<PAGE> 1
As filed with the Securities and Registration No. 333-24349
Exchange Commission on February 25, 1999. 811-08163
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 1 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [ ]
Amendment No. 3 [X]
(Check appropriate box or boxes)
------------------------
HOTCHKIS AND WILEY VARIABLE TRUST
(Exact name of registrant as specified in charter)
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (213) 362-8888
GRACIE FERMELIA
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(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.
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on April 30, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered...............Shares of Beneficial Interest
<PAGE> 2
HOTCHKIS AND WILEY VARIABLE TRUST
EQUITY INCOME VIP PORTFOLIO
FUND PROFILE
April 30, 1999
This profile contains key information about the Fund that is included in the
Fund's prospectus. It is intended for use with a variable contract and is not
intended for other investors. The prospectus includes additional information
about the Fund, including a more detailed description of the risks associated
with investing in the Fund that you may want to consider before you invest. You
may obtain the prospectus and other information about the Fund at no cost from
the insurance company issuing the variable contract.
1. Fund Objective
The investment objective of the Equity Income VIP Portfolio (the "Fund") is
to provide current income and long-term growth of income, accompanied by growth
of capital.
2. Principal Investment Strategies of the Fund
The Fund seeks to achieve its objective by investing mostly in common stocks of
large U.S. companies. Normally, the Fund invests at least 80% of its total
assets in stocks that pay dividends. It also may invest in stocks that don't pay
dividends or interest, but have growth potential unrecognized by the market or
changes in business or management that indicate growth potential.
In investing the Fund, the Advisor follows a value style. This means that the
Advisor buys stocks that it believes are currently undervalued by the market
and thus have a lower price than their true worth. Typical value
characteristics include:
- low price-to-earnings ratio relative to the market
- high dividend yield relative to the market
- low price-to-book value ratio relative to the market
- financial strength
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year. You
may obtain either or both of these reports at no cost from the insurance company
issuing the variable contract.
3. Principal Risks of Investing in the Fund
As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may go up or down. These changes may occur because the
stock market is rising or falling. At other times, there are specific factors
that may affect the value of a particular investment. If the value of the
Fund's investments goes down, you may lose money.
1
<PAGE> 3
4. Fees and Expenses of the Fund
The Advisor is paid a fee from the Fund's assets, computed daily and payable
monthly, at an annual rate of 0.75% of the Fund's average daily net assets. The
Advisor has voluntarily agreed to pay all annual Fund expenses in excess of
1.15% of the Fund's average daily net assets.
Mortality and expense risk fees and other charges may be assessed by
Participating Insurance Companies to investors under the variable annuity
contracts or variable life insurance policies. Investors should refer to the
prospectus of the Participating Insurance Company's separate account for
information on fees. The Separate Account prospectus sets out examples of
aggregate Fund and Separate Account charges.
5. Investment Advisor and Portfolio Managers of the Fund
Hotchkis and Wiley acts as Advisor to the Fund and generally administers the
affairs of the Hotchkis and Wiley Variable Trust. The Advisor is a division of
Merrill Lynch Asset Management, L.P. Gail Bardin and Sheldon Lieberman serve as
the portfolio managers. They have had responsibility for the day-to-day
management of the Fund's portfolio since it began operations in March 1998. Ms.
Bardin is a managing director of the Advisor and has served as a portfolio
manager of the Advisor since 1988. Mr. Lieberman joined the Advisor in 1994 and
has served as a portfolio manager since then.
6. Purchase of Fund Shares
Investors may not purchase shares of the Fund directly, but only through
variable annuity contracts and variable life insurance policies offered through
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.
2
<PAGE> 4
7. Sale of Fund Shares
Investors may not redeem shares of the Fund directly, but only through variable
annuity contracts and variable life insurance policies offered through 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 redeem monies from the applicable contract or policy.
8. Fund Distributions and Tax Information
The Fund expects to pay income dividends quarterly, which will be taxed as
ordinary income, if at all, to the Separate Account and not to contractholders.
Distributions of short-term gains also will be taxable as ordinary income, if at
all, to the Separate Account. Any net capital gains distributed to the Separate
Account are taxable as long-term capital gains regardless of the length of time
the Separate Account has owned shares. Dividends and distributions are paid in
full and fractional shares based on the net asset value per share at the close
of business on the record date.
3
<PAGE> 5
HOTCHKIS AND WILEY VARIABLE TRUST
INTERNATIONAL VIP PORTFOLIO
FUND PROFILE
April 30, 1999
This profile contains key information about the Fund that is included in the
Fund's prospectus. It is intended for use with a variable contract and is not
intended for other investors. The prospectus includes additional information
about the Fund, including a more detailed description of the risks associated
with investing in the Fund that you may want to consider before you invest. You
may obtain the prospectus and other information about the Fund at no cost from
the insurance company issuing the variable contract.
1. Fund Objective
The investment objective of the International VIP Portfolio (the "Fund") is
to provide current income and long-term growth of income, accompanied by growth
of capital.
2. Principal Investment Strategies of the Fund
The Fund seeks to achieve its objective by investing at least 65% of its total
assets in stocks in at least ten foreign markets.
Ordinarily, the Fund invests in stocks of companies located in the developed
foreign markets and invests at least 80% of its total assets in stocks that pay
dividends. It also may invest in stocks that don't pay dividends or interest,
but have growth potential unrecognized by the market or changes in business or
management that indicate growth potential.
In investing the Fund, the Advisor follows a value style. This means that the
Advisor buys stocks that it believes are currently undervalued by the market
and thus have a lower price than their true worth. Typical value
characteristics include:
- low price-to-earnings ratio relative to the market
- high dividend yield relative to the market
- low price-to-book value ratio relative to the market
- financial strength
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year. You
may obtain either or both of these reports at no cost from the insurance
company issuing the variable contract.
3. Principal Risks of Investing in the Fund
As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may go up or down. These changes may occur because the
stock market is rising or falling. At other times, there are specific factors
that may affect the value of a particular investment. If the value of the
Fund's investments goes down, you may lose money.
Because the Fund invests in foreign securities, there are additional risks. For
example, the securities may go up or down in value depending on foreign
exchange rates, foreign political and economic developments and U.S. and
foreign laws relating to foreign investment. Foreign securities may also be
less liquid, more volatile and harder to value than U.S. securities.
1
<PAGE> 6
4. Fees and Expenses of the Fund
The Advisor is paid a fee from the Fund's assets, computed daily and payable
monthly, at an annual rate of 0.75% of the Fund's average daily net assets. The
Advisor has voluntarily agreed to pay all annual Fund expenses in excess of
1.35% of the Fund's average daily net assets.
Mortality and expense risk fees and other charges may be assessed by
Participating Insurance Companies to investors under the variable annuity
contracts or variable life insurance policies. Investors should refer to the
prospectus of the Participating Insurance Company's separate account for
information on fees. The Separate Account prospectus sets out examples of
aggregate Fund and Separate Account charges.
5. Investment Advisor and Subadvisors and Portfolio Managers of the Fund
Hotchkis and Wiley acts as Advisor to the Fund and generally administers the
affairs of the Hotchkis and Wiley Variable Trust. The Advisor is a division of
Merrill Lynch Asset Management, L.P. Mercury Asset Management International and
Merrill Lynch Asset Management U.K. Limited, affiliated investment advisors that
are indirect subsidiaries of Merrill Lynch & Co., Inc., provide
investment-related services to the Advisor for the Fund. Sarah Ketterer, Harry
Hartford and David Chambers have served as the portfolio managers since the Fund
began operations in June 1998. They have responsibility for the day-to-day
management of the Fund's portfolio. Ms. Ketterer is a managing director of the
Advisor, where she has been employed for more than five years. Mr. Hartford has
been a portfolio manager of the Advisor since 1994. Mr. Chambers joined the
Advisor in 1995 from Baring Asset Management, Inc., where he was Senior Vice
President, Global Equities since 1992. He has been associated with Mercury
Asset Management International since July 1998.
6. Purchase of Fund Shares
Investors may not purchase shares of the Fund directly, but only through
variable annuity contracts and variable life insurance policies offered through
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.
2
<PAGE> 7
7. Sale of Fund Shares
Investors may not redeem shares of the Fund directly, but only through variable
annuity contracts and variable life insurance policies offered through 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 redeem monies from the applicable contract or policy.
8. Fund Distributions and Tax Information
The Fund expects to pay income dividends annually, which will be taxed as
ordinary income, if at all, to the Separate Account and not to contractholders.
Distributions of short-term capital gains also will be taxable as ordinary
income, if at all, to the Separate Account. Any net capital gains distributed to
the Separate Account are taxable as long-term capital gains regardless of the
length of time the Separate Account has owned shares. Dividends and
distributions are paid in full and fractional shares based on the net asset
value per share at the close of business on the record date.
3
<PAGE> 8
HOTCHKIS AND WILEY VARIABLE TRUST
TOTAL RETURN BOND VIP PORTFOLIO
FUND PROFILE
April 30, 1999
This Profile contains key information about the Fund that is included in the
Fund's prospectus. It is intended for use with a variable contract and is not
intended for other investors. The prospectus includes additional information
about the Fund, including a more detailed description of the risks associated
with investing in the Fund that you may want to consider before you invest. You
may obtain the prospectus and other information about the Fund at no cost from
the insurance company issuing the variable contract.
1. Fund Objective
The investment objective of the Total Return Bond VIP Portfolio (the "Fund")
is to maximize long-term total return.
2. Principal Investment Strategies of the Fund
The Fund will seek to achieve its objective by investing in a diversified
portfolio of bonds of varying maturities with a portfolio duration of two to
eight years. Portfolio holdings will be concentrated in areas of the bond market
(based on quality, sector, coupon or maturity) which the Advisor believes to be
relatively undervalued. Under normal circumstances, at least 85% of the Fund's
total assets will be investment grade.
Additional information about the Fund's investments will be available in annual
and semi-annual reports to shareholders. In the Fund's annual report for fiscal
year 1999, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during the fiscal
year. You may obtain either or both of the reports at no cost from the
insurance company issuing the variable contract.
3. Principal Risks of Investing in the Fund
As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may go up or down. These changes may occur in response to
interest rate changes or other factors that may affect a particular issuer or
obligation. Generally, when interest rates go up, the value of bonds goes down.
The value of the Fund's shares also may be affected by market conditions and
economic or political developments. If the value of the Fund's investments goes
down, you may lose money.
Because the Fund invests in foreign securities, there are additional risks. For
example, the securities may go up or down in value depending on foreign
exchange rates, foreign political and economic developments and U.S. and
foreign laws relating to foreign investment. Foreign securities may also be
less liquid, more volatile and harder to value than U.S. securities. These
risks are heightened when the issuer of the securities is a country or is in a
country with an emerging capital market.
1
<PAGE> 9
4. Fees and Expenses of the Fund
The Advisor is paid a fee from the Fund's assets, computed daily and payable
monthly, at an annual rate of 0.55% of the Fund's average daily net assets. The
Advisor has voluntarily agreed to pay all annual Fund expenses in excess of
0.65% of the Fund's average daily net assets.
Mortality and expense risk fees and other charges may be assessed by
Participating Insurance Companies to investors under the variable annuity
contracts or variable life insurance policies. Investors should refer to the
prospectus of the Participating Insurance Company's separate account for
information on fees. The Separate Account prospectus sets out examples of
aggregate Fund and Separate Account charges.
5. Investment Advisor and Portfolio Managers of the Fund
Hotchkis and Wiley acts as Advisor to the Fund and generally administers the
affairs of the Hotchkis and Wiley Variable Trust. The Advisor is a division of
Merrill Lynch Asset Management, L.P. Roger DeBard, Michael Sanchez and John
Queen will serve as the portfolio managers when it begins operations. They will
have responsibility for the day-to-day management of the Fund's portfolio. Mr.
DeBard is a managing director of the Advisor and has served as a portfolio
manager of the Advisor since 1985. Mr. Sanchez has served as a portfolio manager
since joining the Advisor in August 1996. Before joining the Advisor, he was
with Provident Investment Counsel as a Senior Vice President and portfolio
manager from 1991 to 1995. Mr. Queen joined the Advisor in 1997. Before joining
the Advisor, Mr. Queen was associated with The Capital Group as a member of an
analyst team responsible for $8 billion in fixed-income assets.
6. Purchase of Fund Shares
Investors may not purchase shares of the Fund directly, but only through
variable annuity contracts and variable life insurance policies offered through
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.
2
<PAGE> 10
7. Sale of Fund Shares
Investors may not redeem shares of the Fund directly, but only through variable
annuity contracts and variable life insurance policies offered through 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 redeem monies from the applicable contract or policy.
8. Fund Distributions and Tax Information
The Fund expects to declare and pay income dividends monthly, which will be
taxed as ordinary income, if at all, to the Separate Account and not to
contractholders. Distributions of short-term capital gains also will be taxable
as ordinary income, if at all, to the Separate Account. Any net capital gains
distributed to the Separate Account are taxable as long-term capital gains
regardless of the length of time the Separate Account has owned shares.
Dividends and distributions are paid in full and fractional shares based on the
net asset value per share at the close of business on the record date.
3
<PAGE> 11
HOTCHKIS AND WILEY VARIABLE TRUST
LOW DURATION VIP PORTFOLIO
FUND PROFILE
April 30, 1999
This Profile contains key information about the Fund that is included in the
Fund's prospectus. It is intended for use with a variable contract and is not
intended for other investors. The prospectus includes additional information
about the Fund, including a more detailed description of the risks associated
with investing in the Fund that you may want to consider before you invest. You
may obtain the prospectus and other information about the Fund at no cost from
the insurance company issuing the variable contract.
1. Fund Objective
The investment objective of the Low Duration VIP Portfolio (the "Fund") is to
maximize total return, consistent with preservation of capital.
2. Principal Investment Strategies of the Fund
The Fund seeks to achieve its objective by investing in a diversified portfolio
of bonds of varying maturities with a portfolio duration of one to three years.
Under normal circumstances, at least 90% of the Fund's assets will be investment
grade.
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year. You
may obtain either or both of these reports at no cost from the insurance
company issuing the variable contract.
3. Principal Risks of Investing in the Fund
As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may go up or down. These changes may occur in response to
interest rate changes or other factors that may affect a particular issuer or
obligation. Generally, when interest rates go up, the value of bonds goes down.
The value of the Fund's shares also may be affected by market conditions and
economic or political developments. If the value of the Fund's investments goes
down, you may lose money.
Because the Fund invests in foreign securities, there are additional risks. For
example, the securities may go up or down in value depending on foreign
exchange rates, foreign political and economic developments and U.S. and
foreign laws relating to foreign investment. Foreign securities may also be
less liquid, more volatile and harder to value than U.S. securities. These
risks are heightened when the issuer of the securities is a country or is in a
country with an emerging capital market.
1
<PAGE> 12
4. Fees and Expenses of the Fund
The Advisor is paid a fee from the Fund's assets, computed daily and payable
monthly, at an annual rate of 0.46% of the Fund's average daily net assets. The
Advisor has voluntarily agreed to pay all Fund expenses in excess of 0.58% of
the Fund's average daily net assets.
Mortality and expense risk fees and other charges may be assessed by
Participating Insurance Companies to investors under the variable annuity
contracts or variable life insurance policies. Investors should refer to the
prospectus of the Participating Insurance Company's separate account for
information on fees. The Separate Account prospectus sets out examples of
aggregate Fund and Separate Account charges.
5. Investment Advisor and Portfolio Managers of the Fund
Hotchkis and Wiley acts as Advisor to the Fund and generally administers the
affairs of the Hotchkis and Wiley Variable Trust. The Advisor is a division of
Merrill Lynch Asset Management, L.P. Roger DeBard, Michael Sanchez and John
Queen serve as the portfolio managers. They have had responsibility for the
day-to-day management of the Fund's portfolio since it began operations in March
1998. Mr. DeBard is a managing director of the Advisor and has served as a
portfolio manager of the Advisor since 1985. Mr. Sanchez has served as a
portfolio manager since joining the Advisor in August 1996. Before joining the
Advisor, he was with Provident Investment Counsel as a Senior Vice President and
portfolio manager from 1991 to 1995. Mr. Queen joined the Advisor in 1997.
Before joining the Advisor, Mr. Queen was associated with The Capital Group as a
member of an analyst team responsible for $8 billion in fixed-income assets.
6. Purchase of Fund Shares
Investors may not purchase shares of the Fund directly, but only through
variable annuity contracts and variable life insurance policies offered through
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.
2
<PAGE> 13
7. Sale of Fund Shares
Investors may not redeem shares of the Fund directly, but only through variable
annuity contracts and variable life insurance policies offered through 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 redeem monies from the applicable contract or policy.
8. Fund Distributions and Tax Information
The Fund expects to declare and pay income dividends monthly, which will be
taxed as ordinary income, if at all, to the Separate Account and not to
contractholders. Distributions of short-term capital gains also will be taxable
as ordinary income, if at all, to the Separate Account. Any net capital gains
distributed to the Separate Account are taxable as long-term capital gains
regardless of the length of time the Separate Account has owned shares.
Dividends and distributions are paid in full and fractional shares based on the
net asset value per share at the close of business on the record date.
3
<PAGE> 14
PROSPECTUS
APRIL 30, 1999
HOTCHKIS AND WILEY VARIABLE TRUST
The following Funds are investments for variable annuity contracts and variable
life insurance contracts issued by insurance companies that have contracts with
the Funds.
EQUITY INCOME VIP PORTFOLIO
Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests primarily in U.S. stocks.
INTERNATIONAL VIP PORTFOLIO
Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests in international stocks.
TOTAL RETURN BOND VIP PORTFOLIO
Seeks to maximize long-term total return. The Fund invests in bonds of varying
maturities with a portfolio duration of two to eight years.
LOW DURATION VIP PORTFOLIO
Seeks to maximize total return, consistent with preservation of capital. The
Fund invests in bonds of varying maturities with a portfolio duration of one to
three years.
The Securities and Exchange Commission has not approved or disapproved these
securities or the accuracy of this Prospectus. It is a criminal offense to state
otherwise.
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<PAGE> 15
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
KEY FACTS.............................................. 3
INVESTMENT OBJECTIVES AND POLICIES..................... 4
INVESTMENT RISKS....................................... 9
THE ADVISOR AND PORTFOLIO MANAGERS..................... 15
HOW TO BUY AND REDEEM SHARES........................... 17
DIVIDENDS AND TAXES.................................... 18
FINANCIAL HIGHLIGHTS................................... 19
INFORMATION ABOUT THE FUNDS........................back cover
</TABLE>
Hotchkis & Wiley logo
<PAGE> 16
KEY FACTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND MAIN STRATEGIES
This section highlights important information about each Fund. Use this summary
to compare the Funds to other mutual funds. More detailed information follows
the summary.
STOCK FUNDS
<TABLE>
<CAPTION>
EQUITY INCOME VIP PORTFOLIO INTERNATIONAL VIP PORTFOLIO
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OBJECTIVE - current income - current income
- long-term growth of income - long-term growth of income
- growth of capital - growth of capital
MAIN INVESTMENTS - stocks of large U.S. companies - international stocks
</TABLE>
BOND FUNDS
Each Bond Fund invests in a diversified portfolio of bonds of different
maturities. They differ in their objectives, the credit quality of their
portfolios and their volatility, as measured by their "duration." Duration is a
measure of how much the price of a bond would change compared to a change in
market interest rate; the longer the duration, the more a bond's price would go
down if interest rates rose.
<TABLE>
<CAPTION>
TOTAL RETURN BOND VIP PORTFOLIO LOW DURATION VIP PORTFOLIO
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OBJECTIVE - maximize long-term total - maximize total return
return - preserve capital
CREDIT QUALITY - at least 85% investment grade; - at least 70% in A rated or
up to 15% rated below investment better; up to 30% rated BBB/Baa;
grade, none below B up to 10% rated below
investment grade, none below B
DURATION 2-8 years 1-3 years
MORE VOLATILE LESS VOLATILE
</TABLE>
MAIN RISKS
As with any mutual fund, the value of a Fund's investments, and therefore the
value of Fund shares, may go up or down. For the Stock Funds, these changes may
occur because the stock market is rising or falling. At other times, there are
specific factors that may affect the value of a particular investment. For the
Bond Funds, these changes may occur in response to interest changes or other
factors that may affect a particular issuer or obligation. Generally, when
interest rates go up, the value of bonds goes down. The value of the Bond Funds'
shares also may be affected by market conditions and economic or political
developments. If the value of the Funds' investments goes down, you may lose
money.
Funds that invest in foreign securities have additional risks. For example, the
securities may go up or down in value depending on foreign exchange rates,
foreign political and economic developments and U.S. and foreign laws relating
to foreign investment. Foreign securities may also be less liquid, more volatile
and harder to value than U.S. securities. These risks are heightened when the
issuer of the securities is a country or is in a country with an emerging
capital market.
3
<PAGE> 17
The Funds are investments for variable annuity contracts and variable life
insurance contracts offered by separate accounts of insurance companies that
have contracts with the Funds ("Participating Insurance Companies"). The Funds
intend to operate in compliance with current state insurance laws and
regulations regarding such things as their concentration of investments and
purchase and sale of futures contracts, and this may impose limits on portfolio
management.
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
STOCK FUNDS
VALUE INVESTING
In investing the Stock Funds, the Advisor follows a value style. This means that
the Advisor buys stocks that it believes are currently undervalued by the market
and thus have a lower price than their true worth. Typical value characteristics
include:
- - low price-to-earnings ratio relative to the market
- - high dividend yield relative to the market
- - low price-to-book value ratio relative to the market
- - financial strength
The different Stock Funds emphasize these characteristics in different degrees
depending on investment objective and market capitalization focus.
Stocks may be "undervalued" because they are part of an industry that is out of
favor with investors generally. Even in those industries, though, individual
companies may have high rates of growth of earnings and be financially sound. At
the same time, the price of their common stock may be depressed because
investors associate the companies with their industries.
This value discipline can sometimes prevent the Funds from investing in market
sectors which are significantly represented in broad market indexes.
EQUITY INCOME VIP PORTFOLIO
The Equity Income VIP Portfolio's investment objective is to provide CURRENT
INCOME and LONG-TERM GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.
The Equity Income VIP Portfolio invests mostly in common stocks of large U.S.
companies. Normally, the Fund invests at least 80% of its total assets in stocks
that pay dividends. It also may invest in stocks that don't pay dividends or
interest, but have growth potential unrecognized by the market or changes in
business or management that indicate growth potential.
The Equity Income VIP Portfolio can invest up to 10% of its total assets in
foreign securities.
4
<PAGE> 18
INTERNATIONAL VIP PORTFOLIO
The International VIP Portfolio's investment objective is to provide CURRENT
INCOME and LONG-TERM GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.
The International VIP Portfolio invests at least 65% of its total assets in
stocks in at least ten foreign markets. Ordinarily, the Fund invests in stocks
of companies located in the developed foreign markets and invests at least 80%
of its total assets in stocks that pay dividends. It also may invest in stocks
that don't pay dividends or interest, but have growth potential unrecognized by
the market or changes in business or management that indicate growth potential.
The International VIP Portfolio may enter into foreign currency options or
forward foreign currency exchange contracts to hedge currency fluctuations.
BOND INVESTMENTS IN STOCK FUNDS
The Stock Funds buy common stocks and securities with common stock
characteristics, like convertible preferred stocks, convertible bonds or
warrants. They also may buy bonds. Convertible securities and bonds will be
rated investment grade (the four highest grades) by a major rating agency like
Moody's Investors Service or Standard & Poor's or, if unrated, be of comparable
quality in the Advisor's opinion.
After the Stock Funds buy a bond or convertible security, it may be given a
lower rating or stop being rated. This would not require the Funds to sell the
security, but the Advisor will consider the change in rating in deciding whether
the Fund should keep the security.
BOND FUNDS
TOTAL RETURN BOND VIP PORTFOLIO
The Total Return Bond VIP Portfolio's investment objective is to MAXIMIZE
LONG-TERM TOTAL RETURN. The Fund invests in bonds with a portfolio duration of
two to eight years. Investments are concentrated in areas of the bond market
(based on quality, sector, coupon or maturity) that the Advisor believes are
relatively undervalued.
LOW DURATION VIP PORTFOLIO
The Low Duration VIP Portfolio's investment objective is to MAXIMIZE TOTAL
RETURN, consistent with CAPITAL PRESERVATION. The Fund invests in bonds with a
portfolio duration of one to three years. The total rate of return for this Fund
is expected to rise and fall less than a longer duration bond fund like the
Total Return Bond VIP Portfolio.
The Bond Funds seek to achieve their objectives by investing mainly in
investment grade, interest-bearing securities of varying maturities. These
include:
- - U.S. Government securities
- - preferred stocks
- - mortgage-backed and other asset-backed securities
- - corporate bonds
- - bonds that are convertible into stocks
5
<PAGE> 19
- - bank certificates of deposit, fixed time deposits and bankers' acceptances
- - repurchase agreements, reverse repurchase agreements and dollar rolls
- - obligations of foreign governments or their subdivisions, agencies and
instrumentalities
- - obligations of international agencies or supra-national entities
- - municipal bonds
RATINGS LIMITATIONS
Total Return Bond VIP Portfolio
- - at least 85% of total assets rated at least investment grade or, if
short-term, the second highest quality grade, by a major rating agency such as
Moody's or Standard & Poor's (S&P)
- - up to 15% of total assets rated below investment grade (below Baa by Moody's
or below BBB by S&P), but none below B
- - can invest in unrated securities if the Advisor believes them to be of
comparable quality
Low Duration VIP Portfolio
- - at least 70% of total assets rated at least A or, if short-term, the second
highest quality grade, by a major rating agency
- - up to 30% of total assets rated Baa by Moody's or BBB by S&P
- - up to 10% of total assets rated below investment grade, but none below B
- - can invest in unrated securities if the Advisor believes them to be of
comparable quality
After a Fund buys a security, it may be given a lower rating or stop being
rated. This will not require the Fund to sell it, but the Advisor will consider
the change in rating in deciding whether to keep the security.
MATURITY AND DURATION REQUIREMENTS
Maturity. The EFFECTIVE MATURITY of a bond is the weighted average period over
which principal is expected to be repaid. STATED MATURITY is the date when the
issuer is scheduled to make the final payment of principal. Effective maturity
is different than stated maturity because it estimates the effect of expected
principal prepayments and call provisions.
Duration. The Bond Funds have different portfolio "durations." Duration
measures the potential volatility of the price of a bond or a portfolio of bonds
prior to maturity. Duration is the magnitude of the change in price of a bond
relative to a given change in the market interest rate. Duration incorporates a
bond's yield, coupon interest payments, final maturity, call and put features
and prepayment exposure into one measure.
For any bond with interest payments occurring before principal is repaid,
duration is ordinarily less than maturity. Generally, the lower the stated or
coupon rate of interest of a bond, the longer the duration. The higher the
stated or coupon rate of interest of a bond, the shorter the duration. The
calculation of duration is based on estimates.
6
<PAGE> 20
Duration is a tool to measure interest rate risk. Assuming a 1% change in
interest rates and the durations shown below, each Bond Fund's price would
change as follows:
<TABLE>
<CAPTION>
FUND DURATION CHANGE IN INTEREST RATES
---- -------- ------------------------
<S> <C> <C>
Total Return Bond 4.5 yrs. 1% decline W 4.5% gain in Fund price
1% rise W 4.5% decline in Fund price
Low Duration 2 yrs. 1% decline W 2% gain in Fund price
1% rise W 2% decline in Fund price
</TABLE>
Other factors such as changes in credit quality, prepayments, the shape of the
yield curve and liquidity affect the price of the Bond Funds and may correlate
with changes in interest rates. These factors can increase swings in the Funds'
share prices during periods of volatile interest rate changes.
FOREIGN BONDS
Each Bond Fund may invest in foreign bonds as follows:
- - up to 25% of total assets in foreign bonds that are denominated in U.S.
dollars
- - up to 15% of total assets in foreign bonds that are not denominated in U.S.
dollars
- - up to 15% of total assets in emerging market foreign bonds
MONEY MARKET INVESTMENTS
To meet redemptions and when waiting to invest cash receipts, the Funds may
invest in short-term, investment grade bonds and other money market instruments.
Also, the Funds temporarily can invest up to 100% of their assets in short-term,
investment grade bonds and other money market instruments in response to adverse
market, economic or political conditions. Although this kind of investing would
provide some income, it would not provide capital appreciation.
TYPES OF SECURITIES
U.S. GOVERNMENT SECURITIES
Each Fund can invest in U.S. Government securities. U.S. Government securities
include direct obligations issued by the United States Treasury, like Treasury
bills, certificates of indebtedness, notes, bonds and parts of notes or bonds.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include the Federal National Mortgage Association ("Fannie Mae"),
Government National Mortgage Association ("Ginnie Mae"), Federal Home Loan
Mortgage Association ("Freddie Mac"), Federal Financing Bank, and Student Loan
Marketing Association ("Sallie Mae").
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 are
backed by the right of the agency to borrow from the Treasury. Others are
supported only by the credit of the agency and not by the Treasury. If the
securities are not backed by the full faith and credit of the United States, the
owner must look mainly to the agency issuing the obligation for repayment.
Each Fund can enter into REPURCHASE AGREEMENTS involving U.S. Government
securities with commercial banks or broker-dealers. This is a method of
short-term investment of cash where the Fund would buy securities from a bank
7
<PAGE> 21
or broker-dealer and sell them back a short time later (usually overnight) for a
slightly higher price. Each Fund intends to be fully "collateralized" as to such
agreements, and the collateral will be marked-to-market daily. But if the person
obligated to repurchase from the Fund defaults, there may be possible delays and
expenses in liquidating the securities, a decline in their value and loss of
interest income.
CORPORATE BONDS
Each Fund can invest in corporate bonds. These include variable and floating
rate bonds and corporate commercial paper.
The Bond Funds can invest in structured debentures and structured notes, which
are hybrid instruments with characteristics of both bonds and swap agreements.
The prices of structured debentures and structured notes can be more volatile
than and are often not correlated to other bonds.
The Bond Funds can invest in inverse floaters and tiered index bonds. In
general, the interest rates on tiered index bonds and inverse floaters move in
the opposite direction of prevailing interest rates.
MUNICIPAL BONDS
The Bond Funds can invest in municipal bonds issued by or on behalf of the
governments of states, territories or possessions of the United States, the
District of Columbia and their agencies and instrumentalities. These include
general obligation bonds, revenue bonds and private activity bonds.
REAL ESTATE INVESTMENT TRUSTS
The Funds can invest in securities of real estate investment trusts or REITs.
ASSET-BACKED SECURITIES
The Bond Funds can invest in securities whose principal and interest payments
are backed by various types of assets, including automobile loans, credit card
loans, and home equity loans.
MORTGAGE-BACKED SECURITIES
The Bond Funds can invest in mortgage-backed securities, including mortgage
pass-through securities and collateralized mortgage obligations ("CMOs").
OTHER DERIVATIVES
The Funds may use other "derivatives," whose performance is derived from the
performance of an underlying asset. The Funds may use derivatives to hedge
against changes in interest rates, foreign currency exchange rates or securities
prices; for liquidity; or as part of their overall investment strategies. Each
Fund will mark assets as segregated or enter offsetting positions to cover its
obligations, if any, under options, futures contracts and swap agreements to
avoid leveraging the Fund.
OTHER STRATEGIES
The Funds also follow certain policies when they:
- - BORROW MONEY: each Fund can borrow up to 10% of the value of its total assets.
The Bond Funds can enter into reverse repurchase agreements in which they sell
securities and agree to buy them back for a fixed price at a later
8
<PAGE> 22
date. They also can use dollar rolls in which they sell securities for
delivery in the current month while agreeing to buy very similar securities at
a later date from the same party. Reverse repurchase agreements and dollar
rolls involve leverage and are treated as borrowings by the Funds.
- - LEND SECURITIES: each Bond Fund can lend up to 33 1/3% of the value of its
total assets.
- - make SHORT SALES AGAINST-THE-BOX: each Fund can borrow and sell "short"
securities when it also owns an equal amount of those securities (or their
equivalent). No more than 25% of a Fund's total assets can be held as
collateral for short sales at any one time.
- - buy securities on a WHEN-ISSUED or DELAYED DELIVERY basis: the Funds will mark
assets as segregated in an amount equal to the when-issued securities.
PORTFOLIO TURNOVER
As a result of the strategies described above, the Bond Funds may have an annual
portfolio turnover rate above 100%. Portfolio turnover is generally the
percentage found by dividing the lesser of portfolio purchases or sales by the
monthly average value of the portfolio. High portfolio turnover (100% or more)
results in higher brokerage commissions and other transaction costs and can
affect these Funds' performance. It also can result in a greater amount of
distributions as ordinary income rather than long-term capital gains.
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
a Fund. As with any mutual fund, there can be no guarantee that a Fund will meet
its goals or that the Fund's performance will be positive for any period of
time.
MARKET AND SELECTION RISK
Market risk is the risk that the stock or bond market will go down in value,
including the possibility that the market will go down sharply and
unpredictably. Selection risk is the risk that the investments that Fund
management selects will underperform the market or other funds with similar
investment objectives and investment strategies.
FOREIGN MARKET RISK
Since the Funds may invest in foreign securities, they offer the potential for
more diversification than an investment only in the United States. This is
because stocks traded on foreign markets have often (though not always)
performed differently than stocks in the United States. However, such
investments involve special risks not present in U.S. investments that can
increase the chances that a Fund will lose money. In particular, investments in
foreign securities involve the following risks, which are generally greater for
investments in emerging markets:
- - The economies of some foreign markets often do not compare favorably with that
of the United States in areas such as growth of gross national product,
reinvestment of capital, resources, and balance of payments. Some of these
economics may rely heavily on particular industries or foreign capital. They
may be more vulnerable to adverse diplomatic developments, the imposition of
economic sanctions against a particular country or countries, changes in
international trading patterns, trade barriers, and other protectionist or
retaliatory measures.
9
<PAGE> 23
- - Investments in foreign markets may be adversely affected by governmental
actions such as the imposition of capital controls, nationalization of
companies or industries, expropriation of assets, or the imposition of
punitive taxes.
- - The governments of certain countries may prohibit or impose substantial
restrictions on foreign investing in their capital markets or in certain
industries. Any of these actions could severely affect security prices. They
could also impair a Fund's ability to purchase or sell foreign securities or
transfer its assets or income back into the United States, or otherwise
adversely affect a Fund's operations.
- - Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and
social instability. Legal remedies available to investors in some foreign
countries may be less extensive than those available to investors in the
United States.
- - Because there are generally fewer investors on foreign exchanges and a smaller
number of shares traded each day, it may be difficult for a Fund to buy and
sell securities on those exchanges. In addition, prices of foreign securities
may go up and down more than prices of securities traded in the United States.
- - Foreign markets may have different clearance and settlement procedures. In
certain markets, settlements may be unable to keep pace with the volume of
securities transactions. If this occurs, settlement may be delayed and a
Fund's assets may be uninvested and not earning returns. A Fund also may miss
investment opportunities or be unable to sell an investment because of these
delays.
- - The value of a Fund's foreign holdings (and hedging transactions in foreign
currencies) will be affected by changes in currency exchange rates.
- - The costs of non-U.S. securities transactions tend to be higher than those of
U.S. transactions.
- - International trade barriers or economic sanctions against certain non-U.S.
countries may adversely affect a Fund's non-U.S. holdings.
- - If a Fund purchases a bond issued by a foreign government, the government may
be unwilling or unable to make payments when due. There may be no formal
bankruptcy proceeding by which the Fund would be able to collect amounts owed
by a foreign government.
EUROPEAN ECONOMIC AND MONETARY UNION (EMU)
A number of European countries have agreed to enter into EMU in an effort to
reduce trade barriers between themselves and eliminate fluctuations in their
currencies. EMU establishes a single European currency (the euro), which was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all initial EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) will be redenominated in the
euro. Thereafter, these securities will trade and make dividend and other
payments only in euros. Like other investment companies and business
organizations, including the companies in which the Funds invest, a Fund could
be adversely affected:
- - If the euro, or EMU as a whole, does not take effect as planned.
- - If a participating country withdraws from EMU.
10
<PAGE> 24
- - If the computing, accounting and trading systems used by a Fund's service
providers, or by other entities with which a Fund or its service providers do
business, are not capable of recognizing the euro as a distinct currency
beginning with euro conversion.
RISKS OF CONVERTIBLE SECURITIES
Convertibles are generally bonds or preferred stocks that may be converted into
common stock. Convertibles typically pay current income, as either interest
(bond convertibles) or dividends (preferred stocks). A convertible's value
usually reflects both the stream of current income payments and the value of the
underlying common stock. The market value of a convertible performs like regular
bonds; that is, if market interest rates rise, the value of a convertible
usually falls. Since it is convertible into common stock, the convertible also
has the same types of market and issuer risk as the underlying common stock.
ADDITIONAL BOND RISKS
- - MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans. When interest rates fall, borrowers
may refinance or otherwise repay principal on their mortgages earlier than
scheduled. When this happens, certain types of mortgage-backed securities will
be paid off more quickly than originally anticipated. Prepayment reduces the
yield to maturity and average life of the mortgage-backed securities. In
addition, when a Fund reinvests the proceeds of a prepayment, it may receive a
lower interest rate than the rate on the security that was prepaid. This risk
is known as "prepayment risk." When interest rates rise, certain types of
mortgage-backed securities will be paid off more slowly than originally
anticipated and the value of these securities will fall. This risk is known as
extension risk.
Because of prepayment risk and extension risk, mortgage-backed securities
react differently to changes in interest rates than other bonds. Small
movements in interest rates (both up and down) may quickly and significantly
reduce the value of certain mortgage-backed securities.
Mortgage-backed securities are issued by Federal government agencies like
Ginnie Mae, Freddie Mac or Fannie Mae. Principal and interest payments on
mortgage-backed securities issued by Federal government agencies are
guaranteed by either the Federal government or the government agency. This
means that such securities have very little credit risk. Other mortgage-backed
securities are issued by private corporations rather than Federal agencies.
Private mortgage-backed securities have credit risk as well as prepayment risk
and extension risk.
Mortgage-backed securities may be either pass-through securities or
collateralized mortgage obligations (CMOs). Pass-through securities represent
a right to receive principal and interest payments collected on a pool of
mortgages, which are passed through to security holders (less servicing
costs). CMOs are created by dividing the principal and interest payments
collected on a pool of mortgages into several revenue streams (tranches) with
different priority rights to portions of the underlying mortgage payments.
Certain CMO tranches may represent a right to receive interest only (IOs),
principal only (POs) or an amount that remains after other floating-rate
tranches are paid (an inverse floater). These securities are frequently
referred to as "mortgage derivatives" and may be extremely sensitive to
changes in interest rates. If a Fund invests in CMO tranches (including CMO
tranches issued by government agencies) and interest rates move in a manner
not anticipated by Fund management, it is possible that the Fund could lose
all or substantially all of its investment.
11
<PAGE> 25
- - ASSET-BACKED SECURITIES -- Like traditional bonds, the value of asset-backed
securities typically increases when interest rates fall and decreases when
interest rates rise. Certain asset-backed securities may also be subject to
the risk of prepayment. In a period of declining interest rates, borrowers may
pay what they owe on the underlying assets more quickly than anticipated.
Prepayment reduces the yield to maturity and the average life of the asset-
backed securities. In addition, when a Fund reinvests the proceeds of a
prepayment, it may receive a lower interest rate than the rate on the security
that was prepaid. In a period of rising interest rates, prepayments may occur
at a slower rate than expected. As a result, the average maturity of the
Fund's portfolio will increase. The value of long-term securities changes more
widely in response to changes in interest rates than shorter-term securities.
- - CREDIT RISK -- Credit risk is the risk that the issuer of bonds will be unable
to pay the interest or principal when due. The degree of credit risk depends
on both the financial condition of the issuer and on the terms of the specific
bonds.
- - INTEREST RATE RISK -- Interest rate risk is the risk that prices of bonds
generally increase when interest rates decline and decrease when interest
rates increase. Prices of longer term securities generally change more in
response to interest rate changes than do prices of shorter term securities.
- - CALL AND REDEMPTION RISK -- Investments in bonds carry the risk that a bond's
issuer will call the bond for redemption prior to the bond's maturity. If
there is an early call of a bond, a Fund may lose income and may have to
invest the proceeds of the redemption in bonds with lower yields than the
called bond.
- - JUNK BONDS -- Junk bonds are bonds that are rated below investment grade by
the major rating agencies or are unrated securities that the Funds' Advisor
believes are of comparable quality. Although junk bonds generally pay higher
rates of interest than investment grade bonds, they are high risk investments
that may cause income and principal losses for a Fund. Junk bonds generally
are less liquid and experience more price volatility than higher rated debt
securities. The issuers of junk bonds may have a larger amount of outstanding
debt relative to their assets than issuers of investment grade bonds. In the
event of an issuer's bankruptcy, claims of other creditors may have priority
over the claims of junk bond holders, leaving few or no assets available to
repay junk bond holders. Junk bonds may be subject to greater call and
redemption risk than higher rated debt securities.
- - WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD
COMMITMENTS -- When-issued, delayed-delivery securities and forward
commitments involve the risk that the security a Fund buys will lose value
prior to its delivery to the Fund. There also is the risk that the security
will not be issued or that the other party will not meet its obligation, in
which case the Fund loses the investment opportunity of the assets it has set
aside to pay for the security and any gain in the security's price.
- - VARIABLE RATE DEMAND OBLIGATIONS -- Variable rate demand obligations are
floating rate securities that consist of an interest in a long-term bond and
the conditional right to demand payment prior to the bond's maturity from a
bank or other financial institution. If the bank or other financial
institution is unable to pay on demand, a Fund may be adversely affected. In
addition, these securities are subject to credit risk.
- - INDEXED AND INVERSE FLOATING RATE SECURITIES -- A Bond Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. A Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, inverse floaters change in value in a manner
that is opposite to most bonds -- that is, interest
12
<PAGE> 26
rates on inverse floaters will decrease when short-term rates increase and
increase when short-term rates decrease. Investments in indexed securities and
inverse floaters may subject a Fund to the risks of reduced or eliminated
interest payments. Investments in indexed securities also may subject a Fund
to loss of principal. In addition, certain indexed securities and inverse
floaters may increase or decrease in value at a greater rate than the
underlying interest rate, which effectively leverages a Fund's investment. As
a result, the market value of such securities will generally be more volatile
than that of fixed rate securities. Both indexed securities and inverse
floaters can be derivative securities and can be considered speculative.
- - SOVEREIGN DEBT -- The Bond Funds may invest in sovereign debt securities.
These securities are issued or guaranteed by foreign government entities.
Investments in sovereign debt subject the Funds to the risk that a government
entity may delay or refuse to pay interest or repayment of principal on its
sovereign debt. Some of these reasons may include cash flow problems,
insufficient foreign currency reserves, political considerations, the relative
size of its debt position to its economy or its failure to put in place
economic reforms required by the International Monetary Fund or other
multilateral agencies. If a government entity defaults, it may ask for more
time in which to pay or for further loans. There is no legal process for
collecting sovereign debts that a government does not pay.
- - CORPORATE LOANS -- Commercial banks and other financial institutions make
corporate loans to companies that need capital to grow or restructure.
Borrowers generally pay interest on corporate loans at rates that change in
response to changes in market interest rates such as the London Interbank
Offered Rate ("LIBOR") or the prime rates of U.S. banks. As a result, the
value of corporate loan investments is generally less responsive to shifts in
market interest rates. Because the trading market for corporate loans is less
developed than the secondary market for bonds and notes, the Fund may
experience difficulties from time to time in selling its corporate loans.
Borrowers frequently provide collateral to secure repayment of these
obligations. Leading financial institutions often act as agent for a broader
group of lenders, generally referred to as a "syndicate". The syndicate's
agent arranges the corporate loans, holds collateral and accepts payments of
principal and interest. If the agent developed financial problems, a Fund may
not recover its investment, or there might be a delay in the Fund's recovery.
By investing in a corporate loan, a Fund becomes a member of the syndicate.
Corporate loans are subject to the risk of loss of principal and income.
Borrowers do not always provide collateral for corporate loans and the value
of the collateral may not completely cover the borrower's obligations at the
time of a default. If a borrower files for protection from its creditors under
the U.S. bankruptcy laws, these laws may limit a Fund's rights to its
collateral. In addition, the value of collateral may erode during a bankruptcy
case. In the event of a bankruptcy, the holder of a corporate loan may not
recover its principal, may experience a long delay in recovering its
investment and may not receive interest during the delay.
RISKS OF ILLIQUID INVESTMENTS
Each Fund may invest up to 15% of its net assets in illiquid securities that it
cannot easily resell within seven days at current value or that have contractual
or legal restrictions on resale. If a Fund buys illiquid securities it may be
unable to quickly resell them or may be able to sell them only at a price below
current value.
- - RESTRICTED SECURITIES -- Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that a
Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.
13
<PAGE> 27
Restricted securities may be illiquid. A Fund may be unable to sell them on
short notice or may be able to sell them only at a price below current value.
A Fund may get only limited information about the issuer, so it may be less
able to predict a loss. In addition, if Fund management receives material
adverse non-public information about the issuer, the Fund will not be able to
sell the security.
- - 144A -- Rule 144A securities are restricted securities that can be resold to
qualified institutional buyers but not the general public. Rule 144A
securities may have an active trading market but carry the risk that the
active trading market may not continue. Under policies adopted by the
Trustees, Rule 144A securities with active trading markets are considered
liquid.
RISKS OF DERIVATIVES
The Funds may use instruments referred to as "derivatives." Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil) or an index (a measure of value or rates, such
as the S&P 500 or the prime lending rate). Types of derivatives that the Funds
may use include futures (Bond Funds only), forwards and options.
Derivatives allow a Fund to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. Derivatives, however, are volatile and involve significant risks,
including credit risk, currency risk, leverage risk, liquidity risk and index
risk.
- - CREDIT RISK -- Credit risk is the risk that the counterparty on a derivative
transaction will be unable to honor its financial obligation to a Fund.
- - CURRENCY RISK -- Currency risk is the risk that changes in the exchange rate
between two currencies will adversely affect the value (in U.S. dollar terms)
of an investment.
- - LEVERAGE RISK -- Leverage risk is the risk associated with certain types of
investments or trading strategies that relatively small market movements may
result in large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that greatly
exceed the amount originally invested.
- - LIQUIDITY RISK -- Liquidity risk is the risk that certain securities may be
difficult or impossible to sell at the time that the seller would like or at
the price that the seller believes the security is currently worth.
- - INDEX RISK -- If the derivative is linked to the performance of an index, it
will be subject to the risks associated with changes in that index. If the
index changes, a Fund could receive lower interest payments or experience a
reduction in the value of the derivative to below what the Fund paid. Certain
indexed securities, including inverse securities (which move in an opposite
direction to the index), may create leverage, to the extent that they increase
or decrease in value at a rate that is a multiple of the changes in the
applicable index.
Please see the Statement of Additional Information (SAI) for detailed
information regarding the types of derivatives that can be used by the Funds and
the risks associated with these instruments.
14
<PAGE> 28
THE ADVISOR AND PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
THE ADVISOR
Hotchkis and Wiley, 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017-5400, has been the Funds' investment advisor since 1998. The
Advisor is a division of Merrill Lynch Asset Management, L.P., a Delaware
limited partnership. The Advisor supervises and arranges the purchase and sale
of securities held in the Funds' portfolios and administers the Funds. The
Advisor also manages other mutual funds and separate investment advisory
accounts.
The table below shows the annualized fees paid to the Advisor for the Funds'
fiscal period ended December 31, 1998 as a percentage of average net assets.
<TABLE>
<CAPTION>
FUND %
---- ---
<S> <C>
Equity Income VIP Portfolio................................. .75
International VIP Portfolio................................. .75
Low Duration VIP Portfolio.................................. .46
</TABLE>
No fees were paid to the Advisor by the Total Return Bond VIP Portfolio, which
had not begun investment operations by December 31, 1998. Under its advisory
contract with the Total Return Bond VIP Portfolio, the Fund will pay the Advisor
an annual fee of .55% of the Fund's average net assets. The Advisor has agreed
to make reimbursements so that the regular annual operating expenses of each
Fund will be limited as follows:
<TABLE>
<CAPTION>
EXPENSE LIMITS
(AS A PERCENTAGE OF
FUND AVERAGE NET ASSETS)
---- -------------------
<S> <C>
Equity Income VIP Portfolio............................. 1.15%
International VIP Portfolio............................. 1.35%
Total Return Bond VIP Portfolio......................... .65%
Low Duration VIP Portfolio.............................. .58%
</TABLE>
The Advisor has agreed to these expense limits for one year, and will thereafter
give shareholders prior notice if this reimbursement policy will change.
The Advisor is allowed to allocate brokerage based on sales of shares of funds
managed by the Advisor but has not done so.
SUBADVISORS
The Advisor has entered into a subadvisory agreement with Mercury Asset
Management International and Merrill Lynch Asset Management U.K. Limited,
affiliated investment advisors that are indirect subsidiaries of Merrill Lynch &
Co., Inc. The subadvisory arrangements are for investment research,
recommendations and other investment-related services to be provided to the
International VIP Portfolio. There is no increase in the aggregate fees paid by
the Fund for these services.
PORTFOLIO MANAGERS
The portfolio managers who have responsibility for the day-to-day management of
the Funds' portfolios are listed below.
15
<PAGE> 29
EQUITY INCOME VIP PORTFOLIO
The portfolio managers of the Equity Income VIP Portfolio are Gail Bardin and
Sheldon Lieberman. Ms. Bardin is a managing director of the Advisor and began
co-managing the Fund in March 1998, when it began operations. She has been a
portfolio manager of the Advisor since 1988. Mr. Lieberman joined the Advisor in
1994 and began co-managing the Fund in March 1998. Before joining the Advisor,
Mr. Lieberman was the Chief Investment Officer for the Los Angeles County
Employees Retirement Association.
INTERNATIONAL VIP PORTFOLIO
The portfolio managers of the International VIP Portfolio are Sarah Ketterer,
Harry Hartford and David Chambers. Ms. Ketterer is a managing director of the
Advisor and has served as portfolio manager of the Fund since it began
operations in June 1998. Before 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. Mr. Hartford has served as a
portfolio manager of the Fund since June 1998. Before joining the Advisor, Mr.
Hartford was with the Investment Bank of Ireland (now Bank of Ireland Asset
Management) as a Senior Manager, International and Global Equities, from 1985 to
1994. Mr. Chambers has served as a portfolio manager of the Fund since June
1998. He has been associated with Mercury Asset Management International in
London since July 1998. Before 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.
BOND FUNDS
The portfolio managers of the Bond Funds are Roger DeBard, Michael Sanchez and
John Queen. Each has served as portfolio managers for the Funds since their
inception. Mr. DeBard is a managing director of the Advisor where he has been a
portfolio manager for more than five years. Mr. Sanchez joined the Advisor in
August 1996. Before 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 a Director of Fixed Income
Investments from 1988 to 1991. Mr. Queen joined the Advisor in 1997. Before
joining the Advisor, Mr. Queen was associated with The Capital Group as a member
of an analyst team responsible for $8 billion in fixed-income assets.
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). A Fund could be adversely affected
if the computer systems used by the Fund's management or other Fund service
providers do not properly address this problem before January 1, 2000. The
Funds' management expects to have addressed this problem before then, and does
not anticipate that the services it provides will be adversely affected. The
Funds' other service providers have told the Funds' management that they also
expect to resolve the Year 2000 Problem, and the Funds' management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Funds could be negatively affected. The Year
2000 Problem could also have a negative impact on the issuers of securities in
which the Funds invest, and this could hurt the Funds' investment returns.
16
<PAGE> 30
HOW TO BUY AND REDEEM 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. You 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 under 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. 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 this designee shall
constitute receipt by the Fund, so long as 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. 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.
17
<PAGE> 31
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Funds pay income dividends, if any, as follows:
<TABLE>
<S> <C>
Monthly Total Return Bond VIP Portfolio
Low Duration VIP Portfolio
Quarterly Equity Income VIP Portfolio
Yearly International VIP Portfolio
</TABLE>
The Funds pay distributions of any net realized short-term gains and any net
capital gains every year. See the prospectuses for variable annuity contracts or
variable life insurance policies issued by Participating Insurance Companies for
additional information.
TAXES
Dividends
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 the Internal Revenue Code and U.S. Treasury regulations. If, as is intended,
each 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 a 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 a 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.
The Code provides for a dividends-received deduction (the "deduction")
applicable to corporations, including insurance companies. 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.
18
<PAGE> 32
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each period)
- --------------------------------------------------------------------------------
These financial highlights were audited by PricewaterhouseCoopers LLP. The
accountants' report and the Funds' financial statements are included in the SAI
and the Funds' annual report, which are available upon request. Further
performance information is contained in the annual report. No financial
highlights are given for the Total Return Bond VIP Portfolio because investment
operations had not begun as of the Funds' fiscal year-end.
<TABLE>
<CAPTION>
March 18, 1998*
through
EQUITY INCOME VIP PORTFOLIO December 31, 1998
- -------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period........................ $ 10.00
--------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.14
Net realized and unrealized loss on investments......... (0.75)
--------
Total from investment operations........................ (0.61)
--------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.12)
--------
Net Asset Value, End of Period.............................. $ 9.27
========
TOTAL RETURN(1)............................................. (6.04)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $988,304
Ratio of expenses to average net assets(2):
Before expense reimbursement.............................. 7.81%
After expense reimbursement............................... 1.15%
Ratio of net investment income to average net assets(2):
Before expense reimbursement............................ (4.95)%
After expense reimbursement............................. 1.71%
Portfolio turnover rate(1).................................. 12%
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
19
<PAGE> 33
<TABLE>
<CAPTION>
June 10, 1998*
through
INTERNATIONAL VIP PORTFOLIO December 31, 1998
- -------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period........................ $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.04
Net realized and unrealized loss on investments......... (0.48)
------------
Total from investment operations.................... (0.44)
------------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.04)
------------
Net Asset Value, End of Period.............................. $ 9.52
============
TOTAL RETURN(1)............................................. (4.38)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $289,134,958
Ratio of expenses to average net assets(2):
Before expense reimbursement.............................. 1.05%
After expense reimbursement............................... 1.05%
Ratio of net investment income to average net assets(2):
Before expense reimbursement.............................. 1.09%
After expense reimbursement............................... 1.09%
Portfolio turnover rate(1).................................. 24%
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
20
<PAGE> 34
<TABLE>
<CAPTION>
March 18, 1998*
through
LOW DURATION VIP PORTFOLIO December 31, 1998
- ----------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period........................ $ 10.00
----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.46
Net realized and unrealized loss on investments......... (0.03)
----------
Total from investment operations........................ 0.43
----------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.45)
----------
Net Asset Value, End of Period.............................. $ 9.98
==========
TOTAL RETURN(1)............................................. 4.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $1,723,748
Ratio of expenses to average net assets(2):
Before expense reimbursement.............................. 5.56%
After expense reimbursement............................... 0.58%
Ratio of net investment income to average net assets(2):
Before expense reimbursement.............................. 0.47%
After expense reimbursement............................... 5.45%
Portfolio turnover rate..................................... 296%
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
21
<PAGE> 35
HOTCHKIS AND WILEY VARIABLE TRUST
725 SOUTH FIGUEROA STREET
SUITE 4000
LOS ANGELES, CALIFORNIA 90017
800-236-4479
INFORMATION ABOUT THE FUNDS
Please read this Prospectus before you invest in the Funds. Keep the Prospectus
for future reference. You can get additional information about the Funds in:
- - Statement of Additional Information (SAI) (incorporated by reference
into -- legally a part of -- this Prospectus)
- - Annual Report (contains a discussion of Fund performance)
- - Semi-annual Report
To get this information free of charge or for shareholder questions, contact:
Firstar Mutual Fund Services, LLC
615 East Michigan Avenue, 3rd Floor
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
(800) 236-4479
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
- - call 1-800-SEC-0330 for information on the Commission's Public Reference Room,
where documents can be copied for a fee
- the information is available at the SEC's Internet site at http://www.sec.gov
You should rely only on the information contained in this Prospectus when
deciding whether to invest. No one is authorized to provide you with information
that is different.
Investment Company Act File No. 811-08163
PROSPECTUS
APRIL 30, 1999
HOTCHKIS AND WILEY VARIABLE TRUST
-------------------------------------------------------
EQUITY INCOME
VIP PORTFOLIO
-------------------------------------------------------
INTERNATIONAL
VIP PORTFOLIO
-------------------------------------------------------
TOTAL RETURN BOND
VIP PORTFOLIO
-------------------------------------------------------
LOW DURATION
VIP PORTFOLIO
-------------------------------------------------------
<PAGE> 36
PROSPECTUS
APRIL 30, 1999
HOTCHKIS AND WILEY VARIABLE TRUST
The Fund is an investment for variable annuity contracts and variable life
insurance contracts issued by insurance companies that have contracts with the
Fund.
INTERNATIONAL VIP PORTFOLIO
Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests in international stocks.
The Securities and Exchange Commission has not approved or disapproved these
securities or the accuracy of this Prospectus. It is a criminal offense to state
otherwise.
- --------------------------------------------------------------------------------
<PAGE> 37
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
KEY FACTS.............................................. 3
INVESTMENT OBJECTIVE AND POLICIES...................... 3
INVESTMENT RISKS....................................... 5
THE ADVISOR AND PORTFOLIO MANAGERS..................... 9
HOW TO BUY AND REDEEM SHARES........................... 11
DIVIDENDS AND TAXES.................................... 12
FINANCIAL HIGHLIGHTS................................... 13
INFORMATION ABOUT THE FUND.........................back cover
</TABLE>
Hotchkis & Wiley logo
<PAGE> 38
KEY FACTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MAIN STRATEGIES
This section highlights important information about the Fund. Use this summary
to compare the Fund to other mutual funds. More detailed information follows the
summary.
<TABLE>
<CAPTION>
INTERNATIONAL VIP PORTFOLIO
- ------------------------------------------------------------------------------------------------
<S> <C>
OBJECTIVE - current income
- long-term growth of income
- growth of capital
MAIN INVESTMENTS - international stocks
</TABLE>
MAIN RISKS
As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may go up or down. These changes may occur because the
stock market is rising or falling. At other times, there are specific factors
that may affect the value of a particular investment. If the value of the Fund's
investments goes down, you may lose money.
Investing in foreign securities has additional risks. For example, the
securities may go up or down in value depending on foreign exchange rates,
foreign political and economic developments and U.S. and foreign laws relating
to foreign investment. Foreign securities may also be less liquid, more volatile
and harder to value than U.S. securities. These risks are heightened when the
issuer of the securities is a country or is in a country with an emerging
capital market.
The Fund is an investment for variable annuity contracts and variable life
insurance contracts offered by separate accounts of insurance companies that
have contracts with the Fund ("Participating Insurance Companies"). The Fund
intends to operate in compliance with current state insurance laws and
regulations regarding such things as its concentration of investments and
purchase and sale of futures contracts, and this may impose limits on portfolio
management.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
VALUE INVESTING
In investing the Fund, the Advisor follows a value style. This means that the
Advisor buys stocks that it believes are currently undervalued by the market and
thus have a lower price than their true worth. Typical value characteristics
include:
- - low price-to-earnings ratio relative to the market
- - high dividend yield relative to the market
- - low price-to-book value ratio relative to the market
- - financial strength
3
<PAGE> 39
Stocks may be "undervalued" because they are part of an industry that is out of
favor with investors generally. Even in those industries, though, individual
companies may have high rates of growth of earnings and be financially sound. At
the same time, the price of their common stock may be depressed because
investors associate the companies with their industries.
This value discipline can sometimes prevent the Fund from investing in market
sectors which are significantly represented in broad market indexes.
The Fund's investment objective is to provide CURRENT INCOME and LONG-TERM
GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.
The Fund invests at least 65% of its total assets in stocks in at least ten
foreign markets. Ordinarily, the Fund invests in stocks of companies located in
the developed foreign markets and invests at least 80% of its total assets in
stocks that pay dividends. It also may invest in stocks that don't pay dividends
or interest, but have growth potential unrecognized by the market or changes in
business or management that indicate growth potential.
The Fund may enter into foreign currency options or forward foreign currency
exchange contracts to hedge currency fluctuations.
BOND INVESTMENTS IN THE FUND
The Fund buys common stocks and securities with common stock characteristics,
like convertible preferred stocks, convertible bonds or warrants. It also may
buy bonds. Convertible securities and bonds will be rated investment grade (the
four highest grades) by a major rating agency like Moody's Investors Service or
Standard & Poor's or, if unrated, be of comparable quality in the Advisor's
opinion.
After the Fund buys a bond or convertible security, it may be given a lower
rating or stop being rated. This would not require the Fund to sell the
security, but the Advisor will consider the change in rating in deciding whether
the Fund should keep the security.
MONEY MARKET INVESTMENTS
To meet redemptions and when waiting to invest cash receipts, the Fund may
invest in short-term, investment grade bonds and other money market instruments.
Also, the Fund temporarily can invest up to 100% of its assets in short-term,
investment grade bonds and other money market instruments in response to adverse
market, economic or political conditions. Although this kind of investing would
provide some income, it would not provide capital appreciation.
TYPES OF SECURITIES
U.S. GOVERNMENT SECURITIES
The Fund can invest in U.S. Government securities. U.S. Government securities
include direct obligations issued by the United States Treasury, like Treasury
bills, certificates of indebtedness, notes, bonds and parts of notes or bonds.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include the Federal National Mortgage Association ("Fannie Mae"),
Government National Mortgage Association ("Ginnie Mae"), Federal Home Loan
Mortgage Association ("Freddie Mac"), Federal Financing Bank, and Student Loan
Marketing Association ("Sallie Mae").
4
<PAGE> 40
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 are
backed by the right of the agency to borrow from the Treasury. Others are
supported only by the credit of the agency and not by the Treasury. If the
securities are not backed by the full faith and credit of the United States, the
owner must look mainly to the agency issuing the obligation for repayment.
The Fund can enter into REPURCHASE AGREEMENTS involving U.S. Government
securities with commercial banks or broker-dealers. This is a method of
short-term investment of cash where the Fund would buy securities from a bank or
broker-dealer and sell them back a short time later (usually overnight) for a
slightly higher price. The Fund intends to be fully "collateralized" as to such
agreements, and the collateral will be marked-to-market daily. But if the person
obligated to repurchase from the Fund defaults, there may be possible delays and
expenses in liquidating the securities, a decline in their value and loss of
interest income.
CORPORATE BONDS
The Fund can invest in corporate bonds. These include variable and floating rate
bonds and corporate commercial paper.
REAL ESTATE INVESTMENT TRUSTS
The Fund can invest in securities of real estate investment trusts or REITs.
DERIVATIVES
The Fund may use "derivatives," whose performance is derived from the
performance of an underlying asset. The Fund may use derivatives to hedge
against changes in foreign currency exchange rates or securities prices; for
liquidity; or as part of its overall investment strategies. The Fund will mark
assets as segregated or enter offsetting positions to cover its obligations, if
any, under options and swap agreements to avoid leveraging the Fund.
OTHER STRATEGIES
The Fund also follows certain policies when it:
- - BORROWS MONEY: the Fund can borrow up to 10% of the value of its total assets.
- - makes SHORT SALES AGAINST-THE-BOX: the Fund can borrow and sell "short"
securities when it also owns an equal amount of those securities (or their
equivalent). No more than 25% of the Fund's total assets can be held as
collateral for short sales at any one time.
- - buys securities on a WHEN-ISSUED or DELAYED DELIVERY basis: the Fund will mark
assets as segregated in an amount equal to the when-issued securities.
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period of
time.
5
<PAGE> 41
MARKET AND SELECTION RISK
Market risk is the risk that the stock or bond market will go down in value,
including the possibility that the market will go down sharply and
unpredictably. Selection risk is the risk that the investments that Fund
management selects will underperform the market or other funds with similar
investment objectives and investment strategies.
FOREIGN MARKET RISK
Since the Fund may invest in foreign securities, it offers the potential for
more diversification than an investment only in the United States. This is
because stocks traded on foreign markets have often (though not always)
performed differently than stocks in the United States. However, such
investments involve special risks not present in U.S. investments that can
increase the chances that the Fund will lose money. In particular, investments
in foreign securities involve the following risks, which are generally greater
for investments in emerging markets:
- - The economies of some foreign markets often do not compare favorably with that
of the United States in areas such as growth of gross national product,
reinvestment of capital, resources, and balance of payments. Some of these
economics may rely heavily on particular industries or foreign capital. They
may be more vulnerable to adverse diplomatic developments, the imposition of
economic sanctions against a particular country or countries, changes in
international trading patterns, trade barriers, and other protectionist or
retaliatory measures.
- - Investments in foreign markets may be adversely affected by governmental
actions such as the imposition of capital controls, nationalization of
companies or industries, expropriation of assets, or the imposition of
punitive taxes.
- - The governments of certain countries may prohibit or impose substantial
restrictions on foreign investing in their capital markets or in certain
industries. Any of these actions could severely affect security prices. They
could also impair the Fund's ability to purchase or sell foreign securities or
transfer its assets or income back into the United States, or otherwise
adversely affect the Fund's operations.
- - Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and
social instability. Legal remedies available to investors in some foreign
countries may be less extensive than those available to investors in the
United States.
- - Because there are generally fewer investors on foreign exchanges and a smaller
number of shares traded each day, it may be difficult for the Fund to buy and
sell securities on those exchanges. In addition, prices of foreign securities
may go up and down more than prices of securities traded in the United States.
- - Foreign markets may have different clearance and settlement procedures. In
certain markets, settlements may be unable to keep pace with the volume of
securities transactions. If this occurs, settlement may be delayed and the
Fund's assets may be uninvested and not earning returns. The Fund also may
miss investment opportunities or be unable to sell an investment because of
these delays.
- - The value of the Fund's foreign holdings (and hedging transactions in foreign
currencies) will be affected by changes in currency exchange rates.
- - The costs of non-U.S. securities transactions tend to be higher than those of
U.S. transactions.
- - International trade barriers or economic sanctions against certain non-U.S.
countries may adversely affect the Fund's non-U.S. holdings.
6
<PAGE> 42
- - If the Fund purchases a bond issued by a foreign government, the government
may be unwilling or unable to make payments when due. There may be no formal
bankruptcy proceeding by which the Fund would be able to collect amounts owed
by a foreign government.
EUROPEAN ECONOMIC AND MONETARY UNION (EMU)
A number of European countries have agreed to enter into EMU in an effort to
reduce trade barriers between themselves and eliminate fluctuations in their
currencies. EMU establishes a single European currency (the euro), which was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all initial EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) will be redenominated in the
euro. Thereafter, these securities will trade and make dividend and other
payments only in euros. Like other investment companies and business
organizations, including the companies in which the Fund invests, the Fund could
be adversely affected:
- - If the euro, or EMU as a whole, does not take effect as planned.
- - If a participating country withdraws from EMU.
- - If the computing, accounting and trading systems used by the Fund's service
providers, or by other entities with which the Fund or its service providers
do business, are not capable of recognizing the euro as a distinct currency
beginning with euro conversion.
RISKS OF CONVERTIBLE SECURITIES
Convertibles are generally bonds or preferred stocks that may be converted into
common stock. Convertibles typically pay current income, as either interest
(bond convertibles) or dividends (preferred stocks). A convertible's value
usually reflects both the stream of current income payments and the value of the
underlying common stock. The market value of a convertible performs like regular
bonds; that is, if market interest rates rise, the value of a convertible
usually falls. Since it is convertible into common stock, the convertible also
has the same types of market and issuer risk as the underlying common stock.
ADDITIONAL BOND RISKS
- - CREDIT RISK -- Credit risk is the risk that the issuer of bonds will be unable
to pay the interest or principal when due. The degree of credit risk depends
on both the financial condition of the issuer and on the terms of the specific
bonds.
- - INTEREST RATE RISK -- Interest rate risk is the risk that prices of bonds
generally increase when interest rates decline and decrease when interest
rates increase. Prices of longer term securities generally change more in
response to interest rate changes than do prices of shorter term securities.
- - CALL AND REDEMPTION RISK -- Investments in bonds carry the risk that a bond's
issuer will call the bond for redemption prior to the bond's maturity. If
there is an early call of a bond, the Fund may lose income and may have to
invest the proceeds of the redemption in bonds with lower yields than the
called bond.
- - WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD
COMMITMENTS -- When-issued, delayed-delivery securities and forward
commitments involve the risk that the security the Fund buys will lose value
prior to its delivery to the Fund. There also is the risk that the security
will not be issued or that the other party will
7
<PAGE> 43
not meet its obligation, in which case the Fund loses the investment opportunity
of the assets it has set aside to pay for the security and any gain in the
security's price.
- - CORPORATE LOANS -- Commercial banks and other financial institutions make
corporate loans to companies that need capital to grow or restructure.
Borrowers generally pay interest on corporate loans at rates that change in
response to changes in market interest rates such as the London Interbank
Offered Rate ("LIBOR") or the prime rates of U.S. banks. As a result, the
value of corporate loan investments is generally less responsive to shifts in
market interest rates. Because the trading market for corporate loans is less
developed than the secondary market for bonds and notes, the Fund may
experience difficulties from time to time in selling its corporate loans.
Borrowers frequently provide collateral to secure repayment of these
obligations. Leading financial institutions often act as agent for a broader
group of lenders, generally referred to as a "syndicate". The syndicate's
agent arranges the corporate loans, holds collateral and accepts payments of
principal and interest. If the agent developed financial problems, the Fund
may not recover its investment, or there might be a delay in the Fund's
recovery. By investing in a corporate loan, the Fund becomes a member of the
syndicate.
Corporate loans are subject to the risk of loss of principal and income.
Borrowers do not always provide collateral for corporate loans and the value
of the collateral may not completely cover the borrower's obligations at the
time of a default. If a borrower files for protection from its creditors under
the U.S. bankruptcy laws, these laws may limit the Fund's rights to its
collateral. In addition, the value of collateral may erode during a bankruptcy
case. In the event of a bankruptcy, the holder of a corporate loan may not
recover its principal, may experience a long delay in recovering its
investment and may not receive interest during the delay.
RISKS OF ILLIQUID INVESTMENTS
The Fund may invest up to 15% of its net assets in illiquid securities that it
cannot easily resell within seven days at current value or that have contractual
or legal restrictions on resale. If the Fund buys illiquid securities it may be
unable to quickly resell them or may be able to sell them only at a price below
current value.
- - RESTRICTED SECURITIES -- Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that
the Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.
Restricted securities may be illiquid. The Fund may be unable to sell them on
short notice or may be able to sell them only at a price below current value.
The Fund may get only limited information about the issuer, so it may be less
able to predict a loss. In addition, if Fund management receives material
adverse non-public information about the issuer, the Fund will not be able to
sell the security.
- - 144A -- Rule 144A securities are restricted securities that can be resold to
qualified institutional buyers but not the general public. Rule 144A
securities may have an active trading market but carry the risk that the
active trading market may not continue. Under policies adopted by the
Trustees, Rule 144A securities with active trading markets are considered
liquid.
RISKS OF DERIVATIVES
The Fund may use instruments referred to as "derivatives." Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil) or an index (a measure of value or rates, such
as the S&P 500 or the prime lending rate). Types of derivatives that the Fund
may use include forwards and options.
8
<PAGE> 44
Derivatives allow the Fund to increase or decrease the level of risk to which
the Fund is exposed more quickly and efficiently than transactions in other
types of instruments. Derivatives, however, are volatile and involve significant
risks, including credit risk, currency risk, leverage risk, liquidity risk and
index risk.
- - CREDIT RISK -- Credit risk is the risk that the counterparty on a derivative
transaction will be unable to honor its financial obligation to the Fund.
- - CURRENCY RISK -- Currency risk is the risk that changes in the exchange rate
between two currencies will adversely affect the value (in U.S. dollar terms)
of an investment.
- - LEVERAGE RISK -- Leverage risk is the risk associated with certain types of
investments or trading strategies that relatively small market movements may
result in large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that greatly
exceed the amount originally invested.
- - LIQUIDITY RISK -- Liquidity risk is the risk that certain securities may be
difficult or impossible to sell at the time that the seller would like or at
the price that the seller believes the security is currently worth.
- - INDEX RISK -- If the derivative is linked to the performance of an index, it
will be subject to the risks associated with changes in that index. If the
index changes, the Fund could receive lower interest payments or experience a
reduction in the value of the derivative to below what the Fund paid. Certain
indexed securities, including inverse securities (which move in an opposite
direction to the index), may create leverage, to the extent that they increase
or decrease in value at a rate that is a multiple of the changes in the
applicable index.
Please see the Statement of Additional Information (SAI) for detailed
information regarding the types of derivatives that can be used by the Fund and
the risks associated with these instruments.
THE ADVISOR AND PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
THE ADVISOR
Hotchkis and Wiley, 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017-5400, has been the Fund's investment advisor since 1998. The
Advisor is a division of Merrill Lynch Asset Management, L.P., a Delaware
limited partnership. The Advisor supervises and arranges the purchase and sale
of securities held in the Fund's portfolio and administers the Fund. The Advisor
also manages other mutual funds and separate investment advisory accounts.
9
<PAGE> 45
The Fund paid an annualized fee to the Advisor for the fiscal period ended
December 31, 1998 of .75% of its average net assets.
The Advisor has agreed to make reimbursements so that the regular annual
operating expenses of the Fund will not exceed 1.35% of its average net assets.
The Advisor has agreed to this expense limit for one year, and will thereafter
give shareholders prior notice if this reimbursement policy will change.
The Advisor is allowed to allocate brokerage based on sales of shares of funds
managed by the Advisor but has not done so.
SUBADVISORS
The Advisor has entered into a subadvisory agreement with Mercury Asset
Management International and Merrill Lynch Asset Management U.K. Limited,
affiliated investment advisors that are indirect subsidiaries of Merrill Lynch &
Co., Inc. The subadvisory arrangements are for investment research,
recommendations and other investment-related services to be provided to the
Fund. There is no increase in the aggregate fees paid by the Fund for these
services.
PORTFOLIO MANAGERS
The portfolio managers who have responsibility for the day-to-day management of
the Fund's portfolio are Sarah Ketterer, Harry Hartford and David Chambers. Ms.
Ketterer is a managing director of the Advisor and has served as portfolio
manager of the Fund since it began operations in June 1998. Before 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. Mr.
Hartford has served as a portfolio manager of the Fund since June 1998. Before
joining the Advisor, Mr. Hartford was with the Investment Bank of Ireland (now
Bank of Ireland Asset Management) as a Senior Manager, International and Global
Equities, from 1985 to 1994. Mr. Chambers has served as a portfolio manager of
the Fund since June 1998. He has been associated with Mercury Asset Management
International in London since July 1998. Before 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.
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund's management that they
also expect to resolve the Year 2000 Problem, and the Fund's management will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on the issuers of securities
in which the Fund invests, and this could hurt the Fund's investment returns.
10
<PAGE> 46
HOW TO BUY AND REDEEM SHARES
- --------------------------------------------------------------------------------
Investors may not purchase or redeem shares of the Fund directly, but only
through variable annuity contracts and variable life insurance policies offered
through the separate accounts of Participating Insurance Companies. You 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 the Fund as an investment option
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 Fund 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 under variable annuity contracts and
variable life insurance policies. Orders received by the Fund are effected on
business days only. Orders for the purchase of shares of the 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 the Fund or its designee. 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 this designee shall
constitute receipt by the Fund, so long as 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 Fund within seven days
after the request is received. The Fund may suspend the right of redemption
under certain extraordinary circumstances in accordance with the rules of the
Securities and Exchange Commission.
The Fund does not assess any sales charges or redemption fees. 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 Fund may be sold to and held by separate accounts that fund
variable annuity and variable life insurance contracts issued by Participating
Insurance Companies. The Fund currently does 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 Fund. 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
Fund assumes no responsibility for such prospectuses.
11
<PAGE> 47
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund pays income dividends, if any, yearly.
<TABLE>
<S> <C>
</TABLE>
The Fund pays distributions of any net realized short-term gains and any net
capital gains every year.
See the prospectuses for variable annuity contracts or variable life insurance
policies issued by Participating Insurance Companies for additional information.
TAXES
Dividends
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 the Internal Revenue Code and 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 the 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.
The Code provides for a dividends-received deduction (the "deduction")
applicable to corporations, including insurance companies. 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 the Fund are eligible for the deduction is the extent to which the
Fund's income is derived from qualifying dividends received from domestic
corporations.
12
<PAGE> 48
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
- --------------------------------------------------------------------------------
These financial highlights were audited by PricewaterhouseCoopers LLP. The
accountants' report and the Fund's financial statements are included in the SAI
and the Fund's annual report, which are available upon request. Further
performance information is contained in the annual report.
<TABLE>
<CAPTION>
June 10, 1998*
through
INTERNATIONAL VIP PORTFOLIO December 31, 1998
- -------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period........................ $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.04
Net realized and unrealized loss on investments......... (0.48)
------------
Total from investment operations.................... (0.44)
------------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.04)
------------
Net Asset Value, End of Period.............................. $ 9.52
============
TOTAL RETURN(1)............................................. (4.38)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $289,134,958
Ratio of expenses to average net assets(2):
Before expense reimbursement.............................. 1.05%
After expense reimbursement............................... 1.05%
Ratio of net investment income to average net assets(2):
Before expense reimbursement.............................. 1.09%
After expense reimbursement............................... 1.09%
Portfolio turnover rate(1).................................. 24%
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
13
<PAGE> 49
HOTCHKIS AND WILEY VARIABLE TRUST
725 SOUTH FIGUEROA STREET
SUITE 4000
LOS ANGELES, CALIFORNIA 90017
800-236-4479
INFORMATION ABOUT THE FUND
Please read this Prospectus before you invest in the Fund. Keep the Prospectus
for future reference. You can get additional information about the Fund in:
- - Statement of Additional Information (SAI) (incorporated by reference
into -- legally a part of -- this Prospectus)
- - Annual Report (contains a discussion of Fund performance)
- - Semi-annual Report
To get this information free of charge or for shareholder questions, contact:
Firstar Mutual Fund Services, LLC
615 East Michigan Avenue, 3rd Floor
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
(800) 236-4479
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
- - call 1-800-SEC-0330 for information on the Commission's Public Reference Room,
where documents can be copied for a fee
- - the information is available at the SEC's Internet site at http://www.sec.gov
You should rely only on the information contained in this Prospectus when
deciding whether to invest. No one is authorized to provide you with information
that is different.
Investment Company Act File No. 811-08163
PROSPECTUS
APRIL 30, 1999
HOTCHKIS AND WILEY VARIABLE TRUST
The Fund is an investment for variable annuity contracts and variable life
insurance contracts issued by insurance companies that have contracts with the
Fund.
-------------------------------------------------------
INTERNATIONAL
VIP PORTFOLIO
-------------------------------------------------------
<PAGE> 50
HOTCHKIS AND WILEY VARIABLE TRUST
STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 30, 1999
The Hotchkis and Wiley Variable Trust (the "Trust") is an investment company
which offers shares of four investment funds -- Equity Income VIP Portfolio,
International VIP Portfolio, Total Return Bond VIP Portfolio and Low Duration
VIP Portfolio (each, a "Fund" and collectively, the "Funds"). The Equity Income
VIP Portfolio and the International VIP Portfolio are sometimes referred to as
the "Stock Funds." The Total Return Bond VIP Portfolio and the Low Duration VIP
Portfolio are sometimes referred to as the "Bond 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 April 30, 1999 of the Funds.
Copies of the prospectus may be obtained at no charge from the Trust, 725 S.
Figueroa Street, Suite 4000, Los Angeles, CA 90017-5400. Hotchkis and Wiley (the
"Advisor") is the investment advisor to the Funds.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trust History............................................... B-2
Description of the Funds, Their Investments and Risks....... B-2
Investment Restrictions................................... B-2
Repurchase Agreements..................................... B-3
U.S. Government Securities................................ B-3
Municipal Obligations..................................... B-4
Corporate Debt Securities................................. B-6
Convertible Securities.................................... B-6
Mortgage-Related Securities............................... B-6
Asset-Backed Securities................................... B-10
Risk Factors Relating to Investing in Mortgage-Related and
Asset-Backed Securities................................. B-10
Duration.................................................. B-11
Effective Maturity........................................ B-12
Derivative Instruments.................................... B-12
Foreign Securities........................................ B-16
Foreign Currency Options and Related Risks................ B-18
Forward Foreign Currency Exchange Contracts............... B-19
Foreign Investment Risks.................................. B-21
Risk Factors Relating to Investing in High Yield
Securities.............................................. B-23
Illiquid Securities....................................... B-23
Reverse Repurchase Agreements............................. B-25
Dollar Rolls.............................................. B-25
Borrowing................................................. B-25
Loans of Portfolio Securities............................. B-25
When-Issued Securities.................................... B-26
Real Estate Investment Trusts............................. B-26
Temporary Defensive Position.............................. B-26
Management.................................................. B-26
The Advisor............................................... B-28
The Distributor........................................... B-29
Other Service Providers................................... B-29
Portfolio Transactions and Brokerage...................... B-29
Trust Shares................................................ B-30
Net Asset Value............................................. B-31
Dividends and Tax Status.................................... B-32
Performance Information..................................... B-34
General Information About the Trust's Shareholders.......... B-35
Appendix -- Description of Ratings.......................... A-1
Financial Statements........................................ 1
Report of Independent Accountants...........................
</TABLE>
<PAGE> 51
TRUST HISTORY
The Trust was organized on February 4, 1997 as a Massachusetts business trust.
The Trust is a diversified, open-end, management investment company currently
consisting of four separate series.
DESCRIPTION OF THE FUNDS, THEIR INVESTMENTS AND RISKS
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 Total Return Bond VIP Portfolio is to maximize
long-term total return.
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 their
investment objectives) 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 (1)
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 (2) 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
B-2
<PAGE> 52
the Funds (except the Bond Funds) will purchase any additional portfolio
securities while such borrowings are outstanding. (The Bond Funds 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 Bond Funds.)
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 Bond Funds, which may lend portfolio securities having an
aggregate market value of up to one-third of the total assets of the Fund.)
Any percentage limitation on a Fund's investments is determined when the
investment is made, unless otherwise noted.
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 times 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.
B-3
<PAGE> 53
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 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: (1) Treasury obligations from which the interest coupons
have been stripped; (2) the interest coupons that are stripped; (3) book-entries
at a Federal Reserve member bank representing ownership of Treasury obligation
components; or (4) 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.
MUNICIPAL OBLIGATIONS
The Bond Funds may invest in municipal obligations. The two principal
classifications of municipal bonds, notes and commercial paper are "general
obligation" and "revenue" bonds, notes or commercial paper. General obligation
bonds, notes or commercial paper are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest.
Issuers of general obligation bonds, notes or commercial paper include states,
counties, cities, towns and other governmental units. Revenue bonds, notes and
commercial paper are payable from the revenues derived from a particular
facility or class of facilities or, in some cases, from specific revenue
sources. Revenue bonds, notes or commercial paper are issued for a wide variety
of purposes, including the financing of electric, gas, water and sewer systems
and other public utilities; industrial development and pollution control
facilities; single and multifamily housing units; public buildings and
facilities; air and marine ports; transportation facilities such as toll roads,
bridges and tunnels; and health and educational facilities such as hospitals and
dormitories. They rely primarily on user fees to pay debt service, although the
principal revenue source is often supplemented by additional security features
which are intended to enhance the creditworthiness of the issuer's obligations.
In some cases, particularly revenue bonds issued to finance housing and public
buildings, a direct or implied "moral obligation" of a governmental unit may be
pledged to the payment of debt service. In other cases, a special tax or other
charge may augment user fees.
Included within the revenue bonds category are participations in municipal lease
obligations or installment purchase contracts of municipalities (collectively,
"lease obligations"). State and local governments issue lease obligations to
acquire equipment leases and facilities. Lease obligations may have risks not
normally associated with general obligation or other revenue bonds. Leases and
installment purchase or conditional sale contracts (which may provide
B-4
<PAGE> 54
for title to the leased asset to pass eventually to the issuer) have developed
as a means for governmental issuers to acquire property and equipment without
the necessity of complying with the constitutional and statutory requirements
generally applicable for the issuance of debt. Certain lease obligations contain
"non-appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on an annual
or other periodic basis. Consequently, continued lease payments on those lease
obligations containing "non-appropriation" clauses are dependent on future
legislative actions. If such legislative actions do not occur, the holders of
the lease obligations may experience difficulty in exercising their rights,
including disposition of the property.
Private activity obligations are issued to finance, among other things,
privately operated housing facilities, pollution control facilities, convention
or trade show facilities, mass transit, airport, port or parking facilities and
certain facilities for water supply, gas, electricity, sewage or solid waste
disposal. Private activity obligations are also issued to privately held or
publicly owned corporations in the financing of commercial or industrial
facilities. The principal and interest on these obligations may be payable from
the general revenues of the users of such facilities. Shareholders, depending on
their individual tax status, may be subject to the federal alternative minimum
tax on the portion of a distribution attributable to these obligations. Interest
on private activity obligations will be considered exempt from federal income
taxes; however, shareholders should consult their own tax advisors to determine
whether they may be subject to the federal alternative minimum tax.
Resource recovery obligations are a type of municipal revenue obligation issued
to build facilities such as solid waste incinerators or waste-to-energy plants.
Usually, a private corporation will be involved and the revenue cash flow will
be supported by fees or units paid by municipalities for the use of the
facilities. The viability of a resource recovery project, environmental
protections regulations and project operator tax incentives may affect the value
and credit quality of these obligations.
Tax, revenue or bond anticipation notes are issued by municipalities in
expectation of future tax or other revenues which are payable from these
specific taxes or revenues. Bond anticipation notes usually provide interim
financing in advance of an issue of bonds or notes, the proceeds of which are
used to repay the anticipation notes. Tax-exempt commercial paper is issued by
municipalities to help finance short-term capital or operating needs in
anticipation of future tax or other revenue.
A variable rate obligation is one whose terms provide for the adjustment of its
interest rate on set dates and which, upon such adjustment, can reasonably be
expected to have a market value that approximates its par value. A floating rate
obligation has terms which provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Variable or floating rate obligations may be secured by bank letters of credit.
Variable rate auction and residual interest obligations are created when an
issuer or dealer separates the principal portion of a long-term, fixed-rate
municipal bond into two long-term, variable-rate instruments. The interest rate
on one portion reflects short-term interest rates, while the interest rate on
the other portion is typically higher than the rate available on the original
fixed-rate bond.
Yields on municipal securities are dependent on a variety of factors, including
the general conditions of the municipal bond and municipal note markets, the
size of a particular offering, the maturity of the obligation and the rating of
the issue. The achievement of the Bond Funds' investment objectives is dependent
in part on the continuing ability of the issuers of municipal securities in
which the Bond Funds invest to meet their obligations for the payment of
principal and interest when due. Obligations of issuers of municipal securities
are subject to the
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provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Reform Act of 1978, as amended.
Therefore, the possibility exists that, as a result of litigation or other
conditions, the ability of any issuer to pay, when due, the principal of and
interest on its municipal securities may be materially affected.
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" (that is, its value as a fixed-income security) or its
"conversion value" (that is, 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 Bond Funds 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
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principal due to the sale of underlying property, refinancing, or foreclosure,
net of fees and costs which may be incurred) may expose a 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: (1) those
issued by the U.S. Government or one of its agencies or instrumentalities, such
as the Government National Mortgage Association ("Ginnie Mae"), the Federal
National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac"); (2) 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 (3) 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.
Ginnie Mae is a wholly-owned United States Government corporation within the
Department of Housing and Urban Development. Ginnie Mae 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 Ginnie Mae (such as savings and loan institutions,
commercial banks and mortgage banks), and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Obligations of Fannie Mae and Freddie Mac 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. Fannie Mae and Freddie Mac may borrow from the U.S. Treasury to meet
its obligations, but the U.S. Treasury is under no obligation to lend to Fannie
Mae or Freddie Mac.
Private mortgage pass-through securities are structured similarly to Ginnie Mae,
Fannie Mae, and Freddie Mac 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 Ginnie Mae, Freddie Mac, or
Fannie Mae. 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
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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 Funds
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: (1)
invest primarily in mortgage-backed securities; (2) do not issue redeemable
securities; (3) operate under general exemptive orders exempting them from all
provisions of the 1940 Act; and (4) are not registered or regulated under the
1940 Act as investment companies. To the extent that the Funds select CMOs that
cannot rely on the rule or do not meet the above requirements, the Funds may not
invest more than 10% of their assets in all such entities and may not acquire
more than 3% of the voting securities of any single such entity.
The Bond Funds may also 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 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.
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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 a 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 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.
Although SMBSs 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
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yet been fully developed and accordingly, these securities may be deemed
"illiquid" and subject to a Fund's limitations on investment in illiquid
securities.
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 Bond Funds 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 Funds.
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 Funds
purchase 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 Funds purchase these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. The Funds may invest a portion of their 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, a 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
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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.
DURATION
In selecting securities for the Bond Funds, 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. 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.
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.
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EFFECTIVE MATURITY
The Bond Funds each invest in a diversified portfolio of fixed-income securities
of varying maturities. The effective maturity is the weighted average period
over which a security's principal is expected to be paid. Stated maturity is the
date when the issuer is scheduled to make the final payment of principal.
Effective maturity differs from stated maturity in that it estimates the
anticipated effect of expected principal prepayments and call provisions.
The effective maturity of a debt security will be the stated maturity, except:
(1) in the case of a security with a call provision, the maturity date will be
considered the call date if there is a high probability, in the opinion of the
Advisor, that the security will be called; (2) in the case of securities with
unconditional put provisions entitling the security holder to receive the
security's approximate amortized cost, the maturity will be considered to be the
next put date; (3) in the case of mortgage-backed or other amortizing
securities, the maturity will be considered to be the average life remaining
(the length of time it is expected to take to retire half of the remaining
principal through amortizing payments) based on prepayment assumptions that the
Advisor believes appropriate; and (4) in the case of a variable or floating rate
investment grade security which, in the Advisor's opinion, will have a market
value approximating amortized cost on the next interest rate reset date, the
maturity will be considered to be the next reset date. However, no Bond Fund
will invest more than 5% of its net assets at the time of purchase in floating
or variable rate instruments of any one issuer, nor invest more than 20% of its
net assets at the time of purchase in floating or variable rate instruments of
issuers within the same industry.
DERIVATIVE INSTRUMENTS
As indicated in the prospectus, to the extent consistent with their investment
objectives and policies and the investment restrictions listed in this Statement
of Additional Information, 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 VIP Portfolio and
the Bond Funds 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 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.
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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 and if permitted by its investment restrictions. 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 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
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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
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
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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.
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 market value of the Fund's assets.
Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged security,
a Fund will experience either a loss or gain on the futures contract which is
not completely offset by movements in the price of the hedged securities. To
compensate for imperfect correlations, the Fund may purchase or sell futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, the Fund may purchase or sell fewer
futures contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts.
The particular securities comprising the index underlying the index financial
futures contract may vary from the securities held by a Fund. As a result, the
Fund's ability to hedge effectively all or a portion of the value of its
securities through the use of such financial futures contracts will depend in
part on the degree to which price movements in the index underlying the
financial futures contract correlate with the price movements of the securities
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held by the Fund. The correlation may be affected by disparities in the Fund's
investments as compared to those comprising the index and general economic or
political factors. In addition, the correlation between movements in the value
of the index may be subject to change over time as additions to and deletions
from the index alter its structure. The correlation between futures contracts on
U.S. Government securities and the securities held by a Fund may be adversely
affected by similar factors and the risk of imperfect correlation between
movements in the prices of such futures contracts and the prices of securities
held by the Fund may be greater. The trading of futures contracts also is
subject to certain market risks, such as inadequate trading activity, which
could at times make it difficult or impossible to liquidate existing positions.
Each Fund expects to liquidate a majority of the futures contracts it enters
into through offsetting transactions on the applicable contract market. There
can be no assurance, however, that a liquid secondary market will exist for any
particular futures contract at any specific time. Thus, it may not be possible
to close out a futures position. In the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may be
required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability to
close out futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments. The liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. Prices have in the past moved beyond the daily limit on a number of
consecutive trading days. A Fund will enter into a futures position only if, in
the judgment of the Advisor, there appears to be an actively traded secondary
market for such futures contracts.
The successful use of transactions in futures and related options also depends
on the ability of the Advisor to forecast correctly the direction and extent of
interest rate movements within a given time frame. To the extent interest rates
remain stable during the period in which a futures contract or option is held by
a Fund or such rates move in a direction opposite to that anticipated, the Fund
may realize a loss on a hedging transaction which is not fully or partially
offset by an increase in the value of portfolio securities. As a result, the
Fund's total return for such period may be less than if it had not engaged in
the hedging transaction.
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contracts can result in
substantial unrealized gains or losses. There is also the risk of loss by a Fund
of margin deposits in the event of the bankruptcy of a broker with whom the Fund
has an open position in a financial futures contract.
The amount of risk a Fund assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option on
a futures contract also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased.
FOREIGN SECURITIES
The Funds 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
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receipts evidencing a similar arrangement. Generally, 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 Bond Funds 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 a Bond Fund'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 these Funds, that invest solely in
securities in developed markets. There is no assurance that any Bond Fund will
achieve these results.
The Bond Funds may invest in the following types of emerging market fixed-income
securities: (1) 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); (2) interests in
issuers organized and operated for the purpose of restructuring the investment
characteristics of Sovereign Debt; (3) fixed-income securities issued by banks
and other business entities; and (4) fixed-income securities denominated in or
indexed to the currencies of emerging markets. Fixed-income securities held by a
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 Bond Funds 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 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
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of credit risk and its consideration of a number of factors, including:
prospects for relative economic growth among the different countries in which
the Bond Funds 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 Bond Funds may invest are not subject to any minimum
credit quality standards.
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
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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 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
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(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 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 segregating cash, U.S.
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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.
FOREIGN INVESTMENT RISKS
Foreign Market Risk. Because the Funds may invest in foreign securities, the
Funds offer you more diversification than an investment only in the United
States since prices of securities traded on foreign markets have often, though
not always, moved counter to prices in the United States. Foreign security
investment, however, involves special risks not present in U.S. investments that
can increase the chances that the Funds will lose money. In particular, the
Stock Funds are subject to the risk that because there are generally fewer
investors on foreign exchanges and a smaller number of shares traded each day,
it may be difficult for a Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may fluctuate more than prices of
securities traded in the United States.
Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair a Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income back
into the United States, or otherwise adversely affect the Fund's operations.
Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.
Currency Risk and Exchange Risk. Securities in which a Fund invests may be
denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of the securities of the
Fund. Generally, when the U.S. dollar rises in value against a foreign currency,
your investment in a security denominated in that currency loses value because
the currency is worth fewer U.S. dollars. Similarly when the U.S.
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dollar decreases in value against a foreign currency, your investment in a
security denominated in that currency gains value because the currency is worth
more U.S. dollars. This risk is generally known as "currency risk" which is the
possibility that a stronger U.S. dollar will reduce returns for U.S. investors
investing overseas and a weak U.S. dollar will increase returns for U.S.
investors investing overseas.
For a number of years, certain European countries have been seeking economic
unification that would, among other things, reduce barriers between countries,
increase competition among companies, reduce government subsidies in certain
industries, and reduce or eliminate currency fluctuations among these European
countries. The Treaty of European Union (the "Maastricht Treaty") seeks to set
out a framework for the European Economic and Monetary Union ("EMU") among the
countries that comprise the European Union ("EU"). Among other things, EMU
establishes a single common European currency (the "euro") that was introduced
on January 1, 1999 and is expected to replace the existing national currencies
of all EMU participants by July 1, 2002. Upon implementation of EMU, certain
securities issued in participating EU countries (beginning with government and
corporate bonds) were redenominated in the euro, and are now listed, traded,
declaring dividends and making other payments only in euros.
No assurance can be given that the changes planned for the EU can be
successfully implemented, or that these changes will result in the economic and
monetary unity and stability intended. There is a possibility that EMU will not
be completed, or will be completed but then partially or completely unwound.
Because any participating country may opt out of EMU within the first three
years, it is also possible that a significant participant could choose to
abandon EMU, which could diminish its credibility and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries, including sharp appreciation or depreciation of
participants' national currencies and a significant increase in exchange rate
volatility, a resurgence in economic protectionism, an undermining of confidence
in the European markets, an undermining of European economic stability, the
collapse or slowdown of the drive toward European economic unity, and/or
reversion of the attempts to lower government debt and inflation rates that were
introduced in anticipation of EMU. Also, withdrawal from EMU at any time by an
initial participant could cause disruption of the financial markets as
securities redenominated in euros are transferred back into that country's
national currency, particularly if the withdrawing country is a major economic
power. Such developments could have an adverse impact on the Funds' investments
in Europe generally or in specific countries participating in EMU. Gains or
losses from euro conversion may be taxable to International VIP Portfolio
shareholders under foreign or, in certain limited circumstances, U.S. tax laws.
Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws to
protect investors the way that the United States securities laws do. Accounting
standards in other countries are not necessarily the same as in the United
States. If the accounting standards in another country do not require as much
detail as U.S. accounting standards, it may be harder for a Fund's portfolio
manager to completely and accurately determine a company's financial condition.
Certain Risks of Holding Fund Assets Outside the United States. A Fund generally
holds the foreign securities in which it invests outside the United States in
foreign banks and securities depositories. These foreign banks and securities
depositories may be recently organized or new to the foreign custody business.
They may also have operations subject to limited or no regulatory oversight.
Also, the laws of certain countries may put limits on a Fund's ability to
recover its assets if a foreign bank or depository or issuer of a security or
any of their agents goes bankrupt. In addition, it can be expected that it will
be more expensive for a Fund to buy, sell and hold securities in certain
B-22
<PAGE> 72
foreign markets than it is in the U.S. market due to higher brokerage,
transaction, custody and/or other costs. The increased expense of investing in
foreign markets reduces the amount a Fund can earn on its investments.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement and clearance
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically involved with the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for a Fund to carry out
transactions. If a Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If a
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.
Dividends or interest on, or proceeds from the sale of, foreign securities may
be subject to foreign withholding taxes, and special U.S. tax considerations may
apply.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES
A description of security ratings is attached as an Appendix. Lower-rated or
unrated (that is, 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 generally include repurchase agreements which have a
maturity of longer than seven days, and securities that are illiquid by virtue
of
B-23
<PAGE> 73
the absence of a readily available market (either within or outside of the
United States) or because they have 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. 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 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.
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, among others, 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 (for example, 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, (1) 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 Advisor, and
(2) it must not be "traded flat" (that is, 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.
B-24
<PAGE> 74
REVERSE REPURCHASE AGREEMENTS
The Bond Funds may enter into reverse repurchase agreements, whereby a 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 these Funds for purposes of
the limit applicable to borrowings.
DOLLAR ROLLS
The Bond Funds may use dollar rolls as part of their investment strategy. In a
dollar roll, a Fund sells securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar securities (same
type and coupon) on a specified future date from the same party. During the roll
period, the Fund forgoes principal and interest paid on the securities. The Fund
is compensated by the difference between the current sales price and the forward
price for the future purchase (often referred to as the "drop") as well as by
the interest earned on the cash proceeds of the initial sale. A "covered roll"
is a specific type of dollar roll for which there is an offsetting cash position
or cash equivalent security position that matures on or before the forward
settlement date of the dollar roll transaction.
The Bond Funds will segregate cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily, equal
in value to their obligations with respect to dollar rolls. Dollar rolls involve
the risk that the market value of the securities retained by the Fund may
decline below the price of the securities the Fund has sold but is obligated to
repurchase under the agreement. If the buyer of the securities under a dollar
roll files for bankruptcy or becomes insolvent, the Fund's use of the proceeds
of the agreement may be restricted pending a determination by the other party,
or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities. Dollar rolls are speculative techniques involving
leverage and are considered borrowings by these Funds, subject to their
limitations on borrowings.
BORROWING
As a fundamental policy, the Stock Funds may borrow money, but only from banks
for temporary or emergency purposes in amounts not exceeding 10% of each Fund's
total assets. The Bond Funds 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 Bond Funds may lend their portfolio
securities, provided: (1) 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; (2) the
Fund may at any time call the loan and obtain the return of the securities
loaned; (3) the Fund will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities loaned will not at
any time exceed one-third of the total assets of the Fund.
B-25
<PAGE> 75
WHEN-ISSUED SECURITIES
The International and Bond Funds 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 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.
REAL ESTATE INVESTMENT TRUSTS
Each Fund 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. REITs offer investors greater liquidity and
diversification than direct ownership 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.
TEMPORARY DEFENSIVE POSITION
When adverse market or economic conditions indicate to the Advisor that a
temporary defensive strategy is appropriate, a Fund may invest all or part of
its assets in short-term investment grade debt obligations of the U.S.
Government, its agencies and instrumentalities, bank certificates of deposit,
bankers' acceptances, high quality commercial paper, demand notes and repurchase
agreements.
MANAGEMENT
The Trustees and officers of the Trust are:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
--------------------- ------------------- --------------------------------------------
<S> <C> <C>
Robert L. Burch III (64) Trustee Managing Partner, A.W. Jones Co. (investments);
One Rockefeller Plaza Chairman, Jonathan Mfg. Corp. (slide manufacturing).
New York, NY 10020
John A. G. Gavin (66) 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.
</TABLE>
B-26
<PAGE> 76
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
--------------------- ------------------- --------------------------------------------
<S> <C> <C>
Joe Grills (64) Trustee Member of the Committee of Investment of Employee
P.O. Box 98 Benefit Assets of the Financial Executives Institute
Rapidan, VA 22733 ("CIEBA") (since 1986); member of CIEBA's Executive
Committee (since 1988) and its Chairman (from
1991 - 1992); Assistant Treasurer of International
Business Machines Incorporated ("IBM") and Chief
Investment Officer of IBM Retirement Funds
(1986 - 1993); Member of the Investment Advisory
Committees of the State of New York Common Retirement
Fund and the Howard Hughes Medical Institute (since
1997); Director, Duke Management Company (since 1992)
and elected Vice Chairman (May 1998); Director, KIMCO
Realty Corporation (since 1997); Director, LaSalle
Street Fund (since 1995); Member of the Investment
Advisory Committee of the Virginia Retirement System
(since 1998); Director, Montpelier Foundation (since
December 1998); Trustee or Director of 22 registered
investment companies (consisting of 55 portfolios) for
which Merrill Lynch Asset Management, L.P. or its
affiliate, Fund Asset Management, L.P. is the advisor.
John F. Hotchkis* (67) Trustee Chairman and Portfolio Manager of the Advisor.
725 South Figueroa Street,
Suite 4000
Los Angeles, CA 90017-5400
Robert B. Hutchinson (79) Trustee Former Chairman (1987 - 88) and Director (1976 - 88),
2525 Montevista Place West Prudential Bank (savings bank); Director and former
Seattle, WA 98198 Senior Vice President, Finance and Secretary, Simpson
Investment Co. (holding company for a wood products
company, pulp and paper company and a PVC products
company); Director, Enterprises International, Inc.
(industrial strapping material manufacturer).
Merle T. Welshans (80) Trustee Adjunct Professor of Finance, Washington University;
14360 Ladue Road Chairperson of the Investment Committee of the
Chesterfield, MO 63017 Missouri United Methodist Foundation; Trustee,
Deaconess Hospital Foundation.
Richard R. West (61) Trustee Professor of Finance (since 1984), Dean (1984 - 1993),
Box 604 and currently Dean Emeritus, New York University
Genoa, NV 89411 Leonard N. Stern School of Business Administration;
Director, Vornado Realty Trust, Inc. (real estate
holding company); Director, Bowne & Co., Inc.
(financial printers); Director, Alexander's, Inc.
(real estate company); Trustee or Director of 56
registered investment companies (consisting of 81
portfolios) for which Merrill Lynch Asset Management,
L.P. or its affiliate, Fund Asset Management, L.P. is
the advisor.
Nancy D. Celick (47) President and Chief Administrative Officer of the Advisor (since
725 South Figueroa Street, Principal Executive 1998); Chief Financial Officer of the Advisor
Suite 4000 Officer (1993 - 1998); Chief Financial Officer of
Los Angeles, CA 90017-5400 Kennedy-Wilson, Inc. (auction marketing services)
(1992 - 1993); Chief Financial Officer of First
National Corporation (bank holding company)
(1984 - 1992).
Gail Bardin (51) Executive Vice Managing Director of the Advisor (since 1996); Partner
725 South Figueroa Street, President of the Advisor (1994 - 1996); Principal of the Advisor
Suite 4000 (1992 - 1994); Portfolio Manager of the Advisor
Los Angeles, CA 90017-5400 (1988 - 1992).
Mark D. Cone (31) Vice President Vice President of the Advisor; Retail Account Manager,
725 South Figueroa Street, Neuberger & Berman (1991 - 1994).
Suite 4000
Los Angeles, CA 90017-5400
</TABLE>
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<PAGE> 77
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
--------------------- ------------------- --------------------------------------------
<S> <C> <C>
Gracie Fermelia (37) Secretary, Vice President of the Advisor; Senior Manager, Price
725 South Figueroa Street, Treasurer, and Waterhouse (1985 - 1994).
Suite 4000 Principal Financial
Los Angeles, CA 90017-5400 and Accounting
Officer
</TABLE>
- ---------------
* "Interested" Trustee, as defined in the 1940 Act, due to the relationship
indicated with the Advisor.
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
aggregate compensation paid to the Trustees during the Trust's fiscal year ended
December 31, 1998 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,
1998.
<TABLE>
<CAPTION>
TOTAL 1998
COMPENSATION
AGGREGATE FROM TRUST AND
COMPENSATION FUND COMPLEX
NAME AND POSITION FROM TRUST PAID TO TRUSTEES*
----------------- ------------ -----------------
<S> <C> <C>
Robert L. Burch III,................................ $ 8,000 $ 20,000
Trustee
John A. G. Gavin,................................... $ 8,000 $ 20,000
Trustee
Joe Grills,......................................... $ 8,000 $186,333
Trustee
John F. Hotchkis,................................... $ -0- $ -0-
Trustee
Robert B. Hutchinson,............................... $ 8,000 $ 18,500
Trustee
Merle T. Welshans,.................................. $ 8,000 $ 20,000
Trustee
Richard R. West,.................................... $ 8,000 $326,125
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, L.P. and its advisory affiliates.
For information as to ownership of shares, see "General Information About the
Trust's Shareholders."
THE ADVISOR
The Advisor provides the Funds with management and investment advisory services.
Hotchkis and Wiley is a division of Merrill Lynch Asset Management, L.P.,
located at 725 South Figueroa Street, Suite 4000, Los Angeles, California
90017-5400, an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc., a
financial services holding company incorporated in Delaware.
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 Total Return Bond VIP Portfolio pays the Advisor a fee at the annual
rate of 0.55% of its average daily 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. For the fiscal period ended December 31, 1998,
B-28
<PAGE> 78
the International VIP Portfolio paid the Advisor $1,019,881. The Equity Income
VIP Portfolio and the Low Duration VIP Portfolio paid no advisory fees and were
reimbursed $44,455 and $51,340, respectively, by the Advisor for the fiscal
period ended December 31, 1998.
In addition, the Advisor has agreed to limit the annual operating expenses of
the Equity Income VIP Portfolio to 1.15% of the Fund's average net assets. The
Advisor has agreed to limit the annual operating expenses of the International
VIP Portfolio to 1.35% of the Fund's average net assets. The Advisor has agreed
to limit the annual operating expenses of the Total Return Bond VIP Portfolio to
0.65% of the Fund's average net assets. 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. These expense limits will be in place through
February 2000. For the fiscal period ended December 31, 1998, the Advisor waived
a portion of its fee as follows: Equity Income VIP Portfolio -- $5,646; and Low
Duration VIP Portfolio -- $5,111.
Each of the four 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.
THE DISTRIBUTOR
Princeton Funds Distributor, Inc., 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, is the Funds' distributor and is an affiliate of the Advisor.
OTHER SERVICE PROVIDERS
The Trust's custodian, Firstar Bank Milwaukee, 615 East Michigan Street,
Milwaukee, Wisconsin, is responsible for holding the Funds' assets and Firstar
Mutual Fund Services, LLC acts as the Trust's accounting services agent. The
Chase Manhattan Bank, through its global custody network, provides custodial
services for assets of the Trust held outside the U.S. The Trust's independent
accountants, PricewaterhouseCoopers 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.
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", that is, 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
B-29
<PAGE> 79
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 (1) were for
purposes contemplated by the Agreements; (2) were for products or services which
provide lawful and appropriate assistance to the Advisor's decision-making
process; and (3) 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.
The value of each Fund's aggregate holdings of the securities of its regular
brokers or dealers (as defined in Rule 10b-1 of the 1940 Act) as of December 31,
1998 is as follows:
<TABLE>
<CAPTION>
REGULAR AGGREGATE
FUND BROKER-DEALER HOLDINGS
- ------------------------------------------------- --------------- ---------
<S> <C> <C>
Low Duration Portfolio Lehman Brothers $74,463
</TABLE>
During the fiscal period ended December 31, 1998, the following brokerage
commissions were paid by the Funds:
<TABLE>
<S> <C>
Equity Income VIP........................................... $ 891
International VIP........................................... $ 415,319
Low Duration VIP............................................ $ 0
</TABLE>
TRUST SHARES
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
B-30
<PAGE> 80
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 classes of shares. The Board
of Trustees has created four 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.
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, Martin Luther King, Jr. Holiday,
Presidents' Day, Good Friday, Memorial Day,
B-31
<PAGE> 81
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.
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 Stock Market ("NSM") 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 NSM. Unlisted equity securities that are not included in NSM 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.
B-32
<PAGE> 82
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 (the "Code").
Qualification as a regulated investment company requires, among other things,
that (1) 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; and (2) each Fund diversify its holdings
so that, at the end of each quarter of the taxable year, (i) at least 50% of the
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 the Code and U.S. Treasury regulations. The Code provides a safe harbor
provision under which a separate account will be treated as satisfying the
diversification requirements if, as of the close of each quarter, the assets in
the account meet the diversification requirements for a regulated investment
company and no more than 55% of those assets consist of cash, cash items, U.S.
government securities and securities of other regulated investment companies.
The U.S. Treasury regulations provide an alternative to the safe harbor
provision of the Code. Under such regulations, a separate account will satisfy
the diversification requirements if, among other things, the regulated
investment company underlying such account invests no more than (1) 55% of the
value of its assets in one investment, (2) 70% of the value of its assets in two
investments, (3) 80% of the value of its assets in three investments, and (4)
90% of the value of its assets in four investments. If, as is intended, each
Fund meets these requirements and complies with 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 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.
In determining the extent to which a Fund's dividends may be eligible for the
70% dividends received deduction applicable to corporations, including insurance
companies, 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. Shareholders should consult
their tax advisors regarding other requirements applicable to the dividends
received deduction.
B-33
<PAGE> 83
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.
PERFORMANCE INFORMATION
Total Return. Average annual total return quotations used in the Funds'
advertising and promotional materials are calculated according to the following
formula:
(n)
P(1+T) = 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 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:
<TABLE>
<S> <C>
(6)
YIELD = 2 [ ( a-b + 1) - 1 ]
cd
</TABLE>
B-34
<PAGE> 84
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.
The 30-day yield for the Low Duration VIP Portfolio for the period ended
December 31, 1998 was 5.41%. (Unsubsidized 30-day yield for the Portfolio for
the period ended December 31, 1998 was 1.87%.)
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, Inc. ("Lipper"), Morningstar, Inc.
("Morningstar") 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, Morningstar
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'S SHAREHOLDERS
As of January 31, 1999, Hotchkis and Wiley, 725 South Figueroa Street, Suite
4000, Los Angeles, CA 90017-5400, owned of record, and to the knowledge of the
Trust, beneficially 95.05% of the outstanding shares of the Equity Income VIP
Portfolio and may be deemed a controlling person of that Fund.
As of January 31, 1999, the following shareholders owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the International VIP Portfolio:
Merrill Lynch Life Insurance Company, Bldg 3, 4(th) Floor, 4804 Deer Lake
Drive E, Jacksonville, FL 32246-6484 -- 92.56%
ML Life Insurance Company of New York, Bldg 3, 4(th) Floor, 4804 Deer Lake
Drive E, Jacksonville, FL 32246-6484 -- 7.44%
B-35
<PAGE> 85
As of January 31, 1999, the following shareholders owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Low Duration VIP Portfolio:
Hotchkis and Wiley, 725 South Figueroa Street, Suite 4000, Los Angeles, CA
90017-5400 -- 61.39%
American General Life Insurance Company, P.O. Box 1591, Houston, TX
77251-1591 -- 38.61%
B-36
<PAGE> 86
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
(that is, 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-1
repayment ability will often be evidenced by many of these characteristics:
- - Leading market positions in well-established industries.
- - High rates of return on funds employed.
A-1
<PAGE> 87
- - Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
- - Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- - Well-established access to a range of financial markets and assured sources of
alternate liquidity.
"PRIME-2" -- Issuers rated "Prime-2" (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Adequate alternate liquidity is maintained.
MUNICIPAL BOND RATINGS:
Moody's ratings for state and municipal short-term obligations are designated
Moody's Investment Grade or "MIG" with variable rate demand obligations being
designated as "VMIG." A VMIG rating may also be assigned to commercial paper
programs which are characterized as having variable short-term maturities, but
having neither a variable rate nor demand feature. Factors used in determining
ratings include liquidity of the borrower and short-term cyclical elements.
STANDARD & POOR'S RATING GROUP
BOND RATINGS:
"AAA" -- An obligation rated AAA has the highest rating assigned by S&P. The
obliger's capacity to meet its financial commitment on the obligation is
extremely strong.
"AA" -- An obligation rated AA differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
"A" -- An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
"BBB" -- An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its commitment on the
obligation.
Obligations rated BB and B are regarded as having significant speculative
characteristics. While such obligations will likely have some quality and
protective characteristics, these may be 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 designation 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 sign (+) designation.
A-2
<PAGE> 88
"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.
MUNICIPAL BOND RATINGS:
S&P uses SP-1, SP-2 and SP-3 to rate short-term municipal obligations. A rating
of SP-1 denotes a strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service is given a (+)
designation.
FITCH INVESTORS SERVICE, INC.
BOND RATINGS:
The following summarizes the ratings used by Fitch for corporate bonds:
"AAA" -- "AAA" ratings denote the lowest expectation of credit risk. They are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
"AA" -- "AA" ratings denote a very low expectation of credit risk. They indicate
very strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.
"A" -- "A" ratings denote a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" -- "BBB" ratings indicate that there is currently a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
"BB" -- "BB" ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
"B" -- "B" ratings indicate that significant credit risk is present, but a
limited margin of safety remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a sustained,
favorable business and economic environment.
PLUS (+) MINUS (-) -- Plus and minus signs may be appended to a rating to denote
relative status within major rating categories. Such suffixes are not added to
the "AAA" long-term rating category or to short-term ratings other than "F1."
SHORT-TERM DEBT RATINGS:
"F-1" -- Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
"F-2" -- Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.
A-3
<PAGE> 89
"F-3" -- Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
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.
A-4
<PAGE> 90
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
EQUITY INCOME VIP PORTFOLIO
<TABLE>
<CAPTION>
COMMON STOCKS -- 97.3% Shares Value
- ---------------------------------------------------------
<S> <C> <C>
AEROSPACE -- 5.1%
.........................................................
Lockheed Martin Corporation 180 $ 15,255
.........................................................
Northrop Grumman Corporation 260 19,013
.........................................................
Rockwell International Corporation 340 16,511
...................... .......................
--------
50,779
- ---------------------------------------------------------
APPAREL & TEXTILES -- 0.8%
.........................................................
Russell Corporation 400 8,125
- ---------------------------------------------------------
AUTO PARTS -- 2.0%
.........................................................
Dana Corporation 370 15,123
.........................................................
TRW Inc. 90 5,057
...................... .......................
--------
20,180
- ---------------------------------------------------------
AUTOS & TRUCKS -- 6.1%
.........................................................
Ford Motor Company 500 29,343
.........................................................
General Motors Corporation 430 30,772
...................... .......................
--------
60,115
- ---------------------------------------------------------
BANKS -- 7.3%
.........................................................
Bank One Corporation 624 31,863
.........................................................
First Union Corporation 300 18,243
.........................................................
KeyCorp 300 9,600
.........................................................
Washington Mutual, Inc. 336 12,831
...................... .......................
--------
72,537
- ---------------------------------------------------------
BEVERAGES -- 1.3%
.........................................................
Anheuser-Busch Companies, Inc. 200 13,125
- ---------------------------------------------------------
BUILDING & FOREST PRODUCTS -- 3.0%
.........................................................
Georgia-Pacific (Timber Group) 400 9,525
.........................................................
Weyerhaeuser Company 400 20,325
...................... .......................
--------
29,850
- ---------------------------------------------------------
CHEMICALS -- 3.1%
.........................................................
The Dow Chemical Company 200 18,188
.........................................................
Union Carbide Corporation 300 12,750
...................... .......................
--------
30,938
- ---------------------------------------------------------
CONGLOMERATES -- 1.9%
.........................................................
Tenneco, Inc. 550 18,734
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Shares Value
<S> <C> <C>
CONSUMER PRODUCTS -- 1.3%
.........................................................
Fortune Brands, Inc. 270 $ 8,538
.........................................................
Tupperware Corporation 240 3,945
...................... .......................
--------
12,483
- ---------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.7%
.........................................................
Harsco Corporation 235 7,153
- ---------------------------------------------------------
FINANCIAL SERVICES -- 2.9%
.........................................................
Associates First Capital Corporation--
Class A 142 6,017
.........................................................
Household International, Inc. 280 11,095
.........................................................
Transamerica Corporation 100 11,550
...................... .......................
--------
28,662
- ---------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 1.7%
.........................................................
Whirlpool Corporation 300 16,613
- ---------------------------------------------------------
INSURANCE -- 6.0%
.........................................................
American General Corporation 130 10,140
.........................................................
Lincoln National Corporation 200 16,363
.........................................................
Ohio Casualty Corporation 100 4,113
.........................................................
Safeco Corporation 300 12,881
.........................................................
St. Paul Companies, Inc. 220 7,645
.........................................................
TIG Holdings, Inc. 500 7,781
...................... .......................
--------
58,923
- ---------------------------------------------------------
MACHINERY -- 2.0%
.........................................................
Deere & Company 125 4,140
.........................................................
New Holland N.V. 1,120 15,330
...................... .......................
--------
19,470
- ---------------------------------------------------------
METALS & MINING -- 4.0%
.........................................................
Alcoa, Inc. 180 13,421
.........................................................
Phelps Dodge Corporation 200 10,175
.........................................................
Reynolds Metals Company 300 15,806
...................... .......................
--------
39,402
- ---------------------------------------------------------
NATURAL GAS -- 0.9%
.........................................................
Eastern Enterprises 200 8,750
- ---------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
1
<PAGE> 91
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
EQUITY INCOME VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------
<S> <C> <C>
OIL -- DOMESTIC -- 6.7%
.........................................................
Atlantic Richfield Company 130 $ 8,483
.........................................................
Occidental Petroleum Corporation 1,100 18,563
.........................................................
Phillips Petroleum Company 500 21,313
.........................................................
USX-Marathon Group, Inc. 360 10,845
.........................................................
Ultramar Diamond Shamrock Corporation 300 7,275
...................... .......................
--------
66,479
- ---------------------------------------------------------
PAPER -- 3.9%
.........................................................
Georgia-Pacific Group 200 11,713
.........................................................
International Paper Company 300 13,443
.........................................................
Union Camp Corporation 200 13,500
...................... .......................
--------
38,656
- ---------------------------------------------------------
PHOTOGRAPHY & OPTICAL -- 1.8%
.........................................................
Eastman Kodak Company 240 17,280
- ---------------------------------------------------------
POLLUTION CONTROL -- 2.4%
.........................................................
Browning-Ferris Industries, Inc. 530 15,072
.........................................................
Waste Management, Inc. 175 8,159
...................... .......................
--------
23,231
- ---------------------------------------------------------
RAILROADS -- 2.1%
.........................................................
CSX Corporation 200 8,300
.........................................................
Norfolk Southern Corporation 400 12,675
...................... .......................
--------
20,975
- ---------------------------------------------------------
RETAIL -- 4.1%
.........................................................
Intimate Brands, Inc. 300 8,963
.........................................................
J.C. Penney Company, Inc. 200 9,375
.........................................................
May Department Stores Company 220 13,283
.........................................................
Sears, Roebuck & Company 200 8,500
...................... .......................
--------
40,121
- ---------------------------------------------------------
SAVINGS & LOANS -- 1.9%
.........................................................
Fannie Mae 250 18,500
- ---------------------------------------------------------
STEEL -- 1.4%
.........................................................
USX-U.S. Steel Group, Inc. 600 13,800
- ---------------------------------------------------------
TOBACCO -- 4.3%
.........................................................
Philip Morris Companies, Inc. 800 42,800
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Shares Value
<S> <C> <C>
UTILITY -- ELECTRIC -- 11.0%
.........................................................
CMS Energy Corporation 400 $ 19,375
.........................................................
Edison International 660 18,398
.........................................................
GPU, Inc. 100 4,418
.........................................................
Illinova Corporation 365 9,125
.........................................................
P P & L Resources, Inc. 448 12,488
.........................................................
PacifiCorp 200 4,213
.........................................................
Public Service Enterprises Group, Inc. 360 14,400
.........................................................
SCANA Corporation 410 13,223
.........................................................
Texas Utilities Company 210 9,804
.........................................................
USEC, Inc. 200 2,775
...................... .......................
--------
108,219
- ---------------------------------------------------------
UTILITY -- TELEPHONE -- 7.6%
.........................................................
AT&T Corporation 300 22,575
.........................................................
ALLTEL Corporation 250 14,953
.........................................................
Bell Atlantic Corporation 190 10,070
.........................................................
GTE Corporation 100 6,500
.........................................................
SBC Communications, Inc. 400 21,450
...................... .......................
--------
75,548
- ---------------------------------------------------------
Total common stocks
(cost $1,032,118) 961,448
</TABLE>
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------
Principal
VARIABLE RATE DEMAND NOTES* -- 2.5% Amount
- ------------------------------------------------------------
General Mills, Inc., 5.2337% $ 7,979 7,979
............................................................
Pitney Bowes, Inc., 5.2337% 16,560 16,560
...................... .......................
--------
Total variable rate demand notes
(cost $24,539) 24,539
- ------------------------------------------------------------
Total investments -- 99.8% (cost
$1,056,657) 985,987
............................................................
Other assets in excess of
liabilities -- 0.2% 2,317
...................... .......................
--------
Total net assets -- 100.0% $988,304
- ------------------------------------------------------------
</TABLE>
* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of December 31, 1998.
See Notes to the Financial Statements
2
<PAGE> 92
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<S> <C> <C>
COMMON STOCKS -- 93.9%
- ------------------------------------------------------------
AUSTRALIA -- 6.3% Shares Value
- ------------------------------------------------------------
AIRLINES -- 1.4%
............................................................
Qantas Airways Limited 2,014,845 $ 4,115,712
- ------------------------------------------------------------
BANKS -- 1.9%
............................................................
Australia and New Zealand
Banking Group, Ltd. 829,085 5,431,621
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.5%
............................................................
Pioneer International, Ltd. 2,000,000 4,232,609
- ------------------------------------------------------------
INSURANCE -- 1.5%
............................................................
QBE Insurance Group, Ltd. 1,038,776 4,301,152
..................... ...................... -----------
Total Australia 18,081,094
- ------------------------------------------------------------
AUSTRIA -- 0.5%
- ------------------------------------------------------------
STEEL -- 0.5%
............................................................
Boehler - Uddeholm AG 30,870 1,436,755
..................... ...................... -----------
Total Austria 1,436,755
- ------------------------------------------------------------
CANADA -- 3.3%
- ------------------------------------------------------------
BANKS -- 1.2%
............................................................
Canadian Imperial Bank of
Commerce 135,080 3,341,823
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 1.0%
............................................................
Imasco, Ltd. 135,510 2,884,881
- ------------------------------------------------------------
FOREST PRODUCTS & PAPER -- 0.2%
............................................................
Nexfor, Inc. 106,493 419,455
- ------------------------------------------------------------
METALS & MINERALS -- 0.8%
............................................................
Noranda, Inc. 244,250 2,425,008
- ------------------------------------------------------------
OIL EXPLORATION & PRODUCTION -- 0.1%
............................................................
Canadian Hunter Exploration
Ltd. # 61,063 397,542
..................... ...................... -----------
Total Canada 9,468,709
- ------------------------------------------------------------
FINLAND -- 1.5%
- ------------------------------------------------------------
FOREST PRODUCTS & PAPER -- 1.5%
............................................................
UPM-Kymmene OYJ 158,780 4,450,400
..................... ...................... -----------
Total Finland 4,450,400
- ------------------------------------------------------------
FRANCE -- 10.9%
- ------------------------------------------------------------
AEROSPACE -- DEFENSE -- 1.8%
............................................................
Thomson CSF 119,723 5,140,834
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
BANKS -- 2.9%
............................................................
Banque Nationale de Paris 58,596 $ 4,824,578
............................................................
Societe Generale 21,380 3,461,792
..................... ...................... -----------
8,286,370
- ------------------------------------------------------------
BEVERAGES -- 1.4%
............................................................
Pernod Ricard SA 62,215 4,040,606
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.5%
............................................................
Lafarge SA 46,470 4,414,809
- ------------------------------------------------------------
CONSUMER DURABLES -- MISCELLANEOUS -- 0.9%
............................................................
Societe BIC SA 47,749 2,648,322
- ------------------------------------------------------------
OIL-INTERNATIONAL -- 2.4%
............................................................
Elf Aquitaine SA 34,160 3,948,164
Total SA 30,139 3,052,039
..................... ...................... -----------
7,000,203
..................... ...................... -----------
Total France 31,531,144
- ------------------------------------------------------------
GERMANY -- 6.6%
- ------------------------------------------------------------
BANKS -- 1.1%
............................................................
Commerzbank AG 101,170 3,199,273
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.2%
............................................................
Dyckerhoff AG 4,819 1,335,943
............................................................
Friedrich Grohe AG 7,730 2,040,897
..................... ...................... -----------
3,376,840
- ------------------------------------------------------------
CHEMICALS -- 1.2%
............................................................
Bayer AG 61,735 2,576,425
............................................................
SGL Carbon AG 15,415 924,980
..................... ...................... -----------
3,501,405
- ------------------------------------------------------------
CONSUMER DURABLES -- MISCELLANEOUS -- 1.5%
............................................................
Buderus AG 7,215 2,627,931
............................................................
Vossloh AG 55,405 1,629,048
..................... ...................... -----------
4,256,979
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 1.6%
............................................................
VEBA AG 77,963 4,664,151
..................... ...................... -----------
Total Germany 18,998,648
- ------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
3
<PAGE> 93
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
HONG KONG -- 3.0%
- ------------------------------------------------------------
REAL ESTATE DEVELOPMENT -- 1.9%
............................................................
Hang Lung Development Company
Limited 2,102,000 $ 2,251,959
............................................................
New World Development Co., Ltd. 1,220,000 3,070,747
..................... ...................... -----------
5,322,706
- ------------------------------------------------------------
UTILITY -- ELECTRIC -- 1.1%
............................................................
Swire Pacific Ltd. Class A 734,500 3,289,811
..................... ...................... -----------
Total Hong Kong 8,612,517
- ------------------------------------------------------------
IRELAND -- 2.4%
- ------------------------------------------------------------
FOOD PRODUCERS -- 1.0%
............................................................
Greencore Group PLC 627,720 2,899,758
- ------------------------------------------------------------
PAPER -- 1.4%
............................................................
Jefferson Smurfit Group PLC 2,205,650 3,977,005
..................... ...................... -----------
Total Ireland 6,876,763
- ------------------------------------------------------------
ITALY -- 3.5%
- ------------------------------------------------------------
OIL EXPLORATION & PRODUCTION -- 1.6%
............................................................
ENI SPA 689,400 4,512,833
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 1.9%
............................................................
Telecom Italia SPA 557,900 4,767,928
............................................................
Telecom Italia SPA -- RNC 117,000 737,519
..................... ...................... -----------
5,505,447
..................... ...................... -----------
Total Italy 10,018,280
- ------------------------------------------------------------
JAPAN -- 8.8%
- ------------------------------------------------------------
ELECTRONIC COMPONENTS -- 1.5%
............................................................
Nintendo Co., Ltd. 45,900 4,455,722
- ------------------------------------------------------------
ELECTRONICS -- 2.1%
............................................................
Kyocera Corporation 85,600 4,530,430
............................................................
Sony Corporation 20,400 1,488,406
..................... ...................... -----------
6,018,836
- ------------------------------------------------------------
FINANCIAL SERVICES -- 2.3%
............................................................
Aiful Corporation 14,100 857,501
............................................................
Promise Company, Ltd. 112,800 5,880,005
..................... ...................... -----------
6,737,506
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
LEISURE/TOYS -- 1.4%
............................................................
NAMCO Ltd. 199,000 $ 4,004,702
............................................................
STEEL -- 1.5%
............................................................
Yodogawa Steel Works, Ltd. 1,166,000 4,403,515
..................... ...................... -----------
Total Japan 25,620,281
- ------------------------------------------------------------
NETHERLANDS -- 9.4%
- ------------------------------------------------------------
BANKS -- 1.1%
............................................................
ABN AMRO Holding N.V. 154,870 3,257,843
- ------------------------------------------------------------
CHEMICALS -- 1.6%
............................................................
Akzo Nobel N.V. 103,985 4,734,809
- ------------------------------------------------------------
ELECTRONICS -- 1.5%
............................................................
Koninklijke (Royal) Philips
Electronics N.V. 66,136 4,437,866
- ------------------------------------------------------------
INSURANCE -- MULTI-LINE -- 3.7%
............................................................
Fortis (NL) N.V. 61,930 5,131,879
............................................................
ING Groep N.V. 90,555 5,521,837
............................................ -----------
10,653,716
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 1.5%
............................................................
Koninklijke KPN N.V. 83,795 4,194,804
..................... ...................... -----------
Total Netherlands 27,279,038
- ------------------------------------------------------------
NORWAY -- 0.5%
- ------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.5%
............................................................
Kvaerner ASA -- Class A 72,490 1,427,156
..................... ...................... -----------
Total Norway 1,427,156
- ------------------------------------------------------------
SINGAPORE -- 2.1%
- ------------------------------------------------------------
COMPUTERS -- 2.1%
............................................................
Creative Technology Limited # 396,300 5,944,500
..................... ...................... -----------
Total Singapore 5,944,500
- ------------------------------------------------------------
SPAIN -- 2.4%
- ------------------------------------------------------------
BANKS -- 1.0%
............................................................
Banco Bilbao Vizcaya S.A. 179,850 2,822,564
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 1.4%
............................................................
Telefonica de Espana S.A. 88,190 3,925,112
............................................................
Telefonica de Espana
S.A. -- Bonus Rights # 88,190 78,378
-----------
4,003,490
............................................ -----------
Total Spain 6,826,054
- ------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
4
<PAGE> 94
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
SWEDEN -- 2.4%
- ------------------------------------------------------------
BANKS -- 0.9%
............................................................
Skandinaviska Enskilda Banken
AB 247,844 $ 2,614,259
- ------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.5%
............................................................
Electrolux AB -- Class B 250,510 4,311,252
..................... ...................... -----------
Total Sweden 6,925,511
- ------------------------------------------------------------
SWITZERLAND -- 6.4%
- ------------------------------------------------------------
FOOD PRODUCERS -- 1.5%
............................................................
Nestle SA "registered" 1,999 4,351,664
- ------------------------------------------------------------
MACHINERY & EQUIPMENT -- 2.4%
............................................................
Saurer AG "registered"# 4,690 2,800,000
............................................................
Sulzer AG "registered" 6,970 4,242,388
............................................ -----------
7,042,388
- ------------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES -- 2.5%
............................................................
Novartis AG "registered" 3,687 7,247,834
............................................ -----------
Total Switzerland 18,641,886
- ------------------------------------------------------------
UNITED KINGDOM -- 23.9%
- ------------------------------------------------------------
APPAREL & TEXTILES -- 0.7%
............................................................
Coats Viyella PLC 4,525,450 2,033,064
- ------------------------------------------------------------
BANKS -- 4.2%
............................................................
Lloyds TSB Group PLC 433,277 6,149,505
............................................................
National Westminster Bank PLC 317,410 6,115,820
............................................ -----------
12,265,325
- ------------------------------------------------------------
BUILDING MATERIALS -- 2.1%
............................................................
Hanson PLC 777,000 6,144,247
- ------------------------------------------------------------
CHEMICALS -- 2.6%
............................................................
BOC Group PLC 266,563 3,903,085
............................................................
Laporte PLC 469,810 3,642,786
............................................ -----------
7,545,871
- ------------------------------------------------------------
DIVERSIFIED -- 1.3%
............................................................
Cookson Group PLC 1,729,690 3,741,426
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 3.8%
............................................................
BTR PLC 1,110,490 2,272,717
............................................................
Tomkins PLC 1,300,520 6,123,913
............................................................
Williams PLC 468,041 2,628,350
............................................ -----------
11,024,980
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
ENGINEERING & CONSTRUCTION -- 1.5%
............................................................
TI Group PLC 782,750 $ 4,223,073
- ------------------------------------------------------------
FOOD & BEVERAGES -- 1.4%
............................................................
Allied Domecq PLC 442,510 4,023,822
- ------------------------------------------------------------
FOOD PRODUCERS -- 0.6%
............................................................
Hillsdown Holdings PLC 1,392,245 1,760,576
- ------------------------------------------------------------
INSURANCE -- 2.6%
............................................................
Allied Zurich AG PLC # 250,635 3,751,184
............................................................
CGU PLC 244,040 3,814,901
............................................ -----------
7,566,085
- ------------------------------------------------------------
RETAIL -- FOOD CHAINS -- 1.4%
............................................................
Tesco PLC 1,414,710 4,060,524
- ------------------------------------------------------------
TOBACCO -- 0.8%
............................................................
B.A.T. Industries PLC 275,855 2,446,954
- ------------------------------------------------------------
UTILITY -- ELECTRIC -- 0.9%
............................................................
Powergen PLC 202,000 2,661,964
..................... ...................... -----------
69,497,911
Total United Kingdom
............................................ -----------
Total common stocks
(cost $273,799,897) 271,636,647
- ------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Principal
CASH EQUIVALENTS -- 6.2% Amount
- -----------------------------------------------------------
Vista Institutional Prime
Money Market Fund $17,995,273 17,995,273
............................................
-----------
Total cash equivalents
(cost $17,995,273) 17,995,273
- -----------------------------------------------------------
Total investments -- 100.1%
(cost $291,795,170) 289,631,920
...........................................................
Liabilities in excess of other
assets -- (0.1)% (496,962)
..................... ......................
-----------
Total net assets -- 100.0% $289,134,958
- -----------------------------------------------------------
</TABLE>
# -- Non income producing security.
See Notes to the Financial Statements
5
<PAGE> 95
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
<TABLE>
<CAPTION>
CORPORATE BONDS AND Principal
NOTES -- 21.7% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
EUROBANKS -- 5.7%
...........................................................
Okobank, CLB 9/09/2002, 5.7386%,
9/29/2049 # $ 50,000 $ 50,082
...........................................................
Svenska Hndls Banken, CLB
3/03/2002, 5.7767%, 3/29/2049 # 50,000 48,898
...................... .......................
---------
98,980
- -----------------------------------------------------------
FINANCIAL SERVICES -- 7.3%
...........................................................
Florida Windstorm (Acquired
4/06/1998, cost $51,543), 6.85%,
8/25/2007 r 50,000 52,114
...........................................................
Lehman Brothers Holdings, 6.20%,
1/15/2002 75,000 74,463
...............................................
---------
126,577
- -----------------------------------------------------------
INDUSTRIAL (DOMESTIC) -- 2.9%
...........................................................
Rite Aid Corp.
(Acquired 12/16/1998, cost
$49,914),
5.50%, 12/15/2000 r 50,000 49,814
- -----------------------------------------------------------
OIL & GAS (DOMESTIC) -- 2.7%
...........................................................
Harcor Energy, Inc.,
CLB 7/15/1999,
14.875%, 7/15/2002 40,000 45,844
- -----------------------------------------------------------
TELECOMMUNICATIONS -- 3.1%
...........................................................
Continental Cablevision, Inc., CLB
6/01/1999, 11.00%, 6/01/2007 50,000 53,773
- -----------------------------------------------------------
Total corporate bonds and notes
(cost $374,665) 374,988
- -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 14.3% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 9.5%
...........................................................
Federal Home Loan Mortgage
Corporation, Gold Series, 6.00%,
12/01/2028' $100,000 $ 98,896
...........................................................
Federal National Mortgage
Association,
1993-142 SA, 8.7490%, 10/25/2022# 17,769 17,813
...........................................................
1996-63 SC, 10.6890%, 1/18/2027# 24 24
...........................................................
1997-76 FT, 6.0250%, 9/17/2027# 31,876 31,641
...........................................................
1998-48 ZN, 6.50%, 8/25/2028 16,004 15,967
...................... .......................
---------
164,341
- -----------------------------------------------------------
PASS-THROUGH SECURITIES -- 3.6%
...........................................................
Government National Mortgage
Association, 8247, 6.6250%,
7/20/2023 # 60,221 61,509
- -----------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 1.2%
...........................................................
Federal National Mortgage
Association,
1997-30 EA (PO), 0.00%,
5/18/2027 19,379 19,105
...........................................................
1998-48 CI (IO), 6.50%,
8/25/2028 11,576 1,072
...............................................
---------
20,177
- -----------------------------------------------------------
Total government agency
mortgage-backed securities (cost
$246,281) 246,027
- -----------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
6
<PAGE> 96
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
<TABLE>
<CAPTION>
NON-AGENCY MORTGAGE- Principal
BACKED SECURITIES -- 23.5% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
ASSET-BACKED SECURITIES -- 10.3%
...........................................................
Associates Manufactured Housing
Pass Through Certificates, CLB,
1996-2 A4, 6.60%, 6/15/2027 $ 75,000 $ 76,551
...........................................................
Champion Auto Grantor Trust
(Acquired 3/18/1998, cost
$29,983), CLB, 1998-A A, 6.11%,
10/15/2002 r 29,983 30,105
...........................................................
Green Tree Financial Corporation,
CLB, 1996-5 B2, 8.45%, 7/15/2027 19,997 18,985
...........................................................
Green Tree Recreational, Equipment
& Consumer Trust, CLB, 1996-B
CTFS, 7.70%, 7/15/2018 50,000 48,250
...........................................................
The Money Store Home Equity Trust,
CLB, 1994-C A3, 7.40%, 3/15/2018 3,028 3,030
...............................................
---------
176,921
- -----------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 13.2%
...........................................................
Citicorp Mortgage Securities,
Inc., CLB, 1997-3 A2, 6.92%,
8/25/2027 19,511 19,586
...........................................................
ICI Funding Corporation Secured
Assets Corporation, CLB, 1997-2
1A4, 7.60%, 7/25/2028 70,000 70,296
...........................................................
Independent National Mortgage
Corporation, CLB, 1996-E A5,
7.00%, 5/25/2026 54,517 54,880
...........................................................
Ocwen Residential MBS Corp., CLB,
(Acquired 6/18/1998, cost
$42,204), 1998-R2 AP 4.9739%,
11/25/2034 # r 42,256 42,471
...........................................................
Residential Funding Mortgage
Securities, Inc., CLB, 1998-S17
A6, 6.75%, 8/25/2028 40,714 40,825
...............................................
---------
228,058
- -----------------------------------------------------------
Total non-agency mortgage-backed
securities (cost $407,968) 404,979
- -----------------------------------------------------------
Principal
U.S. TREASURY OBLIGATIONS -- 31.9% Amount Value
- -----------------------------------------------------------
U.S. Treasury Notes:
5.875%, 11/30/2001" $285,000 $ 294,530
...........................................................
6.25%, 02/28/2002 100,000 104,531
...........................................................
5.50%, 2/29/2000 150,000 151,453
- -----------------------------------------------------------
Total U.S. Treasury obligations
(cost $548,751) 550,514
- -----------------------------------------------------------
VARIABLE RATE DEMAND NOTES* -- 13.8%
- -----------------------------------------------------------
General Mills, Inc., 5.2337% 62,237 62,237
...........................................................
Pitney Bowes, Inc., 5.2337% 84,129 84,129
...........................................................
Sara Lee Corp., 5.2287% 58,011 58,011
...........................................................
Warner-Lambert Co., 5.1760% 32,974 32,974
...................... .......................
---------
Total variable rate demand notes
(cost $237,351) 237,351
- -----------------------------------------------------------
Total investments -- 105.2%
(cost $1,815,016) 1,813,859
...........................................................
Liabilities in excess of other assets --(5.2)% (90,111)
..............................................
---------
Total net assets -- 100.0% $1,723,748
- -----------------------------------------------------------
</TABLE>
# Variable rate security. The rate listed is as of December 31, 1998.
* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of December 31, 1998.
IO -- Interest Only.
PO -- Principal Only.
CLB -- Callable.
r -- Restricted Security. Purchased in a private placement transaction; resale
to the public may require registration or may extend only to qualified
institutional buyers.
' -- When-issued security.
" -- Security segregated as collateral to cover when-issued security.
See Notes to the Financial Statements
7
<PAGE> 97
Financial Statements -- December 31, 1998
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
EQUITY LOW
INCOME INTERNATIONAL DURATION
VIP VIP VIP
PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value*................................. $ 985,987 $289,631,920 $1,813,859
Foreign currency**..................................... -- 320,385 --
Dividends and interest receivable...................... 2,545 452,757 17,105
Receivable for investments sold........................ 5,152 -- 18
Organizational expenses, net of accumulated
amortization........................................ 16,183 16,917 16,183
Prepaid expenses....................................... 124 1,345 3,752
---------- ------------ ----------
Total assets...................................... 1,009,991 290,423,324 1,850,917
---------- ------------ ----------
LIABILITIES:
Payable to Advisor..................................... 5,528 178,629 3,009
Payable for forward currency exchange contracts........ -- 157,797 --
Payable for investments purchased...................... -- 634,648 99,248
Dividends payable...................................... -- -- 7,775
Accrued expenses and other liabilities................. 16,159 317,292 17,137
---------- ------------ ----------
Total liabilities................................. 21,687 1,288,366 127,169
---------- ------------ ----------
Net assets........................................ $ 988,304 $289,134,958 $1,723,748
========== ============ ==========
NET ASSETS CONSIST OF:
Paid in capital........................................ $1,060,991 $294,944,329 $1,726,654
Undistributed net investment income.................... 1,547 62,996 1,612
Undistributed net realized loss on securities and
foreign currency transactions....................... (3,564) (3,646,344) (3,361)
Net unrealized depreciation of securities and foreign
currency............................................ (70,670) (2,226,023) (1,157)
---------- ------------ ----------
Net assets........................................ $ 988,304 $289,134,958 $1,723,748
========== ============ ==========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)......................................... 106,635 30,379,778 172,775
Net asset value per share (offering and redemption
price).............................................. $ 9.27 $ 9.52 $ 9.98
========== ============ ==========
*Cost of Investments.................................... $1,056,657 $291,795,170 $1,815,016
========== ============ ==========
**Cost of Foreign Currency............................... $ -- $ 314,263 $ --
========== ============ ==========
</TABLE>
See Notes to the Financial Statements
8
<PAGE> 98
Financial Statements -- Period Ended December 31, 1998
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
EQUITY
INCOME INTERNATIONAL LOW DURATION
VIP VIP VIP
PORTFOLIO(1) PORTFOLIO(2) PORTFOLIO(1)
-------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Income*
Dividends...................................... $ 20,815 $ 2,909,676 --
Interest....................................... 746 110 $ 68,296
-------- ----------- --------
Total income.............................. 21,561 2,909,786 68,296
-------- ----------- --------
Expenses
Advisory fee................................... 5,646 1,019,881 5,211
Legal and auditing fees........................ 6,238 38,457 5,473
Custodian fees and expenses.................... 3,036 107,772 5,394
Accounting and transfer agent fees and
expenses..................................... 25,952 44,148 28,675
Administration fee............................. 4,070 53,644 4,128
Trustees' fees and expenses.................... 9,006 49,015 8,745
Reports to shareholders........................ 422 34,205 904
Registration fees.............................. 1,666 80,472 1,741
Amortization of organizational expenses........ 2,280 1,546 2,280
Other expenses................................. 456 874 470
-------- ----------- --------
Total expenses............................ 58,772 1,430,014 63,021
Less, expense reimbursement.................... (50,101) -- (56,451)
-------- ----------- --------
Net expenses.............................. 8,671 1,430,014 6,570
-------- ----------- --------
Net investment income............................. 12,890 1,479,772 61,726
-------- ----------- --------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on securities and foreign
currency transactions........................ (3,564) (3,884,261) (143)
Net change in unrealized depreciation of
securities and foreign currency.............. (70,670) (2,226,023) (1,157)
-------- ----------- --------
Net loss on investments........................... (74,234) (6,110,284) (1,300)
-------- ----------- --------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS........................................ $(61,344) $(4,630,512) $ 60,426
======== =========== ========
*Net of Foreign Taxes Withheld...................... $ 96 $ 304,486 $ --
======== =========== ========
</TABLE>
(1) For the period March 18, 1998 (commencement of operations) through December
31, 1998.
(2) For the period June 10, 1998 (commencement of operations) through December
31, 1998.
See Notes to the Financial Statements
9
<PAGE> 99
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
EQUITY INCOME VIP INTERNATIONAL VIP LOW DURATION VIP
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------- ------------------------- -------------------------
March 18, 1998** June 10, 1998** March 18, 1998**
through December 31, 1998 through December 31, 1998 through December 31, 1998
------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income...... $ 12,890 $ 1,479,772 $ 61,726
Net realized loss on
securities and foreign
currency transactions.... (3,564) (3,884,261) (143)
Net change in unrealized
depreciation of
securities and foreign
currency................. (70,670) (2,226,023) (1,157)
---------- ------------ ----------
Net increase
(decrease) in net
assets resulting
from operations..... (61,344) (4,630,512) 60,426
---------- ------------ ----------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS:
Net investment income...... (12,711) (1,179,786) (64,700)
---------- ------------ ----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares
sold..................... 1,070,974 299,085,362 1,713,346
Shares issued in connection
with payment of dividends
and distributions........ 12,711 1,179,786 56,925
Cost of shares redeemed.... (21,326) (5,319,892) (42,249)
---------- ------------ ----------
Net increase in net
assets from Fund
share
transactions........ 1,062,359 294,945,256 1,728,022
---------- ------------ ----------
Total increase in net assets... 988,304 289,134,958 1,723,748
NET ASSETS:
Beginning of period........ -- -- --
---------- ------------ ----------
End of period*............. $ 988,304 $289,134,958 $1,723,748
========== ============ ==========
*Including undistributed net
investment income of: $ 1,547 $ 62,996 $ 1,612
========== ============ ==========
CHANGES IN SHARES OUTSTANDING:
Shares sold................ 107,647 30,816,414 171,309
Shares issued in connection
with payment of dividends
and distributions........ 1,390 125,916 5,683
Shares redeemed............ (2,402) (562,552) (4,217)
---------- ------------ ----------
Net increase.......... 106,635 30,379,778 172,775
========== ============ ==========
** Commencement of operations.
</TABLE>
See Notes to the Financial Statements
10
<PAGE> 100
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
NOTE 1.
ACCOUNTING POLICIES. Hotchkis and Wiley Variable Trust (the "Trust") is
registered under the Investment Company Act of 1940 as a diversified, open-end,
management investment company. The Trust was organized as a Massachusetts
business trust on February 4, 1997 and consists of four series of shares
comprising the Equity Income VIP Portfolio, the International VIP Portfolio, the
Low Duration VIP Portfolio and the Total Return Bond VIP Portfolio
(collectively, the "Funds"), the assets of which are invested in separate,
independently managed portfolios. Investment operations of the Funds began on
March 18, 1998 (the Equity Income VIP Portfolio and the Low Duration VIP
Portfolio) and on June 10, 1998 (the International VIP Portfolio). The Total
Return Bond VIP Portfolio has not commenced operations other than those relating
to organizational matters. 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.
The Equity Income VIP Portfolio seeks to provide current income and long-term
growth of income, accompanied by growth of capital. The International VIP
Portfolio seeks to provide current income and long-term growth of income,
accompanied by growth of capital. The Low Duration VIP Portfolio seeks to
maximize total return, consistent with preservation of capital. The Total Return
Bond VIP Portfolio seeks to maximize long-term total return. The following is a
summary of significant accounting policies followed by the Funds in the
preparation of the financial statements.
ORGANIZATIONAL EXPENSES: Expenses incurred by the Equity Income VIP Portfolio,
International VIP Portfolio and the Low Duration VIP Portfolio in connection
with the organization, registration and the initial public offering of shares
are being deferred and amortized over the period of benefit, but not to exceed
sixty months from the Funds' commencement of operations. These costs were
advanced by the Advisor and will be reimbursed by the Funds. The proceeds of any
redemption of the initial shares by the original shareholder will be reduced by
a pro-rata portion of any then unamortized organization expenses in the same
proportion as the number of initial shares being redeemed bears to the number of
initial shares outstanding at the time of such redemption.
SECURITY VALUATION: Portfolio securities that are listed on a securities
exchange (whether domestic or foreign) or The Nasdaq Stock Market ("NSM") are
valued at the last sale price as of 4:00 p.m., Eastern time, or, in the absence
of recorded sales, at the average of readily available closing bid and asked
prices on such exchange or NSM. Unlisted securities that are not included in NSM
are valued at the average of the quoted bid and asked price in the
over-the-counter market. Fixed-income securities are normally valued on the
basis of quotes obtained from brokers and dealers or pricing services. Certain
fixed-income securities for which daily market quotations are not readily
available may be valued pursuant to guidelines established by the Board of
Trustees, with reference to fixed-income securities
11
<PAGE> 101
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
whose prices are more readily obtainable or 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 quoted values previously
furnished by such market makers. Securities for which market quotations are not
otherwise available are valued at fair value as determined in good faith by
Hotchkis and Wiley (the "Advisor") under procedures established by the Board of
Trustees. Short-term investments 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 values as of the 61st day prior to maturity, if their original
term to maturity exceeded 60 days. 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 TRANSLATIONS: The books and records of the Funds are maintained
in U.S. dollars. For the International VIP Portfolio, foreign currency
transactions are translated into U.S. dollars on the following basis: (i) market
value of investment securities, assets and liabilities at the daily rates of
exchange, and (ii) purchases and sales of investment securities, dividend and
interest income and certain expenses at the rates of exchange prevailing on the
respective dates of such transactions. The International VIP Portfolio does not
isolate and treat as ordinary income that portion of the results of operations
arising as a result of changes in the exchange rate from the fluctuations
arising from changes in the market prices of securities held during the period.
However, for federal income tax purposes, the International VIP Portfolio does
isolate and treat as ordinary income the effect of changes in foreign exchange
rates arising from actual foreign currency transactions and the effect of
changes in foreign exchange rates arising from trade date and settlement date
differences.
FORWARD CURRENCY EXCHANGE CONTRACTS: The International VIP Portfolio utilizes
forward currency exchange contracts for the purpose of hedging foreign currency
risk. Under these contracts, they are obligated to exchange currencies at
specific future dates. Risks arise from the possible inability of
counter-parties to meet the terms of their contracts and from movements in
currency values.
FEDERAL INCOME TAXES: It is each Fund's intent to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and each Fund
intends to distribute investment company net taxable income and net capital
gains to shareholders. Therefore, no federal income tax provision is required.
EXPENSE ALLOCATION: Common expenses incurred by the Funds are allocated among
the Funds based upon (i) relative average net assets, (ii) as incurred on a
specific identification basis, or (iii) evenly among the Funds, depending on the
nature of the expenditure.
RESTRICTED SECURITIES: The Low Duration VIP Portfolio owns investment securities
which are unregistered and thus restricted as to resale. These securities are
valued by the Fund after giving due consideration to pertinent factors including
recent private sales, market conditions and the issuer's
12
<PAGE> 102
- --------------------------------------------------------------------------------
financial performance. Where future disposition of these securities requires
registration under the Securities Act of 1933, the Fund has the right to include
these securities in such registration, generally without cost to the Fund. The
Fund has no right to require registration of unregistered securities. At
December 31, 1998, the Low Duration VIP Portfolio had restricted securities with
an aggregate market value of $174,504, representing 10% of the net assets of the
Fund.
WHEN-ISSUED SECURITIES: The Funds may purchase securities on a when-issued or
delayed delivery basis. Although the payment and interest terms of these
securities are established at the time the purchaser enters into the agreement,
these securities may be delivered and paid for at a future date, generally
within 45 days. The Funds record purchases of when-issued securities and reflect
the values of such securities in determining net asset value in the same manner
as other portfolio securities. The Funds segregate and maintain at all times
cash or other liquid assets in an amount at least equal to the amount of
outstanding commitments for when-issued securities.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared
and paid monthly for the Low Duration VIP Portfolio, declared and paid quarterly
for the Equity Income VIP Portfolio and declared and paid semi-annually for the
International VIP Portfolio. Distributions of net realized capital gains, if
any, will be declared at least annually. Prior to July 1, 1998, dividends from
net investment income were declared daily and paid monthly for the Low Duration
VIP Portfolio.
OTHER: Security and shareholder transactions are recorded on trade date.
Realized gains and losses on sales of investments are calculated on the
identified cost basis. Dividend income and dividends and distributions to
shareholders are recorded on the ex-dividend date. Interest income is recognized
on the accrual basis. Generally accepted accounting principles require that
permanent financial reporting and tax differences relating to shareholder
distributions be reclassified to paid in capital.
NOTE 2.
INVESTMENT ADVISORY AGREEMENTS. Each Fund has an investment advisory agreement
with the Advisor, with whom certain officers and Trustees of the Trust are
affiliated. The Advisor is a division of Merrill Lynch Asset Management, L.P.,
an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. The Advisor
receives a fee, computed daily and payable monthly, at the annual rates
presented below as applied to each Fund's daily net assets. The Advisor has
voluntarily agreed to pay all operating expenses in excess of the annual rates
presented below as applied to each Fund's daily net assets. For the
13
<PAGE> 103
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
period ended December 31, 1998, the Advisor reimbursed the following expenses:
<TABLE>
<CAPTION>
Equity Income International Low Duration
VIP Portfolio VIP Portfolio VIP Portfolio
---------------------------------------------
<S> <C> <C> <C>
ANNUAL ADVISORY RATE..................................... 0.75% 0.75% 0.46%
ANNUAL CAP ON EXPENSES................................... 1.15% 1.35% 0.58%
EXPENSE REIMBURSEMENT.................................... $50,101 $0 $56,451
</TABLE>
As permitted under Rule 10f-3 of the Investment Company Act of 1940, the
Board of Trustees of the Funds has adopted procedures which allow the Funds,
under certain conditions described in the Rule, to acquire newly-issued
securities from a member of an underwriting group in which an affiliated
underwriter participates.
NOTE 3.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the period ended December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Purchases Sales
------------------------------- ------------------------------
Fund U.S. Government Other U.S. Government Other
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EQUITY INCOME VIP PORTFOLIO..... $ 15,224 $ 1,124,274 -- $ 103,816
INTERNATIONAL VIP PORTFOLIO..... -- 326,422,822 -- 48,920,665
LOW DURATION VIP PORTFOLIO...... 3,566,834 1,570,733 $2,775,659 779,785
</TABLE>
As of December 31, 1998, unrealized appreciation (depreciation) for federal
income tax purposes was as follows:
<TABLE>
<CAPTION>
Net Appreciation Appreciated Depreciated
Fund (Depreciation) Securities Securities
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY INCOME VIP PORTFOLIO.................... $ (70,670) $ 58,130 $ (128,800)
INTERNATIONAL VIP PORTFOLIO.................... (4,087,155) 23,654,334 (27,741,489)
LOW DURATION VIP PORTFOLIO..................... (1,157) 7,863 (9,020)
</TABLE>
At December 31, 1998, the cost of investments for federal income tax purposes
was $1,056,657, $293,719,075, and $1,815,016 for the Equity Income,
International and Low Duration VIP Portfolios, respectively. Any differences
between book and tax are due primarily to wash sale losses. In addition, the
cost
14
<PAGE> 104
- --------------------------------------------------------------------------------
basis difference in the International VIP Portfolio is due to mark-to-market
adjustments for passive foreign investment companies.
At December 31, 1998, the Equity Income, International and Low Duration VIP
Portfolios had accumulated net realized capital loss carryovers of $3,564,
$3,178,827 and $3,361, respectively, expiring in 2006. To the extent the Funds
realize future net capital gains, those gains will be offset by any unused
capital loss carryover.
NOTE 4.
FORWARD CURRENCY EXCHANGE CONTRACT. At December 31, 1998, the International VIP
Portfolio had entered into a "portfolio hedge" forward currency exchange
contract that obligates the Fund to deliver and receive currency at a specified
future date. The net unrealized depreciation of $61,576 is included in the net
unrealized depreciation section of the accompanying financial statements. The
terms of the open contract are as follows:
<TABLE>
<CAPTION>
Currency to U.S. $ value at Currency to U.S. $ value at
Settlement Date be Delivered December 31, 1998 be Received December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4/30/99 42,905,100 Hong Kong Dollars $5,530,510 42,905,100 Hong Kong Dollars $5,468,934
</TABLE>
NOTE 5.
FEDERAL TAX DISCLOSURE (UNAUDITED). For the period ended December 31, 1998, 100%
of the ordinary distributions paid in the Equity Income VIP Portfolio qualify
for the dividend received deduction available to corporate shareholders.
The International VIP Portfolio intends to make an election under Internal
Revenue Code Section 853 to pass through non-U.S. taxes paid by the Fund to its
shareholders. Non-U.S. taxes paid by the Fund for the period ended 12/31/98 were
$288,516. Foreign source income earned by the Fund for the period ended 12/31/98
was $1,890,256. Shareholders are entitled to claim a credit for foreign taxes or
a deduction, generally at their option.
15
<PAGE> 105
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
EQUITY INCOME INTERNATIONAL LOW DURATION
VIP PORTFOLIO VIP PORTFOLIO VIP PORTFOLIO
------------------------- ------------------------- -------------------------
March 18, 1998* June 10, 1998* March 18, 1998*
through December 31, 1998 through December 31, 1998 through December 31, 1998
------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period... $10.00 $10.00 $10.00
Income from Investment Operations:
Net investment income.............. 0.14 0.04 0.46
Net realized and unrealized loss on
investments...................... (0.75) (0.48) (0.03)
-------- ------------ ----------
Total from investment operations... (0.61) (0.44) 0.43
-------- ------------ ----------
Less Distributions:
Dividends (from net investment
income).......................... (0.12) (0.04) (0.45)
-------- ------------ ----------
Net Asset Value, End of Period......... $ 9.27 $ 9.52 $ 9.98
======== ============ ==========
Total Return(1)........................ (6.04)% (4.38)% 4.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period.............. $988,304 $289,134,958 $1,723,748
Ratio of expenses to average net
assets(2):
Before expense reimbursement....... 7.81% 1.05% 5.56%
After expense reimbursement........ 1.15% 1.05% 0.58%
Ratio of net investment income to
average net assets(2):
Before expense reimbursement....... (4.95)% 1.09% 0.47%
After expense reimbursement........ 1.71% 1.09% 5.45%
Portfolio turnover rate(1)............. 12% 24% 296%
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
See Notes to the Financial Statements
16
<PAGE> 106
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of Hotchkis and Wiley Variable Trust:
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Equity Income VIP Portfolio,
the International VIP Portfolio and the Low Duration VIP Portfolio (three of the
four portfolios of Hotchkis and Wiley Variable Trust, the "Funds") at December
31, 1998, the results of each of their operations, the changes in each of their
net assets and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Milwaukee, WI
February 18, 1999
17
<PAGE> 107
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) (1) Declaration of Trust(1)
(2) Amended Certificate of Designation(2)
(b) By-Laws(1)
(d) (1) Investment Advisory Agreement
relating to the Equity Income VIP
Portfolio*
(2) Investment Advisory Agreement
relating to the International VIP
Portfolio*
(3) Investment Advisory Agreement
relating to the Low Duration VIP
Portfolio*
(4) Investment Advisory Agreement
relating to the Total Return Bond
VIP Portfolio*
(5) Sub-advisory Agreement relating to the
International VIP Portfolio*
(e) Distribution Agreement(3)
(g) (1) Custodian Agreement with Firstar
Trust Company(3)
(2) Global Custody Tri-Party Agreement between
Firstar Trust Company and Chase Manhattan Bank,
N.A.(3)
(3) Amendment to Foreign Subcustodian Agreement*
(h) (1) Fund Administration Servicing Agreement(3)
(2) Transfer Agent Agreement(3)
(3) Expense Cap Agreement*
(4) Participation Agreement with Merrill Lynch Life
Insurance Company*
(5) Participation Agreement with American General
Life Insurance Company*
(6) Participation Agreement with ML Life Insurance
Company of New York*
(7) Participation Agreement with The United States
Life Insurance Company*
(8) Participation Agreement with Security First Life
Insurance Company*
(i) Opinion and Consent of Counsel(3)
(j) Consent of Independent Accountants*
(l) Subscription Agreement(3)
(n) Financial data schedules*
- ----------
* Filed herewith.
(1) Incorporated by reference to the Registration Statement on
Form N-1A filed on April 1, 1997 (File No. 333-24349).
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on November 21, 1997 (File
No. 333-24349).
(3) Incorporated by reference to Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-1A filed on January 28, 1998 (File
No. 333-24349).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
See "General Information About the Trust's Shareholders" in the
Statement of Additional Information.
C-1
<PAGE> 108
ITEM 25. 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> 109
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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See "The Advisor and Portfolio Managers" in the Prospectuses
constituting Part A of this Registration Statement and "Management--The Advisor"
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 27. PRINCIPAL UNDERWRITERS.
(a) The Registrant's principal underwriter, Princeton Funds
Distributor, Inc. ("PFD"), also acts as principal underwriter for the following
open-end registered investment companies:
Financial Institutions Series Trust, Hotchkis and Wiley Funds, Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield Fund, Inc.,
Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund,
Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill
Lynch Federal Securities Trust, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Funds for Institutions Series, Merrill Lynch Global Allocation
Fund, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement,
Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings, Inc.,
Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc.,
Merrill Lynch Global Technology Fund, Inc., Merrill Lynch Global Utility Fund,
Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill
Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund,
Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal Series
Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc., Merrill
Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series
Funds, Inc., and Merrill Lynch World Income Fund, Inc.
PFD also acts as the principal underwriter for the following
closed-end registered investment companies: Merrill Lynch High Income
Municipal Bond Program, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc. A separate division of PFD acts
as the principal underwriter of a number of other investment companies.
C-3
<PAGE> 110
(b) Set forth below is information concerning each director and
officer of PFD. The principal business address of each such person is P.O. Box
9081, Princeton, New Jersey 08543-9011, except that the address of Messrs.
Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
Position(s) and Office(s) Position and Offices
Name with Princeton Funds Distributor with Registrant
---- -------------------------------- --------------------
<S> <C> <C>
Terry K. Glenn............. President and Director None
Michael G. Clark........... Director None
Thomas J. Verage........... Director None
Robert W. Crook............ Senior Vice President None
Michael J. Brady........... Vice President None
William M. Breen........... Vice President None
James T. Fatseas........... Vice President None
Debra W. Landsman-Yaros.... Vice President None
Michelle T. Lau............ Vice President None
Gerald M. Richard.......... Vice President and Treasurer None
Salvatore Venezia.......... Vice President None
William Wasel.............. Vice President None
Robert Harris.............. Secretary Assistant Secretary
</TABLE>
(c) Not applicable.
ITEM 28. 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 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
Not applicable.
C-4
<PAGE> 111
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment
to the 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 24th day of February, 1999.
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 February 24, 1999
- ------------------------------------
Nancy D. Celick
/s/ Gracie Fermelia Principal Financial and Accounting February 24, 1999
- ------------------------------------
Gracie Fermelia Officer
/s/ Robert L. Burch III Trustee February 24, 1999
- ------------------------------------
Robert L. Burch III
/s/ John Gavin Trustee February 24, 1999
- ------------------------------------
John Gavin
/s/ Joe Grills Trustee February 24, 1999
- ------------------------------------
Joe Grills
/s/ John F. Hotchkis Trustee February 24, 1999
- ------------------------------------
John F. Hotchkis
/s/ Robert B. Hutchinson Trustee February 24, 1999
- ------------------------------------
Robert B. Hutchinson
/s/ Merle T. Welshans Trustee February 24, 1999
- ------------------------------------
Merle T. Welshans
/s/ Richard R. West Trustee February 24, 1999
- ------------------------------------
Richard R. West
</TABLE>
<PAGE> 112
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
a(1) Declaration of Trust(1)
a(2) Amended Certificate of Designation(2)
b By-Laws(1)
d(1) Investment Advisory Agreement relating to
the Equity Income VIP Portfolio*
d(2) Investment Advisory Agreement relating to
the International VIP Portfolio*
d(3) Investment Advisory Agreement relating to
the Low Duration VIP Portfolio*
d(4) Investment Advisory Agreement relating to
the Total Return Bond VIP Portfolio*
d(5) Sub-Advisory Agreement relating to the
International VIP Portfolio*
e Distribution Agreement(3)
g(1) Custodian Agreement with Firstar Trust Company(3)
g(2) Global Custody Tri-Party Agreement between Firstar Trust
Company and Chase Manhattan Bank, N.A.(3)
g(3) Amendment to Foreign Subcustodian Agreement*
h(1) Fund Administration Servicing Agreement(3)
h(2) Transfer Agent Agreement(3)
h(3) Expense Cap Agreement*
h(4) Participation Agreement with Merrill Lynch
Life Insurance Company*
h(5) Participation Agreement with American General
Life Insurance Company*
h(6) Participation Agreement with ML Life Insurance
Company of New York*
h(7) Participation Agreement with The United States Life Insurance
Company*
h(8) Participation Agreement with Security First Life Insurance
Company*
i Opinion and Consent of Counsel(3)
j Consent of Independent Accountants*
l Subscription Agreement(3)
n Financial Data Schedules*
- -----------------------
* Filed herewith.
(1) Incorporated by reference to the Registration Statement on Form N-1A
filed on April 1, 1997 (File No. 333-24349).
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on November 21, 1997
(File No. 333-24349).
(3) Incorporated by reference to the Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-1A filed on January 28, 1998. (File No.
333-24349).
<PAGE> 1
Exhibit d (1)
HOTCHKIS AND WILEY VARIABLE TRUST
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 1st day of February, 1998, 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 four 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 condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of
2
<PAGE> 3
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 February 1, 2000, 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.
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
4
<PAGE> 5
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 /s/ Nancy D. Celick
-------------------------------------
ATTEST:
/s/ Anna Marie Lopez
- ----------------------------------
HOTCHKIS AND WILEY, a
division of the Capital
Management Group of Merrill
Lynch Asset Management, L.P.
By /s/ Nancy D. Celick
-------------------------------------
ATTEST:
/s/ Anna Marie Lopez
- ----------------------------------
5
<PAGE> 1
Exhibit d (2)
HOTCHKIS AND WILEY VARIABLE TRUST
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 1st day of February, 1998, 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 four 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 condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of
2
<PAGE> 3
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 February 1, 2000, 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.
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
4
<PAGE> 5
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 /s/ Nancy D. Celick
-------------------------------------
ATTEST:
/s/ Anna Marie Lopez
- ----------------------------------
HOTCHKIS AND WILEY, a
division of the Capital
Management Group of Merrill
Lynch Asset Management, L.P.
By /s/ Nancy D. Celick
-------------------------------------
ATTEST:
/s/ Anna Marie Lopez
- ----------------------------------
5
<PAGE> 1
Exhibit d (3)
HOTCHKIS AND WILEY VARIABLE TRUST
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 1st day of February, 1998, 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 four 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 condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of
2
<PAGE> 3
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 .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 February 1, 2000, 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.
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
4
<PAGE> 5
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 /s/ Nancy D. Celick
-------------------------------------
ATTEST:
/s/ Anna Marie Lopez
- ----------------------------------
HOTCHKIS AND WILEY, a
division of the Capital
Management Group of Merrill
Lynch Asset Management, L.P.
By /s/ Nancy D. Celick
-------------------------------------
ATTEST:
/s/ Anna Marie Lopez
- ----------------------------------
5
<PAGE> 1
Exhibit d (4)
HOTCHKIS AND WILEY VARIABLE TRUST
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 1st day of February, 1998, by and between HOTCHKIS
AND WILEY VARIABLE TRUST, a Massachusetts business trust (the "Trust"), on
behalf of the Total Return Bond 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 four 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 condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of
2
<PAGE> 3
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 .55%.
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 February 1, 2000, 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.
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
4
<PAGE> 5
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 /s/ Nancy D. Celick
-------------------------------------
ATTEST:
/s/ Anna Marie Lopez
- ----------------------------------
HOTCHKIS AND WILEY, a
division of the Capital
Management Group of Merrill
Lynch Asset Management, L.P.
By /s/ Nancy D. Celick
-------------------------------------
ATTEST:
/s/ Anna Marie Lopez
- ----------------------------------
5
<PAGE> 1
EXHIBIT 99.(D).(5)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the 21st day of July, 1998, by and among HOTCHKIS AND
WILEY, a division of Merrill Lynch Asset Management, L.P., a Delaware limited
partnership ("HOTCHKIS AND WILEY"), MERCURY ASSET MANAGEMENT INTERNATIONAL
LIMITED, a corporation organized under the laws of England and Wales
("MERCURY"), and MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED, a corporation
organized under the laws of England and Wales ("MLAM U.K."). (MERCURY and MLAM
U.K. are collectively referred to herein as the "SUB-ADVISORS.")
W I T N E S S E T H:
WHEREAS, HOTCHKIS AND WILEY and the SUB-ADVISORS are engaged principally
in rendering investment advisory services and are registered as investment
advisers under the U.S.
Investment Advisers Act of 1940, as amended; and
WHEREAS, HOTCHKIS AND WILEY renders investment advisory services under
an investment advisory agreement ("Advisory Agreement") with the Hotchkis and
Wiley International VIP Portfolio (the "Fund"), a portfolio of Hotchkis and
Wiley Variable Trust, a registered investment company (the "Company") under the
U.S. Investment Company Act of 1940, as amended ("Investment Company Act"); and
WHEREAS, the SUB-ADVISORS are regulated by the Investment Management
Regulatory Organization ("IMRO"), a self-regulating organization recognized
under the Financial Services Act of 1986 of the United Kingdom, and the conduct
of their investment business is regulated by IMRO; and
WHEREAS, the SUB-ADVISORS are willing to provide investment advisory
services to HOTCHKIS AND WILEY in connection with the Fund's operations on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, HOTCHKIS AND WILEY and the SUB-ADVISORS hereby agree as
follows:
ARTICLE I
Duties of the SUB-ADVISORS
HOTCHKIS AND WILEY hereby engages each SUB-ADVISOR to act as investment
adviser to HOTCHKIS AND WILEY and to furnish, or arrange for affiliates to
furnish, the investment advisory services described below, subject to the broad
supervision of HOTCHKIS AND WILEY and the Fund, for the period and on the terms
and conditions set forth in this Agreement. Each SUB-ADVISOR hereby accepts such
engagement and agrees during such period to render, or arrange for the rendering
of, such services and to assume the obligations herein set forth for the
compensation provided for herein. HOTCHKIS AND WILEY and the Fund shall for all
purposes herein be deemed Non Private Customers as defined under the rules
promulgated by IMRO (the "IMRO Rules"). The SUB-ADVISORS and their affiliates
shall for
-1-
<PAGE> 2
all purposes herein be deemed to be independent contractors and shall,
unless otherwise expressly provided or authorized, have no authority to act for
or represent the Fund in any way or otherwise be deemed agents of the Fund.
Each SUB-ADVISOR shall have the right to make unsolicited calls on
HOTCHKIS AND WILEY and shall provide HOTCHKIS AND WILEY with such investment
research, advice and supervision as the latter may from time to time consider
necessary for the proper supervision of the assets of the Fund; shall make
recommendations from time to time as to which securities shall be purchased or
sold and what portion of the assets of the Fund shall be held in various
investments, including options, futures, options on futures or cash; shall make
recommendations and effect transactions with respect to foreign currency
matters, including foreign exchange contracts, foreign currency options, foreign
currency futures and related options on foreign currency futures and forward
foreign currency transactions; and shall also make recommendations or take
action as to the manner in which voting rights, rights to consent to corporate
action and any other rights pertaining to the portfolio securities of the Fund
shall be exercised; all of the foregoing subject always to the restrictions of
the Declaration of Trust and By-Laws of the Company, as they may be amended
and/or restated from time to time, the provisions of the Investment Company Act
and the statements relating to the Fund's investment objective, investment
policies and investment restrictions as the same are set forth in the currently
effective Prospectus and Statement of Additional Information relating to the
shares of the Fund under the U.S. Securities Act of 1933, as amended.
The SUB-ADVISORS will not hold money on behalf of HOTCHKIS AND WILEY or
the Fund, nor will the SUB-ADVISORS be the registered holders of the registered
investments of HOTCHKIS AND WILEY or the Fund or be the custodian of documents
or other evidence of title.
ARTICLE II
Allocation of Charges and Expenses
Each SUB-ADVISOR assumes and shall pay the expenses of maintaining the
staff and personnel necessary to perform its obligations under this Agreement
and shall at its own expense provide the office space, equipment and facilities
necessary in connection with the services which it is obligated to provide under
Article I hereof.
ARTICLE III
Compensation of the SUB-ADVISORS
For the services rendered, the facilities furnished and expenses assumed
by the SUB-ADVISORS, HOTCHKIS AND WILEY shall pay to each SUB-ADVISOR a fee in
an amount to be determined from time to time by HOTCHKIS AND WILEY and such
SUB-ADVISOR, but in no event shall such fee be in excess of the amount that
HOTCHKIS AND WILEY actually receives for providing services to the Fund pursuant
to the Advisory Agreement.
-2-
<PAGE> 3
ARTICLE IV
Limitation of Liability of the SUB-ADVISORS
Neither SUB-ADVISOR shall be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or omission
in the performance of sub-advisory services rendered by such SUB-ADVISOR with
respect to the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties hereunder. As used in this Article IV, SUB-ADVISOR
shall include any affiliates of the SUB-ADVISOR performing services for HOTCHKIS
AND WILEY contemplated hereby and directors, officers and employees of the
SUB-ADVISOR and such affiliates.
ARTICLE V
Activities of the SUB-ADVISORS
The services of the SUB-ADVISORS to the Fund are not to be deemed to be
exclusive, the SUB-ADVISORS and any person controlled by or under common control
with the SUB-ADVISORS (for purposes of this Article V referred to as
"affiliates") being free to render services to others. It is understood that
Trustees, officers, employees and shareholders of the Company are or may become
interested in the SUB-ADVISORS and their affiliates, as directors, officers,
employees and shareholders or otherwise, and that directors, officers, employees
and shareholders of the SUB-ADVISORS and their affiliates are or may become
similarly interested in the Fund as shareholders or otherwise.
ARTICLE VI
SUB-ADVISOR Statements Pursuant to IMRO Rules
Any complaints concerning a SUB-ADVISOR should be in writing addressed
to the attention of the Managing Director of such SUB-ADVISOR. HOTCHKIS AND
WILEY has the right to obtain from each SUB-ADVISOR a copy of the IMRO
complaints procedure and to approach IMRO and the Investment Ombudsman directly.
Each SUB-ADVISOR may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding Investments Not Readily
Realisable (as that term is used in the IMRO Rules) or investments denominated
in a currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by each SUB-ADVISOR may be subject to exchange rate fluctuations
which may have favorable or unfavorable effects on investments.
Each SUB-ADVISOR may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding options, futures or
swaps (but not contracts for differences). Markets can be highly volatile and
such investments carry a high degree of risk of loss exceeding the original
investment and any margin on deposit.
-3-
<PAGE> 4
ARTICLE VII
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above written
and shall remain in force until July 21, 2000, and thereafter, but only so long
as such continuance is specifically approved at least annually by (i) the
Trustees of the Company or by the vote of a majority of the outstanding voting
securities of the Fund and (ii) a majority of those Trustees who are not parties
to this Agreement or interested persons of any such party cast in person at a
meeting called for the purpose of voting on such approval.
This Agreement may be terminated with respect to a SUB-ADVISOR at any
time, without the payment of any penalty, by HOTCHKIS AND WILEY or by vote of a
majority of the outstanding voting securities of the Fund, or with respect to a
particular SUB-ADVISOR by the SUB-ADVISOR, on not more than sixty days' written
notice to HOTCHKIS AND WILEY. This Agreement shall automatically terminate with
respect to a SUB-ADVISOR in the event of its assignment by such SUB-ADVISOR or
in the event of the termination of the Advisory Agreement. Any termination shall
be without prejudice to the completion of transactions already initiated.
ARTICLE VIII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Trustees of the Company or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Trustees who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
ARTICLE IX
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE X
Governing Law
This Agreement shall be construed in accordance with the laws of the
State of California and the applicable provisions of the Investment Company Act.
To the extent that the applicable laws of the State of California, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
HOTCHKIS AND WILEY
a division of Merrill Lynch Asset Management, L.P.
By: /s/ Nancy D. Celick
--------------------------------
Title: CAO
-----------------------------
MERCURY ASSET MANAGEMENT INTERNATIONAL LIMITED
By: /s/ James Stratford
/s/ Peter Gibbs
--------------------------------
Title: Compliance Officers
-----------------------------
MERRILL LYNCH ASSET MANAGEMENT
U.K. LIMITED
By: /s/ Alan Albert
-------------------------------
Title: Senior Managing Director
----------------------------
-5-
<PAGE> 1
EXHIBIT 99.(g).(3)
Amendment to Global Custody Tri-Party Agreement
AMENDMENT, dated April 21, 1998 to the 7/1/97 Global Custody Tri-Party
Agreement ("Agreement"), by and among Hotchkis and Wiley Variable Trust, having
a place of business at 800 West Sixth Street, Fifth Floor, Los Angeles,
California 90017, The Chase Manhattan Bank (as successor by operation of law to
The Chase Manhattan Bank, N.A.) ("Bank"), having a place of business at 270 Park
Ave., New York, N.Y. 10017-2070, and Firstar Trust Company, having a place of
business at 615 East Michigan Avenue, Milwaukee, Wisconsin 53202.
It is hereby agreed as follows:
A. Except as modified hereby, the Agreement is confirmed in all
respects. If any of the terms of this Amendment conflict with any of the terms
of the Agreement, the terms of this Amendment shall prevail. Capitalized terms
used herein without definition shall have the meanings ascribed to them in the
Agreement.
B. The Agreement is amended by deleting the amendments to Section 3 of
the Agreement contained in that certain Mutual Fund Rider to Global Custody
Tri-Party Agreement among the parties (the "Mutual Fund Rider").
C. Add a new Section 15 to the Agreement as follows:
15. COMPLIANCE WITH SEC RULE 17f-5.
(a) The Fund's board of trustees (hereinafter "Board") hereby delegates
to Bank, and, except as to the country or countries as to which Bank may, from
time to time, advise the Fund that it does not accept such delegation, Bank
hereby accepts the delegation to it, of the obligation to perform as the Fund's
"Foreign Custody Manager" (as that term is defined in SEC rule 17f-5(a)(2)),
both for the purpose of selecting Eligible Foreign Custodians (as that term is
defined in SEC rule 17f-5(a)(1), and as the same may be amended from time to
time, or that have otherwise been made exempt pursuant to an SEC exemptive
order) to hold Assets and of evaluating the contractual arrangements with such
Eligible Foreign Custodians (as set forth in SEC rule 17f-5(c)(2)); provided
that, the term Eligible Foreign Custodian shall not include any "Compulsory
Depository." A Compulsory Depository shall mean a securities depository or
clearing agency the use of which is compulsory because: (1) its use is required
by law or regulation, (2) securities cannot be withdrawn from the depository, or
(3) maintaining securities outside the depository is not consistent with
prevailing custodial practices in the country which the depository serves.
Compulsory Depositories used by Chase as of the date hereof are set forth in
Appendix 1-A hereto, and as the same may be amended on notice to the Fund from
time to time.
(b) In connection with the foregoing, Bank shall:
-1-
<PAGE> 2
(i) provide written reports notifying the Fund's Board of the placement
of Assets with particular Eligible Foreign Custodians and Compulsory
Depositories and of any material change in the arrangements with such
Eligible Foreign Custodians and, to the extent Bank is aware of the
same, any material change in the arrangements with Compulsory
Depositories, with such reports to be provided to the Fund's Board at
such times as the Board deems reasonable and appropriate based on the
circumstances of the Fund's foreign custody arrangements (and until
further notice from the Fund such reports shall be provided not less
than quarterly with respect to the placement of Assets with particular
Eligible Foreign Custodians and Compulsory Depositories (it being
understood that Bank shall not be responsible to make the Fund's
decision to place Assets with any Compulsory Depository) and with
reasonable promptness upon the occurrence of any material change in the
arrangements with such Eligible Foreign Custodians and, to the extent
Bank is aware of the same, any material change in the arrangements with
Compulsory Depositories);
(ii) exercise the reasonable care, prudence and diligence in performing
as the Fund's Foreign Custody Manager of a New York bank subject to a
New York standard of care having responsibility for the safekeeping of
Assets would exercise;
(iii) in selecting an Eligible Foreign Custodian, first have determined
that Assets placed and maintained in the safekeeping of such Eligible
Foreign Custodian shall be subject to reasonable care, based on the
standards applicable to custodians in the relevant market, after having
considered all factors relevant to the safekeeping of such Assets,
including, without limitation, those factors set forth in SEC rule
17f-5(c)(1)(i)-(iv);
(iv) determine that the written contract with the Eligible Foreign
Custodian (or, in the case of an Eligible Foreign Custodian that is a
securities depository or clearing agency, such contract, the rules or
established practices or procedures of the depository, or any
combination of the foregoing) requires that the Eligible Foreign
Custodian will provide reasonable care for Assets based on the standards
applicable to custodians in the relevant market. In making this
determination, Bank shall consider the provisions of Rule 17f-5(c)(2),
together with whether Bank shall be liable to the Fund for any loss
which shall occur as the result of the failure of the Eligible Foreign
Custodian to exercise reasonable care with respect to the safekeeping of
such Assets to the same extent that Bank would be liable to the Fund if
Bank were holding such Assets in New York; and
(v) have established a system to monitor the continued appropriateness
of maintaining Assets with particular Eligible Foreign Custodians and of
the governing contractual arrangements; it being understood, however,
that in the event that Bank shall have determined that the existing
Eligible Foreign Custodian in a given country would no longer afford
Assets reasonable care and
-2-
<PAGE> 3
that no other Eligible Foreign Custodian in that country would afford
reasonable care, Bank shall promptly so advise the Fund and shall then
act in accordance with the Instructions of the Fund with respect to the
disposition of the affected Assets.
Subject to (b)(i)-(v) above, Bank is hereby authorized to place and maintain
Assets on behalf of the Fund with Eligible Foreign Custodians pursuant to a
written contract deemed appropriate by Bank.
(c) Except as expressly provided herein, the Fund shall be solely
responsible to assure that the maintenance of Assets hereunder complies with the
rules, regulations, interpretations and exemptive orders promulgated by or under
the authority of the SEC.
(d) Bank represents to Fund that it is a U.S. Bank as defined in Rule
17f-5(a)(7). The Fund represents to Bank that: (1) the Assets being placed and
maintained in Bank's custody are subject to the Investment Company Act of 1940,
as the same may be amended from time to time (the "1940 Act"); and (2) (i) its
Board has determined that it is reasonable to rely on Bank to perform as the
Fund's Foreign Custody Manager or (ii) its Foreign Custody Manager (other than
Bank) shall have determined that the Fund may maintain Assets in each country in
which the Fund's Assets shall be held hereunder and determined to accept the
risks arising therefrom (including, but not limited to, a country's financial
infrastructure (and including any Compulsory Depository operating in such
country), prevailing custody and settlement practices, laws applicable to the
safekeeping and recovery of Assets held in custody, and the likelihood of
nationalization, currency controls and the like).
D. Add the following after the first sentence of Section 3 of the
Agreement:
At the request of the Fund, Bank may, but need not, add to Schedule A an
Eligible Foreign Custodian that is either a bank or a non-Compulsory
Depository where Bank has not acted as Foreign Custody Manager with
respect to the selection thereof. Bank shall notify the Fund in the
event that it elects not to add any such entity.
E. Add the following language to the end of Section 3 of the Agreement:
The term Subcustodian as used herein shall mean the following:
(a) a "U.S. Bank," which shall mean a U.S. bank as defined in SEC rule
17f-5(a)(7); and
(b) an "Eligible Foreign Custodian," which shall mean (i) a banking
institution or trust company, incorporated or organized under the laws
of a country other than the United States, that is regulated as such by
that country's government or an agency thereof, (ii) a majority-owned
direct or indirect subsidiary of a U.S. bank or bank holding company
which subsidiary is incorporated or organized under the
-3-
<PAGE> 4
laws of a country other than the United States, (iii) a securities
depository or clearing agency, incorporated or organized under the laws
of a country other than the United States, that acts as a system for the
central handling of securities or equivalent book-entries in that
country and that is regulated by a foreign financial regulatory
authority as defined under Section 2(a)(50) of the 1940 Act, (iv) a
securities depository or clearing agency organized under the laws of a
country other than the United States to the extent acting as a
transnational system for the central handling of securities or
equivalent book-entries, and (v) any other entity that shall have been
so qualified by exemptive order, rule or other appropriate action of the
SEC.
For purposes of clarity, it is agreed that as used in Section 12(a)(i), the term
Subcustodian shall include neither any Eligible Foreign Custodian as to which
Bank has not acted as Foreign Custody Manager nor any Compulsory Depository.
F. Insert the following language in the first sentence of Section 4(d)
of the Agreement following the phrase "except for safe custody or
administration": "or, in the case of cash deposits, liens or rights in favor of
creditors of the Subcustodian arising under bankruptcy, insolvency or similar
laws,".
G. Insert the following language at the beginning of the second sentence
of Section 12(a)(i) of the Agreement:
"Except with respect to those countries as to which the parties may from
time to time agree in writing otherwise,".
G. The insert to Section 11 and the added subsection (c) [sic] to
Section 12 of the Agreement contained in the Mutual Fund Rider are deleted.
*********************
[SIGNATURES FOLLOW]
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
HOTCHKIS AND WILEY THE CHASE MANHATTAN BANK
VARIABLE TRUST
By: /s/ Nancy D. Celick By: /s/ Jerry E. Garcia
Name: Nancy D. Celick Name: Jerry E. Garcia
Title: President Title: Vice President
FIRSTAR TRUST COMPANY
By: /s/ Michael R. McVoy
Name: Michael R. McVoy
Title: Vice President
-5-
<PAGE> 6
APPENDIX 1-A
-1-
COMPULSORY DEPOSITORIES
AS OF SEPTEMBER 12, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
COUNTRY DEPOSITORY INSTRUMENT
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA CAJA DE VALORES Equity, Corporate & Government Debt
- ----------------------------------------------------------------------------------------------------------------------
AUSTRALIA AUSTRACLEAR LTD. Corporate Debt, Money Market +
Semi-Government Debt
- ----------------------------------------------------------------------------------------------------------------------
CHESS Equity
(Clearing House Electronic Sub-register System)
- ----------------------------------------------------------------------------------------------------------------------
RITS Government Debt
(Reserve Bank Information and Transfer Systems)
- ----------------------------------------------------------------------------------------------------------------------
AUSTRIA OESTERREICHISCHE KONTROLBANK AG Equity, Corporate Debt + Government Debt
- -----------------------------------------------------------------------------------------------------------------------
BELGIUM CIK Equity + Corporate Debt
(Caisse Interprofessionnelle de Depots et de Virements
de Titres
- ----------------------------------------------------------------------------------------------------------------------
BANQUE NATIONALE DE BELGIQUE Treasury Bills + Government Debt
- ----------------------------------------------------------------------------------------------------------------------
BRAZIL BOVESPA Equity
(Bolsa de Valores de Sao Paolo)
- ----------------------------------------------------------------------------------------------------------------------
BVRJ Equity
(Bolsa de Valores de Rio de Janeiro)
- ----------------------------------------------------------------------------------------------------------------------
CANADA CDS Equity, Corporate + Government Debt
(Canadian Depository for Securities)
- ----------------------------------------------------------------------------------------------------------------------
CHINA, SHANGHAI SSCCRC Equity
(Shanghai Securities Central Clearing and Registration
Corp.)
- ----------------------------------------------------------------------------------------------------------------------
CHINA, SHENZHEN SSCC Equity
(Shenzhen Securities Registration Co., Ltd.)
- ----------------------------------------------------------------------------------------------------------------------
CZECH REPUBLIC SCP Equity + Long-Term Government Debt
(Securities Center)
- ----------------------------------------------------------------------------------------------------------------------
TKD Treasury Bills + Money Market
(Trh Kratkododich Diluhopisu or Short-Term Bond Market)
- ----------------------------------------------------------------------------------------------------------------------
DENMARK VP Equity, Corporate + Government Debt
(Vaerdipapircentralen)
- ----------------------------------------------------------------------------------------------------------------------
EGYPT MISR CLEARING & SEC. DEP. Equity
- ----------------------------------------------------------------------------------------------------------------------
ESTONIA EVK Equity
(Estonian Central Depository for Securities Ltd.)
- ----------------------------------------------------------------------------------------------------------------------
EUROMARKET CEDEL & EUROCLEAR Euro-Debt
- ----------------------------------------------------------------------------------------------------------------------
FINLAND CSR Equity + Government Debt
(Central Share Registry Finland)
- ----------------------------------------------------------------------------------------------------------------------
HELSINKI MONEY MARKET CENTER LTD. Money Market
- ----------------------------------------------------------------------------------------------------------------------
FRANCE SICOVAM Equity + Corporate Debt
(Banque de France)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 7
-2-
COMPULSORY DEPOSITORIES
AS OF SEPTEMBER 12, 1997
<TABLE>
<CAPTION>
COUNTRY DEPOSITORY INSTRUMENT
<S> <C> <C>
FRANCE SATURNE Government Debt.
(Banque de France)
GERMANY DKV Equity, Corporate + Government Debt
(Deutscher Kassenverein)
GREECE APOTHETIRIO TITLON A.E. Equity
BANK OF GREECE Government Debt
HONG KONG CCASS Equity
(Central Clearing and Settlement System)
CMU Corporate + Government Debt
(Central Moneymarkets Unit)
HUNGARY KELER LTD. Equity + Government Debt
IRELAND CREST Equity
GSO Government Debt
(Gilt Settlement Office)
ISRAEL TASE CLEARING HOUSE Equity, Corporate + Government Debt
(Tel Aviv Stock Exchange Clearing House)
ITALY MONTE TITOLI Equity + Corporate Debt
BANK OF ITALY Government Debt
JAPAN BANK OF JAPAN Registered Government Debt
LATVIA LCD Equity + Government Debt
(Latvian Central Depository)
LEBANON MIDCLEAR Equity
(Custodian and Clearing Center of Lebanon and the Middle
East)
LUXEMBOURG CEDEL Equity
MALAYSIA MCD Equity
(Malaysian Central Depository Snd Bhd)
MAURITIUS CDS Equity
(Central Depository System)
MEXICO INDEVAL Equity, Corporate + Government Debt.
(Institucion para el Deposito de Valores)
MOROCCO MAROCLEAR Equity + Corporate Debt
BANK AL'MAGHRIB Government Debt
NETHERLANDS NECIGEF/KAS ASSOCIATE NV Equity, Corp. + Govt. Debt
DE NEDERLANDSCHE BANK N.V. Money Market
</TABLE>
<PAGE> 8
-3-
COMPUSORY DEPOSITORIES
AS OF SEPTEMBER 12, 1997
<TABLE>
<S> <C> <C>
COUNTRY DEPOSITORY INSTRUMENT
NETHERLANDS NIEC Premium Bonds
(Nederlands Interprofessioneel Effectencentrum
B.V.)
NEW ZEALAND AUSTRACLEAR NEW ZEALAND Equity, Corporate + Government Debt
NORWAY VPS Equity, Corporate + Government Debt
(Verdipapirsentralen)
OMAN NONE
PAKISTAN CDC Equity
(Central Depository Company of Pakistan Ltd.)
PERU CAVALI Equity
(Caja de Valores)
PHILIPPINES PCD Equity
(Philippine Central Depository)
POLAND NDS Equity, Long-Term Government Debt +
(National Securities Depository) Vouchers
CRT TREASURY-BILLS
(Central Registry of Treasury-Bills)
PORTUGAL INTERBOLSA Equity, Corporate + Government Debt
ROMANIA SNCDD-RASDAQ Equity
(National Company for Clearing, Settlement and
Depository for Securities)
BUDAPEST STOCK EXCHANGE REGISTRY Equity
NATIONAL BANK OF ROMANIA Treasury-Bills
RUSSIA MICEX GKOs
(Moscow Interbank Currency Exchange) (Gosudartvennye Kratkosrochnye
Obyazatelstva [T-Bills])
OFZs
(Obligatsyi Federalnogo Zaima
[Federal Loan Bonds])s
SINGAPORE CDP Equity + Corporate Debt and
(Central Depository Pte, Ltd.) Malaysian equities traded on CLOB
MONETARY AUTHORITY OF SINGAPORE Government Debt
SLOVAK REPUBLIC SCP Equity + Government Debt
(Stredisko Cennych Papiru)
NATIONAL BANK OF SLOVAKIA Treasury-Bills
SO. AFRICA CD Corporate + Government Debt
(Central Depository)
SO. KOREA KSD Equity, Corporate + Government Debt
</TABLE>
<PAGE> 9
-4-
COMPULSORY DEPOSITORIES
AS OF SEPTEMBER 12, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
COUNTRY DEPOSITORY INSTRUMENT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SPAIN SCLV Equity + Corporate Debt.
(Servicio de compensacion y Liquidacion de Valores)
- -------------------------------------------------------------------------------------------------------------------------
CBEO
(Central Book Entry Office) Government Debt
- -------------------------------------------------------------------------------------------------------------------------
SRI LANKA CDS Equity
(Central Depository System (Private) Ltd.)
- -------------------------------------------------------------------------------------------------------------------------
SWEDEN VPC Equity, Corporate + Government Debt
(Vardepapperscentralen AB)
- -------------------------------------------------------------------------------------------------------------------------
SWITZERLAND SEGA
(Schweizerische Effekten-Giro AG) Equity, Corporate + Government Debt
- -------------------------------------------------------------------------------------------------------------------------
TAIWAN TSCD Equity + Government Debt
(Taiwan Securities Central Depository Co., Ltd.)
- -------------------------------------------------------------------------------------------------------------------------
THAILAND TSDC Equity, Corporate + Government Debt
(Thailand Securities Depository Company Ltd.)
- -------------------------------------------------------------------------------------------------------------------------
TUNISIA STICODEVAM Equity
(Societe Tunisienne Interprofessionnelle pour la
Compensacion et le Depot des Valeurs Mobilieres)
- -------------------------------------------------------------------------------------------------------------------------
MINISTRY OF FINANCE Government Debt tradable on the stock
exchange (BTNBs)
- -------------------------------------------------------------------------------------------------------------------------
CENTRAL BANK OF TUNISIA Government Debt tradable on the stock
exchange (BTCs)
- -------------------------------------------------------------------------------------------------------------------------
TURKEY TAKAS BANK Equity + Corporate Debt
- -------------------------------------------------------------------------------------------------------------------------
CENTRAL BANK OF TURKEY Government Debt
- -------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM CREST Equity + Corp. Debt
- -------------------------------------------------------------------------------------------------------------------------
CMO Sterling CDs & CP
(Central Moneymarket Office)
- -------------------------------------------------------------------------------------------------------------------------
CGO Gilts
(Central Gilts Offices)
- -------------------------------------------------------------------------------------------------------------------------
UNITED STATES DTC Equity + Corporate Debt
(Depository Trust Company)
- -------------------------------------------------------------------------------------------------------------------------
PTC Mortgage Back Debt
(Participants Trust Company)
- -------------------------------------------------------------------------------------------------------------------------
FED BOOK-ENTRY Government Debt.
- -------------------------------------------------------------------------------------------------------------------------
ZAMBIA LuSE Equity + Government Debt
(LuSE Central Shares Depository Ltd.)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
Exhibit h (3)
EXPENSE CAP AGREEMENT
Agreement made this 23rd day of February, 1999, between Hotchkis and
Wiley, as investment advisor (the "Advisor"), and the Hotchkis and Wiley
Variable Trust regarding the Portfolios of the Trust (individually, a
"Portfolio" and collectively, the "Portfolios").
WHEREAS, the Advisor has been reimbursing the Portfolios for expenses
that exceed certain voluntary expense limits, and
WHEREAS, the Advisor wishes to change its voluntary agreement to limit
expenses of the Portfolios and commit to those limits for a period of time, and
WHEREAS, shareholders of the Portfolios benefit from any expense limits
agreed to by the Advisor.
NOW, THEREFORE, the Portfolios and the Advisor agree to expense limits
on the annual operating expenses of the Portfolios as follows:
<TABLE>
<CAPTION>
Expense Limit
(as a percentage of
Portfolio average net assets)
--------- -------------------
<S> <C>
Equity Income VIP Portfolio 1.15%
International VIP Portfolio 1.35%
Total Return Bond VIP 0.65%
Portfolio
Low Duration VIP Portfolio 0.58%
</TABLE>
The Advisor agrees to continue the foregoing expense limits through February 29,
2000 and thereafter may change any of them only upon 30 days' prior notice to
the applicable Portfolio shareholders.
<PAGE> 2
IN WITNESS WHEREOF, the parties have signed this agreement as of the day
and year first above written.
HOTCHKIS AND WILEY, a division of
Merrill Lynch Asset Management, L.P.
By /s/ Nancy D. Celick
-------------------------------------
Nancy D. Celick
Chief Administrative Officer
HOTCHKIS AND WILEY VARIABLE TRUST
By /s/ Nancy D. Celick
-------------------------------------
Nancy D. Celick
President
-2-
<PAGE> 1
EXHIBIT 99.(h).(4)
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made as of June 5, 1998, between HOTCHKIS AND WILEY
VARIABLE TRUST, a Massachusetts business trust (the "Fund"), MERRILL LYNCH LIFE
INSURANCE COMPANY, a life insurance company organized under the laws of Arkansas
(the "Company"), on its own behalf and on behalf of each segregated asset
account of the Company set forth on Schedule A as attached hereto, as such
schedule may be amended from time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Fund has an effective registration statement with the
Securities and Exchange Commission ("SEC") to register itself as an open-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and to register the offer and sale of its shares under
the Securities Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the Fund desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Fund (the "Participating Insurance
Companies"); and
WHEREAS, Merrill Lynch Funds Distributors, Inc. (the "Underwriter") is
registered as a broker-dealer with the SEC under the Securities Exchange Act of
1934, as amended (the "1934 Act"), is a member in good standing of The National
Association of Securities Dealers, Inc. (the "NASD") and acts as principal
underwriter of the shares of the Fund; and
WHEREAS, the capital stock of the Fund is divided into several series of
shares, each series representing an interest in a particular managed portfolio
of securities and other assets; and
WHEREAS, the several series of shares of the Fund offered by the Fund to
the Company and the Accounts are set forth on Schedule B attached hereto (each,
a "Portfolio," and, collectively, the "Portfolios"); and
WHEREAS, the Fund has received an order from the SEC granting
Participating Insurance Companies and their separate accounts exemptions from
the provisions of sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and
Rules 6e-2(b) (15) and 6e-3(T) (b) (15) thereunder, to the extent necessary to
permit shares of the Fund to be sold to and held by variable annuity and
variable life insurance separate accounts of both affiliated and unaffiliated
life insurance companies and certain qualified pension and retirement plans (the
"Shared Fund Exemptive Order"); and
WHEREAS, Merrill Lynch Asset Management, L.P. ("MLAM") is duly
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended, and any applicable
-1-
<PAGE> 2
state securities laws and, through its Hotchkis and Wiley division, acts as the
Fund's investment adviser; and
WHEREAS, the Company has registered or will register under the 1933 Act
certain variable life insurance policies and/or variable annuity contracts
funded or to be funded through one or more of the Accounts (the "Contracts");
and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios (the "Shares") on behalf of the Accounts to fund the Contracts, and
the Fund intends to sell such Shares to the relevant Accounts at such Shares'
net asset value.
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE 1
SALE OF THE FUND SHARES
1.1 Subject to Section 1.3 of this Agreement, the Fund shall cause the
Underwriter to make Shares of the Portfolios available to the Accounts at such
Shares' most recent net asset value provided to the Company prior to receipt of
such purchase order by the Fund (or the Underwriter as its agent), in accordance
with the operational procedures mutually agreed to by the Underwriter and the
Company from time to time and the provisions of the then-current prospectus of
the Fund. Shares of a particular Portfolio of the Fund shall be ordered in such
quantities and at such times as determined by the Company to be necessary to
meet the requirements of the Contracts. The Board of Trustees of the Fund (the
"Board") may refuse to sell Shares of any Portfolio to any person (including the
Company and the Accounts), or suspend or terminate the offering of Shares of any
Portfolio if such action is required by law or by regulatory authorities having
jurisdiction or is, in the sole discretion of the Board acting in good faith and
in light of their fiduciary duties under federal and any applicable state laws,
necessary in the best interests of the shareholders of such Portfolio.
1.2 Subject to Section 1.3 of this Agreement, the Fund will redeem any
full or fractional Shares of any Portfolio when requested by the Company on
behalf of an Account at such Shares' most recent net asset value provided to the
Company prior to receipt by the Fund (or the Underwriter as its agent) of the
request for redemption, as established in accordance with the operational
procedures mutually agreed to by the Underwriter and the Company from time to
time and the provisions of the then current-prospectus of the Fund. The Fund
shall make payment for such Shares in the manner established from time to time
by the Fund, but in no event shall payment be delayed for a greater period than
is permitted by the 1940 Act (including any Rule or order of the SEC
thereunder).
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1.3 The Fund shall accept purchase and redemption orders resulting from
investment in and payments under the Contracts on each Business Day, provided
that such orders are received prior to 9:00 a.m. Eastern Time on such Business
Day and reflect instructions received by the Company from Contract holders in
good order prior to the time the net asset value of each Portfolio is priced in
accordance with its prospectus (such Portfolio's "valuation time") on the prior
Business Day. Any purchase or redemption order for Shares of any Portfolio
received, on any Business Day, after such Portfolio's valuation time on such
Business Day shall be deemed received prior to 9:00 a.m. on the next succeeding
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates the net asset
value of its Portfolios pursuant to the rules of the SEC. Purchase and
redemption orders shall be provided by the Company to the Underwriter as agent
for the Fund in such written or electronic form (including facsimile) as may be
mutually acceptable to the Company and the Underwriter. The Underwriter may
reject purchase and redemption orders that are not in proper form. In the event
that the Company and the Underwriter agree to use a form of written or
electronic communication which is not capable of recording the time, date and
recipient of any communication and confirming good transmission, the Company
agrees that it shall be responsible (i) for confirming with the Underwriter that
any communication sent by the Company was in fact received by the Underwriter in
proper form, and (ii) for the effect of any delay in the Underwriter's receipt
of such communication in proper form. The Fund and its agents shall be entitled
to rely, and shall be fully protected from all liability in acting, upon the
instructions of the persons named in the list of authorized individuals attached
hereto as Schedule C, or any subsequent list of authorized individuals provided
to the Fund or its agents by the Company in such form, without being required to
determine the authenticity of the authorization or the authority of the persons
named therein.
1.4 Purchase orders that are transmitted to the Fund in accordance with
Section 1.3 of this Agreement shall be paid for no later than 2:00 p.m. Eastern
Time on the same Business Day that the Fund receives notice of the order.
Payments shall be made in federal funds transmitted by wire. In the event that
the Company shall fail to pay in a timely manner for any purchase order validly
received by the Underwriter on behalf of the Fund pursuant to Section 1.3 of
this Agreement (whether or not such failure is the fault of the Company), the
Company shall hold the Fund harmless from any losses reasonably sustained by the
Fund as the result of acting in reliance on such purchase order.
1.5 Issuance and transfer of the Fund's Shares will be by book entry
only. Share certificates will not be issued to the Company or to any Account.
Shares ordered from the Fund will be recorded in the appropriate title for each
Account.
1.6 The Fund shall furnish prompt notice to the Company of any income,
dividends or capital gain distribution payable on Shares of any Portfolio. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's Shares in additional Shares of
that Portfolio. The Fund shall notify the Company of the number of Shares so
issued as payment of such dividends and distributions.
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<PAGE> 4
1.7 The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
such net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 6:30 p.m., Eastern Time.
1.8 The Company agrees that it will not take any action to operate any
Account as a management investment company under the 1940 Act without the Fund's
and the Underwriter's prior written consent.
1.9 The Fund agrees that its Shares will be sold only to Participating
Insurance Companies and their separate accounts. No Shares of any Portfolio will
be sold directly to the general public. The Company agrees that Fund Shares will
be used only for the purposes of funding the Contracts and Accounts listed in
Schedule A, as such schedule may be amended from time to time.
1.10 The Fund agrees that all Participating Insurance Companies shall
have the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding to those contained in Section 2.10 and
Article 4 of this Agreement.
ARTICLE 2
OBLIGATIONS OF THE PARTIES
2.1 The Fund shall prepare and be responsible for filing with the SEC
and any state securities regulators requiring such filing, all shareholder
reports, notices, proxy materials (or similar materials such as voting
instruction solicitation materials), prospectuses and statements of additional
information of the Fund. The Fund shall bear the costs of registration and
qualification of its Shares, preparation and filing of the documents listed in
this Section 2.1 and all taxes to which an issuer is subject on the issuance and
transfer of its Shares.
2.2 At least annually, the Fund or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing only the Portfolios) for the Shares as the Company may reasonably
request for distribution to existing Contract owners whose Contracts are funded
by such Shares. The Fund or its designee shall provide the Company, at the
Company's expense, with as many copies of the current prospectus for the Shares
as the Company may reasonably request for distribution to prospective purchasers
of Contracts. If requested by the Company in lieu thereof, the Fund or its
designee shall provide such documentation (including a "camera ready" copy of
the new prospectus as set in type or, at the request of the Company, a diskette
in the form sent to the financial printer) and other assistance as is reasonably
necessary in order for the parties hereto once each year (or more frequently if
the prospectus for the Shares is supplemented or amended) to have the prospectus
for the Contracts and the prospectus for the Shares printed together in one
document. The expenses of such printing shall be borne by the Company. In the
event that the Company requests that the Fund or its designee provide the Fund's
prospectus in a "camera ready" or diskette format, the Fund shall be responsible
solely for providing the prospectus in the format in which it is accustomed to
formatting prospectuses and shall bear the expense of providing the
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<PAGE> 5
prospectus in such format (e.g., typesetting expenses), and the Company shall
bear the expense of adjusting or changing the format to conform with any of its
prospectuses.
2.3 The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from the Fund or its
designee. The Fund or its designee, at its expense, shall print and provide such
statement of additional information to the Company (or a master of such
statement suitable for duplication by the Company) for distribution to any owner
of a Contract funded by the Shares. The Fund or its designee, at the Company's
expense, shall print and provide such statement to the Company (or a master of
such statement suitable for duplication by the Company) for distribution to a
prospective purchaser who requests such statement.
2.4 The Fund or its designee shall provide the Company free of charge
copies, if and to the extent applicable to the Shares, of the Fund's proxy
materials, reports to Shareholders and other communications to Shareholders in
such quantity as the Company shall reasonably require for distribution to
Contract owners.
2.5 The Company shall furnish, or cause to be furnished, to the Fund or
its designee, a copy of each prospectus for the Contracts or statement of
additional information for the Contracts in which the Fund or its investment
adviser is named prior to the filing of such document with the SEC. The Company
shall furnish, or shall cause to be furnished, to the Fund or its designee, each
piece of sales literature or other promotional material in which the Fund or its
investment adviser is named, at least five Business Days prior to its use. No
such prospectus, statement of additional information or material shall be used
if the Fund or its designee reasonably objects to such use within five Business
Days after receipt of such material.
2.6 At the request of the Fund or its designee, the Company shall furnish, or
shall cause to be furnished, to the Fund or its designee copies of the following
reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under generally
accepted accounting principles ("GAAP"), if any);
(b) the Company's quarterly statements (statutory) (and GAAP, if
any);
(c) any financial statement, proxy statement, notice or report of
the Company relating to the Portfolio(s) sent to shareholders and/or
policyholders;
(d) any registration statement (without exhibits) and financial
reports of the Company relating to the Portfolio(s) filed with the SEC
or any state insurance regulator; and
(e) any other public report submitted to the Company by
independent accountants in connection with any annual, interim or
special audit made by them of the books of the Company relating to the
Portfolio(s).
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<PAGE> 6
2.7 The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund or
its investment adviser in connection with the sale of the Contracts other than
information or representations contained in and accurately derived from the
registration statement or prospectus for the Fund Shares (as such registration
statement and prospectus may be amended or supplemented from time to time),
reports of the Fund, Fund-sponsored proxy statements, or in sales literature or
other promotional material approved by the Fund or its designee, except with the
written permission of the Fund or its designee.
2.8 The Fund shall not give any information or make any representations
or statements on behalf of the Company or concerning the Company, the Accounts
or the Contracts other than information or representations contained in and
accurately derived from the registration statement or prospectus for the
Contracts (as such registration statement and prospectus may by amended or
supplemented from time to time), or in materials approved by the Company for
distribution including sales literature or other promotional materials, except
with the written permission of the Company.
2.9 The Company shall amend the registration statement of the Contracts
under the 1933 Act and registration statement for each Account under the 1940
Act from time to time as required in order to effect the continuous offering of
the Contracts or as may otherwise be required by applicable law. The Company
shall register and qualify the Contracts for sale to the extent required by
applicable securities laws and insurance laws of the various states.
2.10 The Company shall be responsible for assuring that any prospectus
offering a Contract that is a life insurance contract where it is reasonably
probable that such Contract would be a "modified endowment contract," as that
term is defined in Section 7702A of the Internal Revenue Code of 1986, as
amended (the "Code"), will identify such Contract as a modified endowment
contract (or policy).
2.11 Solely with respect to Contracts and Accounts that are subject to
the 1940 Act, so long as, and to the extent that, the SEC interprets the 1940
Act to require pass-through voting privileges for variable policyowners: (a) the
Company will provide pass-through voting privileges to owners of Contracts - or
policies whose cash values are invested, through the Accounts, in Shares of the
Fund; (b) the Fund shall require all Participating Insurance Companies to
calculate voting privileges in the same manner and the Company shall be
responsible for assuring that the Accounts calculate voting privileges in the
manner established by the Fund; (c) with respect to each Account, the Company
will vote Shares of the Fund held by the Account and for which no timely voting
instructions from Contract or policyowners are received, as well as Shares held
by the Account that are owned by the Company for its general account, in the
same proportion as the Company votes Shares held by the Account for which timely
voting instructions are received from Contract - or policyowners; and (d) the
Company and its agents will in no way recommend or oppose or interfere with the
solicitation of proxies for Fund Shares held by Contract owners without the
prior written consent of the Fund, which consent may be withheld in the Fund's
sole discretion.
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<PAGE> 7
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of Arkansas
and has established each Account as a segregated asset account under such law on
the date set forth in Schedule A.
3.2 The Company represents and warrants that it has registered or, prior
to any issuance or sale of the Contracts, will register each Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts.
3.3 The Company represents and warrants that the issuance of the
Contracts will be registered under the 1933 Act prior to any issuance or sale of
the Contracts; the Contracts will be issued and sold in compliance in all
material respects will all applicable federal and state laws; and the sale of
the Contracts shall comply in all material respects with state insurance
suitability requirements.
3.4 The Company represents and warrants that, provided the Fund's
representations and warranties made pursuant to Section 3.7 of this Agreement
are true, the Contracts are currently and at the time of issuance will be
treated as annuity contracts or life insurance policies, whichever is
appropriate, under applicable provisions of the Code. The Company shall make
every effort to maintain such treatment and shall notify the Fund and the
Underwriter immediately upon having a reasonable basis for believing that the
Contracts have ceased to be so treated or that they might not be so treated in
the future.
3.5 The Fund represents and warrants that it is duly organized and
validly existing under the laws of the Commonwealth of Massachusetts.
3.6 The Fund represents and warrants that the sale of the Fund Shares
offered and sold pursuant to this Agreement will be registered under the 1933
Act and that the Fund is registered under the 1940 Act. The Fund shall use its
best efforts to amend its registration statement under the 1933 Act and the 1940
Act from time to time as required in order to affect the continuous offering of
its shares. The Company shall advise the Fund of any state requirements to
register Shares for sale in such states. If the Fund determines that notice
filings are appropriate, the Fund shall use its best efforts to make such notice
filings in accordance with the laws of all fifty states, the District of
Columbia, Virgin Islands and Puerto Rico and such other jurisdictions reasonably
requested by the Company.
3.7 The Fund represents and warrants that the investments of each
Portfolio will comply with Subchapter M of the Code and the diversification
requirements set forth in section 817(h) of the Code and the rules and
regulations thereunder.
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<PAGE> 8
ARTICLE 4
POTENTIAL CONFLICTS
4.1 The parties acknowledge that the Fund's Shares may be made available
for investment to other Participating Insurance Companies. In such event, the
Board will monitor the Fund for the existence of any material irreconcilable
conflict between the interests of the contract owners of all Participating
Insurance Companies. An irreconcilable material conflict may arise for a variety
of reasons, including: (a) an action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting instructions given by
variable annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract owners.
The Board shall promptly inform the Company if they determine that an
irreconcilable material conflict exists and the implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Board. The Company will assist the Board
in carrying out their responsibilities under the Shared Fund Exemptive Order by
providing the Board with all information reasonably necessary for the Board to
consider any issues raised including, but not limited to, information as to a
decision by the Company to disregard Contract owner voting instructions.
4.3 If it is determined by a majority of the Board, or a majority of the
Fund's Trustees who are not affiliated with MLAM or the Underwriter (the
"Disinterested Trustees"), that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its expense and to the extent reasonably practicable (as determined by the
Board), take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Fund or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Fund, or submitting the question of whether
or not such segregation should be implemented to a vote of all affected
Contracts owners and, as appropriate, segregating the assets of any appropriate
group (i.e., annuity contract owners, life insurance contract owners, or
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Contract owners
the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision
by the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's or
Accounts' investment in the Fund and terminate this Agreement with respect to
such Account(s); provided, however, that such withdrawal and
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<PAGE> 9
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the Disinterested Board.
Any such withdrawal and termination must take place within 30 days after the
Fund gives written notice that this provision is being implemented, subject to
applicable law but in any event consistent with the terms of the Shared Fund
Exemptive Order. Until the end of such 30 day- period, the Fund shall continue
to accept and implement orders by the Company for the purchase and redemption of
Shares of the Fund.
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's (or Accounts') investment in the Fund and terminate this
Agreement with respect to such Account(s) within 30 days after the Fund informs
the Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the Disinterested Board.
Until the end of such 30- day period, the Fund shall continue to accept and
implement orders by the Company for the purchase and redemption of Shares of the
Fund.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a
majority of the Disinterested Board shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Company be required to establish a new funding medium for the Contracts if
an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Board determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
affected Account's (or Accounts') investment in the Fund and terminate this
Agreement with respect to such Account(s) within 30 days after the Board inform
the Company in writing of the foregoing determination; provided, however, that
such withdrawal and termination shall, subject to applicable law but in any
event consistent with the terms of the Shared Fund Exemptive Order, be limited
to the extent required by any such material irreconcilable conflict as
determined by a majority of the Disinterested Board.
4.7 The Company shall at least annually submit to the Board such
reports, materials or data as the Board may reasonably request so that the Board
may fully carry out the duties imposed upon them by the Shared Fund Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Board.
4.8 If and to the extent that (a) Rule 6e-2 and Rule 6e-3 (T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the 1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding (as defined in the application for the Shared Fund Exemptive
Order) on terms and conditions materially different from those contained in the
application for the Shared Fund Exemptive Order, or (b) the Shared Fund
Exemptive Order is granted on terms and conditions that differ from those set
forth in this Article 4, then the Fund and/or the Participating Insurance
Companies, as appropriate, shall take such
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steps as may be necessary (a) to comply with Rules 6e-2 and 6e-3(T), as amended,
and Rule 6e-3, as adopted, to the extent such rules are applicable, or (b) to
conform this Article 4 to the terms and conditions contained in the Shared Fund
Exemptive Order, as the case may be.
ARTICLE 5
INDEMNIFICATION
5.1 Indemnification by the Company. The Company agrees to indemnify and
hold harmless the Fund and each of its Trustees, officers, employees and agents
and each person, if any, who controls the Fund within the meaning of Section 15
of the 1933 Act (collectively the "Indemnified Parties" for purposes of this
Article 5) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which such Indemnified
Parties may become subject under any statute or regulation, or common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in a
registration statement or prospectus for the Contracts or in sales
literature generated or approved by the Company on behalf of the
Contracts or Accounts (or any amendment or supplement to any of the
foregoing) (collectively, "Company Documents" for the purposes of this
Article 5), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
provided that this indemnity shall not apply as to any Indemnified Party
if such statement or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from written
information furnished to the Company by or on behalf of the Fund for use
in Company Documents or otherwise for use in connection with the sale of
the Contracts or Shares; or
(b) arise out of or result from statements or representations
(other than statements or representations contained in and accurately
derived from Fund Documents (as defined in Section 5.2(a) below) or
wrongful conduct of the Company or persons under its control, with
respect to the sale or acquisition of the Contracts or Shares; or
(c) arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Fund Documents or the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading if such statement or omission was made in reliance upon and
accurately derived from written information furnished to the Fund by or
on behalf of the Company; or
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(d) arise out of or result from any failure by the Company to
provide the services or furnish the materials required under the terms
of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Company.
5.2 Indemnification by the Fund. The Fund agrees to indemnify and hold
harmless the Company and each of its directors, officers, employees and agents
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article 5) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Fund) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage liability or expense and reasonable legal counsel fees incurred in
connection therewith) (collectively, "Losses"), to which such Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or
alleged untrue statement of any material fact contained in the
registration statement or prospectus for the Fund (or any amendment or
supplement thereto) or in sales literature approved by the Fund (but
solely with respect to statements regarding the Fund), (collectively,
"Fund Documents" for the purposes of this Article 5), or arise out of or
are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this indemnity shall
not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Fund by or
on behalf of the Company for use in Fund Documents or otherwise for use
in connection with the sale of the Contracts or Shares; or
(b) arise out of or result from statement or representations
(other than statements or representations contained in and accurately
derived from Company Documents) or wrongful conduct of the Fund or
persons under its control, with respect to the sale or acquisition of
the Contracts or Shares; or
(c) arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Company Documents or
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information furnished
to the Company by or on behalf of the Fund; or
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(d) arise out of or result from any failure by the Fund to
provide the services or furnish the materials required under the terms
of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Fund.
5.3 Neither the Company nor the Fund shall be liable under the
indemnification provisions of Section 5.1 or 5.2, as applicable, with respect to
any Losses incurred or assessed against any Indemnified Party to the extent such
Losses arise out of or result from such Indemnified Party's willful misfeasance,
bad faith or negligence in the performance of such Indemnified Party's duties or
by reason of such Indemnified Party's reckless disregard of obligations or
duties under this Agreement.
5.4 Neither the Company nor the Fund shall be liable under the
indemnification provisions of Section 5.1 or 5.2, as applicable, with respect to
any claim made against an Indemnified Party unless such Indemnified Party shall
have notified the party against whom indemnification is sought in writing within
a reasonable time after the summons, or other first written notification, giving
information of the nature of the claim shall have been served upon or otherwise
received by such Indemnified Party (or after such Indemnified Party shall have
received notice of service upon or other notification to any designated agent),
but failure to notify the party against whom indemnification is sought of any
such claim shall not relieve that party from any liability that it may have to
the Indemnified Party in the absence of Sections 5.1 and 5.2.
5.5 In case any such action is brought against the Indemnified Parties,
the indemnifying party shall be entitled to participate, at its own expense, in
the defense of such action. The indemnifying party also shall be entitled to
assume the defense thereof, with counsel reasonably satisfactory to the party
named in the action. After notice from the indemnifying party to the Indemnified
Party of an election to assume such defense, the Indemnified Party shall bear
the fees and expenses of any additional counsel retained by it, and the
indemnifying party will not be liable to the Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such
Indemnified Party independently in connection with the defense thereof other
than reasonable costs of investigation.
ARTICLE 6
TERMINATION
6.1 This Agreement may be terminated by either party for any reason by
six (6) months' advance written notice to the other party, and may be terminated
by either party pursuant to Sections 6.2 through 6.7 below upon written notice
to the other party.
6.2 This Agreement may be terminated at the option of the Fund upon
institution of formal proceedings against the Company by the NASD, the SEC, the
insurance department of any state, or any other regulatory body regarding the
Company's duties under this Agreement or
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related to the sale of the Contracts, the operation of the Account, the
administration of the Contracts or the purchase of the Shares, or an expected or
anticipated ruling, judgment or outcome that would, in the Fund's reasonable
judgment, materially impair the Company's ability to meet and perform the
Company's obligations and duties hereunder.
6.3 This Agreement may be terminated at the option of the Fund if the
Contracts cease to qualify as annuity contracts or life insurance policies, as
applicable, under the Code, or if the Fund reasonably believes that the
Contracts may fail to so qualify.
6.4 This Agreement may be terminated by the Fund, at its option, if the
Fund shall determine, in its sole judgment exercised in good faith, that either
(1) the Company shall have suffered a material adverse change in its business or
financial condition or (2) the Company shall have been the subject of material
adverse publicity that is likely to have a material adverse impact upon the
business and operations of either the Fund or the Underwriter.
6.5 This Agreement may be terminated at the option of the Company upon
institution of formal proceedings against the Fund by the NASD, the SEC, the
insurance department of any state, or any other regulatory body regarding the
Fund's duties under this Agreement or related to the sale of Fund shares or the
operation of the Fund, or an expected or anticipated ruling, judgment or outcome
that would, in the Company's reasonable judgment, materially impair the Fund's
ability to meet and perform the Fund's obligations hereunder.
6.6 This Agreement may be terminated at the option of the Company if the
Fund ceases to comply with Subchapter M of the Code, or Section 817(h) of the
Code and the rules and regulations thereunder, or if the Company reasonably
believes that the Fund may fail to so comply.
6.7 This Agreement may be terminated by the Company, at its option, if
the Company shall determine, in its sole judgment exercised in good faith, that
either (1) the Fund shall have suffered a material adverse change in its
business or financial condition or (2) the Fund shall have been the subject of
material adverse publicity that is likely to have a material adverse impact upon
the business and operations of the Company.
6.8 Notwithstanding any termination of this Agreement pursuant to this
Article 6, the Fund and the Underwriter may, at the option of the Fund, continue
to make available additional Fund Shares for so long after the termination of
this Agreement as the Fund desires pursuant to the terms and conditions of this
Agreement as provided in Section 6.9 below, for all Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, without limitation, if the Fund or
Underwriter so elects to make additional Shares available, the owners of the
Existing Contracts or the Company, whichever shall have legal authority to do
so, shall be permitted to reallocate investments in the Fund, redeem investments
in the Fund and/or invest in the Fund upon the making of additional purchase
payments under the Existing Contracts.
-13-
<PAGE> 14
6.9 In the event of a termination of this Agreement pursuant to this
Article 6, the Fund and the Underwriter shall promptly notify the Company
whether the Underwriter and the Fund will continue to make Shares available
after such termination; if the Underwriter and the Fund will continue to make
Shares so available, the provisions of this Agreement shall remain in effect
except for Section 6.1 hereof and thereafter either the Fund or the Company may
terminate the Agreement, as so continued pursuant to this Section 6.9, upon
prior written notice to the other party, such notice to be for a period that is
reasonable under the circumstances but, if given by the Fund, need not be
greater than six months.
6.10 The provisions of Article 5 shall survive the termination of this
Agreement, and the provisions of Article 4 and Sections 2.4 and 2.10 shall
survive the termination of this Agreement so long as Shares of the Fund are held
on behalf of Contract owners in accordance with Section 6.8.
ARTICLE 7
NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Hotchkis and Wiley Variable Trust
800 West Sixth Street, Fifth Floor
Los Angeles, CA 90017
Attention: Gracie Fermelia
If to the Company:
Merrill Lynch Insurance Group, Inc.
Administrative Offices
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Attention: Barry Skolnick, Esq.
-14-
<PAGE> 15
ARTICLE 8
MISCELLANEOUS
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York,
shall be subject to the provisions of the 1933, 1934, and 1940 Acts, and the
rules, regulations and rulings thereunder, including such exemptions from those
statutes, rules and regulations as the SEC may grant and the terms hereof shall
be interpreted and construed in accordance therewith.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Fund arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the relevant Portfolio(s) of the Fund and that no Director, officer, agent,
or holder of shares of beneficial interest of the Fund shall be personally
liable for any such liabilities.
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the SEC, the NASD, and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
8.8 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder may
be assigned by either party without the prior written approval of the other
party.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
-15-
<PAGE> 16
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Fund Participation Agreement as of the date and year
first above written.
MERRILL LYNCH LIFE INSURANCE COMPANY
By: /s/ Barry G. Skolnick
Name: Barry G. Skolnick
Title: Senior Vice President
General Counsel and Secretary
HOTCHKIS AND WILEY VARIABLE TRUST
By: /s/ Nancy D. Celick
Name: Nancy D. Celick
Title: President
-16-
<PAGE> 17
SCHEDULE A
Segregated Accounts of Merrill Lynch Life Insurance Company
Participating in Portfolios of Hotchkis and Wiley Variable Trust
<TABLE>
<CAPTION>
Name of Separate Account Date Established
- ------------------------ ----------------
<S> <C>
Merrill Lynch Life Variable Annuity Separate Account A August 6, 1991
</TABLE>
<PAGE> 18
SCHEDULE B
Portfolios of Hotchkis and Wiley Variable Trust
Offered to Segregated Accounts of Merrill Lynch Life Insurance Company
International VIP Portfolio
<PAGE> 19
SCHEDULE C
Persons Authorized to Act on Behalf of Merrill Lynch Life Insurance Company
The Fund, the Underwriter and their respective agents are authorized to
rely on instructions from the following individuals on behalf of Merrill Lynch
Life Insurance Company on its own behalf and on behalf of each Account:
Name Signature
Joseph E. Crowne, Jr. /s/
-----------------------------------
Peter P. Massa /s/
-----------------------------------
Kelley Woods /s/
-----------------------------------
<PAGE> 1
Exhibit 99.H.5
PARTICIPATION AGREEMENT
AMONG
AMERICAN GENERAL LIFE INSURANCE COMPANY
AMERICAN GENERAL SECURITIES INCORPORATED
HOTCHKIS AND WILEY VARIABLE TRUST
AND
HOTCHKIS AND WILEY
DATED AS OF
FEBRUARY 26, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I. Fund Shares 4
ARTICLE II. Representations and Warranties 6
ARTICLE III. Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 8
ARTICLE IV. Sales Material and Information 12
ARTICLE V. [Reserved] 13
ARTICLE VI. Diversification 13
ARTICLE VII. Potential Conflicts 13
ARTICLE VIII. Indemnification 15
ARTICLE IX. Applicable Law 18
ARTICLE X. Termination 18
ARTICLE XI. Notices 21
ARTICLE XII. Foreign Tax Credits 21
ARTICLE XIII. Miscellaneous 21
SCHEDULE A Portfolios of Hotchkis and Wiley Variable Trust 25
Available for Purchase by American General
Life Insurance Company
SCHEDULE B Separate Accounts and Contracts 26
SCHEDULE C Proxy Voting Procedures 27
</TABLE>
<PAGE> 3
THIS AGREEMENT, made and entered into as of the 26th day of February,
1998 by and among AMERICAN GENERAL LIFE INSURANCE COMPANY (hereinafter the
"Company"), a Texas insurance company, on its own behalf and on behalf of each
separate account of the Company set forth on Schedule B hereto as may be amended
from time to time (each such account hereinafter referred to as the "Account");
AMERICAN GENERAL SECURITIES INCORPORATED ("AGSI"), a Texas corporation; HOTCHKIS
AND WILEY VARIABLE TRUST (hereinafter the "Fund"), a Massachusetts business
trust; and HOTCHKIS AND WILEY (the "Adviser"), a division of The Merrill Lynch
Capital Management Group of Merrill Lynch Asset Management, L.P.
WHEREAS, the Fund desires to act as (i) the investment vehicle for
separate accounts established by insurance companies for individual and group
life insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Insurance Products") and (ii) the investment vehicle for certain
qualified pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an
investment vehicle under their Variable Insurance Products are required to enter
into a participation agreement with the Fund and the Adviser (the "Participating
Insurance Companies"); and
WHEREAS, shares of the Fund are divided into several series of shares,
each representing the interest in a particular managed portfolio of securities
and other assets, any one or more of which may be made available for Variable
Insurance Products of Participating Insurance Companies; and
WHEREAS, the Fund intends to offer shares of the series set forth on
Schedule A (each such series hereinafter referred to as a "Portfolio"), as may
be amended from time to time by mutual agreement of the parties hereto, under
this Agreement to the Accounts of the Company; and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission, dated August 13, 1997, (Rel. No. 1C-22786), granting Participating
Insurance Companies and Variable Insurance Product separate accounts exemptions
from the provisions of Sections 9(a), 13(a), 15(a), and 15(b) of the Investment
Company Act of 1940, as amended (hereinafter the "1940 Act"), and Rules
6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit
shares of the Fund to be sold to and held by Variable Insurance Product separate
accounts of both affiliated and unaffiliated life insurance companies and
Qualified Plans (hereinafter the "Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and any applicable state
securities laws; and
3
<PAGE> 4
WHEREAS, the Adviser acts as investment adviser to the Portfolios of the
Fund; and
WHEREAS, Merrill Lynch Funds Distributor, Inc. (the "Underwriter") is
registered as a broker/dealer under the Securities Exchange Act of 1934, as
amended (hereinafter the "1934 Act"), is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD") and serves
as principal underwriter of the shares of the Fund; and
WHEREAS, the Company has registered or will register certain Variable
Insurance Products under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, on the date shown for such Account on Schedule B
hereto, to set aside and invest assets attributable to the aforesaid Variable
Insurance Product; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid Variable Insurance Products and
the Fund intends to sell such shares to the relevant Account at net asset value;
and
WHEREAS, AGSI serves as both the distributor and the principal
underwriter of the Variable Insurance Products that are set forth on Schedule B;
NOW, THEREFORE, in consideration of their mutual promises, the Company, AGSI,
the Fund and the Adviser agree as follows:
ARTICLE I. FUND SHARES
1.1. The Fund agrees to make available for purchase by the Company
shares of the Portfolios set forth on Schedule A and shall execute orders placed
for each Account on a daily basis at the net asset value next computed after
receipt by the Fund or its designee of such order. For purposes of this Section
1.1, the Company shall be the designee of the Fund for receipt of such orders
from each Account and receipt by such designee by 4:00 p.m. Eastern time on a
Business Day shall constitute receipt by the Fund; provided that the Fund
receives notice of such order as soon as reasonably practical (normally by 10:00
a.m. Eastern time) on the next following Business Day. Notwithstanding the
foregoing, the Company shall use its best efforts to provide the Fund with
notice of such orders by 10:15 a.m. Eastern time on the next following Business
Day. "Business Day" shall mean any day on which the New York Stock Exchange is
open for trading and on which the Fund calculates the net asset value of the
Portfolios' shares pursuant to the rules of the Securities and Exchange
Commission ("SEC"), as set forth in the Fund's Prospectus and Statement of
Additional Information. Notwithstanding the foregoing, the Board of Trustees of
the Fund (hereinafter the "Board") may refuse to permit the Fund to sell shares
of any Portfolio, to any person, or suspend or terminate the
4
<PAGE> 5
offering of shares of any Portfolio, if such action is required by law or by
regulatory authorities having jurisdiction or is, in the sole discretion of the
Board acting in good faith and in light of their fiduciary duties under federal
and any applicable state laws, necessary in the best interests of the
shareholders of such Portfolio.
1.2. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their Variable Insurance Products and to
certain Qualified Plans. No shares of any Portfolio will be sold to the general
public.
1.3. The Fund will not make its shares available for purchase by any
insurance company or separate account unless an agreement containing provisions
substantially the same as Sections 2.4, 2.9, 3.4 and Article VII of this
Agreement is in effect to govern such sales.
1.4. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.4, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee by 4:00
p.m. Eastern time on a Business Day shall constitute receipt by the Fund;
provided that the Fund receives notice of such request for redemption on the
next following Business Day in accordance with the timing rules described in
Section 1.1.
1.5. The Company agrees that purchases and redemptions of Portfolio
shares offered by the then current prospectus of the Fund shall be made in
accordance with the provisions of such prospectus. The Accounts of the Company,
under which amounts may be invested in the Fund, are listed on Schedule B
attached hereto and incorporated herein by reference, as such Schedule B may be
amended from time to time by mutual written agreement of all of the parties
hereto. The Company will give the Fund and the Adviser sixty (60) days' written
notice of its intention to make available in the future, as a funding vehicle
under the Variable Insurance Products, any other investment company.
1.6. The Company will place separate orders to purchase or redeem shares
of each Portfolio. Each order shall describe the net amount of shares and dollar
amount of each Portfolio to be purchased or redeemed. In the event of net
purchases, the Company shall pay for Portfolio shares on the next Business Day
after an order to purchase Portfolio shares is made in accordance with the
provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted
by wire. In the event of net redemptions, the Portfolio shall pay the redemption
proceeds in federal funds transmitted by wire on the next Business Day after an
order to redeem a Portfolio's shares is made in accordance with the provision of
Section 1.4 hereof. Notwithstanding the foregoing, if the payment of redemption
proceeds on the next Business Day would require the Portfolio to dispose of
securities or otherwise incur substantial additional costs, and if the Portfolio
has determined to settle redemption transactions for all shareholders on a
delayed basis, proceeds shall be wired to the Company within seven (7) days and
the Portfolio shall notify in writing the person designated by the Company as
the recipient for such notice of such delay by 3:00 p.m. Eastern time on the
same Business Day that the Company transmits the redemption order to the
Portfolio.
5
<PAGE> 6
1.7. Issuance and transfer of the Fund's shares will be by book entry
only. Share certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.8. The Fund shall make the dividends or capital gain distributions
payable on the Fund's shares available to the Company as soon as reasonably
practical after the dividends or capital gains are calculated (normally by 6:30
p.m. Eastern time) and shall use its best efforts to furnish same day notice by
7:00 p.m. Eastern time (by wire or telephone, followed by written confirmation)
to the Company of any dividends or capital gain distributions payable on the
Fund's shares. The Company hereby elects to receive all such dividends and
capital gain distributions as are payable on the Portfolio shares in additional
shares of that Portfolio. The Company reserves the right to revoke this election
and to receive all such dividends and capital gain distributions in cash. The
Fund shall notify the Company of the number of shares so issued as payment of
such dividends and distributions.
1.9. The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m. Eastern time) and shall use its best efforts to make such net asset value
per share available by 7:00 p.m. Eastern time. In the event that the Fund is
unable to meet the 7:00 p.m. time stated immediately above, then the Fund shall
provide the Company with additional time to notify the Fund of purchase or
redemption orders pursuant to Sections 1.1 and 1.4, respectively, above. Such
additional time shall be equal to the additional time that the Fund takes to
make the net asset values available to the Company; provided, however, that
notification must be made by 10:15 a.m. Eastern time on the Business Day such
order is to be executed regardless of when the net asset value is made
available.
1.10. If the Fund provides materially incorrect share net asset value
information through no fault of the Company, the Company shall be entitled to an
adjustment with respect to the Fund shares purchased or redeemed to reflect the
correct net asset value per share. The determination of the materiality of any
net asset value pricing error shall be based on the SEC's recommended
guidelines, if any. The correction of any such errors shall be made at the
Company level and shall be made pursuant to the SEC's recommended guidelines.
Any material error in the calculation or reporting of net asset value per share,
dividend or capital gain information shall be reported promptly upon discovery
to the Company.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the interests of the
Accounts (the "Contracts") are or will be registered and will maintain the
registration under the 1933 Act and the regulations thereunder to the extent
required by the 1933 Act; that the Contracts will be issued in compliance in all
material respects with all applicable federal and state laws and regulations.
The Company further represents and warrants that it is an insurance company duly
organized and in good standing under applicable law and that it has legally and
validly established each Account prior to any issuance or sale thereof as a
segregated asset account under the Texas Insurance Law and the regulations
thereunder and has registered or, prior to any issuance or sale of the
Contracts, will register and will maintain the registration of each Account as a
unit investment trust in accordance with and to the extent required by the
provisions of the 1940 Act and the regulations thereunder to
6
<PAGE> 7
serve as a segregated investment account for the Contracts. The Company shall
amend its registration statement for its Contracts under the 1933 Act and the
1940 Act from time to time as required in order to effect the continuous
offering of its Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act and the regulations
thereunder to the extent required by the 1933 Act, duly authorized for issuance
in accordance with the laws of the Commonwealth of Massachusetts and sold in
compliance with all applicable federal and state securities laws and regulations
and that the Fund is and shall remain registered under the 1940 Act and the
regulations thereunder to the extent required by the 1940 Act. The Fund shall
amend the registration statement for its shares under the 1933 Act and the 1940
Act from time to time as required in order to effect the continuous offering of
its shares. The Fund shall register the shares for sale in accordance with the
laws of the various states only if and to the extent deemed advisable by the
Fund.
2.3 The Fund and the Adviser will make every effort to qualify each
Portfolio as a Regulated Investment Company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and that the Fund and the Adviser
(with respect to those Portfolios for which such Adviser acts as investment
adviser) thereafter will make every effort to maintain such qualification (under
Subchapter M or any successor or similar provision) and the Fund or the Adviser
will notify the Company immediately upon having a reasonable basis for believing
that a Portfolio has ceased to so qualify or that a Portfolio might not so
qualify in the future.
2.4. The Company represents that each Account is and will continue to be
a "segregated account" under applicable provisions of the Code and that each
Contract is and will be treated as a "variable contract" under applicable
provisions of the Code and that it will make every effort to maintain such
treatments and that it will notify the Fund immediately upon having a reasonable
basis for believing that the Account or Contract has ceased to be so treated or
that they might not be so treated in the future.
2.5. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states.
2.6. The Fund and the Adviser represent that the Fund is lawfully
organized and validly existing under the laws of the Commonwealth of
Massachusetts and that the Fund does and will comply in all material respects
with the applicable provisions of the 1940 Act.
2.7. The Adviser and AGSI each represents and warrants that it is and
shall remain duly registered in all material respects under all applicable
federal and state securities laws and that it will perform its obligations for
the Fund and the Company in compliance in all material respects with the laws
and regulations of its state of domicile and any applicable state and federal
securities laws and regulations.
2.8. The Company represents and warrants that all of its trustees,
officers, employees and other individuals/entities dealing with the money and/or
securities of the Fund are covered by a blanket fidelity bond or similar
coverage, in an amount equal to the greater of $5 million or any
7
<PAGE> 8
amount required by applicable federal or state law or regulation. The aforesaid
includes coverage for larceny and embezzlement is issued by a reputable bonding
company. The Company agrees to make all reasonable efforts to see that this bond
or another bond containing these provisions is always in effect, and agrees to
notify the Fund and the Adviser in the event that such coverage no longer
applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS, VOTING
3.1(a) The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus, including the profile
prospectus, (the "Fund Prospectus") as the Company may reasonably request for
distribution to Contract owners whose Contracts are funded by Portfolio shares.
If requested by the Company, in lieu of providing printed copies of the Fund
Prospectus, the Fund shall provide camera-ready film or computer diskettes
containing the Fund Prospectus and such other assistance as is reasonably
necessary in order for the Company once each year (or more frequently if the
Fund Prospectus is amended during the year) to have the prospectus for the
Contracts (the "Contract Prospectus") and the Fund Prospectus printed together
in one document or separately. The Company may elect to print the Fund
Prospectus in combination with other fund companies' prospectuses. For purposes
hereof, any combined prospectus including the Fund Prospectus along with the
Contract Prospectus or prospectus of other fund companies shall be referred to
as a "Combined Prospectus." For purposes hereof, the term "Fund Portion of the
Combined Prospectus" shall refer to the percentage of the number of Fund
Prospectus pages in the Combined Prospectus in relation to the total number of
pages of the Combined Prospectus.
3.1(b) The Fund shall provide the Company with as many printed copies of
the Fund's current statement of additional information (the "Fund SAI") as the
Company may reasonably request for distribution to any owner of a Contract
funded by Portfolio shares. If requested by the Company in lieu of providing
printed copies of the Fund SAI, the Fund shall provide camera-ready film or
computer diskettes containing the Fund SAI, and such other assistance as is
reasonably necessary in order for the Company once each year (or more frequently
if the Fund SAI is amended during the year) to have the statement of additional
information for the Contracts (the "Contract SAI") and the Fund SAI printed
together or separately. The Company may also elect to print the Fund SAI in
combination with other fund companies' statements of additional information. For
purposes hereof, any combined statement of additional information including the
Fund SAI along with the Contract SAI or statement of additional information of
other fund companies shall be referred to as a "Combined SAI." For purposes
hereof, the term "Fund Portion of the Combined SAI" shall refer to the
percentage of the number of Fund SAI pages in the Combined SAI in relation to
the total number of pages of the Combined SAI.
3.1(c) The Fund shall provide the Company with as many printed copies of
the Fund's annual report and semi-annual report (collectively, the "Fund
Reports") as the Company may reasonably request for distribution to Contract
owners whose Contracts are funded by Portfolio shares. If requested by the
Company in lieu of providing printed copies of the Fund Reports, the Fund shall
provide camera-ready film or computer diskettes containing the Fund's Reports,
and such other assistance as is reasonably necessary in order for the Company
once each year to have the annual report and semi-annual report for the
Contracts (collectively, the "Contract Reports") and the Fund Reports printed
together or separately. The Company may also elect to print the Fund Reports in
8
<PAGE> 9
combination with other fund companies' annual reports and semi-annual reports.
For purposes hereof, any combined annual reports and semi-annual reports
including the Fund Reports along with the Contract Reports or annual reports and
semi-annual reports of other fund companies shall be referred to as "Combined
Reports." For purposes hereof, the term "Fund Portion of the Combined Reports"
shall refer to the percentage of the number of Fund Reports pages in the
Combined Reports in relation to the total number or pages of the Combined
Reports.
3.2 Expenses
3.2(a) Expenses Borne by Company. Except as otherwise provided in this
Section 3.2., all expenses of preparing, setting in type and printing and
distributing (i) Contract Prospectuses, Fund Prospectuses, and Combined
Prospectuses; (ii) Fund SAIs, Contract SAIs, and Combined SAIs; (iii) Fund
Reports, Contract Reports, and Combined Reports, and (iv) Contract proxy
material that the Company may require in sufficient quantity to be sent to
Contract owners, annuitants, or participants under Contracts (collectively, the
"Participants"), shall be the expense of the Company.
3.2(b) Expenses Borne by Fund
Fund Prospectuses
With respect to existing Participants, the Fund shall pay the cost of
setting in type, printing and distributing Fund Prospectuses to be made
available by the Company to such existing Participants in order to update
disclosure as required by the 1933 Act and/or the 1940 Act. With respect to
existing Participants, in the event the Company elects to prepare a Combined
Prospectus, the Fund shall pay the cost of setting in type, printing and
distributing the Fund Portion of the Combined Prospectus to be made available by
the Company to its existing Participants in order to update disclosure as
required by the 1933 Act and/or the 1940 Act. In such event, the Fund shall bear
the cost of typesetting to provide the Fund Prospectus to the Company in the
format in which the Fund is accustomed to formatting prospectuses.
Notwithstanding the foregoing, in no event shall the Fund pay for any such costs
that exceed by more than five (5) percent what the Fund would have paid to print
such documents. The Fund shall not pay any costs of typesetting, printing and
distributing the Fund Prospectus (or Combined Prospectus, if applicable) to
prospective Participants.
Fund SAIs, Fund Reports and Proxy Material
With respect to existing Participants, the Fund shall pay the cost of
setting in type and printing Fund SAIs, Fund Reports and Fund proxy material to
be made available by the Company to its existing Participants. With respect to
existing Participants, in the event the Company elects to prepare a Combined SAI
or Combined Reports, the Fund shall pay the cost of setting in type and printing
the Fund Portion of the Combined SAI or Combined Reports, respectively, to be
made available by the Company to its existing Participants. In such event, the
Fund shall bear the cost of typesetting to provide the Fund SAI or Fund Reports
to the Company in the format in which the Fund is accustomed to formatting
statements of additional information and annual and semi-annual reports.
Notwithstanding the foregoing, in no event shall the Fund pay for any such costs
that exceed by more than five (5) percent what the Fund would have paid to print
such documents. The Fund shall pay
9
<PAGE> 10
one half the cost of distributing Fund SAIs, Fund Reports and Fund proxy
statements and proxy-related material to such existing Participants. The Fund
shall pay the cost of distributing the Fund Portion of the Combined SAIs and the
Fund Portion of the Combined Reports to existing Participants. The Fund shall
not pay any costs of distributing Fund SAIs, Combined SAIs, Fund Reports,
Combined Reports or proxy statements or proxy-related material to prospective
Participants.
The Company agrees to provide the Fund or its designee with such
information as may be reasonably requested by the Fund to assure that the Fund's
expenses do not include the cost of typesetting, printing or distributing any of
the foregoing documents other than those actually distributed to existing
Participants.
The Fund shall pay no fee or other compensation to the Company under
this Agreement, except that if the Fund or any Portfolio adopts and implements a
plan pursuant to Rule 12b-1 under the 1940 Act to finance distribution expenses,
then the Underwriter may make payments to the Company or to AGSI if and in
amounts agreed to by the Underwriter in writing.
All expenses, including expenses to be borne by the Fund pursuant to
Section 3.2 hereof, incident to performance by the Fund under this Agreement
shall be paid by the Fund. The Fund shall see to it that all its shares are
registered and authorized for issuance in accordance with applicable federal law
and, if and to the extent deemed advisable by the Fund, in accordance with
applicable state laws prior to their sale. The Fund shall bear the expenses for
the cost of registration of the Fund's shares.
3.2(c) Expenses Borne by AGSI.
Fund Prospectuses
With respect to prospective Participants, AGSI shall pay one half of the
cost of setting in type, printing and distributing Fund Prospectuses made
available by the Company as sales literature to such prospective Participants.
With respect to prospective Participants, in the event the Company elects to
prepare a Combined Prospectus, AGSI shall pay one half of the cost of printing
and distributing the Combined Prospectus made available by the Company to its
prospective Participants as sales literature. In such event, AGSI shall bear the
cost of typesetting to provide the Fund Prospectus to the Company in the format
in which the Fund is accustomed to formatting prospectuses. Notwithstanding the
foregoing, in no event shall AGSI pay for any such costs that exceed by more
than five (5) percent what AGSI would have paid to print such documents.
Fund SAIs, Fund Reports and Proxy Material.
With respect to prospective Participants, AGSI shall pay one half of the
cost of setting in type and printing Fund SAIs, Fund Reports and Fund proxy
material made available by the Company to its prospective Participants as sales
literature. In the event the Company elects to prepare a Combined SAI or
Combined Reports, AGSI shall pay one half of the cost of printing the Combined
SAI or Combined Reports, respectively, made available by the Company to its
prospective Participants as sales literature. In such event, AGSI shall bear the
cost of typesetting to provide the Fund SAI and Fund Reports to the Company in
the format in which the Fund is accustomed to formatting statements of
additional information and annual and semi-annual reports. Notwithstanding
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<PAGE> 11
the foregoing, in no event shall AGSI pay for any such costs that exceed by more
than five (5) percent what AGSI would have paid to print such documents. AGSI
shall pay one half the cost of distributing Fund SAIs, Combined SAIs, Fund
Reports, Combined Reports, and Fund proxy material to such prospective
Participants as sales literature.
3.2(d) If the Company chooses to receive camera-ready film or computer
diskettes in lieu of receiving printed copies of the Fund Prospectus, Fund SAI
or Fund Reports, the Fund or its designee will be responsible for providing the
Fund Prospectus, Fund SAI or Fund Reports in the format in which it is
accustomed to formatting such documents, and, notwithstanding anything in
Sections 3.2(b) or 3.2(c), the Company shall bear the expense of adjusting or
changing the format to conform with any of its prospectuses or reports.
3.3. The Fund SAI shall be obtainable from the Fund, the Company or such
other person as the Fund may designate.
3.4. If and to the extent required by law the Company shall distribute
all proxy material furnished by the Fund to Participants to whom voting
privileges are required to be extended and shall:
(i) solicit voting instructions from Participants;
(ii) vote the Fund shares in accordance with instructions
received from Participants; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
Portfolio for which instructions have been received,
so long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners. The Company
reserves the right to vote Fund shares held in any segregated asset account in
its own right, to the extent permitted by law. The Fund and the Company shall
follow the procedures, and shall have the corresponding responsibilities, for
the handling of proxy and voting instruction solicitations, as set forth in
Schedule C attached hereto and incorporated herein by reference. Participating
Insurance Companies shall be responsible for ensuring that each of their
separate accounts participating in the Fund calculates voting privileges in a
manner consistent with the standards set forth on Schedule C, which standards
will also be provided to the other Participating Insurance Companies.
3.5. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders. Further, the Fund will act in accordance with the SEC's
interpretation of the requirements of Section 16(a) with respect to periodic
elections of Trustees and with whatever rules the SEC may promulgate with
respect thereto.
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ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material prepared by the Company, AGSI or any person contracting with the
Company or AGSI in which the Fund or the Adviser is named, at least ten Business
Days prior to its use. No such material shall be used if the Fund, the Adviser,
or their designee reasonably objects to such use within ten Business Days after
receipt of such material.
4.2. Neither the Company, AGSI nor any person contracting with the
Company or AGSI shall give any information or make any representations or
statements on behalf of the Fund or concerning the Fund or the Adviser in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or the Fund Prospectus,
as such registration statement or Fund Prospectus may be amended or supplemented
from time to time, or in reports or proxy statements for the Fund, or in sales
literature or other promotional material approved by the Fund or its designee,
except with the written permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material prepared by the Fund in which the Company or its
Account(s) are named at least ten Business Days prior to its use. No such
material shall be used if the Company or its designee reasonably objects to such
use within ten Business Days after receipt of such material.
4.4. Neither the Fund nor the Adviser shall give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Contracts, other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports or solicitations for voting instructions for
each Account which are in the public domain or approved by the Company for
distribution to Participants, or in sales literature or other promotional
material approved by the Company or its designee, except with the written
permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, within five (5)
Business Days of the filing of such document with the SEC or other regulatory
authorities.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in an Account or Contract within five (5) Business Days of the filing of such
document with the SEC or other regulatory authorities.
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4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following: advertisements (such as material published, or designed for use in, a
newspaper, magazine, or other periodical, radio, television, telephone or tape
recording, videotape display, signs or billboards, motion pictures, or other
public media), sales literature (i.e., any written communication distributed or
made generally available to customers or the public, including brochures,
circulars, research reports, market letters, form letters, seminar texts,
reprints or excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications distributed
or made generally available to some or all agents or employees, and registration
statements, prospectuses, statements of additional information, shareholder
reports, and proxy materials.
ARTICLE V. [RESERVED]
ARTICLE VI. DIVERSIFICATION
6.1. The Adviser represents, as to the Portfolios, that it will use its
best efforts at all times to comply with Section 817(h) of the Code and Treasury
Regulation 1.817-5, relating to the diversification requirements for variable
annuity, endowment, or life insurance contracts and any amendments or other
modifications to such Section or Regulations. In the event a Portfolio ceases to
so qualify, the Adviser will take all reasonable steps (a) to notify the Company
and (b) to adequately diversify the Portfolio so as to achieve compliance within
the grace period afforded by Regulation 817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract owners and variable life insurance contract owners;
or (f) a decision by a Participating Insurance Company to disregard the voting
instructions of Contract owners. The Board shall promptly inform the Company if
it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing material
irreconcilable conflicts of which it is aware to the Board. The Company will
assist the Board in carrying out its responsibilities under the Shared Funding
Exemptive Order, by providing the Board with all information reasonably
necessary for the Board to consider any issues raised. This includes, but is not
limited to, an obligation by the Company to inform the Board whenever contract
owner voting instructions are disregarded.
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7.3. If it is determined by a majority of the Board, or a majority of
its disinterested Trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested Trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the Separate Accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance policy
owners, or variable Contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
Contract owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account. No charge
or penalty will be imposed as a result of such withdrawal. The Company agrees
that it bears the responsibility to take remedial action in the event of a Board
determination of an irreconcilable material conflict and the cost of such
remedial action, and these responsibilities will be carried out with a view only
to the interests of Contract owners.
7.4. If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
Trustees of the Board. No charge or penalty will be imposed as a result of such
withdrawal. The Company agrees that it bears the responsibility to take remedial
action in the event of a Board determination of an irreconcilable material
conflict and the cost of such remedial action, and these responsibilities will
be carried out with a view only to the interests of Contract owners.
7.5. For purposes of Sections 7.3 and 7.4 of this Agreement, a majority
of the disinterested Trustees of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Fund be required to establish a new funding medium for the Contracts.
The Company shall not be required by Section 7.3 or 7.4 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict.
7.6. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then the Fund and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules 6e-2
and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable.
7.7. The Company and the Adviser shall at least annually submit to the
Board of the Fund such reports, materials or data as the Board may reasonably
request so that the Board may fully carry out the obligations imposed upon them
by the provisions hereof, and said reports, materials and data
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<PAGE> 15
shall be submitted more frequently if deemed appropriate by the Board. All
reports received by the Board of potential or existing conflicts, and all Board
action with regard to determining the existence of a conflict, notifying
Participating Insurance Companies of a conflict, and determining whether any
proposed action adequately remedies a conflict, shall be properly recorded in
the minutes of the Board or other appropriate records, and such minutes or other
records shall be made available to the SEC upon request.
ARTICLE VIII. INDEMNIFICATION
8.1. Indemnification By Company and AGSI
8.1(a) The Company and AGSI agree to indemnify and hold harmless the
Fund and each member of the Board and officers and agents and the Adviser and
each director and officer of the Adviser, and each person, if any, who controls
the Fund or the Adviser within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" and individually, "Indemnified Party,"
for purposes of this Section 8.1) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Company or AGSI) or expenses (including legal and other expenses), to which
the Indemnified Parties may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the sale
or acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the registration
statement or prospectus for the Contracts or contained in the Contracts
or sales literature for the Contracts (or any amendment or supplement to
any of the foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply as
to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
information furnished to the Company by or on behalf of the Fund for use
in the registration statement or prospectus for the Contracts or in the
Contracts or sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or Fund
shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration
statement, prospectus or sales literature of the Fund not supplied by
the Company or AGSI, or persons under its control and other than
statements or representations authorized by the Fund or the Adviser) or
unlawful conduct of the Company or AGSI or persons under its control,
with respect to the sale or distribution of the Contracts or Fund
shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration
statement, prospectus, or sales literature of the Fund or any amendment
thereof or supplement thereto or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading if
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<PAGE> 16
such a statement or omission was made in reliance upon and in conformity
with information furnished to the Fund by or on behalf of the Company or
AGSI;
(iv) arise as a result of any failure by the Company or AGSI to
provide the services and furnish the materials required under the terms
of this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company or AGSI in this
Agreement or arise out of or result from any other material breach of
this Agreement by the Company or AGSI, as limited by and in accordance
with the provisions of Sections 8.1(b) and 8.1(c) hereof.
8.1(b). Neither the Company nor AGSI shall be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation incurred or assessed against an Indemnified Party as
such may arise from such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations or duties
under this Agreement.
8.1(c). Neither the Company nor AGSI shall be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Company or AGSI in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company or AGSI
of any such claim shall not relieve the Company or AGSI from any liability which
it may have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case any such
action is brought against the Indemnified Parties, the Company or AGSI shall be
entitled to participate, at its own expense, in the defense of such action. The
Company or AGSI also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice from the
Company or AGSI to such Party of the Company's or AGSI's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses under
this Agreement for any legal or other expenses subsequently incurred by such
Party independently in connection with the defense thereof other than reasonable
costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company or AGSI
of the commencement of any litigation or proceedings against them in connection
with the issuance or sale of the Fund shares or the Contracts or the operation
of the Fund.
8.2. Indemnification by the Adviser
8.2(a). The Adviser agrees, with respect to each Portfolio, to indemnify
and hold harmless the Company and each of its directors and officers and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act (collectively, the "Indemnified Parties" and individually, "Indemnified
Party," for purposes of this Section 8.2) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of the Adviser) or expenses (including legal and other expenses) to
which the Indemnified Parties may become subject under any statute, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
16
<PAGE> 17
expenses (or actions in respect thereof) or settlements, result from the gross
negligence, bad faith, willful misconduct of the Adviser or any director,
officer, employee or agent thereof, are related to the operation of the Adviser
or the Fund and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration
statement or prospectus or sales literature of the Fund (or any
amendment or supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such statement
or omission or such alleged statement or omission was made in reliance
upon and in conformity with information furnished to the Adviser or the
Fund or the Underwriter by or on behalf of the Company for use in the
registration statement or prospectus for the Fund or in sales literature
(or any amendment or supplement) or otherwise for use in connection with
the sale of the Contracts or Portfolio shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration
statement, prospectus or sales literature for the Contracts not supplied
by the Adviser or persons under its control and other than statements or
representations authorized by the Company) or unlawful conduct of the
Adviser or persons under its control, with respect to the sale or
distribution of the Contracts or Portfolio shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration
statement, prospectus, or sales literature covering the Contracts, or
any amendment thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statement or statements therein not misleading,
if such statement or omission was made in reliance upon information
furnished to the Company by or on behalf of the Adviser; or
(iv) arise as a result of any failure by the Adviser to provide the
services and furnish the materials required under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Adviser in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Fund or the Adviser; including without limitation any failure by
the Fund or the Adviser to comply with the conditions of Article VI
hereof.
8.2(b). The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.2(c). The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser
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<PAGE> 18
in writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been served
upon such Indemnified Party (or after such Indemnified Party shall have received
notice of such service on any designated agent), but failure to notify the
Adviser of any such claim shall not relieve the Adviser from any liability which
it may have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case any such
action is brought against the Indemnified Parties, the Adviser will be entitled
to participate, at its own expense, in the defense thereof. The Adviser also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Adviser to such Party of
the Adviser's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the Adviser will not be liable to such Party under this Agreement for any legal
or other expenses subsequently incurred by such Party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.2(d). The Company and AGSI agree promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers,
trustees or directors in connection with this Agreement, the issuance or sale of
the Contracts with respect to the operation of each Account, or the sale or
acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Texas.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the SEC may grant
(including, but not limited to, the Shared Funding Exemptive Order) and the
terms hereof shall be interpreted and construed in accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party for any reason upon six-months
advance written notice delivered to the other parties;
or
(b) termination by the Company or AGSI by written notice to
the Fund and the Adviser with respect to any Portfolio
based upon the Company's determination that shares of
such Portfolio are not reasonably available to meet the
requirements of the Contracts. Reasonable advance notice
of election to terminate shall be furnished by the
Company, said termination to be effective ten (10) days
after receipt of notice unless the Fund makes available
a sufficient number of shares to reasonably meet the
requirements of the Account within said ten (10) day
period; or
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(c) termination by the Company or AGSI by written notice to
the Fund and the Adviser with respect to any Portfolio
in the event any of the Portfolio's shares are not
registered, issued or sold in accordance with applicable
state and/or federal law or such law precludes the use
of such shares as the underlying investment medium of
the Contracts issued or to be issued by the Company. The
terminating party shall give prompt notice to the other
parties of its decision to terminate; or
(d) termination by the Company or AGSI by written notice to
the Fund and the Adviser with respect to any Portfolio
in the event that such Portfolio ceases to qualify as a
Regulated Investment Company under Subchapter M of the
Code or under any successor or similar provision, or if
the Company or AGSI reasonably believes that the Fund
may fail to so qualify; or
(e) termination by the Company or AGSI by written notice to
the Fund and the Adviser with respect to any Portfolio
in the event that such Portfolio fails to meet the
diversification requirements specified in Article VI
hereof; or
(f) termination by either the Fund or the Adviser by written
notice to the Company if the Adviser or the Fund shall
determine, in its sole judgment exercised in good faith,
that the Company, AGSI and/or their affiliated companies
has suffered a material adverse change in its business,
operations, financial condition or prospects since the
date of this Agreement or is the subject of material
adverse publicity, provided that the Fund or the Adviser
will give the Company sixty (60) days' advance written
notice of such determination of its intent to terminate
this Agreement, and provided further that after
consideration of the actions taken by the Company or
AGSI and any other changes in circumstances since the
giving of such notice, the determination of the Fund or
the Adviser shall continue to apply on the 60th day
since giving of such notice, then such 60th day shall be
the effective date of termination; or
(g) termination by the Company or AGSI by written notice to
the Fund and the Adviser, if the Company or AGSI shall
determine, in its sole judgment exercised in good faith,
that either the Fund or the Adviser (with respect to the
appropriate Portfolio) has suffered a material adverse
change in its business, operations, financial condition
or prospects since the date of this Agreement or is the
subject of material adverse publicity; provided that the
Company will give the Fund or the Adviser sixty (60)
days' advance written notice of such determination of
its intent to terminate this Agreement, and provided
further that after consideration of the actions taken by
the Company and any other changes in circumstances since
the giving of such notice, the determination of the
Company or AGSI shall continue to apply on the 60th day
since giving of such notice, then such 60th day shall be
the effective date of termination; or
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(h) termination by the Fund or the Adviser by written notice
to the Company, if the Company gives the Fund and the
Adviser the written notice specified in Section 2.4
hereof and at the time such notice was given there was
no notice of termination outstanding under any other
provision of this Agreement; provided, however any
termination under this Section 10.1(h) shall be
effective sixty (60) days after the notice specified in
Section 2.4 was given; or
(i) termination by any party upon the other party's breach
of any representation in Section 2 or any material
provision of this Agreement, which breach has not been
cured to the satisfaction of the terminating party
within ten (10) days after written notice of such breach
is delivered to the Fund or the Company, as the case may
be; or
(j) termination by the Fund or the Adviser by written notice
to the Company in the event an Account or Contract is
not registered or sold in accordance with applicable
federal or state law or regulation, or the Company fails
to provide pass-through voting privileges as specified
in Section 3.4.
10.2. EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund shall at the option of the Company, continue to make
available additional shares of the Fund pursuant to the terms and conditions of
this Agreement, for all Contracts in effect on the effective date of termination
of this Agreement (hereinafter referred to as "Existing Contracts") unless such
further sale of Fund shares is proscribed by law, regulation or applicable
regulatory body, or unless the Fund determines that liquidation of the Fund
following termination of this Agreement is in the best interests of the Fund and
its shareholders. Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to direct reallocation of investments in the Fund,
redemption of investments in the Fund and/or investment in the Fund upon the
making of additional purchase payments under the Existing Contracts. The parties
agree that this Section 10.2 shall not apply to any terminations under Article
VII and the effect of such Article VII terminations shall be governed by Article
VII of this Agreement.
10.3. The Company shall not redeem Fund shares attributable to the
Contracts (as distinct from Fund shares attributable to the Company's assets
held in the Account) except (i) as necessary to implement Contract Owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon
request, the Company will promptly furnish to the Fund the opinion of counsel
for the Company (which counsel shall be reasonably satisfactory to the Fund and
the Adviser) to the effect that any redemption pursuant to clause (ii) above is
a Legally Required Redemption. Furthermore, except in cases where permitted
under the terms of the Contracts, the Company shall not prevent Contract Owners
from allocating payments to a Portfolio that was otherwise available under the
Contracts without first giving the Fund or the appropriate Adviser 90 days prior
written notice of its intention to do so.
20
<PAGE> 21
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Hotchkis and Wiley Variable Trust
800 West Sixth Street, Fifth Floor
Los Angeles, CA 90017
Attention:___________________________
If to Adviser:
Hotchkis and Wiley
800 West Sixth Street, Fifth Floor
Los Angeles, CA 90017
Attention: Gracie Fermelia
If to the Company:
American General Life Insurance Company
2727-A Allen Parkway
Houston, Texas 77019
Attention: Steven A. Glover
If to AGSI:
American General Securities Incorporated
2727 Allen Parkway
Houston, Texas 77019
Attention: F. Paul Kovach, Jr.
ARTICLE XII. FOREIGN TAX CREDITS
The Fund and the Adviser agree to consult with the Company concerning
whether any Portfolio of the Fund qualifies to provide a foreign tax credit
pursuant to Section 853 of the Code.
ARTICLE XIII. MISCELLANEOUS
13.1. All persons dealing with the Fund must look solely to the property
of the Fund for the enforcement of any claims against the Fund as neither the
Board, officers, agents or shareholders
21
<PAGE> 22
assume any personal liability for obligations entered into on behalf of the
Fund.
13.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
13.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
13.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
13.5. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby.
13.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
13.7. The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations at law or in equity, which the parties hereto are entitled to under
state and federal laws.
13.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Adviser may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company under common
control with the Adviser, if such assignee is duly licensed and registered to
perform the obligations of the Adviser under this Agreement.
13.9 The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP"), if
any), as soon as practical and in any event within 90
days after the end of each fiscal year;
(b) the Company's June 30th quarterly statements (statutory)
(and GAAP, if any), as soon as practical and in any
event within 45 days after the end of each semi-annual
period:
(c) any financial statement, proxy statement, notice or
report of the Company sent
22
<PAGE> 23
to stockholders and/or policyholders, as soon as
practical after the delivery thereof to stockholders;
(d) any registration statement (without exhibits) and
financial reports of the Company filed with the SEC or
any state insurance regulator, as soon as practical
after the filing thereof; and
(e) any other public report submitted to the Company by
independent accountants in connection with any annual,
interim or special audit made by them of the books of
the Company, as soon as practical after the receipt
thereof.
23
<PAGE> 24
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and on its behalf by its duly authorized
representative hereto as of the date specified above.
AMERICAN GENERAL LIFE INSURANCE COMPANY on behalf of itself and
each of its Accounts named in Schedule B hereto, as amended from
time to time.
By: /s/
-------------------------------
Name: Rodney O. Martin, Jr.
Title: President and Chief Executive Officer
AMERICAN GENERAL SECURITIES INCORPORATED
By: /s/
-------------------------------
Name: F. Paul Kovach, Jr.
Title: President
HOTCHKIS AND WILEY VARIABLE TRUST
By: /s/
-------------------------------
Name: Nancy D. Celick
Title: President
HOTCHKIS AND WILEY
By: /s/
-------------------------------
Name: Nancy D. Celick
Title: CFO
24
<PAGE> 25
SCHEDULE A
PORTFOLIOS OF HOTCHKIS AND WILEY VARIABLE TRUST
AVAILABLE FOR PURCHASE BY
AMERICAN GENERAL LIFE INSURANCE COMPANY
UNDER THIS AGREEMENT
Equity Income VIP Portfolio
Low Duration VIP Portfolio
25
<PAGE> 26
SCHEDULE B
SEPARATE ACCOUNTS AND CONTRACTS
<TABLE>
<S> <C>
NAME OF SEPARATE ACCOUNT AND FORM NUMBERS AND NAMES OF CONTRACT FUNDED BY
DATE ESTABLISHED BY BOARD OF DIRECTORS SEPARATE ACCOUNT
American General Life Insurance Company Form No:
Separate Account D 97505
Established: November 19, 1973
Name of Contract:
Flexible Payment Variable and Fixed
Individual Deferred Annuity
</TABLE>
26
<PAGE> 27
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
1. The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of
voting instructions from owners of the Contracts and to facilitate the
establishment of tabulation procedures. At this time the Fund will
inform the Company of the Record, Mailing and Meeting dates. This will
be done verbally approximately two months before meeting.
2. Promptly after the Record Date, the Company will perform a "tape run",
or other activity, which will generate the names, addresses and number
of units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in this Step #2. The Company will use its best efforts to call
in the number of Customers to the Fund , as soon as possible, but no
later than two weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of a proxy
statement or other voting instructions and solicitation material. The
Fund will provide at least one copy of the last Annual Report to the
Company pursuant to the terms of Section 3.3 of the Agreement to which
this Schedule relates.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card")
is provided to the Company by the Fund. The Company, at its expense,
shall produce and personalize the Voting Instruction Cards. The Fund or
its affiliate must approve the Card before it is printed. Allow
approximately 2-4 business days for printing information on the Cards.
Information commonly found on the Cards includes:
a. name (legal name as found on account registration)
b. address
c. fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification of
votes (already on Cards as printed by the Fund).
27
<PAGE> 28
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
5. During this time, the Fund will develop, produce and pay for the Notice
of Proxy and the Proxy Statement (one document). Printed and folded
notices and statements will be sent to Company for insertion into
envelopes (envelopes and return envelopes are provided and paid for by
the Company). Contents of envelope sent to Customers by the Company will
include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly
as possible and that their vote is important. One copy will be
supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by the Fund.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness
and completeness. Copy of this approval sent to the Fund.
7. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but not
including,) the meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes
place in another department or another vendor depending on process used.
An often used procedure is to sort Cards on arrival by proposal into
vote categories of all yes, no, or mixed replies, and to begin data
entry.
Note: Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal procedure
and has not been required by the Fund in the past.
9. Signatures on Card checked against legal name on account registration
which was printed on the Card.
Note: For example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card
and is the signature needed on the Card.
10. If Cards are mutilated, or for any reason are illegible or are not
signed properly, they are sent back to Customer with an explanatory
letter and a new Card and return envelope. The
28
<PAGE> 29
mutilated or illegible Card is disregarded and considered to be not
received for purposes of vote tabulation. Any Cards that have been
"kicked out" (e.g. mutilated, illegible) of the procedure are "hand
verified," i.e., examined as to why they did not complete the system.
Any questions on those Cards are usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted
to shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of shares.) The Fund must
review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to the Fund
on the morning of the meeting not later than 10:00 a.m. Eastern time.
The Fund may request an earlier deadline if reasonable and if required
to calculate the vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
15. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will
be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
29
<PAGE> 1
EXHIBIT (h)(6)
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made as of June 5, 1998, between HOTCHKIS AND WILEY
VARIABLE TRUST, a Massachusetts business trust (the "Fund"), ML LIFE INSURANCE
COMPANY OF NEW YORK, a life insurance company organized under the laws of New
York (the "Company"), on its own behalf and on behalf of each segregated asset
account of the Company set forth on Schedule A as attached hereto, as such
schedule may be amended from time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Fund has an effective registration statement with the
Securities and Exchange Commission ("SEC") to register itself as an open-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and to register the offer and sale of its shares under
the Securities Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the Fund desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Fund (the "Participating Insurance
Companies"); and
WHEREAS, Merrill Lynch Funds Distributors, Inc. (the "Underwriter") is
registered as a broker-dealer with the SEC under the Securities Exchange Act of
1934, as amended (the "1934 Act"), is a member in good standing of The National
Association of Securities Dealers, Inc. (the "NASD") and acts as principal
underwriter of the shares of the Fund; and
WHEREAS, the capital stock of the Fund is divided into several series
of shares, each series representing an interest in a particular managed
portfolio of securities and other assets; and
WHEREAS, the several series of shares of the Fund offered by the Fund
to the Company and the Accounts are set forth on Schedule B attached hereto
(each, a "Portfolio," and, collectively, the "Portfolios"); and
WHEREAS, the Fund has received an order from the SEC granting
Participating Insurance Companies and their separate accounts exemptions from
the provisions of sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and
Rules 6e-2(b) (15) and 6e-3(T) (b) (15) thereunder, to the extent necessary to
permit shares of the Fund to be sold to and held by variable annuity and
variable life insurance separate accounts of both affiliated and unaffiliated
life insurance companies and certain qualified pension and retirement plans (the
"Shared Fund Exemptive Order"); and
WHEREAS, Merrill Lynch Asset Management, L.P. ("MLAM") is duly
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended, and any applicable
-1-
<PAGE> 2
state securities laws and, through its Hotchkis and Wiley division, acts as the
Fund's investment adviser; and
WHEREAS, the Company has registered or will register under the 1933 Act
certain variable life insurance policies and/or variable annuity contracts
funded or to be funded through one or more of the Accounts (the "Contracts");
and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios (the "Shares") on behalf of the Accounts to fund the Contracts, and
the Fund intends to sell such Shares to the relevant Accounts at such Shares'
net asset value.
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE 1
SALE OF THE FUND SHARES
1.1 Subject to Section 1.3 of this Agreement, the Fund shall cause the
Underwriter to make Shares of the Portfolios available to the Accounts at such
Shares' most recent net asset value provided to the Company prior to receipt of
such purchase order by the Fund (or the Underwriter as its agent), in accordance
with the operational procedures mutually agreed to by the Underwriter and the
Company from time to time and the provisions of the then-current prospectus of
the Fund. Shares of a particular Portfolio of the Fund shall be ordered in such
quantities and at such times as determined by the Company to be necessary to
meet the requirements of the Contracts. The Board of Trustees of the Fund (the
"Board") may refuse to sell Shares of any Portfolio to any person (including the
Company and the Accounts), or suspend or terminate the offering of Shares of any
Portfolio if such action is required by law or by regulatory authorities having
jurisdiction or is, in the sole discretion of the Board acting in good faith and
in light of their fiduciary duties under federal and any applicable state laws,
necessary in the best interests of the shareholders of such Portfolio.
1.2 Subject to Section 1.3 of this Agreement, the Fund will redeem any
full or fractional Shares of any Portfolio when requested by the Company on
behalf of an Account at such Shares' most recent net asset value provided to the
Company prior to receipt by the Fund (or the Underwriter as its agent) of the
request for redemption, as established in accordance with the operational
procedures mutually agreed to by the Underwriter and the Company from time to
time and the provisions of the then current-prospectus of the Fund. The Fund
shall make payment for such Shares in the manner established from time to time
by the Fund, but in no event shall payment be delayed for a greater period than
is permitted by the 1940 Act (including any Rule or order of the SEC
thereunder).
-2-
<PAGE> 3
1.3 The Fund shall accept purchase and redemption orders resulting from
investment in and payments under the Contracts on each Business Day, provided
that such orders are received prior to 9:00 a.m. Eastern Time on such Business
Day and reflect instructions received by the Company from Contract holders in
good order prior to the time the net asset value of each Portfolio is priced in
accordance with its prospectus (such Portfolio's "valuation time") on the prior
Business Day. Any purchase or redemption order for Shares of any Portfolio
received, on any Business Day, after such Portfolio's valuation time on such
Business Day shall be deemed received prior to 9:00 a.m. on the next succeeding
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates the net asset
value of its Portfolios pursuant to the rules of the SEC. Purchase and
redemption orders shall be provided by the Company to the Underwriter as agent
for the Fund in such written or electronic form (including facsimile) as may be
mutually acceptable to the Company and the Underwriter. The Underwriter may
reject purchase and redemption orders that are not in proper form. In the event
that the Company and the Underwriter agree to use a form of written or
electronic communication which is not capable of recording the time, date and
recipient of any communication and confirming good transmission, the Company
agrees that it shall be responsible (i) for confirming with the Underwriter that
any communication sent by the Company was in fact received by the Underwriter in
proper form, and (ii) for the effect of any delay in the Underwriter's receipt
of such communication in proper form. The Fund and its agents shall be entitled
to rely, and shall be fully protected from all liability in acting, upon the
instructions of the persons named in the list of authorized individuals attached
hereto as Schedule C, or any subsequent list of authorized individuals provided
to the Fund or its agents by the Company in such form, without being required to
determine the authenticity of the authorization or the authority of the persons
named therein.
1.4 Purchase orders that are transmitted to the Fund in accordance with
Section 1.3 of this Agreement shall be paid for no later than 2:00 p.m. Eastern
Time on the same Business Day that the Fund receives notice of the order.
Payments shall be made in federal funds transmitted by wire. In the event that
the Company shall fail to pay in a timely manner for any purchase order validly
received by the Underwriter on behalf of the Fund pursuant to Section 1.3 of
this Agreement (whether or not such failure is the fault of the Company), the
Company shall hold the Fund harmless from any losses reasonably sustained by the
Fund as the result of acting in reliance on such purchase order.
1.5 Issuance and transfer of the Fund's Shares will be by book entry
only. Share certificates will not be issued to the Company or to any Account.
Shares ordered from the Fund will be recorded in the appropriate title for each
Account .
1.6 The Fund shall furnish prompt notice to the Company of any income,
dividends or capital gain distribution payable on Shares of any Portfolio. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's Shares in additional Shares of
that Portfolio. The Fund shall notify the Company of the number of Shares so
issued as payment of such dividends and distributions.
-3-
<PAGE> 4
1.7 The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after such net asset value per share is calculated and shall use its
best efforts to make such net asset value per share available by 6:30 p.m.,
Eastern Time.
1.8 The Company agrees that it will not take any action to operate any
Account as a management investment company under the 1940 Act without the Fund's
and the Underwriter's prior written consent.
1.9 The Fund agrees that its Shares will be sold only to Participating
Insurance Companies and their separate accounts. No Shares of any Portfolio will
be sold directly to the general public. The Company agrees that Fund Shares will
be used only for the purposes of funding the Contracts and Accounts listed in
Schedule A, as such schedule may be amended from time to time.
1.10 The Fund agrees that all Participating Insurance Companies shall
have the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding to those contained in Section 2.10 and
Article 4 of this Agreement.
ARTICLE 2
OBLIGATIONS OF THE PARTIES
2.1 The Fund shall prepare and be responsible for filing with the SEC
and any state securities regulators requiring such filing, all shareholder
reports, notices, proxy materials (or similar materials such as voting
instruction solicitation materials), prospectuses and statements of additional
information of the Fund. The Fund shall bear the costs of registration and
qualification of its Shares, preparation and filing of the documents listed in
this Section 2.1 and all taxes to which an issuer is subject on the issuance and
transfer of its Shares.
2.2 At least annually, the Fund or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing only the Portfolios) for the Shares as the Company may reasonably
request for distribution to existing Contract owners whose Contracts are funded
by such Shares. The Fund or its designee shall provide the Company, at the
Company's expense, with as many copies of the current prospectus for the Shares
as the Company may reasonably request for distribution to prospective purchasers
of Contracts. If requested by the Company in lieu thereof, the Fund or its
designee shall provide such documentation (including a "camera ready" copy of
the new prospectus as set in type or, at the request of the Company, a diskette
in the form sent to the financial printer) and other assistance as is reasonably
necessary in order for the parties hereto once each year (or more frequently if
the prospectus for the Shares is supplemented or amended) to have the prospectus
for the Contracts and the prospectus for the Shares printed together in one
document. The expenses of such printing shall be borne by the Company. In the
event that the Company requests that the Fund or its designee provide the Fund's
prospectus in a "camera ready" or diskette format, the Fund shall be responsible
solely for providing the prospectus in the format in which it is accustomed to
formatting prospectuses and shall bear the expense of providing the
-4-
<PAGE> 5
prospectus in such format (e.g., typesetting expenses), and the Company shall
bear the expense of adjusting or changing the format to conform with any of its
prospectuses.
2.3 The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from the Fund or its
designee. The Fund or its designee, at its expense, shall print and provide such
statement of additional information to the Company (or a master of such
statement suitable for duplication by the Company) for distribution to any owner
of a Contract funded by the Shares. The Fund or its designee, at the Company's
expense, shall print and provide such statement to the Company (or a master of
such statement suitable for duplication by the Company) for distribution to a
prospective purchaser who requests such statement.
2.4 The Fund or its designee shall provide the Company free of charge
copies, if and to the extent applicable to the Shares, of the Fund's proxy
materials, reports to Shareholders and other communications to Shareholders in
such quantity as the Company shall reasonably require for distribution to
Contract owners.
2.5 The Company shall furnish, or cause to be furnished, to the Fund or
its designee, a copy of each prospectus for the Contracts or statement of
additional information for the Contracts in which the Fund or its investment
adviser is named prior to the filing of such document with the SEC. The Company
shall furnish, or shall cause to be furnished, to the Fund or its designee, each
piece of sales literature or other promotional material in which the Fund or its
investment adviser is named, at least five Business Days prior to its use. No
such prospectus, statement of additional information or material shall be used
if the Fund or its designee reasonably objects to such use within five Business
Days after receipt of such material.
2.6 At the request of the Fund or its designee, the Company shall
furnish, or shall cause to be furnished, to the Fund or its designee copies of
the following reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under generally
accepted accounting principles ("GAAP"), if any);
(b) the Company's quarterly statements (statutory) (and GAAP,
if any);
(c) any financial statement, proxy statement, notice or report
of the Company relating to the Portfolio(s) sent to shareholders and/or
policyholders;
(d) any registration statement (without exhibits) and
financial reports of the Company relating to the Portfolio(s) filed
with the SEC or any state insurance regulator; and
(e) any other public report submitted to the Company by
independent accountants in connection with any annual, interim or
special audit made by them of the books of the Company relating to the
Portfolio(s).
-5-
<PAGE> 6
2.7 The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund or
its investment adviser in connection with the sale of the Contracts other than
information or representations contained in and accurately derived from the
registration statement or prospectus for the Fund Shares (as such registration
statement and prospectus may be amended or supplemented from time to time),
reports of the Fund, Fund-sponsored proxy statements, or in sales literature or
other promotional material approved by the Fund or its designee, except with the
written permission of the Fund or its designee.
2.8 The Fund shall not give any information or make any representations
or statements on behalf of the Company or concerning the Company, the Accounts
or the Contracts other than information or representations contained in and
accurately derived from the registration statement or prospectus for the
Contracts (as such registration statement and prospectus may by amended or
supplemented from time to time), or in materials approved by the Company for
distribution including sales literature or other promotional materials, except
with the written permission of the Company.
2.9 The Company shall amend the registration statement of the Contracts
under the 1933 Act and registration statement for each Account under the 1940
Act from time to time as required in order to effect the continuous offering of
the Contracts or as may otherwise be required by applicable law. The Company
shall register and qualify the Contracts for sale to the extent required by
applicable securities laws and insurance laws of the various states.
2.10 The Company shall be responsible for assuring that any prospectus
offering a Contract that is a life insurance contract where it is reasonably
probable that such Contract would be a "modified endowment contract," as that
term is defined in Section 7702A of the Internal Revenue Code of 1986, as
amended (the "Code"), will identify such Contract as a modified endowment
contract (or policy).
2.11 Solely with respect to Contracts and Accounts that are subject to
the 1940 Act, so long as, and to the extent that, the SEC interprets the 1940
Act to require pass-through voting privileges for variable policyowners: (a) the
Company will provide pass-through voting privileges to owners of Contracts - or
policies whose cash values are invested, through the Accounts, in Shares of the
Fund; (b) the Fund shall require all Participating Insurance Companies to
calculate voting privileges in the same manner and the Company shall be
responsible for assuring that the Accounts calculate voting privileges in the
manner established by the Fund; (c) with respect to each Account, the Company
will vote Shares of the Fund held by the Account and for which no timely voting
instructions from Contract or policyowners are received, as well as Shares held
by the Account that are owned by the Company for its general account, in the
same proportion as the Company votes Shares held by the Account for which timely
voting instructions are received from Contract - or policyowners; and (d) the
Company and its agents will in no way recommend or oppose or interfere with the
solicitation of proxies for Fund Shares held by Contract owners without the
prior written consent of the Fund, which consent may be withheld in the Fund's
sole discretion.
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<PAGE> 7
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of New York
and has established each Account as a segregated asset account under such law on
the date set forth in Schedule A.
3.2 The Company represents and warrants that it has registered or,
prior to any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act to serve
as a segregated investment account for the Contracts.
3.3 The Company represents and warrants that the issuance of the
Contracts will be registered under the 1933 Act prior to any issuance or sale of
the Contracts; the Contracts will be issued and sold in compliance in all
material respects will all applicable federal and state laws; and the sale of
the Contracts shall comply in all material respects with state insurance
suitability requirements.
3.4 The Company represents and warrants that, provided the Fund's
representations and warranties made pursuant to Section 3.7 of this Agreement
are true, the Contracts are currently and at the time of issuance will be
treated as annuity contracts or life insurance policies, whichever is
appropriate, under applicable provisions of the Code. The Company shall make
every effort to maintain such treatment and shall notify the Fund and the
Underwriter immediately upon having a reasonable basis for believing that the
Contracts have ceased to be so treated or that they might not be so treated in
the future.
3.5 The Fund represents and warrants that it is duly organized and
validly existing under the laws of the Commonwealth of Massachusetts.
3.6 The Fund represents and warrants that the sale of the Fund Shares
offered and sold pursuant to this Agreement will be registered under the 1933
Act and that the Fund is registered under the 1940 Act. The Fund shall use its
best efforts to amend its registration statement under the 1933 Act and the 1940
Act from time to time as required in order to affect the continuous offering of
its shares. The Company shall advise the Fund of any state requirements to
register Shares for sale in such states. If the Fund determines that notice
filings are appropriate, the Fund shall use its best efforts to make such notice
filings in accordance with the laws of all fifty states, the District of
Columbia, Virgin Islands and Puerto Rico and such other jurisdictions reasonably
requested by the Company.
3.7 The Fund represents and warrants that the investments of each
Portfolio will comply with Subchapter M of the Code and the diversification
requirements set forth in section 817(h) of the Code and the rules and
regulations thereunder.
-7-
<PAGE> 8
ARTICLE 4
POTENTIAL CONFLICTS
4.1 The parties acknowledge that the Fund's Shares may be made
available for investment to other Participating Insurance Companies. In such
event, the Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
Participating Insurance Companies. An irreconcilable material conflict may arise
for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or (f)
a decision by an insurer to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if they determine that an
irreconcilable material conflict exists and the implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Board. The Company will assist the Board
in carrying out their responsibilities under the Shared Fund Exemptive Order by
providing the Board with all information reasonably necessary for the Board to
consider any issues raised including, but not limited to, information as to a
decision by the Company to disregard Contract owner voting instructions.
4.3 If it is determined by a majority of the Board, or a majority of
the Fund's Trustees who are not affiliated with MLAM or the Underwriter (the
"Disinterested Trustees"), that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its expense and to the extent reasonably practicable (as determined by the
Board), take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Fund or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Fund, or submitting the question of whether
or not such segregation should be implemented to a vote of all affected
Contracts owners and, as appropriate, segregating the assets of any appropriate
group (i.e., annuity contract owners, life insurance contract owners, or
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Contract owners
the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision
by the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's or
Accounts' investment in the Fund and terminate this Agreement with respect to
such Account(s); provided, however, that such withdrawal and
-8-
<PAGE> 9
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the Disinterested Board.
Any such withdrawal and termination must take place within 30 days after the
Fund gives written notice that this provision is being implemented, subject to
applicable law but in any event consistent with the terms of the Shared Fund
Exemptive Order. Until the end of such 30 day- period, the Fund shall continue
to accept and implement orders by the Company for the purchase and redemption of
Shares of the Fund.
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's (or Accounts') investment in the Fund and terminate this
Agreement with respect to such Account(s) within 30 days after the Fund informs
the Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the Disinterested Board.
Until the end of such 30- day period, the Fund shall continue to accept and
implement orders by the Company for the purchase and redemption of Shares of the
Fund.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a
majority of the Disinterested Board shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Company be required to establish a new funding medium for the Contracts if
an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Board determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
affected Account's (or Accounts') investment in the Fund and terminate this
Agreement with respect to such Account(s) within 30 days after the Board inform
the Company in writing of the foregoing determination; provided, however, that
such withdrawal and termination shall, subject to applicable law but in any
event consistent with the terms of the Shared Fund Exemptive Order, be limited
to the extent required by any such material irreconcilable conflict as
determined by a majority of the Disinterested Board.
4.7 The Company shall at least annually submit to the Board such
reports, materials or data as the Board may reasonably request so that the Board
may fully carry out the duties imposed upon them by the Shared Fund Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Board.
4.8 If and to the extent that (a) Rule 6e-2 and Rule 6e-3 (T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the 1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding (as defined in the application for the Shared Fund Exemptive
Order) on terms and conditions materially different from those contained in the
application for the Shared Fund Exemptive Order, or (b) the Shared Fund
Exemptive Order is granted on terms and conditions that differ from those set
forth in this Article 4, then the Fund and/or the Participating Insurance
Companies, as appropriate, shall take such
-9-
<PAGE> 10
steps as may be necessary (a) to comply with Rules 6e-2 and 6e-3(T), as amended,
and Rule 6e-3, as adopted, to the extent such rules are applicable, or (b) to
conform this Article 4 to the terms and conditions contained in the Shared Fund
Exemptive Order, as the case may be.
ARTICLE 5
INDEMNIFICATION
5.1 Indemnification by the Company. The Company agrees to indemnify and
hold harmless the Fund and each of its Trustees, officers, employees and agents
and each person, if any, who controls the Fund within the meaning of Section 15
of the 1933 Act (collectively the "Indemnified Parties" for purposes of this
Article 5) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which such Indemnified
Parties may become subject under any statute or regulation, or common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in a
registration statement or prospectus for the Contracts or in sales
literature generated or approved by the Company on behalf of the
Contracts or Accounts (or any amendment or supplement to any of the
foregoing) (collectively, "Company Documents" for the purposes of this
Article 5), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
provided that this indemnity shall not apply as to any Indemnified
Party if such statement or omission or such alleged statement or
omission was made in reliance upon and was accurately derived from
written information furnished to the Company by or on behalf of the
Fund for use in Company Documents or otherwise for use in connection
with the sale of the Contracts or Shares; or
(b) arise out of or result from statements or representations
(other than statements or representations contained in and accurately
derived from Fund Documents (as defined in Section 5.2(a) below) or
wrongful conduct of the Company or persons under its control, with
respect to the sale or acquisition of the Contracts or Shares; or
(c) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Fund Documents
or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information furnished
to the Fund by or on behalf of the Company; or
-10-
<PAGE> 11
(d) arise out of or result from any failure by the Company to
provide the services or furnish the materials required under the terms
of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Company.
5.2 Indemnification by the Fund. The Fund agrees to indemnify and hold
harmless the Company and each of its directors, officers, employees and agents
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article 5) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Fund) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage liability or expense and reasonable legal counsel fees incurred in
connection therewith) (collectively, "Losses"), to which such Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or
alleged untrue statement of any material fact contained in the
registration statement or prospectus for the Fund (or any amendment or
supplement thereto) or in sales literature approved by the Fund (but
solely with respect to statements regarding the Fund), (collectively,
"Fund Documents" for the purposes of this Article 5), or arise out of
or are based upon the omission or the alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this indemnity shall
not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Fund by or
on behalf of the Company for use in Fund Documents or otherwise for use
in connection with the sale of the Contracts or Shares; or
(b) arise out of or result from statement or representations
(other than statements or representations contained in and accurately
derived from Company Documents) or wrongful conduct of the Fund or
persons under its control, with respect to the sale or acquisition of
the Contracts or Shares; or
(c) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Company
Documents or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was
made in reliance upon and accurately derived from written information
furnished to the Company by or on behalf of the Fund; or
-11-
<PAGE> 12
(d) arise out of or result from any failure by the Fund to
provide the services or furnish the materials required under the terms
of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Fund.
5.3 Neither the Company nor the Fund shall be liable under the
indemnification provisions of Section 5.1 or 5.2, as applicable, with respect to
any Losses incurred or assessed against any Indemnified Party to the extent such
Losses arise out of or result from such Indemnified Party's willful misfeasance,
bad faith or negligence in the performance of such Indemnified Party's duties or
by reason of such Indemnified Party's reckless disregard of obligations or
duties under this Agreement.
5.4 Neither the Company nor the Fund shall be liable under the
indemnification provisions of Section 5.1 or 5.2, as applicable, with respect to
any claim made against an Indemnified Party unless such Indemnified Party shall
have notified the party against whom indemnification is sought in writing within
a reasonable time after the summons, or other first written notification, giving
information of the nature of the claim shall have been served upon or otherwise
received by such Indemnified Party (or after such Indemnified Party shall have
received notice of service upon or other notification to any designated agent),
but failure to notify the party against whom indemnification is sought of any
such claim shall not relieve that party from any liability that it may have to
the Indemnified Party in the absence of Sections 5.1 and 5.2.
5.5 In case any such action is brought against the Indemnified Parties,
the indemnifying party shall be entitled to participate, at its own expense, in
the defense of such action. The indemnifying party also shall be entitled to
assume the defense thereof, with counsel reasonably satisfactory to the party
named in the action. After notice from the indemnifying party to the Indemnified
Party of an election to assume such defense, the Indemnified Party shall bear
the fees and expenses of any additional counsel retained by it, and the
indemnifying party will not be liable to the Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such
Indemnified Party independently in connection with the defense thereof other
than reasonable costs of investigation.
ARTICLE 6
TERMINATION
6.1 This Agreement may be terminated by either party for any reason by
six (6) months' advance written notice to the other party, and may be terminated
by either party pursuant to Sections 6.2 through 6.7 below upon written notice
to the other party.
6.2 This Agreement may be terminated at the option of the Fund upon
institution of formal proceedings against the Company by the NASD, the SEC, the
insurance department of any state, or any other regulatory body regarding the
Company's duties under this Agreement or
-12-
<PAGE> 13
related to the sale of the Contracts, the operation of the Account, the
administration of the Contracts or the purchase of the Shares, or an expected or
anticipated ruling, judgment or outcome that would, in the Fund's reasonable
judgment, materially impair the Company's ability to meet and perform the
Company's obligations and duties hereunder.
6.3 This Agreement may be terminated at the option of the Fund if the
Contracts cease to qualify as annuity contracts or life insurance policies, as
applicable, under the Code, or if the Fund reasonably believes that the
Contracts may fail to so qualify.
6.4 This Agreement may be terminated by the Fund, at its option, if the
Fund shall determine, in its sole judgment exercised in good faith, that either
(1) the Company shall have suffered a material adverse change in its business or
financial condition or (2) the Company shall have been the subject of material
adverse publicity that is likely to have a material adverse impact upon the
business and operations of either the Fund or the Underwriter.
6.5 This Agreement may be terminated at the option of the Company upon
institution of formal proceedings against the Fund by the NASD, the SEC, the
insurance department of any state, or any other regulatory body regarding the
Fund's duties under this Agreement or related to the sale of Fund shares or the
operation of the Fund, or an expected or anticipated ruling, judgment or outcome
that would, in the Company's reasonable judgment, materially impair the Fund's
ability to meet and perform the Fund's obligations hereunder.
6.6 This Agreement may be terminated at the option of the Company if
the Fund ceases to comply with Subchapter M of the Code, or Section 817(h) of
the Code and the rules and regulations thereunder, or if the Company reasonably
believes that the Fund may fail to so comply.
6.7 This Agreement may be terminated by the Company, at its option, if
the Company shall determine, in its sole judgment exercised in good faith, that
either (1) the Fund shall have suffered a material adverse change in its
business or financial condition or (2) the Fund shall have been the subject of
material adverse publicity that is likely to have a material adverse impact upon
the business and operations of the Company.
6.8 Notwithstanding any termination of this Agreement pursuant to this
Article 6, the Fund and the Underwriter may, at the option of the Fund, continue
to make available additional Fund Shares for so long after the termination of
this Agreement as the Fund desires pursuant to the terms and conditions of this
Agreement as provided in Section 6.9 below, for all Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, without limitation, if the Fund or
Underwriter so elects to make additional Shares available, the owners of the
Existing Contracts or the Company, whichever shall have legal authority to do
so, shall be permitted to reallocate investments in the Fund, redeem investments
in the Fund and/or invest in the Fund upon the making of additional purchase
payments under the Existing Contracts.
-13-
<PAGE> 14
6.9 In the event of a termination of this Agreement pursuant to this
Article 6, the Fund and the Underwriter shall promptly notify the Company
whether the Underwriter and the Fund will continue to make Shares available
after such termination; if the Underwriter and the Fund will continue to make
Shares so available, the provisions of this Agreement shall remain in effect
except for Section 6.1 hereof and thereafter either the Fund or the Company may
terminate the Agreement, as so continued pursuant to this Section 6.9, upon
prior written notice to the other party, such notice to be for a period that is
reasonable under the circumstances but, if given by the Fund, need not be
greater than six months.
6.10 The provisions of Article 5 shall survive the termination of this
Agreement, and the provisions of Article 4 and Sections 2.4 and 2.10 shall
survive the termination of this Agreement so long as Shares of the Fund are held
on behalf of Contract owners in accordance with Section 6.8.
ARTICLE 7
NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Hotchkis and Wiley Variable Trust
800 West Sixth Street, Fifth Floor
Los Angeles, CA 90017
Attention: Gracie Fermelia
If to the Company:
Merrill Lynch Insurance Group, Inc.
Administrative Offices
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Attention: Barry Skolnick, Esq.
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<PAGE> 15
ARTICLE 8
MISCELLANEOUS
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York,
shall be subject to the provisions of the 1933, 1934, and 1940 Acts, and the
rules, regulations and rulings thereunder, including such exemptions from those
statutes, rules and regulations as the SEC may grant and the terms hereof shall
be interpreted and construed in accordance therewith.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Fund arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the relevant Portfolio(s) of the Fund and that no Director, officer, agent,
or holder of shares of beneficial interest of the Fund shall be personally
liable for any such liabilities.
8.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
8.8 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder may
be assigned by either party without the prior written approval of the other
party.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
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<PAGE> 16
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Fund Participation Agreement as of the date and year
first above written.
ML LIFE INSURANCE COMPANY OF NEW YORK
By: /s/ Barry G. Skolnick
Name: Barry G. Skolnick
Title: Senior Vice President
General Counsel and Secretary
HOTCHKIS AND WILEY VARIABLE TRUST
By: /s/ Nancy D. Celick
Name: Nancy D. Celick
Title: President
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<PAGE> 17
SCHEDULE A
Segregated Accounts of ML Life Insurance Company of New York
Participating in Portfolios of Hotchkis and Wiley Variable Trust
<TABLE>
<CAPTION>
Name of Separate Account Date Established
- ------------------------ ----------------
<S> <C>
ML of New York Variable Annuity Separate Account A August 6, 1991
</TABLE>
<PAGE> 18
SCHEDULE B
Portfolios of Hotchkis and Wiley Variable Trust
Offered to Segregated Accounts of ML Life Insurance Company of New York
International VIP Portfolio
<PAGE> 19
SCHEDULE C
Persons Authorized to Act on Behalf of ML Life Insurance Company of New York
The Fund, the Underwriter and their respective agents are authorized to
rely on instructions from the following individuals on behalf of ML Life
Insurance Company of New York on its own behalf and on behalf of each Account:
Name Signature
Joseph E. Crowne, Jr. /s/
-------------------------------------
Peter P. Massa /s/
-------------------------------------
Kelley Woods /s/
-------------------------------------
<PAGE> 1
EXHIBIT (h)(7)
PARTICIPATION AGREEMENT
AMONG
THE UNITED STATES LIFE INSURANCE COMPANY
IN THE CITY OF NEW YORK
AMERICAN GENERAL SECURITIES INCORPORATED
HOTCHKIS AND WILEY VARIABLE TRUST
AND
HOTCHKIS AND WILEY
DATED AS OF
DECEMBER 1, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I. Fund Shares 4
ARTICLE II. Representations and Warranties 7
ARTICLE III. Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 8
ARTICLE IV. Sales Material and Information 12
ARTICLE V. [Reserved] 14
ARTICLE VI. Diversification 14
ARTICLE VII. Potential Conflicts 14
ARTICLE VIII. Indemnification 16
ARTICLE IX. Applicable Law 19
ARTICLE X. Termination 19
ARTICLE XI. Notices 22
ARTICLE XII. Foreign Tax Credits 22
ARTICLE XIII. Miscellaneous 23
SCHEDULE A Portfolios of Hotchkis and Wiley Variable Trust 26
Available for Purchase by the United States
Life Insurance Company in the City of New York
SCHEDULE B Separate Accounts and Contracts 27
SCHEDULE C Proxy Voting Procedures 28
</TABLE>
<PAGE> 3
THIS PARTICIPATION AGREEMENT, made and entered into as of the 1st day of
December, 1998 by and among THE UNITED STATES LIFE INSURANCE COMPANY IN THE CITY
OF NEW YORK (hereinafter the "Company"), a New York insurance company, on its
own behalf and on behalf of each separate account of the Company set forth on
Schedule B hereto as may be amended from time to time (each such account
hereinafter referred to as the "Account"); AMERICAN GENERAL SECURITIES
INCORPORATED ("AGSI"), a Texas corporation; HOTCHKIS AND WILEY VARIABLE TRUST
(hereinafter the "Fund"), a Massachusetts business trust; and HOTCHKIS AND WILEY
(the "Adviser"), a division of The Merrill Lynch Capital Management Group of
Merrill Lynch Asset Management, L.P.
WHEREAS, the Fund desires to act as (i) the investment vehicle for separate
accounts established by insurance companies for individual and group life
insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Insurance Products") and (ii) the investment vehicle for certain
qualified pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an investment
vehicle under their Variable Insurance Products are required to enter into a
participation agreement with the Fund and the Adviser (the "Participating
Insurance Companies"); and
WHEREAS, shares of the Fund are divided into several series of shares, each
representing the interest in a particular managed portfolio of securities and
other assets, any one or more of which may be made available for Variable
Insurance Products of Participating Insurance Companies; and
WHEREAS, the Fund intends to offer shares of the series set forth on Schedule A
(each such series hereinafter referred to as a "Portfolio"), as may be amended
from time to time by mutual agreement of the parties hereto, under this
Agreement to the Accounts of the Company; and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission, dated August 13, 1997, (Rel. No. 1C-22786), granting Participating
Insurance Companies and Variable Insurance Product separate accounts exemptions
from the provisions of Sections 9(a), 13(a), 15(a), and 15(b) of the Investment
Company Act of 1940, as amended (hereinafter the "1940 Act"), and Rules
6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit
shares of the Fund to be sold to and held by Variable Insurance Product separate
accounts of both affiliated and unaffiliated life insurance companies and
Qualified Plans (hereinafter the "Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment company
under the 1940 Act and its shares are registered under the Securities Act of
1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under the
Investment Advisers
3
<PAGE> 4
Act of 1940, as amended, and any applicable state securities laws; and
WHEREAS, the Adviser acts as investment adviser to the Portfolios of the Fund;
and
WHEREAS, Princeton Funds Distributor, Inc. (formerly Merrill Lynch Funds
Distributor, Inc.), (the "Underwriter") is registered as a broker/dealer under
the Securities Exchange Act of 1934, as amended (hereinafter the "1934 Act"), is
a member in good standing of the National Association of Securities Dealers,
Inc. (hereinafter "NASD") and serves as principal underwriter of the shares of
the Fund; and
WHEREAS, the Company has registered or will register certain Variable Insurance
Products under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated asset
account, established by resolution or under authority of the Board of Directors
of the Company, on the date shown for such Account on Schedule B hereto, to set
aside and invest assets attributable to the aforesaid Variable Insurance
Product; and
WHEREAS, the Company has registered or will register each Account as a unit
investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and regulations,
the Company intends to purchase shares in the Portfolios on behalf of each
Account to fund certain of the aforesaid Variable Insurance Products and the
Fund intends to sell such shares to the relevant Account at net asset value; and
WHEREAS, AGSI serves as both the distributor and the principal underwriter of
the Variable Insurance Products that are set forth on Schedule B;
NOW, THEREFORE, in consideration of their mutual promises, the Company, AGSI,
the Fund and the Adviser agree as follows:
ARTICLE I. FUND SHARES
1.1. The Fund agrees to make available for purchase by the Company
shares of the Portfolios set forth on Schedule A and shall execute orders placed
for each Account on a daily basis at the net asset value next computed after
receipt by the Fund or its designee of such order. For purposes of this Section
1.1, the Company shall be the designee of the Fund for receipt of such orders
from each Account and receipt by such designee by 4:00 p.m. Eastern time on a
Business Day shall constitute receipt by the Fund; provided that the Fund
receives notice of such order as soon as reasonably practical (normally by 10:00
a.m. Eastern time) on the next following Business Day. Notwithstanding the
foregoing, the Company shall use its best efforts to provide the Fund with
notice of such orders by 10:15 a.m. Eastern time on the next following Business
Day. "Business Day" shall mean any day on which the New York Stock Exchange is
open for trading and on which the Fund calculates the
4
<PAGE> 5
net asset value of the Portfolios' shares pursuant to the rules of the
Securities and Exchange Commission ("SEC"), as set forth in the Fund's
Prospectus and Statement of Additional Information. Notwithstanding the
foregoing, the Board of Trustees of the Fund (hereinafter the "Board") may
refuse to permit the Fund to sell shares of any Portfolio, to any person, or
suspend or terminate the offering of shares of any Portfolio, if such action is
required by law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the Board acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, necessary in the
best interests of the shareholders of such Portfolio.
1.2. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their Variable Insurance Products and to
certain Qualified Plans. No shares of any Portfolio will be sold to the general
public.
1.3. The Fund will not make its shares available for purchase by any
insurance company or separate account unless an agreement containing provisions
substantially the same as Sections 2.4, 2.9, 3.4 and Article VII of this
Agreement is in effect to govern such sales.
1.4. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.4, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee by 4:00
p.m. Eastern time on a Business Day shall constitute receipt by the Fund;
provided that the Fund receives notice of such request for redemption on the
next following Business Day in accordance with the timing rules described in
Section 1.1.
1.5. The Company agrees that purchases and redemptions of Portfolio
shares offered by the then current prospectus of the Fund shall be made in
accordance with the provisions of such prospectus. The Accounts of the Company,
under which amounts may be invested in the Fund, are listed on Schedule B
attached hereto and incorporated herein by reference, as such Schedule B may be
amended from time to time by mutual written agreement of all of the parties
hereto. The Company will give the Fund and the Adviser sixty (60) days' written
notice of its intention to make available in the future, as a funding vehicle
under the Variable Insurance Products, any other investment company.
1.6. The Company will place separate orders to purchase or redeem shares
of each Portfolio. Each order shall describe the net amount of shares and dollar
amount of each Portfolio to be purchased or redeemed. In the event of net
purchases, the Company shall pay for Portfolio shares on the next Business Day
after an order to purchase Portfolio shares is made in accordance with the
provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted
by wire. In the event of net redemptions, the Portfolio shall pay the redemption
proceeds in federal funds transmitted by wire on the next Business Day after an
order to redeem a Portfolio's shares is made in accordance with the provision of
Section 1.4 hereof. Notwithstanding the foregoing, if the payment of redemption
proceeds on the next Business Day would require the Portfolio to dispose of
securities or otherwise incur substantial additional costs, and if the Portfolio
has determined to settle redemption transactions for all shareholders on a
delayed basis, proceeds shall be wired to the
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Company within seven (7) days and the Portfolio shall notify in writing the
person designated by the Company as the recipient for such notice of such delay
by 3:00 p.m. Eastern time on the same Business Day that the Company transmits
the redemption order to the Portfolio.
1.7. Issuance and transfer of the Fund's shares will be by book entry
only. Share certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.8. The Fund shall make the dividends or capital gain distributions
payable on the Fund's shares available to the Company as soon as reasonably
practical after the dividends or capital gains are calculated (normally by 6:30
p.m. Eastern time) and shall use its best efforts to furnish same day notice by
7:00 p.m. Eastern time (by wire or telephone, followed by written confirmation)
to the Company of any dividends or capital gain distributions payable on the
Fund's shares. The Company hereby elects to receive all such dividends and
capital gain distributions as are payable on the Portfolio shares in additional
shares of that Portfolio. The Company reserves the right to revoke this election
and to receive all such dividends and capital gain distributions in cash. The
Fund shall notify the Company of the number of shares so issued as payment of
such dividends and distributions.
1.9. The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m. Eastern time) and shall use its best efforts to make such net asset value
per share available by 7:00 p.m. Eastern time. In the event that the Fund is
unable to meet the 7:00 p.m. time stated immediately above, then the Fund shall
provide the Company with additional time to notify the Fund of purchase or
redemption orders pursuant to Sections 1.1 and 1.4, respectively, above. Such
additional time shall be equal to the additional time that the Fund takes to
make the net asset values available to the Company; provided, however, that
notification must be made by 10:15 a.m. Eastern time on the Business Day such
order is to be executed regardless of when the net asset value is made
available.
1.10. If the Fund provides materially incorrect share net asset value
information through no fault of the Company, the Company shall be entitled to an
adjustment with respect to the Fund shares purchased or redeemed to reflect the
correct net asset value per share. The determination of the materiality of any
net asset value pricing error shall be based on the SEC's recommended
guidelines, if any. The correction of any such errors shall be made at the
Company level and shall be made pursuant to the SEC's recommended guidelines.
Any material error in the calculation or reporting of net asset value per share,
dividend or capital gain information shall be reported promptly upon discovery
to the Company.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the interests of the
Accounts (the "Contracts") are or will be registered and will maintain the
registration under the 1933 Act and the regulations thereunder to the extent
required by the 1933 Act; that the Contracts will be issued in
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compliance in all material respects with all applicable federal
and state laws and regulations. The Company further represents and warrants that
it is an insurance company duly organized and in good standing under applicable
law and that it has legally and validly established each Account prior to any
issuance or sale thereof as a segregated asset account under the insurance laws
of the State of New York and the regulations thereunder and has registered or,
prior to any issuance or sale of the Contracts, will register and will maintain
the registration of each Account as a unit investment trust in accordance with
and to the extent required by the provisions of the 1940 Act and the regulations
thereunder to serve as a segregated investment account for the Contracts. The
Company shall amend its registration statement for its Contracts under the 1933
Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act and the regulations
thereunder to the extent required by the 1933 Act, duly authorized for issuance
in accordance with the laws of the Commonwealth of Massachusetts and sold in
compliance with all applicable federal and state securities laws and regulations
and that the Fund is and shall remain registered under the 1940 Act and the
regulations thereunder to the extent required by the 1940 Act. The Fund shall
amend the registration statement for its shares under the 1933 Act and the 1940
Act from time to time as required in order to effect the continuous offering of
its shares. The Fund shall register the shares for sale in accordance with the
laws of the various states only if and to the extent deemed advisable by the
Fund.
2.3. The Fund and the Adviser will make every effort to qualify each
Portfolio as a Regulated Investment Company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and that the Fund and the Adviser
(with respect to those Portfolios for which such Adviser acts as investment
adviser) thereafter will make every effort to maintain such qualification (under
Subchapter M or any successor or similar provision) and the Fund or the Adviser
will notify the Company immediately upon having a reasonable basis for believing
that a Portfolio has ceased to so qualify or that a Portfolio might not so
qualify in the future.
2.4. The Company represents that each Account is and will continue to be
a "segregated account" under applicable provisions of the Code and that each
Contract is and will be treated as a "variable contract" under applicable
provisions of the Code and that it will make every effort to maintain such
treatments and that it will notify the Fund immediately upon having a reasonable
basis for believing that the Account or Contract has ceased to be so treated or
that they might not be so treated in the future.
2.5. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states.
2.6. The Fund and the Adviser represent that the Fund is lawfully
organized and validly existing under the laws of the Commonwealth of
Massachusetts and that the Fund does and will
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<PAGE> 8
comply in all material respects with the applicable provisions of the 1940
Act.
2.7. The Adviser and AGSI each represents and warrants that it is and
shall remain duly registered in all material respects under all applicable
federal and state securities laws and that it will perform its obligations for
the Fund and the Company in compliance in all material respects with the laws
and regulations of its state of domicile and any applicable state and federal
securities laws and regulations.
2.8. The Company represents and warrants that all of its trustees,
officers, employees and other individuals/entities dealing with the money and/or
securities of the Fund are covered by a blanket fidelity bond or similar
coverage, in an amount equal to the greater of $5 million or any amount required
by applicable federal or state law or regulation. The aforesaid includes
coverage for larceny and embezzlement is issued by a reputable bonding company.
The Company agrees to make all reasonable efforts to see that this bond or
another bond containing these provisions is always in effect, and agrees to
notify the Fund and the Adviser in the event that such coverage no longer
applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS, VOTING
3.1(a) The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus, including the profile
prospectus, (the "Fund Prospectus") as the Company may reasonably request for
distribution to Contract owners whose Contracts are funded by Portfolio shares.
If requested by the Company, in lieu of providing printed copies of the Fund
Prospectus, the Fund shall provide camera-ready film or computer diskettes
containing the Fund Prospectus and such other assistance as is reasonably
necessary in order for the Company once each year (or more frequently if the
Fund Prospectus is amended during the year) to have the prospectus for the
Contracts (the "Contract Prospectus") and the Fund Prospectus printed together
in one document or separately. The Company may elect to print the Fund
Prospectus in combination with other fund companies' prospectuses. For purposes
hereof, any combined prospectus including the Fund Prospectus along with the
Contract Prospectus or prospectus of other fund companies shall be referred to
as a "Combined Prospectus." For purposes hereof, the term "Fund Portion of the
Combined Prospectus" shall refer to the percentage of the number of Fund
Prospectus pages in the Combined Prospectus in relation to the total number of
pages of the Combined Prospectus.
3.1(b) The Fund shall provide the Company with as many printed copies of
the Fund's current statement of additional information (the "Fund SAI") as the
Company may reasonably request for distribution to any owner of a Contract
funded by Portfolio shares. If requested by the Company in lieu of providing
printed copies of the Fund SAI, the Fund shall provide camera-ready film or
computer diskettes containing the Fund SAI, and such other assistance as is
reasonably necessary in order for the Company once each year (or more frequently
if the Fund SAI is amended during the year) to have the statement of additional
information for the Contracts (the "Contract SAI") and the
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<PAGE> 9
Fund SAI printed together or separately. The Company may also elect to print the
Fund SAI in combination with other fund companies' statements of additional
information. For purposes hereof, any combined statement of additional
information including the Fund SAI along with the Contract SAI or statement of
additional information of other fund companies shall be referred to as a
"Combined SAI." For purposes hereof, the term "Fund Portion of the Combined SAI"
shall refer to the percentage of the number of Fund SAI pages in the Combined
SAI in relation to the total number of pages of the Combined SAI.
3.1(c) The Fund shall provide the Company with as many printed copies of
the Fund's annual report and semi-annual report (collectively, the "Fund
Reports") as the Company may reasonably request for distribution to Contract
owners whose Contracts are funded by Portfolio shares. If requested by the
Company in lieu of providing printed copies of the Fund Reports, the Fund shall
provide camera-ready film or computer diskettes containing the Fund's Reports,
and such other assistance as is reasonably necessary in order for the Company
once each year to have the annual report and semi-annual report for the
Contracts (collectively, the "Contract Reports") and the Fund Reports printed
together or separately. The Company may also elect to print the Fund Reports in
combination with other fund companies' annual reports and semi-annual reports.
For purposes hereof, any combined annual reports and semi-annual reports
including the Fund Reports along with the Contract Reports or annual reports and
semi-annual reports of other fund companies shall be referred to as "Combined
Reports." For purposes hereof, the term "Fund Portion of the Combined Reports"
shall refer to the percentage of the number of Fund Reports pages in the
Combined Reports in relation to the total number or pages of the Combined
Reports.
3.2. Expenses
3.2(a) Expenses Borne by Company. Except as otherwise provided in this
Section 3.2., all expenses of preparing, setting in type and printing and
distributing (i) Contract Prospectuses, Fund Prospectuses, and Combined
Prospectuses; (ii) Fund SAIs, Contract SAIs, and Combined SAIs; (iii) Fund
Reports, Contract Reports, and Combined Reports, and (iv) Contract proxy
material that the Company may require in sufficient quantity to be sent to
Contract owners, annuitants, or participants under Contracts (collectively, the
"Participants"), shall be the expense of the Company.
3.2(b) Expenses Borne by Fund
Fund Prospectuses
With respect to existing Participants, the Fund shall pay the cost of
setting in type, printing and distributing Fund Prospectuses to be made
available by the Company to such existing Participants in order to update
disclosure as required by the 1933 Act and/or the 1940 Act. With respect to
existing Participants, in the event the Company elects to prepare a Combined
Prospectus, the Fund shall pay the cost of setting in type, printing and
distributing the Fund Portion of the Combined Prospectus to be made available by
the Company to its existing Participants in order to update disclosure as
required by the 1933 Act and/or the 1940 Act. In such event, the Fund shall bear
the cost of typesetting to provide the Fund Prospectus to the Company in the
format in which the Fund is accustomed to formatting prospectuses.
Notwithstanding the foregoing, in no event shall the Fund pay for any such costs
that exceed by more than five (5) percent what the Fund would have paid to print
such documents. The Fund shall not pay any costs of typesetting, printing and
distributing the Fund Prospectus (or Combined Prospectus, if applicable) to
prospective Participants.
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Fund SAIs, Fund Reports and Proxy Material
With respect to existing Participants, the Fund shall pay the cost of
setting in type and printing Fund SAIs, Fund Reports and Fund proxy material to
be made available by the Company to its existing Participants. With respect to
existing Participants, in the event the Company elects to prepare a Combined SAI
or Combined Reports, the Fund shall pay the cost of setting in type and printing
the Fund Portion of the Combined SAI or Combined Reports, respectively, to be
made available by the Company to its existing Participants. In such event, the
Fund shall bear the cost of typesetting to provide the Fund SAI or Fund Reports
to the Company in the format in which the Fund is accustomed to formatting
statements of additional information and annual and semi-annual reports.
Notwithstanding the foregoing, in no event shall the Fund pay for any such costs
that exceed by more than five (5) percent what the Fund would have paid to print
such documents. The Fund shall pay one half the cost of distributing Fund SAIs,
Fund Reports and Fund proxy statements and proxy-related material to such
existing Participants. The Fund shall pay the cost of distributing the Fund
Portion of the Combined SAIs and the Fund Portion of the Combined Reports to
existing Participants. The Fund shall not pay any costs of distributing Fund
SAIs, Combined SAIs, Fund Reports, Combined Reports or proxy statements or
proxy-related material to prospective Participants.
The Company agrees to provide the Fund or its designee with such
information as may be reasonably requested by the Fund to assure that the Fund's
expenses do not include the cost of typesetting, printing or distributing any of
the foregoing documents other than those actually distributed to existing
Participants.
The Fund shall pay no fee or other compensation to the Company under
this Agreement, except that if the Fund or any Portfolio adopts and implements a
plan pursuant to Rule 12b-1 under the 1940 Act to finance distribution expenses,
then the Underwriter may make payments to the Company or to AGSI if and in
amounts agreed to by the Underwriter in writing.
All expenses, including expenses to be borne by the Fund pursuant to
Section 3.2 hereof, incident to performance by the Fund under this Agreement
shall be paid by the Fund. The Fund shall see to it that all its shares are
registered and authorized for issuance in accordance with applicable federal law
and, if and to the extent deemed advisable by the Fund, in accordance with
applicable state laws prior to their sale. The Fund shall bear the expenses for
the cost of registration of the Fund's shares.
3.2(c) Expenses Borne by AGSI.
Fund Prospectuses
With respect to prospective Participants, AGSI shall pay one half of the
cost of setting in type, printing and distributing Fund Prospectuses made
available by the Company as sales literature to such prospective Participants.
With respect to prospective Participants, in the event the Company elects to
prepare a Combined Prospectus, AGSI shall pay one half of the cost of printing
and distributing the Combined Prospectus made available by the Company to its
prospective Participants as sales literature. In such event, AGSI shall bear the
cost of typesetting to provide the Fund
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Prospectus to the Company in the format in which the Fund is accustomed to
formatting prospectuses. Notwithstanding the foregoing, in no event shall AGSI
pay for any such costs that exceed by more than five (5) percent what AGSI would
have paid to print such documents.
Fund SAIs, Fund Reports and Proxy Material.
With respect to prospective Participants, AGSI shall pay one half of the
cost of setting in type and printing Fund SAIs, Fund Reports and Fund proxy
material made available by the Company to its prospective Participants as sales
literature. In the event the Company elects to prepare a Combined SAI or
Combined Reports, AGSI shall pay one half of the cost of printing the Combined
SAI or Combined Reports, respectively, made available by the Company to its
prospective Participants as sales literature. In such event, AGSI shall bear the
cost of typesetting to provide the Fund SAI and Fund Reports to the Company in
the format in which the Fund is accustomed to formatting statements of
additional information and annual and semi-annual reports. Notwithstanding the
foregoing, in no event shall AGSI pay for any such costs that exceed by more
than five (5) percent what AGSI would have paid to print such documents. AGSI
shall pay one half the cost of distributing Fund SAIs, Combined SAIs, Fund
Reports, Combined Reports, and Fund proxy material to such prospective
Participants as sales literature.
3.2(d) If the Company chooses to receive camera-ready film or computer
diskettes in lieu of receiving printed copies of the Fund Prospectus, Fund SAI
or Fund Reports, the Fund or its designee will be responsible for providing the
Fund Prospectus, Fund SAI or Fund Reports in the format in which it is
accustomed to formatting such documents, and, notwithstanding anything in
Sections 3.2(b) or 3.2(c), the Company shall bear the expense of adjusting or
changing the format to conform with any of its prospectuses or reports.
3.3. The Fund SAI shall be obtainable from the Fund, the Company or such
other person as the Fund may designate.
3.4. If and to the extent required by law the Company shall distribute
all proxy material furnished by the Fund to Participants to whom voting
privileges are required to be extended and shall:
(i) solicit voting instructions from Participants;
(ii) vote the Fund shares in accordance with instructions
received from Participants; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
Portfolio for which instructions have been received,
so long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners. The Company
reserves the right to vote Fund shares held in any segregated asset account in
its own right, to the extent permitted by law. The Fund and
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the Company shall follow the procedures, and shall have the corresponding
responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule C attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible for
ensuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule C, which standards will also be provided to the other Participating
Insurance Companies.
3.5. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders. Further, the Fund will act in accordance with the SEC's
interpretation of the requirements of Section 16(a) with respect to periodic
elections of Trustees and with whatever rules the SEC may promulgate with
respect thereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material prepared by the Company, AGSI or any person contracting with the
Company or AGSI in which the Fund or the Adviser is named, at least ten Business
Days prior to its use. No such material shall be used if the Fund, the Adviser,
or their designee reasonably objects to such use within ten Business Days after
receipt of such material.
4.2. Neither the Company, AGSI nor any person contracting with the
Company or AGSI shall give any information or make any representations or
statements on behalf of the Fund or concerning the Fund or the Adviser in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or the Fund Prospectus,
as such registration statement or Fund Prospectus may be amended or supplemented
from time to time, or in reports or proxy statements for the Fund, or in sales
literature or other promotional material approved by the Fund or its designee,
except with the written permission of the Fund.
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4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material prepared by the Fund in which the Company or its
Account(s) are named at least ten Business Days prior to its use. No such
material shall be used if the Company or its designee reasonably objects to such
use within ten Business Days after receipt of such material.
4.4. Neither the Fund nor the Adviser shall give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Contracts, other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports or solicitations for voting instructions for
each Account which are in the public domain or approved by the Company for
distribution to Participants, or in sales literature or other promotional
material approved by the Company or its designee, except with the written
permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, within five (5)
Business Days of the filing of such document with the SEC or other regulatory
authorities.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in an Account or Contract within five (5) Business Days of the filing of such
document with the SEC or other regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following: advertisements (such as material published, or designed for use in, a
newspaper, magazine, or other periodical, radio, television, telephone or tape
recording, videotape display, signs or billboards, motion pictures, or other
public media), sales literature (i.e., any written communication distributed or
made generally available to customers or the public, including brochures,
circulars, research reports, market letters, form letters, seminar texts,
reprints or excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications distributed
or made generally available to some or all agents or employees, and registration
statements, prospectuses, statements of additional information, shareholder
reports, and proxy materials.
ARTICLE V. [RESERVED]
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ARTICLE VI. DIVERSIFICATION
6.1. The Adviser represents, as to the Portfolios, that it will use its
best efforts at all times to comply with Section 817(h) of the Code and Treasury
Regulation 1.817-5, relating to the diversification requirements for variable
annuity, endowment, or life insurance contracts and any amendments or other
modifications to such Section or Regulations. In the event a Portfolio ceases to
so qualify, the Adviser will take all reasonable steps (a) to notify the Company
and (b) to adequately diversify the Portfolio so as to achieve compliance within
the grace period afforded by Regulation 817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract owners and variable life insurance contract owners;
or (f) a decision by a Participating Insurance Company to disregard the voting
instructions of Contract owners. The Board shall promptly inform the Company if
it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing material
irreconcilable conflicts of which it is aware to the Board. The Company will
assist the Board in carrying out its responsibilities under the Shared Funding
Exemptive Order, by providing the Board with all information reasonably
necessary for the Board to consider any issues raised. This includes, but is not
limited to, an obligation by the Company to inform the Board whenever contract
owner voting instructions are disregarded.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested Trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested Trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the Separate Accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance policy
owners, or variable Contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
Contract owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account. No charge
or penalty will be imposed as a result of such
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withdrawal. The Company agrees that it bears the responsibility to take remedial
action in the event of a Board determination of an irreconcilable material
conflict and the cost of such remedial action, and these responsibilities will
be carried out with a view only to the interests of Contract owners.
7.4. If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
Trustees of the Board. No charge or penalty will be imposed as a result of such
withdrawal. The Company agrees that it bears the responsibility to take remedial
action in the event of a Board determination of an irreconcilable material
conflict and the cost of such remedial action, and these responsibilities will
be carried out with a view only to the interests of Contract owners.
7.5. For purposes of Sections 7.3 and 7.4 of this Agreement, a majority
of the disinterested Trustees of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Fund be required to establish a new funding medium for the Contracts.
The Company shall not be required by Section 7.3 or 7.4 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict.
7.6. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then the Fund and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules 6e-2
and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable.
7.7. The Company and the Adviser shall at least annually submit to the
Board of the Fund such reports, materials or data as the Board may reasonably
request so that the Board may fully carry out the obligations imposed upon them
by the provisions hereof, and said reports, materials and data shall be
submitted more frequently if deemed appropriate by the Board. All reports
received by the Board of potential or existing conflicts, and all Board action
with regard to determining the existence of a conflict, notifying Participating
Insurance Companies of a conflict, and determining whether any proposed action
adequately remedies a conflict, shall be properly recorded in the minutes of the
Board or other appropriate records, and such minutes or other records shall be
made available to the SEC upon request.
ARTICLE VIII. INDEMNIFICATION
8.1. Indemnification By Company and AGSI
8.1(a) The Company and AGSI agree to indemnify and hold harmless the
Fund and each member of the Board and officers and agents and the Adviser and
each director and officer of the
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<PAGE> 16
Adviser, and each person, if any, who controls the Fund or the Adviser within
the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of this Section
8.1) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company or AGSI) or expenses
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the registration
statement or prospectus for the Contracts or contained in the Contracts
or sales literature for the Contracts (or any amendment or supplement to
any of the foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply as
to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
information furnished to the Company by or on behalf of the Fund for use
in the registration statement or prospectus for the Contracts or in the
Contracts or sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or Fund
shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration
statement, prospectus or sales literature of the Fund not supplied by
the Company or AGSI, or persons under its control and other than
statements or representations authorized by the Fund or the Adviser) or
unlawful conduct of the Company or AGSI or persons under its control,
with respect to the sale or distribution of the Contracts or Fund
shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration
statement, prospectus, or sales literature of the Fund or any amendment
thereof or supplement thereto or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading if such a statement or
omission was made in reliance upon and in conformity with information
furnished to the Fund by or on behalf of the Company or AGSI;
(iv) arise as a result of any failure by the Company or AGSI to provide
the services and furnish the materials required under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company or AGSI in this
Agreement or arise out of or result from any other material breach of
this Agreement by the Company or AGSI, as limited by and in accordance
with the provisions of Sections 8.1(b) and 8.1(c) hereof.
8.1(b). Neither the Company nor AGSI shall be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation incurred or assessed against an
16
<PAGE> 17
Indemnified Party as such may arise from such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations or duties under this Agreement.
8.1(c). Neither the Company nor AGSI shall be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Company or AGSI in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company or AGSI
of any such claim shall not relieve the Company or AGSI from any liability which
it may have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case any such
action is brought against the Indemnified Parties, the Company or AGSI shall be
entitled to participate, at its own expense, in the defense of such action. The
Company or AGSI also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice from the
Company or AGSI to such Party of the Company's or AGSI's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses under
this Agreement for any legal or other expenses subsequently incurred by such
Party independently in connection with the defense thereof other than reasonable
costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company or AGSI
of the commencement of any litigation or proceedings against them in connection
with the issuance or sale of the Fund shares or the Contracts or the operation
of the Fund.
8.2. Indemnification by the Adviser
8.2(a). The Adviser agrees, with respect to each Portfolio, to indemnify
and hold harmless the Company and each of its directors and officers and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act (collectively, the "Indemnified Parties" and individually, "Indemnified
Party," for purposes of this Section 8.2) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of the Adviser) or expenses (including legal and other expenses) to
which the Indemnified Parties may become subject under any statute, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements, result from the gross
negligence, bad faith, willful misconduct of the Adviser or any director,
officer, employee or agent thereof, are related to the operation of the Adviser
or the Fund and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration
statement or prospectus or sales literature of the Fund (or any
amendment or supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such statement
or omission or such alleged statement or omission was made in reliance
upon and in conformity with information furnished to the Adviser or the
Fund or the Underwriter by or on behalf of
17
<PAGE> 18
the Company for use in the registration statement or prospectus for the
Fund or in sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or
Portfolio shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration
statement, prospectus or sales literature for the Contracts not supplied
by the Adviser or persons under its control and other than statements or
representations authorized by the Company) or unlawful conduct of the
Adviser or persons under its control, with respect to the sale or
distribution of the Contracts or Portfolio shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration
statement, prospectus, or sales literature covering the Contracts, or
any amendment thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statement or statements therein not misleading,
if such statement or omission was made in reliance upon information
furnished to the Company by or on behalf of the Adviser; or
(iv) arise as a result of any failure by the Adviser to provide the
services and furnish the materials required under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Adviser in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Fund or the Adviser; including without limitation any failure by
the Fund or the Adviser to comply with the conditions of Article VI
hereof.
8.2(b). The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.2(c). The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Adviser of any
such claim shall not relieve the Adviser from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Adviser will be entitled to participate, at
its own expense, in the defense thereof. The Adviser also
18
<PAGE> 19
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Adviser to such Party of
the Adviser's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the Adviser will not be liable to such Party under this Agreement for any legal
or other expenses subsequently incurred by such Party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.2(d). The Company and AGSI agree promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers,
trustees or directors in connection with this Agreement, the issuance or sale of
the Contracts with respect to the operation of each Account, or the sale or
acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the SEC may grant
(including, but not limited to, the Shared Funding Exemptive Order) and the
terms hereof shall be interpreted and construed in accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party for any reason upon six-months
advance written notice delivered to the other parties;
or
(b) termination by the Company or AGSI by written notice to
the Fund and the Adviser with respect to any Portfolio
based upon the Company's determination that shares of
such Portfolio are not reasonably available to meet the
requirements of the Contracts. Reasonable advance notice
of election to terminate shall be furnished by the
Company, said termination to be effective ten (10) days
after receipt of notice unless the Fund makes available
a sufficient number of shares to reasonably meet the
requirements of the Account within said ten (10) day
period; or
(c) termination by the Company or AGSI by written notice to
the Fund and the Adviser with respect to any Portfolio
in the event any of the Portfolio's shares are not
registered, issued or sold in accordance with applicable
state and/or federal law or such law precludes the use
of such shares as the underlying investment medium of
the Contracts issued or to be issued by the Company.
19
<PAGE> 20
The terminating party shall give prompt notice to the
other parties of its decision to terminate; or
(d) termination by the Company or AGSI by written notice to
the Fund and the Adviser with respect to any Portfolio
in the event that such Portfolio ceases to qualify as a
Regulated Investment Company under Subchapter M of the
Code or under any successor or similar provision, or if
the Company or AGSI reasonably believes that the Fund
may fail to so qualify; or
(e) termination by the Company or AGSI by written notice to
the Fund and the Adviser with respect to any Portfolio
in the event that such Portfolio fails to meet the
diversification requirements specified in Article VI
hereof; or
(f) termination by either the Fund or the Adviser by written
notice to the Company if the Adviser or the Fund shall
determine, in its sole judgment exercised in good faith,
that the Company, AGSI and/or their affiliated companies
has suffered a material adverse change in its business,
operations, financial condition or prospects since the
date of this Agreement or is the subject of material
adverse publicity, provided that the Fund or the Adviser
will give the Company sixty (60) days' advance written
notice of such determination of its intent to terminate
this Agreement, and provided further that after
consideration of the actions taken by the Company or
AGSI and any other changes in circumstances since the
giving of such notice, the determination of the Fund or
the Adviser shall continue to apply on the 60th day
since giving of such notice, then such 60th day shall be
the effective date of termination; or
(g) termination by the Company or AGSI by written notice to
the Fund and the Adviser, if the Company or AGSI shall
determine, in its sole judgment exercised in good faith,
that either the Fund or the Adviser (with respect to the
appropriate Portfolio) has suffered a material adverse
change in its business, operations, financial condition
or prospects since the date of this Agreement or is the
subject of material adverse publicity; provided that the
Company will give the Fund or the Adviser sixty (60)
days' advance written notice of such determination of
its intent to terminate this Agreement, and provided
further that after consideration of the actions taken by
the Company and any other changes in circumstances since
the giving of such notice, the determination of the
Company or AGSI shall continue to apply on the 60th day
since giving of such notice, then such 60th day shall be
the effective date of termination; or
(h) termination by the Fund or the Adviser by written notice
to the Company, if the Company gives the Fund and the
Adviser the written notice specified in Section 2.4
hereof and at the time such notice was given there was
no notice
20
<PAGE> 21
of termination outstanding under any other provision of
this Agreement; provided, however any termination under
this Section 10.1(h) shall be effective sixty (60) days
after the notice specified in Section 2.4 was given; or
(i) termination by any party upon the other party's breach
of any representation in Section 2 or any material
provision of this Agreement, which breach has not been
cured to the satisfaction of the terminating party
within ten (10) days after written notice of such breach
is delivered to the Fund or the Company, as the case may
be; or
(j) termination by the Fund or the Adviser by written notice
to the Company in the event an Account or Contract is
not registered or sold in accordance with applicable
federal or state law or regulation, or the Company fails
to provide pass-through voting privileges as specified
in Section 3.4.
10.2. EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund shall at the option of the Company, continue to make
available additional shares of the Fund pursuant to the terms and conditions of
this Agreement, for all Contracts in effect on the effective date of termination
of this Agreement (hereinafter referred to as "Existing Contracts") unless such
further sale of Fund shares is proscribed by law, regulation or applicable
regulatory body, or unless the Fund determines that liquidation of the Fund
following termination of this Agreement is in the best interests of the Fund and
its shareholders. Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to direct reallocation of investments in the Fund,
redemption of investments in the Fund and/or investment in the Fund upon the
making of additional purchase payments under the Existing Contracts. The parties
agree that this Section 10.2 shall not apply to any terminations under Article
VII and the effect of such Article VII terminations shall be governed by Article
VII of this Agreement.
10.3. The Company shall not redeem Fund shares attributable to the
Contracts (as distinct from Fund shares attributable to the Company's assets
held in the Account) except (i) as necessary to implement Contract Owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon
request, the Company will promptly furnish to the Fund the opinion of counsel
for the Company (which counsel shall be reasonably satisfactory to the Fund and
the Adviser) to the effect that any redemption pursuant to clause (ii) above is
a Legally Required Redemption. Furthermore, except in cases where permitted
under the terms of the Contracts, the Company shall not prevent Contract Owners
from allocating payments to a Portfolio that was otherwise available under the
Contracts without first giving the Fund or the appropriate Adviser 90 days prior
written notice of its intention to do so.
21
<PAGE> 22
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
IF TO THE FUND: Hotchkis and Wiley Variable Trust
800 West Sixth Street, Fifth Floor
Los Angeles, CA 90017
Attention: ________________;
IF TO ADVISER: Hotchkis and Wiley
725 South Figueroa Street
Suite 4000
Los Angeles, CA 90017
Attention: Turner Swan, Esq.;
IF TO THE COMPANY: The United States Life Insurance Company
In the City of New York
125 Maiden Lane
New York, NY 10038-4992
Attention: Jane Rushton, Esq.
IF TO AGSI: American General Securities Incorporated
2727 Allen Parkway
Houston, Texas 77019
Attention: F. Paul Kovach, Jr.
ARTICLE XII. FOREIGN TAX CREDITS
The Fund and the Adviser agree to consult with the Company concerning
whether any Portfolio of the Fund qualifies to provide a foreign tax credit
pursuant to Section 853 of the Code.
ARTICLE XIII. MISCELLANEOUS
13.1. All persons dealing with the Fund must look solely to the property
of the Fund for the enforcement of any claims against the Fund as neither the
Board, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.
13.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information
22
<PAGE> 23
reasonably identified as confidential in writing by any other party hereto and,
except as permitted by this Agreement, shall not disclose, disseminate or
utilize such names and addresses and other confidential information until such
time as it may come into the public domain without the express written consent
of the affected party.
13.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
13.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
13.5. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby.
13.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
13.7. The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations at law or in equity, which the parties hereto are entitled to under
state and federal laws.
13.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Adviser may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company under common
control with the Adviser, if such assignee is duly licensed and registered to
perform the obligations of the Adviser under this Agreement.
13.9. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP"), if
any), as soon as practical and in any event within 90
days after the end of each fiscal year;
(b) the Company's June 30th quarterly statements (statutory)
(and GAAP, if any),
23
<PAGE> 24
as soon as practical and in any event within 45 days
after the end of each semi-annual period:
(c) any financial statement, proxy statement, notice or
report of the Company sent to stockholders and/or
policyholders, as soon as practical after the delivery
thereof to stockholders;
(d) any registration statement (without exhibits) and
financial reports of the Company filed with the SEC or
any state insurance regulator, as soon as practical
after the filing thereof; and
(e) any other public report submitted to the Company by
independent accountants in connection with any annual,
interim or special audit made by them of the books of
the Company, as soon as practical after the receipt
thereof.
[Remainder of Page Left Intentionally Blank.]
24
<PAGE> 25
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and on its behalf by its duly authorized representative
hereto as of the date specified above.
THE UNITED STATES LIFE INSURANCE COMPANY IN THE CITY OF NEW YORK
on behalf of itself and each of its Accounts named in Schedule B
hereto, as amended from time to time.
By: /s/ Larry M. Robinson
-------------------------------
Name: Larry M. Robinson
Title: Vice President
AMERICAN GENERAL SECURITIES INCORPORATED
By: /s/ F. Paul Kovach, Jr.
-------------------------------
Name: F. Paul Kovach, Jr.
Title: President
HOTCHKIS AND WILEY VARIABLE TRUST
By: /s/ Nancy D. Celick
-------------------------------
Name: Nancy D. Celick
Title: President
HOTCHKIS AND WILEY
By: /s/ Nancy D. Celick
-------------------------------
Name: Nancy D. Celick
Title: Chief Administrative Officer
25
<PAGE> 26
SCHEDULE A
PORTFOLIOS OF HOTCHKIS AND WILEY VARIABLE TRUST
AVAILABLE FOR PURCHASE BY
THE UNITED STATES LIFE INSURANCE COMPANY
IN THE CITY OF NEW YORK
UNDER THIS AGREEMENT
Equity Income VIP Portfolio
Low Duration VIP Portfolio
26
<PAGE> 27
SCHEDULE B
SEPARATE ACCOUNTS AND CONTRACTS
<TABLE>
<S> <C>
NAME OF SEPARATE ACCOUNT AND FORM NUMBERS AND NAMES OF CONTRACT FUNDED BY
DATE ESTABLISHED BY BOARD OF DIRECTORS SEPARATE ACCOUNT
The United States Life Insurance Company Form No:
in the City of New York 98505N
Separate Account USL VA-R
Established: August 8, 1997 Name of Contract:
Select Reserve_ Flexible Payment Variable and Fixed
Individual Deferred Annuity
</TABLE>
27
<PAGE> 28
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
1. The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of
voting instructions from owners of the Contracts and to facilitate the
establishment of tabulation procedures. At this time the Fund will
inform the Company of the Record, Mailing and Meeting dates. This will
be done verbally approximately two months before meeting.
2. Promptly after the Record Date, the Company will perform a "tape run",
or other activity, which will generate the names, addresses and number
of units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in this Step #2. The Company will use its best efforts to call
in the number of Customers to the Fund , as soon as possible, but no
later than two weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of a proxy
statement or other voting instructions and solicitation material. The
Fund will provide at least one copy of the last Annual Report to the
Company pursuant to the terms of Section 3.3 of the Agreement to which
this Schedule relates.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card")
is provided to the Company by the Fund. The Company, at its expense,
shall produce and personalize the Voting Instruction Cards. The Fund or
its affiliate must approve the Card before it is printed. Allow
approximately 2-4 business days for printing information on the Cards.
Information commonly found on the Cards includes:
a. name (legal name as found on account registration)
b. address
c. fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification of
votes (already
28
<PAGE> 29
on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
5. During this time, the Fund will develop, produce and pay for the Notice
of Proxy and the Proxy Statement (one document). Printed and folded
notices and statements will be sent to Company for insertion into
envelopes (envelopes and return envelopes are provided and paid for by
the Company). Contents of envelope sent to Customers by the Company will
include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly
as possible and that their vote is important. One copy will be
supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by the Fund.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness
and completeness. Copy of this approval sent to the Fund.
7. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but not
including,) the meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes
place in another department or another vendor depending on process used.
An often used procedure is to sort Cards on arrival by proposal into
vote categories of all yes, no, or mixed replies, and to begin data
entry.
Note: Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal procedure
and has not been required by the Fund in the past.
9. Signatures on Card checked against legal name on account registration
which was printed on the Card.
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<PAGE> 30
Note: For example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card
and is the signature needed on the Card.
10. If Cards are mutilated, or for any reason are illegible or are not
signed properly, they are sent back to Customer with an explanatory
letter and a new Card and return envelope. The mutilated or illegible
Card is disregarded and considered to be not received for purposes of
vote tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to
why they did not complete the system. Any questions on those Cards are
usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted
to shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of shares.) The Fund must
review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to the Fund
on the morning of the meeting not later than 10:00 a.m. Eastern time.
The Fund may request an earlier deadline if reasonable and if required
to calculate the vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
15. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will
be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
30
<PAGE> 1
EXHIBIT (h)(8)
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made as of January 26, 1999, between HOTCHKIS AND
WILEY VARIABLE TRUST, a Massachusetts business (the "Fund"), SECURITY FIRST LIFE
INSURANCE COMPANY, a life insurance company organized under the laws of Delaware
(the "Company"), on its own behalf and on behalf of each segregated asset
account of the Company set forth on Schedule A as attached hereto, as such
schedule may be amended from time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Fund has an effective registration statement with the
Securities and Exchange Commission ("SEC") to register itself as an open-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and to register the offer and sale of its shares under
the Securities Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the Fund desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Fund (the "Participating Insurance
Companies"); and
WHEREAS, Princeton Funds Distributor, Inc. (the "Underwriter") is
registered as a broker-dealer with the SEC under the Securities Exchange Act of
1934, as amended (the "1934 Act"), is a member in good standing of The National
Association of Securities Dealers, Inc. (the "NASD") and acts as principal
underwriter of the shares of the Fund; and
WHEREAS, the capital stock of the Fund is divided into several series of
shares, each series representing an interest in a particular managed portfolio
of securities and other assets; and
WHEREAS, the several series of shares of the Fund offered by the Fund to
the Company and the Accounts are set forth on Schedule B attached hereto (each,
a "Portfolio," and, collectively, the "Portfolios"); and
WHEREAS, the Fund has received an order from the SEC granting
Participating Insurance Companies and their separate accounts exemptions from
the provisions of sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and
Rules 6e-2(b) (15) and 6e-3(T) (b) (15) thereunder, to the extent necessary to
permit shares of the Fund to be sold to and held by variable annuity and
variable life insurance separate accounts of both affiliated and unaffiliated
life insurance companies and certain qualified pension and retirement plans (the
"Shared Fund Exemptive Order"); and
WHEREAS, Merrill Lynch Asset Management, L.P. ("MLAM") is duly
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended, and any applicable
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<PAGE> 2
state securities laws and, through its Hotchkis and Wiley division, acts as the
Fund's investment adviser; and
WHEREAS, the Company has registered or will register under the 1933 Act
certain variable life insurance policies and/or variable annuity contracts
funded or to be funded through one or more of the Accounts (the "Contracts");
and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios (the "Shares") on behalf of the Accounts to fund the Contracts, and
the Fund intends to sell such Shares to the relevant Accounts at such Shares'
net asset value.
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE 1
SALE OF THE FUND SHARES
1.1 Subject to Section 1.3 of this Agreement, the Fund shall cause the
Underwriter to make Shares of the Portfolios available to the Accounts at such
Shares' most recent net asset value provided to the Company prior to receipt of
such purchase order by the Fund (or the Underwriter as its agent), in accordance
with the operational procedures mutually agreed to by the Underwriter and the
Company from time to time and the provisions of the then-current prospectus of
the Fund. Shares of a particular Portfolio of the Fund shall be ordered in such
quantities and at such times as determined by the Company to be necessary to
meet the requirements of the Contracts. The Board of Trustees of the Fund (the
"Board") may refuse to sell Shares of any Portfolio to any person (including the
Company and the Accounts), or suspend or terminate the offering of Shares of any
Portfolio if such action is required by law or by regulatory authorities having
jurisdiction or is, in the sole discretion of the Board acting in good faith and
in light of their fiduciary duties under federal and any applicable state laws,
necessary in the best interests of the shareholders of such Portfolio.
1.2 Subject to Section 1.3 of this Agreement, the Fund will redeem any
full or fractional Shares of any Portfolio when requested by the Company on
behalf of an Account at such Shares' most recent net asset value provided to the
Company prior to receipt by the Fund (or the Underwriter as its agent) of the
request for redemption, as established in accordance with the operational
procedures mutually agreed to by the Underwriter and the Company from time to
time and the provisions of the then current-prospectus of the Fund. The Fund
shall make payment for such Shares in the manner established from time to time
by the Fund, but in no event shall payment be delayed for a greater period than
is permitted by the 1940 Act (including any Rule or order of the SEC
thereunder).
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<PAGE> 3
1.3 The Fund shall accept purchase and redemption orders resulting from
investment in and payments under the Contracts on each Business Day, provided
that such orders are received prior to 11:30 a.m. Eastern Time on such Business
Day and reflect instructions received by the Company from Contract holders in
good order prior to the time the net asset value of each Portfolio is priced in
accordance with its prospectus (such Portfolio's "valuation time") on the prior
Business Day. Any purchase or redemption order for Shares of any Portfolio
received, on any Business Day, after such Portfolio's valuation time on such
Business Day shall be deemed received prior to 11:30 a.m. on the next succeeding
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates the net asset
value of its Portfolios pursuant to the rules of the SEC. Purchase and
redemption orders shall be provided by the Company to the Underwriter as agent
for the Fund in such written or electronic form (including facsimile) as may be
mutually acceptable to the Company and the Underwriter. The Underwriter may
reject purchase and redemption orders that are not in proper form. In the event
that the Company and the Underwriter agree to use a form of written or
electronic communication which is not capable of recording the time, date and
recipient of any communication and confirming good transmission, the Company
agrees that it shall be responsible (i) for confirming with the Underwriter that
any communication sent by the Company was in fact received by the Underwriter in
proper form, and (ii) for the effect of any delay in the Underwriter's receipt
of such communication in proper form. The Fund and its agents shall be entitled
to rely, and shall be fully protected from all liability in acting, upon the
instructions of the persons named in the list of authorized individuals attached
hereto as Schedule C, or any subsequent list of authorized individuals provided
to the Fund or its agents by the Company in such form, without being required to
determine the authenticity of the authorization or the authority of the persons
named therein.
1.4 Purchase orders that are transmitted to the Fund in accordance with
Section 1.3 of this Agreement shall be paid for no later than 12:00 Noon Eastern
Time on the same Business Day that the Fund receives notice of the order.
Payments shall be made in federal funds transmitted by wire. In the event that
the Company shall fail to pay in a timely manner for any purchase order validly
received by the Underwriter on behalf of the Fund pursuant to Section 1.3 of
this Agreement (whether or not such failure is the fault of the Company), the
Company shall hold the Fund harmless from any losses reasonably sustained by the
Fund as the result of acting in reliance on such purchase order.
1.5 Issuance and transfer of the Fund's Shares will be by book entry
only. Share certificates will not be issued to the Company or to any Account.
Shares ordered from the Fund will be recorded in the appropriate title for each
Account .
1.6 The Fund shall furnish prompt notice to the Company of any income,
dividends or capital gain distribution payable on Shares of any Portfolio. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's Shares in additional Shares of
that Portfolio. The Fund shall notify the Company of the number of Shares so
issued as payment of such dividends and distributions.
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<PAGE> 4
1.7 The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
such net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 6:30 p.m., New York time.
1.8 The Company agrees that it will not take any action to operate any
Account as a management investment company under the 1940 Act without the Fund's
and the Underwriter's prior written consent.
1.9 The Fund agrees that its Shares will be sold only to Participating
Insurance Companies or their separate accounts. No Shares of any Portfolio will
be sold directly to the general public. The Company agrees that Fund Shares will
be used only for the purposes of funding the Contracts and Accounts listed in
Schedule A, as such schedule may be amended from time to time or held in the
general account of the Company.
1.10 The Fund agrees that all Participating Insurance Companies shall
have the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding to those contained in Section 2.10 and
Article 4 of this Agreement.
ARTICLE 2
OBLIGATIONS OF THE PARTIES
2.1 The Fund shall prepare and be responsible for filing with the SEC
and any state securities regulators requiring such filing, all shareholder
reports, notices, proxy materials (or similar materials such as voting
instruction solicitation materials), prospectuses and statements of additional
information of the Fund. The Fund shall bear the costs of registration and
qualification of its Shares, preparation and filing of the documents listed in
this Section 2.1 and all taxes to which an issuer is subject on the issuance and
transfer of its Shares.
2.2 At least annually, the Fund or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing the Portfolios) for the Shares as the Company may reasonably request
for distribution to existing Contract owners whose Contracts are funded by such
Shares. The Fund or its designee shall provide the Company, at the Company's
expense, with as many copies of the current prospectus for the Shares as the
Company may reasonably request for distribution to prospective purchasers of
Contracts. If requested by the Company in lieu thereof, the Fund or its designee
shall provide such documentation (including a "camera ready" copy of the new
prospectus as set in type or, at the request of the Company, a diskette in the
form sent to the financial printer) and other assistance as is reasonably
necessary in order for the parties hereto once each year (or more frequently if
the prospectus for the Shares is supplemented or amended) to have the prospectus
for the Contracts and the prospectus for the Shares printed together in one
document. The expenses of such printing shall be borne by the Company. In the
event that the Company requests that the Fund or its designee provide the Fund's
prospectus in a "camera ready" or diskette format, the Fund shall be responsible
solely for providing the prospectus in the format in which it is accustomed to
formatting prospectuses and shall bear the expense of providing the prospectus
in
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<PAGE> 5
such format (e.g., typesetting expenses), and the Company shall bear the expense
of adjusting or changing the format to conform with any of its prospectuses.
2.3 The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from the Fund or its
designee. The Fund or its designee, at its expense, shall print and provide such
statement of additional information to the Company (or a master of such
statement suitable for duplication by the Company) for distribution to any owner
of a Contract funded by the Shares. The Fund or its designee, at the Company's
expense, shall print and provide such statement to the Company (or a master of
such statement suitable for duplication by the Company) for distribution to a
prospective purchaser who requests such statement.
2.4 The Fund or its designee shall provide the Company free of charge
copies, if and to the extent applicable to the Shares, of the Fund's proxy
materials, reports to Shareholders and other communications to Shareholders in
such quantity as the Company shall reasonably require for distribution to
Contract owners.
2.5 The Company shall furnish, or cause to be furnished, to the Fund or
its designee, a copy of each prospectus for the Contracts or statement of
additional information for the Contracts in which the Fund or its investment
adviser is named prior to the filing of such document with the SEC. The Company
shall furnish, or shall cause to be furnished, to the Fund or its designee, each
piece of sales literature or other promotional material in which the Fund or its
investment adviser is named, at least five Business Days prior to its use. No
such prospectus, statement of additional information or material shall be used
if the Fund or its designee reasonably objects to such use within five Business
Days after receipt of such material.
2.6 The Company shall furnish, or shall cause to be furnished, to the Fund or
its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under generally
accepted accounting principles ("GAAP"), if any), as soon as practical
and in any event within 90 days after the end of each fiscal year;
(b) the Company's quarterly statements (statutory) (and GAAP, if
any), as soon as practical and in any event within 45 days after the end
of each semi-annual period;
(c) any financial statement, proxy statement, notice or report of
the Company sent to public shareholders and/or policyholders, as soon as
practical after the delivery thereof to such shareholders;
(d) any registration statement (without exhibits) and financial
reports of the Company filed with the SEC or any state insurance
regulator, as soon as practical after the filing thereof; and
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<PAGE> 6
(e) any other public report submitted to the Company by
independent accountants in connection with any annual, interim or
special audit made by them of the books of the Company, as soon as
practical after the receipt thereof.
2.7 The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund or
its investment adviser in connection with the sale of the Contracts other than
information or representations contained in and accurately derived from the
registration statement or prospectus for the Fund Shares (as such registration
statement and prospectus may be amended or supplemented from time to time),
reports of the Fund, Fund-sponsored proxy statements, or in sales literature or
other promotional material approved by the Fund or its designee, except with the
written permission of the Fund or its designee.
2.8 The Fund shall not give any information or make any representations
or statements on behalf of the Company or concerning the Company, the Accounts
or the Contracts other than information or representations contained in and
accurately derived from the registration statement or prospectus for the
Contracts (as such registration statement and prospectus may by amended or
supplemented from time to time), or in materials approved by the Company for
distribution including sales literature or other promotional materials, except
with the written permission of the Company.
2.9 The Company shall amend the registration statement of the Contracts
under the 1933 Act and registration statement for each Account under the 1940
Act from time to time as required in order to effect the continuous offering of
the Contracts or as may otherwise be required by applicable law. The Company
shall register and qualify the Contracts for sale to the extent required by
applicable securities laws and insurance laws of the various states.
2.10 The Company shall be responsible for assuring that any prospectus
offering a Contract that is a life insurance contract where it is reasonably
probable that such Contract would be a "modified endowment contract," as that
term is defined in Section 7702A of the Internal Revenue Code of 1986, as
amended (the "Code"), will identify such Contract as a modified endowment
contract (or policy).
2.11 Solely with respect to Contracts and Accounts that are subject to
the 1940 Act, so long as, and to the extent that, the SEC interprets the 1940
Act to require pass-through voting privileges for variable policyowners: (a) the
Company will provide pass-through voting privileges to owners of Contracts - or
policies whose cash values are invested, through the Accounts, in Shares of the
Fund; (b) the Fund shall require all Participating Insurance Companies to
calculate voting privileges in the same manner and the Company shall be
responsible for assuring that the Accounts calculate voting privileges in the
manner established by the Fund; (c) with respect to each Account, the Company
will vote Shares of the Fund held by the Account and for which no timely voting
instructions from Contract or policyowners are received, as well as Shares held
by the Account that are owned by the Company for its general account, in the
same proportion as the Company votes Shares held by the Account for which
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<PAGE> 7
timely voting instructions are received from Contract - or policyowners; and (d)
the Company and its agents will in no way recommend or oppose or interfere with
the solicitation of proxies for Fund Shares held by Contract owners without the
prior written consent of the Fund, which consent may be withheld in the Fund's
sole discretion.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of Delaware and
has established each Account as a segregated asset account under such law on the
date set forth in Schedule A.
3.2 The Company represents and warrants that it has registered or, prior
to any issuance or sale of the Contracts, will register each Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts.
3.3 The Company represents and warrants that the issuance of the
Contracts will be registered under the 1933 Act prior to any issuance or sale of
the Contracts; the Contracts will be issued and sold in compliance in all
material respects will all applicable federal and state laws; and the sale of
the Contracts shall comply in all material respects with state insurance
suitability requirements.
3.4 The Company represents and warrants that, provided the Fund's
representations and warranties made pursuant to Section 3.7 of this Agreement
are true, the Contracts are currently and at the time of issuance will be
treated as annuity contracts or life insurance policies, whichever is
appropriate, under applicable provisions of the Code. The Company shall make
every effort to maintain such treatment and shall notify the Fund and the
Underwriter immediately upon having a reasonable basis for believing that the
Contracts have ceased to be so treated or that they might not be so treated in
the future.
3.5 The Fund represents and warrants that it is duly organized and
validly existing under the laws of the Commonwealth of Massachusetts.
3.6 The Fund represents and warrants that the sale of the Fund Shares
offered and sold pursuant to this Agreement will be registered under the 1933
Act and that the Fund is registered under the 1940 Act. The Fund shall use its
best efforts to amend its registration statement under the 1933 Act and the 1940
Act from time to time as required in order to affect the continuous offering of
its shares. The Company shall advise the Fund of any state requirements to
register Shares for sale in such states. If the Fund determines that notice
filings are appropriate, the Fund shall use its best efforts to make such notice
filings in accordance with the laws of all fifty states, the District of
Columbia, Virgin Islands and Puerto Rico and such other jurisdictions reasonably
requested by the Company.
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<PAGE> 8
3.7 The Fund represents and warrants that the investments of each
Portfolio will comply with Subchapter M of the Code and the diversification
requirements set forth in section 817(h) of the Code and the rules and
regulations thereunder.
ARTICLE 4
POTENTIAL CONFLICTS
4.1 The parties acknowledge that the Fund's Shares may be made available
for investment to other Participating Insurance Companies. In such event, the
Board will monitor the Fund for the existence of any material irreconcilable
conflict between the interests of the contract owners of all Participating
Insurance Companies. An irreconcilable material conflict may arise for a variety
of reasons, including: (a) an action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting instructions given by
variable annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract owners.
The Board shall promptly inform the Company if they determine that an
irreconcilable material conflict exists and the implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Board. The Company will assist the Board
in carrying out their responsibilities under the Shared Fund Exemptive Order by
providing the Board with all information reasonably necessary for the Board to
consider any issues raised including, but not limited to, information as to a
decision by the Company to disregard Contract owner voting instructions.
4.3 If it is determined by a majority of the Board, or a majority of the
Fund's Trustees who are not affiliated with MLAM or the Underwriter (the
"Disinterested Trustees"), that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its expense and to the extent reasonably practicable (as determined by the
Board), take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Fund or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Fund, or submitting the question of whether
or not such segregation should be implemented to a vote of all affected
Contracts owners and, as appropriate, segregating the assets of any appropriate
group (i.e., annuity contract owners, life insurance contract owners, or
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Contract owners
the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account.
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<PAGE> 9
4.4 If a material irreconcilable conflict arises because of a decision
by the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's or
Accounts' investment in the Fund and terminate this Agreement with respect to
such Account(s); provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the Disinterested Board. Any such
withdrawal and termination must take place within 30 days after the Fund gives
written notice that this provision is being implemented, subject to applicable
law but in any event consistent with the terms of the Shared Fund Exemptive
Order. Until the end of such 30 day- period, the Fund shall continue to accept
and implement orders by the Company for the purchase and redemption of Shares of
the Fund.
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's (or Accounts') investment in the Fund and terminate this
Agreement with respect to such Account(s) within 30 days after the Fund informs
the Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the Disinterested Board.
Until the end of such 30- day period, the Fund shall continue to accept and
implement orders by the Company for the purchase and redemption of Shares of the
Fund.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a
majority of the Disinterested Board shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Company be required to establish a new funding medium for the Contracts if
an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Board determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
affected Account's (or Accounts') investment in the Fund and terminate this
Agreement with respect to such Account(s) within 30 days after the Board inform
the Company in writing of the foregoing determination; provided, however, that
such withdrawal and termination shall, subject to applicable law but in any
event consistent with the terms of the Shared Fund Exemptive Order, be limited
to the extent required by any such material irreconcilable conflict as
determined by a majority of the Disinterested Board.
4.7 The Company shall at least annually submit to the Board such
reports, materials or data as the Board may reasonably request so that the Board
may fully carry out the duties imposed upon them by the Shared Fund Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Board.
4.8 If and to the extent that (a) Rule 6e-2 and Rule 6e-3 (T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the 1940 Act or the rules
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<PAGE> 10
promulgated thereunder with respect to mixed or shared funding (as defined in
the application for the Shared Fund Exemptive Order) on terms and conditions
materially different from those contained in the application for the Shared Fund
Exemptive Order, or (b) the Shared Fund Exemptive Order is granted on terms and
conditions that differ from those set forth in this Article 4, then the Fund
and/or the Participating Insurance Companies, as appropriate, shall take such
steps as may be necessary (a) to comply with Rules 6e-2 and 6e-3(T), as amended,
and Rule 6e-3, as adopted, to the extent such rules are applicable, or (b) to
conform this Article 4 to the terms and conditions contained in the Shared Fund
Exemptive Order, as the case may be.
ARTICLE 5
INDEMNIFICATION
5.1 Indemnification by the Company. The Company agrees to indemnify and
hold harmless the Fund and each of its Trustees, officers, employees and agents
and each person, if any, who controls the Fund within the meaning of Section 15
of the 1933 Act (collectively the "Indemnified Parties" for purposes of this
Article 5) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which such Indemnified
Parties may become subject under any statute or regulation, or common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in a
registration statement or prospectus for the Contracts or in the
Contracts or sales literature generated or approved by the Company on
behalf of the Contracts or Accounts (or any amendment or supplement to
any of the foregoing) (collectively, "Company Documents" for the
purposes of this Article 5), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, provided that this indemnity shall not apply as
to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and was accurately
derived from written information furnished to the Company by or on
behalf of the Fund for use in Company Documents or otherwise for use in
connection with the sale of the Contracts or Shares; or
(b) arise out of or result from statements or representations
(other than statements or representations contained in and accurately
derived from Fund Documents (as defined in Section 5.2(a) below) or
wrongful conduct of the Company or persons under its control, with
respect to the sale or acquisition of the Contracts or Shares; or
(c) arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Fund Documents or the
omission or alleged omission to state therein a material fact required
to be stated therein or
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<PAGE> 11
necessary to make the statements therein not misleading if such
statement or omission was made in reliance upon and accurately derived
from written information furnished to the Fund by or on behalf of the
Company; or
(d) arise out of or result from any failure by the Company to
provide the services or furnish the materials required under the terms
of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Company.
5.2 Indemnification by the Fund. The Fund agrees to indemnify and hold
harmless the Company and each of its directors, officers, employees and agents
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article 5) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Fund) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage liability or expense and reasonable legal counsel fees incurred in
connection therewith) (collectively, "Losses"), to which such Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or
alleged untrue statement of any material fact contained in the
registration statement or prospectus for the Fund (or any amendment or
supplement thereto) or in sales literature approved by the Fund (but
solely with respect to statements regarding the Fund), (collectively,
"Fund Documents" for the purposes of this Article 5), or arise out of or
are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this indemnity shall
not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Fund by or
on behalf of the Company for use in Fund Documents or otherwise for use
in connection with the sale of the Contracts or Shares; or
(b) arise out of or result from statement or representations
(other than statements or representations contained in and accurately
derived from Company Documents) or wrongful conduct of the Fund or
persons under its control, with respect to the sale or acquisition of
the Contracts or Shares; or
(c) arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Company Documents or
the omission or alleged omission to state therein a material fact
required to be stated therein
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<PAGE> 12
or necessary to make the statements therein not misleading if such
statement or omission was made in reliance upon and accurately derived
from written information furnished to the Company by or on behalf of the
Fund; or
(d) arise out of or result from any failure by the Fund to
provide the services or furnish the materials required under the terms
of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Fund.
5.3 Neither the Company nor the Fund shall be liable under the
indemnification provisions of Section 5.1 or 5.2, as applicable, with respect to
any Losses incurred or assessed against any Indemnified Party to the extent such
Losses arise out of or result from such Indemnified Party's willful misfeasance,
bad faith or negligence in the performance of such Indemnified Party's duties or
by reason of such Indemnified Party's reckless disregard of obligations or
duties under this Agreement.
5.4 Neither the Company nor the Fund shall be liable under the
indemnification provisions of Section 5.1 or 5.2, as applicable, with respect to
any claim made against an Indemnified Party unless such Indemnified Party shall
have notified the party against whom indemnification is sought in writing within
a reasonable time after the summons, or other first written notification, giving
information of the nature of the claim shall have been served upon or otherwise
received by such Indemnified Party (or after such Indemnified Party shall have
received notice of service upon or other notification to any designated agent),
but failure to notify the party against whom indemnification is sought of any
such claim shall not relieve that party from any liability that it may have to
the Indemnified Party in the absence of Sections 5.1 and 5.2.
5.5 In case any such action is brought against the Indemnified Parties,
the indemnifying party shall be entitled to participate, at its own expense, in
the defense of such action. The indemnifying party also shall be entitled to
assume the defense thereof, with counsel reasonably satisfactory to the party
named in the action. After notice from the indemnifying party to the Indemnified
Party of an election to assume such defense, the Indemnified Party shall bear
the fees and expenses of any additional counsel retained by it, and the
indemnifying party will not be liable to the Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such
Indemnified Party independently in connection with the defense thereof other
than reasonable costs of investigation.
ARTICLE 6
TERMINATION
6.1 This Agreement may be terminated by either party for any reason by
six (6) months' advance written notice to the other party, and may be terminated
by either party pursuant to Sections 6.2 through 6.7 below upon written notice
to the other party.
-12-
<PAGE> 13
6.2 This Agreement may be terminated at the option of the Fund upon
institution of formal proceedings against the Company by the NASD, the SEC, the
insurance department of any state, or any other regulatory body regarding the
Company's duties under this Agreement or related to the sale of the Contracts,
the operation of the Account, the administration of the Contracts or the
purchase of the Shares, or an expected or anticipated ruling, judgment or
outcome that would, in the Fund's reasonable judgment, materially impair the
Company's ability to meet and perform the Company's obligations and duties
hereunder.
6.3 This Agreement may be terminated at the option of the Fund if the
Contracts cease to qualify as annuity contracts or life insurance policies, as
applicable, under the Code, or if the Fund reasonably believes that the
Contracts may fail to so qualify.
6.4 This Agreement may be terminated by the Fund, at its option, if the
Fund shall determine, in its sole judgment exercised in good faith, that either
(1) the Company shall have suffered a material adverse change in its business or
financial condition or (2) the Company shall have been the subject of material
adverse publicity that is likely to have a material adverse impact upon the
business and operations of either the Fund or the Underwriter.
6.5 This Agreement may be terminated at the option of the Company upon
institution of formal proceedings against the Fund by the NASD, the SEC, the
insurance department of any state, or any other regulatory body regarding the
Fund's duties under this Agreement or related to the sale of Fund shares or the
operation of the Fund, or an expected or anticipated ruling, judgment or outcome
that would, in the Company's reasonable judgment, materially impair the Fund's
ability to meet and perform the Fund's obligations hereunder.
6.6 This Agreement may be terminated at the option of the Company if the
Fund ceases to comply with Subchapter M of the Code, or Section 817(h) of the
Code and the rules and regulations thereunder, or if the Company reasonably
believes that the Fund may fail to so comply.
6.7 This Agreement may be terminated by the Company, at its option, if
the Company shall determine, in its sole judgment exercised in good faith, that
either (1) the Fund shall have suffered a material adverse change in its
business or financial condition or (2) the Fund shall have been the subject of
material adverse publicity that is likely to have a material adverse impact upon
the business and operations of the Company.
6.8 Notwithstanding any termination of this Agreement pursuant to this
Article 6, the Fund and the Underwriter may, at the option of the Fund, continue
to make available additional Fund Shares for so long after the termination of
this Agreement as the Fund desires pursuant to the terms and conditions of this
Agreement as provided in Section 6.9 below, for all Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, without limitation, if the Fund or
Underwriter so elects to make additional Shares available, the owners of the
Existing Contracts or the Company, whichever shall have legal authority to do
so, shall be permitted to reallocate investments in the Fund,
-13-
<PAGE> 14
redeem investments in the Fund and/or invest in the Fund upon the making of
additional purchase payments under the Existing Contracts.
6.9 In the event of a termination of this Agreement pursuant to this
Article 6, the Fund and the Underwriter shall promptly notify the Company
whether the Underwriter and the Fund will continue to make Shares available
after such termination; if the Underwriter and the Fund will continue to make
Shares so available, the provisions of this Agreement shall remain in effect
except for Section 6.1 hereof and thereafter either the Fund or the Company may
terminate the Agreement, as so continued pursuant to this Section 6.9, upon
prior written notice to the other party, such notice to be for a period that is
reasonable under the circumstances but, if given by the Fund, need not be
greater than six months.
6.10 The provisions of Article 5 shall survive the termination of this
Agreement, and the provisions of Article 4 and Sections 2.4 and 2.10 shall
survive the termination of this Agreement so long as Shares of the Fund are held
on behalf of Contract owners in accordance with Section 6.8.
ARTICLE 7
NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Hotchkis and Wiley Variable Trust
725 S. Figueroa St., Suite 4000
Los Angeles, CA 90017-5400
Attention: Merilee Gerth
If to the Company:
Security First Life Insurance Company
11365 West Olympic Blvd.
Los Angeles, CA 90064
Attention: President
-14-
<PAGE> 15
ARTICLE 8
MISCELLANEOUS
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York,
shall be subject to the provisions of the 1933, 1934, and 1940 Acts, and the
rules, regulations and rulings thereunder, including such exemptions from those
statutes, rules and regulations as the SEC may grant and the terms hereof shall
be interpreted and construed in accordance therewith.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Fund arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the relevant Portfolio(s) of the Fund and that no trustee, officer, agent, or
holder of shares of beneficial interest of the Fund shall be personally liable
for any such liabilities.
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the SEC, the NASD, and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
8.8 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder may
be assigned by either party without the prior written approval of the other
party.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
-15-
<PAGE> 16
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Fund Participation Agreement as of the date and year
first above written.
SECURITY FIRST LIFE INSURANCE COMPANY
By: /s/ Richard C. Pearson
Name: Richard Pearson
Title: President
HOTCHKIS AND WILEY VARIABLE TRUST
By: /s/ Nancy D. Celick
Name: Nancy D. Celick
Title: President
-16-
<PAGE> 17
SCHEDULE A
Segregated Accounts of Security First Life Insurance Company
Participating in Portfolios of Hotchkis and Wiley Variable Trust
Name of Separate Account Date Established
- ------------------------ ----------------
Security First Life Separate Account A
<PAGE> 18
SCHEDULE B
Portfolios of Hotchkis and Wiley Variable Trust
Offered to Segregated Accounts of Security First Life Insurance Company
International VIP Portfolio
<PAGE> 19
SCHEDULE C
Persons Authorized to Act on Behalf of Security First Life Insurance Company
The Fund, the Underwriter and their respective agents are authorized to
rely on instructions from the following individuals on behalf of Security First
Life Insurance Company on its own behalf and on behalf of each Account:
Name Signature
Richard C. Pearson /s/
-----------------------------------
George Olah /s/
-----------------------------------
<PAGE> 1
EXHIBIT 99.(J)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 1 to the registration
statement under the Securities Act of 1933 and Amendment No. 3 to the
registration statement under the Investment Company Act of 1940 on Form N-1A
(the "Registration Statement") of our report dated February 18, 1999, relating
to the financial statements and financial highlights of the Equity Income VIP
Portfolio, the International VIP Portfolio and the Low Duration VIP Portfolio
(three of the four portfolios of Hotchkis and Wiley Variable Trust), which
appears in such Statement of Additional Information, and to the incorporation
by reference of our report into the Prospectus which constitutes part of this
Registration Statement. We also consent to the reference to us under the
heading "Other Service Providers" in such Statement of Additional Information
and to the reference to us under the heading "Financial Highlights" in such
Prospectus.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
February 23, 1999
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<OVERDISTRIBUTION-GAINS> 0
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<DIVIDEND-INCOME> 2,910
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 1,430
<NET-INVESTMENT-INCOME> 1,480
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