Governing regulatory body
A-4
<PAGE>
APPENDIX E
----------
Factors and Criteria To Be Applied
in the Establishing Systems For the Monitoring of
Foreign Custody Arrangements and Contracts
------------------------------------------
In establishing systems for the Monitoring of foreign custody arrangements
and contracts with Eligible Foreign Custodians, Delegate shall consider the
following factors, if such information is available (check all that apply):
1. Operating performance
2. Established practices and procedures
3. Relationship with market regulators
4. Contingency planning
A-5
<PAGE>
APPENDIX F
----------
Information Regarding Country Risk
----------------------------------
To aid the Board in its determinations regarding Country Risk, Delegate
will furnish Board annually with respect to the jurisdictions specified in
Article 3, the following information:
1. Copy of Addenda or Side Letters to Subcustodian Agreements
2. Legal Opinion, if available, with regard to:
a) Access to books and records by the Fund's accountants
b) Ability to recover assets in the event of bankruptcy of a
custodian
c) Ability to recover assets in the event of a loss
d) Likelihood of expropriation or nationalization, if available
e) Ability to repatriate or convert cash or cash equivalents
3. Audit Report
4. Copy of Balance Sheet from Annual Report
5. Summary of Central Depository Information
6. Country Profile Matrix containing market practice for:
a) Delivery versus payment
b) Settlement method
c) Currency restrictions
d) Buy-in practice
e) Foreign ownership limits
f) Unique market arrangements
A-6
<PAGE>
EXHIBIT 9
PARTICIPATION AGREEMENT
THIS AGREEMENT is made and entered into this ___ day of ________, 1997 by
and between STATE FARM LIFE INSURANCE COMPANY, an Illinois corporation (the
"Company"), on its own behalf and on behalf of the segregated asset accounts of
the Company set forth on Schedule A attached hereto (each, an "Account";
collectively, the "Accounts"), STATE FARM VARIABLE PRODUCT TRUST, a Delaware
business trust (the "Trust"), and STATE FARM INVESTMENT MANAGEMENT CORP., a
Delaware corporation ("SFIM").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Trust issues shares of beneficial interest (the "Shares")
registered under the Securities Act of 1933, as amended (the "1933 Act")
pursuant to a registration statement initially filed with the Securities and
Exchange Commission on February 27, 1997, as amended from time to time (the
"Registration Statement");
WHEREAS, the Trust has established six separate series of Shares, each
corresponding to a separate investment portfolio having its own investment
objective, and may establish additional series of Shares in the future (such
existing and future series are collectively referred to herein as the "Funds");
WHEREAS, the Trust is available to act as the investment vehicle for the
Accounts, and other separate accounts established in connection with variable
life insurance policies and variable annuity contracts issued by the Company and
its affiliates (the "Contracts");
WHEREAS, the Accounts are duly organized, validly existing segregated asset
accounts, established by resolutions of the Board of Directors of the Company,
to set aside and invest assets attributable to the Contracts that are allocated
to the Accounts (the Contracts and the Accounts covered by this agreement, and
the corresponding Funds covered by this agreement in which the Accounts invest,
are specified in Schedule A attached hereto as may be modified from time to
time);
WHEREAS, the Company has registered the Accounts as unit investment trusts
under the 1940 Act;
WHEREAS, SFIM, the Trust's investment adviser and principal underwriter, is
an investment adviser registered under the Investment Advisers Act of 1940, as
amended (the "Advisers Act") and all applicable state securities laws, a broker-
dealer registered under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), and a member of the National Association of Securities Dealers,
Inc. (the "NASD"); and
<PAGE>
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Trust, either directly or in conjunction with SFIM as its
principal underwriter, intends to make a continuous offering of its shares at
net asset value, and the Company has and intends to purchase the shares of the
Funds on behalf of the Accounts to fund the Contracts;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Trust, and SFIM agree as follows:
ARTICLE 1
Sale of Trust Shares
1.1 The Trust and SFIM agree to sell to the Company those shares of the
Trust which the Accounts order, executing such orders on a daily basis at the
net asset value next computed after receipt by the Trust, SFIM, or their
designee for the order of the shares of the Trust. For purposes of this Section
1.1, the Company shall be the Trust's and SFIM's designee for receipt of such
orders from Contract owners and receipt by the Company shall constitute receipt
by the Trust and SFIM; provided, that either the Trust or SFIM receives notice
of such order by 7:30 a.m. Chicago time on the next following Business Day.
"Business Day" shall mean any day on which the New York Stock Exchange is open
for trading and on which the Trust calculates its net asset value pursuant to
the rules of the Securities and Exchange Commission (the "SEC").
1.2 The Trust and SFIM agree to make Trust shares available indefinitely
for purchase at the applicable net asset value per share by the Company and the
Accounts on those days on which the Trust calculates its net asset value
pursuant to rules of the SEC. The Trust shall use reasonable efforts to
calculate its net asset values on the days and at the times described in the
Trust's prospectus (as of the date hereof, as of the close of the New York Stock
Exchange on each day on which the New York Stock Exchange is open for trading,
but not on the Friday following Thanksgiving nor on December 26, 1997).
Notwithstanding the foregoing, the Board of Trustees of the Trust (the "Board")
may refuse to sell shares of any Fund to the Company and the Accounts, or
suspend or terminate the offering of shares of any Fund if such action is
required by law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the Board acting in good faith and in light of its fiduciary
duties under federal and any applicable state laws, necessary in the best
interests of the shareholders of such Fund.
1.3 The Trust and SFIM agree that shares of the Trust will be sold to the
Company and the Accounts. In addition, shares of the Trust may be sold to other
insurance companies affiliated with the Company or their separate accounts.
Shares will not be sold to natural persons. Nothing herein shall prohibit the
Company from establishing separate accounts or sub-accounts other than the
Accounts which purchase shares from investment companies other than the Trust.
<PAGE>
1.4 The Company shall pay for the Trust shares in federal funds
transmitted by wire on the next Business Day after an order to purchase shares
is made in accordance with the provisions of Section 1.1 hereof. For purpose of
Section 2.8, upon receipt by the Trust of the federal funds so wired, such funds
shall cease to be the responsibility of the Company and shall become the
responsibility of the Trust. The amount of redemption proceeds payable pursuant
to Section 1.6 may be credited toward any purchase payments due pursuant to this
Section 1.4.
1.5 The Trust agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Trust held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Trust or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the designee of the Trust for receipt of
requests for redemption from Contract owners and receipt by such designee shall
constitute receipt by the Trust; provided, that the Trust receives notice of
such request for redemption by 7:30 a.m. Chicago time on the next following
Business Day.
1.6 Payment of redemption proceeds will be in federal funds transmitted by
wire on the same Business Day the Trust receives notice of the redemption order
from the Company. The Trust reserves the right to delay payment of redemption
proceeds, but in no event may such payment be delayed longer than the period
permitted by the 1940 Act. If notification of redemption is received after 7:30
a.m. Chicago time, payment for redeemed shares will be made on the next
following Business Day. For purpose of Section 2.8, upon receipt by the Company
of the federal funds so wired, such funds shall cease to be the responsibility
of the Trust and shall become the responsibility of the Company; the Trust will
not bear any responsibility whatsoever for the proper disbursement or crediting
of redemption proceeds. Purchase payments payable pursuant to Section 1.4 may
be credited toward any amounts of redemption proceeds due pursuant to this
Section 1.6.
1.7 Unless otherwise determined by the Board, issuance and transfer of the
Trust's shares will be by book entry only and share certificates will not be
issued to the Company or the Accounts. Shares ordered from the Trust will be
recorded in an appropriate title for the Accounts or the appropriate subaccounts
of the Accounts.
1.8 The Trust shall furnish same day notice (by wire or telephone followed
by written confirmation) to the Company of any income, dividends or capital gain
distributions payable on the Trust's shares. The Company hereby elects to
receive all such dividends and distributions as are payable on the Fund shares
in additional shares of that Fund. The Trust shall notify the Company of the
number of shares so issued as payment of such dividends and distributions.
1.9 The Trust or its custodian shall make the net asset value per share
for each Fund available to the Company on each Business Day as soon as
reasonably practical after the net asset value per share is calculated and shall
use its best efforts to make such net asset value per share available by 6:00
p.m. Chicago time.
<PAGE>
ARTICLE 2
Representations and Warranties
2.1 The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act, and that the Contracts will be issued, sold, and
distributed in material compliance with all applicable state and federal laws,
including without limitation the 1933 Act, the 1934 Act, and the 1940 Act. The
Company further represents and warrants that it is an insurance company duly
organized and in good standing under applicable law, that it has legally and
validly established the Accounts as segregated asset accounts under Illinois
law, and that it has registered the Accounts as unit investment trusts in
accordance with the provisions of the 1940 Act (unless exempt therefrom) to
serve as segregated investment accounts for the Contracts and that it will
maintain such registrations for so long as any Contracts are outstanding. The
Company shall amend the registration statements under the 1933 Act for the
Contracts and the registration statements under the 1940 Act for the Accounts
from time to time as required in order to effect the continuous offering of the
Contracts or as may otherwise be required by applicable law. The Company shall
register and qualify the Contracts for sale in accordance with the securities
laws of the various states only if and to the extent deemed necessary by the
Company.
2.2 The Company represents that it believes, in good faith, that the
Contracts are currently and at the time of issuance will be treated as life
insurance, endowment or annuity contracts under applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), that it will make every
effort to maintain such treatment and that it will notify the Trust immediately
upon having a reasonable basis for believing that the Contracts have ceased to
be so treated or that they might not be so treated in the future.
2.3 The Trust and SFIM represent and warrant that Trust shares sold
pursuant to this agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in material compliance with the laws of
Delaware and all applicable federal and state securities laws. The Trust
further represents that it is and shall remain registered under the 1940 Act,
and that it shall amend the Registration Statement for its shares under the 1933
Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Trust shall register and qualify the
shares for sale in accordance with the laws of the various states, including
those states designated by SFIM pursuant to its underwriting agreement with the
Trust, only if and to the extent deemed advisable by the Trust.
2.4 The Trust represents that each Fund of the Trust is currently
qualified or will be qualified as a Regulated Investment Company under
Subchapter M of the Code and that every effort will be made to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that the Trust will notify the Company orally (followed by written notice) or by
wire immediately upon having a reasonable basis for believing that any Fund of
the Trust has ceased to so qualify or that any Fund might not so qualify in the
future.
<PAGE>
2.5 The Trust currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future. However, if the Trust were
authorized to establish a 12b-1 plan, the Trust would undertake to have the
Board, of which a majority of trustees are not interested persons, as defined in
the 1940 Act, of the Trust, formulate and approve any plan under Rule 12b-1 to
finance distribution expenses.
2.6 The Trust represents that it is lawfully organized and validly
existing under the laws of the State of Delaware and that it does and will
comply in all material respects with the 1940 Act.
2.7 SFIM represents that it is and shall remain duly registered as an
investment adviser and broker-dealer under all applicable federal and state
securities laws at all times when it is the Trust's investment adviser and
principal underwriter and that it shall perform its obligations for the Trust in
material compliance with any applicable state and federal securities laws and
NASD rules and regulations relating to broker-dealers.
2.8 The Trust, SFIM, and the Company each represents and warrants that all
of its directors, trustees, officers, employees, investment advisers, and other
individuals or entities dealing with the money and/or securities of the Trust
are and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Trust in an amount not less than the
minimal coverage as required currently by Section 17(g) and Rule 17g-1 of the
1940 Act or related provisions as may be promulgated from time to time. The
aforesaid bond shall include coverage for larceny and embezzlement and shall be
issued by a reputable bonding company.
ARTICLE 3
Prospectus and Proxy Statements; Voting
3.1 At least annually, the Trust shall, at its expense or at the expense
of SFIM, as appropriate, provide the Company, free of charge, with as many
copies of the Trust's current prospectus as the Company may reasonably request
for distribution to both existing Contract owners and prospective purchasers.
If requested by the Company in lieu thereof, the Trust shall provide such
documentation (including a final "camera ready" copy of the new prospectus as
set in type at the Trust's expense) and other assistance as is reasonably
necessary in order for the parties hereto once each year (or more frequently if
the prospectus for the Trust is supplemented or amended) to have the prospectus
for the Contracts and the Trust's prospectus printed together in one document;
the expenses of such printing to be apportioned between the Company and the
Trust (or SFIM, if appropriate) in proportion to the number of pages of the
Contract and Trust prospectuses, taking account of other relevant factors
affecting the expense of printing, such as columns, charts, etc.; the Trust or
SFIM will bear the cost of printing the Trust's portion of such document, and
the Company will bear the expenses of printing the Accounts' portion of such
document.
<PAGE>
3.2 The Trust's prospectus shall state that the Statement of Additional
Information ("SAI") for the Trust is available from the Trust. The Trust, at
its expense or at the expense of SFIM, as appropriate, shall print and provide
the SAI to the Company (or a master of the SAI suitable for duplication by the
Company) for any Contract owner or prospective purchaser who requests the SAI.
The Company shall provide the SAI to any Contract owner or prospective purchaser
who requests it.
3.3 The Trust (or SFIM, as appropriate), at its expense, shall provide the
Company with copies of its proxy material, reports to shareholders and other
communications to shareholders in such quantity as the Company shall reasonably
require for distribution to Contract owners.
3.4 The Company shall: (a) solicit voting instructions from Contract
owners; (b) vote the Trust shares in accordance with instructions received from
Contract owners; and (c) vote Trust shares for which no instructions have been
received in the same proportion as Trust shares of such Fund for which
instructions have been received. The Company reserves the right to vote Trust
shares held in the Accounts in its own right, to the extent permitted by law.
3.5 The process of soliciting Contract owners' voting instructions,
tabulating votes, and other shareholder voting procedures shall be conducted in
accordance with procedures adopted by the Company.
ARTICLE 4
Sales Material and Information
4.1 The Company shall furnish, or shall cause to be furnished, to the
Trust or its designee, each piece of sales literature or other promotional
material in which the Trust is named, at least five (5) Business Days prior to
its use by the Company. No such material shall be used by the Company if the
Trust or its designee object to such use within five (5) Business Days after
receipt of such material.
4.2 The Company shall not give any information or make any representations
or statements on behalf of the Trust or concerning the Trust in connection with
the sale of the Contracts other than the information or representations
contained in the registration statement or prospectus for the Trust shares, as
such registration statement and prospectus may be amended or supplemented from
time to time, or in reports or proxy statements for the Trust which are in the
public domain or approved by the Trust for distribution to Contract owners, or
in sales literature or other promotional material approved by the Trust or its
designee, except with the permission of the Trust. The Trust or its designee
agrees to respond to any request for approval on a prompt and timely basis.
<PAGE>
4.3 The Trust shall furnish, or shall cause to be furnished, to the
Company or its designee, each piece of sales literature or other promotional
material in which the Company and/or the Accounts is named, at least five (5)
Business Days prior to its use by the Trust. No such material shall be used by
the Trust if the Company or its designee object to such use within five (5)
Business Days after receipt of such material.
4.4 The Trust shall not give any information or make any representations
on behalf of the Company or concerning the Company, the Accounts, or the
Contracts other than information or representations contained in a registration
statement or prospectus for the Contracts, as such registration statement and
prospectus may be amended or supplemented from time to time, or in reports for
the Accounts which are in the public domain or approved by the Company for
distribution to Contract owners, or in sales literature or other promotional
material approved by the Company or its designee, except with the permission of
the Company. The Company or its designee agrees to respond to any request for
approval on a prompt and timely basis.
4.5 The Company and the Trust may each request that the other provide at
least one complete copy of all registration statements, prospectuses, SAIs,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for "no-action" letters, and all
amendments to any of the above, that relate to the Contracts, or to the Trust or
its shares, prior to or contemporaneously with the filing of such document with
the SEC or other regulatory authority. The Company or Trust shall also each
promptly inform the other of the results of any examination by the SEC (or other
regulatory authority) that relates to the Contracts, the Trust or its shares,
and the party that was the subject of the examination shall provide the other
party with a copy of any "deficiency letter" or other correspondence or written
report regarding any such examination.
4.6 For purposes of this Article 4, the phrase "sales literature or other
promotional material" means advertisements (defined as material published, or
designed for use in, a newspaper, magazine, or other periodical, radio,
television, telephone or tape recording, videotape display, signs or billboards,
motion pictures, telephone directories (other than routine listings), electronic
or other public media), sales literature (defined as any written or electronic
communication distributed or made generally available to customers or the public
that is not an advertisement as defined above, including, but not limited to,
circulars, research reports, market letters, performance reports or summaries,
form letters, telemarketing scripts, seminar texts, and reprints or excerpts of
any other advertisement, sales literature or published article), and educational
or training materials or communications distributed or made generally available
to some or all agents or employees.
<PAGE>
ARTICLE 5
Fees and Expenses
5.1 No party hereto shall pay any fee or other compensation to any other
party hereto pursuant to this agreement, except that if the Trust or any Fund
adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act to
finance distribution expenses, then, subject to obtaining any regulatory
approvals, the Trust may make payments to the Company, SFIM, or the Company's
principal underwriter for the Contracts if and in amounts agreed to by the Trust
in writing.
5.2 Each party shall reimburse each other party for expenses initially
paid by such other party but allocated to it in accordance with any allocation
of expenses specified in Article 3 hereof.
ARTICLE 6
Diversification and Related Limitations
6.1 Subject to the Company's obligations under Section 2.2 hereof, the
Trust and SFIM each represent and warrant that the Trust will at all times
invest its assets in such a manner as to ensure that the Contracts will be
treated as annuity, endowment, or life insurance contracts under the Code and
the regulations issued thereunder. Without limiting the scope of the foregoing,
the Trust and SFIM will at all times ensure that the Trust complies with Section
817(h) of the Code and Treas. Reg. (S) 1.817-5, as amended from time to time,
and any Treasury interpretations thereof, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations.
6.2 Trust shares will not be sold to any person or entity that would
result in the Contracts not being treated as annuity, endowment, or life
insurance contracts, in accordance with the statutes and regulations referred to
in Section 6.1 hereof.
ARTICLE 7
Potential Material Conflicts
7.1 The Board shall monitor each Fund of the Trust for the existence of
any material irreconcilable conflict between the interests of the variable
annuity contract owners and the variable life policy owners of the Company
and/or affiliated companies (collectively, "contract owners") investing
indirectly in the Trust. The Trust represents that at all times at least a
majority of the trustees of the Trust shall not be interested persons, as
defined in the 1940 Act (the "disinterested trustees"). The Board shall have
the sole authority to determine if a material irreconcilable conflict exists,
and such determination shall be binding on the
<PAGE>
Company only if approved in the form of a resolution by a majority of the Board,
or a majority of the disinterested trustees of the Board. The Board will give
prompt notice of any such determination to the Company.
7.2 The Company agrees that it will be responsible for reporting any
potential or existing conflicts to the Board. The Company also agrees that, if
a material irreconcilable conflict arises, it will at its own cost remedy such
conflict up to and including: (a) withdrawing the assets allocable to some or
all of the Accounts from the Trust or any Fund and reinvesting such assets in a
different investment medium, including (but not limited to) another Fund of the
Trust, or submitting to a vote of all affected contract owners whether to
withdraw assets from the Trust or any Fund and reinvesting such assets in a
different investment medium and, as appropriate, segregating the assets
attributable to any appropriate group of contract owners that votes in favor of
such segregation, or offering to any of the affected contract owners the option
of segregating the assets attributable to their contracts or policies; and/or
(b) establishing and registering a new management investment company and
segregating the assets underlying the Contracts, unless a majority of Contract
owners materially adversely affected by the conflict have voted to decline the
offer to establish and register a new management investment company.
7.3 A majority of the disinterested trustees of the Board shall determine
whether any proposed action by the Company adequately remedies any material
irreconcilable conflict. In the event that the Board determines that any
proposed action does not adequately remedy any material irreconcilable conflict,
the Company will withdraw each Account designated by the disinterested trustees
from investment in the Trust and terminate this agreement within six (6) months
after the Board informs the Company in writing of the foregoing determination;
provided, that such withdrawal and termination shall be limited to the extent
required to remedy any such material irreconcilable conflict as determined by a
majority of the disinterested trustees of the Board.
7.4 The Trust agrees that it will not enter into any participation
agreement with a life insurance company affiliated with the Company unless such
agreement includes a section substantially identical to this Article 7.
ARTICLE 8
Indemnification
8.1 Indemnification By The Company.
------------------------------
(a) The Company agrees to indemnify and hold harmless the Trust and
SFIM and each of the Trust's and SFIM's trustees, directors, and officers and
each person, if any, who controls the Trust or SFIM within the meaning of
Section 15 of the 1933 Act, and any agents or employees of the foregoing
(collectively, the "Indemnified Parties" for purposes of this Section 8.1),
against any and all losses, claims, damages, liabilities (including
<PAGE>
amounts paid in settlement with the written consent of the Company) or
litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Trust's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the registration
statement or prospectus for the Contracts or contained in the Contracts or sales
literature for the Contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided, that this
agreement to indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made in reliance
upon and in conformity with information furnished the Company by or on behalf of
the Trust or SFIM for use in the registration statement or prospectus for the
Contracts or in the Contracts or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of the Contracts or
Trust shares;
(ii) arise out of or as a result of statements or
representations (other than statements or representations contained in the
registration statement, prospectus or sales literature of the Trust not supplied
by the Company, or persons under its control) or wrongful conduct of the Company
or persons under its control, with respect to the sale or distribution of the
Contracts or Trust shares;
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration statement, prospectus,
or sales literature of the Trust or any amendment thereof or supplement thereto
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading if
such statement or omission was made in reliance upon information furnished to
the Trust or SFIM by or on behalf of the Company; or
(iv) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this agreement or arise
out of or result from any other material breach of this agreement by the
Company; except to the extent provided in Sections 8.1(b) and 8.1(c) hereof.
(b) The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Company of
<PAGE>
any such claim shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision, except to the extent that failure
to notify results in failure of actual notice to the Company and the Company is
damaged solely as a result of failure to give notice. In case any such action is
brought against the Indemnified Parties, the Company shall be entitled to
participate, at its own expense, in the defense of such action. The Company
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action. After notice from the Company to such party
of the Company's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the Company will not be liable to such party under this agreement for any legal
or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation, unless: (i) the Company and the Indemnified Party shall have
mutually agreed on the retention of such counsel; or (ii) the named parties to
any such proceeding (including any impleaded parties) include both the Company
and the Indemnified Party and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests between
them. The Company shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the Company agrees to indemnify the
Indemnified Party from all and against any loss or liability by reason of such
settlement or judgment.
(c) The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Trust shares or the Contracts or the operation of
the Trust and the Indemnified Parties will provide the Company with all relevant
information and documents requested by the Company. For purposes of this
Section 8.1(c), the "commencement" of proceedings shall include any informal or
formal communications from the SEC or its staff (or the receipt of information
from any other persons or entities) indicating that enforcement action by said
Commission or staff may be contemplated or forthcoming; this includes any
information to the effect that any matter(s) has been referred to the SEC's
Division of Enforcement, or that any matter(s) is being discussed with that
Division.
8.2 Indemnification by the Trust and SFIM.
-------------------------------------
(a) The Trust and SFIM, in each case solely to the extent relating
to such party's responsibilities hereunder, agree to indemnify and hold harmless
the Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act, and any
agents or employees of the foregoing (collectively, the "Indemnified Parties"
for purposes of this Section 8.2), against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Trust and SFIM) or litigation (including legal and other expenses) to which
the Indemnified Parties may become subject under any statute, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect
<PAGE>
thereof) or settlements are related to the sale or acquisition of the Trust's
shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the registration
statement or prospectus or sales literature of the Trust (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
provided, that this agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged statement or omission was
made in reliance upon and in conformity with information furnished to the Trust
by or on behalf of the Company for use in the registration statement or
prospectus for the Trust or in sales literature for the Trust (or any amendment
or supplement) or otherwise for use in connection with the sale of the Contracts
or Trust shares;
(ii) arise out of or as a result of statements or
representations (other than statements or representations contained in the
registration statement, prospectus or sales literature for the Contracts not
supplied by the Trust, or persons under its control) or wrongful conduct of the
Trust or persons under its control, with respect to the sale or distribution of
the Contracts or Trust shares;
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration statement, prospectus,
or sales literature covering the Contracts, or any amendment thereof or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statement
or statements therein not misleading, if such statement or omission was made in
reliance upon information furnished to the Company by or on behalf of the Trust;
or
(iv) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this agreement or arise out
of or result from any other material breach of this agreement by the Trust
(including a failure, whether unintentional or in good faith or otherwise, to
comply with the requirements specified in Article 6 of this agreement);
except to the extent provided in Sections 8.2(b) and 8.2(c) hereof.
(b) Neither the Trust nor SFIM shall be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Trust or SFIM in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Trust or SFIM
of any such claim shall not relieve the Trust or SFIM from any liability which
it may have to the Indemnified Party against whom such action is brought
otherwise than on account
<PAGE>
of this indemnification provision, except to the extent that failure to notify
results in the failure of actual notice to the Trust or SFIM and the Trust or
SFIM is damaged solely as a result of failure to give such notice. In case any
such action is brought against the Indemnified Parties, the Trust and SFIM will
be entitled to participate, at their own expense, in the defense thereof. The
Trust and SFIM also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice from the
Trust or SFIM to such party of its election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and neither the Trust nor SFIM shall be liable to such party
under this agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation, unless (i) the Trust, SFIM and the
Indemnified Party shall have mutually agreed to the retention of such counsel or
(ii) the named parties to any such proceeding (including any impleaded parties)
include the Trust or SFIM and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. Neither the Trust nor SFIM shall be liable
for any settlement of any proceeding effected without their written consent but
if settled with such consent or if there be a final judgment for the plaintiff,
the Trust and SFIM agree to indemnify the Indemnified Party from and against any
loss or liability by reason of such settlement or judgment.
(c) The Indemnified Parties will promptly notify both the Trust and
SFIM of the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Trust shares or the Contracts or the
operation of the Trust and the Indemnified Parties will provide the Trust or
SFIM with all relevant information and documents requested by the Trust or SFIM,
respectively. For purposes of this Section 8.1(c), the "commencement" of
proceedings shall include any informal or formal communications from the SEC or
its staff (or the receipt of information from any other persons or entities)
indicating that enforcement action by said Commission or staff may be
contemplated or forthcoming; this includes any information to the effect that
any matter(s) has been referred to the SEC's Division of Enforcement, or that
any matter(s) is being discussed with that Division.
8.3 A successor by law of the parties to this agreement shall be entitled
to the benefits of the indemnification contained in this Article 8. The
indemnification provisions contained in this Article 8 shall survive any
termination of this agreement.
ARTICLE 9
Limitations of Liability
9.1 Limitation of Liability of Company. The Company shall give the Trust
----------------------------------
and SFIM the benefit of the Company's best judgment and efforts in fulfilling
its obligations under this agreement; provided, that the Company shall not be
liable for any error of judgment or import of law, or for any loss suffered by
the Trust or SFIM in connection with the matters
<PAGE>
to which this agreement relates, except loss resulting from: (i) willful
misfeasance, bad faith or gross negligence on the part of the Company in the
performance of its obligations and duties under this agreement; (ii) its
reckless disregard of its obligations and duties under this agreement; or (iii)
a breach of Section 2.2 of this agreement.
9.2 Limitation of Liability of SFIM. SFIM shall give the Trust and the
-------------------------------
Company the benefit of SFIM's best judgment and efforts in fulfilling its
obligations under this agreement; provided, that SFIM shall not be liable for
any error of judgment or import of law, or for any loss suffered by the Trust or
the Company in connection with the matters to which this agreement relates,
except loss resulting from: (i) willful misfeasance, bad faith or gross
negligence on the part of SFIM in the performance of its obligations and duties
under this agreement; (ii) its reckless disregard of its obligations and duties
under this agreement; or (iii) a breach of Sections 2.4 or 6.1 of this
agreement.
9.3 Limitation of Liability of Trust. The Company and SFIM each
--------------------------------
acknowledge that it has received notice of and accepts the limitations on the
Trust's liability as set forth in the Trust's Declaration of Trust, as amended
from time to time. In accordance therewith, the Company and SFIM agree that the
Trust's obligations hereunder shall be limited to the assets of the Funds, and
with respect to each Fund shall be limited to the assets of such Fund, and no
party shall seek satisfaction of any such obligation from any shareholder of the
Trust, nor from any trustee, officer, employee or agent of the Trust.
ARTICLE 10
Duration and Termination of this Agreement
10.1 Effective Date and Term. This agreement shall not become effective
-----------------------
unless and until it is approved by the Trust's Board. This agreement shall come
into full force and effect on the date which it is so approved, provided that it
shall not became effective as to any subsequently created Fund until it has been
approved by the Board specifically for such Fund.
10.2 Termination.
-----------
(a) This agreement shall terminate with respect to one, some, or
all the Accounts, or one, some, or all Funds:
(i) at the option of any party upon six months' advance
written notice to the other party;
(ii) at the option of the Company to the extent that shares of
the Funds are not reasonably available to meet the requirements of the Contracts
or are not "appropriate funding vehicles" for the Contracts, as determined by
the Company reasonably
<PAGE>
and in good faith; provided, that prompt notice of the election to terminate for
such cause and an explanation of such cause shall be furnished by the Company;
(iii) at the option of the Trust upon institution of formal
proceedings against the Company by the SEC or any insurance department or any
other regulatory body regarding the Company's duties under this agreement or
related to the sale of the Contracts, the operation of the Accounts, or the
purchase of the Trust shares;
(iv) at the option of the Company upon institution of formal
proceedings against the Trust or SFIM by the NASD, the SEC, or any state
securities or insurance department or any other regulatory body;
(v) at the option of the Company or the Trust upon receipt of
any necessary regulatory approvals and/or the vote of the Contract owners having
an interest in the Accounts (or any subaccount) to substitute the shares of
another investment company for the corresponding Fund shares of the Trust in
accordance with the terms of the Contracts for which those Fund shares had been
selected to serve as the underlying investment media; provided, that the Company
will give 30 days' prior written notice to the Trust of the date of any proposed
vote or other action taken to replace the Trust's shares; or
(vi) at the option of the Company or the Trust, upon the other
party's material breach of any provision of this agreement.
(b) Without limiting the generality of Section 10.1(a)(ii), shares
of a Fund would not be "appropriate funding vehicles" if, for example, such
shares did not meet the diversification or other requirements referred to in
Article 6 hereof, the Fund did not qualify under Subchapter M of the Code, as
referred to in Section 2.4 hereof, the investments or investment policies,
objectives, and/or limitations of the Fund would impose unanticipated risks on
the Company, or if the Company would be permitted to disregard policy owner
voting instructions under the 1940 Act or the rules promulgated thereunder.
10.3 Any notice pursuant to Section 10.1 shall specify the Fund or Funds,
Contracts and, if applicable, the Accounts as to which the agreement is to be
terminated.
10.4 It is understood and agreed that the right of any party hereto to
terminate this agreement pursuant to Section 10.1(a) may be exercised for cause
or for no cause.
10.5 Except as necessary to implement Contract owner initiated
transactions, or as required by state insurance laws or regulations, the Company
shall not redeem Trust shares attributable to the Contracts (as opposed to Trust
shares attributable to the Company's assets held in the Accounts), and the
Company shall not prevent Contract owners from allocating payments to a Fund
that was otherwise available under the Contracts, until thirty (30) days after
the Company shall have notified the Trust of its intention to do so.
<PAGE>
10.6 Notwithstanding any termination of this agreement, the Trust shall,
at the option of the Company, continue to make available additional shares of
the Funds pursuant to the terms and conditions of this agreement for all
Contracts in effect on the effective date of termination of this agreement (the
"Existing Contracts"). Specifically, without limitation, the owners of the
Existing Contracts shall be permitted to transfer or reallocate investments
under the Contracts, redeem investments in the Trust and/or invest in the Trust
upon the making of additional purchase payments under the Existing Contracts.
ARTICLE 11
Notices
11.1 Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Company:
State Farm Life Insurance Company
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn:
-------------------------
If to the Trust:
State Farm Variable Product Trust
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn:
-------------------------
If to SFIM:
State Farm Investment Management Corp.
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn:
-------------------------
<PAGE>
ARTICLE 12
Miscellaneous Provisions
12.1 Applicable Law.
--------------
(a) This agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of Delaware without regard to
conflicts of law principles or precedents.
(b) This agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant and the terms hereof shall be interpreted and construed in accordance
therewith.
12.2 Severability. If any provision of this agreement shall be held or
------------
made invalid by a court decision, statute, rule or otherwise, the remainder of
this agreement shall not be affected thereby.
12.3 Captions. The captions in this agreement are included for
--------
convenience of reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
12.4 Counterparts. This agreement may be executed simultaneously in
------------
multiple counterparts, each of which taken together shall constitute one and the
same instrument.
12.5 Schedules. The Schedules attached hereto, as modified from time to
---------
time, are incorporated herein by reference and are part of this agreement.
12.6 Cooperation with Authorities. Each party hereto shall cooperate with
----------------------------
the other party and all appropriate governmental authorities (including without
limitation the SEC, the NASD, and state insurance regulators) and shall permit
such authorities reasonable access to its books and records in connection with
any investigation or inquiry relating to this agreement or the transactions
contemplated hereby.
12.7 Cumulative Rights. The rights, remedies and obligations contained in
-----------------
this agreement are cumulative and are in addition to any and all rights,
remedies and obligations, at law or in equity, which the parties hereto are
entitled to under state and federal laws.
12.8 Amendments. This agreement may be amended at any time upon the
----------
consent of all of the parties.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed in their names and on their behalf by their duly authorized officers
all on the day and year first above written.
STATE FARM LIFE INSURANCE COMPANY
By:
---------------------------------
Title:
------------------------------
STATE FARM VARIABLE PRODUCT TRUST
By:
---------------------------------
Title:
------------------------------
STATE FARM INVESTMENT MANAGEMENT CORP.
By:
---------------------------------
Title:
------------------------------
<PAGE>
SCHEDULE A
Accounts, Contracts and Funds Subject
to the Participation Agreement
-------------------------------------
State Farm Life Insurance Company Variable Annuity Separate Account:
- -------------------------------------------------------------------
Contracts: */
--------- -
Funds: Money Market Fund**/
----- --
Large Cap Equity Index Fund**/
--
Small Cap Equity Index Fund**/
--
International Equity Index Fund**/
--
Bond Fund**/
--
Stock and Bond Balanced Fund**/
--
State Farm Life Insurance Company Variable Life Separate Account:
- ----------------------------------------------------------------
Contracts: */
--------- -
Funds: Money Market Fund**/
----- --
Large Cap Equity Index Fund**/
--
Small Cap Equity Index Fund**/
--
International Equity Index Fund**/
--
Bond Fund**/
--
Stock and Bond Balanced Fund**/
--
- -----------------------
*/ After effectiveness of registration statements for the Contract.
- -
**/ After effectiveness of registration statement for the Fund.
- --
<PAGE>
SUTHERLAND, ASBILL & BRENNAN LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
Tel: (202) 383-0100 Stephen E. Roth
Fax: (202) 637-3593 Direct Line: (202) 383-0158
November 25, 1997
Board of Trustees
State Farm Variable Product Trust
One State Farm Plaza
Bloomington, Illinois 61710-0001
Re: State Farm Variable Product Trust
Registration Statement on Form N-1A
(File No. 333-22467)
--------------------------------------
Trustees:
We have acted as counsel to State Farm Variable Product Trust (the
"Trust"), a business trust organized under the laws of the State of Delaware, in
connection with its registration as an open-end management investment company
under the Investment Company Act of 1940, as amended, and in connection with its
registration of an indefinite number of shares of beneficial interest in the
Trust (the "Shares") under the Securities Act of 1933, as amended (the "1933
Act"). In this connection, we have examined the initial registration statement
filed by you and pre-effective amendment number one to the registration
statement to be filed by you with the Securities and Exchange Commission on Form
N-1A (File No. 333-22467) (together, the "registration statement"). We also are
familiar with the actions taken by you at board of trustees meetings held on
June 13, 1997 and September 12, 1997, and intended to be taken by you, in
connection with the authorization, issuance and sale of the Shares.
We have examined such Trust records, certificates and other documents
and reviewed such questions of law as we have considered necessary or
appropriate for purposes of this opinion. In our examination of such materials,
we have assumed the genuineness of all signatures and the conformity to the
original documents of all copies submitted to us. As to certain questions of
fact material to our opinion, we have relied upon statements of officers of the
Trust and upon representations of the Trust made in the registration statements.
Based upon the foregoing, we are of the opinion that the Shares, when
issued and sold in the manner described in the registration statements, will be
legally issued, fully paid and non-assessable.
We are attorneys licensed to practice only in the State of Georgia and
the District of Columbia.
<PAGE>
Board of Trustees
November 25, 1997
Page 2
We hereby consent to the reference to our name in the prospectuses and
statement of additional information filed as part of the registration
statements. In giving this consent, we do not admit that we are in the category
of persons whose consent is required under Section 7 of the 1933 Act. We also
hereby consent to the filing of this opinion as an exhibit to pre-effective
amendment number one to the registration statement to be filed by you with the
Securities and Exchange Commission on Form N-1A.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN LLP
By: /s/ Stephen E. Roth
----------------------------------
Stephen E. Roth
