<PAGE> 1
As filed with the Securities and Registration No. 333-_____
Exchange Commission on April 1, 1997. 811-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [X]
Amendment No. [ ]
(Check appropriate box or boxes)
------------------------
HOTCHKIS AND WILEY VARIABLE TRUST
(Exact name of registrant as specified in charter)
800 West 6th Street, Fifth Floor
Los Angeles, California 90017
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (213) 362-8888
GRACIE FERMELIA
800 WEST 6TH STREET, FIFTH FLOOR
LOS ANGELES, CALIFORNIA 90017
(Name and address of Agent for Service)
Approximate date of proposed public offering: As soon as practicable
after the effective date of the registration statement.
Registrant hereby elects, pursuant to Rule 24f-2 under the Investment
Company Act of 1940, to register an indefinite number or amount of shares by
this Registration Statement.
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 on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
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HOTCHKIS AND WILEY VARIABLE TRUST
CROSS-REFERENCE SHEET
(REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A
Item No. Location in the Prospectus
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<S> <C> <C>
Part A:
Item 1. Cover Page Cover Page
Item 2. Synopsis Not Applicable
Item 3. Condensed Financial Information Not Applicable
Item 4. General Description of Registrant Cover Page; General
Information; Investment Objectives and Policies; Investment Risks;
Principal Investment Restrictions
Item 5. Management of the Fund Organization and Management; General Information
Item 5A. Management's Discussion of Fund Not Applicable
Performance
Item 6. Capital Stock and Other General Information; Dividends and Tax Status; Organization and Management
Securities
Item 7. Purchase of Securities Being Purchase and Redemption of Shares
Offered
Item 8. Redemption or Repurchase Purchase and Redemption of Shares
Item 9. Pending Legal Proceedings Not Applicable
<CAPTION>
Part B: Location in the Statement of Additional Information
---------------------------------------------------
<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History General Information about the Trust
Item 13. Investment Objectives and Investment Objectives and Policies
Policies
Item 14. Management of the Registrant Management
Item 15. Control Persons and Principal General Information about the Trust
Holders of Securities
Item 16. Investment Advisory and Other Management
Securities
Item 17. Brokerage Allocation and Other Management
Practices
Item 18. Capital Stock and Other General Information about the Trust
Securities
Item 19. Purchase, Redemption and Pricing Net Asset Value
of Securities Being Offered
Item 20. Tax Status Dividends and Tax Status
Item 21. Underwriters Not Applicable
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Financial Statements
</TABLE>
Part C:
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Post-Effective
Amendment to the Registration Statement.
<PAGE> 3
P R O S P E C T U S
[HOTCHKIS AND WILEY VARIABLE TRUST LOGO]
HOTCHKIS AND WILEY VARIABLE TRUST (THE "TRUST") IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY HAVING THREE SEPARATE DIVERSIFIED PORTFOLIOS (THE "FUNDS"),
EACH OF WHICH IS A SEPARATE MUTUAL FUND. THE FUNDS ARE INVESTMENT VEHICLES FOR
VARIABLE ANNUITY CONTRACTS AND/OR VARIABLE LIFE INSURANCE CONTRACTS ISSUED BY
PARTICIPATING INSURANCE COMPANIES.
E Q U I T Y I N C O M E
V I P P O R T F O L I O
Seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The Fund invests in domestic equity securities.
I N T E R N A T I O N A L
V I P P O R T F O L I O
Seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The Fund invests in international equity securities.
L O W D U R A T I O N
V I P P O R T F O L I O
Seeks to maximize total return, consistent with preservation of capital. The
Fund invests in a diversified portfolio of fixed-income securities of varying
maturities with a portfolio duration of one to three years. The Fund's
dollar-weighted average maturity will exceed its portfolio duration.
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This Prospectus provides you with the basic information you should know before
investing in any of the Funds. You should read it and keep it for future
reference. A Statement of Additional Information dated _____________, 1997,
containing additional information about the Trust and each Fund has been filed
with the Securities and Exchange Commission and is incorporated by reference in
its entirety into this Prospectus. You may obtain a copy of the Statement of
Additional Information without charge by calling the Trust at 800-236-4479 or
writing the Trust at 800 West Sixth Street, Fifth Floor, Los Angeles, California
90017.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENT IN A FUND'S SHARES INVOLVES RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
SHARES OF THE FUNDS ARE NOT OFFERED TO THE GENERAL PUBLIC BUT MAY ONLY BE
PURCHASED BY THE SEPARATE ACCOUNTS OF PARTICIPATING INSURANCE COMPANIES FOR THE
PURPOSE OF FUNDING VARIABLE ANNUITY CONTRACTS AND/OR VARIABLE LIFE INSURANCE
CONTRACTS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THERE CAN BE NO ASSURANCE THAT THE INVESTMENT OBJECTIVE OF ANY FUND WILL BE
ACHIEVED.
HOTCHKIS AND WILEY VARIABLE TRUST
800 West 6th Street, Fifth Floor, Los Angeles, California 90017
800-236-4479
Investment Advisor: Hotchkis and Wiley
__________, 1997
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<PAGE> 4
T A B L E O F C O N T E N T S
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INVESTMENT OBJECTIVES AND POLICIES................ 3
SECURITIES AND TECHNIQUES USED BY THE FUNDS....... 7
INVESTMENT RISKS.................................. 12
PRINCIPAL INVESTMENT RESTRICTIONS................. 14
ORGANIZATION AND MANAGEMENT....................... 14
PURCHASE AND REDEMPTION OF SHARES................. 16
DIVIDENDS AND TAX STATUS.......................... 17
NET ASSET VALUE................................... 19
PERFORMANCE INFORMATION........................... 19
GENERAL INFORMATION............................... 20
APPENDIX -- DESCRIPTION OF RATINGS................ 20
[HOTCHKIS & WILEY LOGO]
IMPORTANT TELEPHONE NUMBER
--------------------------------
Client Services 800-236-4479
<PAGE> 5
INVESTMENT OBJECTIVES AND POLICIES
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GENERAL
Each Fund's investment objective is a fundamental policy, which cannot be
changed without the approval of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). There can be no assurance that any objective will be met. For a
discussion of certain risks associated with investment in the Funds, including
their use of derivatives, see "Investment Risks" on page 11.
HOTCHKIS AND WILEY, a division of the Merrill Lynch Capital Management Group
of Merrill Lynch Asset Management, L.P. (the "Advisor"), acts as investment
advisor to each Fund.
THE EQUITY INCOME VIP PORTFOLIO
The investment objective of the EQUITY INCOME VIP PORTFOLIO is to provide
current income and long-term growth of income, accompanied by growth of capital.
The EQUITY INCOME VIP PORTFOLIO will attempt to achieve its objective by
investing in equity securities. In selecting investments for the Fund, the
Advisor focuses on securities that it believes to have superior values. In
arriving at this determination, the Advisor will generally seek securities of
companies that have such characteristics as earnings yield at least 3% greater
than the yield on long-term bonds, dividend yield which exceeds the composite
yield on the securities comprising the Standard & Poor's Index of 500 Common
Stocks ("S&P 500"), and overall financial strength.
Under normal market conditions, the EQUITY INCOME VIP PORTFOLIO will invest at
least 80% of its total assets in income-producing equity securities issued by
companies with a record of earnings and dividends. The remainder of its
portfolio may be invested in securities of companies which pay no dividends or
interest but have unrecognized potential for growth or changes in business or
management that indicate possible growth.
The equity securities that the Fund may purchase consist of common stocks or
securities having characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities or warrants. Any such convertible
securities to be invested in by the Fund will be rated investment grade or, if
unrated, be of comparable quality in the opinion of the Advisor, provided,
however, that the Fund may invest up to 5% of its net assets in convertible
securities rated at least B by Moody's Investors Service ("Moody's") or Standard
& Poor's Ratings Group ("S&P") or, if unrated, of comparable quality in the
opinion of the Advisor. "Investment grade" means the debt securities have been
rated at least (i) Baa by Moody's or BBB by S&P, Fitch Investors Service, Inc.
("Fitch") or Duff & Phelps Credit Rating Co. ("Duff & Phelps"); (ii) A-2 by S&P,
Prime-2 by Moody's, F-2 by Fitch or D-2 by Duff & Phelps for short-term
obligations; or (iii) of comparable quality as determined by the Advisor in the
case of unrated securities. All ratings are determined at the time of
investment. See the Appendix for a description of ratings.
Securities rated Baa are considered by Moody's to have speculative
characteristics. For Baa/BBB rated securities, changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade securities.
Securities rated below BBB or Baa are judged to be predominantly speculative
with respect to their capacity to pay interest and repay principal in accordance
with the terms of their obligations and are commonly known as "junk bonds." See
"Investment Risks" on page 11. See the Appendix for a further description of
ratings.
Subsequent to its purchase by the Fund, a security may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the Advisor will consider such an event in
determining whether the Fund should continue to hold the security in its
portfolio.
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<PAGE> 6
When market or economic conditions indicate, in the view of the Advisor, that a
temporary defensive investment strategy is appropriate, all or part of the
Fund's assets may be invested in investment grade debt obligations maturing in
one year or less from the date of the Fund's purchase, such as U.S. Treasury
bills, bank certificates of deposit, bankers' acceptances, commercial paper and
repurchase agreements.
The EQUITY INCOME VIP PORTFOLIO has the right to invest its assets on a "global"
basis, although there is no requirement that it do so. See "Securities and
Techniques Used by the Funds -- Foreign Securities" on page 6.
THE INTERNATIONAL VIP PORTFOLIO
The investment objective of the INTERNATIONAL VIP PORTFOLIO is to provide
current income and long-term growth of income, accompanied by growth of capital.
The Fund will attempt to achieve its objective through a policy of investing in
equity securities in at least three non-U.S. markets. Ordinarily, the Fund will
invest in equity securities issued by companies located in some or all of the
developed foreign equity markets. These markets generally include 14 markets in
Europe as well as Australia, New Zealand, Japan, Hong Kong, Singapore, Malaysia,
Canada and South Korea. There are risks associated with investment in foreign
securities, as described under "Investment Risks -- Risks of Investing in
Emerging Market and Other Foreign Securities" on page 11. In selecting
investments for the Fund, the Advisor will, in general, use the same criteria as
those used in selecting investments for the EQUITY INCOME VIP PORTFOLIO; that
is, it will focus on securities that it believes have superior values. The
Advisor will generally seek equity securities of companies in each country that
have such characteristics as dividend yield greater than the local market
average; earnings yield at least three percentage points greater than the
country's 10-year government bond yield (or low price-to-earnings ratios
relative to the local market), and financial strength.
Under normal market conditions, the INTERNATIONAL VIP PORTFOLIO will invest at
least 80% of its total assets in income-producing equity securities issued by
companies with a record of earnings and dividends. The remainder of its
portfolio may be invested in securities of companies which pay no dividends or
interest, but have potential for growth unrecognized by the market or changes in
business or management that indicate possible growth. The Fund will not invest
in foreign fixed-income securities with a maturity in excess of one year.
The equity securities that the Fund may purchase consist of common stocks or
securities having characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities or warrants. Any such convertible
securities will be securities of an issuer having an outstanding issue of debt
securities rated at least A by Moody's or S&P or, if unrated, be of comparable
quality in the opinion of the Advisor.
THE LOW DURATION VIP PORTFOLIO
The investment objective of the LOW DURATION VIP PORTFOLIO is to maximize total
return, consistent with preservation of capital. The Fund invests in a
diversified portfolio of fixed-income securities of varying maturities with a
portfolio duration of from one to three years. The dollar-weighted average
maturity of the portfolio of the Fund is expected to range from one to five
years.
The LOW DURATION VIP PORTFOLIO will attempt to achieve its objective by
investing in the following types of securities which may be issued by domestic
or foreign entities: (i) U.S. Government securities; (ii) corporate debt
securities, including bonds, notes and debentures; (iii) corporate commercial
paper; (iv) mortgage- and other asset-backed securities, including CMOs and
REMICs; (v) variable and floating rate debt securities (including inverse
floaters); (vi) structured debentures, bonds and notes; (vii) bank certificates
of deposit; (viii) fixed time deposits and bankers' acceptances; (ix) repurchase
agreements and reverse repurchase agreements; (x) preferred stock of issuers
whose assets consist of mortgage-backed securities of U.S. Government agencies;
(xi) debt securities that are convertible into or exchangeable for equity
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<PAGE> 7
securities ("convertible securities"); (xii) obligations of foreign governments
or their subdivisions, agencies and instrumentalities; and (xiii) obligations of
international agencies (such as the Agency for International Development) or
supranational entities. There is no limitation on the percentage of the Fund's
assets that may be committed to any of these types of securities, except to the
extent that a security may be deemed to be illiquid. See "Securities and
Techniques Used by the Funds" on page 6.
Under normal circumstances, the LOW DURATION VIP PORTFOLIO will invest at least
70% of its net assets in securities rated at least: (i) A by Moody's, S&P, Fitch
or Duff & Phelps, (ii) A-2 by S&P, Prime-2 by Moody's, F-2 by Fitch or D-2 by
Duff & Phelps for short-term debt obligations, or (iii) of comparable quality as
determined by the Advisor in the case of unrated securities. Up to 10% of the
LOW DURATION VIP PORTFOLIO'S net assets may be invested in securities rated
below investment grade but rated B or higher by one of the nationally recognized
rating agencies or, if unrated, of comparable quality in the opinion of the
Advisor. The remainder of the LOW DURATION VIP PORTFOLIO'S investments will be
rated Baa or BBB by at least one of these rating agencies or, if unrated, of
comparable quality in the opinion of the Advisor.
The LOW DURATION VIP PORTFOLIO may invest up to 15% of its net assets in
emerging market foreign securities, which are generally considered to be of a
credit quality below investment grade.
The LOW DURATION VIP PORTFOLIO may invest up to 25% of its total assets in
securities of foreign issuers that are denominated in U.S. dollars. Investment
by the Fund in securities of foreign issuers that are not denominated in U.S.
dollars will be limited to a maximum of 15% of total assets. See "Securities and
Techniques Used by the Funds -- Foreign Securities" on page 6.
The LOW DURATION VIP PORTFOLIO invests in a diversified portfolio of
fixed-income securities of varying maturities with a different portfolio
"duration." Duration is a measure of the expected life of a fixed-income
security that was developed as a more precise alternative to the concept of
"term to maturity." Duration incorporates a bond's yield, coupon interest
payments, final maturity, call and put features and prepayment exposure into one
measure. Traditionally, a fixed-income security's "term to maturity" has been
used as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "volatility" of the
security). However, "term to maturity" measures only the time until a
fixed-income security provides its final payment, taking no account of the
pattern of the security's payments prior to maturity.
Duration is a measure of the expected life of a fixed-income security on a
present value basis. Duration takes the length of time intervals between the
present time and the time that the interest and principal payments are scheduled
or, in the case of a mortgage-backed, asset-backed, or callable bond, expected
to be received, and weights them by the present values of the cash to be
received at each future point in time. For any fixed-income security with
interest payments occurring prior to the payment of principal, duration is
ordinarily less than maturity. In general, all other things being equal, the
lower the stated or coupon rate of interest of a fixed-income security, the
longer the duration of the security; conversely, the higher the stated or coupon
rate of interest of a fixed-income security, the shorter the duration of the
security. There are some situations where even the standard duration calculation
does not properly reflect the interest rate exposure of a security. In these and
other similar situations, the Advisor will use more sophisticated analytical
techniques that incorporate the economic life of a security into the
determination of its interest rate exposure. The LOW DURATION VIP PORTFOLIO'S
computation of duration is based on estimated rather than known factors. Thus,
there can be no assurance that a particular portfolio duration will at all times
be achieved by the Fund.
Duration is used in the management of the Fund as a tool to measure interest
rate risk. For example, if the Fund had a 2-year duration, it would be expected
to change in value 2% for every 1% move in interest rates. Assuming an expected
average duration of 2 years, a 1%
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<PAGE> 8
decline in interest rates would cause the Fund to gain 2% in price; likewise, a
1% rise in interest rates would produce a decline of 2% in the Fund's price.
Other factors such as changes in credit quality, prepayments, the shape of the
yield curve and liquidity affect the net asset value of the Fund and may be
correlated with changes in interest rates. These factors can exacerbate swings
in the Fund's share prices during periods of volatile interest rate changes.
For a more detailed discussion of duration, see "Investment Objectives and
Policies -- Duration" in the Statement of Additional Information.
SECURITIES AND TECHNIQUES USED BY THE FUNDS
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The following provides a summary of the securities and techniques used by the
Funds. The Statement of Additional Information contains more detailed
information about these investments and the risks associated with them.
U.S. GOVERNMENT SECURITIES
The Funds may invest in U.S. Government securities. U.S. Government securities
include direct obligations issued by the United States Treasury, such as
Treasury bills, certificates of indebtedness, notes, bonds and component parts
of notes or bonds (including the principal of such obligations or the interest
payments scheduled to be paid on such obligations). U.S. Government agencies and
instrumentalities that issue or guarantee securities include, but are not
limited to, the Federal National Mortgage Association ("FNMA"), Government
National Mortgage Association ("GNMA"), Federal Home Loan Banks, Federal
Financing Bank, and Student Loan Marketing Association.
All Treasury securities are backed by the full faith and credit of the United
States. Obligations of U.S. Government agencies and instrumentalities may or may
not be supported by the full faith and credit of the United States. Some, such
as the Federal Home Loan Banks, are backed by the right of the agency or
instrumentality to borrow from the Treasury. Others, such as securities issued
by FNMA, are supported only by the credit of the instrumentality and not by the
Treasury. If the securities are not backed by the full faith and credit of the
United States, the owner of the securities must look principally to the agency
issuing the obligation for repayment and may not be able to assert a claim
against the United States in the event that the agency or instrumentality does
not meet its commitment.
Among the U.S. Government securities that may be purchased by the Low Duration
VIP Portfolio are certain "mortgage-backed securities" of GNMA, the Federal Home
Loan Mortgage Corporation ("FHLMC") and FNMA. See the discussion of
Mortgage-Related Securities on page 9.
CORPORATE AND OTHER OBLIGATIONS
The LOW DURATION VIP PORTFOLIO may invest in corporate debt securities, variable
and floating rate debt securities and corporate commercial paper in the rating
categories described above. Floating rate securities normally have a rate of
interest which is set as a specific percentage of a designated base rate, such
as the rate on Treasury bonds or bills or the prime rate at a major commercial
bank. The interest rate on floating rate securities changes periodically when
there is a change in the designated base rate. Variable rate securities provide
for a specified periodic adjustment in the interest rate based on prevailing
market rates.
Structured debentures and structured notes are hybrid instruments with
characteristics of both bonds and swap agreements. Like a bond, these securities
make regular coupon payments and generally have fixed principal amounts.
However, the coupon payments are typically tied to a swap agreement which can be
affected by changes in a variety of factors such as exchange rates, the shape of
the yield curve and foreign interest rates. Because of these factors, structured
debentures and structured notes can display price behavior that is more
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volatile than and often not correlated to other fixed-income securities.
The LOW DURATION VIP PORTFOLIO may also invest in inverse floaters and tiered
index bonds. An inverse floater is a type of derivative that bears a floating or
variable interest rate that moves in the opposite direction to the interest rate
on another security or index level. Changes in the interest rate of the other
security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed-rate bond. Tiered index bonds
are also a type of derivative instrument. The interest rate on a tiered index
bond is tied to a specified index or market rate. So long as this index or
market rate is below a predetermined "strike" rate, the interest rate on the
tiered index bond remains fixed. If, however, the specified index or market rate
rises above the "strike" rate, the interest rate on the tiered index bond will
decrease. In general, the interest rates on tiered index bonds and inverse
floaters move in the opposite direction of prevailing interest rates. The market
for inverse floaters and tiered index bonds is relatively new. These corporate
debt obligations may have characteristics similar to those of mortgage-related
securities, but corporate debt obligations, unlike mortgage-related securities,
are not subject to prepayment risk other than through contractual call
provisions which generally impose a penalty for prepayment.
ASSET-BACKED SECURITIES
The LOW DURATION VIP PORTFOLIO may invest in securities whose principal and
interest payouts are backed by, or supported by, any of various types of assets.
These assets most typically include receivables related to the purchase of
automobiles, credit card loans, and home equity loans. These securities
generally take the form of a structured type of security, including
pass-through, pay-through, and stripped interest payout structures.
FOREIGN SECURITIES
Each Fund has the right to invest in foreign securities. Foreign economies may
differ from the U.S. economy; individual foreign companies may differ from
domestic companies in the same industry; and foreign currencies may be stronger
or weaker than the U.S. dollar. The Advisor believes that the ability to invest
abroad will enable the Funds to take advantage of these differences when they
are favorable.
Fixed-income securities that may be purchased by the INTERNATIONAL and LOW
DURATION VIP PORTFOLIOS include debt obligations issued or guaranteed by foreign
governments, their subdivisions, agencies or instrumentalities, or by
supranational entities that have been constituted by the governments of several
countries to promote economic development, such as The World Bank and The Asian
Development Bank. Foreign investment in certain foreign government debt is
restricted or controlled to varying degrees.
The LOW DURATION VIP PORTFOLIO may invest in fixed-income securities of issuers
located in emerging foreign markets. Such markets generally include every
country in the world other than the U.S., Canada, Japan, Australia, Malaysia,
New Zealand, Hong Kong, Singapore, South Korea and most Western European
countries. From time to time, emerging markets have offered the opportunity for
higher returns but involve a higher level of risk. Accordingly, the Advisor
believes that the Fund's limited ability to invest in emerging markets
throughout the world may enable the Fund to obtain a wider range of attractive
investment opportunities. Emerging market securities include securities issued
or guaranteed by governments, their agencies, instrumentalities or central banks
("sovereign debt"); securities of issuers organized and operated to restructure
the investment characteristics of sovereign debt; securities of banks and other
business entities; and securities denominated in or indexed to currencies of
emerging markets. These securities include "Brady Bonds," which afford emerging
market countries a means to restructure their outstanding commercial bank debt.
Foreign governmental issuers of debt or the governmental authorities that
control repayment of the debt may be unable or unwilling to repay principal or
pay interest when due and all or a portion of the interest payments and/or
principal repayment with respect to Brady Bonds may be uncollateralized.
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<PAGE> 10
Emerging market securities are generally considered to be of a credit quality
below investment grade, even though they often are not rated by any nationally
recognized rating agency. The Advisor seeks to reduce the risk associated with
emerging market securities by limiting the amount of such securities held by the
Fund, by the depth of its own credit analysis, and evaluation of political,
economic, currency and other factors that may be pertinent.
There are risks in investing in emerging market and other foreign securities.
See "Investment Risks -- Risks of Investing in Emerging Market and Other Foreign
Securities" on page 11.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements involving U.S. Government
securities with commercial banks or broker-dealers, whereby the seller of a
security agrees to repurchase the security on an agreed-upon date in the future.
While each Fund intends to be fully "collateralized" as to such agreements, and
the collateral will be marked to market daily, if the person obligated to
repurchase from the Fund defaults, there may be possible delays and expenses in
liquidating the securities subject to the repurchase agreement, a decline in
their value and loss of interest.
REVERSE REPURCHASE AGREEMENTS
The LOW DURATION VIP PORTFOLIO may enter into reverse repurchase agreements,
whereby the Fund sells securities concurrently with entering into an agreement
to repurchase those securities at a later date at a fixed price. During the
reverse repurchase agreement period, the Fund continues to receive principal and
interest payments on those securities. Reverse repurchase agreements are
speculative techniques involving leverage and are considered borrowings by the
Fund for purposes of the percentage limitations applicable to borrowings.
BORROWING
As a fundamental policy, the EQUITY INCOME and INTERNATIONAL VIP PORTFOLIOS may
borrow money, but only from banks for temporary or emergency purposes in amounts
not exceeding 10% of the Fund's total assets. The LOW DURATION VIP PORTFOLIO may
borrow for temporary, emergency or investment purposes. This borrowing may be
unsecured. The 1940 Act requires a Fund to maintain continuous asset coverage
(that is, total assets including borrowings, less liabilities exclusive of
borrowings) of 300% of the amount borrowed. Borrowing subjects a Fund to
interest costs which may or may not be recovered by appreciation of the
securities purchased, and can exaggerate the effect on net asset value of any
increase or decrease in the market value of a Fund's portfolio. This is the
speculative factor known as leverage.
LOANS OF PORTFOLIO SECURITIES
For the purpose of achieving income, the LOW DURATION VIP PORTFOLIO may lend its
portfolio securities, provided: (i) the loan is secured continuously by
collateral consisting of short-term, high quality debt securities, including
U.S. Government securities, negotiable certificates of deposit, bankers'
acceptances or letters of credit, maintained on a daily marked-to-market basis
in an amount at least equal to the current market value of the securities
loaned; (ii) the Fund may at any time call the loan and obtain the return of the
securities loaned; (iii) the Fund will receive any interest or dividends paid on
the loaned securities; and (iv) the aggregate market value of securities loaned
will not at any time exceed one-third of the total assets of the Fund.
WHEN-ISSUED SECURITIES
The INTERNATIONAL VIP PORTFOLIO and the LOW DURATION VIP PORTFOLIO may purchase
securities on a when-issued or delayed-delivery basis, generally in connection
with an underwriting or other offering. When-issued and delayed-delivery
transactions occur when securities are bought with payment for and delivery of
the securities scheduled to take place at a future time, beyond normal
settlement dates, generally from 15 to 45 days after the transaction. The price
that the Fund is obligated to pay on the settlement date may be different from
the market value on that date. While securities may be sold prior to the
settlement date, the Funds intend to purchase such securities with the purpose
of
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<PAGE> 11
actually acquiring them, unless a sale would be desirable for investment
reasons. At the time the Fund makes a commitment to purchase a security on a
when-issued basis, it will record the transaction and reflect the value of the
security each day in determining the Fund's net asset value. The Fund will also
establish a segregated account with its custodian in which it will hold cash,
U.S. Government securities, equity securities or other liquid, unencumbered
assets, marked-to-market daily, equal in value to its obligations for
when-issued securities.
SHORT SALES
A Fund may make short sales of securities (i.e., sales of securities the Fund
does not own) or maintain a short position only if (i) at all times when the
short position is open, the Fund owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount to, the
securities sold short (a short sale "against-the-box") and (ii) not more than
25% of the Fund's net assets (taken at current value) is held as collateral for
such sales at any one time.
REAL ESTATE INVESTMENT TRUSTS
The Funds may invest in securities of real estate investment trusts or REITs.
Unlike corporations, REITs do not have to pay income taxes if they meet certain
Internal Revenue Code requirements. To qualify, a REIT must distribute at least
95% of its taxable income to its shareholders and receive at least 75% of that
income from rents, mortgages and sales of property. REITs offer investors
greater liquidity and diversification than direct ownership of a handful of
properties, as well as greater income potential than an investment in common
stocks. Like any investment in real estate, though, a REIT's performance depends
on several factors, such as its ability to find tenants for its properties, to
renew leases and to finance property purchases and renovations.
MORTGAGE-RELATED SECURITIES
The LOW DURATION VIP PORTFOLIO may invest in mortgage-related securities,
including mortgage pass-through securities and collateralized mortgage
obligations. Mortgage pass-through securities are securities representing
interests in pools of mortgages in which payments of both interest and principal
on the securities are generally made monthly, in effect "passing through"
monthly payments made by the individual borrowers on the residential mortgage
loans which underlie the securities (net of fees paid to the issuer or guarantor
of the securities). For a discussion of certain risks associated with investment
in mortgage-related securities, including their volatility, see "Investment
Risks -- Risks of Investing in Fixed-Income Securities" on page 11.
Payment of principal and interest on some mortgage-related securities (but not
the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
GNMA) or by agencies or instrumentalities of the U.S. Government (in the case of
securities guaranteed by FNMA or the FHLMC, which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities created by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance, and letters of credit, which
may be issued by governmental entities, private insurers or the mortgage
poolers.
Collateralized mortgage obligations ("CMOs"), including CMOs that have elected
to be treated as Real Estate Mortgage Investment Conduits ("REMICs"), are hybrid
instruments with characteristics of both bonds and mortgage pass-through
securities. Similar to a bond, interest and prepaid principal on a CMO are paid,
in most cases, monthly. CMOs may be collateralized by whole mortgage loans but
are more typically collateralized by portfolios of securities guaranteed by
GNMA, FHLMC or FNMA or of mortgage pass-through securities created by
non-governmental issuers. CMOs are structured into multiple classes, with each
class bearing a different stated maturity. Monthly payments of princi-
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pal, including prepayments, are first returned to investors holding the shortest
maturity class. Investors holding the longer maturity classes receive principal
only after the first class has been retired.
Other mortgage-related securities include those that directly or indirectly
represent a participation in or are secured by and payable from mortgage loans
on real property, such as CMO residuals, stripped mortgage-backed securities,
variable rate securities (including inverse floaters), or tiered index bonds and
may be structured in classes with rights to receive varying proportions of
principal and interest. Stripped mortgage-backed securities are derivative,
multi-class mortgage securities. The LOW DURATION VIP PORTFOLIO may invest in
stripped mortgage-backed securities issued by the U.S. Government, its agencies
and instrumentalities. Stripped mortgage-backed securities are usually
structured with two classes that receive different proportions of the interest
and principal distributions on a pool of mortgage assets. In certain cases, one
class will receive all of the interest (the interest-only or "IO" class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yields to maturity on IOs and POs are sensitive to the rate of
principal repayments (including prepayments) on the related underlying mortgage
assets, and principal payments may have a material effect on yield to maturity.
If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fund may not fully recoup its initial investment
in IOs. Conversely, if the underlying mortgage assets experience less than
expected prepayments of principal, the yield on POs could be materially
adversely affected. Such securities will be considered liquid only if so
determined in accordance with guidelines established by the Trustees. The LOW
DURATION VIP PORTFOLIO also may invest in stripped mortgage-backed securities
that are privately issued. These securities will be considered illiquid for
purposes of the Fund's limit on illiquid securities.
CMOs and other mortgage-related securities that are issued or guaranteed by the
U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities for purposes of applying the Fund's
diversification tests. Generally, the entity that has the ultimate
responsibility for the payment of interest and principal on a security is deemed
to be the issuer of an obligation.
OTHER DERIVATIVE INSTRUMENTS
In addition to the asset-backed securities and mortgage-related securities
(including tiered index bonds and inverse floaters) which may be purchased only
by the LOW DURATION VIP PORTFOLIO, all Funds may utilize certain other financial
instruments whose performance is derived from the performance of an underlying
asset ("derivatives"). The Funds may purchase and write call and put options on
securities, securities indexes and on foreign currencies, and enter into futures
contracts and use options on futures contracts. The Funds also may enter into
swap agreements with other institutional investors with respect to foreign
currencies, interest rates, and securities indexes. The Funds may use these
techniques to hedge against changes in interest rates, foreign currency exchange
rates or securities prices or as part of their overall investment strategies.
Each Fund will maintain segregated accounts consisting of cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily (or, as permitted by applicable regulation, enter into
certain offsetting positions), to cover its obligations under options, futures
contracts and swap agreements to avoid leveraging of the Fund. See "Investment
Risks -- Risks of Using Certain Derivatives" on page 11.
The Funds may buy or sell interest rate futures contracts, options on interest
rate futures contracts and options on debt securities for the purpose of hedging
against changes in the value of securities which a Fund owns or anticipates
purchasing due to anticipated changes in interest rates. The Funds also may
engage in currency exchange transactions by means of buying or selling foreign
currency on a spot basis, entering into forward foreign currency exchange
contracts, and buying and selling foreign currency options, futures and options
on futures. Foreign currency exchange transactions may be entered into for the
purpose of hedging against foreign currency exchange risk arising from the
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<PAGE> 13
Funds' investment or anticipated investment in securities denominated in foreign
currencies. A Fund will not enter into futures contracts or options thereon for
non-hedging purposes if, immediately thereafter, the aggregate initial margin
deposits on the Fund's futures positions and premiums paid for options thereon
would exceed 5% of the liquidation value of the Fund's total assets. There is no
other percentage limitation on a Fund's use of options, futures and options
thereon, except for the limitation on foreign currency option contracts
described below.
Also, the Funds may enter into interest rate, index and currency exchange rate
swap agreements for the purpose of attempting to obtain a particular desired
return at a lower cost to a Fund than if the Fund had invested directly in an
instrument that yielded that desired return. In a standard swap agreement, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on a particular predetermined investment or investments. Swap
agreements are subject to the Funds' overall limit that no more than 15% of net
assets may be invested in illiquid securities, and a Fund will not enter into a
swap agreement with any single party if the net amount owed or to be received
under existing contracts with that party would exceed 5% of the Fund's assets.
The Funds may purchase foreign currency options or enter into forward foreign
currency exchange contracts for the purpose of hedging against the effect that
currency fluctuations will have on the value of Fund liabilities, such as known
or expected redemptions or the payment of any declared dividends. During the
coming year, no Fund will enter into foreign currency option contracts if the
premiums on such options exceed 5% of the Fund's total assets. See "Investment
Objectives and Policies -- Derivative Instruments" in the Statement of
Additional Information.
STATE INSURANCE REGULATION
Each Fund provides an investment vehicle for variable annuity contracts and
variable life insurance policies to be offered by the separate accounts of
Participating Insurance Companies ("Participating Insurance Companies"). Certain
states have regulations concerning concentration of investments and purchase and
sale of futures contracts, among other techniques. If these regulations are
applied to a Fund, the Fund may be limited in its ability to engage in such
techniques and to manage its investments with the flexibility provided herein.
It is each Fund's intention to operate in material compliance with current
insurance laws and regulations, as applied in each jurisdiction in which
contracts or policies of separate accounts of Participating Insurance Companies
are offered.
INVESTMENT RISKS
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The investment practices described above involve certain risks. The net asset
value of any of the Funds may increase or decrease for many reasons. These
include changes in the market prices of portfolio securities. This means an
investor's price may be worth more or less at redemption than at the time of
purchase. The following provides a summary of the more significant risks
associated with investing in the Funds. The Statement of Additional Information
contains more detailed information about these investments and the risks that
are associated with them.
RISKS OF INVESTING IN EMERGING MARKET AND OTHER FOREIGN SECURITIES
Investments in emerging market and other foreign securities involve certain risk
considerations not typically associated with investing in securities of U.S.
issuers, including: (a) currency devaluations and other currency exchange rate
fluctuations; (b) political uncertainty and instability; (c) more substantial
government involvement in the economy; (d) higher rates of inflation; (e) less
government supervision and regulation
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<PAGE> 14
of the securities markets and participants in those markets; (f) controls on
foreign investment and limitations on repatriation of invested capital and on
the Low Duration VIP Portfolio's ability to exchange local currencies for U.S.
dollars; (g) greater price volatility, substantially less liquidity and
significantly smaller capitalization of securities markets; (h) absence of
uniform accounting and auditing standards; (i) generally higher commission
expenses; (j) delay in settlement of securities transactions; and (k) greater
difficulty in enforcing shareholder rights and remedies.
RISKS OF INVESTING IN FIXED-INCOME SECURITIES
The Funds which invest in fixed-income securities are subject primarily to
interest rate and credit risk. Interest rate risk is the potential for a decline
in bond prices due to rising interest rates. In general, bond prices vary
inversely with interest rates. The change in bond price depends on several
factors, including the bond's maturity date. In general, bonds with longer
maturities are more sensitive to changes in interest rates than bonds with
shorter maturities. Credit risk is the possibility that a bond issuer will fail
to make timely payments of interest or principal to a Fund.
The LOW DURATION VIP PORTFOLIO may invest in mortgage- and asset-backed
securities. The yield characteristics of mortgage-backed and asset-backed
securities differ from traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a
result, if the Fund purchases such a security at a premium, a prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity. Alternatively, if the Fund purchases these securities at a
discount, faster than expected prepayments will increase yield to maturity,
while slower than expected prepayments will reduce yield to maturity. Although
the extent of prepayments on a pool of mortgage loans depends on various
economic and other factors, as a general rule, prepayments on fixed-rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Asset-backed securities,
although less likely to experience the same prepayment rates as mortgage-backed
securities, may respond to certain of the same factors influencing prepayments,
while at other times different factors will predominate. Mortgage-backed
securities and asset-backed securities may decrease in value as a result of
increases in interest rates and may benefit less than other fixed-income
securities from declining interest rates because of the risk of prepayment.
The LOW DURATION VIP PORTFOLIO may invest in stripped mortgage- or asset-backed
securities, which receive differing proportions of the interest and principal
payments from the underlying assets. The market value of such securities
generally is more sensitive to changes in prepayment and interest rates than is
the case with traditional mortgage- and asset-backed securities, and in some
cases the market value may be extremely volatile. With respect to certain
stripped securities, such as interest only ("IO") and principal only ("PO")
classes, a rate of prepayment that is faster or slower than anticipated may
result in a Fund failing to recover all or a portion of its investment, even
though the securities are rated investment grade. Certain of the stripped
mortgage- and asset-backed securities held by the Fund are considered to be
illiquid under guidelines established by the Trustees.
The LOW DURATION VIP PORTFOLIO and, to a limited extent, the EQUITY INCOME VIP
PORTFOLIO may invest a portion of their assets in non-investment grade debt
securities, commonly referred to as "junk bonds." Low-rated and comparable
unrated securities, while generally offering higher yields than investment grade
securities with similar maturities, involve greater risks, including the
possibility of default or bankruptcy. They are regarded as speculative with
respect to the issuer's capacity to pay interest and to repay principal. The
market values of certain of these securities tend to be more sensitive to
individual corporate development and
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<PAGE> 15
changes in economic conditions than higher quality bonds. In addition, low-rated
and comparable unrated securities tend to be less marketable than higher-quality
debt securities because the market for them is not as broad or active. The lack
of a liquid secondary market may have an adverse effect on market price and a
Fund's ability to sell particular securities.
RISKS OF USING CERTAIN DERIVATIVES
Participation in the options or futures markets involves investment risks and
transaction costs to which a Fund would not be subject absent the use of these
strategies. If the Advisor's predictions of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse consequences to
a Fund may leave the Fund in a worse position than if such strategies were not
used. Risks inherent in the use of options, futures contracts and options on
futures contracts include: (i) dependence on the Advisor's ability to predict
correctly movements in the direction of interest rates and securities prices;
(ii) imperfect correlation between the price of options and futures contracts
and options thereon and movements in the prices of the securities being hedged;
(iii) the fact that skills needed to use these strategies are different from
those needed to select portfolio securities; (iv) the absence of a liquid
secondary market for any particular instrument at any time; (v) the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences; and (vi) the possible inability of a Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to do so,
or the possible need for the Fund to sell the security at a disadvantageous
time, due to the requirement that the Fund maintain "cover" or segregate
securities in connection with hedging transactions. The loss from investing in
futures transactions is potentially unlimited. There also is no assurance that a
liquid secondary market will exist for futures contracts and options thereon in
which a Fund may invest. See "Investment Objectives and Policies -- Derivative
Instruments" in the Statement of Additional Information.
PRINCIPAL INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
Each Fund is subject to certain investment restrictions which are fundamental
policies. Fundamental policies are those that cannot be changed without the
approval of a majority (as defined in the 1940 Act) of that Fund's outstanding
voting securities. Each Fund's investment objective is a fundamental policy.
Among its restrictions, a Fund may not (i) with respect to 75% of its total
assets, invest more than 5% of its total assets (determined at the time of
investment) in securities of any one issuer (other than U.S. Government
securities), (ii) with respect to 75% of its total assets, purchase more than
10% of the outstanding voting securities of any one issuer or (iii) invest more
than 25% of its total assets (determined at the time of investment) in one or
more issuers having their principal business activities in a single industry.
Additional information about each Fund's investment restrictions is contained in
the Statement of Additional Information. It is the position of the Securities
and Exchange Commission that open-end investment companies such as the Funds
should not hold more than 15% of the value of their net assets in illiquid
securities. As a matter of operating policy (though not a fundamental policy),
the Funds limit such investments to no more than 15% of the value of their net
assets. The investments in this 15% limit include: (i) those which are
restricted, i.e., those which cannot freely be sold for legal or contractual
reasons; (ii) fixed time deposits subject to withdrawal penalties (other than
overnight deposits); and (iii) repurchase agreements having a maturity of more
than seven days. The 15% limitation does not include obligations which are
payable at principal amount plus accrued interest within seven days after
purchase.
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ORGANIZATION AND MANAGEMENT
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ORGANIZATION AND VOTING RIGHTS
Each Fund is a newly established diversified series of Hotchkis and Wiley
Variable Trust (the "Trust"), an open-end, management investment company
organized as a Massachusetts business trust on February 4, 1997. The Trust's
Board of Trustees decides on matters of general policy and reviews the
activities of the Advisor, and the Trust's officers conduct and supervise the
daily business operations of the Trust. Each Fund is a series of shares, each
having separate assets and liabilities, of the Trust. The Board of Trustees may,
at its own discretion, create additional series of shares and classes within
series.
Generally, the Funds will not hold an annual meeting of shareholders unless
required by the 1940 Act. Shareholders have one vote per share owned. Matters
submitted to shareholders must be approved by a majority of the outstanding
securities of each Fund, unless it is clear that the interests of each Fund in
the matter are identical or the matter does not affect a Fund. At the request of
the holders of at least 10% of the shares, the Trust will hold a meeting to vote
on the removal of a Trustee, which can occur by a vote of a majority of the
outstanding shares. Ten shareholders holding the lesser of $25,000 worth or one
percent of a Fund's shares may advise the Trustees in writing that they wish to
communicate with other shareholders for the purpose of requesting a meeting to
remove a Trustee. The Trustees will then, if requested by the applicants, mail
at the applicants' expense the applicants' communications to all other
shareholders.
The rights accompanying Fund shares are legally vested in the separate accounts.
However, in accordance with current law and interpretations thereof,
Participating Insurance Companies will vote shares held in the separate accounts
in a manner consistent with timely voting instructions received from the holders
of variable annuity contracts and variable life insurance policies. Each
Participating Insurance Company will vote Fund shares held in separate accounts
for which no timely instructions are received from the holders of variable
annuity contracts and variable life insurance policies, as well as shares it
owns, in the same proportion as those shares for which voting instructions are
received. For a further discussion, please refer to the insurance company's
separate account prospectus.
THE INVESTMENT ADVISOR
HOTCHKIS AND WILEY, a division of the Merrill Lynch Capital Management Group of
Merrill Lynch Asset Management, L.P., located at 800 West 6th Street, Los
Angeles, California 90017 and a separate business unit of Merrill Lynch & Co.,
Inc., a financial services holding company incorporated in Delaware, acts as
investment advisor to the Funds and generally administers the affairs of the
Trust. Subject to the direction and control of the Board of Trustees, the
Advisor supervises and arranges the purchase and sale of securities held in the
portfolios of the Funds.
For the services of the Advisor to the EQUITY INCOME VIP PORTFOLIO and the
INTERNATIONAL VIP PORTFOLIO, the Trust, under separate Investment Advisory
Agreements between the Trust and the Advisor, pays the Advisor a fee, computed
daily and payable monthly, at an annual rate of 0.75% of each Fund's average
daily net assets. This fee is higher than that paid by most mutual funds, but
does not reflect the reimbursement of certain of the Funds' expenses as
described below.
Under the Investment Advisory Agreement relating to the LOW DURATION VIP
PORTFOLIO, the Trust pays the Advisor a fee, computed daily and payable monthly,
at an annual rate of 0.46% of the Fund's average daily net assets.
In addition to the fee payable to the Advisor, each Fund is responsible for its
operating expenses including: (i) interest and taxes; (ii) brokerage
commissions; (iii) insurance premiums; (iv) compensation and expenses of the
Trust's Trustees other than those affiliated with the Advisor; (v) legal and
audit expenses;
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(vi) fees and expenses of the Fund's custodian and any subcustodian, shareholder
servicing or transfer agent and accounting services agent; (vii) expenses
incident to the issuance of its shares, including issuance on the payment of, or
reinvestment of, dividends; (viii) fees and expenses incident to the
registration under federal or state securities laws of the Trust or its shares;
(ix) expenses of preparing, printing and mailing reports and notices and proxy
material to shareholders of the Trust; (x) all other expenses incident to
holding meetings of the Trust's shareholders; (xi) dues or assessments of or
contributions to the Investment Company Institute or any successor; and (xii)
such non-recurring expenses as may arise, including litigation affecting the
Trust and the legal obligations which the Trust may have to indemnify its
officers and Trustees with respect thereto.
Although not required to do so, the Advisor has agreed to reimburse each Fund to
the extent necessary so that the expenses of the EQUITY INCOME VIP PORTFOLIO and
INTERNATIONAL VIP PORTFOLIO will not exceed 1% of the Fund's average net assets.
The Advisor has agreed to limit the expenses of the LOW DURATION VIP PORTFOLIO
to 0.58% of the Fund's average net assets. The Advisor will give shareholders at
least 30 days' notice of any decision to change this reimbursement policy.
THE ADMINISTRATOR
Firstar Trust Company, 615 East Michigan Street, Milwaukee, Wisconsin 53202,
serves as administrator to the Trust pursuant to a Fund Administration Servicing
Agreement.
PORTFOLIO MANAGERS
EQUITY INCOME VIP PORTFOLIO
The current portfolio manager of the EQUITY INCOME VIP PORTFOLIO is Gail Bardin.
Ms. Bardin has responsibility for the day-to-day management of the Fund's
portfolio. Ms. Bardin is a managing director of the Advisor. She has been a
portfolio manager of the Advisor since 1988 and has served as portfolio manager
of the Fund since its inception.
INTERNATIONAL VIP PORTFOLIO
The current portfolio managers of the INTERNATIONAL VIP PORTFOLIO are Sarah
Ketterer, Harry Hartford and David Chambers, portfolio managers of the Advisor.
Ms. Ketterer, Mr. Hartford and Mr. Chambers have responsibility for the
day-to-day management of the Fund's portfolio. Prior to joining the Advisor, Ms.
Ketterer was with Bankers Trust Company as an Associate from 1987 to 1990 and a
Financial Analyst with Dean Witter Reynolds from 1983 to 1985. Prior to joining
the Advisor, Mr. Hartford was with the Investment Bank of Ireland as a Senior
Manager, International and Global Equities, from 1985 to 1994. Prior to joining
the Advisor, Mr. Chambers was with Baring Asset Management, Inc. as Senior Vice
President, Global Equities from 1992 to 1995 and Baring Brothers, London,
England as Assistant Director, Corporate Finance from 1990 to 1991. Ms. Ketterer
and Messrs. Hartford and Chambers have served as portfolio managers to the Fund
since its inception.
LOW DURATION VIP PORTFOLIO
The current portfolio managers of the LOW DURATION VIP PORTFOLIO are Roger
DeBard and Michael Sanchez, portfolio managers of the Advisor. Mr. DeBard and
Mr. Sanchez have responsibility for the day-to-day management of the Fund's
portfolio. Mr. DeBard is a managing director of the Advisor. He has been a
portfolio manager of the Advisor since 1985. Mr. Sanchez joined the Advisor in
August 1996 as a portfolio manager. Prior to joining the Advisor, Mr. Sanchez
was with Provident Investment Counsel as a Senior Vice President and portfolio
manager from 1991 to 1995 and with ARCO Investment Management Company as
Director of Fixed Income Investments from 1988 to 1991. Messrs. DeBard and
Sanchez have served as portfolio managers for the Fund since its inception.
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PURCHASE AND REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
Investors may not purchase or redeem shares of the Funds directly, but only
through variable annuity contracts and variable life insurance policies offered
through the separate accounts of Participating Insurance Companies. Investors
should refer to the prospectus of the Participating Insurance Company's separate
account for information on how to purchase a variable annuity contract or
variable life insurance policy, how to select specific Funds as investment
options for the applicable contract or policy and how to redeem monies from the
applicable contract or policy.
The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of the Funds based on, among other things, the amount
of premium payments to be invested and the amount of surrender and transfer
requests (as defined in the prospectus describing the variable annuity contracts
and variable life insurance policies issued by the Participating Insurance
Companies) to be effected on that day pursuant to variable annuity contracts and
variable life insurance policies. Orders received by the Funds are effected on
business days only. Orders for the purchase of shares of a Fund are effected at
the net asset value per share next calculated after an order is received in
proper form by the Fund or its designee so long as payment for the shares is
received by the end of the next business day. Redemptions are effected at the
net asset value per share next calculated after receipt in proper form of a
redemption request by a Fund or its designee. For purposes of the purchase and
redemption of shares of the Funds, the separate account of a Participating
Insurance Company shall be a designee of the Fund for receipt of requests for
purchase and redemption, and receipt by such designee shall constitute receipt
by the Fund, provided that the Fund receives notice of such requests in
accordance with applicable requirements on the next following business day.
Separate accounts must transmit purchase and redemption orders promptly. Payment
for redemptions will be made by the Funds within seven days after the request is
received. The Funds may suspend the right of redemption under certain
extraordinary circumstances in accordance with the rules of the Securities and
Exchange Commission.
The Funds do not assess any sales charges or redemption fees. Sales charges,
mortality and expense risk fees and other charges may be assessed by
Participating Insurance Companies under the variable annuity contracts or
variable life insurance policies. The Participating Insurance Companies are
required to describe these fees in the prospectuses for the contracts or
policies.
Shares of the Funds may be sold to and held by separate accounts that fund
variable annuity and variable life insurance contracts issued by Participating
Insurance Companies. The Funds currently do not foresee any disadvantages to the
holders of variable annuity contracts and variable life insurance policies of
Participating Insurance Companies arising from the fact that interests of the
holders of variable annuity contracts and variable life insurance policies may
differ due to differences of tax treatment or other considerations or due to
conflicts between the Participating Insurance Companies. Nevertheless, the
Trustees will monitor events to seek to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response to such conflicts. Should a material irreconcilable
conflict arise between the holders of variable annuity contracts and variable
life insurance policies of Participating Insurance Companies, the Participating
Insurance Companies may be required to withdraw the assets allocable to some or
all of the separate accounts from the Funds. Any such withdrawal could disrupt
orderly portfolio management to the potential detriment of such holders. The
variable annuity contracts and variable life insurance policies are described in
the separate prospectuses issued by the Participating Insurance Companies. The
Funds assume no responsibility for such prospectuses.
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DIVIDENDS AND TAX STATUS
- --------------------------------------------------------------------------------
The discussion of the federal income taxation of the Funds and their
distributions is for general information only. Purchasers of variable annuity
contracts or variable life insurance policies issued by Participating Insurance
Companies should refer to the prospectuses of those contracts or policies for
additional tax information.
The EQUITY INCOME VIP PORTFOLIO expects to pay income dividends quarterly; the
INTERNATIONAL VIP PORTFOLIO expects to pay income dividends semi-annually; and
the LOW DURATION VIP PORTFOLIO expects to declare income dividends daily and pay
them monthly to shareholders.
Distributions from net realized short-term gains, if any, and distributions from
any net capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses) realized through October 31st of each year and not
previously paid out will be paid out after that date; each Fund may also pay
supplemental distributions after the end of the Trust's fiscal year. Dividends
and distributions are paid in full and fractional shares of each Fund based on
the net asset value per share at the close of business on the record date,
unless the shareholder requests, in writing to the Trust, payment in cash. The
Trust will notify each shareholder after the close of its fiscal year of both
the dollar amount and the tax status of that year's distributions.
Each Fund will be treated as a separate entity for federal tax purposes. The
Funds intend to elect to qualify and remain qualified as regulated investment
companies under Subchapter M of the Internal Revenue Code (the "Code"). If so
qualified, each Fund will not be subject to federal income taxes on its net
investment income and capital gains, if any, realized during any fiscal year
which it distributes to its shareholders provided that at least 90% of its net
investment income earned in the fiscal year is distributed.
A segregated asset account upon which a variable annuity contract or variable
life insurance policy is based must meet certain diversification tests set forth
in U.S. Treasury regulations. If, as is intended, the Fund meets these tests and
complies with certain other conditions, a segregated asset account investing
solely in shares of a Fund will also be deemed to meet these diversification
requirements. However, a failure of the Fund to qualify as a regulated
investment company or to meet such conditions and to comply with such tests
could cause the owners of variable annuity contracts and variable life insurance
policies based on such accounts to recognize ordinary income each year in the
amount of any net appreciation of such contract or policy during the year
(including the annual costs of life insurance, if any, provided under such
policy).
Provided that the Fund and a segregated asset account investing in the Fund
satisfy the above requirements, any distributions from the Fund will be exempt
from current federal income taxation to the extent that such distributions
accumulate in an individual's variable annuity contract or an individual's
variable life insurance contract.
All dividends from net investment income together with distributions of
short-term capital gains (collectively, "income dividends"), will be taxable as
ordinary income to the shareholders even though paid in additional shares. Any
net capital gains ("capital gains distributions") distributed to shareholders
are taxable as long-term capital gains to the shareholders regardless of the
length of time a shareholder has owned his shares.
The Code provides for a dividends-received deduction (the "deduction") by
corporations. Special provisions are contained in the Code as to the eligibility
of dividends for the deduction. The basic test under the Code for determining
the extent to which the dividends paid by each Fund are eligible for the
deduction is the extent to which the Fund's income is derived from qualifying
dividends received from domestic corporations. See "Dividends and Tax Status" in
the Statement of Additional Information for additional information about the
deduction.
17
<PAGE> 20
Dividends and interest received by a Fund may be subject to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate these foreign taxes, and foreign
countries generally do not impose taxes on capital gains on investments by
foreign investors. If more than 50% of the value of the INTERNATIONAL VIP
PORTFOLIO'S total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund may elect to enable shareholders of the Fund
to receive the benefit of the foreign tax credit with respect to any foreign
income taxes paid by the Fund.
Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. Any such loss, however, on shares
that are held for six months or less will be treated as long-term capital loss
to the extent of any capital gain distributions received by the shareholder.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value per share of each Fund is determined on each day that the
New York Stock Exchange is open for trading, as of the close of regular trading
on the New York Stock Exchange (currently 4:00 p.m., Eastern time). The net
asset value per share is the value of the Fund's assets, less its liabilities,
divided by the number of shares of the Fund outstanding. The value of a Fund's
portfolio securities is determined on the basis of the market value of such
securities or, if market quotations are not readily available, at fair value
under guidelines established by the Trustees. Short-term investments maturing in
less than 60 days are valued at amortized cost which the Board has determined to
equal fair value. See "Net Asset Value" in the Statement of Additional
Information for further information.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
Each Fund's performance may be quoted in advertising, shareholder reports and
other communications in terms of yield or total rate of return. All performance
information is historical and is not intended to indicate future performance.
Yield and total rates of return fluctuate in response to market conditions and
other factors, and the value of an investor's shares when redeemed may be more
or less than their original cost.
Each Fund may provide its period and average annualized "total rates of return."
The "total rate of return" refers to the change in the value of an investment in
the Fund over a stated period which was made at the maximum public offering
price and reflects any change in net asset value per share and is compounded to
include the value of any shares purchased with any dividends or capital gains
declared during such period. Period total rates of return may be "annualized."
An "annualized" total rate of return assumes that the period total rate of
return is generated over a one-year period.
Each Fund may provide annualized "yield" quotations. The "yield" of a Fund
refers to the income generated by an investment in the Fund over a 30-day or
one-month period (which period is stated in any such advertisement or
communication). This income is then annualized; that is, the amount of income
generated by the investment over that period is assumed to be generated each
month over a one-year period and is shown as a percentage of the maximum public
offering price on the last day of that period. A "yield" quotation, unlike a
18
<PAGE> 21
total rate of return quotation, does not reflect changes in net asset value.
Yields and total returns quoted for the Funds include the effect of deducting
the Funds' expenses, but may not include charges and expenses attributable to a
particular variable annuity contract or variable life insurance policy. Since
shares of the Funds can be purchased only through a variable annuity contract or
variable life insurance policy, a prospective purchaser should carefully review
the prospectus of the variable annuity contract or variable life insurance
policy he or she has chosen for information on relevant charges and expenses.
Including these charges in the quotations of the Funds' yield and total return
would have the effect of decreasing performance. Performance information for the
Funds must always be accompanied by, and be reviewed with, performance
information for the insurance product which invests in the Funds. See the
Statement of Additional Information for more information concerning the
calculation of yield and total rate of return quotations for the Funds.
All data included in performance advertisements will reflect past performance
and is not indicative of future results. The investment return and principal
value of an investment in a Fund will fluctuate, and an investor's proceeds upon
redeeming Fund shares may be more or less than the original cost of the shares.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Declaration of Trust contains an express disclaimer of shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or its Trustees. The Declaration of Trust provides for indemnification
and reimbursement of expenses out of the Trust's property for any shareholder
held personally liable for its obligations. While Massachusetts law permits a
shareholder of a trust such as this to be held personally liable as a partner
under certain circumstances, the risk of a shareholder incurring financial loss
on account of shareholder liability is highly unlikely and is limited to the
relatively remote circumstances in which the Trust would be unable to meet its
obligations.
Common expenses incurred by the Trust are allocated among the Funds based upon
(i) relative net assets; (ii) as incurred on a specific identification basis; or
(iii) evenly among the Funds, depending on the nature of the expenditure.
Except for (i) changes which do not adversely affect the rights of Trust
shareholders, (ii) a change in the name of the Trust, or a series or class
thereof, (iii) authorization of a new series or class, (iv) changes to supply
any omission or correct any ambiguous or defective provision or (v) changes
required by any federal or state or similar regulatory authority or required by
the Code to eliminate or reduce any federal, state or local taxes which may be
payable by a Fund or its shareholders, no amendment may be made to the
Declaration of Trust without the affirmative vote of the holders of at least 67%
of the Trust's outstanding shares at a meeting at which more than 50% of its
outstanding shares are present in person or represented by proxy. The holders of
shares have no preemptive or conversion rights. Shares when issued are fully
paid and non-assessable, except as set forth above.
The Trust's custodian is Firstar Trust Company, 615 East Michigan Street,
Milwaukee, Wisconsin 53202 and its subcustodian for foreign securities is The
Chase Manhattan Bank, N.A., Four Chase MetroTech Center, Brooklyn, New York
11245.
19
<PAGE> 22
APPENDIX -- DESCRIPTION OF RATINGS
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE
- ----------------------------------------------------------
BOND RATINGS:
"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-edged." 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.
Moody's applies numerical modifiers "1", "2" and "3" in each generic rating
classification from Aa through B. The modifier "1" indicates that the obligation
ranks in the higher end of its generic rating category; the modifier "2"
indicates a mid-range ranking; and the modifier "3" indicates that the company
ranks in the lower end of that generic rating category.
"A" -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
"Baa" -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack 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.
- ----------------------------------------------------------
SHORT-TERM DEBT RATINGS:
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
"PRIME-1" -- Issuers rated "Prime-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
"PRIME-2" -- Issuers rated "Prime-2" (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
STANDARD & POOR'S
RATINGS GROUP
- ----------------------------------------------------------
BOND RATINGS:
"AAA" -- Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
"AA" -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
20
<PAGE> 23
"A" -- Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
"BBB" -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
Debt rated BB and B is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.
- ----------------------------------------------------------
COMMERCIAL PAPER RATINGS:
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
"A-1" -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.
"A-2" -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH INVESTORS SERVICE, INC.
- ----------------------------------------------------------
BOND RATINGS:
The following summarizes the ratings used by Fitch for corporate bonds:
"AAA" -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
"A" -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
"BBB" -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds and, therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
"BB" -- Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified, which could
assist the obligor in satisfying its debt service requirements.
"B" -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
PLUS (+) MINUS (-) -- Plus and minus signs are used with a rating symbol to
indicate the relative position of
21
<PAGE> 24
a credit within the rating category. Plus and minus signs, however, are not used
in the "AAA" category.
- ----------------------------------------------------------
SHORT-TERM DEBT RATINGS:
"F-1+" -- Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
"F-1" -- Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."
"F-2" -- Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned "F-1+" or "F-1" ratings.
DUFF & PHELPS
CREDIT RATING CO.
- ----------------------------------------------------------
BOND RATINGS:
The following summarizes the ratings used by Duff & Phelps for long-term debt:
"AAA" -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
"AA+," "AA," "AA-" -- High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of economic
conditions.
"A+," "A," "A-" -- Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
"BBB+," "BBB," "BBB-" -- Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
"BB+," "BB," "BB-" -- Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
"B+," "B," "B-" -- Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
- ----------------------------------------------------------
SHORT-TERM DEBT RATINGS:
"D-1+" -- Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
"D-1" -- Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
"D-1-" -- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
"D-2" -- Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
22
<PAGE> 25
- -------------------------------------------------------------------------------
PROSPECTUS
_________________, 1997
HOTCHKIS
AND
WILEY
VARIABLE TRUST
800 WEST SIXTH STREET
FIFTH FLOOR
LOS ANGELES, CALIFORNIA 90017
800-236-4479
INVESTMENT ADVISOR
Hotchkis and Wiley
800 West Sixth Street
Fifth Floor
Los Angeles, California 90017
LEGAL COUNSEL
Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
ADMINISTRATOR
CUSTODIAN AND TRANSFER AGENT
Firstar Trust Company
615 East Michigan Street
Milwaukee, Wisconsin 53202
[HOTCHKIS AND WILEY VARIABLE TRUST LOGO]
HOTCHKIS
AND
WILEY
VARIABLE TRUST
Equity Income VIP Portfolio
--------------------------------
International VIP Portfolio
--------------------------------
Low Duration VIP Portfolio
--------------------------------
Hotchkis and Wiley: Investment Advisor
- -------------------------------------------------------------------------------
<PAGE> 26
HOTCHKIS AND WILEY VARIABLE TRUST
Statement of Additional Information
Dated __________
The Hotchkis and Wiley Variable Trust (the "Trust") is an investment
company which offers shares of three investment funds -- Equity Income VIP
Portfolio, International VIP Portfolio and Low Duration VIP Portfolio (each, a
"Fund" and collectively, the "Funds"). The shares of the Funds are offered only
to separate accounts of participating life insurance companies ("Participating
Insurance Companies") for the purpose of funding variable annuity contracts and
variable life insurance contracts.
This Statement of Additional Information is not a prospectus, and it
should be read in conjunction with the prospectus dated __________ of the Funds.
Copies of the prospectus may be obtained at no charge from the Trust, 800 West
6th Street, Los Angeles, CA 90017. Hotchkis and Wiley (the "Advisor") is the
investment advisor to the Funds.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
CROSS REFERENCE TO PAGE IN
PAGE THE PROSPECTUS:
<S> <C> <C>
Investment Objectives and Policies B-2 3
Investment Restrictions B-2 13
Repurchase Agreements B-3 8
U.S. Government Securities B-3 6
Corporate Debt Securities B-4 6
Convertible Securities B-4 3
Mortgage-Related Securities B-4 9
Asset-Backed Securities B-7 7
Risk Factors Relating to Investing in B-7 11
Mortgage-Related and Asset-Backed
Securities
Duration B-8 5
Derivative Instruments B-8 10
Foreign Securities B-11 7
Foreign Currency Options and Related Risks B-13 11
Forward Foreign Currency Exchange Contracts B-13 11
Risk Factors Relating to Investing in High Yield B-15 11
Securities
Illiquid Securities B-15 13
Management B-16 14
The Advisor B-18 14
Portfolio Transactions and Brokerage B-19
Net Asset Value B-19 18
Dividends and Tax Status B-20 16
Performance Information B-21 18
General Information About the Trust B-22 19
</TABLE>
B-1
<PAGE> 27
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Equity Income VIP Portfolio is to
provide current income and long-term growth of income, accompanied by growth of
capital.
The investment objective of the International VIP Portfolio is to
provide current income and long-term growth of income, accompanied by growth of
capital.
The investment objective of the Low Duration VIP Portfolio is to
maximize total return, consistent with preservation of capital.
The portfolio and strategies with respect to the composition of each
Fund are described in the Funds' prospectus.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions (in addition to those
indicated in the prospectus) as fundamental policies, which may not be changed
without the favorable vote of the holders of a "majority" of that Fund's
outstanding voting securities, as defined in the Investment Company Act of 1940
(the "1940 Act"). Under the 1940 Act, the vote of the holders of a "majority" of
a Fund's outstanding voting securities means the vote of the holders of the
lesser of (i) 67% of the shares of the Fund represented at a meeting at which
the holders of more than 50% of its outstanding shares are represented or (ii)
more than 50% of the outstanding shares.
Except as noted, none of the Funds may:
1. Purchase any security, other than obligations of the U.S.
Government, its agencies, or instrumentalities ("U.S. Government
securities"), if as a result: (i) with respect to 75% of its
total assets, more than 5% of the Fund's total assets (determined
at the time of investment) would then be invested in securities
of a single issuer, or (ii) more than 25% of the Fund's total
assets (determined at the time of investment) would be invested
in one or more issuers having their principal business activities
in a single industry.
2. Purchase securities on margin (but any Fund may obtain such
short-term credits as may be necessary for the clearance of
transactions), provided that the deposit or payment by a Fund of
initial or maintenance margin in connection with futures or
options is not considered the purchase of a security on margin.
3. Make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for
securities of the same issue as, and equal in amount to, the
securities sold short (short sale against-the-box), and unless
not more than 25% of the Fund's net assets (taken at current
value) is held as collateral for such sales at any one time.
4. Issue senior securities, borrow money or pledge its assets except
that any Fund may borrow from a bank for temporary or emergency
purposes in amounts not exceeding 10% (taken at the lower of cost
or current value) of its total assets (not including the amount
borrowed) and pledge its assets to secure such borrowings; none
of the Funds (except the Low Duration VIP Portfolio) will
purchase any additional portfolio securities while such
borrowings are outstanding. (The Low Duration VIP Portfolio may
borrow from banks or enter into reverse repurchase agreements and
pledge assets in connection therewith, but only if immediately
after each borrowing there is asset coverage of 300%.)
5. Purchase any security (other than U.S. Government securities) if
as a result, with respect to 75% of the Fund's total assets, the
Fund would then hold more than 10% of the outstanding voting
securities of an issuer.
6. Buy or sell commodities or commodity contracts or real estate or
interests in real estate, although it may purchase and sell
securities which are secured by real estate and securities of
companies which invest or deal in real estate. (For the purposes
of this restriction, forward foreign currency exchange contracts
are not deemed to be commodities or commodity contracts. This
restriction does not apply to the Low Duration VIP Portfolio.)
B-2
<PAGE> 28
7. Act as underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be
an underwriter under certain federal securities laws.
8. Make investments for the purpose of exercising control or
management.
9. Participate on a joint or joint and several basis in any trading
account in securities.
10. Make loans, except through repurchase agreements. (This
restriction does not apply to the Low Duration VIP Portfolio,
which may lend portfolio securities having an aggregate market
value of up to one-third of the total assets of the Fund.)
REPURCHASE AGREEMENTS
Each of the Funds may invest in repurchase agreements collaterized by
U.S. Government securities. A repurchase agreement is an agreement where the
seller agrees to repurchase a security from a Fund at a mutually agreed-upon
time and price. The period of maturity is usually quite short, possibly
overnight or a few days, although it may extend over a number of months. The
resale price is more than the purchase price, reflecting an agreed-upon rate of
return effective for the period of time a Fund's money is invested in the
repurchase agreement. A Fund's repurchase agreements will at all time be fully
collateralized in an amount at least equal to the resale price. The instruments
held as collateral are valued daily, and if the value of instruments declines, a
Fund will require additional collateral. In the event of a default, insolvency
or bankruptcy by a seller, the Fund will promptly seek to liquidate the
collateral. In such circumstances, the Fund could experience a delay or be
prevented from disposing of the collateral. To the extent that the proceeds from
any sale of such collateral upon a default in the obligation to repurchase are
less than the repurchase price, the Fund will suffer a loss.
U.S. GOVERNMENT SECURITIES
U.S. Government agencies or instrumentalities which issue or guarantee
securities include, but are not limited to, the Federal National Mortgage
Association, Government National Mortgage Association, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks,
Federal Land Banks, Tennessee Valley Authority, Inter- American Development
Bank, Asian Development Bank, Student Loan Marketing Association and the
International Bank for Reconstruction and Development.
Except for U.S. Treasury securities, obligations of U.S. Government
agencies and instrumentalities may or may not be supported by the full faith and
credit of the United States. Some are backed by the right of the issuer to
borrow from the Treasury; others by discretionary authority of the U.S.
Government to purchase the agencies' obligations; while still others, such as
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. In the case of securities not backed by the full faith and
credit of the United States, the investor must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate repayment,
and 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. Each Fund will
invest in securities of such instrumentality only when the Advisor is satisfied
that the credit risk with respect to any instrumentality is acceptable.
The Funds may invest in component parts of the U.S. Treasury notes or
bonds, namely, either the corpus (principal) of such Treasury obligations or one
of the interest payments scheduled to be paid on such obligations. These
obligations may take the form of (i) Treasury obligations from which the
interest coupons have been stripped, (ii) the interest coupons that are
stripped, (iii) book-entries at a Federal Reserve member bank representing
ownership of Treasury obligation components, or (iv) receipts evidencing the
component parts (corpus or coupons) of Treasury obligations that have not
actually been stripped. Such receipts evidence ownership of component parts of
Treasury obligations (corpus or coupons) purchased by a third party (typically
an investment banking firm) and held on behalf of the third party in physical or
book-entry form by a major commercial bank or trust company pursuant to a
custody agreement with the third party. These custodial receipts are known by
various names, including "Treasury Receipts," "Treasury Investment Growth
Receipts" ("TIGRs") and "Certificates of Accrual on Treasury Securities"
("CATS"), and are not issued by the U.S. Treasury, therefore they are not U.S.
Government securities, although the underlying bonds represented by these
receipts are debt obligations of the U.S. Treasury.
B-3
<PAGE> 29
CORPORATE DEBT SECURITIES
A Fund's investments in U.S. dollar or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other similar
corporate debt instruments) which meet the minimum ratings criteria set forth
for the Fund, or, if unrated, are in the Advisor's opinion comparable in quality
to corporate debt securities in which the Fund may invest. The rate of return or
return of principal on some debt obligations may be linked or indexed to the
level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
CONVERTIBLE SECURITIES
The Funds may invest in convertible securities of domestic or foreign
issuers, which meet the ratings criteria set forth in the Prospectus. A
convertible security is a fixed-income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of common stock or other equity securities of the same or a
different issuer. Convertible securities rank senior to common stock in a
corporation's capital structure but are usually subordinated to similar
non-convertible securities. While providing a fixed-income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar non-convertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
MORTGAGE-RELATED SECURITIES
The Low Duration VIP Portfolio may invest in residential or commercial
mortgage-related securities, including mortgage pass-through securities,
collateralized mortgage obligations ("CMOs"), adjustable rate mortgage
securities, CMO residuals, stripped mortgage-related securities, floating and
inverse floating rate securities and tiered index bonds.
Mortgage Pass-Through Securities. Mortgage pass-through securities
represent interests in pools of mortgages in which payments of both principal
and interest on the securities are generally made monthly, in effect "passing
through" monthly payments made by borrowers on the residential or commercial
mortgage loans which underlie the securities (net of any fees paid to the issuer
or guarantor of the securities). Mortgage pass-through securities differ from
other forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Early repayment of principal on mortgage pass-through securities (arising
from prepayments of principal due to the sale of underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose the Fund to a lower rate of return upon reinvestment of principal. Also,
if a security subject to repayment has been purchased at a premium, in the event
of prepayment, the value of the premium would be lost.
There are currently three types of mortgage pass-through securities: (i)
those issued by the U.S. Government or one of its agencies or instrumentalities,
such as the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"); (ii) those issued by private issuers that represent an
interest in or are collateralized by pass-through securities issued or
guaranteed by the U.S. Government or one of its agencies or instrumentalities;
and (iii) those issued by private issuers that represent an interest in or are
collateralized by whole mortgage loans or pass-through securities without a
government guarantee but usually having some form of private credit enhancement.
GNMA is a wholly-owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by the institutions
approved by GNMA (such as savings and loan institutions, commercial banks and
mortgage banks), and backed by pools of FHA-insured or VA-guaranteed mortgages.
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Obligations of FNMA and FHLMC are not backed by the full faith and
credit of the United States Government. In the case of obligations not backed by
the full faith and credit of the United States Government, the Fund must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment. FNMA and FHLMC may borrow from the U.S. Treasury to meet its
obligations, but the U.S. Treasury is under no obligation to lend to FNMA or
FHLMC.
Private mortgage pass-through securities are structured similarly to
GNMA, FNMA, and FHLMC mortgage pass-through securities and are issued by
originators of and investors in mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose subsidiaries
of the foregoing.
Pools created by private mortgage pass-through issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments in
the private pools. However, timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers
and the mortgage poolers. The insurance and guarantees and the credit worthiness
of the issuers thereof will be considered in determining whether a
mortgage-related security meets the Funds' investment quality standards. There
can be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. Private
mortgage pass-through securities may be bought without insurance or guarantees
if, through an examination of the loan experience and practices of the
originator/servicers and poolers, the Advisor determines that the securities
meet the Fund's quality standards.
Collateralized Mortgage Obligations. CMOs are debt obligations
collateralized by residential or commercial mortgage loans or residential or
commercial mortgage pass-through securities. Interest and prepaid principal are
generally paid monthly. CMOs may be collateralized by whole mortgage loans or
private mortgage pass-through securities but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA. The issuer of a series of CMOs may elect to be treated as a Real Estate
Mortgage Investment Conduit ("REMIC"). All future references to CMOs also
include REMICs.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral which is ordinarily unrelated to the
stated maturity date. CMOs often provide for a modified form of call protection
through a de facto breakdown of the underlying pool of mortgages according to
how quickly the loans are repaid. Monthly payment of principal received from the
pool of underlying mortgages, including prepayments, is first returned to
investors holding the shortest maturity class. Investors holding the longer
maturity classes usually receive principal only after the first class has been
retired. An investor may be partially protected against a sooner than desired
return of principal because of the sequential payments.
Certain issuers of CMOs are not considered investment companies pursuant
to a rule adopted by the Securities and Exchange Commission ("SEC"), and the
Fund may invest in the securities of such issuers without the limitations
imposed by the 1940 Act on investments by the Fund in other investment
companies. In addition, in reliance on an earlier SEC interpretation, the Fund's
investments in certain other qualifying CMOs, which cannot or do not rely on the
rule, are also not subject to the limitation of the 1940 Act on acquiring
interests in other investment companies. In order to be able to rely on the
SEC's interpretation, these CMOs must be unmanaged, fixed asset issuers, that
(a) invest primarily in mortgage-backed securities, (b) do not issue redeemable
securities, (c) operate under general exemptive orders exempting them from all
provisions of the 1940 Act and (d) are not registered or regulated under the
1940 Act as investment companies. To the extent that the Fund selects CMOs that
cannot rely on the rule or do not meet the above requirements, the Fund may not
invest more than 10% of its assets in all such entities and may not acquire more
than 3% of the voting securities of any single such entity.
The Low Duration VIP Portfolio also may invest in, among other things,
parallel pay CMOs, Planned Amortization Class CMOs ("PAC bonds"), sequential pay
CMOs, and floating rate CMOs. Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. PAC bonds
generally require payments of a specified amount of principal on each payment
date. Sequential pay CMOs generally pay principal to only one class while paying
interest to several classes. Floating rate CMOs are securities whose coupon rate
fluctuates according to some formula related to an existing market index or
rate. Typical indices would include the eleventh district cost-of-funds index
("COFI"), the London Interbank Offered Rate ("LIBOR"), one-year Treasury yields,
and ten-year Treasury yields.
Adjustable Rate Mortgage Securities. Adjustable rate mortgage securities
("ARMs") are pass-through securities collateralized by mortgages with adjustable
rather than fixed rates. ARMs eligible for inclusion in a mortgage pool
generally
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provide for a fixed initial mortgage interest rate for either the first three,
six, twelve, thirteen, thirty-six, or sixty scheduled monthly payments.
Thereafter, the interest rates are subject to periodic adjustment based on
changes to a designated benchmark index.
The ARMs contain maximum and minimum rates beyond which the mortgage
interest rate may not vary over the lifetime of the security. In addition,
certain ARMs provide for additional limitations on the maximum amount by which
the mortgage interest rate may adjust for any single adjustment period. In the
event that market rates of interest rise more rapidly to levels above that of
the ARM's maximum rate, the ARM's coupon may represent a below market rate of
interest. In these circumstances, the market value of the ARM security will
likely have fallen.
Certain ARMs contain limitations on changes in the required monthly
payment. In the event that a monthly payment is not sufficient to pay the
interest accruing on an ARM, any such excess interest is added to the principal
balance of the mortgage loan, which is repaid through future monthly payments.
If the monthly payment for such an instrument exceeds the sum of the interest
accrued at the applicable mortgage interest rate and the principal payment
required at such point to amortize the outstanding principal balance over the
remaining term of the loan, the excess is then utilized to reduce the
outstanding principal balance of the ARM.
CMO Residuals. CMO residuals are derivative mortgage securities issued
by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
part, the yield to maturity on the CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-related securities. See
"Stripped Mortgage-Related Securities" below. In addition, if a series of a CMO
includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to changes
in the level of the index upon which interest rate adjustments are based. As
described below with respect to stripped mortgage-related securities, in certain
circumstances the Fund may fail to recoup fully its initial investment in a CMO
residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may or, pursuant to an exemption therefrom, may not have
been registered under the Securities Act. CMO residuals, whether or not
registered under such Act, may be subject to certain restrictions on
transferability, and may be deemed "illiquid" and subject to the Fund's
limitations on investment in illiquid securities.
Stripped Mortgage-Related Securities. Stripped mortgage-related
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks, and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, a
Fund may fail to fully recoup its initial investment in these securities even if
the security is in one of the highest rating categories.
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Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently introduced. As a result, established trading markets have not
yet been fully developed and accordingly, these securities may be deemed
"illiquid" and subject to a Fund's limitations on investment in illiquid
securities. See "Securities and Techniques Used by the Funds-Mortgage-Related
Securities" in the Prospectus.
Inverse Floaters. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction to the
interest rate on another security or index level. Changes in the interest rate
on the other security or index inversely affect the residual interest rate paid
on the inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. Inverse floaters may
experience gains when interest rates fall and may suffer losses in periods of
rising interest rates. The market for inverse floaters is relatively new.
Tiered Index Bonds. Tiered index bonds are relatively new forms of
mortgage-related securities. The interest rate on a tiered index bond is tied to
a specified index or market rate. So long as this index or market rate is below
a predetermined "strike" rate, the interest rate on the tiered index bond
remains fixed. If, however, the specified index or market rate rises above the
"strike" rate, the interest rate of the tiered index bond will decrease. Thus,
under these circumstances, the interest rate on a tiered index bond, like an
inverse floater, will move in the opposite direction of prevailing interest
rates, with the result that the price of the tiered index bond may be
considerably more volatile than that of a fixed rate bond.
ASSET-BACKED SECURITIES
The Low Duration VIP Portfolio may invest in various types of
asset-backed securities. Through the use of trusts and special purpose
corporations, various types of assets, primarily automobile and credit card
receivables and home equity loans, are being securitized in pass-through
structures similar to the mortgage pass-through or in a pay-through structure
similar to the CMO structure. Investments in these and other types of
asset-backed securities must be consistent with the investment objectives and
policies of the Fund.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED
SECURITIES
The yield characteristics of mortgage-related and asset-backed
securities differ from traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a
result, if the Fund purchases such a security at a premium, a prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity. Alternatively, if the Fund purchases these securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity. The Fund may invest a
portion of its assets in derivative mortgage-related securities which are highly
sensitive to changes in prepayment and interest rates. The Advisor will seek to
manage these risks (and potential benefits) by diversifying its investments in
such securities and through hedging techniques.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage-related securities can be expected to accelerate.
Accordingly, the Fund's ability to maintain positions in high-yielding
mortgage-related securities will be affected by reductions in the principal
amount of such securities resulting from such prepayments, and its ability to
reinvest the returns of principal at comparable yields is subject to generally
prevailing interest rates at that time. Conversely, slower than expected
prepayments may effectively change a security that was considered short or
intermediate-term at the time of purchase into a long-term security. Long-term
securities tend to fluctuate more in response to interest rate changes, leading
to increased net asset value volatility. Prepayments may also result in the
realization of capital losses with respect to higher yielding securities that
had been bought at a premium or the loss of opportunity to realize capital gains
in the future from possible future appreciation.
Asset-backed securities involve certain risks that are not posed by
mortgage-related securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to obtain
full payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities.
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DURATION
In selecting securities for the Low Duration VIP Portfolio, the Advisor
makes use of the concept of duration for fixed-income securities. Duration is a
measure of the expected life of a fixed-income security that was developed as a
more precise alternative to the concept of "term to maturity". Duration
incorporates a bond's yield, coupon interest payments, final maturity and call
features into one measure.
Most debt obligations provide interest ("coupon") payments in addition
to a final ("par") payment at maturity. Some obligations also have call
provisions. Depending on the relative magnitude of these payments, the market
values of debt obligations may respond differently to changes in the level and
structure of interest rates.
Traditionally, a debt security's "term to maturity" has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment, taking no account of the pattern of the security's payments prior
to maturity. Duration is a measure of the expected life of a fixed-income
security on a present value basis. Duration takes the length of the time
intervals between the present time and the time that the interest and principal
payments are scheduled or, in the case of a callable bond, expected to be
received, and weights them by the present values of the cash to be received at
each future point in time. For any fixed-income security with interest payments
occurring prior to the payment of principal, duration is always less than
maturity. In general, all other things being the same, the lower the stated or
coupon rate of interest of a fixed-income security, the longer the duration of
the security; conversely, the higher the stated or coupon rate of interest of a
fixed-income security, the shorter the duration of the security.
Futures, options and options on futures have durations which, in
general, are closely related to the duration of the securities which underlie
them. Holding long futures or call option positions (backed by a segregated
account of cash and cash equivalents) will lengthen a Fund's duration by
approximately the same amount that holding an equivalent amount of the
underlying securities would.
Short futures or put options positions have durations roughly equal to
the negative duration of the securities that underlie those positions, and have
the effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation
does not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Advisor will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
DERIVATIVE INSTRUMENTS
As indicated in the Prospectus, to the extent consistent with their
investment objectives and policies, the Funds may purchase and write call and
put options on securities, securities indexes and on foreign currencies and
enter into futures contracts and use options on futures contracts. The Funds
also may enter into swap agreements with respect to foreign currencies, interest
rates and securities indexes. The Funds may use these techniques to hedge
against changes in interest rates, foreign currency exchange rates, or
securities prices or as part of their overall investment strategies. The
International and Low Duration VIP Portfolios may also purchase and sell options
relating to foreign currencies for the purpose of increasing exposure to a
foreign currency or to shift exposure to foreign currency fluctuations from one
country to another. Each Fund will maintain segregated accounts consisting of
cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets, marked-to- market daily (or, as permitted by applicable
regulation, enter into certain offsetting positions), to cover its obligations
under options and futures contracts to avoid leveraging of the Fund.
Options on Securities and on Securities Indexes. A Fund may purchase put
options on securities to protect holdings in an underlying or related security
against a substantial decline in market value. A Fund may purchase call options
on securities to protect against substantial increases in prices of securities
the Fund intends to purchase pending its ability to invest in such securities in
an orderly manner. A Fund may sell put or call options it has previously
purchased, which could result in a net gain
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or loss depending on whether the amount realized on the sale is more or less
than the premium and other transaction costs paid on the put or call option
which is sold. A Fund may write a call or put option only if the option is
"covered" by the Fund holding a position in the underlying securities or by
other means which would permit immediate satisfaction of the Fund's obligation
as writer of the option. Prior to exercise or expiration, an option may be
closed out by an offsetting purchase or sale of an option of the same series.
The purchase and writing of options involves certain risks. During the
option period, the covered call writer has, in return for the premium on the
option, given up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price. If a
put or call option purchased by the Fund is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price or, in the case of a call,
remains less than or equal to the exercise price, the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
a Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, a Fund may be
unable to close out a position.
There are several risks associated with transactions in options on
securities and on indexes. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether when and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund
seeks to close out an option position. If a Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless. If a Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, a Fund
forgoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.
If trading were suspended in an option purchased by a Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it had purchased. Except
to the extent that a call option on an index written by the Fund is covered by
an option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.
Futures Contracts and Options on Futures Contracts. A Fund may use
interest rate, foreign currency or index futures contracts, as specified for
that Fund in the Prospectus. An interest rate, foreign currency or index futures
contract provides for the future sale by one party and purchase by another party
of a specified quantity of a financial instrument, foreign currency or the cash
value of an index at a specified price and time. A futures contract on an index
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. Although the value of an index might be a
function of the value of certain specified securities, no physical delivery of
these securities is made. A public market exists in futures contracts covering
several indexes as well as a number of financial instruments and foreign
currencies, including: the S & P 500; the S & P 100; the NYSE composite; U.S.
Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S.
Treasury bills; 90-day commercial paper; bank certificates of deposit; the
Australian dollar; the Canadian dollar; the British pound; the German mark; the
Japanese yen; the French franc; the Swiss franc; the Mexican peso; and certain
multinational currencies, such as the European Currency Unit ("ECU"). It is
expected that other futures contracts will be developed and traded in the
future.
A Fund may purchase and write call and put options on futures. Options
on futures possess many of the same characteristics as options on securities and
indexes (discussed above). An option on a futures contract gives the holder the
right, in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise
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price at any time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option, the
opposite is true.
Each Fund will use futures contracts and options on futures contracts in
accordance with the rules of the Commodity Futures Trading Commission ("CFTC").
For example, a Fund might use futures contracts to hedge against anticipated
changes in interest rates that might adversely affect either the value of the
Fund's securities or the price of the securities which the Fund intends to
purchase. A Fund's hedging activities may include sales of futures contracts as
an offset against the effect of expected increases in interest rates, and
purchases of futures contracts as an offset against the effect of expected
declines in interest rates. Although other techniques could be used to reduce
that Fund's exposure to interest rate fluctuations, the Fund may be able to
hedge its exposure more effectively and perhaps at a lower cost by using futures
contracts and options on futures contracts.
A Fund will only enter into futures contracts and options on futures
contracts which are standardized and traded on a U.S. or foreign exchange, board
of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by a Fund, the
Fund is required to deposit with its custodian (or broker, if legally permitted)
a specified amount of cash or U.S. Government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. Each Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by a Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or receives cash, called
"variation margin", equal to the daily change in value of the futures contract.
This process is known as "marking to market". Variation margin does not
represent a borrowing or loan by a Fund but is instead a settlement between the
Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Fund will mark to
market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.
Limitations on Use of Futures and Options Thereon. When purchasing a
futures contract, a Fund will maintain with its custodian (and mark-to-market on
a daily basis) cash, U.S. Government securities, equity securities or other
liquid, unencumbered assets that, when added to the amounts deposited with a
futures commission merchant as margin, are equal to the market value of the
futures contract. Alternatively, the Fund may "cover" its position by purchasing
a put option on the same futures contract with a strike price as high or higher
than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited with a futures commission merchant as margin, are equal to the
market value of the instruments underlying the contract. Alternatively, the Fund
may "cover" its position by owning the instruments underlying the contract (or,
in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Trust's custodian).
When selling a call option on a futures contract, a Fund will maintain
with its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets that, when
added to the amounts deposited with a futures commission merchant as margin,
equal the total market value of the futures contract underlying the call option.
Alternatively, the Fund may cover its position by entering into a long position
in the same futures contract at a price no higher than the strike price of the
call option, by owning the instruments underlying the futures contract, or by
holding a separate call option permitting the Fund to purchase the same futures
contract at a price not higher than the strike price of the call option sold by
the Fund.
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When selling a put option on a futures contract, a Fund will maintain
with its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets that equal
the purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.
In order to comply with current applicable regulations of the CFTC
pursuant to which the Trust avoids being deemed a "commodity pool operator," the
Funds are limited in their futures trading activities to positions which
constitute "bona fide hedging" positions within the meaning and intent of
applicable CFTC rules, or to non-hedging positions for which the aggregate
initial margin and premiums will not exceed 5% of the liquidation value of the
Fund's assets.
The requirements for qualification as a regulated investment company
also may limit the extent to which a Fund may enter into futures contracts,
options thereon or forward contracts. See "Dividends and Tax Status."
Risks Associated with Futures and Options on Futures Contracts. There
are several risks associated with the use of futures contracts and options on
futures contracts as hedging techniques. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in the futures
contract. There can be no guarantee that there will be a correlation between
price movements in the hedging vehicle and in the Fund securities being hedged.
In addition, there are significant differences between the securities and
futures markets that could result in an imperfect correlation between the
markets, causing a given hedge not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as variation in
speculative market demand for futures and options on futures, including
technical influences in futures trading and options on futures, and differences
between the financial instruments being hedged and the instruments underlying
the standard contracts available for trading in such respects as interest rate
levels, maturities, and creditworthiness of issuers. A decision as to whether,
when and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist at a time when
a Fund seeks to close out a futures contract or an option on futures position,
and that Fund would remain obligated to meet margin requirements until the
position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist.
Additional Risks of Options on Securities, Futures Contracts, Options on
Futures Contracts, and Forward Currency Exchange Contracts and Options Thereon.
Options on securities, futures contracts, options on futures contracts,
currencies and options on currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States; may not involve a clearing mechanism and related guarantees; and
are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. The value of such positions also could be
adversely affected by (i) other complex foreign political, legal and economic
factors, (ii) lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in the Funds' ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, and (iv) lesser trading volume.
FOREIGN SECURITIES
In addition to purchasing securities of foreign issuers in foreign
markets, the International and Low Duration VIP Portfolios may invest in
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") or
other securities convertible into securities of issuers based in foreign
countries. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts,
usually issued by a U.S. bank or trust company, evidencing ownership of the
underlying securities; EDRs are European receipts evidencing a similar
arrangement. Generally,
B-11
<PAGE> 37
ADRs are issued in registered form, denominated in U.S. dollars, and are
designed for use in the U.S. securities markets; EDRs are issued in bearer form,
denominated in other currencies, and are designed for use in European securities
markets.
The Low Duration VIP Portfolio may also invest in fixed-income
securities of issuers located in emerging foreign markets. Emerging markets
generally include every country in the world other than the United States,
Canada, Japan, Australia, Malaysia, New Zealand, Hong Kong, South Korea,
Singapore and most Western European countries. In determining what countries
constitute emerging markets, the Advisor will consider, among other things,
data, analysis and classification of countries published or disseminated by the
International Bank for Reconstruction and Development (commonly known as the
World Bank) and the International Finance Corporation. Currently, investing in
many emerging markets may not be desirable or feasible, because of the lack of
adequate custody arrangements for a Fund's assets, overly burdensome
repatriation and similar restrictions, the lack of organized and liquid
securities markets, unacceptable political risks or other reasons. As
opportunities to invest in securities in emerging markets develop, the Fund
expects to expand and further broaden the group of emerging markets in which it
invests.
From time to time, emerging markets have offered the opportunity for
higher returns in exchange for a higher level of risk. Accordingly, the Advisor
believes that the Low Duration VIP Portfolio's ability to invest in emerging
markets throughout the world may enable the achievement of results superior to
those produced by funds, with similar objectives to those of the Fund, that
invest solely in securities in developed markets. There is no assurance that the
Low Duration VIP Portfolio will achieve these results.
The Low Duration VIP Portfolio may invest in the following types of
emerging market fixed-income securities: (a) fixed-income securities issued or
guaranteed by governments, their agencies, instrumentalities or political
subdivisions, or by government owned, controlled or sponsored entities,
including central banks (collectively, "Sovereign Debt"), including Brady Bonds
(described below); (b) interests in issuers organized and operated for the
purpose of restructuring the investment characteristics of Sovereign Debt; (c)
fixed-income securities issued by banks and other business entities; and (d)
fixed-income securities denominated in or indexed to the currencies of emerging
markets. Fixed-income securities held by the Fund may take the form of bonds,
notes, bills, debentures, bank debt obligations, short-term paper, loan
participations, assignments and interests issued by entities organized and
operated for the purpose of restructuring the investment characteristics of any
of the foregoing. There is no requirement with respect to the maturity of
fixed-income securities in which the Fund may invest.
The Low Duration VIP Portfolio may invest in Brady Bonds and other
Sovereign Debt of countries that have restructured or are in the process of
restructuring Sovereign Debt pursuant to the Brady Plan. "Brady Bonds" are debt
securities issued under the framework of the Brady Plan, an initiative announced
by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for
debtor nations to restructure their outstanding external commercial bank
indebtedness. In restructuring its external debt under the Brady Plan framework,
a debtor nation negotiates with its existing bank lenders as well as
multilateral institutions such as the International Bank for Reconstruction and
Development (the "World Bank") and the International Monetary Fund ("IMF"). The
Brady Plan framework, as it has developed, contemplates the exchange of
commercial bank debt for newly issued Brady Bonds. Brady Bonds may also be
issued in respect of new money being advanced by existing lenders in connection
with the debt restructuring. The World Bank and/or the IMF support the
restructuring by providing funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new Brady Bonds
or to repurchase outstanding bank debt at a discount.
Emerging market fixed-income securities generally are considered to be
of a credit quality below investment grade, even though they often are not rated
by any nationally recognized statistical rating organizations. Investment in
emerging market fixed-income securities will be allocated among various
countries based upon the Advisor's analysis of credit risk and its consideration
of a number of factors, including: prospects for relative economic growth among
the different countries in which the Low Duration VIP Portfolio may invest;
expected levels of inflation; government policies influencing business
conditions; the outlook for currency relationships; and the range of the
individual investment opportunities available to international investors. The
Advisor's emerging market sovereign credit analysis includes an evaluation of
the issuing country's total debt levels, currency reserve levels, net
exports/imports, overall economic growth, level of inflation, currency
fluctuation, political and social climate and payment history. Particular
fixed-income securities will be selected based upon credit risk analysis of
potential issuers, the characteristics of the security and interest rate
sensitivity of the various debt issues available with respect to a particular
issuer, analysis of the anticipated volatility and liquidity of the particular
debt instruments, and the tax implications to the Fund. The emerging market
fixed-income securities in which the Low Duration VIP Portfolio may invest are
not subject to any minimum credit quality standards.
B-12
<PAGE> 38
FOREIGN CURRENCY OPTIONS AND RELATED RISKS
The Funds may take positions in options on foreign currencies to hedge
against the risk of foreign exchange rate fluctuations on foreign securities the
Funds hold in their portfolios or intend to purchase. For example, if a Fund
were to enter into a contract to purchase securities denominated in a foreign
currency, it could effectively fix the maximum U.S. dollar cost of the
securities by purchasing call options on that foreign currency. Similarly, if a
Fund held securities denominated in a foreign currency and anticipated a decline
in the value of that currency against the U.S. dollar, it could hedge against
such a decline by purchasing a put option on the currency involved. The markets
in foreign currency options are relatively new, and a Fund's ability to
establish and close out positions in such options is subject to the maintenance
of a liquid secondary market. There can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. In addition,
options on foreign currencies are affected by all of those factors that
influence foreign exchange rates and investments generally.
The quantities of currencies underlying option contracts represent odd
lots in a market dominated by transactions between banks, and as a result extra
transaction costs may be incurred upon exercise of an option.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations be firm or revised on a
timely basis. Quotation information is generally representative of very large
transactions in the interbank market and may not reflect smaller transactions
where rates may be less favorable. Option markets may be closed while
round-the-clock interbank currency markets are open, and this can create price
and rate discrepancies.
Risks of Options Trading. The Funds may effectively terminate their
rights or obligations under options by entering into closing transactions.
Closing transactions permit a Fund to realize profits or limit losses on its
options positions prior to the exercise or expiration of the option. The value
of a foreign currency option depends on the value of the underlying currency
relative to the U.S. dollar. Other factors affecting the value of an option are
the time remaining until expiration, the relationship of the exercise price to
market price, the historical price volatility of the underlying currency and
general market conditions. As a result, changes in the value of an option
position may have no relationship to the investment merit of a foreign security.
Whether a profit or loss is realized on a closing transaction depends on the
price movement of the underlying currency and the market value of the option.
Options normally have expiration dates of up to nine months. The
exercise price may be below, equal to or above the current market value of the
underlying currency. Options that expire unexercised have no value, and a Fund
will realize a loss of any premium paid and any transaction costs. Closing
transactions may be effected only by negotiating directly with the other party
to the option contract, unless a secondary market for the options develops.
Although the Funds intend to enter into foreign currency options only with
dealers which agree to enter into, and which are expected to be capable of
entering into, closing transactions with the Funds, there can be no assurance
that a Fund will be able to liquidate an option at a favorable price at any time
prior to expiration. In the event of insolvency of the counter-party, a Fund may
be unable to liquidate a foreign currency option. Accordingly, it may not be
possible to effect closing transactions with respect to certain options, with
the result that a Fund would have to exercise those options that it had
purchased in order to realize any profit.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Funds may use forward contracts to protect against uncertainty in
the level of future exchange rates. The Funds will not speculate with forward
contracts or foreign currency exchange rates.
A Fund may enter into forward contracts with respect to specific
transactions. For example, when a Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when a Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on a security that it holds, the Fund may desire to "lock in" the U.S. dollar
price of the security or the U.S. dollar equivalent of the payment, by entering
into a forward contract for the purchase or sale, for a fixed amount of U.S.
dollars or foreign currency, of the amount of foreign currency involved in the
underlying transaction. A Fund will thereby be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
currency exchange rates during the period between the date on which the security
is purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.
A Fund also may use forward contracts in connection with portfolio
positions to lock in the U.S. dollar value of those positions, to increase the
Fund's exposure to foreign currencies that the Advisor believes may rise in
value relative to the U.S. dollar or to shift the Fund's exposure to foreign
currency fluctuations from one country to another. For example, when the
B-13
<PAGE> 39
Advisor believes that the currency of a particular foreign country may suffer a
substantial decline relative to the U.S. dollar or another currency, it may
enter into a forward contract to sell the amount of the former foreign currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. This investment practice generally is
referred to as "cross-hedging" when another foreign currency is used.
The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for a
Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
The projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Fund to sustain losses
on these contracts and transaction costs. A Fund may enter into forward
contracts or maintain a net exposure to such contracts only if (1) the
consummation of the contracts would not obligate the Fund to deliver an amount
of foreign currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency or (2) the Fund maintains in a
segregated account cash, U.S. Government securities, equity securities or other
liquid, unencumbered assets, marked-to-market daily, in an amount not less than
the value of the Fund's total assets committed to the consummation of the
contracts. Under normal circumstances, consideration of the prospect for
currency parities will be incorporated into the longer term investment decisions
made with regard to overall diversification strategies. However, the Advisor
believes it is important to have the flexibility to enter into such forward
contracts when it determines that the best interests of the Fund will be served.
At or before the maturity date of a forward contract that requires a
Fund to sell a currency, the Fund may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, a Fund
may close out a forward contract requiring it to purchase a specified currency
by entering into a second contract entitling it to sell the same amount of the
same currency on the maturity date of the first contract. The Fund would realize
a gain or loss as a result of entering into such an offsetting forward contract
under either circumstance to the extent the exchange rate between the currencies
involved moved between the execution dates of the first and second contracts.
The cost to the Fund of engaging in forward contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved. The use
of forward contracts does not eliminate fluctuations in the prices of the
underlying securities the Fund owns or intends to acquire, but it does fix a
rate of exchange in advance. In addition, although forward contracts limit the
risk of loss due to a decline in the value of the hedged currencies, at the same
time they limit any potential gain that might result should the value of the
currencies increase.
Although the Funds value their assets daily in terms of U.S. dollars,
they do not intend to convert holdings of foreign currencies into U.S. dollars
on a daily basis. The Funds may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
Swap Agreements. The Funds may enter into interest rate, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Fund than if the Fund had
invested directly in an instrument that yielded the desired return. Swap
agreements are two party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. The "notional amount" of the swap
agreement is only a fictive basis on which to calculate the obligations which
the parties to a swap agreement have agreed to exchange. A
B-14
<PAGE> 40
Fund's obligations (or rights) under a swap agreement will generally be equal
only to the net amount to be paid or received under the agreement based on the
relative values of the positions held by each party to the agreement (the "net
amount"). A Fund's obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Fund) and any accrued but unpaid net
amounts owed to a swap counter-party will be covered by the maintenance of a
segregated account consisting of cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets marked-to-market daily, to avoid
any potential leveraging of the Fund's portfolio. A Fund will not enter into a
swap agreement with any single party if the net amount owed or to be received
under existing contracts with that party would exceed 5% of the Fund's assets.
Whether a Fund's use of swap agreements will be successful in furthering
its investment objective of total return will depend on the Advisor's ability
correctly to predict whether certain types of investments are likely to produce
greater returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counter-party. The Advisor will cause a Fund to
enter into swap agreements only with counter-parties that would be eligible for
consideration as repurchase agreement counter-parties. Restrictions imposed by
the Internal Revenue Code may limit the Funds' ability to use swap agreements.
The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect a Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES
Lower-rated or unrated (i.e., high yield) securities are more likely to
react to developments affecting market risk (such as interest rate sensitivity,
market perception of creditworthiness of the issuer and general market
liquidity) and credit risk (such as the issuer's inability to meet its
obligations) than are more highly rated securities, which react primarily to
movements in the general level of interest rates. The Advisor considers both
credit risk and market risk in making investment decisions for the Funds.
Investors should carefully consider the relative risk of investing in high yield
securities and understand that such securities are not generally meant for
short-term trading.
The amount of high yield securities outstanding proliferated in the
1980's in conjunction with the increase in merger and acquisition and leveraged
buyout activity. Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities. Under adverse market or
economic conditions, the secondary market for high yield securities could
contract further, independent of any specific adverse changes in the condition
of a particular issuer. As a result, the Advisor could find it more difficult to
sell these securities or may be able to sell the securities only at prices lower
than if such securities were widely traded. Prices realized upon the sale of
such lower-rated or unrated securities, under these circumstances, may be less
than the prices used in calculating the Funds' net asset value.
Lower-rated or unrated debt obligations also present risks based on
payment expectations. If an issuer calls the obligation for redemption, the Fund
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If a Fund experiences unexpected net
redemptions, it may be forced to sell its higher-rated securities, resulting in
a decline in the overall credit quality of the Fund's portfolio and increasing
the exposure of the Fund to the risks of high yield securities.
ILLIQUID SECURITIES
A Fund may not hold more than 15% of its net assets in illiquid
securities. Illiquid securities include repurchase agreements which have a
maturity of longer than seven days, and securities that are illiquid by virtue
of the absence of a readily available market (either within or outside of the
Unites States) or legal or contractual restrictions of resale. Historically,
illiquid securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act, securities which are otherwise not readily marketable and
repurchase agreements have a maturity of longer than seven days. Securities
which have not been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased directly from the
issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainly in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
B-15
<PAGE> 41
difficulty satisfying redemption within seven days. The absence of a trading
market can make it difficult to ascertain a market value for illiquid
investments. Also market quotations are less readily available. The judgment of
the Advisor may at times play a greater role in valuing these securities than in
the case of unrestricted securities. A mutual fund might also have to register
such restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A established a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The Advisor will monitor the liquidity
of such restricted securities subject to the supervision of the Trustees. In
reaching liquidity decisions, the Advisor will consider, inter alia, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security; and (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer). In addition, in order for
commercial paper that is issued in reliance on Section 4(2) of the Securities
Act to be considered liquid, (i) it much be rated in one of the two highest
rating categories by at least two nationally recognized statistical rating
organizations ("NRSRO"), or if only one NRSRO rates the securities, by that
NRSRO, or, if unrated, be of comparable quality in the view of the investment
adviser, and (ii) it must not be "traded flat" (i.e., without accrued interest)
or in default as to principal or interest. Investing in Rule 144A securities
could have the effect of increasing the level of Fund illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing these securities. Repurchase agreements subject to demand are deemed
to have a maturity equal to the notice period.
MANAGEMENT
The Trustees and officers of the Trust are:
<TABLE>
<CAPTION>
Position
Name, address & age with Trust Principal occupations during past five years
- ------------------- ---------- --------------------------------------------
<S> <C> <C>
Robert L. Burch III (62) Trustee Managing Partner, A.W. Jones Co.
885 Third Avenue (investments); Chairman, Jonathan Mfg. Corp.
New York, NY 10022 (slide manufacturing).
John A. G. Gavin (65) Trustee Chairman, Gamma Services Corp. (venture capital)
2100 Century Park West (since 1968); Principal, Gavin, Dailey & Partners
Los Angeles, CA 90067 (consulting) (since 1993); U.S. Ambassador to Mexico
(1981-1986); Director, Atlantic Richfield Co.,
Dresser Industries, Inc., Pinkertons, International
Wire Corp. and Kap Resources.
Joe Grills (61) Trustee Member of the Committee of Investment of Employee
183 Soundview Lane Benefit Assets of the Financial Executives Institute
New Canaan, CT 06840 ("CIEBA") since 1986; member of CIEBA's Executive Committee
since 1988 and its Chairman from 1991 to 1992; Assistant
Treasurer of International Business Machines Incorporated
("IBM") and Chief Investment Officer of the IBM
</TABLE>
B-16
<PAGE> 42
<TABLE>
<S> <C> <C>
Retirement Funds from 1986 until 1993; Member of the Investment
Advisory Committee of the State of New York Common Retirement
Fund; Director, Duke Management Company, KIMCO Realty Corp.
and LaSalle Street Fund; Investment Advisory Committee, Howard Hughes
Medical Institute; Trustee or Director of a number of investment
companies for which Merrill Lynch Asset Management is the advisor.
John F. Hotchkis* (64) Trustee Chairman and Portfolio Manager of the Advisor.
800 West 6th Street
Los Angeles, CA 90017
Robert B. Hutchinson (76) Trustee Former Chairman (1987-88) and Director (1976-88), Prudential Bank
c/o Simpson Investment Co. (savings bank); Director and former Senior Vice President, Finance and
1201 3rd Avenue Secretary, Simpson Investment Co. (holding company for a wood
Seattle, WA 98101 products company, pulp and paper company and a PVC products
company); Director, Enterprises International, Inc. (industrial strapping
material manufacturer).
Michael L. Quinn* (50) Trustee Chief Executive Officer of the Advisor since November 1996; Head
Merrill Lynch Capital of Merrill Lynch Capital Management Group since April 1995; co-head
Management Group of the Equity Division of Merrill Lynch, Pierce, Fenner & Smith Inc.,
800 Scudders Mill Road from February 1991 - April 1995; Trustee, Valley Hospital and the
Plainsboro, NJ 08536 University of Denver.
Merle T. Welshans (78) Trustee Adjunct Professor of Finance, Washington University; Chairperson of
14360 Ladue Road the Investment Committee of the Missouri United Methodist Foundation;
Chesterfield, MO 63017 Trustee, Deaconess Hospital Foundation.
Richard R. West (58) Trustee Dean Emeritus of New York University's Leonard N. Stern School of
Box 604 Business (since 1993); formerly Dean (1984-1993) and Professor of
Genoa, NV 89411 of Finance (1984-1995), New York University's Leonard N. Stern School
of Business; Director, Bornado, Inc., Alexander's Inc., Bowne & Co.,
Inc. and Smith Corona Corp.; Trustee or Director of a number of
investment companies for which Merrill Lynch Asset Management is
the advisor.
Nancy D. Celick (45) President and Chief Financial Officer and Director of the Advisor; Chief Financial
800 West 6th Street Principal Officer Kennedy-Wilson, Inc. (Auction Marketing Services), 1992-1993;
Los Angeles, CA 90017 Executive Officer Chief Financial Officer, First National Corporation (Bank Holding
Company), 1984-1992.
Gail Bardin (50) Executive Managing Director of the Advisor since 1995; Partner of the Advisor
800 West 6th Street Vice President (1994-1995); Principal of the Advisor (1992-1994); Portfolio Manager
Los Angeles, CA 90017 of the Advisor (1988-1992).
Mark D. Cone (28) Vice President Vice President of the Advisor; Retail Account Manager, Neuberger &
800 West 6th Street Berman (1991-1994).
Los Angeles, CA 90017
Gracie Fermelia (35) Secretary, Vice President of the Advisor; Senior Manager, Price Waterhouse
800 West 6th Street Treasurer, and (1985-1994).
Los Angeles, CA 90017 Principal
Financial and
Accounting Officer
</TABLE>
- ------------
* "Interested" Trustee, as defined in the 1940 Act, due to the
relationship indicated with the Advisor.
B-17
<PAGE> 43
The Trust does not pay salaries to any of its officers or fees to any
of its Trustees affiliated with the Advisor. The following table sets forth the
estimated aggregate compensation to be paid to the Trustees during the Trust's
fiscal year ending __________, 1997 and the aggregate compensation paid to the
Trustees for service on the Trust's Board and that of any other fund for which
the Advisor serves as investment adviser or has an investment adviser that is an
affiliated person of the Advisor ("Fund Complex") for the calendar year ended
December 31, 1996.
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement Estimated Annual from Trust
Aggregate Benefits Accrued Benefits and Fund
Compensation as Part of Fund Upon Complex Paid
Name and Position from Trust Expenses Retirement to Trustees *
- ----------------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Robert L. Burch III, none n/a
Trustee
John A. G. Gavin, none n/a
Trustee
Joe Grills, none n/a
Trustee
John F. Hotchkis, $ -0- none n/a $ -0-
Trustee
Robert B. Hutchinson, none n/a
Trustee
Michael L. Quinn, $-0- none n/a $ -0-
Trustee
Merle T. Welshans, none n/a
Trustee
Richard R. West, none n/a
Trustee
</TABLE>
* Each Trustee also serves as a Trustee of the Hotchkis and Wiley Funds. Messrs.
Grills and West also serve on the boards of other investment companies advised
by Merrill Lynch Asset Management, LP and its advisory affiliates (Mr. Grills
serves 18 registered investment companies representing 38 portfolios and Mr.
West serves 41 registered investment companies representing 54 portfolios).
The Advisor
Hotchkis and Wiley, a division of Merrill Lynch Capital Management Group,
located at 800 West 6th Street, Los Angeles, California 90017 and a separate
business unit of Merrill Lynch & Co., Inc., a financial services holding company
incorporated in Delaware, acts as Advisor to the Funds.
The Equity Income and International VIP Portfolios pay the Advisor for the
services performed a fee at the annual rate of 0.75% of each Fund's average net
assets. The Low Duration VIP Portfolio pays the Advisor a fee at the annual rate
of 0.46% of its average daily net assets.
In addition, the Advisor has voluntarily agreed to limit the annual
operating expenses of the Equity Income and International VIP Portfolios to 1%
of each Fund's average net assets. Additionally, the Advisor has agreed to limit
the annual operating expenses of the Low Duration VIP Portfolio to 0.58% of the
Fund's average net assets.
B-18
<PAGE> 44
Each of the three Investment Advisory Agreements provides that the Advisor
shall not be liable to the Trust for any error of judgment by the Advisor or for
any loss sustained by any of the Funds except in the case of a breach of
fiduciary duty with respect to the receipt of compensation for services (in
which case any award of damages will be limited as provided in the 1940 Act) or
of willful misfeasance, bad faith, gross negligence or reckless disregard of
duty.
Portfolio Transactions and Brokerage
The Investment Advisory Agreements state that in connection with its
duties to arrange for the purchase and the sale of securities held in the
portfolio of each Fund by placing purchase and sale orders for that Fund, the
Advisor shall select such broker-dealers ("brokers") as shall, in the Advisor's
judgment, implement the policy of the Trust to achieve "best execution", i.e.,
prompt and efficient execution at the most favorable securities price. In making
such selection, the Advisor is authorized in the Agreements to consider the
reliability, integrity and financial condition of the broker. The Advisor is
also authorized by the Agreements to consider whether the broker provides
brokerage and/or research services to the Fund and/or other accounts of the
Advisor. The Agreements state that the commissions paid to brokers may be higher
than another broker would have charged if a good faith determination is made by
the Advisor that the commission is reasonable in relation to the services
provided, viewed in terms of either that particular transaction or the Advisor's
overall responsibilities as to the accounts as to which it exercises investment
discretion and that the Advisor shall use its judgment in determining that the
amount of commissions paid are reasonable in relation to the value of brokerage
and research services provided and need not place or attempt to place a specific
dollar value on such services or on the portion of commission rates reflecting
such services. The Agreements provide that to demonstrate that such
determinations were in good faith, and to show the overall reasonableness of
commissions paid, the Advisor shall be prepared to show that commissions paid
(i) were for purposes contemplated by the Agreements; (ii) were for products or
services which provide lawful and appropriate assistance to the Advisor's
decision-making process; and (iii) were within a reasonable range as compared to
the rates charged by brokers to other institutional investors as such rates may
become known from available information. The Advisor is also authorized to
consider sales of shares of each Fund and/or of any other investment companies
for which the Advisor acts as Advisor as a factor in the selection of brokers to
execute brokerage and principal transactions, subject to the requirements of
"best execution", as defined above, although the Advisor is not currently doing
so.
The research services discussed above may be in written form or through
direct contact with individuals and may include information as to particular
companies and securities as well as market, economic or institutional areas and
information assisting the Trust in the valuation of the Funds' investments. The
research which the Advisor receives for the Funds' brokerage commissions,
whether or not useful to a Fund, may be useful to the Advisor in managing the
accounts of the Advisor's other advisory clients. Similarly, the research
received for the commissions of such accounts may be useful to any Fund.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission although the price of the security usually includes a profit to the
dealer. Money market instruments usually trade on a "net" basis as well. On
occasion, certain money market instruments may be purchased by the Funds
directly from an issuer in which case no commissions or discounts are paid. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount.
The International VIP Portfolio anticipates that its brokerage
transactions involving securities of companies headquartered in countries other
than the U.S. will be conducted primarily on the principal exchanges of such
countries. Transactions on foreign exchanges are usually subject to fixed
commissions which are generally higher than negotiated commissions on U.S.
transactions, although the Trust will endeavor to achieve the best net results
in effecting its portfolio transactions. There is generally less government
supervision and regulation of exchanges and brokers in foreign countries than in
the U.S.
NET ASSET VALUE
As indicated in the Funds' Prospectus, the net asset value per share of
each Fund's shares will be determined on each day that the New York Stock
Exchange is open for trading. That Exchange annually announces the days on which
it will not be open for trading; the most recent announcement indicates that it
will not be open on the following days: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. However, that Exchange may close on days not included in that
announcement. Also, no Fund is required to compute its net asset value on any
day on which no order to purchase or redeem its shares is received.
B-19
<PAGE> 45
Securities are valued by an independent pricing agent to the extent
possible. In determining the net asset value of each Fund's shares, equity
securities that are listed on a securities exchange (whether domestic or
foreign) or quoted by the NASDAQ National Market System are valued at the last
sale price on that day as of the close of regular trading on the New York Stock
Exchange (which is currently 4:00 p.m., New York time), or, in the absence of
recorded sales, at the average of readily available closing bid and asked prices
on such exchange or on such System. Unlisted equity securities that are not
included in such National Market System are valued at the average of the quoted
bid and asked prices in the over-the-counter market.
Fixed-income securities which are traded on a national securities exchange
will be valued at the last sale price or, if there was no sale on such day, at
the average of readily available closing bid and asked prices on such exchange.
However, securities with a demand feature exercisable within one to seven days
are valued at par. Prices for fixed-income securities may be based on quotations
received from one or more market-makers in the securities, or on evaluations
from pricing services. Fixed-income securities for which quotations or prices
are not readily available are valued at their fair value as determined by the
Advisor under guidelines established by the Board of Trustees, with reference to
fixed-income securities whose prices are more readily obtainable or to an
appropriate matrix utilizing similar factors. As a broader market does not
exist, the proceeds received upon the disposal of such securities may differ
from their recorded value. Debt securities which mature in less than 60 days are
valued at amortized cost (unless the Board of Trustees determines that this
method does not represent fair value), if their original maturity was 60 days or
less or by amortizing the value as of the 61st day prior to maturity, if their
original term to maturity exceeded 60 days.
Options, futures contracts and options thereon which are traded on
exchanges are valued at their last sale or settlement price as of the close of
the exchanges or, if no sales are reported, at the average of the quoted bid and
asked prices as of the close of the exchange.
Trading in securities listed on foreign securities exchanges or
over-the-counter markets is normally completed before the close of regular
trading on the New York Stock Exchange. In addition, foreign securities trading
may not take place on all business days in New York and may occur on days on
which the New York Stock Exchange is not open. In addition, foreign currency
exchange rates are generally determined prior to the close of trading on the New
York Stock Exchange. Events affecting the values of foreign securities and
currencies will not be reflected in the determination of net asset value unless
the Board of Trustees determines that the particular event would materially
affect net asset value, in which case an adjustment will be made. Investments
quoted in foreign currency are valued daily in U.S. dollars on the basis of the
foreign currency exchange rate prevailing at the time of valuation. Foreign
currency exchange transactions conducted on a spot basis are valued at the spot
rate prevailing in the foreign exchange market.
Securities and other assets for which market quotations are not readily
available are valued at their fair value as determined by the Advisor under
guidelines established by and under the general supervision and responsibility
of the Board of Trustees.
DIVIDENDS AND TAX STATUS
Each Fund intends to qualify and remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code.
Qualification as a regulated investment company requires, among other things,
that (a) at least 90% of each Fund's annual gross income, without offset for
losses from the sale or other disposition of securities, be derived from
payments with respect to securities loans, interest, dividends and gains from
the sale or other disposition of securities, foreign currencies or options
(including forward contracts) thereon; (b) each Fund derive less than 30% of its
gross income from gains (without offset for losses) from the sale or other
disposition of securities or options thereon held for less than three months;
and (c) each Fund diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. Government securities and other securities limited in
respect of any one issuer to an amount not greater than 5% of the Fund's assets
and 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities). In addition, in order not to be
subject to federal taxation, each Fund must distribute to its shareholders at
least 90% of its net investment income, other than net capital gains, earned in
each year.
A separate account upon which a variable annuity contract or variable life
insurance contract is based must meet certain diversification requirements set
forth in U.S. Treasury regulations. Such regulations generally require, among
other things, that a regulated investment company underlying such contracts may
invest no more than (i) 55% of the value of its assets in one investment, (ii)
70% of the value of its assets in two investments, (ii) 80% of the value of its
assets in three investments, and (iv) 90% of the value of its assets in four
investments. If, as is intended, each Fund meets these requirements and complies
with
B-20
<PAGE> 46
certain other conditions, a separate account investing solely in shares of a
Fund will also be deemed to meet these diversification requirements. However, a
failure of a Fund to qualify as a regulated investment company or to meet such
conditions and to comply with such requirements could cause the owners of
variable annuity contracts and variable life insurance contracts and variable
life insurance contracts based on such accounts to recognize ordinary income
each year in the amount of any net appreciation of such contract during the year
(including the annual costs of life insurance, if any, provided under such
contract).
Provided that each Fund and a separate account investing in such Fund
satisfy the above requirements, any distributions from a Fund will be exempt
from current federal income taxation to the extent that such distributions
accumulate in a variable annuity contract or variable life insurance contract
owned by an individual.
A Fund is required to pay an excise tax to the extent it does not
distribute to its shareholders during such calendar year at least 98% of its
ordinary income for that calendar year, 98% of its capital gains over capital
losses for the one-year period ending October 31 in such calendar year, and all
undistributed ordinary income and capital gains for the preceding respective
one-year period. The Funds intend to meet these distribution requirements to
avoid excise tax liability. The Funds also intend to continue distributing to
shareholders all of the excess of net long-term capital gain over net short-term
capital loss on sales of securities. If the net asset value of shares of a Fund
should, by reason of a distribution of realized capital gains, be reduced below
a shareholder's cost, such distribution would to that extent be a return of
capital to that shareholder even though taxable to the shareholder, and a sale
of shares by a shareholder at net asset value at that time would establish a
capital loss for federal tax purposes.
In determining the extent to which a Fund's dividends may be eligible for
the 70% dividends received deduction by corporate shareholders, interest income,
capital gain net income, gain or loss from Section 1256 contracts, dividend
income from foreign corporations and income from other sources will not
constitute qualified dividends. Corporate shareholders should consult their tax
advisors regarding other requirements applicable to the dividends received
deduction.
Special rules apply to the treatment of certain forward foreign currency
exchange contracts (Section 1256 contracts). At the end of each year, such
investments held by a Fund must be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Except to the
extent that such gains or losses are treated as "Section 988" gains or losses,
as described below, sixty percent of any gain or loss recognized on these
"deemed sales" and on actual dispositions may be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss.
Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or loss.
Similarly, gains or losses on forward foreign currency exchange contracts or
dispositions of debt securities denominated in a foreign currency attributable
to fluctuations in the value of the foreign currency between the date of
acquisition of the security and the date of disposition are also treated as
ordinary gain or loss. These gains, referred to as "Section 988" gains or
losses, increase or decrease the amount of a Fund's investment company taxable
income available to be distributed to its shareholders as ordinary income,
rather than increasing or decreasing the Fund's net capital gain. If Section 988
losses exceed other investment company taxable income during a taxable year, the
Fund would not be able to make any ordinary dividend distributions, or
distributions made before the losses were realized would be recharacterized as a
return of capital to shareholders, rather than as an ordinary dividend, reducing
the basis of each shareholder's shares.
Any loss realized on a sale, redemption or exchange of shares of a Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
received in connection with the payment of a dividend by a Fund constitute a
replacement of shares.
PERFORMANCE INFORMATION
Total Return. Average annual total return quotations used in the Funds'
advertising and promotional materials are calculated according to the following
formula:
P(1 + T)(n) = ERV
where P equals a hypothetical initial payment of $1000; T equals average annual
total return; n equals the number of years; and ERV equals the ending redeemable
value at the end of the period of a hypothetical $1000 payment made at the
beginning of the
B-21
<PAGE> 47
period.
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication. Average annual
total return, or "T" in the above formula, is computed by finding the average
annual compounded rates of return over the period that would equate the initial
amount invested to the ending redeemable value. Average annual total return
assumes the reinvestment of all dividends and distributions.
Yield. Annualized yield quotations used in a Fund's advertising and
promotional materials are calculated by dividing the Fund's interest income for
a specified thirty-day period, net of expenses, by the average number of shares
outstanding during the period, and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the net asset value per share
at the end of the period. Yield quotations are calculated according to the
following formula:
YIELD = 2 [ ( a-b + 1)(6) - 1 ]
-----
cd
where a equals dividends and interest earned during the period; b equals
expenses accrued for the period, net of reimbursements; c equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends; and d equals the maximum offering price per share on the last
day of the period.
Except as noted below, in determining net investment income earned during
the period ("a" in the above formula), a Fund calculates interest earned on each
debt obligation held by it during the period by (1) computing the obligation's
yield to maturity, based on the market value of the obligation (including actual
accrued interest) on the last business day of the period or, if the obligation
was purchased during the period, the purchase price plus accrued interest; (2)
dividing the yield to maturity by 360 and multiplying the resulting quotient by
the market value of the obligation (including actual accrued interest). Once
interest earned is calculated in this fashion for each debt obligation held by
the Fund, net investment income is then determined by totaling all such interest
earned.
For purposes of these calculations, the maturity of an obligation with one
or more call provisions is assumed to be the next date on which the obligation
reasonably can be expected to be called or, if none, the maturity date.
Other information. Each Fund's performance data quoted in advertising and
other promotional materials represents past performance and is not intended to
predict or indicate future results. The return and principal value of an
investment in a Fund will fluctuate, and an investor's redemption proceeds may
be more or less than the original investment amount. Yields and total returns
quoted for a Fund include the effect of deducting the Fund's expenses, but may
not include charges and expenses attributable to a particular variable annuity
contract or variable life insurance policy. Including these charges in the
quotations of a Fund's yield and total return would have the effect of
decreasing performance. Since shares of the Funds can be purchased only through
a variable annuity contract or variable life insurance policy, a purchaser of
such contract or policy should carefully review the prospectus for the
applicable variable annuity contract or variable life insurance policy for
information on relevant charges and expenses. Performance information for the
Funds must always be accompanied by, and be reviewed with, performance
information for the insurance product which invests in the Funds.
In advertising and promotional materials, a Fund may compare its
performance with data published by Lipper Analytical Services, Inc. ("Lipper")
or CDA Investment Technologies, Inc. ("CDA"). The Fund also may refer in such
materials to mutual fund performance rankings and other data, such as
comparative asset, expense and fee levels, published by Lipper or CDA.
Advertising and promotional materials also may refer to discussions of the Fund
and comparative mutual fund data and ratings reported in independent periodicals
including, but not limited to, The Wall Street Journal, Money Magazine, Forbes,
Business Week, Financial World and Barron's.
GENERAL INFORMATION ABOUT THE TRUST
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest and to divide or combine
the shares into a greater or lesser number of shares without thereby changing
the proportionate beneficial interest in each Fund. Each share represents an
interest in a Fund proportionately equal to the interest of each other share.
Upon the Trust's liquidation, all shareholders would share pro rata in the net
assets of the Fund in question available for distribution to shareholders. If
they deem it advisable and in the best interest of shareholders, the Board of
Trustees may create
B-22
<PAGE> 48
classes of shares. The Board of Trustees has created three series of shares, and
may create additional series in the future, which have separate assets and
liabilities; each of such series has or will have a designation including the
word "Series." Income and operating expenses not specifically attributable to a
particular Fund are allocated fairly among the Funds by the Trustees, generally
on the basis of the relative net assets of each Fund.
The Declaration of Trust provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust and satisfy any judgment thereon.
Ten shareholders holding the lesser of $25,000 worth or one percent of a
Fund's shares may advise the Trustees in writing that they wish to communicate
with other shareholders for the purpose of requesting a meeting to remove a
Trustee. The Trustees will then, if requested by the applicants, mail at the
applicants' expense the applicants' communication to all other shareholders.
The Trust or any Fund may be terminated if approved by the vote of a
majority of the Trustees or by the approval of the holders of a majority of the
Trust's outstanding shares, as defined in the 1940 Act. If not so terminated,
the Trust will continue indefinitely.
Rule 18f-2 under the 1940 Act provides that as to any investment company
which has two or more series outstanding and as to any matter required to be
submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. A change in
investment policy may go into effect as to one or more series whose holders so
approve the change even though the required vote is not obtained as to the
holders of other affected series.
The rights accompanying Fund shares are legally vested in the separate
accounts. However, in accordance with current law and interpretations thereof,
Participating Insurance Companies will vote shares held in the separate accounts
in a manner consistent with timely voting instructions received from the holders
of variable annuity contracts and variable life insurance policies. Each
Participating Insurance Company will vote Fund shares held in separate accounts
for which no timely instructions are received from the holders of variable
annuity contracts and variable life insurance policies, as well as shares it
owns, in the same proportion as those shares for which voting instructions are
received. For a further discussion, please refer to the insurance company's
separate account prospectus.
The Trust's custodian, Firstar Trust Company, 615 East Michigan Street,
Milwaukee, Wisconsin, is responsible for holding the Funds' assets and acts as
the Trust's accounting services agent. Subcustodians provide custodial services
for assets of the Trust held outside the U.S. The Trust's independent
accountants, Price Waterhouse LLP, 100 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202, examine the Trust's financial statements and assist in the
preparation of certain reports to the Securities and Exchange Commission.
As of the date of this Statement of Additional Information, ____________ owns
all of the outstanding shares of the Trust.
B-23
<PAGE> 49
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
The following audited financial statements are included in the
Statement of Additional Information constituting Part B of this Registration
Statement:**
Statement of Assets and Liabilities
Notes to Financial Statements
Report of Independent Accountants
The following financial statements are included in the Prospectuses
constituting Part A of this Registration Statement:
None.
(b) Exhibits:
(1) (a) Declaration of Trust*
(b) Certificate of Designation*
(2) By-Laws*
(3) Not applicable
(4) Not applicable
(5) (a) Form of Investment Advisory Agreement
relating to the Equity Income VIP Portfolio*
(b) Form of Investment Advisory Agreement
relating to the International VIP Portfolio*
(c) Form of Investment Advisory Agreement
relating to the Low Duration VIP Portfolio*
(6) Not applicable
(7) Not applicable
(8) (a) Custodian Agreement with Firstar Trust Company**
(b) Sub-Custodian Agreement between Firstar Trust
Company and Chase Manhattan Bank, N.A. **
(9) Fund Administration Servicing Agreement**
(10) Opinion and Consent of Counsel**
(11) Consent of Independent Auditors**
(12) Not applicable
(13) Investment letter**
(14) Not applicable
(15) Not applicable
(16) Not applicable
- ----------
* Filed herewith.
** To be filed by amendment.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
See "General Information About the Trust" in the Statement of
Additional Information.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
None.
C-1
<PAGE> 50
ITEM 27. INDEMNIFICATION.
Section 12 of Article SEVENTH of Registrant's Declaration of Trust,
states as follows:
(c) As used in this paragraph the following terms shall have the
meanings set forth below:
(i) the term "indemnitee" shall mean any present or
former Trustee, officer or employer of the Trust, any present
or former Trustee or officer of another trust or corporation
whose securities are or were owned by the Trust or of which
the Trust is or was a creditor and who served or serves in
such capacity at the request of the Trust, any present or
former investment advisor, sub-advisor or principal
underwriter of the Trust and the heirs, executors,
administrators, successors and assigns of any of the
foregoing; however, whenever conduct by an indemnitee is
referred to, the conduct shall be that of the original
indemnitee rather than that of the heir, executor,
administrator, successor or assignee;
(ii) the term "covered proceeding" shall mean any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, to
which an indemnitee is or was a party or is threatened to be
made a party by reason of the fact or facts under which he or
it is an indemnitee as defined above;
(iii) the term "disabling conduct" shall mean willful
misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of the office in
question;
(iv) the term "covered expenses" shall mean expenses
(including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by an
indemnitee in connection with a covered proceeding; and
(v) the term "adjudication of liability" shall mean,
as to any covered proceeding and as to any indemnitee, an
adverse determination as to the indemnitee whether by judgment
order, settlement, conviction or upon a plea of nolo
contendere or its equivalent.
(d) The Trust shall not indemnify any indemnitee for any
covered expenses in any covered proceeding if there has been an
adjudication of liability against such indemnitee expressly based on a
finding of disabling conduct.
(e) Except as set forth in (d) above, the Trust shall
indemnify an indemnitee for covered expenses in any covered proceeding,
whether or not there is an adjudication of liability as to such
indemnitee, if a determination has been made that the indemnitee was
not liable by reason of disabling conduct by (i) a final decision of
the court or other body before which the covered proceeding was
brought; or (ii) in the absence of such decision, a reasonable
determination, based on a review of the facts, by either (a) the vote
of a majority of a quorum of Trustees who are neither "interested
persons," as defined in the 1940 Act, nor parties to the covered
proceeding or (b) an independent legal counsel in a written opinion;
provided that such Trustees or counsel, in reaching such determination,
may but need not presume the absence of disabling conduct on the part
of the indemnitee by reason of the manner in which the covered
proceeding was terminated.
(f) Covered expenses incurred by an indemnitee in connection
with a covered proceeding shall be advanced by the Trust to an
indemnitee prior to the final disposition of a covered proceeding upon
the request of the indemnitee for such advance and the undertaking by
or on behalf of the indemnitee to repay the advance unless it is
ultimately determined that the indemnitee is entitled to
indemnification thereunder, but only if one or more of the following is
the case: (i) the indemnitee shall provide a security for such
undertaking; (ii) the Trust shall be insured against losses arising out
of any lawful advances; or (iii) there shall have been a determination,
based on a review of the readily available facts (as, opposed to a full
trial-type inquiry) that there is a reason to believe that the
indemnitee ultimately will be found entitled to indemnification by
either independent legal counsel in a written opinion or by the vote of
a majority of a
C-2
<PAGE> 51
quorum of trustees who are neither "interested persons" as defined in
the 1940 Act nor parties to the covered proceeding.
(g) Nothing herein shall be deemed to affect the right of the
Trust and/or any indemnitee to acquire and pay for any insurance
covering any or all indemnitees to the extent permitted by the 1940 Act
or to affect any other indemnification rights to which any indemnitee
may be entitled to the extent permitted by the 1940 Act.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is,
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.
See "Organization and Management" in the Prospectus constituting Part A
of this Registration Statement and "Management" in the Statement of Additional
Information constituting Part B of this Registration Statement. Information as
to Hotchkis and Wiley, a division of Merrill Lynch Asset Management, L.P., is
included in its Form ADV filed with the Securities and Exchange Commission (File
No. 801-11583), as most recently amended, the text of which is incorporated
herein by reference.
ITEM 29. PRINCIPAL UNDERWRITERS.
Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder are in the possession of Registrant and
Registrant's custodian, as follows: the documents required to be maintained by
paragraphs (4), (5), (6), (7), (10) and (11) of Rule 31a-1(b) will be maintained
by the Registrant, and all other records will be maintained by the Custodian.
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
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.
The Registrant hereby undertakes to furnish to each person to whom a
Prospectus is delivered a copy of Registrant's latest annual report to
shareholders upon request and without charge.
C-3
<PAGE> 52
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Los Angeles and State of California on the 1st day of
April, 1997.
HOTCHKIS AND WILEY VARIABLE TRUST
By: /s/ Nancy D. Celick
------------------------------------
Nancy D. Celick
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Nancy D. Celick Principal Executive Officer April 1, 1997
- ------------------------------------
Nancy D. Celick
/s/ Gracie Fermelia Principal Financial and Accounting April 1, 1997
- ------------------------------------
Gracie Fermelia Officer
/s/ Robert L. Burch III Trustee April 1, 1997
- ------------------------------------
Robert L. Burch III
Trustee
- ------------------------------------
John Gavin
/s/ Joe Grills Trustee April 1, 1997
- ------------------------------------
Joe Grills
/s/ John F. Hotchkis Trustee April 1, 1997
- ------------------------------------
John F. Hotchkis
Trustee
- ------------------------------------
Robert B. Hutchinson
/s/ Michael L. Quinn Trustee April 1, 1997
- ------------------------------------
Michael L. Quinn
/s/ Merle T. Welshans Trustee April 1, 1997
- ------------------------------------
Merle T. Welshans
/s/ Richard R. West Trustee April 1, 1997
- ------------------------------------
Richard R. West
</TABLE>
<PAGE> 1
EXHIBIT 99.B1(a)
HOTCHKIS AND WILEY VARIABLE TRUST
DECLARATION OF TRUST
Dated February 4, 1997
THE DECLARATION OF TRUST OF Hotchkis and Wiley Variable Trust is made
the 4th day of February, 1997 by the party signatory hereto, as trustee
(such person, so long as s/he shall continue in office in accordance with the
terms of this Declaration of Trust, and all other persons who at the time in
question have been duly elected or appointed as trustees in accordance with the
provisions of this Declaration of Trust and are then in office, being
hereinafter called the "Trustees").
WITNESSETH
WHEREAS, the Trustees desire to form a trust fund under the laws of
Massachusetts for the investment and reinvestment of funds contributed thereto;
and
WHEREAS, it is proposed that the beneficial interest in the trust
assets be divided into transferable shares of beneficial interest as
hereinafter provided;
NOW, THEREFORE, the Trustees hereby declare that they will hold in
trust, all money and property contributed to the trust fund to manage and
dispose of the same for the beneficial interest issued hereunder and subject to
the provisions hereof, to wit:
FIRST: This Trust shall be known as HOTCHKIS AND WILEY VARIABLE TRUST.
SECOND: Whenever used herein, unless otherwise required by the context
or specifically provided:
1. All terms used in this Declaration of Trust which are defined
in the 1940 Act shall have the meanings given to them in the 1940 Act.
2. The "Trust" refers to HOTCHKIS AND WILEY VARIABLE TRUST.
<PAGE> 2
3. "Shareholder" means a record owner of Shares of the Trust.
4. The "Trustees" refer to the individual trustees in their
capacity as trustees hereunder of the Trust and their successor or successors
for the time being in office as such trustees.
5. "Shares" means the equal proportionate units of interest into
which the beneficial interest in the Trust shall be divided from time to time
and includes fractions of Shares as well as whole Shares.
6. The "1940 Act" refers to the Investment Company Act of 1940,
as amended from time to time, together with the rules, regulations and any
relevant exemptive orders of the Commission from time to time in effect
thereunder.
7. "Commission" means the Securities and Exchange Commission.
8. "Board" or "Board of Trustees" means the Board of Trustees of
the Trust.
9. In this Declaration of Trust, the masculine embraces the
feminine.
10. "Majority Shareholder Vote", as used with respect to the
election of any Trustee at a meeting of Shareholders, shall mean the vote for
the election of such Trustee of a plurality of all outstanding Shares of the
Trust, without regard to Series or Class, represented in person or by proxy and
entitled to vote thereon, provided, that a quorum is present; and as used with
respect to any other action required or permitted to be taken by Shareholders,
shall mean the affirmative vote for such action of the holders of that number
of all outstanding Shares (or, where a separate vote of Shares of any
particular Series or Class is to be taken, the affirmative vote of that number
of the outstanding Shares of that Series or Class) of the Trust which
constitutes: (a) a majority of all Shares (or of Shares of the particular
Series or Class) represented in person or by proxy and
2
<PAGE> 3
entitled to vote on such action at the meeting of Shareholders at which such
action is to be taken, provided, that a quorum is present; or (b) if such vote
is to be given or such action is to be taken by written consent of
Shareholders, a majority of all Shares (or of Shares of the particular Series
or Class) issued and outstanding and entitled to vote on such action; or (c) as
used with respect to any action requiring the affirmative vote of "a majority
of the outstanding voting securities", as the quoted phrase is defined in the
1940 Act, of the Trust or of any Series or Class, "Majority Shareholder Vote"
means the vote for such action at a meeting of Shareholders of the smallest
majority of all outstanding Shares of the Trust (or of Shares of the particular
Series or Class) entitled to vote on such action which satisfies such 1940 Act
voting requirement.
11. "Person" shall mean and include individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities, whether
or not legal entities, and governments and agencies and political subdivisions
thereof.
12. "Prospectus", as used with respect to any Fund or Series of
Shares shall mean the prospectus relating to such Fund or Series which
constitutes part of the currently effective Registration Statement of the Trust
under the 1933 Act, as such prospectus may be amended or supplemented from time
to time.
13. "Single Class Voting", as used with respect to any matter to
be acted upon at a meeting or by written consent of Shareholders, shall mean a
style of voting in which each holder of one or more Shares shall be entitled to
one vote on the matter in question for each Share standing in his name on the
records of the Trust, irrespective of Series or Class, and all outstanding
Shares or all Series or Classes vote as a single class.
3
<PAGE> 4
14. "Trust Property" shall mean, as of any particular time, any
and all property which shall have been transferred, conveyed or paid to the
Trust or the Trustees, and all interest, dividends, income, earnings, profits
and gains therefrom, and proceeds thereof, including any proceeds derived from
the sale, exchange or liquidation thereof, and any funds or payments derived
from any reinvestment of such proceeds in whatever form the same may be, and
which at such time is owned or held by, or for the account of, the Trust or the
Trustees, without regard to the Fund to which such property is allocated.
15. "1933 Act" shall mean the federal Securities Act of 1933 and
the rules and regulations of the Commission thereunder, all as from time to
time amended and in effect.
THIRD: The purpose or purposes for which the Trust is formed and the
business or objects to be transacted, carried on and promoted by it are as
follows:
1. To hold, invest and reinvest its funds, and in connection
therewith to hold part or all of its funds in cash, and to purchase or
otherwise acquire, hold for investment or otherwise, sell, sell short, assign,
negotiate, transfer, exchange or otherwise dispose of or turn to account or
realize upon, securities (which term "securities" shall for the purposes of
this Declaration of Trust, without limitation of the generality thereof, be
deemed to include any stocks, shares, bonds, debentures, notes, mortgages or
other obligations, and any certificates, receipts, warrants or other
instruments representing rights to receive, purchase or subscribe for the same,
or evidencing or representing any other rights or interests therein, or in any
property or assets) created or issued by any issuer (which term "issuer" shall
for the purposes of this Declaration of Trust, without limitation of the
generality thereof be deemed to include any persons, firms, associations,
corporations, syndicates, combinations, organizations, governments, or
subdivisions
4
<PAGE> 5
thereof) or in any other financial instruments whether or not considered as
securities or commodities; and to exercise, as owner or holder of any
securities or other financial instruments, all rights, powers and privileges in
respect thereof, and to do any and all acts and things for the preservation,
protection, improvement and enhancement in value of any or all such securities.
2. To borrow money and pledge assets in connection with any of
the objects or purposes of the Trust, and to issue notes or other obligations
evidencing such borrowings, to the extent permitted by the 1940 Act and by the
Trust's fundamental investment policies under the 1940 Act.
3. To issue and sell its Shares in such amounts and on such terms
and conditions, for such purposes and for such amount or kind of consideration
(including without limitation thereto, securities or other financial
instruments) now or hereafter permitted by the laws of the Commonwealth of
Massachusetts and by this Declaration of Trust, as the Trustees may determine.
4. To purchase or otherwise acquire, hold, dispose of, resell,
transfer, reissue or cancel (all without the vote or consent of the
Shareholders of the Trust) its Shares, in any manner and to the extent now or
hereafter permitted by the laws of Massachusetts and by this Declaration of
Trust.
5. To conduct its business in all its branches at one or more
offices in Massachusetts and elsewhere in any part of the world, without
restriction or limit as to extent.
6. To carry out all or any of the foregoing objects and purposes
as principal or agent, and alone or with associates or, to the extent now or
hereafter permitted by the laws of Massachusetts, as a member of, or as the
owner or holder of any stock of, or share of interest in,
5
<PAGE> 6
any issuer, and in connection therewith to make or enter into such deeds or
contracts with any issuers and to do such acts and things and to exercise such
powers, as a natural person could lawfully make, enter into, do or exercise.
7. To do any and all such further acts and things and to exercise
any and all such further powers as may be necessary, incidental, relative,
conducive, appropriate or desirable for the accomplishment, carrying out or
attainment of all or any of the foregoing purposes or objects.
The foregoing objects and purposes shall, except as otherwise
expressly provided, be in no way limited or restricted by reference to, or
inference from, the terms of any other clause of this or any other Articles of
this Declaration of Trust, and shall each be regarded as independent and
construed as powers as well as objects and purposes, and the enumeration of
specific purposes, objects and powers shall not be construed to limit or
restrict in any manner the meaning of general terms or the general powers of
the Trust now or hereafter conferred by the laws of the Commonwealth of
Massachusetts nor shall the expression of one thing be deemed to exclude
another, though it be of like nature, not expressed; provided, however, that
the Trust shall not carry on any business, or exercise any powers, in any
state, territory, district or country except to the extent that the same may
lawfully be carried on or exercised under the laws thereof.
FOURTH: The beneficial interest in the Trust shall at all times be
divided into an unlimited number of transferable Shares without par value.
1. Establishment and Designation of Funds and Series and Classes
of Shares.
(a) Funds and Series of Shares. The Trustees shall have the power
and authority, at any time or from time to time, and without any requirement of
Shareholder approval, to establish and designate one or more separate
portfolios or funds (each a "Fund") for
6
<PAGE> 7
the purpose of holding one or more separate and distinct portfolios of assets,
and to authorize a separate series of Shares to represent the beneficial
interests in each such Fund (each a "Series"). Such establishment and
designation shall be effective upon the execution by a Majority of the Trustees
(or by an officer of the Trust pursuant to the vote of a Majority of the
Trustees) of an instrument setting forth the establishment and designation of
such Fund and the relative rights and preferences of such Series of Shares, and
the manner in which the same may be amended (a "Certificate of Designation").
The Certificate of Designation establishing a Fund may provide that the number
of Shares of such Fund which may be issued is unlimited, or may limit the
number of Shares, and may provide that its Shares shall be divided into
Classes, or shall consist of a single Class.
(b) Classes of Shares. Without limitation of any other powers
accorded to them by this Declaration or otherwise, the Trustees shall have
power, at any time or from time to time, and without the necessity for any
Shareholder approval, to authorize two or more separate Classes of Shares of
any Series initially authorized without Classes, as they deem necessary or
desirable, by vote of a Majority of the Trustees, and in such connection to fix
and determine the relative rights and burdens of Shares of the respective
Classes of such Series as to sales charges, redemption charges or other fees
and charges to which such Shares shall be subject, allocations of expenses,
rights of redemption, special and related rights as to dividends and on
liquidation, conversion rights, and conditions under which Shareholders of the
several Classes shall have separate voting rights or (subject to the provisions
of paragraph 1 of Article FIFTH) no voting rights. Any such authorization of
Classes shall be effective upon the execution by a Majority of the Trustees (or
by an officer of the Trust pursuant to the vote of a Majority of the Trustees)
of
7
<PAGE> 8
the Certificate of Designation establishing such Series setting forth such
provisions and the manner in which the same may be amended.
2. Changes of Terms of Series and Classes. At any time at which
no Shares of a Series are outstanding, the Trustees may terminate such Series
and the Fund to which it pertains, and at any time at which no Shares of a
particular Class and no Shares of any other Class which are convertible into
Shares of such Class are outstanding, the Trustees may terminate such Class.
Any such termination of a Series or Class shall be effected by the execution by
a Majority of the Trustees, or by an officer of the Trust pursuant to the vote
of a Majority of the Trustees, of an instrument so providing (a "Certificate of
Termination"). Each Certificate of Designation or Certificate of Termination,
any instrument amending a Certificate of Designation, and any instrument
authorizing the establishment of Classes of the Shares of a Series shall have
the status of an amendment to this Declaration of Trust, and shall be filed as
provided in paragraph 11 of Article EIGHTH hereof, but such filing shall not be
a prerequisite to the effectiveness thereof.
3. Reclassification of Shares. Without limitation of any other
powers accorded to them by this Declaration or otherwise, the Trustees shall
have power to classify or reclassify any unissued Shares, or any Shares of any
Series previously issued and reacquired by the Trust, into Shares of one or
more other Series that may be established and designated from time to time; and
to classify or reclassify any unissued Shares of any Series, or any Shares of
any Series previously issued and reacquired by the Trust into any number of
additional Classes of such Series by setting or changing in one or more
respects provisions applicable to such Class or Classes relating to sales
charges, any rights of redemption and the price, terms and manner of
redemption, special and relative rights as to dividends and other distributions
and on liquidation,
8
<PAGE> 9
sinking or purchase fund provisions, conversion rights, and (subject to the
provisions of paragraph 1 of Article FIFTH) the conditions under which the
Shareholders of the several Classes shall have separate voting rights or no
voting rights. Except as otherwise provided as to a particular Fund herein or
in the Certificate of Designation therefor, the Trustees shall have all the
rights and powers, and be subject to all the duties and obligations, with
respect to each such Fund and the assets and affairs thereof as they have under
this Declaration with respect to the Trust and the Trust Property in general.
4. Character of Separate Funds and Shares Thereof. Each Fund
established hereunder shall be a separate component of the assets of the Trust,
and the holders of Shares of the Series representing the beneficial interests
in that Fund shall be considered Shareholders of such Fund, and also as
Shareholders of the Trust for purposes of receiving reports and notices and
(except as otherwise provided herein or in the Certificate of Designation for a
particular Fund as to such Fund, or as required by the 1940 Act or other
applicable law) the right to vote, all without distinction by Series.
5. Consideration for Shares. The Trustees may issue Shares of
any Series to such Persons, or for such consideration (which may include
property subject to, or acquired in connection with the assumption of,
liabilities) and on such terms, not inconsistent with the provisions of the
1940 Act, as they may determine (or for no consideration if pursuant to a Share
dividend or split-up), all without action or approval of the Shareholders.
Contributions to the Trust may be accepted for, and Shares shall be redeemed
as, whole Shares and/or one one-thousandth (1/1000th) of a Share or multiples
thereof. All Shares when so issued on the terms determined by the Trustees
shall be fully paid and non-assessable (but may be subject to
9
<PAGE> 10
mandatory contribution back to the Trust as provided in sub-section (f) of
paragraph 6 of this Article FOURTH). The Trustees may authorize any
distributor, principal underwriter, custodian, transfer agent or other Person
to accept orders for the purchase of Shares that conform to such authorized
terms and to reject any purchase orders for Shares, whether or not conforming
to such authorized terms.
6. General Provisions for All Funds. Subject to the power of the
Trustees to classify or reclassify any unissued Shares of a Series in
accordance with paragraph 3 of this Article FOURTH, the Shares of the Fund
(unless the Trustees otherwise determine with respect to a Fund at the time of
establishing and designating the same), shall have the following relative
rights and preferences:
(a) Assets Belonging to Funds. Any portion of the Trust
Property allocated to a particular Fund, and all consideration received by the
Trust for the issue or sale of Shares of such Fund, together with all assets in
which such consideration is invested or reinvested, all interest, dividends,
income, earnings, profits and gains therefrom, and proceeds thereof, including
any proceeds derived from the sale, exchange or liquidation of such assets, and
any funds or payments derived from any reinvestment of such proceeds, in
whatever form the same may be, shall be held by the Trustees in trust for the
benefit of the holders of Shares of that Fund and shall irrevocably belong to
that Fund for all purposes, and shall be so recorded upon the books of account
of the Trust, and the Shareholders of such Fund shall not have, and shall be
conclusively deemed to have waived, any claims to the assets of any Fund of
which they are not Shareholders. Such consideration, assets, interest,
dividends, income, earnings, profits, gains and proceeds, together with any
General Items allocated to that Fund as provided in the following
10
<PAGE> 11
sentence, are herein referred to collectively as "Fund Assets" of such Fund,
and as assets "belonging to" that Fund. If the Trust shall have or realize any
assets, interest, dividends, income, earnings, profits, gains or proceeds which
are not readily identifiable as belonging to any particular Fund (collectively,
"General Items"), the Trustees shall allocate such General Items to and among
any one or more of the Funds of the Trust in such manner and on such basis as
they, in their sole discretion, deem fair and equitable; and any General Items
so allocated to a particular Fund shall belong to and be part of the Fund
Assets of that Fund. Each such allocation by the Trustees shall be conclusive
and binding upon the Shareholders of all Funds for all purposes.
(b) Liabilities of Funds. The assets belonging to each
Fund shall be charged with the liabilities incurred by or arising in respect of
that Fund and all expenses, costs, charges and reserves attributable to that
Fund, and at any time at which the Trust shall have more than one Fund, any
general liabilities, expenses, costs, charges or reserves which are not readily
identifiable as pertaining to any particular Fund shall be allocated and
charged by the Trustees to and among any one or more of the Funds of the Trust
in such manner and on such basis as the Trustees in their sole discretion deem
fair and equitable. The liabilities, expenses, costs, charges and reserves so
allocated and so charged to a particular Fund are herein referred to as
"liabilities of" that Fund. Each allocation of liabilities, expenses, costs,
charges and reserves by the Trustees shall be conclusive and binding upon the
Shareholders of all Funds for all purposes. The creditors of a particular Fund
may look only to the assets of that Fund to satisfy such creditors' claims, and
the creditors of a particular Class of a Fund may look only to the share of
that Class in the Fund Assets of such Fund to satisfy their claims.
11
<PAGE> 12
(c) Dividends. Dividends and distributions on Shares of
any Series shall, subject to any applicable provisions of the 1940 Act or other
applicable law or regulation, be paid with such frequency as the Trustees may
determine, which may be daily or otherwise pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Trustees may
determine, to the Shareholders of that Series, from such of the income, accrued
or realized, and capital gains, realized or unrealized, and out of the assets
belonging to the Fund to which such Series pertains, as the Trustees may
determine, after providing for actual and accrued liabilities of that Fund.
All dividends and distributions on Shares of any Series without separate
Classes shall be distributed pro rata to the holders of Shares of that Series
in proportion to the number of such Shares held by such holders at the date and
time of record established for the payment of such dividends or distributions.
Dividends and distributions on the Shares of a Fund having separate Classes of
Shares shall be in such amount as may be declared from time to time by the
Trustees, and such dividends and distributions may vary as between such Classes
to reflect differing allocations among such Classes of the liabilities,
expenses, costs, charges and reserves of such Fund, and any resultant
differences between the net asset value of such several Classes, to such extent
and for such purposes as the Trustees may deem appropriate, but dividends and
distributions on the Shares of a particular Class shall be distributed pro rata
to the Shareholders of that Class in proportion to the number of such Shares
held by such holders at the date and time of record established for the payment
of such dividends and distributions. Notwithstanding the last two preceding
sentences, the Trustees may determine, in connection with any dividend or
distribution program or procedure, that no dividend or distribution shall be
payable on newly-issued Shares as to which the Shareholder's purchase order
and/or payment have not been
12
<PAGE> 13
received by the time or times established by the Trustees under such program or
procedure, or that dividends or distributions shall be payable on Shares which
have been tendered by the holder thereof for redemption or repurchase, but the
redemption or repurchase proceeds of which have not yet been paid to such
Shareholder. Dividends and distributions on the Shares of a Series may be made
in cash or Shares of any Class of that Series, or a combination thereof, as
determined by the Trustees, or pursuant to any program that the Trustees may
have in effect at the time for the election by each Shareholder of the mode of
the making of such dividend or distribution to that Shareholder. Any such
dividend or distribution paid in Shares will be paid at the net asset value
thereof as determined in accordance with paragraph 13 of Article SEVENTH.
(d) Liquidation: Dissolution, Termination. In the event
of the liquidation or dissolution of the Trust, the Shareholders of each Fund
with outstanding Shares shall be entitled to receive, and in the event of the
liquidation, dissolution or termination of any single Fund having outstanding
Shares, the Shareholders of such Fund shall be entitled to receive, when and as
declared by the Trustees, the excess of the Fund Assets of such Fund over the
liabilities of such Fund. The assets so distributable to the Shareholders of
any Fund without Classes shall be distributed among such Shareholders in
proportion to the number of Shares of that Fund held by them and recorded on
the books of the Trust. The assets so distributable to the Shareholders of any
Fund with Classes shall be allocated among such Classes in proportion to the
respective share of such Class in the Fund Assets of such Fund, and shall be
distributed to the Shareholders of each such Class in proportion to the number
of Shares of that Class held by them and recorded on the books of the Trust.
13
<PAGE> 14
(e) Redemption by Shareholder. Each holder of Shares of
any Series or Class shall have the right at such times as may be permitted by
the Trustees, but no less frequently than once each week, to require the Trust
to redeem all or any part of such Shares at a redemption price equal to the net
asset value of such Shares next determined in accordance with paragraph 13 of
Article SEVENTH; provided, that the Trustees may from time to time, in their
discretion, determine and impose a fee for such redemption, and the proceeds of
the redemption of Shares (including a fractional Share) of any Series or Class
shall be reduced by the amount of any applicable contingent deferred sales
charge payable on such redemption pursuant to the terms of the initial issuance
of the Shares of such Series or Class (to the extent consistent with the 1940
Act). The redemption price of Shares redeemed under this sub-section (e) shall
be paid in cash; provided, however, that if the Trustees determine, which
determination shall be conclusive, that conditions exist with respect to any
Series or Class of Shares which make payment wholly in cash unwise or
undesirable, the Trust may make payment wholly or partly in securities or other
assets belonging to such, at the value of such securities or assets used in
such determination of net asset value. Notwithstanding the foregoing, the
Trust may postpone payment of the redemption price and may suspend the right of
the holders of Shares of any Series or Class to require the Trust to redeem
such Shares during any period or at any time when and to the extent permissible
under the 1940 Act.
(f) Shareholder Disclosure: Redemption at the Option of
the Trust. The holders of Shares of each Series and Class shall upon demand
disclose to the Trustees in writing such information with respect to their
direct and indirect ownership of Shares of such Series or Class as the Trustees
deem necessary to comply with the provisions of the Internal Revenue
14
<PAGE> 15
Code, or to comply with the requirements of any other authority. Each Share of
any Series or Class shall be subject to redemption at the option of the Trust
at the redemption price which would be applicable if such Share were being
redeemed by the Shareholder pursuant to subsection (e) of this paragraph 6 on
the effective date of such redemption: (i) at any time, if the Trustees
determine in their sole discretion that failure to so redeem may have
materially adverse consequences to the holders of the Shares of the Trust,
generally, or of any Fund thereof, or (ii) upon such other conditions with
respect to maintenance of Shareholder accounts with a minimum amount of at
least five hundred dollars ($500) as may from time to time be determined by the
Trustees in accordance with the 1940 Act. The Trustees shall have authority to
fix the effective date of such redemption, which shall be not earlier than the
date on which the Trust gives notice thereof to the shareholders whose Shares
are to be redeemed. Upon such redemption the holders of the Shares so redeemed
shall have no further right with respect thereto other than to receive payment
of such redemption price.
(g) Equality. All Shares of each Series without Classes
shall represent an equal proportionate interest in the Fund Assets of the Fund
to which such Series pertains (subject to the liabilities of that Fund), and
each Share of any such Series shall be equal to each other Share thereof. All
Shares of each Class of any Series having separate Classes shall represent an
equal proportionate interest in the share of such Class in the Fund Assets of
the Fund to which such Series pertains, subject to a like share of the
liabilities of such Fund, adjusted for any liabilities specifically allocable
to that Class, and each Share of any such Class shall be equal to each other
Share thereof; but the interests represented by the Shares of the different
Classes of a Series having separate Classes shall reflect any distinctions
among the several Classes of such
15
<PAGE> 16
Series existing under this paragraph 6 or under sub-section (b) of paragraph 1
of this Article FOURTH, or under the Certificate of Designation providing for
such Series. The Trustees may from time to time divide or combine the Shares
of any Series, or any Class of any Series, into a greater or lesser number of
Shares of that Series or Class without thereby changing the proportionate
beneficial interest in the Fund Assets of the Fund to which such Series or
Class pertains, or in any way affecting the rights of the holders of Shares of
any other Series or Class.
(h) Rights of Fractional Shares. Any fractional Share of
any Series or Class of Shares shall carry proportionately all the rights and
obligations of a whole Share of that Series or Class, including rights and
obligations with respect to voting, receipt of dividends and distributions,
redemption of Shares, and liquidation of the Trust or of the Fund to which such
Series or Class pertains.
(i) Conversion Rights. Subject to compliance with the
requirements of the 1940 Act, the Trustees shall have the authority to provide
(i) that holders of Shares of any Series or Class shall have the right to
convert said Shares into Shares of any other investment company registered as
such under the 1940 Act and designated for that purpose (an "Eligible
Investment Company") in the Trust's Prospectus for the Shares being converted,
(ii) that holders of any Class of a Series shall have the right to convert such
Shares into Shares of one or more other Classes of such Series, and (iii) that
Shares of any Class of a Series shall be automatically converted into Shares of
another Class of such Series, in each case in accordance with such requirements
and procedures as the Trustees may establish.
7. Ownership of Shares; Transfers. The ownership of Shares shall
be recorded on the books of the Trust or of a transfer agent or similar agent
for the Trust, which books shall be
16
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maintained separately for the Shares of each Series and Class that has been
authorized. All Shares of the Trust shall be transferable, but transfers of
Shares of a particular Series or Class will be recorded on the Share transfer
records of the Trust applicable to that Series or Class only at such times as
Shareholders shall have the right to require the Trust to redeem Shares of that
Series or Class and at such other times as may be permitted by the Trustees.
Certificates evidencing the ownership of Shares need not be issued except as
the Trustees may otherwise determine from time to time, and the Trustees shall
have power to call outstanding Share certificates and to replace them with book
entries. The Trustees may make such rules as they consider appropriate for the
issuance of Share certificates, the use of facsimile signatures, the transfer
of Shares and similar matters. The record books of the Trust as kept by the
Trust or any transfer agent or similar agent, as the case may be, shall be
conclusive as to who are the Shareholders and as to the number of Shares of
each Series and/or Class held from time to time by each such Shareholder.
8. No Pre-emptive Rights. No Shareholder, by virtue of holding
Shares of any Series or Class, shall have any pre-emptive or other right to
subscribe to any additional Shares of that Series or Class, or to any Shares of
any other Series or Class, or any other securities issued by the Trust.
9. Status of Shares. Every Shareholder, by virtue of having
become a Shareholder, shall be deemed to have expressly assented and agreed to
the terms hereof and to have become a party hereto. Shares shall be deemed to
be personal property, giving only the rights provided herein. Ownership of
Shares shall not entitle the Shareholder to any title in or to the whole or any
part of the Trust Property or right to call for a partition or division of the
same or for an
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accounting, nor shall the ownership of Shares constitute the Shareholders
partners. The death of a Shareholder during the continuance of the Trust shall
not operate to terminate the Trust or any Fund, nor entitle the representative
of any deceased Shareholder to an accounting or to take any action in court or
elsewhere against the Trust or the Trustees, but only to the rights of said
decedent under this Declaration.
10. Rights of Shareholders, and Obligations of Trustees.
Notwithstanding anything elsewhere contained in this Declaration of Trust or in
the By-laws, so long as the By-laws do not provide for regular annual meetings
of Shareholders of the Trust, the Shareholders of the Trust shall have such
rights, and the Trust, the Board of Trustees, and the Trustees shall have such
obligations as would exist if the Trust were a common law trust covered by
Section 16(c) of the 1940 Act. Whenever the Trust is divided into separate
Funds represented by separate Series of Shares, each such Fund shall be
considered as if it were a separate common law trust covered by said Section
16(c). However, the Trust may at any time or from time to time apply to the
Commission for one or more exemptions from all or part of said Section 16(c)
and, if an exemptive order or orders are issued by the Commission, such order
or orders shall be deemed part of said Section 16(c) for purposes of this
paragraph 10.
FIFTH: Shareholders:
1. Voting Powers. The Shareholders shall have power to vote only
for the following matters:
(a) for the election or removal of Trustees as provided
in the By-laws;
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(b) with respect to the approval or termination in
accordance with the 1940 Act of any investment advisory contract,
management contract or other contract as to which Shareholder approval
is required by the 1940 Act;
(c) with respect to any amendment of this Declaration to
the extent and as provided in paragraph 11 of Article EIGHTH hereof;
(d) to the same extent as the stockholders of a
Massachusetts business corporation as to whether or not a court action,
proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or any Fund,
or the Shareholders of any of them (provided, however, that a
Shareholder of a particular Fund shall not in any event be entitled to
maintain a derivative or class action on behalf of any other Fund or
the Shareholders thereof);
(e) with respect to any merger or consolidation of, or any
sale (other than a sale solely for cash) of all or substantially all
the assets of, the Trust or any Fund;
(f) as to whether the Trust or any Fund should be
incorporated; and
(g) with respect to such additional matters relating to the
Trust as may be required by the 1940 Act, this Declaration of Trust,
the By-Laws or any registration of the Trust with the Commission (or
any successor agency) or any State, or as the Trustees may consider
necessary or desirable.
If and to the extent that the Trustees shall determine that such action
is required by law or by this Declaration, they shall cause each matter required
or permitted to be voted upon at a meeting or by written consent of Shareholders
to be submitted to a separate vote of the outstanding Shares of each Fund
entitled to vote thereon; provided, that (i) when required by the 1940 Act or
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<PAGE> 20
Massachusetts or other law, actions of Shareholders shall be taken by Single
Class Voting of all outstanding Shares of each Series and Class whose holders
are entitled to vote thereon, and (ii) when (A) the Trustees determine that any
matter to be submitted to a vote of Shareholders affects only the rights or
interests of Shareholders of one or more but not all Series, or of one or more
but not all Classes of a single Series, or (B) where a vote of the holders of
Shares of any Series or Class, or of more than one Series or Class, voting as
separate Series or Classes, is required by the 1940 Act or Massachusetts law as
to any proposal, then only the Shareholders of each Series or Class so affected
shall be entitled to vote thereon. Without limiting the generality of the
foregoing, and except as required by the 1940 Act or other law, the
Shareholders of each Class of a Series having more than one Class shall have
exclusive voting rights with respect to the provisions of any distribution plan
adopted by the Trustees pursuant to Rule l2b-1 under the 1940 Act (a "Plan")
applicable to such Class.
2. Number of Votes and Manner of Voting: Proxies. On each matter
submitted to a vote of the Shareholders, each holder of Shares of any Series or
Class of which the Shareholders are entitled to vote thereon shall be entitled
to a number of votes equal to the number of Shares and fractions of Shares of
such Series or Class standing in such Shareholder's name on the books of the
Trust on the record date for such meeting. There shall be no cumulative voting
in the election of Trustees. At any meeting of Shareholders, any holder of
Shares entitled to vote thereat may vote by proxy, provided, that no proxy
shall be voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary
may direct, for verification prior to the time at which such vote shall be
taken. A proxy with respect to Shares held in the name of two (2) or more
Persons shall be valid if executed by
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<PAGE> 21
any one of them unless at or prior to exercise of the proxy the Trust receives
a specific written notice to the contrary from any one of them. A proxy
purporting to be executed by or on behalf of a Shareholder shall be deemed
valid unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger. If the holder of any such Share is a
minor or a person of unsound mind, and subject to guardianship or to the legal
control of any other person as regards the charge or management of such Share,
he may vote by his guardian or such other person appointed or having such
control, and such vote may be given in person or by proxy.
3. Meetings of Shareholders. Meetings of Shareholders may be
called by the Trustees from time to time for the purpose of taking action upon
any matter requiring the vote or authority of the Shareholders as herein
provided, or upon any other matter deemed by the Trustees to be necessary or
desirable. The Trustees shall promptly call a meeting of Shareholders for the
purpose of voting upon removal of any Trustee of the Trust when requested to do
so in writing by Shareholders holding not less than ten percent (10%) of the
Shares then outstanding. If the Trustees shall fail to call or give notice of
any meeting of Shareholders for a period of thirty (30) days after written
application by Shareholders holding at least ten percent (10%) of the Shares
then outstanding requesting that a meeting be called for any other purpose
requiring action by the Shareholders as provided herein or in the By-Laws, then
Shareholders holding at least ten percent (10%) of the Shares then outstanding
may call and give notice of such meeting, and thereupon the meeting shall be
held in the manner provided for herein in case of call thereof by the Trustees.
4. Notice of Meetings. Written notice of any meeting of
Shareholders, stating the time, place and purposes of the meeting, shall be
given or caused to be given by the Trustees by
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<PAGE> 22
mailing such notice at least ten (10) and not more than ninety (90) days
before such meeting, postage prepaid, to each Shareholder at his address as it
appears on the records of the Trust. Only the business stated in the notice of
the meeting shall be considered at such meeting. Any adjourned meeting may be
held as adjourned without further notice.
5 . Quorum and Required Vote. The holders of one-third (1/3) of the
Shares entitled to vote on a matter shall be a quorum for the transaction of
business with respect to such matter at a Shareholders' meeting, except as may
be otherwise required by the 1940 Act, the laws of The Commonwealth of
Massachusetts or other applicable law, or by this Declaration or the By-laws of
the Trust, but any lesser number shall be sufficient for adjournments. Any
adjourned session or sessions may be held within a reasonable time after the
date set for the original meeting without the necessity of further notice. A
Majority Shareholder Vote at a meeting of which a quorum is present shall
decide any question, except when a different vote is required or permitted by
any provision of the 1940 Act, the laws of The Commonwealth of Massachusetts or
other applicable law, or by this Declaration or the By-Laws, or when the
Trustees shall in their discretion require a larger vote or the vote of a
majority or larger fraction of the Shares of one or more particular Series or
Classes. If the Shares of any Fund divided into Classes shall include a Class
having exclusive voting rights with respect to certain matters, the aforesaid
quorum and voting requirements with respect to action to be taken by the
Shareholders of such Class on such matters shall be applicable only to the
Shares of such Class.
6. Record Dates. For the purpose of determining the Shareholders
who are entitled to notice of and to vote at any meeting or any adjournment
thereof, or who are entitled to participate in any dividend or distribution, or
for the purpose of any other action, the Trustees
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<PAGE> 23
may from time to time close the transfer books for such period, not exceeding
thirty (30) days (except at or in connection with the termination of the
Trust), as the Trustees may determine; or without closing the transfer books
the Trustees may fix a date and time not more than ninety (90) days prior to
the date of any meeting of Shareholders, the payment of any dividend or
distribution or other action as the date and time of record for the
determination of Shareholders entitled to notice of and to vote at such meeting
or any adjournment thereof or to be treated as Shareholders of record for such
purposes, even though he has since that date and time disposed of his Shares,
and no Shareholder becoming such after that date and time shall be so entitled
to vote at such meeting or any adjournment thereof or to be treated as a
Shareholder of record for purposes of such dividend, distribution or other
action.
7. Action by Written Consent. Subject to the provisions of the
1940 Act and other applicable law, any action taken by Shareholders may be
taken without a meeting if a majority of Shareholders entitled to vote on the
matter (or such larger proportion thereof or of the Shares of any particular
Series or Class as shall be required by the 1940 Act or by any express
provision of this Declaration or the By-Laws or as shall be permitted by the
Trustees) consent to the action in writing and if the writings in which such
consent is given are filed with the records of the meetings of Shareholders, to
the same extent and for the same period as proxies given in connection with a
Shareholders' meeting. Such consent shall be treated for all purposes as a
vote taken at a meeting of Shareholders.
8. Inspection of Records. The records of the Trust shall be open
to inspection by Shareholders to the same extent as is permitted stockholders
of a Massachusetts business corporation under the Massachusetts Business
Corporation Law.
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9. Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters not
inconsistent with the provisions hereof
SIXTH: The person who shall act as initial Trustee is the person
initially executing this Declaration of Trust or any counterpart thereof. The
By-Laws of the Trust may fix the number of Trustees at a number no less than
three (except prior to the first public offering of Shares of the Trust) and may
authorize the Trustees to increase or decrease the number of Trustees, to fill
the vacancies created by any such increase in the number of Trustees, to set and
alter the terms of office of the Trustees and to lengthen or lessen their own
terms or make their terms of indefinite duration, all subject to the 1940 Act.
Unless otherwise provided by the By-Laws of the Trust, the Trustees need not be
Shareholders.
SEVENTH: The following provisions are hereby adopted for the purpose
of defining, limiting and regulating the powers of the Trust and of the
Trustees and Shareholders.
1. As soon as any Trustee is duly elected by the Shareholders or
the Trustees and shall have accepted this trust, the Trust estate shall vest in
the new Trustee or Trustees, together with the continuing Trustees without any
further act or conveyance, and he shall be deemed a Trustee hereunder.
2. The death, declination, resignation, retirement, removal, or
incapacity of the Trustees, or any one of them, shall not operate to annul the
Trust or to revoke any existing agency created pursuant to the terms of this
Declaration of Trust.
3. The assets of the Trust shall be held separate and apart from
any assets now or hereafter held in any capacity other than as Trustee
hereunder by the Trustees or any successor Trustees. All of the assets of the
Trust shall at all times be considered as vested in the Trustees.
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<PAGE> 25
Except as provided in this Declaration of Trust, no Shareholder shall have, as
such holder of beneficial interest in the Trust, any authority, power or right
whatsoever to transact business for or on behalf of the Trust, or on behalf of
the Trustees, in connection with the property or assets of the Trust, or in any
part thereof, except the rights to receive the income and distributable amounts
arising therefrom as set forth herein.
4. The Trustees in all instances shall act as principals, and are
and shall be free from the control of the Shareholders. The Trustees shall
have full power and authority to do any and all acts and to make and execute
any and all contracts and instruments that they may consider necessary or
appropriate in connection with the management of the Trust. The Trustees shall
not in any way be bound or limited by present or future laws or customs in
regard to Trust investments, but shall have full authority and power to make
any and all investments which they, in their uncontrolled discretion, shall
deem proper to accomplish the purposes of this Trust. Subject to any
applicable limitation in this Declaration of Trust or in the By-Laws of the
Trust, the Trustees shall have power and authority:
(a) to adopt By-Laws not inconsistent with this
Declaration of Trust providing for the conduct of the business of the Trust and
to amend and repeal them to the extent that they do not reserve that right to
the Shareholders;
(b) to elect and remove such officers and appoint and
terminate such officers as they consider appropriate with or without cause;
(c) to employ a bank or trust company as custodian of any
assets of the Trust subject to any conditions set forth in this Declaration of
Trust or in the By-Laws;
(d) to retain a transfer agent and Shareholder servicing
agent, or both;
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(e) to provide for the distribution of Shares either
through a principal underwriter or the Trust itself or both;
(f) to set record dates in the manner provided for in the
By-Laws of the Trust;
(g) to delegate such authority as they consider desirable
to any officers of the Trust and to any agent, custodian or underwriter;
(h) to vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property held in Trust
hereunder; and to execute and deliver powers of attorney to such person or
persons as the Trustees shall deem proper, granting to such person or persons
such power and discretion with relation to securities or property as the
Trustees shall deem proper;
(i) to exercise powers and rights of subscription or
otherwise which in any manner arise out of ownership of securities held in
trust hereunder;
(j) to hold any security or property in a form not
indicating any trust, whether in bearer, unregistered or other negotiable form;
or either in its own name or in the name of a custodian or a nominee or
nominees, subject in either case to proper safeguards according to the usual
practice of Massachusetts business trusts or investment companies;
(k) to consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or concern, any
security of which is held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or concern, and to
pay calls or subscriptions with respect to any security held in the Trust;
(l) to compromise, arbitrate, or otherwise adjust claims
in favor of or against the Trust or any matter in controversy including, but
not limited to, claims for taxes;
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(m) to make, in the manner provided in the By-Laws,
distributions of income and of capital gains to Shareholders;
(n) to borrow money to the extent and in the manner
permitted by the 1940 Act and the Trust's fundamental policy thereunder as to
borrowing; and
(o) to enter into investment advisory or management
contracts, subject to the 1940 Act, with any one or more corporations,
partnerships, trusts, associations or other persons; if the other party or
parties to any such contract are authorized to enter into securities
transactions on behalf of the Trust, such transactions shall be deemed to have
been authorized by all of the Trustees.
5. No one dealing with the Trustees shall be under any obligation
to make any inquiry concerning the authority of the Trustees, or to see to the
application of any payments made or property transferred by the Trustees or
upon their order.
6. (a) The Trustees shall have no power to bind any Shareholder
personally or to call upon any Shareholder for the payment of any sum of money
or assessment whatsoever other than such as the Shareholder may at any time
personally agree to pay by way of subscription to any Shares or otherwise.
Every note, bond, contract or other undertaking issued by or on behalf of the
Trust or the Trustees relating to the Trust shall include a recitation limiting
the obligation represented thereby to the Trust and its assets (but the
omission of such a recitation shall not operate to bind any Shareholder).
(b) Except as otherwise provided in this Declaration of
Trust or the By-Laws, whenever this Declaration of Trust calls for or permits
any action to be taken by the Trustees hereunder, such action shall mean that
taken by the Board of Trustees by vote of the majority of
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a quorum of Trustees as set forth from time to time in the By-Laws of the Trust
or as required pursuant to the provisions of the 1940 Act and the rules and
regulations promulgated thereunder.
(c) The Trustees shall possess and exercise any and all
such additional powers as are reasonably implied from the powers herein
contained such as may be necessary or convenient in the conduct of any business
or enterprise of the Trust, to do and perform anything necessary, suitable, or
proper for the accomplishment of any of the purposes, or the attainment of any
one or more of the objects, herein enumerated, or which shall at any time
appear conducive to or expedient for the protection or benefit of the Trust,
and to do and perform all other acts or things necessary or incidental to the
purposes herein before set forth, or that may be deemed necessary by the
Trustees.
(d) The Trustees shall have the power to determine
conclusively whether any moneys, securities, or other properties of the Trust
property are, for the purposes of this Trust, to be considered as capital or
income and in what manner any expenses or disbursements are to be borne as
between capital and income whether or not in the absence of this provision such
moneys, securities, or other properties would be regarded as capital or income
and whether or not in the absence of this provision such expenses or
disbursements would ordinarily be charged to capital or to income.
7. The By-Laws of the Trust may divide the Trustees into classes
and prescribe the tenure of office of the several classes, but no class shall
be elected for a period shorter than that from the time of the election
following the division into classes until the next meeting of Shareholders.
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8. The Shareholders shall have the right to inspect the records,
documents, accounts and books of the Trust, subject to reasonable regulations
of the Trustees, not contrary to Massachusetts law, as to whether and to what
extent, and at what times and places, and under what conditions and
regulations, such right shall be exercised.
9. Any Trustee, or any officer elected or appointed by the
Trustees or by any committee of the Trustees or by the Shareholders or
otherwise, may be removed at any time, with or without cause, in such lawful
manner as may be provided in the By-Laws of the Trust.
10. If the By-Laws so provide, the Trustees shall have power to
hold their meetings, to have an office or offices and, subject to the
provisions of the laws of Massachusetts, to keep the books of the Trust outside
of said Commonwealth at such places as may from time to time be designated by
them.
11. Securities held by the Trust shall be voted in person or by proxy
by the President or a Vice-President, or such officer or officers of the Trust
as the Trustees shall designate for the purpose, or by a proxy or proxies
thereunto duly authorized by the Trustees, except as otherwise ordered by vote
of the holders of a majority of the Shares outstanding and entitled to vote in
respect thereto.
12. (a) Subject to the provision of the 1940 Act, any Trustee,
officer or employee, individually, or any partnership of which any Trustee,
officer or employee may be a member, or any corporation or association of which
any Trustee, officer or employee may be an officer, director, trustee, employee
or stockholder, may be a party to, or may be pecuniarily or otherwise
interested in, any contract or transaction of the Trust, and in the absence of
fraud no contract or other transaction shall be thereby affected or
invalidated; provided that in case a Trustee, or a
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partnership, corporation or association of which a Trustee is a member,
officer, director, trustee, employee or stockholder is so interested, such fact
shall be disclosed or shall have been known to the Trustees or a majority
thereof; and any Trustee who is so interested, or who is also a director,
officer, trustee, employee or stockholder of such other corporation or
association or a member of such partnership which is so interested, may be
counted in determining the existence of a quorum at any meeting of the Trustees
which shall authorize any such contract or transaction. and may vote thereat to
authorize any such contract or transaction, with like force and effect as if he
were not such director, officer, trustee, employee or stockholder of such other
trust or corporation or association or a member of a partnership so interested.
(b) Specifically, but without limitation of the
foregoing, the Trust may enter into a management or investment advisory
contract or underwriting contract and other contracts with, and may otherwise
do business with any manager or investment adviser and/or any sub-adviser for
the Trust and/or principal underwriter of the Shares of the Trust or any
subsidiary or affiliate of any such manager or investment adviser and/or
sub-adviser and/or principal underwriter and may permit any such firm or
corporation to enter into any contracts or other arrangements with any other
firm or corporation relating to the Trust notwithstanding that the Board of the
Trust may be composed in part of partners, directors, officers or employees of
any such firm or corporations, and officers of the Trust may have been or may
be or become partners, directors, officers or employees of any such firm or
corporation, and in the absence of fraud the Trust and any such firm or
corporation may deal freely with each other, and no such contract or
transaction between the Trust and any such firm or corporation shall be
invalidated or in any way affected thereby, nor shall any Trustee or officer of
the Trust be liable to the Trust or to any
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Shareholder or creditor thereof or to any other person for any loss incurred by
it or him solely because of the existence of any such contract or transaction;
provided that nothing herein shall protect any Trustee or officer of the Trust
against any liability to the Trust or to its security holders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
(c) As used in this paragraph the following terms shall
have the meanings set forth below:
(i) the term "indemnitee" shall mean any present
or former Trustee, officer or employee of the Trust, any present or
former Trustee or officer of another trust or corporation whose
securities are or were owned by the Trust or of which the Trust is or
was a creditor and who served or serves in such capacity at the
request of the Trust, any present or former investment advisor, sub-
advisor or principal underwriter of the Trust and the heirs,
executors, administrators, successors and assigns of any of the
foregoing; however, whenever conduct by an indemnitee is referred to,
the conduct shall be that of the original indemnitee rather than that
of the heir, executor, administrator, successor or assignee;
(ii) the term "covered proceeding" shall mean any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, to which an
indemnitee is or was a party or is threatened to be made a party by
reason of the fact or facts under which he or it is an indemnitee as
defined above;
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(iii) the term "disabling conduct" shall mean
willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of the office in question;
(iv) the term "covered expenses" shall mean
expenses (including attorney's fees), judgments. fines and amounts
paid in settlement actually and reasonably incurred by an indemnitee
in connection with a covered proceeding; and
(v) the term "adjudication of liability" shall
mean, as to any covered proceeding and as to any indemnitee, an
adverse determination as to the indenmitee whether by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its
equivalent.
(d) The Trust shall not indemnify any indemnitee for any
covered expenses in any covered proceeding if there has been an adjudication of
liability against such indemnitee expressly based on a finding of disabling
conduct.
(e) Except as set forth in (d) above, the Trust shall
indemnify any indemnitee for covered expenses in any covered proceeding,
whether or not there is an adjudication of liability as to such indemnitee, if
a determination has been made that the indemnitee was not liable by reason of
disabling conduct by (i) a final decision of the court or other body before
which the covered proceeding was brought; or (ii) in the absence of such
decision, a reasonable determination, based on a review of the facts, by either
(a) the vote of a majority of a quorum of Trustees who are neither "interested
persons", as defined in the 1940 Act, nor parties to the covered proceeding or
(b) an independent legal counsel in a written opinion; provided that such
Trustees or counsel, in reaching such determination, may but need not presume
the absence of
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disabling conduct on the part of the indemnitee by reason of the manner in
which the covered proceeding was terminated.
(f) Covered expenses incurred by an indemnitee in
connection with a covered proceeding shall be advanced by the Trust to an
indemnitee prior to the final disposition of a covered proceeding upon the
request of the indemnitee for such advance and the undertaking by or on behalf
of the indemnitee to repay the advance unless it is ultimately determined that
the indemnitee is entitled to indemnification thereunder, but only if one or
more of the following is the case: (i) the indemnitee shall provide a security
for such undertaking; (ii) the Trust shall be insured against losses arising
out of any lawful advances; or (iii) there shall have been a determination,
based on a review of the readily available facts (as opposed to a full
trial-type inquiry) that there is a reason to believe that the indemnitee
ultimately will be found entitled to indemnification by either independent
legal counsel in a written opinion or by the vote of a majority of a quorum of
trustees who are neither "interested persons" as defined in the 1940 Act nor
parties to the covered proceeding.
(g) Nothing herein shall be deemed to affect the right of
the Trust and/or any indemnitee to acquire and pay for any insurance covering
any or all indemnitees to the extent permitted by the 1940 Act or to affect any
other indemnification rights to which any indemnitee may be entitled to the
extent permitted by the 1940 Act.
13. Determination of Net Asset Value, Net Income and
Distributions.
(a) The net asset value of each outstanding Share of each
Fund shall be determined at such time or times on such days as the Trustees may
determine, in accordance with the 1940 Act. The method of determination of net
asset value of Shares of each Series and Class
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shall be determined by the Trustees and shall be as set forth in the Prospectus
relating to the respective Series or Class, with any expenses being borne
solely by a particular Class of a Series being reflected in the net asset value
of the Shares of such Class. The power and duty to make the daily calculations
may be delegated by the Trustees to the adviser, administrator, manager,
custodian, transfer agent or such other person as the Trustees may determine.
The Trustees may suspend the daily determination of net asset value to the
extent permitted by the 1940 Act.
(b) In determining the net asset value of the Shares of a
Series or Class at any time, the following rules shall apply:
(i) Shares to be issued shall be deemed to be
outstanding as of the time of the determination of the net asset value
per Share applicable to such issuance and the net price thereof shall
be deemed to be an asset belonging to the Fund to which such Shares
pertains, or to the share of the Class in the assets of the Series to
which such Shares pertain, as the case may be;
(ii) Shares to be redeemed by the Trust shall be
deemed to be outstanding until the time of the determination of the
net asset value applicable to such redemption, and thereupon and until
paid the redemption price thereof shall be deemed to be a liability of
the Fund to which such Shares pertain, or a liability forming part of
the share of the Class to which such Shares pertain in the liabilities
of the Fund to which such Class pertains, as the case may be; and
(iii) Shares redeemed by a Fund pursuant to
sub-section (f) of paragraph 6 of Article FOURTH shall be deemed to be
outstanding until whichever is the later of (A) the effective date of
such redemption, as determined for purposes of such sub-
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section (f), and (B) the time as of which the redemption price is
determined, and thereupon and until paid, the redemption price thereof
shall be deemed to be a liability of such Fund.
(c) In addition to the foregoing, the Trustees are
empowered, in their absolute discretion, to establish other bases or times, or
both, for determining the net asset value of each Share of the Trust in
accordance with the 1940 Act and to authorize the voluntary purchase by the
Trust, either directly or through an agent, of Shares of the Trust upon such
terms and conditions and for such consideration as the Trustees shall deem
advisable in accordance with any such provision, rule or regulation.
(d) Payment of the net asset value of Shares of a Fund
properly surrendered to the Trust for redemption shall be made by such Fund
within seven (7) days after tender of such Shares to the Trust for such
purpose, plus any period of time during which the right of the holders of the
Shares of such Fund to require such Fund to redeem such Shares has been
suspended. Any such payment may be made in portfolio securities of such Fund
and/or in cash, as the Trustees shall deem advisable, and no Shareholder shall
have a right, other than as determined by the Trustees, to have his Shares
redeemed in kind.
EIGHTH:
1. In case any Shareholder or former Shareholder shall be held to
be personally liable solely by reason of his being or having been a Shareholder
and not because of his acts or omissions or for some other reason, the
Shareholder or former Shareholder (or his heirs, executors, administrators or
other legal representatives or in the case of a corporation or other entity,
its corporate or other general successor) shall be entitled out of the Trust
estate to be held
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harmless from and indemnified against all loss and expense arising from such
liability. This Trust shall, upon request by the Shareholder, assume the
defense of any claim made against any Shareholder for any act or obligation of
the Trust and satisfy any judgment thereon.
2. It is hereby expressly declared that a trust and not a
partnership is created hereby. No Trustee hereunder shall have any power to
bind personally either the Trust's officers or any Shareholder. All persons
extending credit to, contracting with or having any claim against the Trust or
the Trustees shall look only to the assets of the Trust for payment under such
credit, contract or claim; and neither the Shareholders nor the Trustees, nor
any of their agents, whether past, present or future, shall be personally
liable therefor. Nothing in this Declaration of Trust shall protect a Trustee
against any liability to which such Trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee
hereunder.
3. The exercise by the Trustees of their powers and discretion
hereunder in good faith and with reasonable care under the circumstances then
prevailing, shall be binding upon everyone interested. Subject to the
provisions of paragraph 2 of this Article EIGHTH, the Trustees shall not be
liable for errors of judgment or mistakes of fact or law. The Trustees may
take advice of counsel or other experts with respect to the meaning and
operations of this Declaration of Trust, and subject to the provisions of
paragraph 2 of this Article EIGHTH, shall be under no liability for any act or
omission in accordance with such advice or for failing to follow such advice.
The Trustees shall not be required to give any bond as such, nor any surety if
a bond is required.
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4. This Trust, and each Fund of the Trust, shall continue without
limitation of time, but subject to the provisions of sub-section (a) through
(e) of this paragraph 4:
(a) The Trustees, with the favorable vote of the holders of more
than 50% of the outstanding Shares entitled to vote may sell and convey the
assets of the Trust (which sale may be subject to the retention of assets for
the payment of liabilities and expenses) to another issuer for a consideration
which may be or include securities of such issuer. Upon making provision for
the payment of liabilities, by assumption by such issuer or otherwise, the
Trustees shall distribute the remaining proceeds ratably among the holders of
the Shares of the Trust then outstanding.
(b) The Trustees, with the favorable vote of the holders of more
than 50% of the outstanding Shares entitled to vote, may at any time sell and
convert into money all the assets of the Trust. Upon making provision for the
payment of all outstanding obligations, taxes and other liabilities, accrued or
contingent, of the Trust, the Trustees shall distribute the remaining assets of
the Trust ratably among the holders of the outstanding Shares.
(c) Upon completion of the distribution of the remaining proceeds
or the remaining assets as provided in sub-sections (a) and (b), the Trust
shall terminate and the Trustees shall be discharged of any and all further
liabilities and duties hereunder and the right, title and interest of all
parties shall be cancelled and discharged.
(d) Subject to a Majority Shareholder Vote of each Series affected
by the matter or, if applicable, to a Majority Shareholder Vote of the Trust,
the Trustees may sell or otherwise transfer and convey all or substantially all
the assets of any Fund of the Trust to another Fund of the Trust, or sell or
otherwise transfer and convey all or substantially all the
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assets of the Trust or any Fund thereof to, or merge or consolidate the Trust
or any Fund of the Trust (pursuant to the laws of any jurisdiction providing
for or authorizing the merger or consolidation of an entity such as the Trust
or such Fund with or into an entity organized under the laws of such
jurisdiction) into or with, another trust, partnership, association or
corporation organized under the laws of any state or other jurisdiction and
which is or thereupon becomes an open-end management investment company, as
defined in the 1940 Act, for adequate consideration, which may include the
assumption of all or substantially all outstanding obligations, taxes and other
liabilities, accrued or contingent of the Trust or the Fund affected, as the
case may be, and which may include shares of beneficial interest or stock of or
other equity interests in such other Fund of the Trust or such trust,
partnership, association or corporation.
(e) The Trustees may at any time, in their discretion, sell and
convert into money all or substantially all the assets of any Fund and
terminate such Fund (a "Terminating Fund"), without the need for any
Shareholder vote. In any such case, after paying, or making provision for, all
outstanding obligations, taxes and other liabilities, accrued or contingent, of
the Terminating Fund, the Trustees shall distribute the proceeds of such sale,
and any other assets of the Terminating Fund remaining after such payment or
provision among the Shareholders of such Fund in accordance with sub-section
(d) of paragraph 6 of Article FOURTH, and shall terminate such Fund in
accordance with paragraph 2 of Article FOURTH. Upon termination of any Fund,
the Trustees shall thereupon be discharged from all further liabilities and
duties with respect to such Fund, and the rights and interests of all
Shareholders of such Fund shall thereupon cease.
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5. The original or a copy of this instrument and of each
declaration of trust supplemental hereto shall be kept at the office of the
Trust where it may be inspected by any Shareholder. A copy of this instrument
and of each Supplemental Declaration of Trust shall be filed with the
Massachusetts Secretary of State, as well as any other governmental office
where such filing may from time to time be required. Anyone dealing with the
Trust may rely on a certificate by an officer of the Trust as to whether or not
any such Supplemental Declarations of Trust have been made and as to any
matters in connection with the Trust hereunder, and with the same effect as if
it were the original, may rely on a copy certified by an officer of the Trust
to be a copy of this instrument or of any such Supplemental Declaration of
Trust. In this instrument or in any such Supplemental Declaration of Trust,
references to this instrument, and all expressions like "herein", "hereof" and
"hereunder" shall be deemed to refer to this instrument as amended or affected
by any such Supplemental Declaration of Trust. This instrument may be executed
in any number of counterparts, each of which shall be deemed an original.
6. The Trust set forth in this instrument is created under and is
to be governed by and construed and administered according to the laws of the
Commonwealth of Massachusetts. The Trust shall be of the type commonly called
a Massachusetts business trust, and without limiting the provisions hereof, the
Trust may exercise all powers which are ordinarily exercised by such a trust.
7. In the event that any person advances the organizational
expenses of the Trust, such advances shall become an obligation of the Trust
subject to such terms and conditions as may be fixed by, and on a date fixed
by, or determined in accordance with criteria fixed by the Board of Trustees,
to be amortized over a period or periods to be fixed by the Board.
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8. Whenever any action is taken under this Declaration of Trust
under any authorization to take action which is permitted by the 1940 Act, such
action shall be deemed to have been properly taken if such action is in
accordance with the construction of the 1940 Act then in effect as expressed in
"no action" letters of the staff of the Commission or any release, rule,
regulation or other under the 1940 Act or any decision of a court of competent
jurisdiction, notwithstanding that any of the foregoing shall later be found to
be invalid or otherwise reversed or modified by any of the foregoing.
9. Any action which may be taken by the Board of Trustees under
this Declaration of Trust or its By-Laws may be taken by the description
thereof in the then effective prospectus or Statement of Additional Information
relating to the Shares under the Securities Act of 1933 or in any proxy
statement of the Trust rather than by formal resolution of the Board.
10. Whenever under this Declaration of Trust, the Board of
Trustees is permitted or required to place a value on assets of the Trust, such
action may be delegated by the Board, and/or determined in accordance with a
formula determined by the Board, to the extent permitted by the 1940 Act.
11. Amendment Procedure.
(a) This Declaration may be amended by a Majority
Shareholder Vote, at a meeting of Shareholders, or by written consent without a
meeting. The Trustees may also amend this Declaration without the vote or
consent of Shareholders to change the name of a Trust, a Fund or any Series or
Class of Shares, to authorize additional Funds, and additional Series and
Classes of Shares, to make any changes which do not adversely affect the rights
of any Shareholders of the Trust, to supply any omission, to cure, correct or
supplement any ambiguous,
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<PAGE> 41
defective or inconsistent provision hereof, or if they deem it necessary to
conform this Declaration to the requirements of applicable federal, state or
similar regulatory authority, or of the regulated investment company provisions
of the United States Internal Revenue Code, as from time to time in effect, or
to eliminate or reduce any federal, state or local taxes which may be payable
by a Fund or its Shareholders.
(b) No amendment may be made under this paragraph 11
which would change any rights with respect to any Shares of any Series or Class
by reducing the amount payable thereon upon liquidation of the Trust or a Fund,
or by diminishing or eliminating any voting rights pertaining thereto, except
with the vote or consent of the holders of two-thirds (2/3) of the Shares of
each Series and Class so affected outstanding and entitled to vote. Nothing
contained in this Declaration shall permit any amendment which impairs the
exemption from personal liability of the Shareholders, Trustees, officers,
employees and agents of the Trust or a Fund, or to permit assessments upon
Shareholders.
(c) A certificate in recordable form, signed by a
Majority of the Trustees, or by a Trustee or officer of the Trust pursuant to
the vote of a Majority of the Trustees, setting forth an amendment and reciting
that it was duly adopted by the Shareholders or by the Trustees as aforesaid,
or a copy of the Declaration, as amended, in recordable form, and executed by a
Majority of the Trustees, shall be conclusive evidence of such amendment when
lodged among the records of the Trust, unless some later effective date is
specified in such instrument.
(d) A restated Declaration, integrating into a single
instrument all of the provisions of this Declaration which are then in effect
and operative, may be executed from time to time by a Majority of the Trustees
and shall, upon filing with the Secretary of The
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Commonwealth of Massachusetts, be conclusive evidence of all amendments
contained therein, and may thereafter be referred to in lieu of the original
Declaration and the various amendments thereto.
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IN WITNESS WHEREOF, the undersigned has executed this instrument this
4th day of February ,1997.
/s/ Thomas E. Weesner
-----------------------------------
Thomas E. Weesner, Trustee
Trustee's address:
c/o Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
R/A:
CFC Network - Prentice-Hall
84 State Street - 5th Floor
Boston, Massachusetts 02109
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MASSACHUSETTS
COUNTY OF SUFFOLK, SS. BOSTON
February 4, 1997
Then personally appeared before me the above-named Thomas E. Weesner,
known to me and known to be the person named and who signed the foregoing
instrument, and acknowledged the same to be his free act and deed.
Before me,
/s/ Camille Balletto
-----------------------------------
Notary Public
My commission expires:
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<PAGE> 1
EXHIBIT 99.B1(b)
Certificate of Designation
--------------------------
HOTCHKIS AND WILEY VARIABLE TRUST
The undersigned, being the Secretary of Hotchkis and Wiley Variable
Trust (hereinafter referred to as the "Trust"), a trust with transferable
shares of the type commonly called a Massachusetts business trust, DOES HEREBY
CERTIFY that, pursuant to the authority conferred upon the Trustees of the
Trust by Article FOURTH, paragraph 1(a) of the Declaration of Trust dated
February 4, 1997 (hereinafter referred to as the "Declaration of Trust"), and
by the affirmative vote of a majority of the Trustees at a meeting duly called
and held on February 11, 1997, the shares of beneficial interest of the Trust
are divided into three separate series, each series to have the following
special and relative rights:
(1) The series shall be designated as follows:
Equity Income VIP Series
International VIP Series
Low Duration VIP Series
(2) Each series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the Trust's
then currently effective registration statement under the Securities Act of
1933. Each share of beneficial interest of each series ("share") shall be
redeemable, shall be entitled to one vote or fraction thereof in respect of a
fractional share on matters on which shares of that series shall be entitled to
vote and shall represent a pro rata beneficial interest in the assets allocated
to that series, and shall be entitled to receive its pro rata share of net
assets of that series upon liquidation of that series, all as provided in the
Declaration of Trust.
(3) The shares of beneficial interest of each series of the Trust
shall consist of a single class; provided, however, that the Trustees reserve
the right to hereafter create one or more classes of shares of any series of
the Trust. An unlimited number of shares of each series may be issued.
<PAGE> 2
(4) Shareholders of each series shall vote as a separate class on any
matter to the extent required by, and any matter shall be deemed to have been
effectively acted upon with respect to any series as provided in, Rule 18f-2,
as from time to time in effect, under the 1940 Act, or any successor rule and
by the Declaration of Trust.
(5) The assets and liabilities of the Trust shall be allocated among
the above-referenced series as set forth in paragraph 6 of Article FOURTH of the
Declaration of Trust, except that the liabilities, expenses, costs, charges or
reserves of the Trust which are not readily identifiable as belonging to any
particular series shall be allocated among the series (a) on the basis of their
relative average daily net assets, (b) as incurred on a specific identification
basis or (c) evenly among the series, depending on the nature of the
expenditure.
(6) The Trustees (including any successor Trustees) shall have the
right at any time and from time to time to reallocate assets and expenses or to
change the designation of any series now or hereafter created, or to otherwise
change the special and relative rights of any such series provided that such
change shall not adversely affect the rights of holders of shares of a series.
IN WITNESS WHEREOF, the undersigned has set her hand and seal this 11th
day of February, 1997.
/s/ Gracie V. Fermelia
---------------------------------
Gracie V. Fermelia, Secretary
-2-
<PAGE> 1
EXHIBIT 99.B2
HOTCHKIS AND WILEY VARIABLE TRUST
BY-LAWS
ARTICLE
1.
SHAREHOLDERS
Section 1. Place of Meeting. All meetings of the Shareholders (which term
as used herein shall, together with all other terms defined in the Declaration
of Trust, have the same meaning as in the Declaration of Trust) shall be held at
the principal office of the Trust or at such other place as may from time to
time be designated by the Board of Trustees and stated in the notice of meeting.
Section 2. Calling of Meetings. Meetings of the Shareholders for any
purpose or purposes (including the election of Trustees) may be called by the
Chairman of the Board of Trustees, if any, or by the President or by the Board
of Trustees and shall be called by the Secretary upon receipt of the request in
writing signed by Shareholders holding not less than one-third in amount of the
entire number of Shares issued and outstanding and entitled to vote thereat.
Such request shall state the purpose or purposes of the proposed meeting.
Section 3. Notice of Meetings. Not less than ten days' and not more than
ninety days' written or printed notice of every meeting of Shareholders, stating
the time and place thereof (and the general nature of the business proposed to
be transacted at any special or extraordinary meeting),
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shall be given to each Shareholder entitled to vote thereat by mailing it,
postage prepaid and addressed to him at his address as it appears upon the books
of the Trust.
No notice of the time, place or purpose of any meeting of Shareholders need
be given to any Shareholder who attends in person or by proxy or to any
Shareholder who, in writing executed and filed with the records of the meeting,
either before or after the holding thereof, waives such notice.
Section 4. Record Dates. The Board of Trustees may fix, in advance, a
date, not exceeding ninety days and not less than ten days preceding the date of
any meeting of Shareholders, and not exceeding ninety days preceding any
dividend payment date or any date for the allotment of rights, as a record date
for the determination of the Shareholders entitled to receive such dividends or
rights, as the case may be; and only Shareholders of record on such date shall
be entitled to notice of and to vote at such meeting or to receive such
dividends or rights, as the case may be.
Section 5. Quorum, Adjournment of Meetings. The presence in person or by
proxy of the holders of record of one-third of the Shares of the stock of the
Trust issued and outstanding and entitled to vote thereat, shall constitute a
quorum at all meetings of the Shareholders. If at any meeting of the
Shareholders there shall be less than a quorum present, the Shareholders present
at such meeting may, without further notice, adjourn the same from time to time
until a quorum shall attend, but no business shall be transacted at any such
adjourned meeting except such as might have been lawfully transacted had the
meeting not been adjourned.
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<PAGE> 3
Section 6. Voting and Inspectors. At all meetings of Shareholders every
Shareholder of record entitled to vote thereat shall be entitled to vote at such
meeting either in person or by proxy appointed by instrument in writing
subscribed by such Shareholder or his duly authorized attorney-in-fact.
All elections of Trustees shall be had by a plurality of the votes cast
and all questions shall be decided by a majority of the votes cast, in each case
at a duly constituted meeting, except as otherwise provided in the Declaration
of Trust or in these By-Laws or by specific statutory provision superseding the
restrictions and limitations contained in the Declaration of Trust or in these
By-Laws.
At any election of Trustees, the Board of Trustees prior thereto may, or,
if they have not so acted, the Chairman of the meeting may, and upon the request
of the holders of ten per cent (10%) of the Shares entitled to vote at such
election shall, appoint two inspectors of election who shall first subscribe an
oath of affirmation to execute faithfully the duties of inspectors at such
election with strict impartiality and according to the best of their ability,
and shall after the election make a certificate of the result of the vote taken.
No candidate for the office of Trustee shall be appointed such inspector.
The Chairman of the meeting may cause a vote by ballot to be taken upon
any election or matter, and such vote shall be taken upon the request of the
holders of ten per cent (10%) of the Shares entitled to vote on such election or
matter.
Section 7. Conduct of Shareholders' Meetings. The meetings of the
Shareholders shall be presided over by the Chairman of the Board of Trustees, if
any, or if he shall not be present, by the President, or if he shall not be
present, by a Vice-President, or if neither the Chairman of the Board of
Trustees, the President nor any Vice-President is present, by a chairman to be
elected at the meeting. The Secretary of the Trust, if present, shall act as
Secretary of such meetings, or if he is not present, an Assistant Secretary
shall so act; if neither the Secretary nor an Assistant Secretary is present,
then the meeting shall elect its secretary.
Section 8. Concerning Validity of Proxies, Ballots, Etc. At every meeting
of the Shareholders, all proxies shall be received and taken in charge of and
all ballots shall be received
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and canvassed by the secretary of the meeting, who shall decide all questions
touching the qualification of voters, the validity of the proxies, and the
acceptance or rejection of votes, unless inspectors of election shall have been
appointed as provided in Section 6, in which event such inspectors of election
shall decide all such questions.
ARTICLE 1.
BOARD OF TRUSTEES
Section 1. Number of Tenure of Office. The business and property of the
Trust shall be conducted and managed by a Board of Trustees consisting of the
number of Trustees appointed by the initial Trustee, which number may be
increased or decreased as provided in Section 2 of this Article. The Board of
Trustees may sit and alter the terms of office of the Trustees, may lengthen or
lessen their own terms or make their terms of indefinite duration, all subject
to the 1940 Act. Trustees need not be Shareholders.
Section 2. Increase or Decrease in Number of Trustees; Removal. The Board
of Trustees may increase the number of Trustees to a number not exceeding
fifteen, and may elect Trustees to fill the vacancies created by any such
increase in the number of Trustees; the Board of Trustees may likewise decrease
the number of Trustees to a number not less than three. Vacancies occurring
other than by reason of any such increase shall be filled as provided for a
Massachusetts business corporation. In the event that after proxy material has
been printed for a meeting of Shareholders at which Trustees are to be elected
any one or more management nominees dies or becomes
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<PAGE> 5
incapacitated, the authorized number of Trustees shall be automatically reduced
by the number of such nominees, unless the Board of Trustees prior to the
meeting shall otherwise determine. Any Trustee at any time may be removed either
with or without cause by resolution duly adopted by the affirmative votes of the
holders of the majority of the Shares of the Trust present in person or by proxy
at any meeting of Shareholders at which such vote may be taken, provided that a
quorum is present, or by such larger vote as may be required by Massachusetts
law. Any Trustee at any time may be removed for cause by resolution duly adopted
at any meeting of the Board of Trustees provided that notice thereof is
contained in the notice of such meeting and that such resolution is adopted by
the vote of at least two-thirds of the Trustees whose removal is not proposed.
As used herein, "for cause" shall mean any cause which under Massachusetts law
would permit the removal of a Trustee of a business trust.
Section 3. Place of Meeting. The Trustees may hold their meetings, have
one or more offices, and keep the books of the Trust outside Massachusetts, at
any office or offices of the Trust or at any other place as they may from time
to time by resolution determine, or, in the case of meetings, as they may from
time to time by resolution determine or as shall be specified or fixed in the
respective notices or waivers of notice thereof.
Section 4. Regular Meetings. Regular meetings of the Board of Trustees
shall be held at such time and on such notice, if any, as the Trustees may from
time to time determine.
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Section 5. Special Meetings. Special meetings of the Board of Trustees may
be held from time to time upon call of the Chairman of the Board of Trustees, if
any, the President or two or more of the Trustees, by oral or telegraphic or
written notice duly served on or sent or mailed to each Trustee not less than
one day before such meeting. No notice need be given to any Trustee who attends
in person or to any Trustee who, in writing executed and filed with the records
of the meeting either before or after the holding thereof, waives such notice.
Such notice or waiver of notice need not state the purpose or purposes of such
meeting.
Section 6. Quorum. One-third of the Trustees then in office shall
constitute a quorum for the transaction of business, provided that a quorum
shall in no case be less than two Trustees. If at any meeting of the Board there
shall be less than a quorum present (in person or by open telephone line, to the
extent permitted by the 1940 Act), a majority of those present may adjourn the
meeting from time to time until a quorum shall have been obtained. The act of
the majority of the Trustees present at any meeting at which there is a quorum
shall be the act of the Board, except as may be otherwise specifically provided
by statute, by the Declaration of Trust or by these By-Laws.
Section 7. Executive Committee. The Board of Trustees may, by the
affirmative vote of a majority of the entire Board, elect from the Trustees an
Executive Committee to consist of such number of Trustee as the Board may from
time to time determine. The Board of Trustees by such
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<PAGE> 7
affirmative vote shall have power at any time to change the members of such
Committee and may fill vacancies in the Committee by election from the Trustees.
When the Board of Trustees is not in session, the Executive Committee shall have
and may exercise any or all of the powers of the Board of Trustees in the
management of the business and affairs of the Trust (including the power to
authorize the seal of the Trust to be affixed to all papers which may require
it) except as provided by law and except the power to increase or decrease the
size of, or fill vacancies on, the Board. The Executive Committee may fix its
own rules of procedure, and may meet, when and as provided by such rules or by
resolution of the Board of Trustees, but in every case the presence of a
majority shall be necessary to constitute a quorum. In the absence of any member
of the Executive Committee the members thereof present at any meeting, whether
or not they constitute a quorum, may appoint a member of the Board of Trustees
to act in the place of such absent member.
Section 8. Other Committees. The Board of Trustees, by the affirmative
vote of a majority of the entire Board, may appoint other committees which shall
in each case consist of such number of members (not less than two) and shall
have and may exercise such powers as the Board may determine in the resolution
appointing them. A majority of all members of any such committee may determine
its action, and fix the time and place of its meetings, unless the Board of
Trustees shall otherwise provide. The Board of Trustees shall have power at any
time to change the members and powers of any such committee, to fill vacancies,
and to discharge any such committee.
7
<PAGE> 8
Section 9. Informal Action by and Telephone Meetings of Trustees and
Committees. Any action required or permitted to be taken at any meeting of the
Board of Trustees or any committee thereof may be taken without a meeting, if a
written consent to such action is signed by all members of the Board, or of such
committee, as the case may be. Trustees or members of a committee of the Board
of Trustees may participate in a meeting by means of a conference telephone or
similar communications equipment; such participation shall, except as otherwise
required by the 1940 Act, have the same effect as presence in person.
Section 10. Compensation of Trustees. Trustees shall be entitled to
receive such compensation from the Trust for their services as may from time to
time be voted by the Board of Trustees.
Section 11. Dividends. Dividends or distributions payable on the Shares
may, but need not, be declared by specific resolution of the Board as to each
dividend or distribution; in lieu of such specific resolutions, the Board may,
by general resolution, determine the method of computation thereof, the method
of determining the Shareholders to which they are payable and the methods of
determining whether and to which Shareholders they are to be paid in cash or in
additional Shares.
ARTICLE 2.
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OFFICERS
Section 1. Executive Officers. The executive officers of the Trust shall
be chosen by the Board of Trustees. These may include a Chairman of the Board of
Trustees, and shall include a President, one or more Vice-Presidents (the number
thereof to be determined by the Board of Trustees), a Secretary and a Treasurer.
The Chairman of the Board of Trustees, if any, shall be selected from among the
Trustees. The Board of Trustees may also in its discretion appoint Assistant
Secretaries, Assistant Treasurers, and other officers, agents and employees, who
shall have such authority and perform such duties as the Board or the Executive
Committee may determine. The Board of Trustees may fill any vacancy which may
occur in any office. Any two offices, except those of President and
Vice-President, may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity, if such
instrument is required by law or these By-Laws to be executed, acknowledged or
verified by two or more officers.
Section 2. Term of Office. The term of office of all officers shall be as
fixed by the Board of Trustees; however, any officer may be removed from office
at any time with or without cause by the vote of a majority of the entire Board
of Trustees.
Section 3. Powers and Duties. The officers of the Trust shall have such
powers and duties as generally pertain to their respective offices, as well as
such powers and duties as may from time to time be conferred by the Board of
Trustees or the Executive Committee.
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ARTICLE 3.
SHARES
Section 1. Certificates of Shares. Each Shareholder of the Trust may be
issued a certificate or certificates for his Shares in such form as the Board of
Trustees may from time to time prescribe, but only if and to the extent and on
the conditions prescribed by the Board.
Section 2. Transfer of Shares. Shares shall be transferable on the books
of the Trust by the holder thereof in person or by his duly authorized attorney
or legal representative, upon surrender and cancellation of certificates, if
any, for the same number of Shares, duly endorsed or accompanied by proper
instruments of assignment and transfer, with such proof of the authenticity of
the signature as the Trust or its agent may reasonably require; in the case of
shares not represented by certificates, the same or similar requirements may be
imposed by the Board of Trustees.
Section 3. Stock Ledgers. The stock ledgers of the Trust, containing the
name and address of the Shareholders and the number of shares held by them
respectively, shall be kept at the principal offices of the Trust or, if the
Trust employs a transfer agent, at the offices of the transfer agent of the
Trust.
Section 4. Lost, Stolen or Destroyed Certificates. The Board of Trustees
may determine the conditions upon which a new certificate may be issued in place
of a certificate which is alleged to have been lost, stolen or destroyed; and
may, in its discretion, require the owner of such certificate
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or his legal representative to give bond, with sufficient surety to the Trust
and the transfer agent, if any, to indemnify it and such transfer agent against
any and all loss or claims which may arise by reason of the issue of a new
certificate in the place of the one so lost, stolen or destroyed.
ARTICLE 4.
SEAL
The Board of Trustees shall provide a suitable seal of the Trust, in such
form and bearing such inscriptions as it may determine.
ARTICLE 5.
FISCAL YEAR
The fiscal year of the Trust shall be fixed by the Board of Trustees.
ARTICLE 6.
AMENDMENT OF BY-LAWS
The By-Laws of the Trust may be altered, amended, added to or repealed by
the Shareholders or by majority vote of the entire Board of Trustees, but any
such alteration, amendment, addition or repeal of the By-Laws by action of the
Board of Trustees may be altered or repealed by the Shareholders.
11
<PAGE> 1
Exhibit 99.B5(a)
HOTCHKIS AND WILEY VARIABLE TRUST
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this______ day of______, 1997, by and between HOTCHKIS
AND WILEY VARIABLE TRUST, a Massachusetts business trust (the "Trust"), on
behalf of the Equity Income VIP Series (the "Portfolio"), and HOTCHKIS AND
WILEY, a division of the Capital Management Group of Merrill Lynch Asset
Management, L.P. (the "Advisor").
WITNESSETH:
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 ("1940
Act") and is currently comprised of three series, one of which is the
Portfolio; and each series will engage in the business of investing and
reinvesting its assets; and
WHEREAS, the Advisor is a registered investment advisor under the
Investment Advisors Act of 1940 and engages in the business of providing
investment advisory services; and
WHEREAS, the Trust's Board of Trustees, including a majority of the
Trustees who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of any such party, and the Portfolio's initial
shareholder have approved this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the receipt of
which is hereby acknowledged, it is hereby agreed by and between the parties
hereto as follows:
1. IN GENERAL
The Advisor agrees, all as more fully set forth herein, to act as
managerial investment advisor to the Trust with respect to the investment of
the assets of the Portfolio and to supervise and arrange the purchase and sale
of securities held in the portfolio of the Portfolio.
2. DUTIES AND OBLIGATIONS OF THE ADVISOR WITH RESPECT TO
INVESTMENT OF ASSETS OF THE PORTFOLIO
(a) Subject to the succeeding provisions of this section
and subject to the direction and control of the Board of
Trustees of the Trust, the Advisor shall:
(i) Decide what securities or other assets shall
be purchased or sold by the Trust with respect to the Portfolio
and when; and
(ii) Arrange for the purchase and the sale of
securities or other assets held in the portfolio of the
Portfolio by placing purchase and sale orders for the Trust
with respect to the Portfolio.
<PAGE> 2
(b) Any investment purchases or sales made by the Advisor
shall at all times conform to, and be in accordance with, any
requirements imposed by: (1) the provisions of the 1940 Act
and of any rules or regulations in force thereunder; (2) any
other applicable provisions of law; (3) the provisions of the
Declaration of Trust and By-Laws of the Trust as amended from
time to time: (4) any policies and determinations of the Board
of Trustees of the Trust; and (5) the fundamental policies of
the Trust relating to the Portfolio, as reflected in the
Trust's Registration Statement under the 1940 Act, or as
amended by the shareholders of the Portfolio.
(c) The Advisor shall give the Trust the benefit of its
best judgment and effort in rendering services hereunder, but
the Advisor shall not be liable for any loss sustained by
reason of the purchase, sale or retention of any security
whether or not such purchase, sale or retention shall have
been based on its own investigation and research or upon
investigation and research made by any other individual, firm
or corporation, if such purchase, sale or retention shall have
been made and such other individual, firm or corporation shall
have been selected in good faith. Nothing herein contained
shall, however, be construed to protect the Advisor against
any liability to the Trust or its security holders by reason
of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless
disregard of obligations and duties under this Agreement.
(d) Nothing in this Agreement shall prevent the Advisor
or any affiliated person (as defined in the 1940 Act) of the
Advisor from acting as investment advisor or manager and/or
principal underwriter for any other person, firm or
corporation and shall not in any way limit or restrict the
Advisor or any such affiliated person from buying, selling or
trading any securities for its or their own accounts or the
accounts of others for whom it or they may be acting,
provided, however, that the Advisor expressly represents that
it will undertake no activities which, in its judgment, will
adversely affect the performance of its obligations to the
Trust under this Agreement.
(e) It is agreed that the Advisor shall have no
responsibility or liability for the accuracy or completeness
of the Trust's Registration Statement under the 1940 Act or
the Securities Act of 1933 except for information supplied by
the Advisor for inclusion therein. The Trust may indemnify
the Advisor to the full extent permitted by the Trust's
Declaration of Trust.
3. BROKER-DEALER RELATIONSHIPS
The Advisor is responsible for decisions to buy and sell securities
for the Portfolio, broker-dealer selection, and negotiation of brokerage
commission rates. The Advisor's primary consideration in effecting a
securities transaction will be execution at the most favorable price. In
selecting a broker-dealer to execute each particular transaction, the Advisor
will take the following into consideration: the best net price available; the
reliability, integrity and financial
2
<PAGE> 3
condition of the broker-dealer; the size of and difficulty in executing the
order; and the value of the expected contribution of the broker-dealer to the
investment performance of the Portfolio on a continuing basis. Accordingly,
the price to the Portfolio in any transaction may be less favorable than that
available from another broker-dealer if the difference is reasonably justified
by other aspects of the portfolio execution services offered. Subject to such
policies as the Board of Trustees of the Trust may determine, the Advisor shall
not be deemed to have acted unlawfully or to have breached any duty created by
this Agreement or otherwise solely by reason of its having caused the Portfolio
to pay a broker or dealer that provides brokerage or research services to the
Advisor an amount of commission for effecting a portfolio transaction in excess
of the amount of commission another broker or dealer would have charged for
effecting that transaction, if the Advisor determines in good faith that such
amount of commission was 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 the Advisor's overall responsibilities
with respect to the Trust. The Advisor is further authorized to allocate the
orders placed by it on behalf of the Portfolio to such brokers or dealers who
also provide research or statistical material, or other services, to the Trust,
the Advisor, or any affiliate of either. Such allocation shall be in such
amounts and proportions as the Advisor shall determine, and the Advisor shall
report on such allocations regularly to the Trust, indicating the
broker-dealers to whom such allocations have been made and the basis therefor.
The Advisor is also authorized to consider sales of shares as a factor in the
selection of brokers or dealers to execute portfolio transactions, subject to
the requirements of best execution, i.e., that such brokers or dealers are able
to execute the order promptly and at the best obtainable securities price.
4. ALLOCATION OF EXPENSES
The Advisor agrees that it will furnish the Trust, at the Advisor's
expense, with all office space and facilities, and equipment and clerical
personnel necessary for carrying out its duties under this Agreement. The
Advisor (or an affiliate thereof) will also pay all compensation of all
Trustees, officers and employees of the Trust who are affiliated persons of the
Advisor. All operating costs and expenses relating to the Portfolio not
expressly assumed by the Advisor under this Agreement shall be paid by the
Trust from the assets of the Portfolio, as applicable, including, but not
limited to (i) interest and taxes; (ii) brokerage commissions, (iii) insurance
premiums; (iv) compensation and expenses of the Trust's Trustees other than
those affiliated with the Advisor; (v) legal and audit expenses; (vi) fees and
expenses of the Trust's custodian, shareholder servicing or transfer agent and
accounting services agent; (vii) expenses incident to the issuance of the
Portfolio's shares, including issuance on the payment of, or reinvestment of,
dividends; (viii) fees and expenses incident to the registration under Federal
or state securities laws of the Trust or the shares of the Portfolio; (ix)
expenses of preparing, printing and mailing reports and notices and proxy
materials to shareholders of the Portfolio; (x) all other expenses incident to
holding meetings of the Portfolio's shareholders; (xi) dues or assessments of
or contributions to the Investment Company Institute or any successor; (xii)
such non-recurring expenses as may arise, including litigation affecting the
Trust and the legal obligations which the Trust may have to indemnify its
officers and Trustees with respect thereto; and (xiii) all expenses which the
Trust or the Portfolio agree to bear in any distribution agreement or in any
plan adopted by the Trust and/or the Portfolio pursuant to Rule 12b-1 under the
1940 Act.
3
<PAGE> 4
5. COMPENSATION OF THE ADVISOR
The Trust agrees to pay the Advisor and the Advisor agrees to accept
as full compensation for all services rendered by the Advisor hereunder. an
annual management fee, payable monthly and computed on the value of the average
net assets of the Portfolio as of the close of business each business day, at
the annual rate of .75%.
6. DURATION AND TERMINATION
(a) This Agreement shall go into effect on the date hereof and
shall, unless terminated as hereinafter provided, continue in
effect until _________, 1999, and thereafter from year to year,
but only so long as such continuance is specifically approved
at least annually by the Trust's Board of Trustees, including
the vote of a majority of the Trustees who are not parties to
this Agreement or "interested persons" (as defined in the 1940
Act) of any such party cast in person at a meeting called for
the purpose of voting on such approval, or by the vote of the
holders of a "majority" (as so defined) of the outstanding
voting securities of the Portfolio and by such a vote of the
Trustees.
(b) This Agreement may be terminated by the Advisor at any time
without penalty upon giving the Trust sixty (60) days' written
notice (which notice may be waived by the Trust) and may be
terminated by the Trust at any time without penalty upon giving
the Advisor sixty (60) days' written notice (which notice may
be waived by the Advisor), provided that such termination by
the Trust shall be directed or approved by the vote of a
majority of all of its Trustees in office at the time or by the
vote of the holders of a majority (as defined in the 1940 Act)
of the voting securities of the Trust at the time outstanding
and entitled to vote. This Agreement shall automatically
terminate in the event of its assignment (as so defined).
7. USE OF ADVISOR'S NAME
The Trust may use the name "Hotchkis and Wiley Variable Trust" or any
name including the words "Hotchkis and Wiley" only for so long as this
Agreement or any other advisory agreement relating to the Trust is in effect.
If the Agreement or any other advisory agreement relating to the Trust is no
longer in effect, the Trust will (to the extent that it lawfully can) cease to
use such a name or any other name indicating that it is advised by or otherwise
connected with the Advisor, or any organization that shall have succeeded to
the Advisor's business. In no event shall the Trust use the name "Hotchkis and
Wiley Variable Trust" or any name including the words "Hotchkis and Wiley" if
the Advisor's function is transferred or assigned to a company over which
Merrill Lynch & Co., Inc. does not have control.
4
<PAGE> 5
8. AGREEMENT BINDING ONLY ON TRUST PROPERTY
The Advisor understands that the obligations of this Agreement are not
binding upon any shareholder of the Trust personally, but bind only the Trust's
property; the Advisor represents that it has notice of the provisions of the
Trust's Declaration of Trust disclaiming shareholder liability for acts or
obligations of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by duly authorized persons and their seals to be
hereunto affixed. all as of the day and year first above written.
HOTCHKIS AND WILEY VARIABLE
TRUST
By___________________________
ATTEST:
______________________________
HOTCHKIS AND WILEY, a division of the
Capital Management Group of Merrill
Lynch Asset Management, L.P.
By___________________________
ATTEST:
_______________________________
5
<PAGE> 1
EXHIBIT 99.B5(b)
HOTCHKIS AND WILEY VARIABLE TRUST
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this day of , 1997, by and between HOTCHKIS
AND WILEY VARIABLE TRUST, a Massachusetts business trust (the "Trust"), on
behalf of the International VIP Series (the "Portfolio"), and HOTCHKIS AND
WILEY, a division of the Capital Management Group of Merrill Lynch Asset
Management, L.P. (the "Advisor").
WITNESSETH:
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 ("1940
Act") and is currently comprised of three series, one of which is the
Portfolio; and each series will engage in the business of investing and
reinvesting its assets; and
WHEREAS, the Advisor is a registered investment advisor under the
Investment Advisors Act of 1940 and engages in the business of providing
investment advisory services; and
WHEREAS, the Trust's Board of Trustees, including a majority of the
Trustees who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of any such party, and the Portfolio's initial
shareholder have approved this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the receipt of
which is hereby acknowledged, it is hereby agreed by and between the parties
hereto as follows:
1. IN GENERAL
The Advisor agrees, all as more fully set forth herein, to act as
managerial investment advisor to the Trust with respect to the investment of
the assets of the Portfolio and to supervise and arrange the purchase and sale
of securities held in the portfolio of the Portfolio.
2. DUTIES AND OBLIGATIONS OF THE ADVISOR WITH RESPECT TO
INVESTMENT OF ASSETS OF THE PORTFOLIO
(a) Subject to the succeeding provisions of this section and
subject to the direction and control of the Board of Trustees
of the Trust, the Advisor shall:
(i) Decide what securities or other assets shall be
purchased or sold by the Trust with respect to the
Portfolio and when; and
(ii) Arrange for the purchase and the sale of
securities or other assets held in the portfolio of the
Portfolio by placing purchase and sale orders for the
Trust with respect to the Portfolio.
<PAGE> 2
(b) Any investment purchases or sales made by the Advisor
shall at all times conform to, and be in accordance with, any
requirements imposed by: (1) the provisions of the 1940 Act
and of any rules or regulations in force thereunder, (2) any
other applicable provisions of law; (3) the provisions of the
Declaration of Trust and By-Laws of the Trust as amended from
time to time: (4) any policies and determinations of the Board
of Trustees of the Trust; and (5) the fundamental policies of
the Trust relating to the Portfolio, as reflected in the
Trust's Registration Statement under the 1940 Act, or as
amended by the shareholders of the Portfolio.
(c) The Advisor shall give the Trust the benefit of its
best judgment and effort in rendering services hereunder, but
the Advisor shall not be liable for any loss sustained by
reason of the purchase, sale or retention of any security
whether or not such purchase, sale or retention shall have
been based on its own investigation and research or upon
investigation and research made by any other individual, firm
or corporation, if such purchase, sale or retention shall have
been made and such other individual, firm or corporation shall
have been selected in good faith. Nothing herein contained
shall, however, be construed to protect the Advisor against
any liability to the Trust or its security holders by reason
of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless
disregard of obligations and duties under this Agreement.
(d) Nothing in this Agreement shall prevent the Advisor
or any affiliated person (as defined in the 1940 Act) of the
Advisor from acting as investment advisor or manager and/or
principal underwriter for any other person, firm or
corporation and shall not in any way limit or restrict the
Advisor or any such affiliated person from buying, selling or
trading any securities for its or their own accounts or the
accounts of others for whom it or they may be acting,
provided, however, that the Advisor expressly represents that
it will undertake no activities which, in its judgment, will
adversely affect the performance of its obligations to the
Trust under this Agreement.
(e) It is agreed that the Advisor shall have no
responsibility or liability for the accuracy or completeness
of the Trust's Registration Statement under the 1940 Act or
the Securities Act of 1933 except for information supplied by
the Advisor for inclusion therein. The Trust may indemnify
the Advisor to the full extent permitted by the Trust's
Declaration of Trust.
3. BROKER-DEALER RELATIONSHIPS
The Advisor is responsible for decisions to buy and sell securities
for the Portfolio, broker-dealer selection, and negotiation of brokerage
commission rates. The Advisor's primary consideration in effecting a
securities transaction will be execution at the most favorable price. In
selecting a broker-dealer to execute each particular transaction, the Advisor
will take the following into consideration: the best net price available; the
reliability, integrity and financial
2
<PAGE> 3
condition of the broker-dealer; the size of and difficulty in executing the
order; and the value of the expected contribution of the broker-dealer to the
investment performance of the Portfolio on a continuing basis. Accordingly,
the price to the Portfolio in any transaction may be less favorable than that
available from another broker-dealer if the difference is reasonably justified
by other aspects of the portfolio execution services offered. Subject to such
policies as the Board of Trustees of the Trust may determine, the Advisor shall
not be deemed to have acted unlawfully or to have breached any duty created by
this Agreement or otherwise solely by reason of its having caused the Portfolio
to pay a broker or dealer that provides brokerage or research services to the
Advisor an amount of commission for effecting a portfolio transaction in excess
of the amount of commission another broker or dealer would have charged for
effecting that transaction, if the Advisor determines in good faith that such
amount of commission was 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 the Advisor's overall responsibilities
with respect to the Trust. The Advisor is further authorized to allocate the
orders placed by it on behalf of the Portfolio to such brokers or dealers who
also provide research or statistical material, or other services, to the Trust,
the Advisor, or any affiliate of either. Such allocation shall be in such
amounts and proportions as the Advisor shall determine, and the Advisor shall
report on such allocations regularly to the Trust, indicating the
broker-dealers to whom such allocations have been made and the basis therefor.
The Advisor is also authorized to consider sales of shares as a factor in the
selection of brokers or dealers to execute portfolio transactions, subject to
the requirements of best execution, i.e., that such brokers or dealers are able
to execute the order promptly and at the best obtainable securities price.
4. ALLOCATION OF EXPENSES
The Advisor agrees that it will furnish the Trust, at the Advisor's
expense, with all office space and facilities, and equipment and clerical
personnel necessary for carrying out its duties under this Agreement. The
Advisor (or an affiliate thereof) will also pay all compensation of all
Trustees, officers and employees of the Trust who are affiliated persons of the
Advisor. All operating costs and expenses relating to the Portfolio not
expressly assumed by the Advisor under this Agreement shall be paid by the
Trust from the assets of the Portfolio, as applicable, including, but not
limited to (i) interest and taxes; (ii) brokerage commissions; (iii) insurance
premiums; (iv) compensation and expenses of the Trust's Trustees other than
those affiliated with the Advisor; (v) legal and audit expenses; (vi) fees and
expenses of the Trust's custodian, shareholder servicing or transfer agent and
accounting services agent; (vii) expenses incident to the issuance of the
Portfolio's shares, including issuance on the payment of, or reinvestment of,
dividends; (viii) fees and expenses incident to the registration under Federal
or state securities laws of the Trust or the shares of the Portfolio; (ix)
expenses of preparing, printing and mailing reports and notices and proxy
materials to shareholders of the Portfolio; (x) all other expenses incident to
holding meetings of the Portfolio's shareholders; (xi) dues or assessments of
or contributions to the Investment Company Institute or any successor; (xii)
such non-recurring expenses as may arise, including litigation affecting the
Trust and the legal obligations which the Trust may have to indemnify its
officers and Trustees with respect thereto; and (xiii) all expenses which the
Trust or the Portfolio agree to bear in any distribution agreement or in any
plan adopted by the Trust and/or the Portfolio pursuant to Rule 12b-1 under
the 1940 Act.
3
<PAGE> 4
5. COMPENSATION OF THE ADVISOR
The Trust agrees to pay the Advisor and the Advisor agrees to accept
as full compensation for all services rendered by the Advisor hereunder, an
annual management fee, payable monthly and computed on the value of the average
net assets of the Portfolio as of the close of business each business day, at
the annual rate of .75%.
6. DURATION AND TERMINATION
(a) This Agreement shall go into effect on the date hereof and
shall, unless terminated as hereinafter provided, continue in
effect until , 1999, and thereafter from year to year,
but only so long as such continuance is specifically approved
at least annually by the Trust's Board of Trustees, including
the vote of a majority of the Trustees who are not parties to
this Agreement or "interested persons" (as defined in the 1940
Act) of any such party cast in person at a meeting called for
the purpose of voting on such approval, or by the vote of the
holders of a "majority" (as so defined) of the outstanding
voting securities of the Portfolio and by such a vote of the
Trustees.
(b) This Agreement may be terminated by the Advisor at any
time without penalty upon giving the Trust sixty (60) days'
notice written notice (which notice may be waived by the
Trust) and may be terminated by the Trust at any time without
penalty upon giving the Advisor sixty (60) days' written
notice (which notice may be waived by the Advisor), provided
that such termination by the Trust shall be directed or
approved by the vote of a majority of all of its Trustees in
office at the time or by the vote of the holders of a majority
(as defined in the 1940 Act) of the voting securities of the
Trust at the time outstanding and entitled to vote. This
Agreement shall automatically terminate in the event of its
assignment (as so defined).
7. USE OF ADVISOR'S NAME
The Trust may use the name "Hotchkis and Wiley Variable Trust" or any
name including the words "Hotchkis and Wiley" only for so long as this
Agreement or any other advisory agreement relating to the Trust is in effect.
If the Agreement or any other advisory agreement relating to the Trust is no
longer in effect, the Trust will (to the extent that it lawfully can) cease to
use such a name or any other name indicating that it is advised by or otherwise
connected with the Advisor, or any organization that shall have succeeded to
the Advisor's business. In no event shall the Trust use the name "Hotchkis and
Wiley Variable Trust" or any name including the words "Hotchkis and Wiley" if
the Advisor's function is transferred or assigned to a company over which
Merrill Lynch & Co., Inc. does not have control.
4
<PAGE> 5
8. AGREEMENT BINDING ONLY ON TRUST PROPERTY
The Advisor understands that the obligations of this Agreement are not
binding upon any shareholder of the Trust personally, but bind only the Trust's
property, the Advisor represents that it has notice of the provisions of the
Trust's Declaration of Trust disclaiming shareholder liability for acts or
obligations of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by duly authorized persons and their seals to be
hereunto affixed, all as of the day and year first above written.
HOTCHKIS AND WILEY VARIABLE
TRUST
By__________________________________
ATTEST:
_______________________________
HOTCHKIS AND WILEY, a division of the
Capital Management Group of Merrill
Lynch Asset Management, L.P.
By__________________________________
ATTEST:
_______________________________
5
<PAGE> 1
EXHIBIT 99.B5(c)
HOTCHKIS AND WILEY VARIABLE TRUST
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this __ day of __________, 1997, by and between HOTCHKIS
AND WILEY VARIABLE TRUST, a Massachusetts business trust (the "Trust"), on
behalf of the Low Duration VIP Series (the "Portfolio"), and HOTCHKIS AND WILEY,
a division of the Capital Management Group of Merrill Lynch Asset Management,
L.P. (the "Advisor").
WITNESSETH:
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 ("1940
Act") and is currently comprised of three series, one of which is the
Portfolio; and each series will engage in the business of investing and
reinvesting its assets; and
WHEREAS, the Advisor is a registered investment advisor under the
Investment Advisors Act of 1940 and engages in the business of providing
investment advisory services; and
WHEREAS, the Trust's Board of Trustees, including a majority of the
Trustees who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of any such party, and the Portfolio's initial
shareholder have approved this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the receipt of
which is hereby acknowledged, it is hereby agreed by and between the parties
hereto as follows:
1. IN GENERAL
The Advisor agrees, all as more fully set forth herein, to act as
managerial investment advisor to the Trust with respect to the investment of
the assets of the Portfolio and to supervise and arrange the purchase and sale
of securities held in the portfolio of the Portfolio.
2. DUTIES AND OBLIGATIONS OF THE ADVISOR WITH RESPECT TO
INVESTMENT OF ASSETS OF THE PORTFOLIO
(a) Subject to the succeeding provisions of this section
and subject to the direction and control of the Board of
Trustees of the Trust, the Advisor shall:
(i) Decide what securities or other assets shall
be purchased or sold by the Trust with respect to the
Portfolio and when; and
(ii) Arrange for the purchase and the sale of
securities or other assets held in the portfolio of
the Portfolio by placing purchase and sale orders for
the Trust with respect to the Portfolio.
<PAGE> 2
(b) Any investment purchases or sales made by the Advisor
shall at all times conform to, and be in accordance with, any
requirements imposed by: (l) the provisions of the 1940 Act
and of any rules or regulations in force thereunder; (2) any
other applicable provisions of law; (3) the provisions of the
Declaration of Trust and By-Laws of the Trust as amended from
time to time; (4) any policies and determinations of the Board
of Trustees of the Trust; and (5) the fundamental policies of
the Trust relating to the Portfolio, as reflected in the
Trust's Registration Statement under the 1940 Act, or as
amended by the shareholders of the Portfolio.
(c) The Advisor shall give the Trust the benefit of its
best judgment and effort in rendering services hereunder, but
the Advisor shall not be liable for any loss sustained by
reason of the purchase, sale or retention of any security
whether or not such purchase, sale or retention shall have
been based on its own investigation and research or upon
investigation and research made by any other individual, firm
or corporation, if such purchase, sale or retention shall have
been made and such other individual, firm or corporation shall
have been selected in good faith. Nothing herein contained
shall, however, be construed to protect the Advisor against
any liability to the Trust or its security holders by reason
of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless
disregard of obligations and duties under this Agreement.
(d) Nothing in this Agreement shall prevent the Advisor
or any affiliated person (as defined in the 1940 Act) of the
Advisor from acting as investment advisor or manager and/or
principal underwriter for any other person, firm or
corporation and shall not in any way limit or restrict the
Advisor or any such affiliated person from buying, selling or
trading any securities for its or their own accounts or the
accounts of others for whom it or they may be acting,
provided, however, that the Advisor expressly represents that
it will undertake no activities which, in its judgment, will
adversely affect the performance of its obligations to the
Trust under this Agreement.
(e) It is agreed that the Advisor shall have no
responsibility or liability for the accuracy or completeness
of the Trust's Registration Statement under the 1940 Act or
the Securities Act of 1933 except for information supplied by
the Advisor for inclusion therein. The Trust may indemnify
the Advisor to the full extent permitted by the Trust's
Declaration of Trust.
3. BROKER-DEALER RELATIONSHIPS
The Advisor is responsible for decisions to buy and sell securities
for the Portfolio, broker-dealer selection, and negotiation of brokerage
commission rates. The Advisor's primary consideration in effecting a
securities transaction will be execution at the most favorable price. In
selecting a broker-dealer to execute each particular transaction, the Advisor
will take the following into consideration: the best net price available; the
reliability, integrity and financial
2
<PAGE> 3
condition of the broker-dealer; the size of and difficulty in executing the
order; and the value of the expected contribution of the broker-dealer to the
investment performance of the Portfolio on a continuing basis. Accordingly,
the price to the Portfolio in any transaction may be less favorable than that
available from another broker-dealer if the difference is reasonably justified
by other aspects of the portfolio execution services offered. Subject to such
policies as the Board of Trustees of the Trust may determine, the Advisor shall
not be deemed to have acted unlawfully or to have breached any duty created by
this Agreement or otherwise solely by reason of its having caused the Portfolio
to pay a broker or dealer that provides brokerage or research services to the
Advisor an amount of commission for effecting a portfolio transaction in excess
of the amount of commission another broker or dealer would have charged for
effecting that transaction, if the Advisor determines in good faith that such
amount of commission was 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 the Advisor's overall responsibilities
with respect to the Trust. The Advisor is further authorized to allocate the
orders placed by it on behalf of the Portfolio to such brokers or dealers who
also provide research or statistical material, or other services, to the Trust,
the Advisor, or any affiliate of either. Such allocation shall be in such
amounts and proportions as the Advisor shall determine, and the Advisor shall
report on such allocations regularly to the Trust, indicating the
broker-dealers to whom such allocations have been made and the basis therefor.
The Advisor is also authorized to consider sales of shares as a factor in the
selection of brokers or dealers to execute portfolio transactions, subject to
the requirements of best execution, i.e., that such brokers or dealers are able
to execute the order promptly and at the best obtainable securities price.
4. ALLOCATION OF EXPENSES
The Advisor agrees that it will furnish the Trust, at the Advisor's
expense, with all office space and facilities, and equipment and clerical
personnel necessary for carrying out its duties under this Agreement. The
Advisor (or an affiliate thereof) will also pay all compensation of all
Trustees, officers and employees of the Trust who are affiliated persons of the
Advisor. All operating costs and expenses relating to the Portfolio not
expressly assumed by the Advisor under this Agreement shall be paid by the
Trust from the assets of the Portfolio, as applicable, including, but not
limited to (i) interest and taxes; (ii) brokerage commissions; (iii) insurance
premiums; (iv) compensation and expenses of the Trust's Trustees other than
those affiliated with the Advisor; (v) legal and audit expenses; (vi) fees and
expenses of the Trust's custodian, shareholder servicing or transfer agent and
accounting services agent; (vii) expenses incident to the issuance of the
Portfolio's shares, including issuance on the payment of, or reinvestment of,
dividends; (viii) fees and expenses incident to the registration under Federal
or state securities laws of the Trust or the shares of the Portfolio; (ix)
expenses of preparing, printing and mailing reports and notices and proxy
materials to shareholders of the Portfolio; (x) all other expenses incident to
holding meetings of the Portfolio's shareholders; (xi) dues or assessments of
or contributions to the Investment Company Institute or any successor; (xii)
such non-recurring expenses as may arise, including litigation affecting the
Trust and the legal obligations which the Trust may have to indemnify its
officers and Trustees with respect thereto; and (xiii) all expenses which the
Trust or the Portfolio agree to bear in any distribution agreement or in any
plan adopted by the Trust and/or the Portfolio pursuant to Rule 12b-1 under
the 1940 Act.
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5. COMPENSATION OF THE ADVISOR
The Trust agrees to pay the Advisor and the Advisor agrees to accept
as full compensation for all services rendered by the Advisor hereunder, an
annual management fee, payable monthly and computed on the value of the average
net assets of the Portfolio as of the close of business each business day, at
the annual rate of .46%.
6. DURATION AND TERMINATION
(a) This Agreement shall go into effect on the date hereof and
shall, unless terminated as hereinafter provided, continue in
effect until ____________, 1999, and thereafter from year to
year, but only so long as such continuance is specifically
approved at least annually by the Trust's Board of Trustees,
including the vote of a majority of the Trustees who are not
parties to this Agreement or "interested persons" (as defined
in the 1940 Act) of any such party cast in person at a meeting
called for the purpose of voting on such approval, or by the
vote of the holders of a "majority" (as so defined) of the
outstanding voting securities of the Portfolio and by such a
vote of the Trustees.
(b) This Agreement may be terminated by the Advisor at any
time without penalty upon giving the Trust sixty (60) days'
notice written notice (which notice may be waived by the
Trust) and may be terminated by the Trust at any time without
penalty upon giving the Advisor sixty (60) days' written
notice (which notice may be waived by the Advisor), provided
that such termination by the Trust shall be directed or
approved by the vote of a majority of all of its Trustees in
office at the time or by the vote of the holders of a majority
(as defined in the 1940 Act) of the voting securities of the
Trust at the time outstanding and entitled to vote. This
Agreement shall automatically terminate in the event of its
assignment (as so defined).
7. USE OF ADVISOR'S NAME
The Trust may use the name "Hotchkis and Wiley Variable Trust" or any
name including the words "Hotchkis and Wiley" only for so long as this
Agreement or any other advisory agreement relating to the Trust is in effect.
If the Agreement or any other advisory agreement relating to the Trust is no
longer in effect, the Trust will (to the extent that it lawfully can) cease to
use such a name or any other name indicating that it is advised by or otherwise
connected with the Advisor, or any organization that shall have succeeded to
the Advisor's business. In no event shall the Trust use the name "Hotchkis and
Wiley Variable Trust" or any name including the words "Hotchkis and Wiley" if
the Advisor's function is transferred or assigned to a company over which
Merrill Lynch & Co., Inc. does not have control.
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8. AGREEMENT BINDING ONLY ON TRUST PROPERTY
The Advisor understands that the obligations of this Agreement are not
binding upon any shareholder of the Trust personally, but bind only the Trust's
property; the Advisor represents that it has notice of the provisions of the
Trust's Declaration of Trust disclaiming shareholder liability for acts or
obligations of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by duly authorized persons and their seals to be
hereunto affixed, all as of the day and year first above written.
HOTCHKIS AND WILEY VARIABLE
TRUST
By_______________________________
ATTEST:
_____________________________
HOTCHKIS AND WILEY, a division of the
Capital Management Group of Merrill
Lynch Asset Management, L.P.
By______________________________
ATTEST:
_____________________________
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