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As filed with the Securities and Registration No. 333-24349
Exchange Commission on April 7, 2000. 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. 2 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [ ]
Amendment No. 4 [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
TURNER SWAN
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)
[X] on May 1, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) 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
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PROSPECTUS
MAY 1, 2000
HOTCHKIS AND WILEY VARIABLE TRUST [LOGO]
The Fund is a portfolio of the Hotchkis and Wiley Variable Trust. It is an
investment for variable annuity contracts and variable life insurance contracts
issued by insurance companies that have contracts with the Fund.
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.
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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TABLE OF CONTENTS
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KEY FACTS.............................................. 3
INVESTMENT OBJECTIVE AND POLICIES...................... 5
INVESTMENT RISKS....................................... 7
THE ADVISOR AND PORTFOLIO MANAGERS..................... 10
HOW TO BUY AND REDEEM SHARES........................... 10
DIVIDENDS AND TAXES.................................... 11
FINANCIAL HIGHLIGHTS................................... 12
INFORMATION ABOUT THE FUND.........................back cover
</TABLE>
Hotchkis & Wiley logo
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KEY FACTS
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INVESTMENT OBJECTIVE AND MAIN STRATEGIES
This section highlights important information about the Fund. Use this summary
to compare the Fund to other mutual funds that fund a portion of a variable
annuity or insurance contract. More detailed information follows the summary.
VALUE INVESTING
In investing the Fund's assets, Hotchkis and Wiley (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 yield relative to the market
- - low price-to-book value ratio relative to the market
- - financial strength
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 sometimes prevents investments in stocks that are in
well-known indexes, like the S&P 500 Index. Also, the return of the Fund will
not necessarily be similar to the return of the S&P 500 Index.
<TABLE>
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EQUITY INCOME VIP PORTFOLIO
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OBJECTIVE - current income
- long-term growth of income
- growth of capital
MAIN INVESTMENTS - stocks of large U.S. companies
</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.
See "Investment Risks" for more information about the risks associated with the
Fund.
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.
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THE FUND'S PERFORMANCE
The bar chart and table below provide some indication of the risks of investing
in the Fund by showing changes in the Fund's performance and by showing how the
Fund's average annual total returns for 1 year and the life of the Fund (which
is less than 5 years) compare with those of a broad measure of market
performance. How the Fund has performed in the past is not necessarily an
indication of how the Fund will perform in the future. The bar chart and table
do not reflect insurance-related fees and expenses which, if reflected, would
lower the returns shown below.
EQUITY INCOME VIP PORTFOLIO
<TABLE>
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1999 -2.73
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</TABLE>
Total return for the three months ended March 31, 2000: -7.48%.
Best quarter: 12.88% (2nd Quarter of 1999).
Worst quarter: -10.84% (3rd Quarter of 1999).
<TABLE>
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AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1999) 1 YEAR 3/18/98
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Equity Income VIP Portfolio -2.73% -4.90%
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S&P 500 Index 21.14% 20.49%
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</TABLE>
This chart compares the Equity Income VIP Portfolio's performance with the
returns of the Standard & Poor's 500 Composite Stock Price Index, a capital
weighted, unmanaged index representing the aggregate market value of the common
equity of 500 stocks primarily traded on the New York Stock Exchange. The Fund's
value disciplines often prevent investments in major stocks in the Index and the
Fund's returns may not be similar to the Index's returns.
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INVESTMENT OBJECTIVE AND POLICIES
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The Fund's investment objective is to provide CURRENT INCOME and LONG-TERM
GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.
The Fund 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 Fund can invest up to 10% of its total assets in foreign securities.
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. The Fund may not achieve its objective
using this type of investing.
OTHER STRATEGIES
The Fund uses certain other investment strategies:
- - 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.
- - REPURCHASE AGREEMENTS: 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.
- - 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. Types of
derivatives that the Fund may use include forward contracts, swap agreements
and options. 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. The Fund will mark liquid assets as
segregated or enter offsetting positions to cover its obligations, if any,
under forward contracts, swap agreements and options to avoid leveraging the
Fund.
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<PAGE> 7
- - BORROW MONEY: the Fund can borrow up to 10% of the value of its total assets.
- - 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.
- - WHEN-ISSUED or DELAYED DELIVERY: the Fund can buy securities on a when-issued
or delayed delivery basis. The Fund will mark liquid assets as segregated in
an amount equal to the when-issued securities.
- - CORPORATE LOANS: the Fund can invest in 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.
- - 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. Illiquid securities and
restricted securities involve liquidity risk, market risk and selection risk.
- 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.
6
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INVESTMENT RISKS
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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.
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
The Fund may invest in foreign securities. Stocks traded on foreign markets have
often (though not always) performed differently than stocks in the U.S. 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 U.S. in areas such as growth of gross national product, reinvestment of
capital, resources, and balance of payments. Some of these economies 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 U.S., 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 U.S.
- - 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 U.S.
- - 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.
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- - 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 foreign securities transactions tend to be higher than those of
U.S. transactions.
- - International trade barriers or economic sanctions against certain foreign
countries may adversely affect the Fund's foreign holdings.
- - 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 entered 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) were redenominated in the euro.
These securities 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 transition to 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.
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.
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<PAGE> 10
- - 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 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.
When-issued and delayed-delivery securities and forward commitments involve
market risk, selection risk and leverage risk.
- - CORPORATE LOANS -- 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 DERIVATIVES
Derivatives involve the following risks:
- - 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.
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THE ADVISOR AND PORTFOLIO MANAGERS
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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.
The Fund paid an annualized fee to the Advisor for the fiscal year ended
December 31, 1999 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 1.15% of its average net assets. The Advisor has agreed to
continue this expense limit through April 30, 2001, and will thereafter give
shareholders prior notice if this reimbursement policy will change.
The Advisor may pay administrative service fees to Participating Insurance
Companies. The Advisor also is allowed to allocate brokerage based on sales of
shares of funds managed by the Advisor but has not done so.
PORTFOLIO MANAGERS
The portfolio managers who have responsibility for the day-to-day management of
the Fund's portfolio are Gail Bardin and Sheldon Lieberman. Ms. Bardin is a
managing director of the Advisor and began to co-manage 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.
HOW TO BUY AND REDEEM SHARES
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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 or private placement memorandum ("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 money 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 Participating Insurance Companies' prospectuses) to
be effected on that day under variable annuity contracts and variable life
insurance policies. Orders received by the Fund are processed on business days
only. The Fund prices orders for the purchase of shares 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. The Fund prices redemptions 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 is a
designee of the Fund for receipt of purchase and redemption orders. Receipt
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by a Participating Insurance Company is receipt by the Fund, so long as the Fund
receives timely notice of the order by the next business day. Separate accounts
must transmit purchase and redemption orders promptly. The Fund pays redemptions
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 charge any sales charges or redemption fees. Participating
Insurance Companies may charge mortality and expense risk fees and other charges
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 are 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 such
holders 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.
DIVIDENDS AND TAXES
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DIVIDENDS AND DISTRIBUTIONS
The Fund pays income dividends, if any, quarterly.
The Fund pays distributions of any net realized short-term gains and any net
capital gains at least annually.
See the prospectuses for variable annuity contracts or variable life insurance
policies issued by Participating Insurance Companies for additional information.
TAXES
The Fund has elected to qualify and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. If so
qualified, the Fund will not be subject to federal income taxes on its net
investment income and capital gains, if any, realized during any fiscal year in
which it distributes to its shareholders at least 90% of its net investment
income earned in the fiscal year.
A segregated asset account upon which a variable annuity contract or variable
life insurance policy is based must meet certain diversification tests in the
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. A failure of the Fund to qualify as a regulated
investment company or to meet these conditions and to comply with these tests
could cause the owners of variable annuity contracts and variable life insurance
policies based on such accounts to recognize ordinary income each year
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<PAGE> 13
in the amount of any net appreciation of their contracts or policies during the
year (including the annual costs of life insurance, if any, provided under such
policies).
The terms of the variable annuity or variable life insurance plan through which
you invest and the tax rules governing such annuities and plans govern the tax
consequences of an investment in the Fund. Please refer to the prospectus for
the variable annuity or variable life insurance plan through which you are
investing.
FINANCIAL HIGHLIGHTS
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The financial highlights table is intended to help you understand the Fund's
financial performance for the periods since it began operations. Certain
information reflects financial results for a single Fund share. The total return
in the table represents the rate that an investor would have earned (or lost) on
an investment in the Fund (assuming reinvestment of all dividends and
distributions, but excluding insurance-related fees and expenses). 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>
March 18, 1998*
Year Ended through
EQUITY INCOME VIP PORTFOLIO December 31, 1999 December 31, 1998
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<S> <C> <C>
Net Asset Value, Beginning of Period........................ $ 9.27 $ 10.00
-------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.20 0.14
Net realized and unrealized loss on investments......... (0.45) (0.75)
-------- --------
Total from investment operations.................... (0.25) (0.61)
-------- --------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.19) (0.12)
-------- --------
Net Asset Value, End of Period.............................. $ 8.83 $ 9.27
======== ========
TOTAL RETURN................................................ (2.73)% (6.04)%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $972,160 $988,304
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 5.76% 7.81%(2)
After expense reimbursement............................... 1.15% 1.15%(2)
Ratio of net investment income to average net assets:
Before expense reimbursement............................ (2.71)% (4.95)%(2)
After expense reimbursement............................. 1.90% 1.71%(2)
Portfolio turnover rate..................................... 24% 12%(1)
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
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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 market conditions and investment
strategies that affected Fund performance)
- - Semi-annual Report
To get this information free of charge or for shareholder questions, contact:
The Fund's transfer agent
(800) 236-4479
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
- - call 1-202-942-8090 for information on the Commission's Public Reference Room,
where documents can be reviewed and copied
- - the information is available at the SEC's Internet site on the EDGAR Database
at http://www.sec.gov
- - copies of the information retrievable from the SEC's Internet site are
available for a fee by writing to the SEC's Public Reference Section or by
electronic request at [email protected]
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
MAY 1, 2000
[LOGO]
HOTCHKIS AND WILEY VARIABLE TRUST
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EQUITY INCOME
VIP PORTFOLIO
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PROSPECTUS
MAY 1, 2000
HOTCHKIS AND WILEY VARIABLE TRUST [LOGO]
The Fund is a portfolio of the Hotchkis and Wiley Variable Trust. It 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 primarily 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.
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TABLE OF CONTENTS
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<TABLE>
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KEY FACTS.............................................. 3
INVESTMENT OBJECTIVE AND POLICIES...................... 5
INVESTMENT RISKS....................................... 7
THE ADVISOR AND PORTFOLIO MANAGERS..................... 10
HOW TO BUY AND REDEEM SHARES........................... 11
DIVIDENDS AND TAXES.................................... 12
FINANCIAL HIGHLIGHTS................................... 13
INFORMATION ABOUT THE FUND.........................back cover
</TABLE>
Hotchkis & Wiley logo
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KEY FACTS
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INVESTMENT OBJECTIVE AND MAIN STRATEGIES
This section highlights important information about the Fund. Use this summary
to compare the Fund to other mutual funds that fund a portion of a variable
annuity or insurance contract. More detailed information follows the summary.
VALUE INVESTING
In investing the Fund's assets, Hotchkis and Wiley (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 yield relative to the market
- - low price-to-book value ratio relative to the market
- - financial strength
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 sometimes prevents investments in stocks that are in
well-known indexes, like the MSCI EAFE Index. Also, the return of the Fund will
not necessarily be similar to the return of the MSCI EAFE Index.
<TABLE>
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INTERNATIONAL VIP PORTFOLIO
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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.
See "Investment Risks" for more information about the risks associated with the
Fund.
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<PAGE> 18
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.
THE FUND'S PERFORMANCE
The bar chart and table below provide some indication of the risks of investing
in the Fund by showing changes in the Fund's performance and by showing how the
Fund's average annual total returns for 1 year and the life of the Fund (which
is less than 5 years) compare with those of a broad measure of market
performance. How the Fund has performed in the past is not necessarily an
indication of how the Fund will perform in the future. The bar chart and table
do not reflect insurance-related fees and expenses which, if reflected, would
lower the returns shown below.
INTERNATIONAL VIP PORTFOLIO
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TOTAL RETURN
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1999 21.68%
</TABLE>
Total return for the three months ended March 31, 2000: -1.83%.
Best quarter: 11.38% (2nd Quarter of 1999).
Worst quarter: 0.73% (1st Quarter of 1999).
<TABLE>
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AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1999) 1 YEAR 6/10/98
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International VIP Portfolio 21.68% 10.20%
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MSCI EAFE Index 27.30% 19.73%*
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</TABLE>
This chart compares the International VIP Portfolio's performance with the
returns of the Morgan Stanley Capital International Europe, Australia, Far East
Index (MSCI EAFE Index), an arithmetic average weighted by market value of the
performance of over 1,000 non-U.S. companies representing 20 stock markets in
Europe, Australia, New Zealand and the Far East. The Fund's value disciplines
often prevent investments in major stocks in the Index and the Fund's returns
may not be similar to the Index's returns.
* Since June 1, 1998.
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INVESTMENT OBJECTIVE AND POLICIES
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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.
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. The Fund may not achieve its objective
using this type of investing.
OTHER STRATEGIES
The Fund uses certain other investment strategies:
- - 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.
- - REPURCHASE AGREEMENTS: 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.
- - 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. Types of
derivatives that the Fund may use include forward contracts, swap agreements
and options. 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. The Fund will mark liquid assets as
segregated or enter offsetting positions to cover its obligations, if any,
under forward contracts, swap agreements and options to avoid leveraging the
Fund.
5
<PAGE> 20
- - BORROW MONEY: the Fund can borrow up to 10% of the value of its total assets.
- - 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.
- - WHEN-ISSUED or DELAYED DELIVERY: the Fund can buy securities on a when-issued
or delayed delivery basis. The Fund will mark liquid assets as segregated in
an amount equal to the when-issued securities.
- - CORPORATE LOANS: the Fund can invest in 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.
- - 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. Illiquid securities and
restricted securities involve liquidity risk, market risk and selection risk.
- 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.
6
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INVESTMENT RISKS
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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.
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 invests in foreign securities, it offers the potential for more
diversification than an investment only in the U.S. This is because stocks
traded on foreign markets have often (though not always) performed differently
than stocks in the U.S. 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 U.S. in areas such as growth of gross national product, reinvestment of
capital, resources, and balance of payments. Some of these economies 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 U.S., 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 U.S.
- - 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 U.S.
- - 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.
7
<PAGE> 22
- - 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 foreign securities transactions tend to be higher than those of
U.S. transactions.
- - International trade barriers or economic sanctions against certain foreign
countries may adversely affect the Fund's foreign holdings.
- - 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 entered 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) were redenominated in the euro.
These securities 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 transition to 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.
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.
8
<PAGE> 23
- - 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 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.
When-issued and delayed-delivery securities and forward commitments involve
market risk, selection risk and leverage risk.
- - CORPORATE LOANS -- 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 DERIVATIVES
Derivatives involve the following risks:
- - 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.
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THE ADVISOR AND PORTFOLIO MANAGERS
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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.
The Fund paid an annualized fee to the Advisor for the fiscal year ended
December 31, 1999 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
continue this expense limit through April 30, 2001, and will thereafter give
shareholders prior notice if this reimbursement policy will change. No
reimbursement was made to the Fund for the fiscal year ended December 31, 1999.
The Advisor may pay administrative service fees to Participating Insurance
Companies. The Advisor also 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 Ltd., 33 King William Street, London, England EC4R 9AS,
and Merrill Lynch Asset Management U.K. Limited, Ropemaker Place, 25 Ropemaker
Street, London, England E2Y 9LY, 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 is a managing director of the Advisor and 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 is a managing director of the Advisor and 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.
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<PAGE> 25
HOW TO BUY AND REDEEM SHARES
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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 or private placement memorandum ("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 money 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 Participating Insurance Companies' prospectuses) to
be effected on that day under variable annuity contracts and variable life
insurance policies. Orders received by the Fund are processed on business days
only. The Fund prices orders for the purchase of shares 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. The Fund prices redemptions 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 is a
designee of the Fund for receipt of purchase and redemption orders. Receipt by a
Participating Insurance Company is receipt by the Fund, so long as the Fund
receives timely notice of the order by the next business day. Separate accounts
must transmit purchase and redemption orders promptly. The Fund pays redemptions
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 charge any sales charges or redemption fees. Participating
Insurance Companies may charge mortality and expense risk fees and other charges
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 are 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 such
holders 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.
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DIVIDENDS AND TAXES
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DIVIDENDS AND DISTRIBUTIONS
The Fund pays income dividends, if any, yearly.
The Fund pays distributions of any net realized short-term gains and any net
capital gains at least annually.
See the prospectuses for variable annuity contracts or variable life insurance
policies issued by Participating Insurance Companies for additional information.
TAXES
The Fund has elected to qualify and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. If so
qualified, the Fund will not be subject to federal income taxes on its net
investment income and capital gains, if any, realized during any fiscal year in
which it distributes to its shareholders at least 90% of its net investment
income earned in the fiscal year.
A segregated asset account upon which a variable annuity contract or variable
life insurance policy is based must meet certain diversification tests in the
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. A failure of the Fund to qualify as a regulated
investment company or to meet these conditions and to comply with these 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 their contracts or policies during the year
(including the annual costs of life insurance, if any, provided under such
policies).
The terms of the variable annuity or variable life insurance plan through which
you invest and the tax rules governing such annuities and plans govern the tax
consequences of an investment in the Fund. Please refer to the prospectus for
the variable annuity or variable life insurance plan through which you are
investing.
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FINANCIAL HIGHLIGHTS
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The financial highlights table is intended to help you understand the Fund's
financial performance for the periods since it began operations. Certain
information reflects financial results for a single Fund share. The total return
in the table represents the rate that an investor would have earned (or lost) on
an investment in the Fund (assuming reinvestment of all dividends and
distributions, but excluding insurance-related fees and expenses). 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*
Year Ended through
INTERNATIONAL VIP PORTFOLIO December 31, 1999 December 31, 1998
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<S> <C> <C>
Net Asset Value, Beginning of Period........................ $ 9.52 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.15 0.04
Net realized and unrealized gain (loss) on
investments........................................... 1.91 (0.48)
------------ ------------
Total from investment operations.................... 2.06 (0.44)
------------ ------------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.06) (0.04)
------------ ------------
Net Asset Value, End of Period.............................. $ 11.52 $ 9.52
============ ============
TOTAL RETURN(1)............................................. 21.68% (4.38)%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $284,833,863 $289,134,958
Ratio of expenses to average net assets..................... 1.01% 1.05%(2)
Ratio of net investment income to average net assets........ 1.63% 1.09%(2)
Portfolio turnover rate..................................... 71% 24%(1)
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
13
<PAGE> 28
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 market conditions and investment
strategies that affected Fund performance)
- - Semi-annual Report
To get this information free of charge or for shareholder questions, contact:
The Fund's transfer agent
(800) 236-4479
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
- - call 1-202-942-8090 for information on the Commission's Public Reference Room,
where documents can be reviewed and copied
- - the information is available at the SEC's Internet site on the EDGAR Database
at http://www.sec.gov
- - copies of the information retrievable from the SEC's Internet site are
available for a fee by writing to the SEC's Public Reference Section or by
electronic request at [email protected]
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
MAY 1, 2000
[LOGO]
HOTCHKIS AND WILEY VARIABLE TRUST
- -------------------------------------------------------
---------------------------------------------------
INTERNATIONAL
VIP PORTFOLIO
---------------------------------------------------
- -------------------------------------------------------
<PAGE> 29
PROSPECTUS
MAY 1, 2000
HOTCHKIS AND WILEY VARIABLE TRUST [LOGO]
The Fund is a portfolio of the Hotchkis and Wiley Variable Trust. It is an
investment for variable annuity contracts and variable life insurance contracts
issued by insurance companies that have contracts with the Fund.
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.
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> 30
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
KEY FACTS.............................................. 3
INVESTMENT OBJECTIVE AND POLICIES...................... 4
INVESTMENT RISKS....................................... 8
THE ADVISOR AND PORTFOLIO MANAGERS..................... 12
HOW TO BUY AND REDEEM SHARES........................... 13
DIVIDENDS AND TAXES.................................... 14
INFORMATION ABOUT THE FUND.........................back cover
</TABLE>
[HOTCHKIS AND WILEY LOGO]
<PAGE> 31
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 that fund a portion of a variable
annuity or insurance contract. More detailed information follows the summary.
The Fund invests in a diversified portfolio of bonds of different maturities,
including U.S. Government securities, corporate bonds, asset-backed securities
and mortgage-backed securities. The Fund's duration is from two to eight years.
Duration is a measure of how much the price of a bond would change compared to a
change in market interest rates. Duration is discussed further on page 4.
<TABLE>
<CAPTION>
TOTAL RETURN BOND VIP PORTFOLIO
- ------------------------------------------------------------------------------------------------
<S> <C>
OBJECTIVE - maximize long-term total
return
MAIN STRATEGIES
CREDIT QUALITY - at least 85% investment grade;
up to 15% rated below investment
grade, none below B
DURATION - 2-8 years
</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 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. The longer the duration of the Fund, the
more the Fund's price will go down if interest rates go up. If the value of the
Fund's investments goes down, you may lose money.
The Fund invests in mortgage-backed and asset-backed securities. In addition to
normal bond risks, these securities are subject to prepayment risk.
The Fund invests in "junk" bonds, which have more credit risk and tend to be
less liquid than higher-rated securities.
See "Investment Risks" for more information about the risks associated with the
Fund.
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.
3
<PAGE> 32
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund'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.
TYPES OF INVESTMENTS
The Fund seeks to achieve its objective 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
- - 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
- - 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 Investors Service ("Moody's") or Standard & Poor's Ratings Group
("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
After the 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. 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.
4
<PAGE> 33
Duration is a tool to measure interest rate risk. Assuming a 1% change in
interest rates and the duration shown below, the Fund's price would change as
follows:
<TABLE>
<CAPTION>
FUND DURATION CHANGE IN INTEREST RATES
---- -------- ------------------------
<S> <C> <C>
Total Return Bond VIP 4.5 yrs. 1% decline ----> 4.5% gain in Fund price
1% rise ----> 4.5% 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 Fund and may correlate with
changes in interest rates. These factors can increase swings in the Fund's share
prices during periods of volatile interest rate changes.
FOREIGN BONDS
The 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 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. The Fund may not achieve its objective
using this type of investing.
PORTFOLIO TURNOVER
As a result of the strategies described above, the Fund 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 mark ups and other transaction costs and can affect the Fund's
performance. It also can result in a greater amount of distributions as ordinary
income rather than long-term capital gains.
TYPES OF SECURITIES USED IN PRINCIPAL STRATEGIES
U.S. GOVERNMENT SECURITIES
The Fund can invest in U.S. Government securities. U.S. Government securities
include direct obligations issued by the U.S. 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 U.S.
Obligations of U.S. Government agencies and instrumentalities may or may not be
supported by the full faith and credit of the U.S. 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 U.S., the owner must look mainly to the
agency issuing the obligation for repayment.
5
<PAGE> 34
CORPORATE BONDS
The Fund can invest in corporate bonds. These include variable and floating rate
bonds and corporate commercial paper.
The Fund 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 Fund 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.
ASSET-BACKED SECURITIES
The Fund 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 Fund can invest in mortgage-backed securities, including mortgage
pass-through securities and collateralized mortgage obligations ("CMOs").
OTHER STRATEGIES
The Fund uses certain other investment strategies:
- - REPURCHASE AGREEMENTS: 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.
- - MUNICIPAL BONDS: the Fund 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 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. Types of
derivatives that the Fund may use include futures contracts, forward
contracts, swap agreements and options. 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. The Fund will
mark liquid assets as segregated or enter offsetting positions to cover its
obligations, if any, under futures contracts, forward contracts, swap
agreements and options to avoid leveraging the Fund.
6
<PAGE> 35
- - BORROW MONEY: the Fund can borrow up to 10% of the value of its total assets.
The Fund can enter into reverse repurchase agreements in which the Fund sells
securities and agrees to buy them back for a fixed price at a later date. The
Fund also can use dollar rolls in which the Fund sells 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 Fund.
- - LEND SECURITIES: the Fund can lend up to 33 1/3% of the value of its total
assets.
- - 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.
- - WHEN-ISSUED or DELAYED DELIVERY: the Fund can buy securities on a when-issued
or delayed delivery basis. The Fund will mark liquid assets as segregated in
an amount equal to the when-issued securities.
- - CORPORATE LOANS: the Fund can invest in 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.
- - 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. Illiquid securities and
restricted securities involve liquidity risk, market risk and selection risk.
- 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 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.
7
<PAGE> 36
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.
MARKET AND SELECTION RISK
Market risk is the risk that the 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 U.S. This is because stocks
traded on foreign markets have often (though not always) performed differently
than stocks in the U.S. 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 U.S. in areas such as growth of gross national product, reinvestment of
capital, resources, and balance of payments. Some of these economies 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 U.S., 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 U.S.
- - Because there are generally fewer investors in foreign bonds and a smaller
number of bonds traded each day, it may be difficult for the Fund to buy and
sell foreign bonds. In addition, prices of foreign bonds may go up and down
more than prices of bonds traded in the U.S.
- - 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.
8
<PAGE> 37
- - 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 foreign securities transactions tend to be higher than those of
U.S. transactions.
- - International trade barriers or economic sanctions against certain foreign
countries may adversely affect the Fund's foreign holdings.
- - 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 entered 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) were redenominated in the euro.
These securities 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 transition to 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.
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 the 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.
9
<PAGE> 38
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 the 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.
- - 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 the 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, the 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 Fund's 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 the Fund. Junk bonds generally
are less liquid and experience more price volatility than higher
10
<PAGE> 39
rated bonds. 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 bonds. Junk bonds involve credit risk,
market risk, selection risk and liquidity risk.
- - 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 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.
When-issued and delayed-delivery securities and forward commitments involve
market risk, selection risk and leverage risk.
- - 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, the Fund may be adversely affected. In
addition, these securities are subject to credit risk.
- - INDEXED AND INVERSE FLOATING RATE SECURITIES -- The 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. The 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 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 the Fund to the risks of reduced or eliminated interest payments.
Investments in indexed securities also may subject the 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 the 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 Fund may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign government entities.
Investments in sovereign debt subject the Fund 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 to pay or for further loans. There is no legal process for collecting
sovereign debts that a government does not pay.
- - CORPORATE LOANS -- 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.
11
<PAGE> 40
RISKS OF DERIVATIVES
Derivatives involve the following risks:
- - 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 investment
operations began in February 2000. 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.
The Fund will pay an annual advisory fee to the Advisor of .55% 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 .65% of its average net
assets. The Advisor has agreed to this expense limit through April 30, 2001, and
will thereafter give shareholders prior notice if this reimbursement policy will
change.
The Advisor may pay administrative service fees to Participating Insurance
Companies. The Advisor also is allowed to allocate brokerage based on sales of
shares of funds managed by the Advisor but has not done so.
PORTFOLIO MANAGERS
The portfolio managers who have responsibility for the day-to-day management of
the Fund are Roger DeBard, Michael Sanchez and John Queen. Each has served as
portfolio manager for the Fund since its inception. Mr. DeBard is a managing
director of the Advisor where he has been a portfolio manager for more than five
years. Mr. Sanchez
12
<PAGE> 41
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.
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 or private placement memorandum ("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 money 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 Participating Insurance Companies' prospectuses) to
be effected on that day under variable annuity contracts and variable life
insurance policies. Orders received by the Fund are processed on business days
only. The Fund prices orders for the purchase of shares 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. The Fund prices redemptions 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 is a
designee of the Fund for receipt of purchase and redemption orders. Receipt by a
Participating Insurance Company is receipt by the Fund, so long as the Fund
receives timely notice of the order by the next business day. Separate accounts
must transmit purchase and redemption orders promptly. The Fund pays redemptions
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 charge any sales charges or redemption fees. Participating
Insurance Companies may charge mortality and expense risk fees and other charges
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 are 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 such
holders 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
13
<PAGE> 42
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.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund pays income dividends, if any, monthly.
The Fund pays distributions of any net realized short-term gains and any net
capital gains at least annually.
See the prospectuses for variable annuity contracts or variable life insurance
policies issued by Participating Insurance Companies for additional information.
TAXES
The Fund will elect to qualify and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. If so
qualified, the Fund will not be subject to federal income taxes on its net
investment income and capital gains, if any, realized during any fiscal year in
which it distributes to its shareholders at least 90% of its net investment
income earned in the fiscal year.
A segregated asset account upon which a variable annuity contract or variable
life insurance policy is based must meet certain diversification tests in the
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. A failure of the Fund to qualify as a regulated
investment company or to meet these conditions and to comply with these 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 their contracts or policies during the year
(including the annual costs of life insurance, if any, provided under such
policies).
The terms of the variable annuity or variable life insurance plan through which
you invest and the tax rules governing such annuities and plans govern the tax
consequences of an investment in the Fund. Please refer to the prospectus for
the variable annuity or variable life insurance plan through which you are
investing.
14
<PAGE> 43
[HOTCHKIS AND WILEY VARIABLE TRUST LOGO]
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 market conditions and investment
strategies that affected Fund performance)
- - Semi-annual Report
To get this information free of charge or for shareholder questions, contact:
The Fund's transfer agent
(800) 236-4479
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
- - call 1-202-942-8090 for information on the Commission's Public Reference Room,
where documents can be reviewed and copied
- - the information is available at the SEC's Internet site on the EDGAR Database
at http://www.sec.gov
- - copies of the information retrievable from the SEC's Internet site are
available for a fee by writing to the SEC's Public Reference Section or by
electronic request at [email protected]
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
MAY 1, 2000
[HOTCHKIS AND WILEY LOGO]
[HOTCHKIS AND WILEY VARIABLE TRUST LOGO]
- -------------------------------------------------------
---------------------------------------------------
TOTAL RETURN BOND
VIP PORTFOLIO
---------------------------------------------------
- -------------------------------------------------------
<PAGE> 44
PROSPECTUS
MAY 1, 2000
HOTCHKIS AND WILEY VARIABLE TRUST [LOGO]
The Fund is a portfolio of the Hotchkis and Wiley Variable Trust. It is an
investment for variable annuity contracts and variable life insurance contracts
issued by insurance companies that have contracts with the Fund.
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.
<PAGE> 45
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
KEY FACTS.............................................. 3
INVESTMENT OBJECTIVE AND POLICIES...................... 5
INVESTMENT RISKS....................................... 9
THE ADVISOR AND PORTFOLIO MANAGERS..................... 13
HOW TO BUY AND REDEEM SHARES........................... 14
DIVIDENDS AND TAXES.................................... 15
FINANCIAL HIGHLIGHTS................................... 16
INFORMATION ABOUT THE FUND.........................back cover
</TABLE>
[HOTCHKIS AND WILEY LOGO]
<PAGE> 46
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 that fund a portion of a variable
annuity or insurance contract. More detailed information follows the summary.
The Fund invests in a diversified portfolio of bonds of different maturities,
including U.S. Government securities, corporate bonds, asset-backed securities
and mortgage-backed securities. The Fund's duration is from one to three years.
Duration is a measure of how much the price of a bond would change compared to a
change in market interest rates. Duration is discussed further on page 5.
<TABLE>
<CAPTION>
LOW DURATION VIP PORTFOLIO
- ------------------------------------------------------------------------------------------------
<S> <C>
OBJECTIVE - maximize total return
- preserve capital
MAIN STRATEGIES
CREDIT QUALITY - at least 70% in A rated or better;
up to 30% rated BBB/Baa;
up to 10% rated below investment grade, none below B
DURATION - 1-3 years
</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 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. The longer the duration of the Fund, the
more the Fund's price will go down if interest rates go up. If the value of the
Fund's investments goes down, you may lose money.
The Fund invests in mortgage-backed and asset-backed securities. In addition to
normal bond risks, these securities are subject to prepayment risk.
The Fund invests in "junk" bonds, which have more credit risk and tend to be
less liquid than higher-rated securities.
See "Investment Risks" for more information about the risks associated with the
Fund.
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.
3
<PAGE> 47
THE FUND'S PERFORMANCE
The bar chart and table below provide some indication of the risks of investing
in the Fund by showing changes in the Fund's performance and by showing how the
Fund's average annual total returns for 1 year and the life of the Fund (which
is less than 5 years) compare with those of a broad measure of market
performance. How the Fund has performed in the past is not necessarily an
indication of how the Fund will perform in the future. The bar chart and table
do not reflect insurance-related fees and expenses which, if reflected, would
lower the returns shown below.
LOW DURATION VIP PORTFOLIO
Total
Return
<TABLE>
<S> <C>
1999 2.8%
</TABLE>
Total return for the three months ended March 31, 2000: 1.07%
Best quarter: 0.82% (3rd Quarter of 1999).
Worst quarter: 0.55% (2nd Quarter of 1999).
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1999) 1 YEAR 3/18/98
- ------------------------------------------------------------------------------------------------------
Low Duration VIP Portfolio 2.80% 4.04%
- ------------------------------------------------------------------------------------------------------
Merrill Lynch 1-3 Year U.S. Treasury Note Index 3.06% 4.76%
- ------------------------------------------------------------------------------------------------------
</TABLE>
This chart compares the Low Duration VIP Portfolio's performance with the
returns of the Merrill Lynch 1-3 Year U.S. Treasury Note Index, an unmanaged
index of U.S. Treasury securities with maturities of one to three years which
are guaranteed as to the timely payment of interest and principal by the U.S.
Government. The Fund owns securities not reflected in the Index or guaranteed.
4
<PAGE> 48
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund'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.
TYPES OF INVESTMENTS
The Fund seeks to achieve its objective 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
- - 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
- - 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 Investors Service or BBB by
Standard & Poor's
- - 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 the 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. 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.
5
<PAGE> 49
Duration is a tool to measure interest rate risk. Assuming a 1% change in
interest rates and the duration shown below, the Fund's price would change as
follows:
<TABLE>
<CAPTION>
FUND DURATION CHANGE IN INTEREST RATES
---- -------- ------------------------
<S> <C> <C>
Low Duration VIP 2 yrs. 1% decline ---> 2% gain in Fund price
1% rise ---> 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 Fund and may correlate with
changes in interest rates. These factors can increase swings in the Fund's share
prices during periods of volatile interest rate changes.
FOREIGN BONDS
The 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 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. The Fund may not achieve its objective
using this type of investing.
PORTFOLIO TURNOVER
As a result of the strategies described above, the Fund 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 mark ups and other transaction costs and can affect the Fund's
performance. It also can result in a greater amount of distributions as ordinary
income rather than long-term capital gains.
TYPES OF SECURITIES USED IN PRINCIPAL STRATEGIES
U.S. GOVERNMENT SECURITIES
The Fund can invest in U.S. Government securities. U.S. Government securities
include direct obligations issued by the U.S. 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 U.S.
Obligations of U.S. Government agencies and instrumentalities may or may not be
supported by the full faith and credit of the U.S. 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 U.S., the owner must look mainly to the
agency issuing the obligation for repayment.
6
<PAGE> 50
CORPORATE BONDS
The Fund can invest in corporate bonds. These include variable and floating rate
bonds and corporate commercial paper.
The Fund 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 Fund 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.
ASSET-BACKED SECURITIES
The Fund 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 Fund can invest in mortgage-backed securities, including mortgage
pass-through securities and collateralized mortgage obligations ("CMOs").
OTHER STRATEGIES
The Fund uses certain other investment strategies:
- - REPURCHASE AGREEMENTS: 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.
- - MUNICIPAL BONDS: the Fund 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 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. Types of
derivatives that the Fund may use include futures contracts, forward
contracts, swap agreements and options. 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. The Fund will
mark liquid assets as segregated or enter offsetting positions to cover its
obligations, if any, under futures contracts, forward contracts, swap
agreements and options to avoid leveraging the Fund.
7
<PAGE> 51
- - BORROW MONEY: the Fund can borrow up to 10% of the value of its total assets.
The Fund can enter into reverse repurchase agreements in which the Fund sells
securities and agrees to buy them back for a fixed price at a later date. The
Fund also can use dollar rolls in which the Fund sells 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 Fund.
- - LEND SECURITIES: the Fund can lend up to 33 1/3% of the value of its total
assets.
- - 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.
- - WHEN-ISSUED or DELAYED DELIVERY: the Fund can buy securities on a when-issued
or delayed delivery basis. The Fund will mark liquid assets as segregated in
an amount equal to the when-issued securities.
- - CORPORATE LOANS: the Fund can invest in 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.
- - 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. Illiquid securities and
restricted securities involve liquidity risk, market risk and selection risk.
- 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 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.
8
<PAGE> 52
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.
MARKET AND SELECTION RISK
Market risk is the risk that the 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 U.S. This is because stocks
traded on foreign markets have often (though not always) performed differently
than stocks in the U.S. 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 U.S. in areas such as growth of gross national product, reinvestment of
capital, resources, and balance of payments. Some of these economies 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 U.S., 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 U.S.
- - Because there are generally fewer investors in foreign bonds and a smaller
number of bonds traded each day, it may be difficult for the Fund to buy and
sell foreign bonds. In addition, prices of foreign bonds may go up and down
more than prices of bonds traded in the U.S.
- - 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.
9
<PAGE> 53
- - 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 foreign securities transactions tend to be higher than those of
U.S. transactions.
- - International trade barriers or economic sanctions against certain foreign
countries may adversely affect the Fund's foreign holdings.
- - 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 entered 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) were redenominated in the euro.
These securities 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 transition to 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.
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 the 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.
10
<PAGE> 54
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 the 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.
- - 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 the 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, the 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 bonds that the Fund's 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 the Fund. Junk bonds generally
are less liquid and experience more price volatility than higher
11
<PAGE> 55
rated bonds. 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 bonds. Junk bonds involve credit risk,
market risk, selection risk and liquidity risk.
- - 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 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.
When-issued and delayed-delivery securities and forward commitments involve
market risk, selection risk and leverage risk.
- - 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, the Fund may be adversely affected. In
addition, these securities are subject to credit risk.
- - INDEXED AND INVERSE FLOATING RATE SECURITIES -- The 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. The 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 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 the Fund to the risks of reduced or eliminated interest payments.
Investments in indexed securities also may subject the 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 the 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 Fund may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign government entities.
Investments in sovereign debt subject the Fund 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 to pay or for further loans. There is no legal process for collecting
sovereign debts that a government does not pay.
- - CORPORATE LOANS -- 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.
12
<PAGE> 56
RISKS OF DERIVATIVES
Derivatives involve the following risks:
- - 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.
The Fund paid an annualized fee to the Advisor for the fiscal year ended
December 31, 1999 of .46% 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 .58% of its average net assets. The Advisor has agreed to
continue this expense limit through April 30, 2001, and will thereafter give
shareholders prior notice if this reimbursement policy will change.
The Advisor may pay administrative service fees to Participating Insurance
Companies. The Advisor also is allowed to allocate brokerage based on sales of
shares of funds managed by the Advisor but has not done so.
PORTFOLIO MANAGERS
The portfolio managers who have responsibility for the day-to-day management of
the Fund are Roger DeBard, Michael Sanchez and John Queen. Each has served as
portfolio manager for the Fund since its inception. Mr. DeBard is a managing
director of the Advisor where he has been a portfolio manager for more than five
years. Mr. Sanchez
13
<PAGE> 57
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.
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 or private placement memorandum ("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 money 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 Participating Insurance Companies' prospectuses) to
be effected on that day under variable annuity contracts and variable life
insurance policies. Orders received by the Fund are processed on business days
only. The Fund prices orders for the purchase of shares 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. The Fund prices redemptions 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 is a
designee of the Fund for receipt of purchase and redemption orders. Receipt by a
Participating Insurance Company is receipt by the Fund, so long as the Fund
receives timely notice of the order by the next business day. Separate accounts
must transmit purchase and redemption orders promptly. The Fund pays redemptions
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 charge any sales charges or redemption fees. Participating
Insurance Companies may charge mortality and expense risk fees and other charges
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 are 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 such
holders 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.
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<PAGE> 58
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund pays income dividends, if any, monthly.
The Fund pays distributions of any net realized short-term gains and any net
capital gains at least annually.
See the prospectuses for variable annuity contracts or variable life insurance
policies issued by Participating Insurance Companies for additional information.
TAXES
The Fund has elected to qualify and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. If so
qualified, the Fund will not be subject to federal income taxes on its net
investment income and capital gains, if any, realized during any fiscal year in
which it distributes to its shareholders at least 90% of its net investment
income earned in the fiscal year.
A segregated asset account upon which a variable annuity contract or variable
life insurance policy is based must meet certain diversification tests in the
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. A failure of the Fund to qualify as a regulated
investment company or to meet these conditions and to comply with these 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 their contracts or policies during the year
(including the annual costs of life insurance, if any, provided under such
policies).
The terms of the variable annuity or variable life insurance plan through which
you invest and the tax rules governing such annuities and plans govern the tax
consequences of an investment in the Fund. Please refer to the prospectus for
the variable annuity or variable life insurance plan through which you are
investing.
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<PAGE> 59
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance for the periods since it began operations. Certain
information reflects financial results for a single Fund share. The total return
in the table represents the rate that an investor would have earned (or lost) on
an investment in the Fund (assuming reinvestment of all dividends and
distributions, but excluding insurance-related fees and expenses). 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>
March 18, 1998*
Year Ended through
LOW DURATION VIP PORTFOLIO December 31, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $ 9.98 $ 10.00
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.54 0.46
Net realized and unrealized loss on investments......... (0.27) (0.03)
---------- ----------
Total from investment operations.................... 0.27 0.43
---------- ----------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.53) (0.45)
---------- ----------
Net Asset Value, End of Period.............................. $ 9.72 $ 9.98
========== ==========
TOTAL RETURN(1)............................................. 2.80% 4.40%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $1,700,885 $1,723,748
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 4.00% 5.56%(2)
After expense reimbursement............................... 0.58% 0.58%(2)
Ratio of net investment income to average net assets:
Before expense reimbursement.............................. 1.90% 0.47%(2)
After expense reimbursement............................... 5.32% 5.45%(2)
Portfolio turnover rate..................................... 137% 296%(1)
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
16
<PAGE> 60
[HOTCHKIS AND WILEY VARIABLE TRUST LOGO]
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 market conditions and investment
strategies that affected Fund performance)
- - Semi-annual Report
To get this information free of charge or for shareholder questions, contact:
The Fund's transfer agent
(800) 236-4479
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
- - call 1-202-942-8090 for information on the Commission's Public Reference Room,
where documents can be reviewed and copied
- - the information is available at the SEC's Internet site on the EDGAR Database
at http://www.sec.gov
- - copies of the information retrievable from the SEC's Internet site are
available for a fee by writing to the SEC's Public Reference Section or by
electronic request at [email protected]
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
MAY 1, 2000
[HOTCHKIS AND WILEY LOGO]
[HOTCHKIS AND WILEY VARIABLE TRUST LOGO]
- -------------------------------------------------------
---------------------------------------------------
LOW DURATION
VIP PORTFOLIO
---------------------------------------------------
- -------------------------------------------------------
<PAGE> 61
HOTCHKIS AND WILEY VARIABLE TRUST
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 2000
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 prospectuses dated May 1, 2000 of the Funds. Copies
of the prospectuses 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-24
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
Shares of Other Investment Companies...................... B-26
Management.................................................. B-27
The Advisor............................................... B-29
Subadvisors............................................... B-30
The Distributor........................................... B-30
Code of Ethics............................................ B-30
Other Service Providers................................... B-31
Portfolio Transactions and Brokerage...................... B-31
Trust Shares................................................ B-33
Net Asset Value............................................. B-34
Dividends and Tax Status.................................... B-35
Performance Information..................................... B-36
General Information About the Trust's Shareholders.......... B-37
Appendix -- Description of Ratings.......................... A-1
Financial Statements
</TABLE>
<PAGE> 62
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 that Fund's 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> 63
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.
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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
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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 creditworthiness 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 prospectuses, 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 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
its 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 liquidation 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 a credit risk analysis of
potential issuers, the characteristics of the security, the interest rate
sensitivity of the various debt issues available with respect to a particular
issuer, an 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 that foreign exchange rate fluctuations will affect the value of
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. 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. 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
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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 or shareholders of other Funds 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
disclosure or 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 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.
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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 the 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.
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 prior to the
sale.
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 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 that have a maturity of longer than seven
days. Securities which
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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.
Illiquid securities are more difficult to sell and value than exchange-traded or
listed securities with similar characteristics. 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 must 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.
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
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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 mark as segregated 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 for purposes of the limit
applicable to 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.
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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 mark as segregated with its custodian
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.
SHARES OF OTHER INVESTMENT COMPANIES
The Funds can invest in securities of other investment companies except to the
extent prohibited by law. Like all equity investments, these investments may go
up or down in value. They also may not perform in correlation with a Fund's
principal strategies. The Funds will pay additional fees through their
investments in other investment companies.
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MANAGEMENT
The Trustees oversee the actions of the Funds' Advisor and other service
providers and decide upon matters of general policy. The Trustees also review
the actions of the Funds' officers, who conduct and supervise the daily business
operations of the Funds. The Trustees and officers of the Trust are:
Michael Baxter* (36) -- Trustee -- 725 South Figueroa Street, Suite 4000, Los
Angeles, CA 90017-5400. Co-Head of the Advisor (since 1999); Managing Director
of the Advisor (since 1996); Partner of the Advisor (1994 - 1996); Portfolio
Manager of the Advisor (since 1990).
Robert L. Burch III (66) -- Trustee -- One Rockefeller Plaza, New York, NY
10020. Managing Partner, A.W. Jones Co. (investments) (since 1984); Chairman,
Jonathan Mfg. Corp. (slide manufacturing) (since 1977).
John A. G. Gavin (69) -- Trustee -- 2100 Century Park West, Los Angeles, CA
90067. Partner and Managing Director, Hicks, Muse, Tate and Furst (Latin
America) (private equity investment firm) (since 1994); Chairman, Gamma Services
Corp. (venture capital) (since 1968); Principal, Gavin, Dailey & Partners
(consulting) (since 1993); U.S. Ambassador to Mexico (1981 - 1986); Director,
Apex Mortgage Capital, Inc., Atlantic Richfield Co., International Wire Corp.
and Krause's Furniture.
Joe Grills (65) -- Trustee -- P.O. Box 98, Rapidan, VA 22733. Member of the
Committee of Investment of Employee Benefit Assets of the Financial Executives
Institute ("CIEBA") (since 1986); member of CIEBA's Executive Committee (since
1988) and its Chairman (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 (since 1992) and Vice Chairman (since 1998),
Duke Management Company; Director, KIMCO Realty Corporation (since 1997) and
LaSalle Street Fund (since 1995); Member of the Investment Advisory Committee of
the Virginia Retirement System (since 1998); Director, Montpelier Foundation
(since 1998); Trustee or Director of 24 registered investment companies
(consisting of 56 portfolios) for which Merrill Lynch Asset Management, L.P. or
its affiliate, Fund Asset Management, L.P., is the advisor.
Nigel Hurst-Brown* (48) -- Trustee -- 725 South Figueroa Street, Suite 4000, Los
Angeles, CA 90017-5400. Co-Head of the Advisor (since 1999); Managing Director
of Merrill Lynch Mercury Asset Management (since 1998); Director of Mercury
Asset Management Group Plc. (since 1990).
Madeleine A. Kleiner (48) -- Trustee -- 1900 Avenue of the Stars, Suite 1700,
Los Angeles, CA 90067. Senior Executive Vice President, Chief Administrative
Officer and General Counsel, H.F. Ahmanson & Company and Home Savings of
America, FSB (banking company) (1995 - 1998); Partner, Gibson, Dunn & Crutcher
(law firm) (1983 - 1995).
Richard R. West (62) -- Trustee -- Box 604, Genoa, NV 89411. Professor of
Finance (since 1984), Dean (1984 - 1993), and currently Dean Emeritus, New York
University 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 62 registered investment companies (consisting of 86 portfolios)
for which Merrill Lynch Asset Management, L.P. or its affiliate, Fund Asset
Management, L.P., is the advisor.
- ---------------
* "Interested" Trustee, as defined in the 1940 Act, due to the relationship
indicated with the Funds' Advisor.
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Nancy D. Celick (48) -- President and Principal Executive Officer -- 725 South
Figueroa Street, Suite 4000, Los Angeles, CA 90017-5400. Chief Administrative
Officer of the Advisor (since 1998); Chief Financial Officer of the Advisor
(1993 - 1998); Chief Financial Officer of Kennedy-Wilson, Inc. (auction
marketing services) (1992 - 1993); Chief Financial Officer of First National
Corporation (bank holding company) (1984 - 1992).
Gail Bardin (53) -- Executive Vice President -- 725 South Figueroa Street, Suite
4000, Los Angeles, CA 90017-5400. Managing Director of the Advisor (since 1996);
Partner of the Advisor (1994 - 1996); Principal of the Advisor (1992 - 1994);
Portfolio Manager of the Advisor (1988 - 1992).
Mark D. Cone (32) -- Vice President -- 225 Liberty Street, 30th Floor, New York,
NY 10080-6130. Vice President of the Advisor; Retail Account Manager, Neuberger
& Berman (1991 - 1994).
Anna Marie S. Lopez (32) -- Treasurer, Principal Financial and Accounting
Officer and Assistant Secretary -- 725 South Figueroa Street, Suite 4000, Los
Angeles, CA 90017-5400. Compliance Officer of the Advisor (since 1999);
Compliance Associate of the Advisor (1997 - 1999); Manager, Price Waterhouse
(1991 - 1997).
Turner Swan (38) -- Secretary -- 725 S. Figueroa Street, Suite 4000, Los
Angeles, CA 90017-5400. Attorney with the Advisor (since 1997); Attorney,
Sheppard, Mullin, Richter & Hampton LLP (1995 - 1997); Attorney, Trout Trading
Management Company Ltd. (1993 - 1995).
Gracie Fermelia (38) -- Vice President, Assistant Secretary and Assistant
Treasurer -- 725 South Figueroa Street, Suite 4000, Los Angeles, CA 90017-5400.
Business Manager of the International Department of the Advisor (since 1998);
Compliance Officer of the Advisor (1994 - 1998); Senior Manager, Price
Waterhouse (1985 - 1994).
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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, 1999 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,
1999.
<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
AGGREGATE FROM TRUST AND
COMPENSATION FUND COMPLEX
NAME AND POSITION FROM TRUST PAID TO TRUSTEES*
----------------- ------------ -----------------
<S> <C> <C>
Michael Baxter,..................................... $ -- $ --
Trustee
Robert L. Burch III,................................ $13,000 $ 34,000
Trustee
John A. G. Gavin,................................... $10,000 $ 25,000
Trustee
Joe Grills,......................................... $13,000 $232,333
Trustee
Nigel Hurst-Brown,.................................. $ -- $ --
Trustee
Robert B. Hutchinson,............................... $13,000 $ 34,000
Former Trustee
Madeleine A. Kleiner,............................... $ 6,000 $ 18,000
Trustee
Merle T. Welshans,.................................. $13,000 $ 34,000
Former Trustee
Richard R. West,.................................... $13,000 $422,225
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, a division of Merrill Lynch Asset Management, L.P. ("MLAM"),
is located at 725 South Figueroa Street, Suite 4000, Los Angeles, California
90017-5400. MLAM is an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc., a financial services holding company incorporated in Delaware. MLAM and
its advisory affiliates act as the investment advisor for more than 140
registered investment companies and offer portfolio management and portfolio
analysis services to individual and institutional accounts.
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
daily 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, the
International VIP Portfolio paid the Advisor $1,019,881 and for the fiscal year
ended December 31, 1999, the International VIP Portfolio paid the Advisor
$1,678,700. The Equity Income VIP Portfolio and the Low Duration VIP Portfolio
paid no
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advisory fees and were reimbursed $44,455 and $51,340, respectively, by the
Advisor for the fiscal period ended December 31, 1998. For the fiscal year ended
December 31, 1999, the Equity Income VIP Portfolio and the Low Duration VIP
Portfolio paid no advisory fees and were reimbursed by the Advisor $40,647 and
$50,385, respectively. The Total Return Bond VIP Portfolio had not commenced
investment operations as of December 31, 1999.
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. The Advisor has agreed to these expense limits
through April 2001. 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. For the fiscal year ended December 31,
1999, the Advisor waived a portion of its fees as follows: Equity Income VIP
Portfolio -- $7,896; and Low Duration VIP Portfolio -- $7,842.
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 in the case of
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
SUBADVISORS
The Advisor has entered into subadvisory agreements with Mercury Asset
Management International Ltd. 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 at rates of compensation as may be agreed by the
parties. There is no increase in the aggregate fees paid by this Fund for such
services.
THE DISTRIBUTOR
Princeton Funds Distributor, Inc., 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, is the Funds' distributor and makes a continuous offering of the
Funds' shares. It is not compensated by the Funds. The distributor is an
indirect subsidiary of Merrill Lynch & Co., Inc., and is an affiliate of the
Advisor.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule 17j-1
of the 1940 Act which includes the Code of Ethics of the Advisor and distributor
(together, the "Code"). The Code significantly restricts the personal investing
activities of all employees of the Advisor and distributor and, as described
below, imposes additional, more onerous, restrictions on Fund investment
personnel.
The Code requires that all employees of the Advisor and principal underwriter
preclear any personal securities investment (with limited exceptions, such as
government securities). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Advisor and principal underwriter include a ban on acquiring
any securities in a "hot" initial public offering and a prohibition from
profiting on short-term trading in
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<PAGE> 91
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Advisor. Furthermore, the Code provides for trading "blackout periods" which
prohibit trading by investment personnel of a Fund within 7 days of trading by
the Fund in the same (or equivalent) security. The Code is on public file with,
and is available from, the SEC.
OTHER SERVICE PROVIDERS
The Trust's custodian, Firstar Bank Milwaukee, N.A., 615 East Michigan Street,
Milwaukee, Wisconsin, is responsible for holding the Trust's domestic assets and
Firstar Mutual Fund Services, LLC ("FMFS"), located at the same address, acts as
the Trust's accounting services agent, transfer agent and dividend paying agent.
FMFS is responsible for the issuance, transfer and redemption of shares and the
opening and maintenance of shareholder accounts. For these services, FMFS
receives an annual fee of $14.00 per shareholder account. FMFS is also
reimbursed for its out-of-pocket expenses.
The Chase Manhattan Bank, Four Chase MetroTech Center, Brooklyn, New York 11245,
through its global custody network, provides custodial services for assets of
the Trust held outside the U.S.
The Trust's independent accountant, PricewaterhouseCoopers LLP, 100 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202, examines the Trust's financial
statements and assists in the preparation of certain reports to the SEC.
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") that will, 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. The Agreements also state that the Advisor shall use its judgment in
determining that the amount of commissions paid are reasonable in relation to
the value of brokerage and research services provided and need not place or
attempt to place a specific dollar value on such services or on the portion of
commission rates reflecting such services. The Agreements provide that to
demonstrate that such determinations were in good faith, and to show the overall
reasonableness of commissions paid, the Advisor shall be prepared to show that
commissions paid (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.
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<PAGE> 92
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 United
States.
The value of any 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,
1999 is as follows:
<TABLE>
<CAPTION>
REGULAR AGGREGATE
FUND BROKER-DEALER HOLDINGS
- ------------------------------------------------- --------------- ---------
<S> <C> <C>
Low Duration VIP Portfolio Lehman Brothers $24,773
</TABLE>
During the fiscal year ended December 31, 1999, the following brokerage
commissions were paid by the Funds:
<TABLE>
<S> <C>
Equity Income VIP Portfolio................................. $ 502
International VIP Portfolio................................. $ 531,182
Low Duration VIP Portfolio.................................. $ 0
</TABLE>
The Advisor is an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a registered broker-dealer, and the other broker-dealer
subsidiaries of Merrill Lynch & Co., Inc. For the fiscal year ended December 31,
1999, transactions with affiliated broker-dealers were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF AGGREGATE
DOLLAR AMOUNT OF
PERCENTAGE OF AGGREGATE TRANSACTIONS INVOLVING
BROKERAGE PAYMENT OF
COMMISSIONS PAID COMMISSIONS COMMISSIONS EFFECTED
TO AFFILIATED PAID TO AFFILIATED THROUGH AFFILIATED
FUND BROKER-DEALERS BROKER-DEALERS BROKER-DEALERS
---- ---------------- ----------------------- -----------------------
<S> <C> <C> <C>
International VIP Portfolio............... $20,524 3.9% 2.4%
</TABLE>
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<PAGE> 93
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 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. 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 Participating Insurance
Company's separate account prospectus or private placement memorandum.
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<PAGE> 94
NET ASSET VALUE
As indicated in the Funds' prospectuses, 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, 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.
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<PAGE> 95
Securities and other assets for which market quotations are not readily
available are valued at their fair value as determined by the Advisor under
guidelines established by and under the general supervision and responsibility
of the Board of Trustees.
DIVIDENDS AND TAX STATUS
Each Fund (except the Total Return Bond VIP Portfolio, which had not commenced
investment operations as of December 31, 1999) has elected to qualify and each
Fund intends to 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 ("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).
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.
Certain provisions of the Code and Regulations may require a Fund to recognize
income with respect to an investment before cash is received. In order to meet
the distribution requirements, the Fund may need to sell investments it
otherwise may wish to hold to insure that it has sufficient cash to meet these
requirements.
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<PAGE> 96
Dividends paid by a Fund from its ordinary income and distributions of the
Fund's net realized capital gains are includable in the respective Participating
Insurance Company's gross income. Distributions of a Fund's net realized
long-term capital gains retain their character as long-term capital gains in the
hands of the Participating Insurance Companies if certain requirements are met.
The tax treatment of such dividends and distributions depends on the respective
Participating Insurance Company's tax status. To the extent that income of a
Fund represents dividends on common or preferred stock, rather than interest
income, its distributions to the Participating Insurance Companies will be
eligible for the present 70% dividends received deduction applicable in the case
of a life insurance company as provided in the Code. See the prospectus or
private placement memorandum for the contracts issued by your Participating
Insurance Company for a description of the respective Insurance Company's tax
status, the taxation of an investment in your particular contract and the
charges which may be made to cover any taxes attributable to the separate
account.
Dividends and interest received by a Fund may be subject to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate these foreign taxes, and foreign
countries generally do not impose taxes on capital gains on investments by
foreign investors.
PERFORMANCE INFORMATION
Total Return. Average annual total return quotations used in the Funds'
advertising and promotional materials are calculated according to the following
formula:
P(1+T)(n) = ERV
where P equals a hypothetical initial payment of $1000; T equals average annual
total return; n equals the number of years; and ERV equals the ending redeemable
value at the end of the period of a hypothetical $1000 payment made at the
beginning of the 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>
YIELD = 2 [(a - b + 1)(6) - 1]
-----
cd
</TABLE>
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
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<PAGE> 97
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, 1999 was 6.07%. (Unsubsidized 30-day yield for the Portfolio for
the period ended December 31, 1999 was 2.84%.)
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 or private placement memorandum 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 sales literature, a Fund may compare its performance to that
of various broad market indexes, including without limitation the Standard &
Poor's 500 Composite Stock Price Index, the Morgan Stanley Capital International
Europe, Australia, Far East Index, the Lehman Brothers Aggregate Bond Index, and
the Merrill Lynch 1-3 Year U.S. Treasury Note Index. When comparing its
performance to a market index, a Fund may refer to various statistical measures
derived from the historic performance of the Fund and the index, such as
standard deviation, beta and the like. In addition, a Fund may refer in
advertising or sales literature to (i) mutual fund performance ratings, rankings
and comparisons (including risk-adjusted ratings, rankings and comparisons),
(ii) other comparisons of mutual fund data including assets, expenses, fees and
other data, and (iii) other discussions reported in or assigned by Business
Week, CDA Investment Technologies, Inc., Financial World, Forbes Magazine,
Fortune Magazine, Lipper Inc., Money Magazine, Morningstar, Inc., U.S. News &
World Report, The Wall Street Journal, Barron's and other industry publications.
Performance comparisons should not be considered indicative of a Fund's relative
performance for any future period.
GENERAL INFORMATION ABOUT THE TRUST'S SHAREHOLDERS
As of March 31, 2000, the following shareholders owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Equity Income VIP Portfolio:
Hotchkis and Wiley, 725 South Figueroa Street, Suite 4000, Los Angeles, CA
90017-5400 -- 93.98%.
American General Life Insurance Company, Separate Account D, P.O. Box
1591, Houston, TX 77251-1591 -- 6.02%.
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<PAGE> 98
As of March 31, 2000, 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 Variable Annuity Separate Account A, Bldg 3, 4th Floor,
4804 Deer Lake Drive E, Jacksonville, FL 32246-6484 -- 90.74%
ML of New York Variable Life Separate Account, Bldg 3, 4th Floor, 4804 Deer
Lake Drive E, Jacksonville, FL 32246-6484 -- 6.95%
As of March 31, 2000, 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 -- 65.09%
American General Life Insurance Company Separate Account D, P.O. Box 1591,
Houston, TX 77251-1591 -- 29.07%
As of March 31, 2000, the following shareholders owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Total Return Bond VIP Portfolio:
Hotchkis and Wiley, 725 South Figueroa Street, Suite 4000, Los Angeles, CA
90017-5400 -- 67.07%.
AIG Life Insurance Company, 1 Alico Plaza, Wilmington, DE
19801-3708 -- 32.93%.
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<PAGE> 99
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> 100
- - 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 RATINGS GROUP
BOND RATINGS:
"AAA" -- An obligation rated AAA has the highest rating assigned by S&P. The
obligor'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> 101
"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:
"F1" -- Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
"F2" -- 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> 102
"F3" -- 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> 103
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1999
- --------------------------------------------------------------------------------
EQUITY INCOME VIP PORTFOLIO
<TABLE>
<CAPTION>
COMMON STOCKS -- 98.2% Shares Value
- -------------------------------------------------------------
<S> <C> <C>
AEROSPACE -- 4.9%
.............................................................
Lockheed Martin Corporation 830 $ 18,156
.............................................................
Northrop Grumman Corporation 400 21,625
.............................................................
Rockwell International Corporation 160 7,660
........................ ........................ --------
47,441
- -------------------------------------------------------------
ALUMINUM -- 3.7%
.............................................................
Alcoa, Inc. 10 830
.............................................................
Reynolds Metals Company 460 35,248
........................ ........................ --------
36,078
- -------------------------------------------------------------
APPAREL & TEXTILES -- 0.7%
.............................................................
Russell Corporation 430 7,203
- -------------------------------------------------------------
APPLIANCE & HOUSEHOLD FURNITURE -- 1.3%
.............................................................
Whirlpool Corporation 200 13,013
- -------------------------------------------------------------
AUTO PARTS -- 5.0%
.............................................................
Dana Corporation 530 15,867
.............................................................
Delphi Automotive Systems Corporation 480 7,560
.............................................................
Meritor Automotive, Inc. 265 5,134
.............................................................
Tenneco, Inc. 226 2,105
.............................................................
TRW Inc. 350 18,178
........................ ........................ --------
48,844
- -------------------------------------------------------------
AUTOS & TRUCKS -- 5.2%
.............................................................
Ford Motor Company 500 26,719
.............................................................
General Motors Corporation 330 23,987
........................ ........................ --------
50,706
- -------------------------------------------------------------
BEVERAGES -- 1.2%
.............................................................
Anheuser-Busch Companies, Inc. 160 11,340
- -------------------------------------------------------------
CHEMICALS -- 3.4%
.............................................................
The Dow Chemical Company 150 20,044
.............................................................
Eastman Chemical Company 240 11,445
.............................................................
Millennium Chemicals Inc. 60 1,185
........................ ........................ --------
32,674
- -------------------------------------------------------------
CONTAINERS -- 1.2%
.............................................................
Pactiv Corporation# 1,130 12,006
- -------------------------------------------------------------
</TABLE>
<TABLE>
- -------------------------------------------------------------
<CAPTION>
Shares Value
<S> <C> <C>
ELECTRICAL: UTILITIES -- 10.6%
.............................................................
CMS Energy Corporation 400 $ 12,475
.............................................................
DTE Energy Company 200 6,275
.............................................................
Edison International 730 19,117
.............................................................
GPU, Inc. 120 3,592
.............................................................
Illinova Corporation 465 16,159
.............................................................
P P & L Resources, Inc. 493 11,277
.............................................................
Public Service Enterprises Group,
Inc. 295 10,270
.............................................................
SCANA Corporation 450 12,094
.............................................................
ScottishPower PLC 116 3,248
.............................................................
Texas Utilities Company 230 8,179
........................ ........................ --------
102,686
- -------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.9%
.............................................................
Harsco Corporation 260 8,255
- -------------------------------------------------------------
FOREST PRODUCTS -- 3.3%
.............................................................
Georgia-Pacific (Timber Group) 400 9,850
.............................................................
Weyerhaeuser Company 310 22,262
........................ ........................ --------
32,112
- -------------------------------------------------------------
INSURANCE: LIFE -- 3.1%
.............................................................
American General Corporation 200 15,175
.............................................................
Lincoln National Corporation 370 14,800
........................ ........................ --------
29,975
- -------------------------------------------------------------
INSURANCE: PROPERTY CASUALTY -- 5.3%
.............................................................
The Allstate Corporation 830 19,920
.............................................................
Safeco Corporation 500 12,438
.............................................................
St. Paul Companies, Inc. 560 18,865
........................ ........................ --------
51,223
- -------------------------------------------------------------
LEISURE/TOYS -- 0.9%
.............................................................
Fortune Brands, Inc. 270 8,927
- -------------------------------------------------------------
MACHINERY -- 1.7%
.............................................................
CNH Global N.V. 1,230 16,374
- -------------------------------------------------------------
METALS: MISC. -- 1.4%
.............................................................
Phelps Dodge Corporation 200 13,425
- -------------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES -- 1.6%
.............................................................
Xerox Corporation 690 15,654
- -------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
1
<PAGE> 104
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1999
- --------------------------------------------------------------------------------
EQUITY INCOME VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
OIL -- DOMESTIC -- 7.6%
.............................................................
Conoco Inc. -- Class B 330 $ 8,209
.............................................................
Occidental Petroleum Corporation 900 19,462
.............................................................
Phillips Petroleum Company 410 19,270
.............................................................
Sunoco, Inc. 100 2,350
.............................................................
USX-Marathon Group, Inc. 615 15,183
.............................................................
Ultramar Diamond Shamrock Corporation 400 9,075
........................ ........................ --------
73,549
- -------------------------------------------------------------
OIL -- INTERNATIONAL -- 0.4%
.............................................................
Texaco Inc. 80 4,345
- -------------------------------------------------------------
PAPER -- 4.7%
.............................................................
Georgia-Pacific Group 260 13,195
.............................................................
International Paper Company 577 32,564
........................ ........................ --------
45,759
- -------------------------------------------------------------
PHOTOGRAPHY/IMAGING -- 2.3%
.............................................................
Eastman Kodak Company 330 21,863
- -------------------------------------------------------------
POLLUTION CONTROL -- 0.3%
.............................................................
Waste Management, Inc. 175 3,008
- -------------------------------------------------------------
RAILROADS -- 2.0%
.............................................................
CSX Corporation 260 8,158
.............................................................
Norfolk Southern Corporation 570 11,685
........................ ........................ --------
19,843
- -------------------------------------------------------------
REGIONAL BANKS -- 4.5%
.............................................................
Bank One Corporation 424 13,594
.............................................................
First Security Corporation 300 7,659
.............................................................
First Union Corporation 320 10,500
.............................................................
KeyCorp 370 8,186
.............................................................
UnionBanCal Corporation 100 3,944
........................ ........................ --------
43,883
- -------------------------------------------------------------
RETAIL: DEPARTMENT STORES -- 1.2%
.............................................................
May Department Stores Company 350 11,287
- -------------------------------------------------------------
RETAIL: GENERAL MERCHANDISE -- 2.0%
.............................................................
J.C. Penney Company, Inc. 400 7,975
.............................................................
Sears, Roebuck & Company 390 11,871
........................ ........................ --------
19,846
- -------------------------------------------------------------
</TABLE>
<TABLE>
- -------------------------------------------------------------
<CAPTION>
Shares Value
<S> <C> <C>
SAVINGS & LOANS -- 1.8%
.............................................................
Washington Mutual, Inc. 680 $ 17,680
- -------------------------------------------------------------
SMALL LOANS & FINANCE -- 3.2%
.............................................................
Associates First Capital
Corporation -- Class A 142 3,896
.............................................................
Fannie Mae 270 16,858
.............................................................
Household International, Inc. 280 10,430
........................ ........................ --------
31,184
- -------------------------------------------------------------
STEEL -- 2.0%
.............................................................
USX-U.S. Steel Group, Inc. 600 19,800
- -------------------------------------------------------------
TOBACCO -- 2.7%
.............................................................
Philip Morris Companies, Inc. 1,120 25,970
- -------------------------------------------------------------
TELEPHONE -- 8.1%
.............................................................
AT&T Corporation 450 22,837
.............................................................
ALLTEL Corporation 240 19,845
.............................................................
Bell Atlantic Corporation 205 12,620
.............................................................
GTE Corporation 120 8,468
.............................................................
SBC Communications, Inc. 300 14,625
........................ ........................ --------
78,395
........................ ........................ --------
Total common stocks 954,348
(cost $1,111,583)
- -------------------------------------------------------------
<CAPTION>
VARIABLE RATE Principal
DEMAND NOTES* -- 2.2% Amount
- -------------------------------------------------------------
<S> <C> <C>
Pitney Bowes, Inc., 6.095%
(cost $21,702) $21,702 21,702
- -------------------------------------------------------------
Total investments -- 100.4%
(cost $1,133,285) 976,050
.............................................................
Liabilities in excess of other
assets -- (0.4%) (3,890)
........................ ........................ --------
Total net assets -- 100.0% $972,160
- -------------------------------------------------------------
</TABLE>
# -- Non-income producing security.
* -- Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates.
The rate listed is as of December 31, 1999.
See Notes to the Financial Statements
2
<PAGE> 105
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY INCOME VIP PORTFOLIO December 31, 1999
- -------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value*.................................... $ 976,050
Dividends and interest receivable......................... 2,835
Organizational expenses, net of accumulated
amortization............................................ 11,975
----------
Total assets.......................................... 990,860
----------
LIABILITIES:
Payable to Advisor........................................ 6,015
Accrued expenses and other liabilities.................... 12,685
----------
Total liabilities..................................... 18,700
----------
Net assets............................................ $ 972,160
==========
NET ASSETS CONSIST OF:
Paid in capital........................................... $1,096,351
Undistributed net investment income....................... 2,494
Undistributed net realized gain on securities............. 30,550
Net unrealized depreciation of securities................. (157,235)
----------
Net assets............................................ $ 972,160
==========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)............................................. 110,139
Net asset value per share (offering and redemption
price).................................................. $ 8.83
==========
*Cost of Investments....................................... $1,133,285
==========
</TABLE>
See Notes to the Financial Statements
3
<PAGE> 106
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
EQUITY INCOME VIP PORTFOLIO December 31, 1999
- -------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Income*
Dividends............................................... $ 30,755
Interest................................................ 1,358
--------
Total income........................................ 32,113
--------
Expenses
Advisory fee............................................ 7,896
Legal and auditing fees................................. 359
Custodian fees and expenses............................. 5,390
Accounting and transfer agent fees and expenses......... 31,042
Administration fee...................................... 496
Trustees' fees and expenses............................. 360
Reports to shareholders................................. 10,841
Registration fees....................................... 22
Amortization of organizational expenses................. 4,208
Other expenses.......................................... 37
--------
Total expenses...................................... 60,651
Less, expense reimbursement............................. (48,543)
--------
Net expenses........................................ 12,108
--------
Net investment income................................... 20,005
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on securities......................... 34,115
Net change in unrealized depreciation of securities..... (86,565)
--------
Net loss on investments................................... (52,450)
--------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(32,445)
========
*Net of Foreign Taxes Withheld.............................. $ 101
========
</TABLE>
See Notes to the Financial Statements
4
<PAGE> 107
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 18, 1998**
Year Ended through
EQUITY INCOME VIP PORTFOLIO December 31, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income................................... $ 20,005 $ 12,890
Net realized gain (loss) on securities.................. 34,115 (3,564)
Net change in unrealized depreciation of securities..... (86,565) (70,670)
-------- ----------
Net decrease in net assets resulting from
operations.......................................... (32,445) (61,344)
-------- ----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................... (21,583) (12,711)
-------- ----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................... 75,069 1,070,974
Shares issued in connection with payment of dividends
and distributions...................................... 21,583 12,711
Cost of shares redeemed................................. (58,768) (21,326)
-------- ----------
Net increase in net assets from Fund share
transactions........................................ 37,884 1,062,359
-------- ----------
Total increase (decrease) in net assets..................... (16,144) 988,304
NET ASSETS:
Beginning of period..................................... 988,304 --
-------- ----------
End of period*.......................................... $972,160 $ 988,304
======== ==========
*Including undistributed net investment income of: $ 2,494 $ 1,547
======== ==========
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................. 7,689 107,647
Shares issued in connection with payment of dividends
and distributions...................................... 2,335 1,390
Shares redeemed......................................... (6,520) (2,402)
-------- ----------
Net increase........................................ 3,504 106,635
======== ==========
**Commencement of operations.
</TABLE>
See Notes to the Financial Statements
5
<PAGE> 108
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1999
NOTE 1.
ACCOUNTING POLICIES. The Equity Income VIP Portfolio (the "Fund") is a series of
Hotchkis and Wiley Variable Trust (the "Trust"), an open-end, management
investment company organized as a Massachusetts business trust on February 4,
1997 and registered under the Investment Company Act of 1940. The Fund commenced
operations on March 18, 1998. The Fund seeks current income and long-term growth
of income, accompanied by growth of capital. Shares of the Fund 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. In addition to the Fund, the
Trust offers the International VIP Portfolio, the Low Duration VIP Portfolio and
the Total Return Bond VIP Portfolio (collectively, the "Funds"). The assets of
each series are invested in separate, independently managed portfolios. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of the financial statements.
ORGANIZATIONAL EXPENSES: Expenses incurred by the Trust 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 Trust's commencement of operations. 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. 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.
FEDERAL INCOME TAXES: It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and the Fund
intends to distribute substantially all of its 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 Trust 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.
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.
6
<PAGE> 109
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared
and paid quarterly. Distributions of net realized capital gains, if any, will be
declared and paid at least annually.
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 within the capital accounts.
NOTE 2.
INVESTMENT ADVISORY AGREEMENT. The 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 rate of 0.75%
as applied to the Fund's daily net assets. The Advisor has agreed to pay all
operating expenses in excess of 1.15% as applied to the Fund's daily net assets.
For the year ended December 31, 1999, the Advisor paid $48,543 of operating
expenses on behalf of the Fund.
As permitted under Rule 10f-3 of the Investment Company Act of 1940, the Board
of Trustees of the Trust has adopted procedures which allow the Fund, 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.
CREDIT FACILITY. Effective December 3, 1999, the Fund entered into a one year
Credit Agreement with a syndicate of bank lenders led by Bank of America
intended to provide the Fund with a source of cash to be used to meet redemption
requests from Fund shareholders. The Fund together with certain other open-end
investment companies advised by Merrill Lynch Asset Management, L.P. and/or its
affiliates may borrow in the aggregate up to $1,000,000,000, except that in no
event may the borrowing by the Fund or any participating fund be in excess of
that permitted by its prospectus and Statement of Additional Information or by
applicable law. The Fund had no borrowings under the Credit Agreement in 1999.
NOTE 4.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the year ended December 31, 1999 were $287,042
and $241,692, respectively.
As of December 31, 1999, unrealized appreciation (depreciation) for federal
income tax purposes was as follows:
<TABLE>
<CAPTION>
Net Appreciated Depreciated
Fund Depreciation Securities Securities
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Income VIP Portfolio................................. $(157,235) $84,372 $(241,607)
</TABLE>
At December 31, 1999, the cost of investments for federal income tax purposes
was $1,133,285. Any differences between book and tax are due primarily to wash
sale losses.
The Fund utilized capital loss carryovers of $3,564 in 1999.
NOTE 5.
FEDERAL TAX DISCLOSURE (UNAUDITED). For the year ended December 31, 1999, 100%
of the ordinary distributions paid in the Fund qualify for the dividend received
deduction available for corporate shareholders.
NOTE 6.
SUBSEQUENT EVENT (UNAUDITED). As of February 16, 2000, the Fund's net assets and
net asset value per share were $843,238 and $7.66, respectively.
7
<PAGE> 110
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 18, 1998*
Year Ended through
EQUITY INCOME VIP PORTFOLIO December 31, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $ 9.27 $ 10.00
-------- --------
Income from Investment Operations:
Net investment income................................... 0.20 0.14
Net realized and unrealized gain (loss) on
investments............................................ (0.45) (0.75)
-------- --------
Total from investment operations........................ (0.25) (0.61)
-------- --------
Less Distributions:
Dividends (from net investment income).................. (0.19) (0.12)
-------- --------
Net Asset Value, End of Period.............................. $ 8.83 $ 9.27
======== ========
Total Return................................................ (2.73)% (6.04)%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $972,160 $988,304
Ratio of expenses to average net assets:
Before expense reimbursement............................ 5.76% 7.81%(2)
After expense reimbursement............................. 1.15% 1.15%(2)
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement............................ (2.71)% (4.95)%(2)
After expense reimbursement............................. 1.90% 1.71%(2)
Portfolio turnover rate..................................... 24% 12%(1)
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
See Notes to the Financial Statements
8
<PAGE> 111
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of Hotchkis and Wiley Variable Trust:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule 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
(one of the four portfolios of Hotchkis and Wiley Variable Trust, the "Fund") at
December 31, 1999, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated, in conformity
with accounting principles generally accepted in the United States. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, 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 audits, which included confirmation
of securities at December 31, 1999 by correspondence with the custodian, provide
a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS
Milwaukee, WI
February 17, 2000
9
<PAGE> 112
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1999
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
COMMON STOCKS -- 94.6% Shares Value
- -----------------------------------------------------------
<S> <C> <C>
AUSTRALIA -- 3.6%
- -----------------------------------------------------------
INSURANCE: MULTI-LINE -- 1.1%
...........................................................
QBE Insurance Group, Ltd. 681,996 $ 3,177,675
- -----------------------------------------------------------
REGIONAL BANKS -- 1.4%
...........................................................
Australia and New Zealand
Banking Group, Ltd. 555,260 4,037,799
- -----------------------------------------------------------
TRANSPORTATION -- 1.1%
...........................................................
Qantas Airways Limited 1,267,155 3,159,968
..................... ...................... -----------
Total Australia 10,375,442
- -----------------------------------------------------------
AUSTRIA -- 0.5%
- -----------------------------------------------------------
STEEL -- 0.5%
...........................................................
Boehler -- Uddeholm AG 31,940 1,473,238
..................... ...................... -----------
Total Austria 1,473,238
- -----------------------------------------------------------
CANADA -- 3.3%
- -----------------------------------------------------------
INSURANCE: MULTI-LINES -- 2.2%
...........................................................
Clarica Life Insurance Co. 127,755 2,302,222
...........................................................
Manulife Financial Corporation # 306,177 3,915,298
..................... ...................... -----------
6,217,520
- -----------------------------------------------------------
METALS: MISC. -- 1.1%
...........................................................
Noranda, Inc. 225,320 3,029,684
..................... ...................... -----------
Total Canada 9,247,204
- -----------------------------------------------------------
FINLAND -- 1.6%
- -----------------------------------------------------------
PAPER -- 1.6%
...........................................................
UPM-Kymmene OYJ 114,170 4,599,224
..................... ...................... -----------
Total Finland 4,599,224
- -----------------------------------------------------------
FRANCE -- 8.3%
- -----------------------------------------------------------
BEVERAGES -- 1.2%
...........................................................
Pernod Ricard SA 58,375 3,339,242
- -----------------------------------------------------------
BUILDING MATERIALS -- 1.0%
...........................................................
Lafarge SA 24,390 2,839,502
- -----------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES -- 1.0%
...........................................................
BIC 61,039 2,777,322
- -----------------------------------------------------------
</TABLE>
<TABLE>
- -----------------------------------------------------------
<CAPTION>
Shares Value
<S> <C> <C>
OIL -- INTERNATIONAL -- 2.8%
...........................................................
Elf Aquitaine SA 5 $ 770
...........................................................
Total Fina SA -- Class B 60,027 8,010,048
..................... ...................... -----------
8,010,818
- -----------------------------------------------------------
REGIONAL BANKS -- 2.3%
...........................................................
Banque Nationale de Paris 72,616 6,698,852
...........................................................
Societe Generale 4 931
..................... ...................... -----------
6,699,783
..................... ...................... -----------
Total France 23,666,667
- -----------------------------------------------------------
GERMANY -- 6.3%
- -----------------------------------------------------------
CHEMICALS -- 2.7%
...........................................................
Aventis SA 89,483 5,181,811
...........................................................
SGL Carbon AG # 36,769 2,443,984
..................... ...................... -----------
7,625,795
- -----------------------------------------------------------
CONSUMER DURABLES -- MISCELLANEOUS -- 1.0%
...........................................................
Buderus AG 174,780 2,957,152
- -----------------------------------------------------------
REGIONAL BANKS -- 1.1%
...........................................................
Commerzbank AG 81,960 3,008,653
- -----------------------------------------------------------
UTILITIES: MISC. -- 1.5%
...........................................................
VEBA AG 85,782 4,168,368
..................... ...................... -----------
Total Germany 17,759,968
- -----------------------------------------------------------
HONG KONG -- 3.3%
- -----------------------------------------------------------
ELECTRICAL UTILITIES -- 1.6%
...........................................................
Shandong International Power
Development Company Limited 32,542,000 4,604,827
- -----------------------------------------------------------
REAL ESTATE -- 1.7%
...........................................................
Hang Lung Development Company 2,321,000 2,627,446
...........................................................
New World Development Co., Ltd. 1,047,000 2,357,006
..................... ...................... -----------
4,984,452
..................... ...................... -----------
Total Hong Kong 9,589,279
- -----------------------------------------------------------
IRELAND -- 4.1%
- -----------------------------------------------------------
FOODS -- 1.0%
...........................................................
Greencore Group PLC 919,300 2,823,772
- -----------------------------------------------------------
PAPER -- 1.6%
...........................................................
Jefferson Smurfit Group PLC 1,468,432 4,436,574
- -----------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
1
<PAGE> 113
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1999
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
- -----------------------------------------------------------
<S> <C> <C>
REGIONAL BANKS -- 1.5%
...........................................................
Allied Irish Banks PLC 371,358 $ 4,233,619
..................... ...................... -----------
Total Ireland 11,493,965
- -----------------------------------------------------------
ITALY -- 3.7%
- -----------------------------------------------------------
OIL -- INTERNATIONAL -- 1.2%
...........................................................
ENI SPA 644,400 3,543,405
- -----------------------------------------------------------
TELECOMMUNICATIONS -- 2.5%
...........................................................
Telecom Italia SPA 493,700 6,960,874
..................... ...................... -----------
Total Italy 10,504,279
- -----------------------------------------------------------
JAPAN -- 8.3%
- -----------------------------------------------------------
ELECTRONICS -- 3.4%
...........................................................
Nintendo Co., Ltd. 58,000 9,642,569
- -----------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES -- 1.3%
...........................................................
Canon, Inc. 92,000 3,657,134
- -----------------------------------------------------------
RETAIL: GENERAL MERCHANDISE -- 0.9%
...........................................................
Circle K Japan Company, Ltd. 63,000 2,584,530
- -----------------------------------------------------------
SMALL LOANS & FINANCE -- 1.8%
...........................................................
Promise Company, Ltd. 48,400 2,464,199
...........................................................
Sanyo Shinpan Finance Co., Ltd. 82,400 2,823,724
..................... ...................... -----------
5,287,923
- -----------------------------------------------------------
STEEL -- 0.9%
...........................................................
Yodogawa Steel Works, Ltd. 834,000 2,515,034
..................... ...................... -----------
Total Japan 23,687,190
- -----------------------------------------------------------
NETHERLANDS -- 9.1%
- -----------------------------------------------------------
CHEMICALS -- 1.6%
...........................................................
Akzo Nobel N.V. 90,955 4,561,719
- -----------------------------------------------------------
ELECTRONICS -- 2.1%
...........................................................
Philips Electronics N.V. 43,744 5,947,352
- -----------------------------------------------------------
INSURANCE -- MULTI-LINE -- 2.7%
...........................................................
Fortis (NL) N.V. 90,650 3,263,747
...........................................................
ING Groep N.V. 71,840 4,336,663
..................... ...................... -----------
7,600,410
- -----------------------------------------------------------
REGIONAL BANKS -- 0.9%
...........................................................
ABN AMRO Holding N.V. 101,050 2,523,833
- -----------------------------------------------------------
</TABLE>
<TABLE>
- -----------------------------------------------------------
<CAPTION>
Shares Value
<S> <C> <C>
TELECOMMUNICATIONS -- 1.8%
...........................................................
Koninklijke KPN N.V. 52,435 $ 5,117,026
..................... ...................... -----------
Total Netherlands 25,750,340
- -----------------------------------------------------------
NEW ZEALAND -- 2.1%
- -----------------------------------------------------------
TELECOMMUNICATIONS -- 2.1%
...........................................................
Telecom Corporation of New
Zealand 1,288,025 6,043,027
..................... ...................... -----------
Total New Zealand 6,043,027
- -----------------------------------------------------------
NORWAY -- 0.9%
- -----------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.9%
...........................................................
Kvaerner ASA -- Class A# 120,606 2,530,681
..................... ...................... -----------
Total Norway 2,530,681
- -----------------------------------------------------------
PORTUGAL -- 1.9%
- -----------------------------------------------------------
TELEPHONE -- 1.9%
...........................................................
Portugal Telecom SA 499,364 5,476,684
..................... ...................... -----------
Total Portugal 5,476,684
- -----------------------------------------------------------
SINGAPORE -- 4.4%
- -----------------------------------------------------------
COMPUTER SOFTWARE & SERVICES -- 1.9%
...........................................................
Creative Technology, Ltd. 312,091 5,437,176
- -----------------------------------------------------------
DIVERSIFIED COMPANIES -- 0.7%
...........................................................
Jardine Matheson Holdings, Ltd. 466,400 1,837,616
- -----------------------------------------------------------
MONEY CENTER BANKS -- 1.8%
...........................................................
United Overseas Bank Ltd. 586,928 5,178,776
..................... ...................... -----------
Total Singapore 12,453,568
- -----------------------------------------------------------
SPAIN -- 2.1%
- -----------------------------------------------------------
TELECOMMUNICATIONS -- 2.1%
...........................................................
Telefonica S.A. 240,039 5,995,240
..................... ...................... -----------
Total Spain 5,995,240
- -----------------------------------------------------------
SWEDEN -- 1.4%
- -----------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.4%
...........................................................
Electrolux AB -- Class B 157,180 3,954,982
..................... ...................... -----------
Total Sweden 3,954,982
- -----------------------------------------------------------
SWITZERLAND -- 5.4%
- -----------------------------------------------------------
BUILDING MATERIALS -- 1.8%
...........................................................
Geberit International AG 14,960 5,118,497
- -----------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
2
<PAGE> 114
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1999
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
- -----------------------------------------------------------
<S> <C> <C>
MACHINERY -- 2.0%
...........................................................
Saurer AG "registered" # 6,059 $ 2,925,107
...........................................................
Sulzer AG "registered" # 4,382 2,847,260
..................... ...................... -----------
5,772,367
- -----------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES -- 1.6%
...........................................................
Novartis AG "registered" 3,160 4,638,163
..................... ...................... -----------
Total Switzerland 15,529,027
- -----------------------------------------------------------
UNITED KINGDOM -- 24.3%
- -----------------------------------------------------------
AIRLINES -- 1.4%
...........................................................
BAA PLC 563,720 3,961,010
- -----------------------------------------------------------
AUTO -- 0.1%
...........................................................
Lex Service PLC 68,090 409,147
- -----------------------------------------------------------
BEVERAGES -- 0.8%
...........................................................
Allied Domecq PLC 450,610 2,227,283
- -----------------------------------------------------------
BUILDING MATERIALS -- 1.4%
...........................................................
Hanson PLC 483,500 4,053,377
- -----------------------------------------------------------
DIVERSIFIED COMPANIES -- 5.5%
...........................................................
Cookson Group PLC 1,213,260 4,899,447
...........................................................
Invensys PLC 671,361 3,654,596
...........................................................
Tomkins PLC 1,095,040 3,537,636
...........................................................
Williams PLC 768,209 3,496,202
..................... ...................... -----------
15,587,881
- -----------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 1.4%
...........................................................
TI Group PLC 510,690 3,918,358
- -----------------------------------------------------------
FOODS -- 0.8%
...........................................................
Unilever PLC 300,130 2,208,264
- -----------------------------------------------------------
HOUSEHOLD PRODUCTS -- 1.1%
...........................................................
Reckitt Benckiser PLC 351,219 3,293,316
- -----------------------------------------------------------
INSURANCE: MULTI-LINE -- 2.3%
...........................................................
Allied Zurich AG PLC 278,405 3,280,617
...........................................................
CGU PLC 196,980 3,173,863
..................... ...................... -----------
6,454,480
- -----------------------------------------------------------
</TABLE>
<TABLE>
- -----------------------------------------------------------
<CAPTION>
Shares Value
<S> <C> <C>
PUBLISHING -- 2.4%
...........................................................
Reed International PLC 377,100 $ 2,823,316
...........................................................
United News & Media PLC 321,358 4,095,617
..................... ...................... -----------
6,918,933
- -----------------------------------------------------------
REGIONAL BANKS -- 2.5%
...........................................................
Lloyds TSB Group PLC 276,070 3,453,773
...........................................................
National Westminster Bank PLC 178,910 3,843,611
..................... ...................... -----------
7,297,384
- -----------------------------------------------------------
RETAIL -- FOOD CHAINS -- 1.4%
...........................................................
Tesco PLC 1,301,850 3,958,669
- -----------------------------------------------------------
TELECOMMUNICATIONS -- 1.3%
...........................................................
British Telecommunications PLC 150,294 3,673,109
- -----------------------------------------------------------
TEXTILES -- 0.9%
...........................................................
Coats Viyella PLC 3,962,250 2,624,091
- -----------------------------------------------------------
TOBACCO -- 1.0%
...........................................................
B.A.T. Industries PLC 475,992 2,704,500
..................... ...................... -----------
Total United Kingdom 69,289,802
..................... ...................... -----------
Total common stocks (cost $242,990,611) 269,419,807
- -----------------------------------------------------------
PREFERRED STOCKS -- 0.5%
- -----------------------------------------------------------
GERMANY -- 0.5%
- -----------------------------------------------------------
BUILDING MATERIALS -- 0.5%
...........................................................
Dyckerhoff AG 48,190 1,475,377
..................... ...................... -----------
Total Germany 1,475,377
..................... ...................... -----------
Total preferred stocks (cost $1,745,673) 1,475,377
- -----------------------------------------------------------
<CAPTION>
VARIABLE RATE DEMAND Principal
NOTES* -- 4.7% Amount
- -----------------------------------------------------------
<S> <C> <C>
Chase Manhattan Bank, 3.9062%
(cost $13,407,489) $13,407,507 13,407,507
..................... ...................... -----------
Total investments -- 99.8% 284,302,691
(cost $258,143,773)
...........................................................
Other assets in excess of liabilities --0.2 %531,172
..................... ...................... -----------
Total net assets -- 100.0% $284,833,863
- -----------------------------------------------------------
</TABLE>
#-Non-income producing security.
*-Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rate listed is as of December 31, 1999.
See Notes to the Financial Statements
3
<PAGE> 115
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL VIP PORTFOLIO December 31, 1999
- -------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value*.................................... $284,302,691
Cash...................................................... 178,034
Dividends and interest receivable......................... 666,701
Organizational expenses, net of accumulated
amortization............................................ 12,709
Prepaid expenses.......................................... 497
------------
Total assets.......................................... 285,160,632
------------
LIABILITIES:
Payable to Advisor........................................ 175,783
Accrued expenses and other liabilities.................... 150,986
------------
Total liabilities..................................... 326,769
------------
Net assets............................................ $284,833,863
============
NET ASSETS CONSIST OF:
Paid in capital........................................... $255,830,197
Undistributed net investment income....................... 3,197,003
Undistributed net realized gain (loss) on securities and
foreign currency transactions........................... (355,851)
Net unrealized appreciation of securities and foreign
currency................................................ 26,162,514
------------
Net assets............................................ $284,833,863
============
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)............................................. 24,734,480
Net asset value per share (offering and redemption
price).................................................. $ 11.52
============
*Cost of Investments........................................ $258,143,773
============
</TABLE>
See Notes to the Financial Statements
4
<PAGE> 116
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
INTERNATIONAL VIP PORTFOLIO December 31, 1999
- -------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Income*
Dividends............................................... $ 5,462,950
Interest................................................ 451,144
-----------
Total income........................................ 5,914,094
-----------
Expenses
Advisory fee............................................ 1,678,700
Legal and auditing fees................................. 79,886
Custodian fees and expenses............................. 158,049
Accounting and transfer agent fees and expenses......... 78,278
Administration fee...................................... 104,159
Trustees' fees and expenses............................. 87,310
Reports to shareholders................................. 58,358
Registration fees....................................... 169
Amortization of organizational expenses................. 4,208
Other expenses.......................................... 8,452
-----------
Total expenses...................................... 2,257,569
-----------
Net investment income................................... 3,656,525
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on securities and foreign currency
transactions........................................... 4,289,725
Net change in unrealized appreciation of securities and
foreign currency....................................... 28,388,537
-----------
Net gain on investments................................... 32,678,262
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $36,334,787
===========
*Net of Foreign Taxes Withheld.............................. $ 613,156
===========
</TABLE>
See Notes to the Financial Statements
5
<PAGE> 117
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 10, 1998**
Year Ended through
INTERNATIONAL VIP PORTFOLIO December 31, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income................................... $ 3,656,525 $ 1,479,772
Net realized gain (loss) on securities and foreign
currency transactions.................................. 4,289,725 (3,884,261)
Net change in unrealized appreciation (depreciation) of
securities and foreign currency........................ 28,388,537 (2,226,023)
------------- ------------
Net increase (decrease) in net assets resulting from
operations.......................................... 36,334,787 (4,630,512)
------------- ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................... (1,524,275) (1,179,786)
------------- ------------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................... 114,485,146 299,085,362
Shares issued in connection with payment of dividends
and distributions...................................... 1,524,275 1,179,786
Cost of shares redeemed................................. (155,121,028) (5,319,892)
------------- ------------
Net increase (decrease) in net assets from Fund
share transactions.................................. (39,111,607) 294,945,256
------------- ------------
Total increase (decrease) in net assets..................... (4,301,095) 289,134,958
NET ASSETS:
Beginning of period..................................... 289,134,958 --
------------- ------------
End of period*.......................................... $ 284,833,863 $289,134,958
============= ============
*Including undistributed net investment income of: $ 3,197,003 $ 62,996
============= ============
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................. 10,476,787 30,816,414
Shares issued in connection with payment of dividends
and distributions...................................... 136,340 125,916
Shares redeemed......................................... (16,258,425) (562,552)
------------- ------------
Net increase (decrease)............................. (5,645,298) 30,379,778
============= ============
** Commencement of operations.
</TABLE>
See Notes to the Financial Statements
6
<PAGE> 118
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1999
NOTE 1.
ACCOUNTING POLICIES. The International VIP Portfolio (the "Fund") is a series of
Hotchkis and Wiley Variable Trust (the "Trust"), an open-end, management
investment company organized as a Massachusetts business trust on February 4,
1997 and registered under the Investment Company Act of 1940. The Fund commenced
operations on June 10, 1998. The Fund seeks current income and long-term growth
of income, accompanied by growth of capital. Shares of the Fund 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. In addition to the Fund, the
Trust offers the Equity Income VIP Portfolio, the Low Duration VIP Portfolio and
the Total Return Bond VIP Portfolio (collectively, the "Funds"). The assets of
each series are invested in separate, independently managed portfolios. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of the financial statements.
ORGANIZATIONAL EXPENSES: Expenses incurred by the Trust 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 Trust's commencement of operations. 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. 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 Fund are maintained
in U.S. dollars. 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
Fund 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 Fund 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.
7
<PAGE> 119
FORWARD CURRENCY EXCHANGE CONTRACTS: The Fund utilizes forward currency exchange
contracts for the purpose of hedging foreign currency risk. Under these
contracts, the Fund is 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 the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and the Fund
intends to distribute substantially all of its 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 Trust 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.
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 annually. Distributions of net realized capital gains, if any, will be
declared and paid at least annually.
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 within the capital accounts.
NOTE 2.
INVESTMENT ADVISORY AGREEMENT. The 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 rate of 0.75%
as applied to the Fund's daily net assets. The Advisor has agreed to pay all
operating expenses in excess of 1.35% as applied to the Fund's daily net assets.
The Advisor has entered into subadvisory agreements with Mercury Asset
Management International Limited 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.
The Fund paid $20,489 in commissions on Fund transactions to an affiliated
broker during the year ended December 31, 1999.
As permitted under Rule 10f-3 of the Investment Company Act of 1940, the Board
of Trustees of the Trust has adopted procedures which allow the Fund, 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.
8
<PAGE> 120
NOTE 3.
CREDIT FACILITY. Effective December 3, 1999, the Fund entered into a one year
Credit Agreement with a syndicate of bank lenders led by Bank of America
intended to provide the Fund with a source of cash to be used to meet redemption
requests from Fund shareholders. The Fund together with certain other open-end
investment companies advised by Merrill Lynch Asset Management, L.P. and/or its
affiliates may borrow in the aggregate up to $1,000,000,000, except that in no
event may the borrowing by the Fund or any participating fund be in excess of
that permitted by its prospectus and Statement of Additional Information or by
applicable law. The Fund had no borrowings under the Credit Agreement in 1999.
NOTE 4.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the year ended December 31, 1999 were
$150,846,867 and $182,928,700, respectively.
As of December 31, 1999, unrealized appreciation (depreciation) for federal
income tax purposes was as follows:
<TABLE>
<CAPTION>
Appreciated Depreciated
Fund Net Appreciation Securities Securities
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International VIP Portfolio................................. $24,947,401 $43,005,529 $(18,058,128)
</TABLE>
At December 31, 1999, the cost of investments for federal income tax purposes
was $259,355,290. Any differences between book and tax are due primarily to wash
sale losses and mark-to-market adjustments for passive foreign investment
companies.
At December 31, 1999, the Fund deferred, on a tax basis, post-October losses of
$1,291,782. The Fund utilized capital loss carryovers of $3,178,827 in 1999.
NOTE 5.
FEDERAL TAX DISCLOSURE (UNAUDITED). The Fund 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 year ended
December 31, 1999 were $625,356. Foreign source income earned by the Fund for
the year ended December 31, 1999 was $6,363,598.
9
<PAGE> 121
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 10, 1998*
Year Ended through
INTERNATIONAL VIP PORTFOLIO December 31, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $ 9.52 $ 10.00
------------ ------------
Income from Investment Operations:
Net investment income................................... 0.15 0.04
Net realized and unrealized gain (loss) on
investments............................................ 1.91 (0.48)
------------ ------------
Total from investment operations........................ 2.06 (0.44)
------------ ------------
Less Distributions:
Dividends (from net investment income).................. (0.06) (0.04)
------------ ------------
Net Asset Value, End of Period.............................. $ 11.52 $ 9.52
============ ============
Total Return................................................ 21.68% (4.38)%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $284,833,863 $289,134,958
Ratio of expenses to average net assets..................... 1.01% 1.05%(2)
Ratio of net investment income to average net assets........ 1.63% 1.09%(2)
Portfolio turnover rate..................................... 71% 24%(1)
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
See Notes to the Financial Statements
10
<PAGE> 122
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of Hotchkis and Wiley Variable Trust:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule 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 International VIP Portfolio
(one of the four portfolios of Hotchkis and Wiley Variable Trust, the "Fund") at
December 31, 1999, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated, in conformity
with accounting principles generally accepted in the United States. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, 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 audits, which included confirmation
of securities at December 31, 1999 by correspondence with the custodian, provide
a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS
Milwaukee, WI
February 17, 2000
11
<PAGE> 123
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1999
- --------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
<TABLE>
<CAPTION>
CORPORATE BONDS Principal
AND NOTES -- 27.4% Amount Value
- ------------------------------------------------------------
<S> <C> <C>
BANKS -- 2.9%
............................................................
Sovereign Bancorp, 6.625%,
3/15/2001 $ 50,000 $ 48,755
- ------------------------------------------------------------
EUROBANKS -- 10.2%
............................................................
National Westminster Bank P.L.C
6.62%, 9/16/2002 # 75,000 75,125
............................................................
Okobank, CLB 9/09/2002, 6.62%,
9/29/2049 # 50,000 49,252
............................................................
Svenska Hndls Banken, CLB
3/03/2002, 6.6212%, 3/29/2049 # 50,000 49,331
...................... ....................... ---------
173,708
- ------------------------------------------------------------
FINANCIAL SERVICES -- 4.4%
............................................................
Lehman Brothers Holdings, 7.000%,
10/01/2002 25,000 24,773
............................................................
U.S. West Capital Funding,
(Acquired 6/03/1999, cost
$50,000), 6.5712%, 6/15/2000 # r 50,000 49,990
...................... ....................... ---------
74,763
- ------------------------------------------------------------
OIL -- INTEGRATED -- 2.9%
............................................................
Occidental Petroleum Corp., 6.24%,
11/24/2000 50,000 49,661
- ------------------------------------------------------------
RETAIL -- 2.5%
............................................................
Rite Aid Corp., (Acquired
12/16/1998, cost $49,914),
5.500%, 12/15/2000 r 50,000 43,250
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 1.6%
............................................................
Sprint Spectrum L.P., CLB
8/15/2001, 11.00%, 8/15/2006 25,000 27,641
- ------------------------------------------------------------
TRANSPORTATION -- 2.9%
............................................................
Bombardier Capital, Inc.,
(Acquired 1/22/1999, cost
$49,897), 6.00%, 1/15/2002 r 50,000 48,757
...................... ....................... ---------
Total corporate bonds and notes 466,535
(cost $476,538)
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 8.8% Amount Value
- ------------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 8.7%
............................................................
Federal National Mortgage Association,
............................................................
1993-142 SA, 8.957%, 10/25/2022
# $ 7,329 $ 6,818
............................................................
1997-76 FT, 6.8687%, 9/17/2027 # 22,142 20,622
............................................................
Pool # 508757, 6.3610%,
8/01/2029 122,992 119,764
...................... ....................... ---------
147,204
- ------------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.1%
............................................................
Federal National Mortgage
Association,
1998-48 CI (IO), 6.50%,
8/25/2028 8,050 1,664
...................... ....................... ---------
Total government agency mortgage-
backed securities
148,868
(cost $152,007)
- ------------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED SECURITIES -- 32.1%
- ------------------------------------------------------------
ASSET-BACKED SECURITIES -- 25.2%
............................................................
Asset Backed Funding Certificates,
CLB, 1999-1 A2F, 7.641%,
10/25/2030 24,940 24,885
............................................................
Associates Manufactured Housing
Pass Through Certificates, CLB,
1996-2 A4, 6.60%, 6/15/2027 75,000 74,172
............................................................
Champion Auto Grantor Trust,
(Acquired 3/18/1998, cost
$10,827) CLB, 1998-A A, 6.11%,
10/15/2002 r 10,827 10,814
............................................................
Chemical Master Credit Card Trust
1, CLB, 1995-2 A, 6.23%,
6/15/2003 25,000 24,948
............................................................
CIT Marine Trust, CLB, 1999-A A2,
5.80%, 4/15/2010 50,000 48,214
............................................................
DiTech Home Loan Owner Trust, CLB,
1997-1 A2, 6.59%, 4/15/2013 9,548 9,530
............................................................
Green Tree Recreational, Equipment
& Consumer Trust, CLB:
............................................................
1996-B CTFS, 7.70%, 7/15/2018 50,000 48,009
............................................................
1996-C A1, 6.7025%, 10/15/2017 # 45,016 45,043
............................................................
</TABLE>
See Notes to the Financial Statements
1
<PAGE> 124
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1999
- --------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
<TABLE>
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
Nationslink Funding Corporation,
CLB, 1999-SL A1V, 6.8187%,
4/10/2007 # $ 64,750 $ 64,772
............................................................
Navistar Financial Corporation
Owner Trust, CLB, 1996-B A3,
6.33%, 4/21/2003 38,999 39,006
............................................................
Nomura Asset Securities
Corporation, CLB, 1995-MD3 A1A,
8.17%, 3/04/2020 38,227 38,787
...................... ....................... ---------
428,180
- ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 6.9%
............................................................
Citicorp Mortgage Securities,
Inc., CLB, 1997-3 A2, 6.92%,
8/25/2027 2,861 2,854
............................................................
First Union-Lehman Brothers
Commercial Mortgage Trust, CLB,
1997-C1 A1, 7.15%, 2/18/2004 23,157 23,017
............................................................
Nomura Depositor Trust, (Acquired
9/03/1999, cost $49,104),
1998-ST1A A3A, 7.0125%, 1/15/2003
# r 50,000 49,031
............................................................
Ocwen Residential MBS Corp.,
(Acquired 6/18/1998, cost
$29,431), CLB, 1998-R2
AP,6.4416%, 11/25/2034 # r 29,468 29,192
............................................................
Residential Funding Mortgage
Securities, Inc., CLB, 1998-S17
A6, 6.75%, 8/25/2028 12,856 12,815
...................... ....................... ---------
116,909
...................... ....................... ---------
Total non-agency mortgage-backed securities 545,089
(cost $553,828)
- ------------------------------------------------------------
<CAPTION>
U.S. TREASURY Principal
OBLIGATIONS -- 24.0% Amount Value
- ------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY NOTES:
............................................................
5.50%, 2/29/2000 125,000 125,078
............................................................
6.25%, 6/30/2002 185,000 184,942
............................................................
5.75%, 10/31/2002 100,000 98,625
...................... ....................... ---------
Total U.S. Treasury obligations 408,645
(cost $413,402)
- ------------------------------------------------------------
</TABLE>
<TABLE>
- ------------------------------------------------------------
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
VARIABLE RATE
DEMAND NOTES* -- 6.0%
- ------------------------------------------------------------
General Mills, Inc., 6.095% $ 60,723 $ 60,723
............................................................
Pitney Bowes, Inc., 6.095% 41,653 41,653
...................... ....................... ---------
Total variable rate demand notes
(cost $102,376) 102,376
- ------------------------------------------------------------
Total investments -- 98.3%
(cost $1,698,151) 1,671,513
............................................................
Other assets in excess of liabilities -- 1.7% 29,372
...................... ....................... ---------
Total net assets -- 100.0% $1,700,885
- ------------------------------------------------------------
</TABLE>
# -- Variable rate security. The rate listed is as of December 31, 1999.
* -- 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, 1999.
IO -- Interest only.
CLB -- Callable.
r -- Restricted Security. Purchased in a private placement transaction; resale
to the public may require registration or may be limited to qualified
institutional buyers.
See Notes to the Financial Statements
2
<PAGE> 125
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LOW DURATION VIP PORTFOLIO December 31, 1999
- -------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value*.................................... $1,671,513
Cash...................................................... 4,523
Receivable from Advisor................................... 22,855
Dividends and interest receivable......................... 14,404
Organizational expenses, net of accumulated
amortization............................................ 11,987
Prepaid expenses.......................................... 15
----------
Total assets.......................................... 1,725,297
----------
LIABILITIES:
Dividends payable......................................... 8,187
Accrued expenses and other liabilities.................... 16,225
----------
Total liabilities..................................... 24,412
----------
Net assets............................................ $1,700,885
==========
NET ASSETS CONSIST OF:
Paid in capital........................................... $1,744,882
Undistributed net investment income....................... 2,784
Accumulated net realized loss on securities............... (20,143)
Net unrealized depreciation of securities................. (26,638)
----------
Net assets............................................ $1,700,885
==========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)............................................. 174,932
Net asset value per share (offering and redemption
price).................................................. $ 9.72
==========
*Cost of Investments........................................ $1,698,151
==========
</TABLE>
See Notes to the Financial Statements
3
<PAGE> 126
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
LOW DURATION VIP PORTFOLIO December 31, 1999
- -------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Income
Interest................................................ $100,600
--------
Total income........................................ 100,600
--------
Expenses
Advisory fee............................................ 7,842
Legal and auditing fees................................. 537
Custodian fees and expenses............................. 5,040
Accounting and transfer agent fees and expenses......... 36,501
Administration fee...................................... 773
Trustees' fees and expenses............................. 669
Reports to shareholders................................. 12,445
Registration fees....................................... 38
Amortization of organizational expenses................. 4,196
Other expenses.......................................... 74
--------
Total expenses...................................... 68,115
Less, expense reimbursement............................. (58,227)
--------
Net expenses........................................ 9,888
--------
Net investment income................................... 90,712
--------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on securities......................... (17,121)
Net change in unrealized depreciation of securities..... (25,481)
--------
Net loss on investments................................... (42,602)
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 48,110
========
</TABLE>
See Notes to the Financial Statements
4
<PAGE> 127
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 18, 1998**
Year Ended through
LOW DURATION VIP PORTFOLIO December 31, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income................................... $ 90,712 $ 61,726
Net realized loss on securities......................... (17,121) (143)
Net change in unrealized depreciation of securities..... (25,481) (1,157)
---------- ----------
Net increase in net assets resulting from
operations.......................................... 48,110 60,426
---------- ----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................... (91,719) (64,700)
---------- ----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................... 227,553 1,713,346
Shares issued in connection with payment of dividends
and distributions...................................... 91,307 56,925
Cost of shares redeemed................................. (298,114) (42,249)
---------- ----------
Net increase in net assets from Fund share
transactions........................................ 20,746 1,728,022
---------- ----------
Total increase (decrease) in net assets..................... (22,863) 1,723,748
NET ASSETS:
Beginning of period..................................... 1,723,748 --
---------- ----------
End of period*.......................................... $1,700,885 $1,723,748
========== ==========
*Including undistributed net investment income of: $ 2,784 $ 1,612
========== ==========
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................. 22,957 171,309
Shares issued in connection with payment of dividends
and distributions...................................... 9,271 5,683
Shares redeemed......................................... (30,071) (4,217)
---------- ----------
Net increase........................................ 2,157 172,775
========== ==========
** Commencement of operations.
</TABLE>
See Notes to the Financial Statements
5
<PAGE> 128
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1999
NOTE 1.
ACCOUNTING POLICIES. The Low Duration VIP Portfolio (the "Fund") is a series of
Hotchkis and Wiley Variable Trust (the "Trust"), an open-end, management
investment company organized as a Massachusetts business trust on February 4,
1997 and registered under the Investment Company Act of 1940. The Fund commenced
operations on March 18, 1998. The Fund seeks to maximize total return,
consistent with preservation of capital. Shares of the Fund 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. In addition to the Fund, the
Trust offers the Equity Income VIP Portfolio, the International VIP Portfolio
and the Total Return Bond VIP Portfolio (collectively, the "Funds"). The assets
of each series are invested in separate, independently managed portfolios. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of the financial statements.
ORGANIZATIONAL EXPENSES: Expenses incurred by the Trust 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 Trust's commencement of operations. 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 broker-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 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 disposition of
such securities may differ from values previously furnished by such methods.
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.
FEDERAL INCOME TAXES: It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and the Fund
intends to distribute substantially all of its 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 Trust 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.
6
<PAGE> 129
RESTRICTED SECURITIES: The Fund owns investment securities which are
unregistered and thus restricted as to resale. Resale to the public may require
registration or may be limited to qualified institutional buyers. At December
31, 1999, the Fund had restricted securities with an aggregate market value of
$231,034, representing 14% of the net assets of the Fund.
WHEN-ISSUED SECURITIES: The Fund 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 Fund records purchases of when-issued securities and
reflects the values of such securities in determining net asset value in the
same manner as other portfolio securities. The Fund segregates and maintains 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. Distributions of net realized capital gains, if any, will be
declared and paid at least annually.
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 within the capital accounts.
NOTE 2.
INVESTMENT ADVISORY AGREEMENT. The 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 rate of 0.46%
as applied to the Fund's daily net assets. The Advisor has agreed to pay all
operating expenses in excess of 0.58% as applied to the Fund's daily net assets.
For the year ended December 31, 1999, the Adviser paid $58,227 of operating
expenses on behalf of the Fund.
As permitted under Rule 10f-3 of the Investment Company Act of 1940, the Board
of Trustees of the Trust has adopted procedures which allow the Fund, 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.
7
<PAGE> 130
NOTE 3.
CREDIT FACILITY. Effective December 3, 1999, the Fund entered into a one year
Credit Agreement with a syndicate of bank lenders led by Bank of America
intended to provide the Fund with a source of cash to be used to meet redemption
requests from Fund shareholders. The Fund together with certain other open-end
investment companies advised by Merrill Lynch Asset Management, L.P. and/or its
affiliates may borrow in the aggregate up to $1,000,000,000, except that in no
event may the borrowing by the Fund or any participating fund be in excess of
that permitted by its prospectus and Statement of Additional Information or by
applicable law. The Fund had no borrowings under the Credit Agreement in 1999.
NOTE 4.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the year ended December 31, 1999, were as
follows:
<TABLE>
<CAPTION>
Purchases Sales
-------------------------- --------------------------
Fund U.S. Government Other U.S. Government Other
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Low Duration VIP Portfolio............................ $1,266,280 $968,247 $1,483,209 $712,763
</TABLE>
As of December 31, 1999, unrealized appreciation (depreciation) for federal
income tax purposes was as follows:
<TABLE>
<CAPTION>
Net Appreciated Depreciated
Fund Depreciation Securities Securities
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Low Duration VIP Portfolio.................................. $(26,638) $410 $(27,048)
</TABLE>
At December 31, 1999, the cost of investments for federal income tax purposes
was $1,698,151. Any differences between book and tax are due primarily to wash
sale losses.
At December 31, 1999, the Fund had accumulated net realized capital loss
carryovers of $3,361 expiring in 2006 and $16,782 expiring in 2007. To the
extent that the Fund realizes future net capital gains, those gains will be
offset by any unused capital loss carryover.
NOTE 5.
FEDERAL TAX DISCLOSURE (UNAUDITED). For the year ended December 31, 1999, 23% of
dividends distributed were derived from interest on U.S. government securities
which is generally exempt from state income tax.
8
<PAGE> 131
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 18, 1998*
Year Ended through
LOW DURATION VIP PORTFOLIO December 31, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $ 9.98 $ 10.00
---------- ----------
Income from Investment Operations:
Net investment income................................... 0.54 0.46
Net realized and unrealized loss on investments......... (0.27) (0.03)
---------- ----------
Total from investment operations........................ 0.27 0.43
---------- ----------
Less Distributions:
Dividends (from net investment income).................. (0.53) (0.45)
---------- ----------
Net Asset Value, End of Period.............................. $ 9.72 $ 9.98
========== ==========
Total Return................................................ 2.80% 4.40%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $1,700,885 $1,723,748
Ratio of expenses to average net assets
Before expense reimbursement............................ 4.00% 5.56%(2)
After expense reimbursement............................. 0.58% 0.58%(2)
Ratio of net investment income to average net assets
Before expense reimbursement............................ 1.90% 0.47%(2)
After expense reimbursement............................. 5.32% 5.45%(2)
Portfolio turnover rate..................................... 137% 296%(1)
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
See Notes to the Financial Statements
9
<PAGE> 132
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of Hotchkis and Wiley Variable Trust:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule 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 Low Duration VIP Portfolio (one
of the four portfolios of Hotchkis and Wiley Variable Trust, the "Fund") at
December 31, 1999, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated, in conformity
with accounting principles generally accepted in the United States. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, 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 audits, which included confirmation
of securities at December 31, 1999 by correspondence with the custodian, provide
a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, WI
February 17, 2000
10
<PAGE> 133
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(4)
(2) Investment Advisory Agreement
relating to the International VIP
Portfolio(4)
(3) Investment Advisory Agreement
relating to the Low Duration VIP
Portfolio(4)
(4) Investment Advisory Agreement
relating to the Total Return Bond
VIP Portfolio(4)
(5) Sub-advisory Agreement relating to the
International VIP Portfolio(4)
(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(4)
(h) (1) Fund Administration Servicing Agreement(3)
(2) Transfer Agent Agreement(3)
(3) Expense Cap Agreement(4)
(4) Participation Agreement with Merrill Lynch Life
Insurance Company(4)
(5) Participation Agreement with American General
Life Insurance Company(4)
(6) Participation Agreement with ML Life Insurance
Company of New York(4)
(7) Participation Agreement with The United States
Life Insurance Company(4)
(8) Participation Agreement with Security First Life
Insurance Company(4)
(9) Amendment to Expense Cap Agreement*
(10) Credit Agreement*
(11) Participation Agreement with AIG Life Insurance
Company*
(12) Participation Agreement with American
International Life Assurance Company of NY*
(13) Participation Agreement with Hartford Life and
Annuity Insurance Company*
(i) Opinion and Consent of Counsel(3)
(j) Consent of Independent Accountants*
(l) Subscription Agreement(3)
(p) Code of Ethics*
- ----------
* 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).
(4) Incorporated by reference to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on February 25, 1999 (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.
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<PAGE> 134
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> 135
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, Master
Focus Twenty Trust, Master Global Financial Services Trust, Master Large Cap
Series Trust, Master Premier Growth Trust, 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 Disciplined Equity 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 Financial Services Fund, Inc., 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 Index Funds, 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 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 Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc., Merrill Lynch
Senior Floating Rate Fund, Inc. and Merrill Lynch Senior Floating Rate Fund II,
Inc. A separate division of PFD acts as the principal underwriter of a number of
other investment companies.
C-3
<PAGE> 136
(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........... Treasurer and 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
Donald C. Burke............ Vice President 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> 137
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Fund certifies that it meets all of the requirements for
effectiveness of this Post-Effective Amendment to the Registration Statement
pursuant to Rule 485(b) under the Securities Act and has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, duly authorized, in the City of Los Angeles and State of California
on the 7th day of April, 2000.
HOTCHKIS AND WILEY VARIABLE TRUST
By: /s/ Nancy D. Celick
------------------------------------
Nancy D. Celick
President
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Nancy D. Celick Principal Executive Officer April 7, 2000
- ------------------------------------
Nancy D. Celick
/s/ Anna Marie Lopez Principal Financial and Accounting April 7, 2000
- ------------------------------------
Anna Marie Lopez Officer
/s/ Michael Baxter Trustee April 7, 2000
- ------------------------------------
Michael Baxter
/s/ Robert L. Burch III Trustee April 7, 2000
- ------------------------------------
Robert L. Burch III
/s/ John A. G. Gavin Trustee April 7, 2000
- ------------------------------------
John A. G. Gavin
/s/ Joe Grills Trustee April 7, 2000
- ------------------------------------
Joe Grills
/s/ Nigel Hurst-Brown Trustee April 7, 2000
- ------------------------------------
Nigel Hurst-Brown
/s/ Madeleine A. Kleiner Trustee April 7, 2000
- ------------------------------------
Madeleine A. Kleiner
/s/ Richard R. West Trustee April 7, 2000
- ------------------------------------
Richard R. West
</TABLE>
<PAGE> 138
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(4)
d(2) Investment Advisory Agreement relating to
the International VIP Portfolio(4)
d(3) Investment Advisory Agreement relating to
the Low Duration VIP Portfolio(4)
d(4) Investment Advisory Agreement relating to
the Total Return Bond VIP Portfolio(4)
d(5) Sub-Advisory Agreement relating to the
International VIP Portfolio(4)
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(4)
h(1) Fund Administration Servicing Agreement(3)
h(2) Transfer Agent Agreement(3)
h(3) Expense Cap Agreement(4)
h(4) Participation Agreement with Merrill Lynch
Life Insurance Company(4)
h(5) Participation Agreement with American General
Life Insurance Company(4)
h(6) Participation Agreement with ML Life Insurance
Company of New York(4)
h(7) Participation Agreement with The United States Life Insurance
Company(4)
h(8) Participation Agreement with Security First Life Insurance
Company(4)
h(9) Amendment to Expense Cap Agreement*
h(10) Credit Agreement*
h(11) Participation Agreement with AIG Life Insurance Company*
h(12) Participation Agreement with American International Life
Assurance Company of NY*
h(13) Participation Agreement with Hartford Life and Annuity Insurance
Company*
i Opinion and Consent of Counsel(3)
j Consent of Independent Accountants*
l Subscription Agreement(3)
p Code of Ethics*
- -----------------------
* 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).
(4) Incorporated by reference to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed February 25, 1999 (File No.
333-24349).
<PAGE> 1
EXHIBIT 99.h(9)
AMENDMENT TO EXPENSE CAP AGREEMENT
THIS AMENDMENT TO EXPENSE CAP AGREEMENT ("Amendment"), effective as of
March 1, 2000, is entered into between Hotchkis and Wiley, as investment advisor
("Advisor"), and Hotchkis and Wiley Variable Trust (the "Trust").
WHEREAS, pursuant to an Expense Cap Agreement dated February 23, 1999
(the "Agreement"), the Advisor agreed to limit expenses of certain portfolios of
the Trust through February 29, 2000; and
WHEREAS, the Advisor and the Trust desire to extend the period of such
expense limits; and
WHEREAS, shareholders of the Trust benefit from any expense limits
agreed to by the Advisor;
NOW, THEREFORE, in consideration of the premises and the mutual covenants and
agreements in this Amendment, the parties, intending to be legally bound, hereby
agree as follows:
A. Extension of Period of Expense Limits. The Advisor agrees to continue
the expense limits set forth in the Agreement through April 30, 2001.
B. Confirmation of Agreement. Except as expressly provided in this
Amendment, the Agreement shall remain in full force and effect and is
hereby ratified and confirmed.
IN WITNESS WHEREOF, the parties have executed this Amendment effective as of the
date first above written.
Hotchkis and Wiley, Hotchkis and Wiley Variable Trust
a division of Merrill Lynch
Asset Management, L.P.
/s/ Michael F. Baxter /s/ Nancy D. Celick
Michael Baxter Nancy D. Celick
Co-Head President
<PAGE> 1
EXHIBIT 99.h(10)
CREDIT AGREEMENT
dated as of
December 3, 1999
among
the Borrowers party hereto,
the Banks party hereto,
The Bank of New York, as Syndication Agent,
National Australia Bank Limited, as Co-Documentation Agent
Bank One, NA as Co-Documentation Agent,
State Street Bank and Trust Company,
as Operations Agent
and
Bank of America, National Association,
as Administrative Agent
<PAGE> 2
Arranged by
Banc of America Securities LLC,
as Sole Lead Arranger and Sole Book Manager
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ARTICLE I
DEFINITIONS
<S> <C> <C>
1.1. Definitions...........................................................................1
1.2. Accounting Terms and Determinations...................................................8
1.3. Assumptions Regarding Structure.......................................................8
1.4. Authority of Adviser; Adviser Disclaimer..............................................9
ARTICLE II
THE CREDIT
2.1. Commitments to Lend...................................................................9
2.2. Notice of Borrowings.................................................................10
2.3. Notice to Banks; Funding of Loans....................................................11
2.4. Loan Accounts; Notes; Records........................................................12
2.5. Optional Termination or Reduction of Commitments.....................................12
2.6. Extension of Termination Date........................................................13
2.7. Optional Prepayments.................................................................14
2.8. Mandatory Payments...................................................................14
2.9. Interest Rates.......................................................................15
2.10. Fees.................................................................................15
2.11. General Provisions as to Payments....................................................16
2.12. Computation of Interest and Fees.....................................................16
2.13. Withholding Tax Exemption............................................................17
2.14. Source of Repayment..................................................................18
2.15. Capital Adequacy.....................................................................18
2.16. Substitution of Banks................................................................18
2.17. Survival.............................................................................19
ARTICLE III
CONDITIONS
3.1. Effectiveness........................................................................19
3.2. All Borrowings.......................................................................20
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1. Existence............................................................................21
4.2. Authorization........................................................................21
4.3. No Conflicts.........................................................................21
4.4. Validity and Binding Effect..........................................................21
4.5. No Default...........................................................................22
</TABLE>
i
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C> <C>
4.6. Financial Statements.................................................................22
4.7. Litigation...........................................................................22
4.8. Liens................................................................................22
4.9. Purpose..............................................................................22
4.10. Compliance and Government Approvals..................................................22
4.11. Subsidiaries; Investments............................................................23
4.12. Investment Policies..................................................................23
4.13. Status of Loans......................................................................23
4.14. ERISA................................................................................23
4.15. Taxes................................................................................23
4.16. Asset Coverage.......................................................................23
4.17. Full Disclosure......................................................................23
4.18. Year 2000............................................................................23
ARTICLE V
COVENANTS
5.1. Information..........................................................................24
5.2. Existence............................................................................25
5.3. Nature of Business...................................................................25
5.4. Books, Records and Access............................................................25
5.5. Insurance............................................................................25
5.6. Asset Coverage Ratio.................................................................26
5.7. Changes to Organization Documents, etc...............................................26
5.8. Service Providers....................................................................26
5.9. Payment of Obligations...............................................................26
5.10. Compliance with Laws.................................................................26
5.11. Debt.................................................................................26
5.12. Negative Pledge......................................................................27
5.13. Consolidations, Mergers and Sales of Assets..........................................27
5.14. Use of Proceeds......................................................................27
5.15. Compliance with Prospectus...........................................................27
5.16. Tax Status...........................................................................28
5.17. No Subsidiary........................................................................28
5.18. ERISA................................................................................28
5.19. Distributions........................................................................28
5.20. Custodian............................................................................28
5.21. Acquisitions.........................................................................28
ARTICLE VI
EVENTS OF DEFAULTS
6.1. Events of Default....................................................................29
6.2. Remedies.............................................................................30
6.3. Notice of Default....................................................................30
</TABLE>
ii
<PAGE> 5
<TABLE>
<CAPTION>
ARTICLE VII
THE AGENTS
<S> <C> <C>
7.1. Appointment and Authorization........................................................30
7.2. Action by Agents.....................................................................31
7.3. Consultation with Experts............................................................31
7.4. Liability of Agents..................................................................31
7.5. Indemnification......................................................................31
7.6. Credit Decision......................................................................31
7.7. Successor Agents.....................................................................32
7.8. Agents as Banks......................................................................32
7.9. Distribution by an Agent.............................................................32
7.10. Delinquent Banks.....................................................................32
7.11. Syndication Agent; Co-Documentation Agents...........................................33
ARTICLE VIII
MISCELLANEOUS
8.1. Notices..............................................................................33
8.2. No Waivers...........................................................................33
8.3. Expenses; Documentary Taxes; Indemnification.........................................34
8.4. Set Off..............................................................................35
8.5. Amendments and Waivers...............................................................35
8.6. Successors and Assigns...............................................................35
8.7. Additional Borrowers.................................................................37
8.8. Governing Law; Submission to Jurisdiction............................................37
8.9. Counterparts; Integration............................................................37
8.10. WAIVER OF JURY TRIAL.................................................................38
8.11. Confidentiality......................................................................38
8.12. Representations and Warranties of the Banks..........................................38
Exhibit A - Form of Allocation Notice
Exhibit B - Form of Notice of Borrowing
Exhibit C - Form of Notice of Conversion/Paydown
Exhibit D - Form of Note
Exhibit E - Form of Opinion of Brown & Wood LLP
Exhibit F - Form of Compliance Certificate
Exhibit G - Form of Assignment and Acceptance
Exhibit H - Form of Joinder
Schedule 1 - Addresses for Notices and Commitment Amounts
Schedule 4.9 Borrowers Not Investing In Margin Stock
</TABLE>
iii
<PAGE> 6
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of December 3, 1999, is made by and
among each of the investment companies, and to the extent any Borrower is a
series of a Trust or a Maryland corporation, each Trust or Maryland corporation
on behalf of such Borrowers, as are or may become party hereto listed on the
signature pages hereto or hereafter added hereto, the various banks as are or
may become party hereto (collectively, the "Banks"), THE BANK OF NEW YORK, as
syndication agent, NATIONAL AUSTRALIA BANK LIMITED, as co-documentation agent,
BANK ONE, NA, as co-documentation agent, STATE STREET BANK AND TRUST COMPANY, as
operations agent and BANK OF AMERICA, NATIONAL ASSOCIATION, as administrative
agent for the Banks.
W I T N E S S E T H:
WHEREAS, the Borrowers, and to the extent any Borrowers are a series of
a Trust or Maryland corporation, such Trusts or Maryland corporations, are
open-end management investment companies registered under the Act;
WHEREAS, the Borrowers, and to the extent any Borrowers are a series of
a Trust or Maryland corporation, such Trusts or Maryland corporations, on behalf
of their Borrowers, severally desire to obtain Commitments from the Banks
pursuant to which Loans, in a maximum aggregate principal amount at any one time
outstanding not to exceed $1,000,000,000, will be made to such Borrowers from
time to time prior to the Termination Date;
WHEREAS, the Banks are willing, on the terms and subject to the
conditions hereinafter set forth, to extend such Commitments and make such Loans
to the Borrowers; and
WHEREAS, the proceeds of the Loans will be used by the Borrowers to fund
shareholder redemptions and for other lawful purposes as allowed under the Act,
other than for leverage.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1. DEFINITIONS. The following terms, as used herein, have the
following meanings:
"Act" means the Investment Company Act of 1940, as amended.
"Additional Commitment" has the meaning set forth in Section 2.6(b).
"Additional Commitment Bank" has the meaning set forth in Section
2.6(b).
"Administrative Agent" means Bank of America acting as Administrative
Agent for the Banks and any successor thereof.
1
<PAGE> 7
"Adviser" means Merrill Lynch Asset Management, L.P. or one of its
Affiliates, as investment adviser, sub-adviser or administrator to a Borrower.
"Adviser Persons" is defined in Section 1.4.
"Affiliate" has the meaning ascribed to the term "Affiliated Person" in
the Act and the rules and regulations thereunder.
"Agents" means, collectively, the Administrative Agent and the
Operations Agent, and, individually, each of the Administrative Agent and the
Operations Agent.
"Allocation Notice" means a notice, substantially in the form of Exhibit
A, furnished to the Administrative Agent by or on behalf of each Borrower
setting forth, as of the date of such notice, the manner of allocation of
liability for amounts that shall become due and payable by the Borrowers under
this Agreement other than principal and interest in respect of Loans. The
allocation of liability among the Borrowers as set forth in an Allocation Notice
shall be effective from the date of receipt thereof by the Administrative Agent
until a later dated Allocation Notice is delivered to the Administrative Agent.
"Arranger" means Banc of America Securities LLC, a Delaware limited
liability company as sole lead arranger and sole book manager.
"Asset Coverage Ratio" means, with respect to any Borrower, the ratio
which the Net Asset Value of such Borrower, less the value of assets subject to
Liens, bears to the aggregate amount of Debt of such Borrower.
"Assignee" has the meaning set forth in Section 8.6.
"Assignment and Acceptance" has the meaning set forth in Section 8.6.
"Authorized Signatory" means the president, the executive vice
president, any senior vice president, any vice president, the treasurer, the
secretary or any other duly authorized officer of a Borrower or any duly
authorized employee of Merrill Lynch Asset Management, L.P. or any of its
affiliated investment advisers designated by such Borrower as its agent,
provided that the Operations Agent shall have received a manually signed
certificate of the Secretary of such Borrower as to the incumbency of, and
bearing a manual specimen signature of, such duly authorized officer or agent
and such duly authorized officer or agent shall be reasonably satisfactory to
the Operations Agent.
"Bank" is defined in the preamble.
"Bank of America" means Bank of America, National Association, a
national banking association.
"Base Rate" means a fluctuating rate per annum equal to the higher of
(a) the Federal Funds Rate plus 1/2 of 1% and, (b) the rate of interest in
effect for such day as publicly announced from time to time by Bank of America
as its "prime rate." Such rate is a rate set by Bank of America based upon
various factors including Bank of America's costs and desired return,
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<PAGE> 8
general economic conditions and other factors, and is used as a reference point
for pricing some loans, which may be priced at, above, or below such announced
rate. Any change in such rate announced by Bank of America shall take effect at
the opening of business on the day specified in the public announcement of such
change.
"Benefit Arrangement" means at any time an employee benefit plan within
the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan
and which is maintained or otherwise contributed to by any member of the ERISA
Group.
"Borrower" means each Person that is a signatory hereto as a Borrower
and each series or class of shares of a Trust or a Maryland corporation which
constitutes a "series" under the Act, which is a signatory to this Agreement or
which becomes a signatory to this Agreement as a Borrower following the approval
of all the Banks.
"Borrowing" means a borrowing hereunder, consisting of Loans of the same
type made to a Borrower on the same day by the Banks under Article II.
"Borrowing Date" means the Business Day on which Loans are advanced
hereunder as specified in a Notice of Borrowing delivered pursuant to Section
2.2(a) hereof.
"Business Day" means any day which is not (a) a Saturday or Sunday, (b)
a day on which commercial banks are authorized or required to be closed in
Boston, Massachusetts, or New York City, New York or (c) a day on which the New
York Stock Exchange, Inc. is authorized or required to be closed.
"Capital Adequacy Regulation" means any guideline, request or directive
of any central bank or other Governmental Authority, or any other law, rule or
regulation, whether or not having the force of law, in each case, regarding
capital adequacy of any bank or of any corporation controlling a bank.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor statute.
"Committed Loans" means loans made pursuant to Section 2.1(a).
"Commitment" means the agreement of each Bank, subject to the terms and
conditions of this Agreement, to make Loans to the Borrowers hereunder.
"Commitment Amount" means, with respect to each Bank, the amount set
forth opposite the name of such Bank on Schedule 1 attached hereto, as such
amount may be reduced from time to time pursuant to Sections 2.5 or reduced or
increased from time to time pursuant to Section 8.6; and "Commitment Amounts"
means, as of any date, the aggregate of all such amounts on such date. On the
Effective Date the aggregate Commitment Amounts equal $1,000,000,000.
"Commitment Percentage" means, with respect to each Bank, the percentage
set forth opposite the name of such Bank on Schedule 1 attached hereto as such
Bank's percentage of the aggregate Commitment Amounts of all of the Banks.
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"Compliance Certificate means a certificate in substantially the form of
Exhibit F.
"Consent Date" has the meaning set forth in Section 2.6(a).
"Custodian" means, on any date, the entity which acts as a Borrower's
custodian for purposes of Section 17(f) of the Act.
"Debt" of any Person means at any date, without duplication, (a) all
obligations of such Person for borrowed money or extensions of credit, (b) all
obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments, (c) all obligations of such Person to pay the deferred
purchase price of property or services, except trade accounts payable arising in
the ordinary course of business, (d) all obligations of such Person as lessee
which are or should be capitalized in accordance with GAAP, (e) all Debt of
others secured by a Lien on any asset of such Person, whether or not such Debt
is assumed by such Person, (f) all obligations of such Person under Guarantees,
all obligations to reimburse the issuer in respect of letters of credit, or
other similar obligations, (g) all obligations of such Person in respect of
banker's acceptances and under reverse repurchase agreements, and (h) all
obligations of such Person in respect of futures contracts, swaps and other
obligations that are senior securities for purposes of the Act.
"Default" means with respect to a Borrower any condition or event which
with the giving of notice or lapse of time or both would, unless cured or
waived, become an Event of Default by such Borrower.
"Delinquent Bank" has the meaning set forth in Section 7.10(a).
"Distribution" means the declaration or payment of any dividend on or in
respect of any shares of any class of capital stock of a Borrower, other than
dividends payable solely in shares of common stock of a Borrower; the purchase,
redemption, or other retirement of any shares of any class of capital stock of a
Borrower, directly or indirectly; the return of capital by a Borrower to its
shareholders as such; or any other distribution on or in respect of any shares
of any class of capital stock of a Borrower.
"Effective Date" means the date this Agreement becomes effective in
accordance with Section 3.1.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA Group" means a Borrower and all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with such Borrower, are treated as a single
employer under Section 414 of the Code.
"Event of Default" has the meaning set forth in Section 6.1.
"Existing Termination Date" has the meaning set forth in Section 2.6(a).
"Failure" has the meaning set forth in Section 7.10(b).
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<PAGE> 10
"Federal Funds Rate" means for any day, an interest rate per annum
(expressed as a decimal, rounded upwards, if necessary, to the next higher 1/100
of 1%) equal to the weighted average of the quotations for the federal funds
offered rate received by the Operations Agent at approximately 9:30 a.m. (Boston
time) on such day from three Federal funds brokers of recognized standing
selected by the Operations Agent in its sole discretion.
"FRB" means the Board of Governors of the Federal Reserve System and any
Governmental Authority succeeding to any of its principal functions.
"GAAP" means United States generally accepted accounting principles.
"Governmental Authority" means any nation or government, any state or
other political subdivision thereof, any central bank (or similar monetary or
regulatory authority) thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
and any corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
"Guarantee" by any Person means any obligation, contingent or otherwise,
of such Person directly or indirectly guaranteeing any Debt or other obligation
of any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (a) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt or other obligation (whether arising by virtue of partnership arrangements,
by agreement to keep-well, to purchase assets, goods, securities or services, to
take-or-pay, or to maintain financial statement conditions or otherwise) or (b)
entered into for the purpose of assuring in any other manner the obligee of such
Debt or other obligation of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part), provided that the term
Guarantee shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Indemnified Liabilities" has the meaning set forth in Section 8.3(b).
"Indemnified Parties" has the meaning set forth in Section 8.3(b).
"Insolvency Proceeding" means, with respect to any Person, (a) any case,
action or proceeding before any court or other Governmental Authority relating
to bankruptcy, reorganization, insolvency, liquidation, receivership,
dissolution, winding-up or relief of debtors or (b) any general assignment for
the benefit of creditors, composition, marshalling of assets for creditors, or
other similar arrangement in respect of its creditors generally or any
substantial portion of its creditors, undertaken under U.S. Federal, state or
foreign law, including the Bankruptcy Code.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
"Loan Documents" means, collectively, this Agreement, the Notes, if any,
issued pursuant to Section 2.4, and any and all other documents and instruments
required to be delivered pursuant to this Agreement, in each case as amended and
in effect from time to time.
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"Loans" means an extension of credit made or to be made to a Borrower by
the Banks pursuant to Article II and may be a Base Rate Loan or a Federal Funds
Rate Loan (each a "type" of Loan). Loans shall include both Committed Loans and
Swing Line Advances.
"Maryland corporation" means each investment company listed as such on
the signature pages hereof.
"Material Adverse Effect" means any change that is material and adverse
to (x) the condition (financial or otherwise) or business of a Borrower, or (y)
the ability of a Borrower to duly and punctually pay and perform all or any of
its Obligations.
"Maximum Amount" has the meaning set forth in Section 2.1(a).
"Moody's" means Moody's Investors Services, Inc., or any successor
acceptable to the Required Banks performing substantially the same function.
"Multiemployer Plan" means at any time an employee pension benefit plan
within the meaning of Section 4001(a)(3) of ERISA to which any member of the
ERISA Group is then making or accruing an obligation to make contributions or
has within the preceding five plan years made contributions, including for these
purposes any Person which ceased to be a member of the ERISA Group during such
five year period.
"Net Asset Value" means, at any date ,with respect to any Borrower,
Total Assets less Total Liabilities (other than the Loans of such Borrower and
any accrued interest thereon) of such Borrower.
"Non-Extending Bank" has the meaning set forth in Section 2.6(a).
"Notes" means promissory notes of the Borrowers issued pursuant to
Section 2.4, and
"Note" means any one of such promissory notes issued pursuant to Section
2.4.
"Notice of Borrowing" has the meaning set forth in Section 2.2(a).
"Notice of Conversion" has the meaning set forth in Section 2.2(b).
"Obligations" means all indebtedness, obligations and liabilities of a
Borrower to any of the Banks, the Operations Agent and the Administrative Agent,
existing on the date of this Agreement or arising thereafter, direct or
indirect, absolute or contingent, matured or unmatured, liquidated or
unliquidated, secured or unsecured, arising by contract, operation of law or
otherwise, arising or incurred under this Agreement or any of the other Loan
Documents or in respect of any of the Loans to a Borrower hereunder or any of
the Notes or other instruments at any time evidencing any thereof.
"Operations Agent" means State Street acting as Operations Agent for the
Banks and any successor thereof.
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"Organization Documents" means, for any Borrower that is a Trust or a
series of a Trust, the Trust Agreement, the bylaws, any certificate of
determination or instrument relating to the rights of preferred shareholders of
such Trust, for any Borrower that is a series of a Maryland corporation, the
articles of incorporation and bylaws of such Maryland corporation and for any
Borrower that is not a series of a Trust or a Maryland corporation, its articles
of incorporation and bylaws.
"Participant" has the meaning set forth in Section 8.6(b).
"Person" means an individual, a corporation (or series thereof), limited
liability company, a partnership, an association, a trust (or series thereof) or
any other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"Plan" means at any time an employee pension benefit plan (other than a
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards of Section 302 or Section 412 of the Code and either
(i) is maintained, or contributed to, by any member of the ERISA Group for
employees of any member of the ERISA Group or (ii) has at any time within the
preceding five years been maintained, or contributed to, by any Person which was
at such time a member of the ERISA Group for employees of any Person which was
at such time a member of the ERISA Group.
"Prospectus" means with respect to a Borrower, the current prospectus of
such Borrower delivered to the Administrative Agent prior to the date hereof and
any subsequent prospectus of such Borrower (or Part A of such Borrower's
registration statement)
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
"Required Banks" means at any time Banks (other than Delinquent Banks)
whose Commitment Amounts equal more than 50% of the result of (i) the aggregate
Commitment Amounts of all Banks minus (ii) the aggregate Commitment Amounts of
all Delinquent Banks at such time; and if the Commitments of the Banks are
terminated, Banks (other than Delinquent Banks) whose outstanding Loans equal
more than 50% of the result of (i) the aggregate principal amount of all Loans
outstanding at such time minus (ii) the aggregate principal amount of all Loans
outstanding at such time from the Delinquent Banks; provided, however, that if
any one Bank (other than a Delinquent Bank) holds 50% or more of the aggregate
Commitment Amounts of all Banks (other than Delinquent Banks), Required Banks
means such Bank plus at least one other Bank (other than a Delinquent Bank),
unless there is no such other Bank.
"Revolving Credit Period" means the period from and including the
Effective Date to but excluding the Termination Date.
"SAI" means, with respect to a Borrower, the current statement of
additional information of such Borrower (or Part B of such Borrower's
registration statement) and any subsequent statement of additional information
of such Borrower.
"S&P" means Standard & Poors Ratings Group, or any successor acceptable
to the Required Banks performing substantially the same function.
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<PAGE> 13
"Section 2.13(a) Tax" has the meaning set forth in Section 2.13(a).
"State Street" means State Street Bank and Trust Company, a
Massachusetts trust company.
"Subsidiary" of the Borrower means any corporation or other entity of
which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by the Borrower.
"Swing Line Lender" means State Street.
"Swing Line Advance" has the meaning specified in Section 2.1(b).
"Termination Date" means December 1, 2000, provided that the Termination
Date (and each Bank's Commitment to make Loans hereunder) may be extended in
accordance with Section 2.6 hereof.
"Total Assets" means, with respect to a Borrower as of any date, the
aggregate amount of all items that would be set forth as assets on a balance
sheet of such Borrower on such date prepared in accordance with GAAP. The assets
of a Borrower shall be valued in accordance with the Act, the rules and
regulations under the Act, and the valuation procedures set forth in its most
recent Prospectus and SAI.
"Total Liabilities" means, with respect to a Borrower as of any date,
the aggregate amount of all items that would be set forth as liabilities on a
balance sheet of such Borrower on such date prepared in accordance with GAAP.
"Trust" means each investment company listed as such on the signature
pages hereof.
"Trust Agreement" means, with respect to a Trust, such Trust's trust
agreement and declaration of trust or similar instrument, as amended from time
to time.
"type" has the meaning specified in the definition of Loan.
1.2. ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise specified
herein, all accounting terms used herein shall be interpreted, all accounting
determinations hereunder shall be made and all financial statements required to
be delivered hereunder shall be prepared in accordance with GAAP as in effect
from time to time in the United States of America, applied on a basis consistent
(except for changes concurred in by a Borrower's independent public accountants)
with the most recent audited financial statements of the Borrower delivered to
the Banks hereunder.
1.3. ASSUMPTIONS REGARDING STRUCTURE. The parties acknowledge and
agree that with respect to any Trusts, such Trusts are comprised of one or more
separate Borrowers and that such Borrowers are not separately existing legal
entities entitled to enter into contractual agreements or to execute
instruments, and for these reasons, the relevant Trusts are executing this
Agreement on behalf of their specified respective Borrowers.
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1.4. AUTHORITY OF ADVISER; ADVISER DISCLAIMER. Each of the Borrowers
hereby confirms that the Adviser and the employees of the Adviser designated by
such Borrower as its agents have been duly authorized to act on behalf of such
Borrower for purposes of this Agreement and to take all actions which such
Borrower is entitled or required to take hereunder or thereunder, including,
without limitation, requesting the making or conversion of Loans on behalf of a
Borrower pursuant to Section 2, reducing or terminating the Commitments as to
one or more Borrowers, and executing and delivering any and all certificates,
reports, financial information and notices required to be delivered to the
Agents hereunder. Notwithstanding the foregoing or anything to the contrary
contained in this Agreement, the parties hereto acknowledge and agree that (a)
in taking any such action hereunder, the Adviser is acting solely in its
capacity as investment adviser for a Borrower and not in its individual
capacity, (b) neither the Adviser nor any of its officers, employees or agents
(with the Adviser, collectively, "Adviser Persons") shall have any liability
whatsoever for any action taken or omitted to be taken by any of them in
connection with this Agreement nor shall any of them be bound by or liable for
any indebtedness, liability or obligation hereunder and (c) neither the Adviser
nor any Adviser Person shall be responsible in any manner to the Agents or the
Banks for the truth, completeness or accuracy of any statement, representation,
warranty or certification contained in this Agreement, any other Loan Document
or in any information, report, certificate or other document furnished by the
Adviser on behalf of any Trust or Borrower in connection with this Agreement.
ARTICLE II
THE CREDIT
2.1. COMMITMENTS TO LEND. (a) Subject to the terms and conditions set
forth in this Agreement, each of the Banks severally agrees to make loans to the
Borrowers, and the Borrowers may borrow, repay and reborrow from time to time
during the Revolving Credit Period, upon notice by a Borrower to the Operations
Agent given in accordance with Section 2.2(a) hereof, such sums as are requested
by the Borrowers up to a maximum aggregate amount outstanding (after giving
effect to all amounts requested) at any one time equal to such Bank's Commitment
Amount, provided that the aggregate principal amount of all Loans outstanding
(after giving effect to all amounts requested) shall not exceed at any time the
aggregate Commitment Amounts of all of the Banks and the aggregate principal
amount of all Loans outstanding to any Borrower (after giving effect to all
amounts requested) shall not exceed at any time the maximum amount (the "Maximum
Amount") such Borrower is permitted to borrow at such time under applicable laws
and regulations, the limitations on borrowing adopted by such Borrower in its
Prospectus and/or SAI or elsewhere, and any agreements with federal, state,
local or foreign governmental authorities or regulators, in each case as in
effect from time to time. Each Borrowing under this Section shall be in an
aggregate principal amount of not less than $500,000 and shall be made from the
several Banks pro rata in accordance with each Bank's Commitment Percentage.
(b) Notwithstanding the provisions of clause (a) of this Section
2.1, and subject to the terms and conditions of this Agreement, State Street
agrees to make a portion of its Commitment Amount available by making Loans
(each, a "Swing Line Advance", and, collectively, the
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<PAGE> 15
"Swing Line Advances") to any Borrower and each Borrower may borrow, repay and
reborrow such Swing Line Advances, from time to time during the Revolving Credit
Period, upon notice by any Borrower to the Operations Agent in accordance with
Section 2.2(a), in an aggregate principal amount at any time outstanding not to
exceed $75,000,000 (after giving effect to all Swing Line Advances requested);
provided that the aggregate amount of all Loans outstanding from State Street
(after giving effect to all Swing Line Advances requested) shall not exceed
State Street's Commitment Amount. Swing Line Advances may be Federal Funds Rate
Loans or Base Rate Loans. Each Borrower promises to pay each Swing Line Advance
made to such Borrower, together with any and all accrued and unpaid interest
thereon, on the earlier of (A) ten (10) days after the date such Swing Line
Advance was made, (B) the date of the next Loan made to such Borrower by the
Banks pursuant to clause (a) of this Section, and (C) the Termination Date. If
(x) any Swing Line Advance remains outstanding to any Borrower more than (10)
days from the date of the advance thereof, (y) Loans are not requested pursuant
to clause (a) of this Section by such Borrower prior to the Termination Date, or
(z) State Street so requests at any time in its sole and absolute discretion,
then each Bank (including State Street in its capacity as a Bank) shall fund its
pro rata share (based upon such Bank's Commitment Percentage) of the principal
amount of such Swing Line Advance with a Committed Loan, which Committed Loan
shall initially be a Base Rate Loan. Each Bank's obligations to make such
payments to the Operations Agent for account of the Swing Line Lender under this
paragraph (b), and the Swing Line Lender's right to receive the same, shall be
absolute and unconditional and shall not be affected by any circumstance
whatsoever, including, without limitation, the failure of any other Bank to make
its payment under this paragraph (b), the financial condition of any Borrower,
the existence of any Default or Event of Default, the failure of any of the
conditions set forth in Article III to be satisfied, or the termination of the
Commitments. Each such payment to the Swing Line Lender shall be made without
any offset, abatement, withholding or reduction whatsoever. Each Bank agrees to
funds its pro rata share of such outstanding Swing Line Advances on (i) the
Business Day on which demand therefore is made by the Swing Line Lender as
aforesaid, provided that notice of such demand is given not later than 1:00 P.M.
(Boston time) on such Business Day or (ii) the first Business Day next
succeeding such demand if notice of such demand is given after such time. If and
to the extent that any Bank shall not have so made the amount of such Swing Line
Advance available to the Operations Agent, such Bank agrees to pay to the
Operations Agent for the account of the Swing Line Lender forthwith on demand
such amount together with interest thereon, for each day from the date of demand
by the Swing Line Lender until the date such amount is paid to the Operations
Agent, as the Federal Funds Rate.
2.2. Notice of Borrowings. (a) Each Borrowing shall be made upon the
borrowing Borrower's irrevocable written notice substantially in the form of
Exhibit B attached hereto (a "Notice of Borrowing") not later than 12:00 noon
(Boston time) (or telephonic notice not later than 12:00 noon (Boston time)
confirmed in a writing substantially in the form of Exhibit B attached hereto
not later than 12:30 p.m. (Boston time)) on the Business Day of the proposed
Borrowing, appropriately completed concerning the Borrowing. Each Notice of
Borrowing or oral request shall constitute a representation and warranty by the
borrowing Borrower that the conditions set forth in Section 3.2 have been
satisfied on the date of such notice and will be satisfied on the Borrowing
Date.
(b) Each Borrower may elect from time to time to convert any
outstanding Base Rate Loan or Federal Funds Rate Loan to a Loan of the other
type, by giving a notice on the date of
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<PAGE> 16
the conversion to the Operations Agent substantially in the form of Exhibit C
attached hereto (a "Notice of Conversion") not later than 12:00 noon (Boston
time) (or telephonic notice by 12:00 noon (Boston time) confirmed in a writing
substantially in the form of Exhibit C attached hereto not later than 12:30 p.m.
(Boston time)).
(c) Notwithstanding the foregoing, any Borrower may request a Swing
Line Advance under this Section 2.1 (c) by delivering to the Operations Agent,
no later than 3:00 P.M. (Boston time) on the date of the proposed Swing Line
Advance, a Notice of Borrowing, which shall be made by facsimile transmission,
confirmed immediately in writing.
(d) State Street will make the amount of such Swing Line Advance
available to the Borrower requesting such Swing Line Advance at the account
noticed by such Borrower to State Street.
2.3. NOTICE TO BANKS; FUNDING OF LOANS. (a) Upon receipt of a Notice
of Borrowing or an oral request for a Borrowing in accordance with Section 2.2,
the Operations Agent shall promptly notify each Bank of the contents thereof and
of such Bank's ratable share, if any, of such Borrowing. Such Notice of
Borrowing or oral request shall not thereafter be revocable by the borrowing
Borrower and shall obligate the borrowing Borrower to accept the Loans requested
from the Banks on the Borrowing Date.
(b) Not later than 3:00 p.m. (Boston time) on the Borrowing Date of
each Borrowing, each Bank shall make available its share, if any, of such
Borrowing, in Federal or other funds immediately available in Boston, to the
Operations Agent at its address referred to in Section 8.1. Unless the
Operations Agent determines that any applicable condition specified in Article
III has not been satisfied, the Operations Agent will make its share of such
Borrowing and the funds so received from the other Banks available to the
borrowing Borrower as noticed to the Operations Agent with the name of its
custodian and payment instructions (including ABA number and demand deposit
account number) on the Borrowing Date. The failure or refusal of any Bank to
make available to the Operations Agent as provided herein its share of any
Borrowing shall not relieve any other Bank from its several obligations
hereunder.
(c) If any Committed Loan is to be made to a Borrower hereunder on a
day on which any Swing Line Advance to such Borrower is outstanding, the
proceeds of such Committed Loan shall be applied first to the repayment of the
outstanding Swing Line Advances to such Borrower, and only an amount equal to
the difference (if any) between the amount being borrowed and the Swing Line
Advances being repaid shall be made available to such Borrower by the Operations
Agent as provided in clause (b) of this Section 2.3.
(d) Unless the Operations Agent shall have received notice from a
Bank prior to any Borrowing Date that such Bank will not make available to the
Operations Agent such Bank's share of such Borrowing, the Operations Agent may
assume that such Bank has made such share available to the Operations Agent on
such Borrowing Date in accordance with subsection (b) of this Section and the
Operations Agent may (but it shall not be required to), in reliance upon such
assumption, make available to the borrowing Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have so made
such share available to the Operations Agent, such Bank and the borrowing
Borrower severally agree to repay to the Operations Agent,
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<PAGE> 17
within three days after demand by the Operations Agent, such amount together
with interest thereon, for each day from the date such amount is made available
to the borrowing Borrower until the date such amount is repaid to the Operations
Agent, at (i) in the case of the borrowing Borrower, a rate per annum equal to
the interest rate applicable thereto pursuant to Section 2.9 and (ii) in the
case of such Bank, the Federal Funds Rate. If such Bank shall repay to the
Operations Agent such amount, such amount so repaid shall constitute such Bank's
Loan included in such Borrowing for purposes of this Agreement.
2.4. LOAN ACCOUNTS; NOTES; RECORDS. (a) The Loans made by each Bank
to each Borrower shall be evidenced by one or more loan accounts or records
maintained by such Bank in the ordinary course of business. The loan accounts or
records maintained by the Operations Agent and each Bank shall be prima facie
evidence of the amount of the Loans made by the Banks to each Borrower and the
interest and payments thereon. Any failure so to record or any error in doing so
shall not, however, limit or otherwise affect the obligation of the Borrowers
hereunder to pay any amount owing with respect to the Loans.
(b) The Borrowers hereby agree that if, in the opinion of any Bank,
a promissory note or other evidence of debt is required to reflect or enforce
the Debt of the Borrowers resulting from the Loans made, or to be made, by such
Bank, then upon request of such Bank, the Borrowers shall promptly execute and
deliver to such Bank, for the Loans made or to be made by such Bank, a
promissory note substantially in the form of Exhibit D attached hereto, payable
to the order of such Bank in an amount equal to the Loans payable or to be
payable to such Bank from time to time, provided, that as a condition to issuing
any such Note, the Borrowers may require an indemnity with respect to lost
instruments from such Bank, in form and substance satisfactory to the Borrowers
and their counsel.
2.5. OPTIONAL TERMINATION OR REDUCTION OF COMMITMENTS. (a) The
Borrowers shall have the right at any time and from time to time prior to the
Termination Date upon three Business Days' prior written notice to the
Operations Agent to reduce by $50,000,000 or a larger integral multiple of
$10,000,000 the unborrowed portion of the aggregate Commitment Amounts of the
Banks or terminate entirely each Bank's Commitment, whereupon the Commitment
Amounts of each of the Banks shall be reduced pro rata in accordance with their
Commitment Percentages of the amount specified in such notice or, as the case
may be, each Bank's Commitment shall be terminated. Promptly after receiving any
notice of the Borrowers delivered pursuant to this Section, the Operations Agent
will notify the Banks of the substance thereof. Upon the effective date of any
such reduction or termination, the Borrower shall pay to the Operations Agent
for the respective accounts of the Banks the full amount of any commitment fee
then accrued on the amount of the reduction. No reduction in the Commitment
Amounts or termination of the Commitments may be reinstated.
(b) Any Borrower may on three Business Days' written notice to the
Agents cease to be a Borrower hereunder on the date specified in such notice,
provided all Obligations due and owing by such Borrower hereunder are repaid in
full on such date. A Borrower ceasing to be a Borrower hereunder shall not
affect the then applicable Commitment Amounts, which shall remain unchanged.
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2.6. EXTENSION OF TERMINATION DATE. (a) The Borrowers may, by notice to
the Administrative Agent (which shall promptly deliver a copy to the Operations
Agent and each of the Banks) not less than 45 days and not more than 60 days
prior to the Termination Date then in effect hereunder (the "Existing
Termination Date"), request that the Banks extend the Termination Date for an
additional 364 days from the Consent Date (as defined below). Each Bank, acting
in its sole discretion, shall, by notice to the Borrowers and the Administrative
Agent (who shall notify the Operations Agent) given on the date (and, subject to
the provision below, only on the date) 30 days prior to the Existing Termination
Date (provided, if such date is not a Business Day, then such notice shall be
given on the next succeeding Business Day) (the "Consent Date"), advise the
Borrowers whether or not such Bank agrees to such extension; provided that each
Bank that determines not to extend the Termination Date (a "Non-Extending Bank")
shall notify the Administrative Agent (who shall notify the Operations Agent and
the Borrowers) of such fact promptly after such determination (but in any event
no later than the Consent Date) and any Bank that does not advise the Borrowers
on or before the Consent Date shall be deemed to be a Non-Extending Bank. The
election of any Bank to agree to such extension shall not obligate any other
Bank to agree to such extension.
(b) The Borrowers shall have the right on or before the Existing
Termination Date to replace each Non-Extending Bank with, and otherwise add to
this Agreement, one or more other commercial banks, which may include any Bank
(each, prior to the Existing Termination Date, an "Additional Commitment Bank")
with the approval of the Agents (which approval shall not be unreasonably
delayed or withheld). Each Additional Commitment Bank shall enter into an
Assignment and Acceptance pursuant to which such Additional Commitment Bank
shall, effective as of the Existing Termination Date, undertake a Commitment (an
"Additional Commitment") (if any such Additional Commitment Bank is a Bank, its
Additional Commitment shall be in addition to such Bank's Commitment hereunder
on such date).
(c) If (and only if) Banks with Commitment Amounts that, in the
aggregate, together with the proposed Commitment Amounts of the Additional
Commitment Banks that will become effective on the Existing Termination Date,
aggregate at least 75% of the aggregate Commitment Amounts on the Consent Date
shall have agreed to extend the Existing Termination Date, then, effective as of
the Existing Termination Date, (i) the Existing Termination Date shall be
extended to the date which is 364 days after the Consent Date (provided, if such
date is not a Business Day, then such Termination Date as so extended shall be
the next preceding Business Day), (ii) the aggregate Commitment Amounts shall
equal the sum of the Commitments of the Banks (other than the non-extending
Banks) and the Additional Commitment Banks and each (iii) Additional Commitment
Bank shall thereupon become a "Bank" with a Commitment for all purposes of this
Agreement.
(d) Notwithstanding the foregoing, the extension of the Existing
Termination Date shall not be effective with respect to any Bank unless:
(i) no Default or Event of Default shall have occurred and
be continuing on the date of the notice requesting such extension, the
Consent Date or the Existing Termination Date;
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(ii) each of the representations and warranties of the
Borrowers in Article IV hereof shall be true and correct on and as of
each of the date of the notice requesting such extension, the Consent
Date and the Existing Termination Date with the same force and effect as
if made on and as of each such date (or, if any such representation or
warranty is expressly stated to have been made as of a specific date, as
of such specific date); and
(iii) each Non-Extending Bank shall have been paid in full by
the respective Borrowers all amounts owing to such Bank hereunder on or
before the Existing Termination Date.
Even if the Existing Termination Date is extended as provided in this Section
2.6, the Commitment of each Non-Extending Bank shall terminate on the Existing
Termination Date.
2.7. OPTIONAL PREPAYMENTS. (a) Each Borrower may, with telephonic
notice to the Operations Agent by 12:00 P.M. confirmed in writing substantially
in the form of Exhibit C attached hereto no later than 12:30 p.m. (Boston time)
on the Business Day of such payment (which notice shall not thereafter be
revocable by such Borrower), prepay any Loans made to such Borrower in whole at
any time, or from time to time in part in an aggregate principal amount not less
than $500,000 and in larger integral multiples of $100,000, by paying the
principal amount to be prepaid together with accrued interest thereon to the
date of prepayment. Each such optional prepayment shall be applied to prepay
ratably the Loans of the several Banks included in such Borrowing made to such
Borrower.
(b) Upon receipt of a notice of prepayment pursuant to subsection
(a), the Operations Agent shall promptly notify each Bank of the contents
thereof and of such Bank's ratable share of such prepayment.
(c) Subject to the satisfaction of the conditions set forth in
Section 3.2, Loans prepaid prior to the Termination Date may be reborrowed prior
to the Termination Date.
2.8. MANDATORY PAYMENTS. (a) If at any time Asset Coverage Ratio for
any Borrower shall be less than 3 to 1, such Borrower shall, within three (3)
Business Days, prepay such principal amount of one or more Loans made to such
Borrower, as may be necessary so that after such prepayment the Asset Coverage
Ratio for such Borrower shall not exceed 3 to 1.
(b) On any date on which the Loans outstanding exceed the aggregate
Commitment Amounts, the Borrowers, which have Loans outstanding at such date,
shall immediately severally prepay such principal amount of the one or more
Loans made to such Borrowers (together with accrued interest thereon) based upon
each such Borrower's pro rata share of such amount in excess of the aggregate
Commitment Amounts, as may be necessary to eliminate such excess.
(c) On any date on which the Loans outstanding of any Borrower
exceed the Maximum Amount for such Borrower, such Borrower shall immediately
prepay such principal amount of one or more Loans, as may be necessary to
eliminate such excess.
(d) Each Swing Line Advance shall mature, and the principal amount
thereof shall be due and payable, as provided in Section 2.1(b).
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(e) Each Loan (other than a Swing Line Advance) shall mature, and
the principal amount thereof shall be due and payable, on the earlier of (i) the
date that is 60 days after the date of the making of such Loan or any Swing Line
Advance refinanced with such Loan and (ii) the Termination Date. No proceeds of
any Loan shall be used to refinance any Loan (other than a Swing Line Advance).
(f) On the Termination Date, each Bank's Commitment Amount
permanently shall reduce to $0 and each Bank's Commitment shall terminate. Each
Borrower severally promises to pay on the Termination Date, and there shall
become absolutely due and payable on the Termination Date, all of the Loans
outstanding to it on such date, together with all accrued and unpaid interest
thereon and all other amounts outstanding hereunder owing by it on such date.
2.9. INTEREST RATES. (a) Subject to Sections 2.9(c) and (d), each
Federal Funds Rate Loan shall bear interest on the outstanding principal amount
thereof, for the period commencing with the date such Federal Funds Rate Loan is
made up to but not including the date such Federal Funds Rate Loan is repaid in
full, at a rate per annum equal to the Federal Funds Rate as in effect from time
to time plus 0.50%. Interest on each Federal Funds Rate Loan shall be payable on
the last day of each calendar quarter commencing on the first such day after the
Effective Date and on the Termination Date. The Operations Agent shall on each
Business Day for which a Federal Funds Rate Loan is outstanding notify the
borrowing Borrower and the Banks in writing (by telecopy) of the Federal Funds
Rate in effect on such day.
(b) Subject to Sections 2.9(c) and (d), each Base Rate Loan shall
bear interest on the outstanding principal amount thereof, for the period
commencing with the date such Base Rate Loan is made at a rate per annum equal
to the Base Rate. Interest on each Base Rate Loan shall be payable on the last
day of each calendar quarter commencing March 31, 2000 and on the Termination
Date.
(c) Notwithstanding the foregoing, during the period from and including
December 1, 1999 to and including January 31, 2000, interest on Federal Funds
Rate Loans shall accrue at a rate not less than the Base Rate.
(d) Any overdue principal of (whether at stated maturity, by
acceleration or otherwise) and (to the extent permitted by applicable law)
interest on the Loans and all other overdue amounts payable hereunder shall bear
interest, payable on demand, for each day from and including the date payment
thereof was due (whether at stated maturity, by acceleration or otherwise) to
but not including the date of actual payment, at a rate per annum equal to the
sum of two percent (2%) above the Base Rate until such amount shall be paid in
full (after as well as before judgment).
2.10. FEES. (a) Subject to the allocation requirements of Section
2.14, during the Revolving Credit Period, each of the Borrowers severally shall
pay to the Operations Agent for the account of each Bank its pro rata share of
the commitment fee at the rate of 0.09% per annum on the daily amount by which
the aggregate amount of such Bank's Commitment Amount exceeded the aggregate
outstanding principal amount of the Loans made by such Bank. For the purpose of
calculating the commitment fee, Swing Advances shall not be considered to be
outstanding Loans.
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(b) The commitment fee shall accrue from and including the Effective
Date to but excluding the Termination Date. Accrued commitment fees payable
hereunder shall be payable quarterly in arrears on the 15th day of each April,
July, October and January of each year for the calendar quarter ending on the
last day of the immediately preceding month commencing on the first such day
after the Effective Date, and on the Termination Date.
(c) Subject to the allocation requirements of Section 2.14, on the
Effective Date, each of the Borrowers severally shall pay to each Bank its pro
rata share of the closing fee in the amount previously agreed to between the
Borrowers and such Bank.
(d) Subject to the allocation requirements of Section 2.14, the
Borrowers severally shall pay to the Agents for their own accounts, annually in
advance on the Effective Date and on each anniversary thereof during the term of
this Agreement, its pro rata share of the non-refundable agent's fee as agreed
upon separately, by the Borrowers and each Agent.
2.11. GENERAL PROVISIONS AS TO PAYMENTS. (a) Payment of principal of
and interest on the Loans and of fees and all other amounts due hereunder shall
be made not later than 1:00 p.m. (Boston time) on the date when due, in United
States dollars and in Federal or other funds immediately available in Boston, to
the Operations Agent at its address referred to in Section 8.1. The Operations
Agent will promptly distribute to each Bank its ratable share of each such
payment received by the Operations Agent for the account of the Banks. Whenever
any payment of principal of, or interest on, the Loans or of fees shall be due
on a day which is not a Business Day, the date for payment thereof shall be
extended to the next succeeding Business Day. If the date for any payment of
principal is extended by operation of law or otherwise, interest thereon shall
be payable for such extended time.
(b) Unless the Operations Agent shall have received notice from a
Borrower prior to the date on which any payment is due to the Banks hereunder
that such Borrower will not make such payment in full, the Operations Agent may
assume that such Borrower has made such payment in full to the Operations Agent
on such date and the Operations Agent may (but it shall not be required to), in
reliance upon such assumption, cause to be distributed to each Bank on such due
date an amount equal to the amount then due such Bank. If and to the extent that
a Borrower shall not have so made such payment, each Bank shall repay to the
Operations Agent forthwith on demand such amount distributed to such Bank
together with interest thereon, for each day from the date such amount is
distributed to such Bank until the date such Bank repays such amount to the
Operations Agent, at the Federal Funds Rate.
(c) Each Borrower agrees that payments by such Borrower hereunder
and under any of the other Loan Documents shall be made without setoff or
counterclaim.
2.12. COMPUTATION OF INTEREST AND FEES. All interest based on the
Federal Funds Rate and fees hereunder shall be computed on the basis of a year
of 360 days and paid for the actual number of days elapsed and all interest
based on the rate specified in clause (b) of the definition of "Base Rate" shall
be computed on the basis of a year of 365/366 days and paid for the actual
number of days elapsed.
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2.13. WITHHOLDING TAX EXEMPTION. (a) All payments hereunder and under
any of the other Loan Documents shall be made free and clear of and without any
deduction for or on account of any tax, levy, deduction, withholding, or other
similar charge of whatever nature (but excluding any tax on the overall net
income of a Bank or its lending office by the jurisdiction in which such Bank is
incorporated or has its principal office or such lending office) (each such
non-excluded tax, levy, deduction, withholding or similar charge, for the
purposes of this Section, a "Section 2.13(a) Tax") imposed by the United States
of America, or any political subdivision or taxing authority thereof or therein
(each, for the purposes of this Section, an "Appropriate Taxing Authority"),
except as expressly provided in this Section. Except as otherwise provided in
Section 2.13(c), if any Section 2.13(a) Taxes are imposed and required by law to
be paid or withheld from any amount payable to any Bank, then the borrowing
Borrower upon the request of such Bank shall (i) increase the amount of such
payment so that such Bank will receive a net amount (after deduction of all
Section 2.13(a) Taxes) equal to the amount due hereunder, (ii) pay such Section
2.13(a) Taxes to the Appropriate Taxing Authority for the account of such Bank
in a timely manner, and (iii) as promptly as possible thereafter, send such Bank
evidence showing payment thereof.
(b) Each Bank that is not incorporated under the laws of the United
States of America or a state thereof agrees that it ((x) if such Bank is an
original Bank party to this Agreement, on or prior to the Effective Date, and
(y) if such Bank becomes a Bank party to this Agreement after the Effective
Date, on or prior to the date such Bank becomes a Bank party hereto) will
deliver to the Borrowers and the Operations Agent two duly completed copies of
United States Internal Revenue Service Form W8ECI, certifying in either case
that such Bank is entitled to receive payments under this Agreement without
deduction or withholding of any United States federal income taxes. Each Bank
which so delivers a Form W8ECI further undertakes to deliver to the Borrowers
and the Operations Agent two additional copies of such form (or a successor
form) on or before the date that such form expires or becomes obsolete or after
the occurrence of any event requiring a change in the most recent form so
delivered by it, and such amendments thereto or extensions or renewals thereof
as may be reasonably requested by the Borrowers or the Operations Agent, in each
case certifying that such Bank is entitled to receive payments under this
Agreement without deduction or withholding of any United States federal income
taxes, unless an event (including without limitation any change in treaty, law
or regulation) has occurred prior to the date on which any such delivery would
otherwise be required which renders all such forms inapplicable or which would
prevent such Bank from duly completing and delivering any such form with respect
to it and such Bank advises the Borrowers and the Operations Agent that it is
not capable of receiving payments without any deduction or withholding of United
States federal income tax.
(c) Notwithstanding anything to the contrary contained in Section
2.13(a), the Borrowers will not be required to make any additional payment to or
for the account of any Bank under Section 2.13(a) by reason of (i) a breach by
such Bank of any certification or representation set forth in any form furnished
to the Borrowers under Section 2.13(b) or (ii) such Bank's failure or inability
to furnish under Section 2.13(b) an original or an extension or renewal of a
Form W8ECI (or successor form), as applicable, unless such Bank is exempt from
furnishing such Form pursuant to Section 2.13(b).
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2.14. SOURCE OF REPAYMENT. (a) Notwithstanding any other provision of
this Agreement, the parties agree that the assets and liabilities of each
Borrower, are separate and distinct from the assets and liabilities of each
other Borrower, and to the extent a Borrower is a series of a Trust or a
Maryland corporation, each other series of that Trust or Maryland corporation,
as the case may be, and that no Borrower, and to the extent a Borrower is a
series of a Trust or a Maryland corporation, no other series of that Trust or
Maryland corporation, as the case may be, shall be liable or shall be charged
for any debt, obligation, liability, fee or expense arising under this Agreement
or out of or in connection with any transaction other than one entered into by
or on behalf of itself. The Borrowers shall (i) as provided in Section 3.1(d),
(ii) to the extent feasible, at least five Business Days in advance of a date on
which a payment in respect of a debt, obligation, liability, fee or expense
arising hereunder (other than principal of or interest on a Loan) shall be due
and payable and (iii) upon request of the Administrative Agent or at any time at
the option of the Borrowers, cause to be provided to the Administrative Agent an
Allocation Notice; provided, however, should the Borrowers fail to deliver to
the Administrative Agent an Allocation Notice with respect to such amounts
within five Business Days following a request for the same by the Administrative
Agent, the Borrowers shall be severally liable therefor to the Agent and/or the
Banks in the proportion set forth in the Allocation Notice most recently
delivered to the Administrative Agent.
(b) With respect to each Trust, the parties hereto acknowledge that
the Trust Agreement for each Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts and the Clerk of the City of Boston or the
Secretary of State of the State of Delaware, as applicable. With respect to each
Trust, the parties hereby agree that this Agreement is not executed on behalf of
the trustees of such Trust as individuals; that the obligations of any Borrower
of such Trust under this Agreement and any claims, obligations or liabilities
arising hereunder are not binding on any of the trustees, officers or
shareholders of such Trust individually but are binding upon only the assets and
property of such Borrower; and that no Borrower or series of a Trust will be
held liable for the obligations or liabilities of any other Borrower or series
of that Trust.
2.15. CAPITAL ADEQUACY. If any Bank shall have determined that (i) the
introduction of any Capital Adequacy Regulation, (ii) any change in any Capital
Adequacy Regulation or (iii) any change in the interpretation or administration
of any Capital Adequacy Regulation by any central bank or other Governmental
Authority charged with the interpretation or administration thereof, in each
case occurring after the date hereof, affects or would affect the amount of
capital required or expected to be maintained by the Bank or any corporation
controlling the Bank and (taking into consideration such Bank's or such
corporation's policies with respect to capital adequacy and such Bank's desired
return on capital) determines that the amount of such capital is increased as a
consequence of its Commitment, loans or obligations under this Agreement, then,
within 10 days after demand of such Bank to the Borrowers through the Agent
(which demand shall be in writing and shall set forth in reasonable detail the
calculation of such amounts), each of the Borrowers severally shall pay to such
Bank, from time to time as specified by the Bank, its pro rata share of
additional amounts sufficient to compensate the Bank for such increase.
2.16. SUBSTITUTION OF BANKS. Upon the receipt by the Borrowers from
any Bank (an "Affected Bank") of a claim for compensation under Section 2.13 or
2.15, the Borrowers may: (i) request the Affected Bank to use its best efforts
to obtain a replacement bank satisfactory to the
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Borrowers to acquire and assume all or ratable part of all of such Affected
Bank's Loans and Commitment (a "Replacement Bank"); (ii) request one more of the
other Banks to acquire and assume all or any part of such Affected Bank's Loans
and Commitment; or (iii) designate a Replacement Bank. Any such designation of a
Replacement Bank under clause (i) or (iii) shall be subject to the prior written
consent of the Agents (which consent shall not be unreasonably withheld).
2.17. SURVIVAL. The agreements and obligations of the Borrowers under
Sections 2.13 and 2.15 shall survive the payment of all other Obligations for a
period of ninety days.
ARTICLE III
CONDITIONS
3.1. EFFECTIVENESS. This Agreement shall become effective on the date
that each of the following conditions shall have been satisfied (or waived in
accordance with Section 8.5):
(a) receipt by the Administrative Agent of counterparts hereof
signed by each of the parties hereto;
(b) receipt by each of the Banks of an opinion of Brown & Wood LLP,
counsel to the Borrowers, substantially in the form of Exhibit E attached hereto
and reasonably satisfactory to the Administrative Agent in all respects;
(c) receipt by the Administrative Agent of a manually signed
certificate from the Secretary of each Borrower, in form and substance
satisfactory to the Administrative Agent and dated the Effective Date, as to (i)
the incumbency of, and bearing manual specimen signatures of, the Authorized
Signatories of such Borrower, (ii) the Custodian of such Borrower and (iii) the
investment adviser of the Borrower, and certifying and attaching copies of (A)
such Borrower's Organization Documents as then in effect, (B) duly authorized
resolutions of such Borrower's board of directors or trustees authorizing the
transactions contemplated hereby, (C) the Prospectus and (D) all amendments to
the Borrower's investment objectives, policies and restrictions since the date
of the Prospectus;
(d) receipt by the Operations Agent of an Allocation Notice;
(e) receipt by the Administrative Agent of all documents, opinions
and instruments it may reasonably request prior to the execution of this
Agreement relating to compliance with applicable rules and regulations
promulgated by Governmental Authorities, the existence of each Borrower, the
authority for and the validity and enforceability of this Agreement and the
other Loan Documents, and any other matters relevant hereto, all in form and
substance satisfactory to the Administrative Agent; and
(f) receipt by the Agents of payment of all fees and expenses
(including fees and disbursements of special counsel for the Administrative
Agent) then payable hereunder and under the other Loan Documents.
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The Administrative Agent shall promptly notify the Borrowers, the
Operations Agent and the Banks of the Effective Date and such notice shall be
conclusive and binding on all parties hereto.
3.2. ALL BORROWINGS. The obligation of any Bank to make a Loan to a
Borrower on the occasion of any Borrowing is subject to the satisfaction of the
following conditions by such Borrower:
(a) receipt by the Operations Agent of a Notice of Borrowing as
required by Section 2.2, which is completed in a manner satisfactory to the
Operations Agent in all respects,
(b) immediately after such Borrowing, the aggregate outstanding
principal amount of the Loans to the borrowing Borrower will not exceed its
Maximum Amount;
(c) immediately after such Borrowing, the aggregate principal amount
of the Loans to all Borrowers will not exceed the aggregate Commitment Amounts;
(d) immediately before and after such Borrowing, no Default or Event
of Default shall have occurred and be continuing with respect to the borrowing
Borrower;
(e) each of the representations and warranties of the borrowing
Borrower contained in this Agreement shall be true on and as of the date of such
Borrowing (unless any such representation and warranty shall relate solely to an
earlier date, in which case such representation and warranty shall be true and
correct as of such earlier date); and
(f) receipt by the Operations Agent with respect to the borrowing
Borrower (other than a Borrower listed on Schedule 4.9) of a duly executed FRB
Form FR U-1 for each Bank as required pursuant to FRB Regulation U (12 C.F.R.
Section 221.1 et seq.), in form and substance satisfactory to the Operations
Agent and its counsel, together with all information requested by the Operations
Agent in connection therewith, including updates of information, if any,
required by such Regulation U.
(g) receipt by the Operations Agent of payment instructions from the
Borrower, as required under Section 2.3(b).
Each Borrowing hereunder shall be deemed to be a representation and warranty by
the borrowing Borrower on the date of such Borrowing as to the facts specified
in clauses, (c), (d) and (e) of this Section.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
In order to induce the Banks and the Agents to enter into this Agreement
and to make Loans hereunder, each Borrower and, to the extent such Borrower is a
series of a Trust or a Maryland corporation, such Trust or Maryland corporation,
not in its individual capacity, but on behalf of such Borrower severally
represents and warrants to the Agents and each Bank with
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<PAGE> 26
respect to itself as set forth in this Article IV. The representations and
warranties contained in this Article IV with respect to an individual Borrower
shall be deemed to be repeated by such Borrower each time that a Loan is made to
such Borrower as provided in Article III.
4.1. EXISTENCE. Such Borrower, or to the extent such Borrower is a
series of a Trust or a Maryland corporation, such Trust or Maryland corporation,
is an open-end management investment company within the meaning of the Act and
is duly organized, validly existing and in good standing under the laws of the
state of its organization. Such Borrower, or to the extent such Borrower is a
Trust or a Maryland corporation, such Trust or Maryland corporation, is duly
qualified to do business and in good standing in each other jurisdiction in
which such qualification is required by applicable law, except to the failure to
be so qualified or in good standing could not have a Material Adverse Effect on
such Borrower. To the extent such Borrower is a series of shares of beneficial
interest in the Trust or Maryland corporation of which it comprises a series
(which shares have been and will be duly authorized, validly issued, fully paid
and non-assessable by such Trust or Maryland corporation) it legally constitutes
a fund or portfolio permitted to be marketed to investors pursuant to the
provisions of the Act.
4.2. AUTHORIZATION. Such Borrower, or to the extent such Borrower is
a series of a Trust or a Maryland corporation, such Trust or Maryland
corporation on behalf of such series, is duly authorized to execute and deliver
this Agreement and, with respect to such Trust or Maryland corporation, so long
as this Agreement shall remain in effect with respect to it, each of its
Borrowers will continue to be duly authorized to borrow monies hereunder on its
own behalf and to perform its obligations under this Agreement. The execution,
delivery and performance by such Borrower, or to the extent such Borrower is a
series of a Trust or Maryland corporation, such Trust or Maryland corporation on
behalf of such Borrower, of this Agreement and the Borrowings of each Borrower
do not and will not require any consent or approval of or registration with any
Governmental Authority.
4.3. NO CONFLICTS. The execution, delivery and performance by such
Borrower, or to the extent such Borrower is a series of a Trust or Maryland
corporation, the execution and delivery by such Trust or Maryland corporation on
behalf of such Borrower, of this Agreement do not and, so long as this Agreement
shall remain in effect with respect to it, will not (i) conflict with any
provision of law, (ii) conflict with the Organization Documents of such
Borrower, or the extent such Borrower is a Trust or a Maryland corporation such
Trust or Maryland corporation, (iii) conflict with any material agreement
binding upon it, (iv) conflict with such Borrower's most recent Prospectus or
its most recent SAI (v) conflict with any court or administrative order or
decree applicable to such Borrower or (vi) require or result in the creation or
imposition of any Lien on any of such Borrower's assets.
4.4. VALIDITY AND BINDING EFFECT. This Agreement is the legal, valid
and binding obligation of such Borrower, enforceable against it in accordance
with its terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, receivership, fraudulent conveyance, fraudulent
transfer, moratorium or other similar laws of general application affecting the
enforcement of creditors' rights or by general principles of equity (regardless
of whether considered in a proceeding in equity or at law).
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4.5. NO DEFAULT. Such Borrower is not in default under any agreement
or instrument to which it is a party or by which any of its respective
properties or assets is bound or affected, other than such defaults that could
not reasonably be expected to have a Material Adverse Effect on such Borrower.
To the best of its knowledge, no Event of Default or Default with respect to it
has occurred and is continuing.
4.6. FINANCIAL STATEMENTS. The most recent audited statement of
assets and liabilities and, if applicable, the most recent semi-annual asset
statement of such Borrower, copies of which have been or will be furnished to
the Banks, have been prepared in conformity with GAAP applied on a basis
consistent with that of the preceding fiscal year or period and present fairly
its financial condition as at such dates and the results of its operations for
the periods then ended, subject (in the case of the interim financial statement)
to year-end audit adjustments. Since the date of its most recent statement of
assets and liabilities and such semi-annual asset statement, there has been no
Material Adverse Effect on such Borrower.
4.7. LITIGATION. No claims, litigation, arbitration proceedings or
governmental proceedings that could reasonably be expected to have a Material
Adverse Effect are pending or, to the best of its knowledge, threatened against
such Borrower. Other than any liability incident to such claims, litigation or
proceedings or provided for or disclosed in the financial statements referred to
in Section 4.6 such Borrower has no contingent liabilities which are material to
it other than those incurred in the ordinary course of business.
4.8. LIENS. None of such Borrower's property, revenues or assets is
subject to any Lien, except (i) Liens in favor of the Banks, if any, and (ii)
Liens permitted under Section 5.12
4.9. PURPOSE. The proceeds of the Loans will be used by such Borrower
to fund shareholder redemptions and for other lawful purposes permitted under
the Act, other than leverage, and by its most recent Prospectus and most recent
SAI. The proceeds of the Loans will not be used for leverage. Neither the making
of any Loan nor the use of the proceeds thereof will violate or be inconsistent
with the provisions of Federal Reserve Board Regulations U or X. Such Borrower
is not engaged in the business of extending credit for the purpose of purchasing
or carrying margin stock. With respect to any Borrower listed on the attached
Schedule 4.9, less than 25% of the assets of such Borrower consists of "margin
stock" as defined under Federal Reserve Board Regulation U.
4.10. COMPLIANCE AND GOVERNMENT APPROVALS. Such Borrower, or to the
extent the Borrower is a series of a Trust or a Maryland corporation, such Trust
or Maryland corporation, is in compliance with all statutes and governmental
rules and regulations applicable to it, including, without limitation, the Act
other than immaterial incidents of non-compliance that could not reasonably be
expected to result in a Material Adverse Effect on such Borrower. No
authorization or approval or other action by, and no notice to or filing with,
any Governmental Authority or other Person is required for the due execution,
delivery or performance by such Borrower of this Agreement, or to the extent
such Borrower is a Trust or a Maryland corporation, the execution and delivery
by such Trust or Maryland corporation of this Agreement on its behalf.
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4.11. SUBSIDIARIES; INVESTMENTS. Such Borrower, or to the extent such
Borrower is a series of a Trust or a Maryland corporation, such Trust or
Maryland corporation, has no Subsidiaries. Such Borrower has no equity
investments or any interest in any other Person other than portfolio securities
(including investment company securities) which may have been acquired in the
ordinary course of business.
4.12. INVESTMENT POLICIES. Such Borrower's assets are being invested
substantially in accordance with the investment policies and restrictions set
forth in each of its most recent Prospectus and its most recent SAI. Such
Borrower is in compliance in all material respects with all investment policies
and restrictions set forth in its most recent Prospectus and most recent SAI.
4.13. STATUS OF LOANS. Such Borrower's obligation in connection with
the repayment of any Loans made to it hereunder shall at all times constitute
its unconditional Debt and will rank at least pari passu in priority of payment
with all of its other present and future unsecured and unsubordinated Debt of
such Borrower.
4.14. ERISA. (a)Such Borrower is not a member of an ERISA Group or has
any liability in respect of any Benefit Arrangement, Plan or Multiemployer Plan.
(b) No Loan made to such Borrower will constitute a "prohibited
transaction" within the meaning of Section 406 of ERISA or Section 4975 of the
Code for which an exemption is not available.
4.15. TAXES. Such Borrower qualifies as a "regulated investment
company" within the meaning of the Code or is treated as a partnership for
federal income tax purposes. Such Borrower has filed or caused to be filed tax
returns and reports required by law to have been filed by it and has paid all
taxes and governmental charges thereby shown to be owing, except any such taxes
or charges which are being diligently contested in good faith by appropriate
proceedings and for which adequate reserves in accordance with GAAP have been
set aside on its books or where the failure to file any such return or report or
the nonpayment of any such taxes or charges could not reasonably be expected to
have a Material Adverse Effect on such Borrower.
4.16. ASSET COVERAGE. The Loans to be made to such Borrower are a
"senior security representing indebtedness" for purposes of and as defined in
Section 18 of the Act. Immediately after the making of each Loan hereunder to
such Borrower, the Asset Coverage Ratio of such Borrower shall be at least 300%.
4.17. FULL DISCLOSURE. All written information heretofore furnished by
such Borrower to the Agents and the Banks for purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all such written
information hereafter furnished by such Borrower to the Agents and the Banks
will be, true and accurate in all material respects on the date as of which such
information is stated or certified.
4.18. YEAR 2000. The investment adviser for such Borrower has filed a
form ADV-Y2K with the Securities and Exchange Commission, dated as of June 4,
1999 or May 28, 1999, as the case may be (the "Y2K Form"). The information
disclosed in the Y2K Form was true and
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correct as of such date, and as of the date hereof. Such Borrower and its
investment adviser are taking all necessary action to comply with the remaining
deadlines and other requirements set forth in the Y2K Form in order to be in
compliance therewith. Any failure to comply with the deadlines or other
requirements of the Y2K Form is not expected to result in a Default or Event of
Default with respect to such Borrower or to have a Material Adverse Effect on
such Borrower.
ARTICLE V
COVENANTS
From the date of this Agreement and thereafter until the expiration or
termination of the Commitments and until all Obligations have been paid or
performed in full, each Borrower, or to the extent such Borrower is a series of
a Trust or a Maryland corporation, such Trust or Maryland corporation not in its
individual capacity but on behalf of such Borrower shall perform the obligations
made applicable to it in this Article V.
5.1. INFORMATION. Such Borrower will deliver to the Operations Agent
(and to each of the Banks):
(a) as soon as available and in any event within 60 days after the
end of each fiscal year of such Borrower, (i) a statement of such Borrower's
assets and liabilities, including the portfolio of investments, as of the end of
such fiscal year and the related statements of operations and changes in net
assets for such fiscal year, or (ii) if different from the foregoing, the
statements which such Borrower is required to prepare under applicable laws and
regulations as of the end of such period, all reported in a manner acceptable to
the Securities and Exchange Commission, together with an audit report thereon
issued by independent public accountants of nationally recognized standing;
(b) as soon as available and in any event within 60 days after the
end of the first semi-annual period of each fiscal year of such Borrower, (i) a
statement of such Borrower's assets and liabilities, including the portfolio of
investments, as of the end of such period, (ii) if different from the foregoing,
the statements which such Borrower is required to prepare under applicable laws
and regulations as of the end of such period, all certified (subject to normal
year-end adjustments) as to fairness of presentation, GAAP and consistency by
the treasurer or vice president of the Borrower or accompanied by an audit
report thereon issued by independent public accountants of nationally recognized
standing;
(c) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a Compliance Certificate,
if such Borrower has Loans outstanding to it;
(d) promptly after such Borrower obtains knowledge of any Default or
Event of Default with respect to such Borrower, a certificate of an Authorized
Signatory of such Borrower setting forth the details thereof and the action
which such Borrower is taking or proposes to take with respect thereto;
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(e) promptly upon the effectiveness thereof with the Securities and
Exchange Commission or the mailing thereof to its shareholders, copies of all
reports to shareholders, amendments and supplements to the Prospectus, proxy
statements and other materials of a financial or otherwise material nature by
such Borrower;
(f) promptly upon any officer of such Borrower becoming aware of any
action, suit or proceeding of the type described in Section 4.7 against such
Borrower, notice and a description thereof and copies of any filed complaint
relating thereto;
(g) promptly upon the effectiveness thereof, copies of all
amendments to such Borrower's investment objectives, policies and restrictions;
and
(h) from time to time such additional information regarding the
financial position or business of such Borrower as the Administrative Agent, at
the request of the Required Banks, may reasonably request.
5.2. EXISTENCE. Such Borrower, or to the extent such Borrower is a
series of a Trust or a Maryland corporation, such Trust or Maryland corporation,
shall (i) maintain and preserve its existence as a registered investment company
and, in the case of a Trust or Maryland corporation which has series funds or
portfolios the respective existence of each of its Borrowers as a "series,"
within the meaning of the Act, and (ii) maintain and preserve all rights,
privileges, licenses, copyrights, trademarks, trade names, franchises and other
authority to the extent material and necessary for the conduct of its business
in the ordinary course, unless the failure to do so could not reasonably be
expected to have a Material Adverse Effect on such Borrower.
5.3. NATURE OF BUSINESS. Such Borrower, or to the extent such
Borrower is a series of a Trust or a Maryland corporation, such Trust or
Maryland corporation, shall (i) continue in, and limit its operations to, the
business of an open-end management investment company, within the meaning of the
Act, and (ii) maintain in full force and effect at all times all governmental
licenses, registrations, permits and approvals necessary for the continued
conduct of its business, including, without limitation, its registration with
the Securities and Exchange Commission under the Act as an open-end investment
company, unless in the case of (i) or (ii) the failure to do so could not
reasonably be expected to have a Material Adverse Effect on such Borrower.
5.4. BOOKS, RECORDS AND ACCESS. Borrower, or to the extent such
Borrower is a series of a Trust or a Maryland corporation, such Trust or
Maryland corporation, as the case may be, shall maintain complete and accurate
books and records in which full and correct entries in conformity with GAAP
shall be made of all transactions in relation to its business and activities;
upon reasonable notice, such Borrower or such Trust or Maryland corporation, as
the case may be, shall permit access by the Banks to its books and records
during normal business hours and permit the Banks to make extracts of such books
and records.
5.5. INSURANCE. Such Borrower shall maintain in full force and effect
insurance to such extent and against such liabilities as is commonly maintained
by companies similarly situated, including, but not limited to (i) such fidelity
bond coverage as shall be required by Rule 17g-1 promulgated under the Act or
any similar or successor provision and (ii) errors and omissions, director and
officer liability and other insurance against such risks and in such
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amounts (and with such co-insurance and deductibles) as is usually carried by
other companies of established reputation engaged in the same or similar
businesses and similarly situated and will, upon request of the Operations
Agent, furnish to the Banks a certificate of an Authorized Signatory setting
forth the nature and extent of all insurance maintained by such Borrower in
accordance with this Section.
5.6. ASSET COVERAGE RATIO. Such Borrower shall at all times maintain
an Asset Coverage Ratio of at least 3 to 1 or such other more restrictive ratio
as may be set forth in the most recent Prospectus or most recent SAI of such
Borrower.
5.7. CHANGES TO ORGANIZATION DOCUMENTS, ETC. Such Borrower, shall not
make or permit to be made any material changes to its Organization Documents
which could have a Material Adverse Effect on such Borrower without the prior
written consent of the Required Banks.
5.8. SERVICE PROVIDERS. Such Borrower, shall not change its
accountant, except to a "Big 5" accounting firm, unless the Required Banks
provide their prior written consent to such change, which consent shall not be
withheld by the Required Banks unless, based upon their reasonable judgment, the
Required Banks in good faith conclude that such change will result in a change
in the creditworthiness of such Borrower.
5.9. PAYMENT OF OBLIGATIONS. Such Borrower severally promises to duly
and punctually pay or cause to be paid the principal and interest on the Loans
and all other amounts payable by it provided for in this Agreement and the other
Loan Documents. Such Borrower will pay and discharge, at or before maturity, all
of its material obligations and liabilities, except where the same may be
contested in good faith by appropriate proceedings, and appropriate reserves for
the accrual of any of the same are maintained in accordance with GAAP.
5.10. COMPLIANCE WITH LAWS. Such Borrower will comply in all respects
with all applicable laws, ordinances, rules, regulations and requirements of
governmental authorities (including, without limitation, ERISA and the Act and
the rules and regulations thereunder) and the exchange on which its shares are
traded if any, except where (a) the necessity of compliance therewith is
contested in good faith by appropriate proceedings, (b) exemptive relief has
been obtained therefrom and remains in effect or (c) the violation thereof could
not reasonably be expected to have a Material Adverse Effect on such Borrower.
Such Borrower will file or cause to be filed all federal and other tax returns,
reports and declarations required by all relevant jurisdictions on or before the
due dates for such returns, reports and declarations and will pay all taxes and
other governmental assessments and charges as and when they become due (except
those that are being contested in good faith by such Borrower and as to which
such Borrower has established appropriate reserves on its books and records or
where the failure to file any such return or report or the nonpayment of any
such taxes or charges could not reasonably be expected to have a Material
Adverse Effect on such Borrower).
5.11. DEBT. Such Borrower will not create, incur, assume or suffer to
exist or be or remain liable for any Debt other than
(a) Debt arising under this Agreement and the other Loan Documents,
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(b) overdrafts extended by such Borrower's Custodian in the ordinary
course of business, and
(c) Debt arising in connection with portfolio investments and
investment techniques permissible under the Act and consistent with such
Borrower's investment objectives and policies as stated in the Prospectus and
SAI,
provided that in no event shall such Borrower (i) borrow money or create
leverage under any arrangement other than from the Banks pursuant to this
Agreement or on an overnight basis from such Borrower's Custodian to the extent
provided in clause (b) hereof, or (ii) issue or be or remain liable for or have
outstanding any "senior security" (as defined in the Act) other than the Loans.
Such Borrower will not issue or have outstanding any preferred stock.
5.12. NEGATIVE PLEDGE. Such Borrower will not create, assume or suffer
to exist any Lien on any of its assets, whether now owned or hereafter acquired,
or on the income or profits therefrom, except (a) Liens in respect of Debt
permitted under Section 5.11(b) and, (b) Liens for taxes, assessments or other
governmental charges or levies which are not delinquent or which are being
contested in good faith and by appropriate proceedings diligently conducted, and
for which adequate reserves have been set aside in accordance with generally
GAAP, that enforcement of such Liens is stayed pending such contest, (c)
statutory Liens arising by operation of law such as mechanic's, materialmen's,
carriers' and warehousemen's liens incurred in the ordinary course of business
which are not delinquent or which are being contested in good faith and by
appropriate proceedings diligently conducted, and for which adequate reserves
have been set aside in accordance with GAAP, provided that enforcement of such
Liens is stayed pending such contest, (d) Liens arising out of judgments or
decrees which are being contested in good faith and by appropriate proceedings
diligently conducted, and for which adequate reserves have been set aside in
accordance with GAAP, provided that enforcement thereof is stayed pending such
contest, and (e) Liens in favor of such Borrower's Custodian granted pursuant to
the custody agreement with the Custodian to secure obligations arising under
such custody agreement.
5.13. CONSOLIDATIONS, MERGERS AND SALES OF ASSETS. Such Borrower will
not consolidate or merge with or into any other Person (other than another
Borrower) or reorganize its assets into series of a series corporation or
entity, nor will such Borrower sell, lease or otherwise transfer, directly or
indirectly, all or any substantial part of its assets to any other Person (other
than another Borrower) except that such Borrower may sell its assets in the
ordinary course of business as described in its Prospectus or SAI.
5.14. USE OF PROCEEDS. The proceeds of the Loans made under this
Agreement to such Borrower will be used by such Borrower solely for the funding
of shareholder redemptions and other lawful purposes under the Act, other than
for leverage.
5.15. COMPLIANCE WITH PROSPECTUS. Such Borrower will at all times
comply in all material respects with the investment objectives, limitations and
policies set forth (or incorporated by reference) in its Prospectus or SAI.
Nothing in this Section 5.15, except as specifically provided in the next
succeeding sentence, shall be deemed to limit the ability of such Borrower to
amend its non-fundamental investment objectives, policies or restrictions,
provided that such Borrower shall comply with the requirements of Section
5.1(g). Such Borrower will
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not permit its fundamental investment objective or any fundamental policy or
restriction or its diversified or non-diversified status to be changed from
those in effect on the date hereof and reflected in its Prospectus or SAI
delivered to the Banks on the date hereof, in each case without the prior
written consent of the Required Banks. Such Borrower will maintain its status as
an open-end management investment company.
5.16. TAX STATUS. Such Borrower will maintain its status as a
"regulated investment company" under the Code at all times and will make
sufficient distributions to qualify as a "regulated investment company" pursuant
to subchapter M of the Code or its status as a partnership for federal income
tax purposes.
5.17. NO SUBSIDIARY. Such Borrower will not at any time have any
Subsidiary.
5.18. ERISA. Such Borrower will not become a member of any ERISA Group
nor incur any liability in respect of any Benefit Arrangement, Plan or
Multiemployer Plan, including without limitation for benefits thereunder.
5.19. DISTRIBUTIONS. Such Borrower will not make any Distribution, if
a Default or Event of Default has occurred and is continuing or will exist after
giving effect thereto provided that notwithstanding the foregoing, such Borrower
shall be permitted to (a) declare and pay Distributions on or in respect of its
common stock or shares each month in an amount equal to the undistributed net
investment income for such month, (b) distribute each year all of its net
investment income (including net realized capital gains) so that it will not be
subject to tax (including corporate and/or excise taxes) under the Code
(provided, that if any Borrower's net investment income (including net realized
capital gains) calculated on a tax basis exceeds its net investment income
calculated in accordance with GAAP, such Borrower may also distribute such
excess to its shareholders) and (c) satisfy shareholder redemptions, unless, in
any case (i) a Default or Event of Default under Sections 6.1(d) or 6.1(e) has
occurred and is continuing with respect to such Borrower, or (ii) such Borrower
has failed to pay when due any principal of or any interest on any Loan made to
such Borrower, after giving effect to any grace period, and such failure has not
been cured. Nothing in the preceding sentence shall be deemed or construed to
limit the Banks' ability to exercise their remedies hereunder with respect to
such Borrower upon the occurrence and during the continuance of an Event of
Default hereunder.
5.20. CUSTODIAN. Such Borrower, will at all times maintain or cause to
be maintained as its Custodian either (a) its Custodian on the date hereof or
(b) with prior written notice to the Banks, any other entity which is a bank or
trust company organized under the laws of the United States and having both (i)
assets of at least $10 billion and (ii) a long-term debt rating of not less than
A from S&P or A2 from Moody's.
5.21. ACQUISITIONS. Such Borrower will not purchase or otherwise acquire
all or substantially all of the assets of any other Person (other than another
Borrower).
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ARTICLE VI
EVENTS OF DEFAULTS
6.1. EVENTS OF DEFAULT. Each of the following shall constitute an
Event of Default with respect to a Borrower under this Agreement (it being
understood that an Event of Default with respect to a Borrower shall not
constitute an Event of Default with respect to any other Borrower):
(a) Default in payment by a Borrower (i) when and as required to be
paid herein of any amount of principal of any Loan or (ii) within five days
after the same becomes due of any interest, fee or any other amount payable
hereunder or under any other Loan Document.
(b) Default by a Borrower in the payment when due, whether by
acceleration or otherwise (subject to any applicable grace period), of any Debt
(other than the Loans) of, or guaranteed by, such Borrower in excess of 5% of
such Borrower's then-current Net Asset Value.
(c) Any event or condition shall occur that results in the
acceleration of the maturity of any Debt (other than the Loans) of, or
guaranteed by, a Borrower or enables the holder or holders of such other Debt or
any trustee or agent for such holders (any required notice of default having
been given and any applicable grace period having expired) to accelerate the
maturity of such other Debt in excess of 5% of such Borrower's then-current
total Net Asset Value.
(d) A Borrower (i) ceases or fails to be solvent, or generally fails
to pay, or admits in writing its inability to pay, its debts as they become due,
subject to applicable grace periods, if any, whether at stated maturity or
otherwise; (ii) commences any Insolvency Proceeding with respect to itself; or
(iii) takes any action to effectuate or authorize any of the foregoing.
(e)(i) Any involuntary Insolvency Proceeding is commenced or filed
against a Borrower, or any writ, judgment, warrant of attachment, execution or
similar process is issued or levied against a substantial part of its assets,
and any such proceeding or petition shall not be dismissed, or such writ,
judgment, warrant of attachment, execution or similar process shall not be
released, vacated or fully bonded within 60 days after commencement, filing or
levy; (ii) a Borrower admits the material allegations of a petition against it
in any Insolvency Proceeding, or an order for relief (or similar order under
non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) it acquiesces in
the appointment of a receiver, trustee, custodian, conservator, liquidator,
mortgagee in possession (or agent therefor) or other similar Person for itself
or a substantial portion of its property or business.
(f) A Borrower shall default in the performance of its agreements
under (i) Section 5.1(d), 5.2(i), 5.3(i), 5.8, 5.11, 5.13 or 5.14 or (ii)
Section 5.6, and in the case of Section 5.6 such default is not cured within
three (3) Business Days.
(g) A Borrower shall default in the performance of its other
agreements herein set forth (and not constituting an Event of Default under any
of the other subsections of this Section 6.1), and such default shall continue
for 30 days after notice thereof to such Borrower from the Administrative Agent.
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(h) Any representation or warranty made by a Borrower herein, or in
any schedule, statement, report, notice, certificate or other writing furnished
by it on or as of the date as of which the facts set forth therein are stated or
certified, is untrue or misleading in any material respect when made or deemed
made or any certification made or deemed made by it to the Banks is untrue or
misleading in any material respect on or as of the date made or deemed made.
(i) There shall be entered against a Borrower one or more judgments
or decrees which, when taken together, will exceed the lesser of 5% of such
Borrower's Net Asset Value and $5,000,000, excluding those judgments or decrees
(i) that shall have been stayed or discharged less than 30 calendar days from
the entry thereof and (ii) those judgments and decrees for and to the extent
which such Borrower is insured and with respect to which the insurer has assumed
responsibility in writing or for and to the extent which such Borrower is
otherwise indemnified if the terms of such indemnification and the Person
providing such indemnification are satisfactory to the Required Banks.
(j) The investment adviser of a Borrower shall cease to be an
Affiliate of Merrill Lynch & Co., Inc.
6.2. REMEDIES. If any Event of Default described in Section 6.1 shall
have occurred and be continuing with respect to a Borrower, the Administrative
Agent, upon the direction of the Required Banks, shall declare the Commitments
to be terminated with respect to the applicable Borrower and such Borrower's
Obligations to be due and payable, whereupon such Commitments shall immediately
terminate with respect to such Borrower and such Obligations shall become
immediately due and payable, all without advance notice of any kind (except that
if an event described in Section 6.1(d) or Section 6.1(e) occurs with respect to
such Borrower, the Commitments shall immediately terminate with respect to such
Borrower and the Obligations with respect to such Borrower shall become
immediately due and payable without declaration or advance notice of any kind).
The Administrative Agent shall promptly advise such Borrower of any such
declaration, but failure to do so shall not impair the effect of such
declaration. If an Event of Default shall have occurred and be continuing with
respect to a Borrower, the Administrative Agent may exercise on behalf of itself
and the Banks all rights and remedies available to it and the Banks against such
Borrower under the Loan Documents or applicable law.
6.3. NOTICE OF DEFAULT. The Administrative Agent shall give notice to
a Borrower under Section 6.1(g) promptly upon being requested to do so by the
Required Banks and shall thereupon notify all the Banks thereof.
ARTICLE VII
THE AGENTS
7.1. APPOINTMENT AND AUTHORIZATION. Subject to Section 7.7 hereof,
each Bank irrevocably appoints and authorizes each of the Administrative Agent
and the Operations Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement and
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the other Loan Documents as are delegated to such Agent by the terms hereof or
thereof, together with all such powers as are reasonably incidental thereto.
7.2. ACTION BY AGENTS. The duties and responsibilities of each Agent
hereunder are only those expressly set forth herein. The relationship between
each Agent and the Banks is and shall be that of agent and principal only, and
nothing contained in this Agreement or any of the other Loans Documents shall be
construed to constitute either Agent as a trustee for any Bank. Without limiting
the generality of the foregoing, neither Agent shall be required to take any
action with respect to any Default or Event of Default, except as expressly
provided in Article VI.
7.3. CONSULTATION WITH EXPERTS. Each Agent may consult with legal
counsel, independent public accountants and other experts selected by it and
shall not be liable for any action taken or omitted to be taken by it in good
faith in accordance with the advice of such counsel, accountants or experts.
7.4. LIABILITY OF AGENTS. No Agent nor any of its directors,
officers, agents or employees shall be liable for any action taken or not taken
by it in connection herewith (a) with the consent or at the request of the
Required Banks or (b) in the absence of its own gross negligence or willful
misconduct. No Agent nor any of its directors, officers, agents or employees
shall be responsible for or have any duty to ascertain, inquire into or verify
(i) any statement, warranty or representation made by any other Person in
connection with this Agreement or any borrowing hereunder; (ii) the performance
or observance of any of the covenants or agreements of any Borrower; (iii) the
satisfaction of any condition specified in Article III, except, receipt of items
required to be delivered to it; or (iv) the validity, enforceability,
effectiveness or genuineness of this Agreement (except as to its own execution
of this Agreement), the other Loan Documents or any other instrument or writing
furnished in connection herewith or therewith. Neither Agent shall incur any
liability by acting in reliance upon any notice, consent, certificate, statement
or other writing (which may be a bank wire, telex or similar writing) reasonably
believed by it to be genuine or to be signed by the proper party or parties.
7.5. INDEMNIFICATION. The Banks hereby ratably agree to indemnify
each Agent (to the extent not reimbursed by the Borrowers) against any cost,
expense (including counsel fees and disbursements), claim, demand, action, loss
or liability (except such as directly result from such Agent's gross negligence
or willful misconduct) that such Agent may suffer or incur in connection with
this Agreement or any of the other Loan Documents or any action taken or omitted
by such Agent hereunder or thereunder.
7.6. CREDIT DECISION. Each Bank acknowledges that it has,
independently and without reliance upon any Agent or any other Bank, and based
on such documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance upon any Agent or
any other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking any action under this Agreement.
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7.7. SUCCESSOR AGENTS. Each Agent may resign at any time by giving
written notice thereof to the Banks and the Borrowers. Upon any such
resignation, the Required Banks shall have the right to appoint a successor
Agent with the prior written consent of the Borrowers, which consent shall not
be unreasonably withheld or delayed. If no successor Agent shall have been so
appointed by the Required Banks within 30 days after the retiring Agent gives
notice of resignation, then the retiring Agent may, on behalf of the Banks,
appoint a successor Agent, which shall be a commercial bank organized or
licensed under the laws of the United States of America or of any State thereof
and having a combined capital and surplus of at least $50,000,000. Upon the
acceptance of its appointment as an Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the rights
and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligations hereunder. After any retiring Agent's
resignation hereunder as an Agent, the provisions of this Article shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was an
Agent.
7.8. AGENTS AS BANKS. In its individual capacity, each of Bank of
America and State Street and any other Bank that serves as a successor Agent
hereunder shall have the same obligations and the same rights, powers and
privileges in respect of its Commitment and the Loans made by it as it would
have were it not also an Agent.
7.9. DISTRIBUTION BY AN AGENT. If in the opinion of an Agent the
distribution of any amount received by it in such capacity hereunder or under
any of the other Loan Documents might involve it in liability, it may refrain
from making such distribution until its right to make distribution shall have
been adjudicated by a court of competent jurisdiction. If a court of competent
jurisdiction shall adjudge that any amount received and distributed by an Agent
is to be repaid, each Person to whom any such distribution shall have been made
shall either repay to such Agent its proportionate share of the amount so
adjudged to be repaid or shall pay over the same in such manner and to such
Persons as shall be determined by such court.
7.10. DELINQUENT BANKS. (a)Notwithstanding anything to the contrary
contained in this Agreement or any of the other Loan Documents, any Bank that
(i) willfully does not or (ii) does not as a result of a Failure (as defined
below) (A) make available to the Operations Agent its pro rata share of any
Loan, or (B) comply with the provisions of Section 8.4 with respect to making
dispositions and arrangements with the other Banks, where such Bank's share of
any payment received, whether by setoff or otherwise, is in excess of its pro
rata share of such payments due and payable to all of the Banks, in each case
as, when and to the full extent required by the provisions of this Agreement,
shall be deemed delinquent (a "Delinquent Bank") and shall be deemed a
Delinquent Bank until such time as such delinquency is satisfied. A Delinquent
Bank shall be deemed to have assigned any and all payments due to it from the
Borrowers, whether on account of outstanding Loans, interest, fees or otherwise,
to the remaining nondelinquent Banks for application to, and reduction of, their
respective pro rata shares of all outstanding Loans. The Delinquent Bank hereby
authorizes the Operations Agent to distribute such payments to the nondelinquent
Banks in proportion to their respective pro rata shares of all outstanding
Loans. A Delinquent Bank shall be deemed to have satisfied in full a delinquency
when and if, as a result of application of the assigned payments to all
outstanding Loans of the nondelinquent Banks, the Banks' respective pro rata
shares of all outstanding Loans
32
<PAGE> 38
have been returned to those in effect immediately prior to such delinquency and
without giving effect to the nonpayment causing such delinquency.
(b) For purposes of this Section 7.10, a Failure of a Bank shall
mean (i) it shall seek the appointment of a trustee, receiver, liquidator,
custodian or other similar official for it or any substantial part of its
property, or shall commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking the appointment of a trustee, receiver, liquidator or other similar
official for it or any substantial part of its property, or shall consent to any
such relief or to the appointment of or taking possession by any such official
in an involuntary case or other proceeding commenced against it, or (ii) it
makes a general assignment for the benefit of creditors, or shall fail generally
to pay its debts as they become due, or shall take any corporate action to
authorize any of the foregoing, or (iii) an involuntary case or other proceeding
shall be commenced against it seeking liquidation, reorganization or other
relief with respect to it or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it, or (iv) an
order for relief shall be entered against it under the federal bankruptcy laws
as now or hereafter in effect.
7.11. SYNDICATION AGENT; CO-DOCUMENTATION AGENTS. None of the Banks
identified on the facing page of this Agreement as a "syndication agent" or a
"co-documentation agent" shall have any right, power, obligation, liability,
responsibility or duty under this Agreement other than those applicable to all
Banks as such. Without limiting the foregoing, none of the Banks so identified
as a "syndication agent" or "co-documentation agent" shall have or be deemed to
have any fiduciary relationship with any Bank. Each Bank acknowledges that it
has not relied, and will not rely, on any of the Banks so identified in deciding
to enter into this Agreement or in taking or not taking action hereunder.
ARTICLE VIII
MISCELLANEOUS
8.1. NOTICES. All notices, requests, consents and other
communications to any party hereunder shall be in writing (including bank wire,
facsimile transmission or similar writing) and shall be given to such party at
its address or facsimile number set forth on Schedule 1 attached hereto. Each
such notice, request, consent or other communication shall be effective (a) if
given by facsimile, when such facsimile is transmitted to the facsimile number
specified in this Section and the appropriate confirmation is received, (b) if
given by mail, 72 hours after such communication is deposited in the mails with
first class postage prepaid, addressed as aforesaid or (c) if given by any other
means, when delivered at the address specified in this Section; provided that
notices to the Operations Agent under Article II or Article VII shall not be
effective until received.
8.2. NO WAIVERS. No failure or delay by any Agent or any Bank in
exercising any right, power or privilege hereunder or under any other Loan
Document shall operate as a waiver thereof nor shall any single or partial
exercise thereof preclude any other or further exercise
33
<PAGE> 39
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
8.3. EXPENSES; DOCUMENTARY TAXES; INDEMNIFICATION. (a) Each Borrower
severally agrees to pay its pro rata share of (i) all reasonable out-of-pocket
expenses of each Agent and the Administrative Agent's affiliates, including the
fees and disbursements of special counsel for the Administrative Agent, in
connection with the preparation, negotiation and closing of this Agreement and
the other Loan Documents, the syndication of the facility established hereby,
any waiver or consent hereunder or any amendment hereof, any waiver of any Event
of Default or alleged Event of Default hereunder, and any termination hereof,
provided, that no Borrower shall be liable for any such expenses incurred in
connection with any amendment or waiver that does not relate to or affect such
Borrower and such expenses shall be borne by the Borrowers to which they relate
based upon their pro rata share thereof and (ii) if an Event of Default occurs
with respect to such Borrower, all reasonable out-of-pocket expenses incurred by
each Agent and each Bank in connection therewith, including fees and
disbursements of counsel, provided that reimbursement shall be for no more than
one counsel for the Agents and the Banks plus any local counsel that counsel for
the Agents and the Banks shall deem necessary, in each case incurred in
connection with such Event of Default and collection, bankruptcy, insolvency and
other enforcement proceedings resulting therefrom. Each Borrower severally
agrees to indemnify each Bank against its pro rata share of any transfer taxes,
documentary taxes, assessments or charges made by any governmental authority by
reason of the execution and delivery of this Agreement or the other Loan
Documents.
(b) In consideration of the execution and delivery of this Agreement
by each Bank and the extension of the Commitments, each Borrower hereby
severally indemnifies, exonerates and holds each Agent and each Bank and each of
their respective officers, directors, employees and agents (collectively, the
"Indemnified Parties") free and harmless from and against any and all actions,
causes of action, suits, losses, costs, liabilities and damages, and expenses
incurred in connection therewith (irrespective of whether any such Indemnified
Party is a party to the action for which indemnification hereunder is sought),
including reasonable attorneys' fees and disbursements (collectively, the
"Indemnified Liabilities"), incurred by the Indemnified Parties or any of them
as a result of, or arising out of, or relating to:
(i) the use by such Borrower of the proceeds of any Loan;
and
(ii) the entering into and performance of this Agreement and
any of the other Loan Documents by any of the Indemnified Parties
(including any action brought by or on behalf of such Borrower as the
result of any determination pursuant to Article III not to fund any
Borrowing, but only to the extent that such Borrower is not the
prevailing party);
except for any such Indemnified Liabilities arising for the account of a
particular Indemnified Party by reason of the relevant Indemnified Party's gross
negligence or willful misconduct or arising out of any action between or among
any Agent and the Banks. If and to the extent that the foregoing undertaking may
be unenforceable for any reason, such Borrower hereby severally agrees to make
the maximum contribution to the payment and satisfaction of each of the
34
<PAGE> 40
Indemnified Liabilities which is permissible under applicable law. No Borrower
shall be liable for any consequential damages.
8.4. SET OFF. During the continuance of any Event of Default and the
acceleration of the Obligations, any deposits or other sums credited by or due
from any of the Banks to a Borrower, and any securities or other property of a
Borrower in the possession of such Bank (except to the extent such Bank is
holding any securities or other assets of such Borrower in its capacity as
custodian of such Borrower) may be applied to or set off by such Bank against
the payment of the Obligations of such and any and all other liabilities,
direct, or indirect, absolute or contingent, due or to become due, now existing
or hereafter arising, of such Borrower to such Bank. Each of the Banks agrees
with each other Bank that (a) if an amount to be set off is to be applied to
Debt of a Borrower to such Bank, other than Debt owing hereunder to such Bank,
such amount shall be applied ratably to such other Debt and to the Obligations
owing to such Bank, and (b) if such Bank shall receive from such Borrower
whether by voluntary payment, exercise of the right of set off, counterclaim,
cross action, or enforcement of a claim based on the Obligations of such
Borrower owing to such Bank by proceedings against such Borrower at law or in
equity or by proof thereof in bankruptcy, reorganization, liquidation,
receivership or similar proceedings, or otherwise, and shall retain and apply to
the payment of the Obligations of such Borrower owing to such Bank any amount in
excess of its ratable portion of the payments received by all of the Banks with
respect to the Obligations of such Borrower owed to all of the Banks, such Bank
will make such disposition and arrangements with the other Banks with respect to
such excess, either by way of distribution, pro tanto assignment of claims,
subrogation or otherwise as shall result in each Bank receiving in respect of
the Obligations of such Borrower owing to it its proportionate payment as
contemplated by this Agreement; provided that if all or any part of such excess
payment is thereafter recovered from such Bank, such disposition and
arrangements shall be rescinded and the amount restored to the extent of such
recovery, but without interest.
8.5. AMENDMENTS AND WAIVERS. Any provision of this Agreement or any
of the other Loan Documents may be amended or waived if, but only if, such
amendment or waiver is in writing and is signed by the Borrowers and the
Required Banks (and, if the rights or duties of an Agent are affected thereby,
by such Agent); provided that no such amendment or waiver shall, unless signed
by all the Banks (a) increase or decrease the Commitment Amount of any Bank
(except as provided in Section 8.6(c)) or subject any Bank to any additional
obligation, (b) reduce or forgive the principal of or rate of interest on any
Loan or any fees to the Banks hereunder, (c) postpone the final date fixed for
any payment of principal of or interest on any Loan or any fees to the Banks
hereunder or for the termination of the Commitments (except as provided in
Section 2.6), or (d) change the percentage of the Commitment Amounts or of the
aggregate unpaid principal amount of the Loans, or the number of Banks, which
shall be required for the Banks or any of them to take any action under this
Section or any other provision of this Agreement. No delay or omission on the
part of the Bank, or any holder hereof in exercising any right hereunder shall
operate as a waiver of such right or of any other rights of the Bank or such
holder, nor shall any delay, omission or waiver on any one occasion be deemed a
bar or waiver of the same or any other right on any further occasion.
8.6. SUCCESSORS AND ASSIGNS. (a)The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns,
35
<PAGE> 41
except that no Borrower may assign or otherwise transfer any of its rights under
this Agreement without the prior written consent of all of the Banks.
(b) Any Bank may at any time grant to one or more commercial banks
that are able to make the representation and warranty contained in Section 8.12
(each a "Participant") participating interests in its Commitment or all of its
Loans. In the event of any such grant by a Bank of a participating interest to a
Participant, whether or not upon notice to the Borrowers and the Agents, such
Bank shall remain responsible for the performance of its obligations hereunder,
and the Borrowers and the Agents shall continue to deal solely and directly with
such Bank in connection with such Bank's rights and obligations under this
Agreement. Any agreement pursuant to which any Bank may grant such a
participating interest shall provide that such Bank shall retain the sole right
and responsibility to enforce the obligations of the Borrowers hereunder,
including, without limitation, the right to approve any amendment, modification
or waiver of any provision of this Agreement; provided that such participation
agreement may provide that such Bank will not agree to any modification,
amendment or waiver of this Agreement described in clause (a), (b), (c) or of
Section 8.5 without the consent of the Participant. An assignment or other
transfer which is not permitted by clause (c) or (d) below shall be given effect
for purposes of this Agreement only to the extent of a participating interest
granted in accordance with this clause (b).
(c) Any Bank may at any time assign to one or more commercial banks
that are able to make the representation and warranty contained in Section 8.12
(each an "Assignee") all or a minimum of $15,000,000 of its rights and
obligations under this Agreement and the other Loan Documents, and such Assignee
shall assume such rights and obligations, pursuant to an assignment and
acceptance agreement (an "Assignment and Acceptance") in substantially the form
of Exhibit G attached hereto executed by such Assignee and such transferor Bank,
with, if no Event of Default has occurred and is continuing with respect to one
or more Borrowers that have Loans outstanding, the written consent of the
Borrowers, which consent shall not be unreasonably withheld or delayed, and of
the Agents; provided, that an assignment to a Bank shall not be required to be
in any minimum amount. Upon execution and delivery of such instrument and
payment by such Assignee to such transferor Bank of an amount equal to the
purchase price agreed between such transferor Bank and such Assignee, such
Assignee shall be a Bank party to this Agreement and shall have all the rights
and obligations of a Bank with Commitment Amounts, as set forth in such
instrument of assumption, and the transferor Bank shall be released from its
obligations hereunder to a corresponding extent, and no further consent or
action by any party shall be required. Upon the consummation of any assignment
pursuant to this clause, the transferor Bank, the Administrative Agent shall be
authorized to revise Schedule 1 to reflect such assignment and to circulate such
revised schedule to the Operations Agent, the Banks and the Borrowers. In
connection with any such assignment, the transferor Bank shall pay to the Agents
a fee for processing such assignment in the aggregate amount of $3,500. If the
Assignee is not incorporated under the laws of the United States of America or a
state thereof, it shall deliver to the Borrowers and the Operations Agent
certification as to exemption from deduction or withholding of any United States
federal income taxes in accordance with Section 2.13.
36
<PAGE> 42
(d) Any Bank may at any time assign all or any portion of its rights
under this Agreement to a Federal Reserve Bank. No such assignment shall release
the transferor Bank from its obligations hereunder.
8.7. ADDITIONAL BORROWERS. Other investment companies (or series of
investment companies), in addition to those Borrowers which are original
signatories to this Agreement, may, with the written approval of all the Banks,
become parties to this Agreement and be deemed Borrowers for all purposes of
this Agreement by executing an instrument substantially in the form of Exhibit H
hereto (with such changes therein as may be approved by the Banks), which
instrument shall (i) have attached to it a copy of this Agreement (as the same
may have been amended) with a revised Allocation Notice reflecting the
participation of such additional investment company and (ii) be accompanied by
the documents and instruments required to be delivered by the Borrowers pursuant
to Section 3.1 hereof, including, without limitation, an opinion of counsel for
such Borrower, in a form reasonably satisfactory to the Administrative Agent;
provided, however, that no such additional Borrower shall be added unless all
the Banks consent.
No investment company (or series of an investment company) shall be
admitted as a party to this Agreement as a Borrower unless at the time of such
admission and after giving effect thereto: (i) the representations and
warranties set forth in Article IV hereof shall be true and correct with respect
to such Borrower; (ii) such Borrower shall be in compliance in all material
respects with all of the terms and provisions set forth herein on its part to be
observed or performed at the time of the admission and after giving effect
thereto; and (iii) no Default or Event of Default with respect to such Borrower
shall have occurred and be continuing.
8.8. GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS AGREEMENT AND
EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE STATE OF
NEW YORK AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED
BY THE LAWS OF SAID STATE OF NEW YORK. EACH OF THE BORROWERS, THE AGENTS AND THE
BANKS AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR
ANY FEDERAL COURT IN EACH CASE SITTING IN NEW YORK COUNTY AND CONSENTS TO THE
EXCLUSIVE JURISDICTION OF SUCH COURT AND THE SERVICE OF PROCESS IN ANY SUCH SUIT
BEING MADE UPON EACH OF THE BORROWERS, THE AGENTS AND THE BANKS BY MAIL AT THE
ADDRESS SPECIFIED IN SECTION 8.1. EACH OF THE BORROWERS, THE AGENTS AND THE
BANKS HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE
OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN
INCONVENIENT COURT.
8.9. COUNTERPARTS; INTEGRATION. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Agreement and each of the other Loan Documents constitute the entire agreement
and understanding among the parties hereto and supersede any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. The provisions of this Agreement are severable and if any one clause or
provision
37
<PAGE> 43
hereof shall be held invalid or unenforceable in whole or in part in any
jurisdiction, then such invalidity or unenforceability shall affect only such
clause or provision, or part thereof, in such jurisdiction, and shall not in any
manner affect such clause or provision in any other jurisdiction, or any other
clause or provision of this Agreement in any jurisdiction.
8.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWERS, THE AGENTS AND THE
BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
8.11. CONFIDENTIALITY. Each Bank and each Agent agrees (on behalf of
itself and each of its affiliates, directors, officers, employees and
representatives) to use reasonable precautions to keep confidential, in
accordance with their customary procedures for handling confidential information
of this nature and in accordance with safe and sound banking practices, any
non-public information supplied to it by or on behalf of the Borrowers pursuant
to this Agreement, provided that nothing herein shall limit the disclosure of
any such information (a) to the extent required by statute, rule, regulation or
judicial process, (b) to counsel for any of the Banks or any Agent in connection
with this Agreement, (c) to bank examiners, auditors or accountants, (d) to any
Agent or any Bank, (e) in connection with any litigation to which any one or
more of the Banks or the Agents is a party arising out of or in connection with
this Agreement, or (f) to any assignee or participant (or prospective assignee
or participant) so long as such assignee or participant (or prospective assignee
or participant) first agrees in writing to be bound by the terms of this Section
8.11; provided, further, that unless specifically prohibited by applicable law
or court order, each Bank and each Agent shall, prior to disclosure thereof,
notify the Borrowers of any request for disclosure of any such non-public
information (i) by any governmental agency or representative thereof (other than
any such request in connection with an examination of the financial condition of
such Bank by such governmental agency) or (ii) pursuant to legal process.
8.12. REPRESENTATIONS AND WARRANTIES OF THE BANKS. Each Bank hereby
represents and warrants to the Borrowers that it is (1) (A) a banking
institution organized under the laws of the United States, (B) a member bank of
the Federal Reserve System or (C) any other banking institution or trust
company, whether incorporated or not, doing business under the laws of any State
or of the United States, a substantial portion of the business of which consists
of receiving deposits or exercising fiduciary powers similar to those permitted
to national banks under the authority of the Comptroller of the Currency, and
which is supervised and examined by State or Federal authority having
supervision over banks, and which is not operated for the purpose of evading the
provisions of the Act and (2) it is not "affiliated" (within the meaning of the
Act) with any Borrower or the Adviser. Each Bank will immediately notify the
Borrowers if such Bank is no longer able to make the representations and
warranties stated in the preceding sentence.
[Remainder of page left blank]
38
<PAGE> 44
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
[BORROWERS]
BANK OF AMERICA, NATIONAL ASSOCIATION,
Individually and as Administrative Agent
By:
----------------------------------------
Title
STATE STREET BANK AND TRUST COMPANY,
Individually and as Operations Agent
By:
----------------------------------------
Title
[OTHER BANKS]
39
<PAGE> 45
Exhibit A-1
Exhibit A
FORM OF ALLOCATION NOTICE
Date: ________________
To: Bank of America, National Association, as Administrative Agent for the
Banks party to the Credit Agreement dated as of December 3, 1999 (as
amended and in effect from time to time, the "Credit Agreement") among
the Borrowers party thereto, The Bank of New York, as syndication agent,
National Australia Bank Limited, as co-documentation agent, Bank One,
NA, as co-documentation agent, the Banks party thereto, State Street
Bank and Trust Company, as Operations Agent, and Bank of America,
National Association, as Administrative Agent
Ladies and Gentlemen:
Reference is hereby made to the Credit Agreement dated as of December 3,
1999 (the terms defined therein being used herein as therein defined). This
instrument is an Allocation Notice as contemplated by the Credit Agreement.
The allocation of liability of the Borrowers in respect of all
liabilities, obligations, fees and expenses under the Credit Agreement (other
than principal and interest) shall be as set forth herein and shall be effective
from the date hereof until a later dated Allocation Notice is delivered to the
Administrative Agent.
<TABLE>
<CAPTION>
Name of Borrower % Allocation
---------------- ------------
<S> <C>
[insert Borrower's name]
" "
" "
" "
" "
" "
" "
" "
" "
" "
" "
</TABLE>
Exhibit A-1
<PAGE> 46
<TABLE>
<CAPTION>
Name of Borrower % Allocation
---------------- ------------
<S> <C>
" "
" "
" "
" "
" "
" "
" "
" "
" "
" "
" "
" "
" "
" "
" "
" "
" "
" "
100%
</TABLE>
[Borrower's name]
By
---------------------------------
Title
------------------------------
Exhibit A-2
<PAGE> 47
[Borrower's name]
By
---------------------------------
Title
------------------------------
[Borrower's name]
By
---------------------------------
Title
------------------------------
[Borrower's name]
By
---------------------------------
Title
------------------------------
[Borrower's name]
By
---------------------------------
Title
------------------------------
Exhibit A-3
<PAGE> 48
Exhibit B
FORM OF
NOTICE OF BORROWING
DATE:
---------------------------------------
TO: State Street Bank and Trust Company, as Operations Agent
ATTN:
---------------------------------------
FROM: [Borrower's name]
In connection with the Credit Agreement, dated as of December 3, 1999,
among the Borrowers party thereto, the Banks party thereto, The Bank of New
York, as syndication agent, National Australia Bank Limited, as co-documentation
agent, Bank One, NA, as co-documentation agent, State Street Bank and Trust
Company, as Operations Agent and Bank of America, National Association, as
Administrative Agent (as amended and in effect from time to time, the "Credit
Agreement"), please increase the outstanding balance of Loans as indicated
below. Capitalized terms which are used herein without definition and which are
defined in the Credit Agreement shall have the same meanings herein as in the
Credit Agreement.
<TABLE>
<S> <C>
(a) Name of Borrower: ________________________________
(b) Date of proposed Borrowing: ________________________________
(c) Swing Advance or Commitment Loan ________________________________
(d) Amount of Loan requested: $
================================
(e) Type of Loan requested:
================================
(f) Aggregate principal amount of Loans
outstanding by the borrowing Borrower to
all Banks (including Loan requested): $_______________________________
(g) Asset Coverage Ratio for the borrowing
Borrower after giving effect to
proposed Borrowing: ________________________________
</TABLE>
(h) Each of the representations and warranties of the borrowing Borrower in the
Credit Agreement shall be true and correct as of the date of the proposed
borrowing (unless such representation and warranty shall relate solely to an
earlier date, in which such representation and warranty shall be true and
correct as of such earlier date).
Exhibit B-1
<PAGE> 49
(i) No Default or Event of Default with respect to the borrowing Borrower has
occurred and is continuing both before and after giving effect to the
proposed Borrowing.
[Borrower's name]
By
---------------------------------
Title
------------------------------
Exhibit B-2
<PAGE> 50
Exhibit C-1
Exhibit C
NOTICE OF CONVERSION OR PAYDOWN
TO: State Street Bank and Trust Company, as Operations Agent for the
Banks party to the Credit Agreement dated as of December 3, 1999 (as
amended and in effect from time to time, the "Credit Agreement")
among the Borrowers party thereto, the Banks party thereto, The Bank
of New York, as syndication agent, National Australia Bank Limited,
as co-documentation agent, Bank One, NA, as co-documentation agent,
State Street Bank and Trust Company, as Operations Agent, and Bank of
America, National Association, as Administrative Agent.
FROM: [Borrower's name]
DATE:
---------------------------------------
Conversion ( )
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
EXISTING LOAN NEW LOAN
Type Amount Date Convert To Amount Date
- ----------------- ------------ ------------ ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Base Rate ( ) $ Base Rate ( ) $
------------ ------------ ----------- --------------
- -----------------
Fed Funds ( ) $ Fed Funds ( ) $
----------- --------------
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Paydown on ( ) on __________________ PAYDOWN WIRE INSTRUCTIONS
EXISTING LOAN
Type Amount Date
- ----------------- ------------ ------------
Base Rate ( ) $
----------- ------------
Fed Funds ( ) $
-----------
- -------------------------------------------------------------------------------------------------
Authorized Signatory ________________________________ Date _____________________
Authorized Signatory ________________________________ Date _____________________
Ticket # _________
</TABLE>
Exhibit C-1
<PAGE> 51
Exhibit D
FORM OF NOTE
$ Date:
------------------------------- ------------------------
$
------------------------------------------------------------------------------
FOR VALUE RECEIVED, each Borrower severally hereby promises to pay to
the order of (the "Bank") at 225 Franklin Street, Boston, Massachusetts 02110:
(a) prior to or on the Termination Date the principal amount
of [INSERT BANK'S COMMITMENT AMOUNT] Dollars ($ ) or, if less, the
aggregate unpaid principal amount of Loans advanced by the Bank to such
Borrower pursuant to the Credit Agreement dated as of December 3, 1999
(as amended and in effect from time to time, the "Credit Agreement"),
among the Borrowers, the Banks, The Bank of New York, as syndication
agent, National Australia Bank Limited, as co-documentation agent, Bank
One, NA, as co-documentation agent, State Street Bank and Trust Company,
as Operations Agent, and Bank of America, National Association, as
Administrative Agent; and
(b) interest on the principal balance hereof from time to
time outstanding from the Effective Date (as defined in the Credit
Agreement) through and including the maturity date hereof at the times
and at the rates provided in the Credit Agreement.
This Note evidences borrowings under and has been issued by the
Borrowers in accordance with the terms of the Credit Agreement. The Bank and any
holder hereof is entitled to the benefits of the Credit Agreement and the other
Loan Documents, and may enforce the agreements of the Borrowers contained
therein, and any holder hereof may exercise the respective remedies provided for
thereby or otherwise available in respect thereof, all in accordance with the
respective terms thereof. All capitalized terms used in this Note and not
otherwise defined herein shall have the same meanings herein as in the Credit
Agreement.
Each Borrower irrevocably authorizes the Bank to make or cause to be
made, at or about the date of any Loan made to such Borrower or at the time of
receipt of any payment of principal of this Note, an appropriate notation on the
grid attached to this Note, or the continuation of such grid, or any other
similar record, including computer records, reflecting the making of such Loan
or (as the case may be) the receipt of such payment. The outstanding amount of
the Loans set forth on the grid attached to this Note, or the continuation of
such grid, or any other similar record, including computer records, maintained
by the Bank with respect to any Loans made to a Borrower shall be prima facie
evidence of the principal amount thereof owing and unpaid severally by such
Borrower to the Bank, but the failure to record, or any error in so recording,
any such amount on any such grid, continuation or other record shall not limit
or otherwise affect the obligation of any Borrower hereunder or under the Credit
Agreement to make several payments of principal and of interest on this Note
when due.
42
<PAGE> 52
The Borrowers have the right in certain circumstances and the obligation
under certain other circumstances to prepay the whole or part of the principal
of this Note severally owing by such Borrower on the terms and conditions
specified in the Credit Agreement.
If any one or more of the Events of Default shall occur and be
continuing with respect to a Borrower, the entire unpaid principal amount of
this Note severally owing by such Borrower and all of the unpaid interest
accrued thereon may become or be declared due and payable in the manner and with
the effect provided in the Credit Agreement.
No delay or omission on the part of the Bank or any holder hereof in
exercising any right hereunder shall operate as a waiver of such right or of any
other rights of the Bank or such holder, nor shall any delay, omission or waiver
on any one occasion be deemed a bar or waiver of the same or any other right on
any further occasion.
Except to the extent otherwise provided in the Credit Agreement, each
Borrower hereby waives presentment, demand, notice, protest and all other
demands and notices in connection with the delivery, acceptance, performance,
default or enforcement of this Note, and assent to any extension or postponement
of the time of payment or any other indulgence, to any substitution, exchange or
release of collateral and to the addition or release of any other party or
person primarily or secondarily liable.
THIS NOTE AND THE OBLIGATIONS OF THE BORROWERS HEREUNDER SHALL FOR ALL
PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF
NEW YORK.
IN WITNESS WHEREOF, the undersigned have caused this Note to be signed
in its name by their respective duly authorized officers as of the day and year
first above written.
[Borrower's name]
By
---------------------------------------
Title
-------------------------------------
Exhibit D-2
<PAGE> 53
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Date Borrower Amount and Type Amount of Balance of Notation
of Loan Principal Paid or Principal Unpaid Made By
Prepaid
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
</TABLE>
Exhibit D-3
<PAGE> 54
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Date Borrower Amount and Type Amount of Balance of Notation
of Loan Principal Paid or Principal Unpaid Made By
Prepaid
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
</TABLE>
Exhibit D-4
<PAGE> 55
Exhibit E
TEXT OF BORROWERS' COUNSEL OPINION
This Opinion is being furnished pursuant to Section 3.1 of the Credit
Agreement (the "Credit Agreement") dated as of December 3, 1999 among the
Borrowers party thereto, the Banks party thereto, State Street Bank and Trust
Company, as Operations Agent, and Bank of America, National Association, as
Administrative Agent.
Each Delaware Trust is duly formed and legally existing under the laws
of the State of Delaware.
Each Massachusetts Trust has been duly established as a voluntary
association with transferable shares of beneficial interest commonly referred to
as a Massachusetts business trust, and is existing and in good standing under
and by virtue of the laws of the Commonwealth of Massachusetts.
Each Maryland Corporation is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Maryland.
Each Borrower, or to the extent such Borrower is a series of a Trust or
a Maryland Corporation, such Trust or Maryland Corporation on behalf of such
Borrower, has the corporate or trust power and authority to enter into and to
perform the obligations of such Borrower under the Credit Agreement.
The execution and delivery by each Borrower, or to the extent such
Borrower is a series of a Trust or a Maryland Corporation, by such Trust or
Maryland Corporation on behalf of such Borrower, of the Credit Agreement, the
borrowing of the Loans pursuant to the Credit Agreement by each Borrower, or to
the extent such Borrower is a series of a Trust or a Maryland Corporation, by
such Trust or Maryland Corporation on behalf of such Borrower, and the
performance by each Borrower, or to the extent such Borrower is a series of a
Trust or a Maryland Corporation, by such Trust or Maryland Corporation on behalf
of such Borrower, of its agreements and obligations under the Credit Agreement
have been duly authorized by all requisite corporate or trust action, where
necessary, on the part of each Borrower, or to the extent such Borrower is a
series of a Trust or a Maryland Corporation, on the part of such Trust or
Maryland Corporation, and do not and will not (a) conflict with the organization
documents or bylaws or the most recent Prospectus or the most recent SAI of any
Borrower, (b) contravene or constitute a default under any provision of any New
York State or Federal law, rule or regulation applicable to any Borrower, (c)
constitute a violation of or a default under or result in the creation of any
mortgage, lien, pledge, charge, security interest or encumbrance upon the
property of any Borrower under the Custody Agreement, Investment Advisory
Agreement, the Transfer Agency Agreement, the Distribution Agreement or the Plan
of Distribution applicable to any Borrower, or to our knowledge, any indenture,
mortgage, deed of trust or other loan agreement, each Borrower having advised us
that it is not a party to any indenture, mortgage, deed of trust or loan
agreement (other than the Credit Agreement), (d) require any consent or approval
of, or registration with, any New York State or Federal governmental authority
under
Exhibit E-1
<PAGE> 56
any law, rule or regulation applicable to any Borrower or, (e) to our
knowledge, conflict with any court or administrative order or decree applicable
to any Borrower.
Each of the Loan Documents has been duly executed and delivered by or on
behalf of each Borrower and constitutes the valid and binding obligation of the
each Borrower, enforceable against such Borrower in accordance with its terms.
To our knowledge, there is no pending or threatened action, suit or
proceeding before any court, governmental or regulatory authority, agency,
commission, or board of arbitration against any Borrower which, if adversely
determined, could have a materially adverse effect on the financial condition or
operations of such Borrower or on its ability to perform its obligations under
the Credit Agreement.
The transactions and arrangements contemplated by the Credit Agreement
do not violate Regulation U of the Board of Governors of the Federal Reserve
System.
To our knowledge, each Borrower, or to the extent such Borrower is a
series of a Trust or a Maryland Corporation, such Trust or Maryland Corporation,
is registered as open-end management investment company under the Investment
Company Act of 1940.
Exhibit E-2
<PAGE> 57
Exhibit F
FORM OF COMPLIANCE CERTIFICATE
Date: ____________________
To each of the Banks referred to below
c/o State Street Bank and
Trust Company, as Operations Agent
225 Franklin Street
Boston, Massachusetts 02110
Attention: [insert name]
Ladies and Gentlemen:
Reference is hereby made to the Credit Agreement, dated as of December
3, 1999 (as amended and in effect from time to time, the "Credit Agreement"), by
and among the Borrowers party thereto, the Banks party thereto, The Bank of New
York, as syndication agent, National Australia Bank Limited, as co-documentation
agent, Bank One, NA, as co-documentation agent, State Street Bank and Trust
Company, as Operations Agent, and Bank of America, National Association, as
Administrative Agent. Capitalized terms used herein and not otherwise defined
shall have the meanings assigned to such terms in the Credit Agreement.
The undersigned hereby certifies to you that he/she is an Authorized
Signatory and that no Default or Event of Default, as to the undersigned, has
occurred and is continuing on the date hereof.
The Asset Coverage Ratio of the undersigned as of the date hereof is
_______ to 1.0.
[Borrower's name]
Exhibit F-1
<PAGE> 58
Exhibit G
FORM OF
ASSIGNMENT AND ACCEPTANCE
Dated as of __________________
Reference is made to the Credit Agreement, dated as of December 3, 1999
(as from time to time amended and in effect, the "Credit Agreement"), by and
among the Borrowers party thereto, The Bank of New York, as syndication agent,
National Australia Bank Limited, as co-documentation agent, Bank One, NA, as
co-documentation agent, State Street Bank and Trust Company, as operations agent
(in such capacity, the "Operations Agent") and Bank of America, National
Association, as administrative agent (in such capacity, the "Administrative
Agent"). Capitalized terms used herein and not otherwise defined shall have the
meanings assigned to such terms in the Credit Agreement.
_________________________ (the "Assignor") and _______________________
(the "Assignee") hereby agree as follows:
SECTION 1. ASSIGNMENT. Subject to the terms and conditions of this
Agreement and Acceptance, the Assignor hereby sells and assigns to the Assignee,
and the Assignee hereby purchases and assumes without recourse to the Assignor,
a [$ ] interest in and to the rights, benefits, indemnities and obligations of
the Assignor under the Credit Agreement equal to [ %] in respect of the
Assignor's Commitment immediately prior to the Effective Date (as hereinafter
defined).
SECTION 2. ASSIGNOR'S REPRESENTATIONS. The Assignor (a) represents and
warrants that (i) it is legally authorized to enter into this Assignment and
Acceptance, (ii) as of the date hereof, its aggregate Commitment Amount is
[$_______], its Commitment Percentage is [____%], the aggregate outstanding
principal balance of its Loans equals [$____] (in each case after giving effect
to the assignment contemplated hereby but without giving effect to any
contemplated assignments which have not yet become effective), and (iii)
immediately after giving effect to all assignments which have not yet become
effective, the Assignor's Commitment Percentage will be sufficient to give
effect to this Agreement and Acceptance; (b) makes no representation or
warranty, express or implied, and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with the
Credit Agreement or any of the other Loan Documents or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of the Credit
Agreement, any of the other Loan Documents or any other instrument or document
furnished pursuant thereto, other than that it is the legal and beneficial owner
of the interest being assigned by it hereunder free and clear of any claim or
encumbrance; (c) makes no representation or warranty and assumes no
responsibility with respect to the financial condition of any Borrower, or the
performance or observance by any Borrower in respect of any of the Obligations
or any of its obligations under the Credit Agreement or any of the other Loan
Documents or any other instrument or document delivered or executed pursuant
thereto; and (d) if issued by the Borrowers pursuant to Section 2.4 of the
Credit Agreement, attaches hereto its Note.
Exhibit G-2
<PAGE> 59
[Pursuant to Section 2.4 of the Credit Agreement, the Assignee requests
that the Borrowers exchange the Assignor's Note for new Notes payable to the
Assignor and the Assignee as follows:
<TABLE>
<CAPTION>
Notes Payable to Amounts of
the Order of: Notes
---------------- -----------
<S> <C>
Assignor $
- -------------------------------- =======================
Assignee $
- -------------------------------- =======================
</TABLE>
SECTION 3. ASSIGNEE'S REPRESENTATIONS. The Assignee (a) represents and
warrants that (i) it is duly and legally authorized to enter into this Agreement
and Acceptance, (ii) the execution, delivery and performance of this Assignment
and Acceptance do not conflict with any provision of law or of the charter or
by-laws of the Assignee, or of any agreement binding on the Assignee, (iii) all
acts, conditions and things required to be done and performed and to have
occurred prior to the execution, delivery and performance of this Assignment and
Acceptance, and to render the same the legal, valid and binding obligation of
the Assignee, enforceable against it in accordance with its terms, have been
done and performed and have occurred in due and strict compliance with all
applicable laws; (b) confirms that it has received a copy of the Credit
Agreement, together with copies of the most recent financial statements
delivered pursuant to Section 5.1 thereof and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Assignment and Acceptance; (c) agrees that it will,
independently and without reliance upon the Assignor, any Agent or any other
Bank and based on such documents and information as it shall deem appropriate at
the time, continue to make its own credit decisions in taking or not taking
action under the Credit Agreement; (d) appoints and authorizes each Agent to
take such action as agent on its behalf and to exercise such powers under the
Credit Agreement and the other Loan Documents as are delegated to such Agent by
the terms thereof, together with such powers as are reasonably incidental
thereto; and (e) agrees that it will perform in accordance with their terms all
the obligations which by the terms of the Credit Agreement are required to be
performed by it as a Bank.
SECTION 4. EFFECTIVE DATE. The effective date for this Assignment and
Acceptance shall be [___________ ] (the "Effective Date"). Following the
execution of this Assignment and Acceptance each party hereto shall deliver its
duly executed counterpart hereof to the Agents for consent by the Agents.
Schedule 1 to the Credit Agreement shall thereupon be replaced as of the
Effective Date by the Schedule 1 annexed hereto.
SECTION 5. RIGHTS UNDER CREDIT AGREEMENT. Upon such acceptance by the
Agents, from and after the Effective Date, (a) the Assignee shall be a party to
the Credit Agreement and, to the extent provided in this Assignment and
Acceptance, have the rights and obligations of a Bank thereunder, and (b) the
Assignor shall, with respect to that portion of its interest under the Credit
Agreement assigned hereunder, relinquish its rights and be released from its
obligations under the Credit Agreement; provided, however, that the Assignor
shall retain its rights to be
Exhibit G-3
<PAGE> 60
indemnified pursuant to Section 8.3 of the Credit Agreement with respect to any
claims or actions arising prior to the Effective Date.
SECTION 6. PAYMENTS. Upon such acceptance of this Assignment and
Acceptance by the Agents, from and after the Effective Date, the Operations
Agent shall make all payments in respect of the rights and interests assigned
hereby (including payments of principal, interest, fees and other amounts) to
the Assignee. The Assignor and the Assignee shall make any appropriate
adjustments in payments for periods prior to the Effective Date by the
Operations Agent or with respect to the making of this assignment directly
between themselves.
SECTION 7. GOVERNING LAW. THIS ASSIGNMENT AND ACCEPTANCE IS INTENDED TO
TAKE EFFECT AS A SEALED INSTRUMENT TO BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 8. COUNTERPARTS. The Assignment and Acceptance may be executed
in any number of counterparts which shall together constitute but one and the
same agreement.
Exhibit G-4
<PAGE> 61
IN WITNESS WHEREOF, intending to be legally bound, each of the
undersigned has caused this Assignment and Acceptance to be executed on its
behalf by its officer thereunto duly authorized, as of the date first above
written.
[ASSIGNOR]
By:
----------------------------------
Title:
-------------------------------
[ASSIGNEE]
By:
----------------------------------
Title:
-------------------------------
Exhibit G-5
<PAGE> 62
CONSENTED TO:
[BORROWERS' NAMES]
By:
---------------------------------------
Title:
BANK OF AMERICA, NATIONAL
ASSOCIATION, as Administrative Agent
By:
---------------------------------------
Title:
------------------------------------
STATE STREET BANK AND TRUST
COMPANY, as Operations Agent
By:
---------------------------------------
Title:
------------------------------------
Exhibit G-6
<PAGE> 63
Exhibit H
JOINDER
Reference is made to the credit agreement (as amended and in effect from
time to time, the "Credit Agreement") dated December 3, 1999, by and among the
Borrowers party thereto, the Banks party thereto, The Bank of New York, as
syndication agent, National Australia Bank Limited, as co-documentation agent,
Bank One, NA, as co-documentation agent, State Street Bank and Trust Company, as
Operations Agent, and Bank of America, National Association, as Administrative
Agent.
All capitalized terms used in this Joinder which are defined in the
Credit Agreement shall have the meanings set forth therein unless otherwise
defined or the context otherwise requires.
Each of the undersigned hereby agrees that effective the date hereof, it
shall be a Borrower under the Credit Agreement. Each of the undersigned agrees
to be bound by the terms and conditions of the Credit Agreement as a Borrower.
In connection herewith, a new Allocation Notice shall be delivered.
IN WITNESS WHEREOF, the undersigned have executed this Joinder this ___
day of ____________, ____.
[Insert Name of Borrower]
By:
----------------------------------
Title:
-------------------------------
[Insert Name of Borrower]
By:
----------------------------------
Title:
-------------------------------
[Insert Name of Borrower]
By:
----------------------------------
Title:
-------------------------------
<PAGE> 1
EXHIBIT 99.h(11)
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made as of April 30, 1999, among HOTCHKIS AND WILEY
VARIABLE TRUST, a Massachusetts business trust (the "Fund"), AIG 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"), and HOTCHKIS AND WILEY, a division
of Merrill Lynch Asset Management, L.P., a limited partnership organized under
the laws of Delaware (the "Advisor").
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
-1-
<PAGE> 2
WHEREAS, Merrill Lynch Asset Management, L.P. is duly registered as an
investment adviser under the Investment Advisers Act of 1940, as amended, and
any applicable 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
-2-
<PAGE> 3
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).
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 10:00 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 10:00 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
-3-
<PAGE> 4
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.
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
-4-
<PAGE> 5
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 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;
-5-
<PAGE> 6
(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.
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, where it is
reasonably probable that an offered 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"), it 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
-6-
<PAGE> 7
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.
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 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 reasonable 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 Fund shall use its best efforts to make Shares
available in all fifty states, the District of Columbia, Virgin Islands and
Puerto Rico.
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 the Advisor 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
-8-
<PAGE> 9
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 submit to the Board such annual 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.
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, and the Advisor and each of its partners, officers,
employees and agents and each person, if any, who controls the Advisor 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 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 Advisor. The Advisor 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 Advisor or
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 statements or
representations (other than statements or representations contained in
and accurately derived from Company Documents) or wrongful conduct of
the Advisor or 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
-11-
<PAGE> 12
information furnished to the Company by or on behalf of the Fund or the
Advisor; or
(d) arise out of or result from any failure by the Fund or
Advisor 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 or Advisor in this
Agreement or arise out of or result from any other material breach of
this Agreement by the Fund or Advisor.
5.3 Neither the Company nor the Advisor 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 Advisor 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.
-12-
<PAGE> 13
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 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 Advisor shall have suffered a material adverse change in its
business or financial condition or (2) the Advisor 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.
-13-
<PAGE> 14
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.
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: Compliance
If to the Company:
AIG Life Insurance Company
80 Pine Street
New York, NY 10005
Attention: Kenneth Judkowitz
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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 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.
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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.
AIG LIFE INSURANCE COMPANY
By: /s/ Kenneth F. Judkowitz
-------------------------------------
Name: Kenneth F. Judkowitz
-----------------------------------
Title: Vice President
----------------------------------
HOTCHKIS AND WILEY VARIABLE TRUST
/s/ Nancy D. Celick
Nancy D. Celick
President
HOTCHKIS AND WILEY, A DIVISION OF
MERRILL LYNCH ASSET MANAGEMENT, L.P.
/s/ Nancy D. Celick
Nancy D. Celick
Chief Administrative Officer
-16-
<PAGE> 17
SCHEDULE A
Segregated Accounts of AIG Life Insurance Company
Participating in Portfolios of Hotchkis and Wiley Variable Trust
<TABLE>
<CAPTION>
Name of Separate Account Date Established
- ------------------------ ----------------
<S> <C>
Variable Account I June 1986
Variable Account II June 1986
</TABLE>
<PAGE> 18
SCHEDULE B
Portfolios of Hotchkis and Wiley Variable Trust
Offered to Segregated Accounts of AIG Life Insurance Company
International VIP Portfolio
Low Duration VIP Portfolio
<PAGE> 1
EXHIBIT 99.h(12)
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made as of April 30, 1999, among HOTCHKIS AND WILEY
VARIABLE TRUST, a Massachusetts business trust (the "Fund"), AMERICAN
INTERNATIONAL LIFE ASSURANCE 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"), and HOTCHKIS AND WILEY, a division of Merrill Lynch Asset
Management, L.P., a limited partnership organized under the laws of Delaware
(the "Advisor").
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
-1-
<PAGE> 2
WHEREAS, Merrill Lynch Asset Management, L.P. is duly registered as an
investment adviser under the Investment Advisers Act of 1940, as amended, and
any applicable 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
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<PAGE> 3
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).
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 10:00 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 10:00 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
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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.
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
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<PAGE> 5
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 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;
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<PAGE> 6
(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.
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, where it is
reasonably probable that an offered 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"), it 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
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<PAGE> 7
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.
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 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 reasonable 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 Fund shall use its best efforts to make Shares
available in all fifty states, the District of Columbia, Virgin Islands and
Puerto Rico.
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 the Advisor 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
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<PAGE> 9
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 submit to the Board such annual 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.
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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<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, and the Advisor and each of its partners, officers,
employees and agents and each person, if any, who controls the Advisor 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 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 Advisor. The Advisor 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 Advisor or
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 statements or
representations (other than statements or representations contained in
and accurately derived from Company Documents) or wrongful conduct of
the Advisor or 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
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<PAGE> 12
information furnished to the Company by or on behalf of the Fund or the
Advisor; or
(d) arise out of or result from any failure by the Fund or
Advisor 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 or Advisor in this
Agreement or arise out of or result from any other material breach of
this Agreement by the Fund or Advisor.
5.3 Neither the Company nor the Advisor 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 Advisor 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.
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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 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 Advisor shall have suffered a material adverse change in its
business or financial condition or (2) the Advisor 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.
-13-
<PAGE> 14
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.
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: Compliance
If to the Company:
American International Life Assurance Company of New York
80 Pine Street
New York, NY 10005
Attention: Kenneth Judkowitz
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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 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.
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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.
AMERICAN INTERNATIONAL LIFE ASSURANCE
COMPANY OF NEW YORK
By: /s/ Kenneth F. Judkowitz
----------------------------------
Name: Kenneth F. Judkowitz
--------------------------------
Title: Vice President
-------------------------------
HOTCHKIS AND WILEY VARIABLE TRUST
/s/ Nancy D. Celick
Nancy D. Celick
President
HOTCHKIS AND WILEY, A DIVISION OF
MERRILL LYNCH ASSET MANAGEMENT, L.P.
/s/ Nancy D. Celick
Nancy D. Celick
Chief Administrative Officer
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<PAGE> 17
SCHEDULE A
Segregated Accounts of American International Life Assurance Company of
New York Participating in Portfolios of Hotchkis and Wiley Variable Trust
Name of Separate Account Date Established
Variable Account A June 1986
Variable Account B June 1986
<PAGE> 18
SCHEDULE B
Portfolios of Hotchkis and Wiley Variable Trust
Offered to Segregated Accounts of
American International Life Assurance Company of New York
International VIP Portfolio
Low Duration VIP Portfolio
<PAGE> 1
EXHIBIT 99.h(13)
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made as of April 6, 1999, between HOTCHKIS AND WILEY
VARIABLE TRUST, a Massachusetts business (the "Fund"), HARTFORD LIFE AND ANNUITY
INSURANCE COMPANY, a life insurance company organized under the laws of
Connecticut (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.
-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., 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.
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 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 sent to public shareholders and/or policyholders;
(d) any registration statement (without exhibits) and
financial reports of the Company 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.
-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
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, and that the Contracts will be issued and sold in compliance in
all material respects will all applicable federal and state laws.
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. 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
-8-
<PAGE> 9
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 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
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<PAGE> 10
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 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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<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
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<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 180 days' 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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<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, as long as such failure to qualify is not the
fault of the Fund.
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 but subject to
Article 1, the Fund shall, at the option of the Company, continue to make
available additional Fund Shares pursuant to the terms and conditions of this
Agreement for all Contracts in effect on the effective date of termination of
this Agreement, provided that the Company continues to comply with all of its
obligations hereunder as if this Agreement had not been terminated.
6.9 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.
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<PAGE> 14
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:
Hartford Life and Annuity Insurance Company
P.O. Box 2999
Hartford, CT 06104-2999
Attention: General Counsel
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.
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<PAGE> 15
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.
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.
HARTFORD LIFE AND ANNUITY INSURANCE
COMPANY
By: /s/ Wendell J. Bosseu
------------------------------------
Name: Wendell J. Bosseu
-----------------------------------
Title: Vice President
----------------------------------
HOTCHKIS AND WILEY VARIABLE TRUST
/s/ Nancy D. Celick
Nancy D. Celick
President
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<PAGE> 16
SCHEDULE A
Segregated Accounts of Hartford Life and Annuity Insurance Company
Participating in Portfolios of Hotchkis and Wiley Variable Trust
Name of Separate Account Date Established
- ------------------------ ----------------
ICMG Registered Variable Life Separate October 9, 1995
Account One
<PAGE> 17
SCHEDULE B
Portfolios of Hotchkis and Wiley Variable Trust
Offered to Segregated Accounts of Hartford Life and Annuity Insurance Company
International VIP Portfolio
<PAGE> 18
SCHEDULE C
Persons Authorized to Act on Behalf of Hartford Life and
Annuity Insurance Company
--------------------------------------------------------
The Fund, the Underwriter and their respective agents are authorized to
rely on instructions from the following individuals on behalf of Hartford Life
and Annuity Insurance Company on its own behalf and on behalf of each Account:
Name Signature
Carol Lewis, Assistant Director ___________________________
Tibor Held, Accountant ___________________________
Mark Strogoff, Accountant ___________________________
Todd Farber, Accountant ___________________________
<PAGE> 1
Exhibit 99.j
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form N-1A of our
report dated February 17, 2000, 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 appear in such Registration Statement.
We also consent to the references to us under the headings "Other Service
Providers" and "Financial Highlights" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
April 6, 2000
<PAGE> 1
EXHIBIT 99.P
CODE OF ETHICS
MERRILL LYNCH ASSET MANAGEMENT GROUP (MLAMG)
REGISTERED INVESTMENT COMPANIES
AND THEIR INVESTMENT ADVISERS
AND PRINCIPAL UNDERWRITER
SECTION 1 - BACKGROUND
This Code of Ethics is adopted under Rule 17j-1 under the Investment
Company Act of 1940 ("1940 Act") and Rule 204-2(a) under the Investment Advisers
Act of 1940 and has been approved by the Boards of Directors of each of the
MLAMG funds.(1) Except where noted, the Code applies to all MLAMG employees.
Section 17(j) under the Investment Company Act of 1940 makes it unlawful
for persons affiliated with investment companies, their principal underwriters
or their investment advisers to engage in fraudulent personal securities
transactions. Rule 17j-1 requires each Fund, investment adviser and principal
underwriter to adopt a Code of Ethics that contains provisions reasonably
necessary to prevent an employee from engaging in conduct prohibited by the
principles of the Rule. The Rule also requires that reasonable diligence be used
and procedures be instituted which are reasonably necessary to prevent
violations of the Code of Ethics.
On August 23, 1999, the SEC adopted amendments to Rule 17j-1 which
require greater board oversight of personal trading practices, more complete
reporting of employee securities trading and preclearance of employee purchases
of initial public offerings and private placements. The amendments require,
among other things, that MLAMG provide its fund boards annually a written report
that (i) describes issues that arose during the previous year under the Code,
including information about material code violations and sanctions imposed and
(ii) certifies to the board that MLAMG has adopted procedures reasonably
necessary to prevent access persons from violating the Code.
SECTION 2 - STATEMENT OF GENERAL FIDUCIARY PRINCIPLES
The Code of Ethics is based on the fundamental principle that MLAMG and its
employees must put client interests first. As an investment adviser, MLAMG has
fiduciary responsibilities to its clients, including the registered investment
companies
- -----------------------
(1) As applicable herein, MLAMG includes all AMG investment advisory affiliates
and the affiliated principal underwriter of investment companies registered
under the 1940 Act.
<PAGE> 2
(the "Funds") for which it serves as investment adviser. Among MLAMG's fiduciary
responsibilities is the responsibility to ensure that its employees conduct
their personal securities transactions in a manner which does not interfere or
appear to interfere with any Fund transactions or otherwise take unfair
advantage of their relationship to the Funds. All MLAMG employees must adhere to
this fundamental principle as well as comply with the specific provisions set
forth herein. It bears emphasis that technical compliance with these provisions
will not insulate from scrutiny transactions which show a pattern of compromise
or abuse of an employee's fiduciary responsibilities to the Funds. Accordingly,
all MLAMG employees must seek to avoid any actual or potential conflicts between
their personal interest and the interest of the Funds. In sum, all MLAMG
employees shall place the interest of the Funds before personal interests.
SECTION 3 - INSIDER TRADING POLICY
All MLAMG employees are subject to MLAMG's Insider Trading Policy, which
is considered an integral part of this Code of Ethics. MLAMG's Insider Trading
Policy, which is set forth in the MLAMG Code of Conduct, prohibits MLAMG
employees from buying or selling any security while in the possession of
material nonpublic information about the issuer of the security. The policy also
prohibits MLAMG employees from communicating to third parties any material
nonpublic information about any security or issuer of securities. Additionally,
no MLAMG employee may use inside information about MLAMG activities or the
activities of any Merrill Lynch & Co., Inc. entity to benefit the Funds or to
gain personal benefit. Any violation of MLAMG's Insider Trading Policy may
result in sanctions, which could include termination of employment with MLAMG.
(See Section 10--Sanctions).
SECTION 4 - RESTRICTIONS RELATING TO SECURITIES TRANSACTIONS
A. GENERAL TRADING RESTRICTIONS FOR ALL EMPLOYEES
The following restrictions apply to all MLAMG employees:
1. ACCOUNTS. No employee, other than those employed by Mercury
Asset Management International Ltd. ("MAMI"), may engage in
personal securities transactions other than through an account
maintained with Merrill Lynch, Pierce, Fenner & Smith
Incorporated or another Merrill Lynch broker/dealer entity
("Merrill Lynch") unless written permission is obtained from the
Compliance Director. Similarly, no MAMI employee may engage in
personal securities transactions other than through an account
maintained with Merrill Lynch or The Bank of New York Europe
Limited ("BNYE") unless written permission is obtained from the
Compliance Director.
2. ACCOUNTS INCLUDE FAMILY MEMBERS AND OTHER ACCOUNTS. Accounts of
employees include the accounts of their spouses, dependent
relatives, trustee and custodial accounts or any other account
in which the employee has a financial
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<PAGE> 3
interest or over which the employee has investment discretion.
3. PRECLEARANCE. All employees must obtain approval from the
Compliance Director or preclearance delegatee prior to entering
any securities transaction (with the exception of exempted
securities as listed in Section 5) in all accounts. Approval of
a transaction, once given, is effective only for the business
day on which approval was requested or until the employee
discovers that the information provided at the time the
transaction was approved is no longer accurate.
4. RESTRICTIONS ON PURCHASES. No employee may purchase any security
which at the time is being purchased, or to the employee's
knowledge is being considered for purchase, by any Fund managed
by MLAMG. This restriction, however, does not apply to personal
trades of employees which coincide with trades by any MLAMG
index fund.
5. RESTRICTIONS ON SALES. No employee may sell any security which
at the time is actually being sold, or to the employee's
knowledge is being considered for sale, by any Fund managed by
MLAMG. This restriction, however, does not apply to personal
trades of employees which coincide with trades by any MLAMG
index fund.
6. RESTRICTIONS ON RELATED SECURITIES. The restrictions and
procedures applicable to the transactions in securities by
employees set forth in this Code of Ethics shall similarly apply
to securities that are issued by the same issuer and whose value
or return is related, in whole or in part, to the value or
return of the security purchased or sold or being contemplated
for purchase or sale during the relevant period by the Fund. For
example, options or warrants to purchase common stock, and
convertible debt and convertible preferred stock of a particular
issuer would be considered related to the underlying common
stock of that issuer for purposes of this policy. In sum, the
related security would be treated as if it were the underlying
security for the purpose of the pre-clearance procedures
described herein.
7. PRIVATE PLACEMENTS. Employee purchases and sales of "private
placement" securities (including all private equity
partnerships, hedge funds, limited partnership or venture
capital funds) must be precleared directly with the Compliance
Director or designee. No employee may engage in any such
transaction unless the Compliance Director or his designee and
the employee's senior manager have each previously determined in
writing that the contemplated investment does not involve any
potential for conflict with the investment activities of the
Funds.
If, after receiving the required approval, an employee has any
material role in
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<PAGE> 4
the subsequent consideration by any Fund of an investment in the
same or affiliated issuer, the employee must disclose his or her
interest in the private placement investment to the Compliance
Director and the employee's department head. The decision to
purchase securities of the issuer by a Fund must be
independently reviewed and authorized by the employee's
department head.
8. INITIAL PUBLIC OFFERINGS. As set forth in Paragraph A.3. of this
Section 4, the purchase by an employee of securities offered in
an initial public offering must be precleared. As a matter of
policy, employees will not be allowed to participate in
so-called "hot" offerings as such term may be defined by Merrill
Lynch or appropriate regulators.
9. PROHIBITION ON SHORT-TERM PROFITS. Employees are prohibited from
profiting on any sale and subsequent purchase, or any purchase
and subsequent sale of the same (or equivalent) securities
occurring within 60 calendars days ("short-term profit"). This
holding period also applies to all permitted options
transactions; therefore, for example, an employee may not
purchase or write an option if the option will expire in less
than 60 days (unless the employee is buying or writing an option
on a security that the employee has held more than 60 days). In
determining short-term profits, all transactions within a 60-day
period in all accounts related to the employee shall be netted
regardless of an employee's intentions to do otherwise (e.g.,
tax or other trading strategies). Should an employee fail to
preclear a trade that results in a short-term profit, the trade
would be subject to reversal with all costs and expenses related
to the trade borne by the employee, and the employee would be
required to disgorge the profit. Transactions not required to be
precleared under Section 5 will not be subject to this
prohibition.
B. ADDITIONAL TRADING RESTRICTIONS FOR DECISION-MAKING EMPLOYEES
The following additional restrictions apply to decision-making employees
(i.e., employees who recommend or determine which securities transactions a Fund
undertakes). The Compliance Department will retain and keep current a list of
decision-making employees.
1. NOTIFICATION. A decision-making employee must notify the
Compliance Department or preclearance designee of any intended
transactions in a security for his or her own personal account
which is owned or contemplated for purchase or sale by a Fund
for which the employee has decision-making authority.
2. BLACKOUT PERIODS. A decision-making employee may not buy or sell
a security within 7 CALENDAR DAYS either before or after a
purchase or sale of the same or related security by a Fund or
portfolio management group for which the employee has
decision-making authority. For example, if a Fund trades a
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<PAGE> 5
security on day 0, day 8 is the first day the manager, analyst
or portfolio management group member of that Fund may trade the
security for his or her own account.
3. ESTABLISHING POSITIONS COUNTER TO FUND POSITIONS. No
decision-making employee may establish a long position in a
personal account in a security if a Fund for which the employee
is a decision-making employee holds a put option on such
security (aside from a put purchased for hedging purposes where
the fund holds the underlying security), has written a call
option on such security, or otherwise maintains a position that
would benefit from a decrease in the value of the underlying
security (e.g., a short sale other than a short sale
"against-the-box").
No decision-making employee may purchase a put option or write a
call option where a Fund for which such person has
decision-making responsibilities holds a long position in the
underlying security.
No decision-making employee may short sell any security where a
Fund for which the employee has decision-making authority holds
a long position in the same security or where such Fund
otherwise maintains a position in respect of which the Fund
would benefit from an increase in the value of the security.
4. PURCHASING AN INVESTMENT FOR A FUND THAT IS A PERSONAL HOLDING.
A decision-making employee may not purchase an investment for a
Fund that is also a personal holding of the employee or any
other account covered by this Code of Ethics, or the value of
which is materially linked to a personal holding, unless the
decision-making employee has obtained prior approval from the
employee's senior manager.
5. INDEX FUNDS. The restrictions of this Section 4.B. do not apply
to purchases and sales of securities by decision-making
employees which coincide with trades by any MLAMG index fund.
C. TRADING RESTRICTIONS FOR DISINTERESTED DIRECTORS OF THE MLAMG FUNDS
The following restrictions apply only to disinterested directors of the
MLAMG Funds (i.e., any director who is not an "interested person" of a MLAMG
fund within the meaning of Section 2(a)(10) of the 1940 Act):
1. RESTRICTIONS ON PURCHASES. No disinterested director may
purchase any security which, to the director's knowledge at the
time, is being purchased or is being considered for purchase by
any Fund managed by MLAMG.
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<PAGE> 6
2. RESTRICTIONS ON SALES. No disinterested director may sell any
security which, to the director's knowledge at the time, is
being sold or is being considered for sale by any Fund managed
by MLAMG.
3. RESTRICTIONS ON TRADES IN SECURITIES RELATED IN VALUE. The
restrictions applicable to the transactions in securities by
disinterested directors shall similarly apply to securities that
are issued by the same issuer and whose value or return is
related, in whole or in part, to the value or return of the
security purchased or sold by the Fund (see Section 4.A.6.).
SECTION 5 - EXEMPTED TRANSACTIONS/SECURITIES
MLAMG has determined that the following securities transactions do not
present the opportunity for improper trading activities that Rule 17j-1 is
designed to prevent; therefore, the restrictions set forth in Section 4 of this
Code (including preclearance, prohibition on short-term profits and blackout
periods) shall not apply.
Exempted transactions/securities may not be executed/held in brokerage
accounts maintained outside of Merrill Lynch.
THE REPORTING REQUIREMENTS LISTED IN SECTION 6 OF THIS CODE, HOWEVER,
SHALL APPLY TO THE SECURITIES AND TRANSACTION TYPES SET FORTH IN PARAGRAPHS F-J
OF THIS SECTION.
A. Purchases or sales in an account over which the employee has no direct
or indirect influence or control (e.g., an account managed on a fully
discretionary basis by an investment adviser or trustee).
B. Purchases or sales of direct obligations of the U.S. Government.
C. Purchases or sales of open-end investment companies (including money
market funds), variable annuities and unit investment trusts. (However,
unit investment trusts traded on a stock exchange (e.g., MITS, SPDRS,
DIAMONDS, NASDAQ 100, etc.) must be precleared.)
D. Purchases or sales of bank certificates, bankers acceptances, commercial
paper and other high quality short-term debt instruments, including
repurchase agreements.
E. Merrill Lynch common stock which is purchased and sold within any
Merrill Lynch employee benefit plan and stock purchased and sold through
similar such employer-sponsored plans in which a spouse of a MLAMG
employee may participate.
F. Purchases or sales which are non-volitional on the part of the employee
(e.g., an in-the-money option that is automatically exercised by a
broker; a security that is
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<PAGE> 7
called away as a result of an exercise of an option; or a security that
is sold by a broker, without employee consultation, to meet a margin
call not met by the employee).
G. Purchases which are made by reinvesting cash dividends pursuant to an
automatic dividend reinvestment plan.
H. Purchases effected upon the exercise of rights issued by an issuer pro
rata to all holders of a class of its securities, to the extent such
rights were acquired from such issuer.
I. Purchases or sales of commodities, futures (including currency futures
and futures on broad-based indices), options on futures and options on
broad-based indices. (Currently, "broad-based indices" include only the
S&P 100, S&P 500, FTSE 100 and Nikkei 225.)
J. The receipt of a bona fide gift of securities. (Donations of securities,
however, require preclearance.)
SECTION 6 - REPORTING BY EMPLOYEES
The requirements of this Section 6 apply to all MLAMG employees. The
requirements will also apply to all transactions in the accounts of spouses,
dependent relatives and members of the same household, trustee and custodial
accounts or any other account in which the employee has a financial interest or
over which the employee has investment discretion. The requirements do not apply
to securities acquired for accounts over which the employee has no direct or
indirect control or influence. All employees whose accounts are maintained at
Merrill Lynch or BNYE are deemed to have automatically complied with the
requirements of this Section 6 B. and C. as to reporting executed transactions
and personal holdings. Transactions and holdings in such accounts are
automatically reported to the Compliance Department through automated systems.
Employees who have approved accounts outside of Merrill Lynch or BNYE
are deemed to have complied with the requirements of this Section 6 B. and C.
provided that the Compliance Department receives duplicate statements and
confirmations directly from their brokers.
Employees who effect reportable transactions outside of a brokerage
account (e.g., optional purchases or sales through an automatic investment
program directly with an issuer) will be deemed to have complied with this
requirement by preclearing transactions with the Compliance Department and by
reporting their holdings annually on the "Personal Securities Holdings" form, as
required by the Compliance Department.
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A. INITIAL HOLDINGS REPORT. Each new MLAMG employee will be given a copy of
this Code of Ethics upon commencement of employment. All new employees
must disclose their personal securities holdings to the Compliance
Department within 10 days of commencement of employment with MLAMG.
(Similarly, securities holdings of all new related accounts must be
reported to the Compliance Department within 10 days of the date that
such account becomes related to the employee.) With respect to exempt
securities referred to in Section 5 which do not require
preclearance/reporting, employees must nonetheless initially report
those exempt securities defined in Section 5.F.-J. (This reporting
requirement does not apply to holdings that are the result of
transactions in exempt securities as defined in Section 5.A.-E.) Initial
holdings reports must identify the title, number of shares, and
principal amount with respect to each security holding. Within 10 days
of commencement of employment, each employee shall file an
Acknowledgement stating that he or she has read and understands the
provisions of the Code.
B. RECORDS OF SECURITIES TRANSACTIONS. All employees must preclear each
securities transaction (with the exception of exempt transactions in
Section 5) with the Compliance Department or preclearance designee. At
the time of preclearance, the employee must provide a complete
description of the security and the nature of the transaction. As
indicated above, employees whose accounts are maintained at Merrill
Lynch or BNYE or who provide monthly statements directly from their
brokers/dealers are deemed to have automatically complied with the
requirement to report executed transactions.
C. ANNUAL HOLDINGS REPORT. All employees must submit an annual holdings
report reflecting holdings as of a date no more than 30 days before the
report is submitted. As indicated above, employees whose accounts are
maintained at Merrill Lynch or BNYE or who provide monthly statements
directly from their brokers/dealers are deemed to have automatically
complied with this requirement.
With respect to exempt securities referred to in Section 5 which do not
require preclearance/reporting, employees must nonetheless annually
report the holdings of those exempt securities that are defined in
Section 5.F.-J. (This reporting requirement, however, does not apply to
exempt securities as defined in Section 5.A.-E.)
D. ANNUAL CERTIFICATION OF COMPLIANCE. All MLAMG employees must certify
annually to the Compliance Department that (1) they have read and
understand and agree to abide by this Code of Ethics; (2) they have
complied with all requirements of the Code of Ethics, except as
otherwise notified by the Compliance Department that they have not
complied with certain of such requirements; and (3) they have reported
all transactions required to be reported under the Code of Ethics.
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E. REVIEW OF TRANSACTIONS AND HOLDINGS REPORTS. All transactions reports
and holdings reports will be reviewed by appropriate management or
compliance personnel according to procedures established by the
Compliance Department.
SECTION 7 - REPORTING BY DISINTERESTED DIRECTORS OF MLAMG FUNDS
A disinterested director of a Fund need only report a transaction in a
security if the director, at the time of that transaction, knew or, in the
ordinary course of fulfilling the official duties of a director of such Fund,
should have known that, during the 15-day period immediately preceding the date
of the transaction by the director, the security was purchased or sold by the
Fund or was being considered for purchase or sale by the Fund. In reporting such
transactions, disinterested directors must provide: the date of the transaction,
a complete description of the security, number of shares, principal amount,
nature of the transaction, price, commission, and name of broker/dealer through
which the transaction was effected.
As indicated in Section 6.D. for MLAMG employees, disinterested
directors are similarly required to certify annually to the Compliance
Department that (1) they have read and understand and agree to abide by this
Code of Ethics; (2) they have complied with all requirements of the Code of
Ethics, except as otherwise reported to the Compliance Department that they have
not complied with certain of such requirements; and (3) they have reported all
transactions required to be reported under the Code of Ethics.
SECTION 8 - APPROVAL AND REVIEW BY BOARDS OF DIRECTORS
The Board of Directors of each MLAMG Fund, including a majority of
directors who are disinterested directors, must approve this Code of Ethics.
Additionally, any material changes to this Code must be approved by the Board of
Directors within six months after adoption of any material change. The Board of
Directors must base its approval of the Code and any material changes to the
Code on a determination that the Code contains provisions reasonably necessary
to prevent employees from engaging in any conduct prohibited by Rule 17j-1.
Prior to approving the Code or any material change to the Code, the Board of
Directors must receive a certification from the Fund, the Investment Adviser or
Principal Underwriter that it has adopted procedures reasonably necessary to
prevent employees from violating the Code of Ethics.
SECTION 9 - REVIEW OF MLAMG ANNUAL REPORT
At least annually, the Fund, the Investment Adviser and the Principal
Underwriter must furnish to the Fund's Board of Directors, and the Board of
Directors must consider, a written report that (1) describes any issues arising
under this Code of Ethics or procedures since the last report to the Board of
Directors, including, but not limited to, information about material violations
of the Code of Ethics or procedures
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and sanctions imposed in response to the material violations and (2) certifies
that the Fund, Investment Adviser and Principal Underwriter have adopted
procedures reasonably necessary to prevent employees from violating this Code of
Ethics.
SECTION 10 - SANCTIONS
Potential violations of the Code of Ethics must be brought to the
attention of the Compliance Director or his designee and are investigated. Upon
completion of the investigation, if necessary, the matter will be reviewed by
the Code of Ethics Review Committee and the employee's senior manager. The Code
of Ethics Review Committee will make a determination as to whether any sanction
should be imposed. Sanctions will include, but are not limited to, a letter of
caution or warning, reversal of a trade, fine or other monetary penalty,
disgorgement of a profit or absorption of costs associated with a trade,
suspension of personal trading privileges, suspension of employment (with or
without compensation), and termination of employment.
SECTION 11 - EXCEPTIONS
An exception to any of the policies, restrictions or requirements set
forth herein may be granted only upon a showing by the employee to the Code of
Ethics Review Committee that such employee would suffer extreme financial
hardship should an exception not be granted. Should the subject of the exception
request involve a transaction in a security, a change in the employee's
investment objectives, tax strategies, or special new investment opportunities
would not constitute acceptable reasons for a waiver.
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