As Filed With The Securities And Exchange Commission On June 16, 1999
File Nos. 333-______ and 811-09379
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (X)
Pre-Effective Amendment No.___ ( )
Post-Effective Amendment No. ___ ( )
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. ___ ( )
LSA VARIABLE SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
3100 Sanders Road, Suite J5B, Northbrook, Illinois 60062
(Address of Principal Executive Offices) (Zip Code)
(847) 402-5352
(Registrant's Telephone Number, Including Area Code)
Brenda D. Sneed, Esquire
(Name and Address of Agent for Service of Process)
Copies to:
Joan E. Boros, Esquire
Thomas C. Mira, Esquire
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
1025 Thomas Jefferson Street, N.W.
Suite 400 East
Washington, D.C. 20007
Approximate Date of Commencement of the Proposed Public Offering of the
Securities: As soon as practicable after the effective date of the Registration
Statement under the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
thereafter shall become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
LSA VARIABLE SERIES TRUST
The LSA Variable Series Trust (the "Trust") is a group of mutual funds sold
exclusively to separate accounts of life insurance companies, including Allstate
Life Insurance Company and its subsidiaries. There are presently five portfolios
(the Funds") that are available for investment.
The information in this prospectus is of interest to anyone who owns or is
considering purchasing a variable annuity or variable life contract issued by an
insurance company separate account that makes the Funds available as investment
options. This prospectus explains the investment objectives, risks and
strategies of each Fund.
You should read the prospectus to help you decide whether the insurance company
separate account that invests in a Fund is the right investment for you. You
should keep this prospectus for future reference along with the prospectus for
the insurance product which accompanies this prospectus.
Prospectus The terms "you, "your" and "yours" refers
October __, 1999 to the Contract owner as an investor in
the insurance company separate accounts.
LSA Variable Series Trust To learn more about the Funds and their
3100 Sanders Road investments, you may obtain a copy of the
Northbrook, IL 60062 Statement of Additional Information (SAI)
dated October__, 1999. The SAI has been
filed with the Securities and Exchange
Commission (SEC) and is incorporated herein
by reference, which means it is legally a
part of the prospectus. For a free copy
contact your insurance company.
----------------------------------------------
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
This Prospectus contains information you should know before investing, including
information about risks. Please read it before you invest and keep it for future
reference.
<PAGE>
Table of Contents
Funds at a Glance
General information about the Funds,
the Manager, and the Advisers
Fund Summaries
For each Fund, the investment
objective, Adviser, strategy, risks
and who may want to invest
More Information About the Funds
The types of investment strategies
that may be used by some or all of
the Funds and additional information
about investment risks
Management of the Funds
General information about the
organization and operations of the
Funds, including details about the
Adviser to each Fund
Valuing a Fund's Assets
General information on how a Fund's
assets are valued, including market
value, fair value, and the use of
foreign currency conversion values
Pricing of Fund Shares
Details on how each Fund's per share
price (also know as "net asset
value") is determined, how to
purchase and redeem shares
Fees and Expenses
Details on the cost of operating the
Funds including fees, expenses and
calculations
Additional Fund Information
Income and capital gain
distributions, taxes, Year 2000
Preparations, Statement of Additional
Information, annual reports
<PAGE>
PART A
<PAGE>
Funds at a Glance
The Trust
The LSA Variable Series Trust (the "Trust") is a group of mutual funds managed
by LSA Asset Management LLC (the "Manager").
The Manager
The Manager carefully selects other professional investment managers (the
"Advisers") to carry out the day to day management of each Fund. The Manager
receives a fee, payable quarterly, based on a percentage of average net assets
of the Funds.
The Advisers
The Advisers are the professional investment managers who perform the day-to-day
investing on behalf of the Funds subject to the general supervision of the
Manager and the Trust's Board of Trustees (the "Board"). The fees of the
Advisers are paid by the Manager, not the Funds. Each Adviser is a registered
investment adviser with the Securities and Exchange Commission (the "SEC"). The
following chart lists the Adviser and each Fund's investment objective.
<TABLE>
<CAPTION>
---------------------- ----------------------- -----------------------------------------------
<S> <C> <C>
Fund Adviser Investment Objective
---------------------- ----------------------- -----------------------------------------------
---------------------- ----------------------- -----------------------------------------------
Aggressive Equity Morgan Stanley Asset Seeks to provide capital appreciation by
Management* investing primarily in equity securities of
U.S. and foreign companies.
---------------------- ----------------------- -----------------------------------------------
---------------------- ----------------------- -----------------------------------------------
Growth Equity Goldman Sachs Asset Seeks to provide long-term growth of capital.
Management
---------------------- ----------------------- -----------------------------------------------
---------------------- ----------------------- -----------------------------------------------
Structured Equity J.P. Morgan Seeks to provide a consistently high total
Investment Management return from a broadly diversified portfolio
Inc. of equity securities with risk
characteristics similar to the Standard &
Poor's 500 Stock Index.
---------------------- ----------------------- -----------------------------------------------
---------------------- ----------------------- -----------------------------------------------
Value Equity Salomon Brothers Seeks to provide long-term growth of capital
Asset Management Inc. with current income as a secondary objective.
---------------------- ----------------------- -----------------------------------------------
---------------------- ----------------------- -----------------------------------------------
Balanced OpCap Advisors Seeks to provide a combination of growth of
capital and investment income (growth of
capital is the primary objective) by investing
in a mix of equity and debt.
---------------------- ----------------------- -----------------------------------------------
</TABLE>
*On December 1, 1998 Morgan Stanley Asset Management Inc. changed its name
to Morgan Stanley Dean Witter Investment Management Inc. but continues to do
business in certain instances using the name Morgan Stanley Asset Management.
<PAGE>
FUND SUMMARIES
Aggressive Equity Fund (Morgan Stanley Asset Management)
Investment Objective: The Aggressive Equity Fund seeks to provide capital
appreciation by investing primarily in equity securities of U.S. and foreign
companies. The Fund is "non-diversified" meaning that it may, and generally
will, invest in securities of a limited number of issuers; however, the Fund
presently does not intend to invest more than 25% of its assets in securities of
a single company.
Investment Strategies: The Fund invests primarily in equity and equity-linked
securities such as common and preferred stocks, convertible securities, and
rights and warrants to purchase common stocks. The Fund will invest in
securities of companies the Adviser believes possess above-average potential for
capital appreciation. The Adviser focuses on companies with consistent or rising
earnings growth records and compelling business strategies. Valuation is of
secondary importance and is considered generally in the context of prospects for
sustainable earnings growth. The Adviser's focus on individual security
selection may result in an emphasis on particular industry sectors. In general,
the Fund invests in companies with market size of $1 billion or more but may
also include smaller companies. The Fund may invest all of its assets in
securities of foreign companies; however, it presently does not anticipate
investing more than 25% of its total assets in foreign securities.
Primary Risks: The Fund is subject to the market fluctuation risks associated
with all investments in common stocks and other equity securities. Stock markets
tend to move in cycles. Stock values fluctuate based on the performance of
individual companies and on general market and economic conditions. You can lose
money over the short or even long-term. The Fund is also subject to:
o The risk that the Fund's market sector, mid to large-size growth oriented
companies, may underperform relative to other sectors.
o The risk that poor stock selection may cause the Fund to underperform when
compared with other funds with similar objectives.
o The risk that the Fund's performance may be hurt disproportionately by the
poor performance of relatively few stocks.
o The risk that the Fund's foreign investments may be subject to fluctuations
in foreign currency values, adverse political or economic events, greater
market volatility and lower liquidity.
Who May Want to Invest: You may wish to consider investing in this Fund if:
o You are seeking capital appreciation.
o You are willing to accept the above-average risks associated with investing
in a portfolio of common stocks.
o You are willing to accept greater volatility in hopes of a greater increase
in share price.
o You are seeking exposure to foreign equity securities and are willing to
assume the related risks.
Past Performance:
Because the Fund has been in operation for less than one year no performance
history has been provided.
Growth Equity Fund (Goldman Sachs Asset Management)
Investment Objective: The Growth Equity Fund seeks long-term growth of capital.
Investment Strategies: The Fund invests in a diversified portfolio of equity
securities (mainly common stocks) of companies that the Adviser believes have
long-term capital appreciation potential. The Fund invests at least 90% of its
total assets in equity securities. The Adviser primarily seeks companies showing
a relatively strong earnings growth trend. Although the Fund invests primarily
in U.S. securities, it may invest up to 10% of its total assets in foreign
securities, including securities of issuers in emerging countries and securities
quoted in foreign currencies.
Primary Risks: The Fund is subject to the market fluctuation risks associated
with all investments in common stocks and other equity securities. Stock markets
tend to move in cycles. Stock values fluctuate based on the performance of
individual companies and on general market and economic conditions. You can lose
money over the short or even long-term. The Fund is also subject to:
o The risk that returns on the types of securities purchased by the Fund may
not perform as well as other types of investments.
o The risk that poor stock selection may cause the Fund to underperform when
compared with other funds with similar objectives.
o The risk that the Fund's foreign investments may be subject to fluctuations
in foreign currency values, adverse political or economic events, greater
market volatility and lower liquidity.
o The risk that losses may result from the Fund's investments in options,
futures, swaps, structured securities and other derivative instruments, all
of which may be leveraged. In leveraged transactions, small changes in
prices may produce disproportionate losses to the Fund.
Who May Want to Invest: You may wish to consider investing in this Fund if:
o You are seeking potential capital appreciation over the long-term.
o You are willing to accept the above-average risks associated with investing
in a portfolio of common stocks.
o You are willing to accept greater volatility in the hopes of a greater
increase in share price.
<PAGE>
Past Performance:
Because the Fund has been in operation for less than one year no performance
history has been provided.
Structured Equity Fund (J.P. Morgan Investment Management Inc.)
Investment Objective: The Structured Equity Fund seeks to provide a consistently
high total return from a broadly diversified portfolio of equity securities with
risk characteristics similar to the Standard & Poor's 500 (S&P 500) Composite
Stock Price Index.
Investment Strategies: The Fund invests primarily in large and medium size U.S.
companies contained in the S&P 500 Index. Industry by industry, the Fund's
assets are invested so that the Fund's industry exposure is similar to the S&P
500. Within each industry the Fund modestly emphasizes stocks the Adviser
identifies as being undervalued or fairly valued and modestly underweights or
does not hold stocks that appear overvalued. By owning a large number of stocks
within the S&P 500, with an emphasis on those that appear undervalued or fairly
valued, and by tracking the industry weightings of that index, the Fund seeks
returns that modestly exceed those of the S&P 500 over the long term with
virtually the same level of volatility.
Primary Risks: The Fund is subject to the market fluctuation risks associated
with all investments in common stocks and other equity securities. Stock markets
tend to move in cycles. Stock values fluctuate based on the performance of
individual companies and on general market and economic conditions. You can lose
money over the short or even long-term. The Fund is also subject to:
o The risk that returns from stocks of medium and large size companies may not
perform as well as other types of investments.
o The risk that poor stock selection may cause the Fund to underperform when
compared to other funds with similar objectives.
Who May Want to Invest: You may wish to consider investing in this Fund if:
o You are seeking high total return from a diversified portfolio of stocks of
large and medium size U.S. companies.
o You are willing to accept the above-average risks associated with investing
in a portfolio of common stocks.
o You are willing to accept greater volatility in hopes of a greater increase
in share price.
Past Performance:
Because the Fund has been in operation for less than one year no performance
history has been provided.
Value Equity Fund (Salomon Brothers Asset Management Inc.)
Investment Objectives: The Value Equity Fund seeks to provide long-term growth
of capital. Current income is a secondary objective.
Investment Strategies: The Fund seeks to achieve its objective by investing
primarily in common stocks of established U.S. companies. The Adviser will favor
companies believed to have growth possibilities at reasonable values. The Fund
will maintain a carefully selected portfolio of securities that is diversified
among industries and companies.
Primary Risks: The Fund is subject to the market fluctuation risks associated
with all investments in common stocks and other equity securities. Stock markets
tend to move in cycles. Stock values fluctuate based on the performance of
individual companies and on general market and economic conditions. You can lose
money over the short or even long-term. The Fund is also subject to:
o The risk that returns on the types of securities purchased by the Fund may
not perform as well as other types of investments.
o The risk that poor stock selection may cause the Fund to underperform when
compared with other funds with similar objectives.
Who May Want to Invest: You may wish to consider investing in this Fund if:
o You are seeking long-term capital growth.
o You are willing to accept the above-average risks associated with investing
in a portfolio of common stocks.
o You would like a Fund that provides the potential for current income as a
secondary objective. You are willing to accept greater volatility in
hopes of a greater increase in share price.
Past Performance:
Because the Fund has been in operation for less than one year no performance
history has been provided.
Balanced Fund (OpCap Advisors)
Investment Objective: The Balanced Fund seeks to provide a combination of growth
of capital and investment income by investing in a mix of debt and equity
securities. Growth of capital is the Fund's primary objective.
Investment Strategies: The Fund invests in common stocks (with an emphasis on
dividend paying stocks), preferred stocks, securities convertible into common
stock, and debt securities. The Fund will invest at least 25% of its assets in
equity securities and at least 25% in debt securities. In general, the Fund
expects to be 50-75% invested in equity securities. However, the Balanced Fund's
day-to-day investment allocation mix among equity and debt securities will be
determined by the Adviser based on the Adviser's perception of prevailing market
conditions and risks. By investing in both debt and equity securities, it is
anticipated that the Balanced Fund will generally be less volatile than the
overall market. The Fund's equity investments will be primarily in dividend
paying common stocks that the Adviser believes to be "undervalued" in the
marketplace. Generally, equity securities the Adviser believes are undervalued
may have certain characteristics such as substantial and growing discretionary
cash flow; strong shareholder value-oriented management; valuable consumer or
commercial franchises; and favorable price to intrinsic value relationship. The
Fund may invest up to 25% of its total assets in below investment grade,
high-yield debt securities (commonly known as "junk bonds"). The Fund may also
invest all of its assets in securities of foreign companies, though it presently
does not anticipate investing more than 25% of its assets in foreign securities.
Primary Risks: The Fund is subject to the market fluctuation risks associated
with all investments in common stocks and other equity securities. Stock markets
tend to move in cycles. Stock values fluctuate based on the performance of
individual companies and on general market and economic conditions. You can lose
money over the short or even long-term. The Fund is also subject to:
o The risk that (1) an issuer of debt securities held by the Fund may fail to
repay interest and principal in a timely manner and (2) the prices of debt
securities will decline over short or even long periods due to rising
interest rates. While all debt securities in which the Fund invests will be
subject to these risks, the Fund's ability to invest up to 25% of its assets
in junk bonds increases these risks.
o The risk that poor security selection may cause the Fund to underperform
when compared with other funds with similar objectives.
o The risk that the Fund's foreign investments may be subject to fluctuations
in foreign currency values, adverse political or economic events and greater
market volatility and lower liquidity.
o The risk that the types of securities in which the Fund invests may not
perform as well as other types of investments.
Who May Want to Invest: You may wish to consider investing in this Fund if:
o You wish to invest in a fund emphasizing a combination of growth of capital
and investment income by investing in a combination of equity and debt
securities.
o You are seeking exposure to foreign investments and are willing to assume
the related risks. You are seeking exposure to junk bonds and are willing
to assume the related risks.
Past Performance:
Because the Fund has been in operation for less than one year no performance
history has been provided.
<PAGE>
More Information About The Funds
Some of the Funds have been established by investment advisers which manage
other mutual funds having similar names and investment objectives. While some of
the Funds may be similar to, and may in fact be modeled after, other mutual
funds, you should understand that the Funds are not otherwise directly related
to any other mutual fund. Consequently, the investment performance of other
mutual funds and any similarly named Fund may differ substantially.
INVESTMENT STRATEGIES
Each Fund follows a distinct set of investment strategies. Four of the Funds,
the Aggressive Equity Fund, Growth Equity Fund, Structured Equity Fund, and
Value Equity Fund are considered "Equity Funds" because they invest primarily in
equity securities (mostly common stocks). The Balanced Fund is considered a
"balanced" fund because its principal strategy is to invest in a mix of equity
and debt securities. Each Fund may change its investment objective without
shareholder approval in accordance with applicable law. All percentage
limitations relating to the Funds' investment strategies are applied at the time
a Fund acquires a security.
The Structured Equity Fund, Aggressive Equity Fund and Value Equity Fund will
normally invest at least 65% of their assets in equity securities; the Growth
Equity Fund will normally invest at least 90% of its assets in equity
securities. Therefore, as an investor in these Funds, the return on your
investment will be based primarily on the risks and rewards relating to equity
securities. The Balanced Fund will invest at least 25% of its assets in equity
securities and at least 25% in debt securities. As an investor in the Balanced
Fund, the return on your investment will be based on the risks and rewards
relating to both equity and debt securities.
Equity Securities
There are various types of equity securities such as common stocks, preferred
stocks, and warrants. In addition, the Funds may treat debt instruments which
are "convertible" into equity as equity securities (or as debt securities).
However, it is expected that the Funds' equity investments will be primarily in
common stocks.
Common stocks represent partial ownership in a company and entitle stockholders
to share in the company's profits (or losses). Common stocks also entitle the
holder to share in any of the company's dividends. The value of a company's
stock may fall as a result of factors which directly relate to that company,
such as lower demand for the company's products or services or poor management
decisions. A stock's value may also fall because of economic conditions which
affect many companies, such as increases in production costs. The value of a
company's stock may also be affected by changes in financial market conditions
that are not directly related to the company or its industry, such as changes in
interest rates or currency exchange rates. In addition, a company's stock
generally pays dividends only after the company makes required payments to
holders of its bonds and other debt. For this reason, the value of the stock
will usually react more strongly than bonds and other debt to actual or
perceived changes in the company's financial condition or progress.
As a general matter, other types of equity securities are subject to many of the
same risks as common stocks.
The Funds may invest in equity securities of U.S. and foreign companies.
Investments in foreign securities present special risks and other considerations
- -- these are discussed under "Foreign Securities" on page __.
Debt Securities
Investments in debt securities are part of the Balanced Fund's principal
investment strategy. The other Funds will generally have a portion of their
assets invested in debt securities as a cash reserve or for other appropriate
reasons. Convertible debt securities may be considered equity or debt
securities, and, in either event, they possess many of the attributes and risks
of debt securities. A prospective investor in any of the Funds should be aware
of the risks associated with investing in debt securities.
Debt securities can generally be classified into two categories as follows: (1)
"investment grade" debt securities and (2) "non-investment grade" debt
securities (also known as "junk bonds"). Investment grade debt securities are
those which are rated within the four highest rating categories of a nationally
recognized rating organization (or if unrated, securities of comparable quality
as determined by an Adviser). A discussion of the ratings services appears in an
Appendix to the Statement of Additional Information. Investment grade debt
securities are considered to have less risk of issuer default than lower rated
securities. However, higher rated debt securities will generally have a lower
yield than lower rated debt securities. Debt securities in the fourth highest
rating category are viewed as having adequate capacity for payment of principal
and interest, but do have speculative characteristics and involve a higher
degree of risk than that associated with investments in debt securities in the
three higher rating categories. Money market instruments are short-term high
quality debt securities. They are the highest investment grade quality and
therefore carry the lowest risk of issuer default. Some common types of money
market instruments include U.S. Treasury bills and notes, commercial paper,
banker's acceptances; and negotiable certificates of deposit. All of the Funds
may invest in money market instruments and other types of debt securities as a
cash reserve.
Debt securities that are rated below the four highest categories (or unrated
securities of comparable quality determined by an Adviser) are known as "junk
bonds". Junk bonds are considered to be of poor standing and predominantly
speculative. Junk bonds are considered speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligations. Accordingly, they present considerable risk of issuer default.
Junk bonds may be subject to substantial market fluctuations. They are also
subject to greater risk of loss of income and principal than investment-grade
securities. There may be less of a market for junk bonds and therefore they may
be harder to sell at a desirable price.
Foreign Securities
The Aggressive Equity and Balanced Funds may each invest all of their respective
assets in foreign securities, though the Aggressive Equity Fund and the Balanced
Fund presently do not anticipate investing over 25% of assets in foreign
securities. The Structured Equity Fund and the Value Equity Fund may each invest
up to 20% in foreign securities; the Growth Equity Fund may invest up to 10% of
its assets in foreign securities. For these purposes, foreign securities include
securities of issuers in emerging countries and securities quoted in foreign
currencies.
Foreign equity and debt securities generally have the same risk characteristics
as U.S. equity and debt securities. However, they also present a number of
additional risks and considerations that are not associated with U.S.
investments. For example, investments in foreign securities may subject a Fund
to the adverse political or economic conditions of the foreign country. These
risks increase in the case of "emerging market" countries which are more likely
to be politically and economically unstable. Foreign countries, especially
emerging market countries, may prevent or delay a Fund from selling its
investments and taking money out of the country. In addition, foreign securities
may not be as liquid as U.S. securities which could result in a Fund being
unable to sell its investments in a timely manner. Foreign countries, especially
emerging market countries, also have less stringent investor protection,
disclosure and accounting standards than the U.S. As a result, there is
generally less publicly-available information about foreign companies than U.S.
companies. Investments in foreign securities may cause a Fund to lose money when
converting investments from foreign currencies into U.S. dollars due to
unfavorable currency exchange rates.
Derivatives
Derivatives are financial instruments designed to achieve a particular economic
result when the price of an underlying security, index, interest rate,
commodity, or other financial instrument changes. Derivatives may be used by the
Funds to hedge investments and potential investments, manage risks, manage
interest or currency-sensitive assets or to enhance total return. A Fund may
enter into certain derivative transactions in lieu of purchasing the underlying
assets, such as entering into futures contracts on the S&P 500 Index or options
on such futures contracts. Derivatives can subject a Fund to various levels of
risk. There are four basic derivative products: forward contracts, futures
contracts, options, and swaps.
Forward contracts commit the parties to a transaction at a time in the future at
a price determined when the transaction is initiated. They are the predominant
means of hedging currency or commodity exposures. Futures contracts are similar
to forwards but differ in that (1) they are traded through regulated exchanges,
and (2) are "marked to market" daily. The Balanced Fund will not engage in
currency transactions.
Options differ from forwards and futures in that the buyer has no obligation to
perform under the contract. The buyer pays a fee, called a premium, to the
seller, who is called a writer. The writer gets to keep the premium in any event
but must deliver (in the context of the type of option) at the buyer's demand.
Caps and floors are specialized options which enable floating-rate borrowers and
lenders to reduce their exposure to interest rate swings for a fee.
A swap is an agreement between two parties to exchange certain financial
instruments or components of financial instruments. Parties may exchange streams
of interest rate payments, principal denominated in two different currencies, or
virtually any payment stream as agreed to by the parties. The Balanced Fund will
not enter into currency swaps.
Derivatives involve special risks. If an Adviser judges market conditions
incorrectly or employs a strategy that does not correlate well with a Fund's
investments, these techniques could result in a loss. These techniques may
increase a Fund's volatility and may involve a small investment of cash relative
to the magnitude of the risk assumed. In addition, these techniques could result
in a loss if the counterparty to the transaction does not perform as promised.
In addition, the use of derivatives for non-hedging purposes (that is, to seek
to increase total return) is considered a speculative practice and presents
even greater risk of loss when these instruments are leveraged.
Temporary Defensive Strategies
Each Fund may take temporary defensive positions that depart from its principal
investment strategies in response to adverse market, economic, political or
other conditions. During these times, a Fund may not be actively pursuing its
investment goals and may have up to 100% of its assets in short-term debt
securities or cash.
OTHER INVESTMENT RISKS
This prospectus describes the main risks an investor faces in any of the Funds.
It is important to keep in mind one of the main principles of investing: The
higher the risk of losing your money, the higher the potential reward. The
reverse is also generally true: The lower the risk, the lower the potential
reward.
Risk tolerances vary among investors.
In addition to the primary risks described in the Fund summaries, all of
the Funds are subject to liquidity risk. This is the risk that a Fund will not
be able to timely pay redemption proceeds because of unusual market conditions,
an unusually high volume of redemption requests, or other reasons.
<PAGE>
Portfolio Turnover
Consistent with its investment policies, a Fund may engage in active trading
without regard to the effect on portfolio turnover. Higher portfolio turnover
(e.g., 100% per year) would cause a Fund to incur additional transaction costs.
MANAGEMENT OF THE FUNDS
Board of Trustees
The Board is responsible for overseeing all operations of the Funds, including
retaining and supervising the performance of the Manager.
Investment Manager
LSA Asset Management LLC, the Manager, located at 3100 Sanders Road, Northbrook,
Illinois, is each Fund's investment adviser. The Manager is a wholly owned
subsidiary of Allstate Life Insurance Company ("Allstate Life"). The Manager was
organized in Delaware in 1999 and is registered with the Securities and Exchange
Commission as an investment adviser. The Funds are the only investment companies
managed by the Manager. Allstate Life, incorporated in 1957 in Illinois, has
established a record of financial strength that has consistently resulted in
superior ratings. A.M. Best Company assigns an A+ (Superior) to Allstate Life.
Standard & Poor's Insurance Rating Services assigns an AA+ (Very Strong)
financial strength rating and Moody's Investors Service, Inc. assigns an Aa2
(Excellent) financial strength rating to Allstate Life.
The Manager has overall responsibility for providing investment advisory and
related services to the Funds, including responsibility for selecting Advisers
to carry out the day to day investment management of the Funds. The Manager will
review and monitor the performance of each Fund for purposes of considering
whether changes should be made in regard to a Fund's investment strategies as
well as whether a change in the Adviser to a Fund is warranted. The Manager will
also monitor the Funds for compliance purposes and will instruct each of the
Advisers as to their compliance duties for their respective Fund.
The Manager considers
various factors in selecting the Advisers, including:
o level of knowledge and skill
o performance as compared to a peer group of other advisers or to an
appropriate index
o consistency of performance over five years or more
o adherence to investment style and Fund objectives
o employees, facilities and financial strength
o quality of service
o how the Adviser's investment style compliments other selected Advisers'
investment styles.
Two or more Advisers may manage a Fund, with each managing a portion of the
Fund's assets. If a Fund has more than one Adviser, the Manager may change these
allocations from time to time, often based upon the results of the Manager's
evaluations of the Advisers.
The Advisers
The Advisers make the day-to-day decisions to buy and sell specific securities
for a Fund. Each Adviser manages a Fund's investments according to the Fund's
investment objectives and strategies.
The Funds and the Manager have applied for an order from the Securities and
Exchange Commission which permits the Manager to hire and fire Advisers or
change the terms of those advisory agreements without obtaining shareholder
approval. The Manager has ultimate responsibility to oversee Advisers and their
hiring, termination and replacement.
Adviser to the Aggressive Equity Fund
Morgan Stanley Asset Management ("MSAM"), 1221 Avenue of the Americas, New York,
New York 10020, is the adviser to the Aggressive Equity Fund. MSAM conducts a
worldwide portfolio management business and provides a broad range of portfolio
management services to customers in the United States and abroad. Morgan Stanley
Dean Witter & Co. is the direct parent of MSAM. Philip W. Freidman and William
S. Auslander are the portfolio managers for the Aggressive Equity Fund, and have
served in that capacity since commencement of the Fund's operations.
Philip W. Friedman is a Managing Director of MSAM and is head of MSAM's
Institutional Equity Group. He has been with MSAM and its affiliates since 1990.
William S. Auslander is a Principal of MSAM and a portfolio manager in the
Institutional Equity Group. He joined MSAM in 1995 as an equity analyst in the
Institutional Equity Group. Prior to joining MSAM, he worked at Icahn & Co. for
nine years as an equity analyst.
On December 1, 1998, Morgan Stanley Asset Management Inc. changed its name to
Morgan Stanley Dean Witter Investment Management Inc., but continues to do
business in certain instances using the name Morgan Stanley Asset Management.
Adviser to the Growth Equity Fund
Goldman Sachs Asset Management ("GSAM"), One New York Plaza, New York, New York
10004, a separate operating division of Goldman, Sachs and Co. ("Goldman
Sachs"), serves as the Adviser to the Growth Equity Fund. Goldman Sachs provides
a wide range of fully discretionary investment advisory services including
quantitatively driven and actively managed U.S. and international equity
portfolios, U.S. and global fixed income portfolios, commodity and currency
products, and money markets. The portfolio management team is led by Herbert E.
Ehlers, Robert G. Collins, and Gregory H. Ekizian, all of whom joined GSAM in
1997. From 1994-1997, Mr. Ehlers, Managing Director, was Chief Investment
Officer and Chairman of Liberty Investment Management, Inc. ("Liberty"). From
1984-1994, Mr. Ehlers was a portfolio manager and President of Liberty's
predecessor firm, Eagle Asset Management ("Eagle"). From 1991-1997, Mr. Collins,
Vice President, was a portfolio manager at Liberty. From 1990-1997, Mr. Ekizian,
Vice President, was a portfolio manager at Liberty and its predecessor firm,
Eagle.
Adviser to the Structured Equity Fund
J.P. Morgan Investment Management Inc. ("JPMIM"), 522 Fifth Avenue, New York,
New York 10036, is the Adviser to the Structured Equity Fund. JPMIM is a
wholly-owned subsidiary of J.P. Morgan &Co. Incorporated. JPMIM manages employee
benefit funds of corporations, labor unions and state and local governments and
the accounts of other institutional investors, including investment companies.
The portfolio management team is led by James C. Wiess and Timothy J. Devlin,
both vice presidents of JPMIM. Mr. Wiess has been at J.P. Morgan since 1992, and
prior to managing the Fund managed other structured equity portfolios for J.P.
Morgan. Mr. Devlin has been at J.P. Morgan since July of 1996, and prior to that
time was an equity portfolio manager at Mitchell Hutchins Asset Management Inc.
Adviser to the Value Equity Fund
Salomon Brothers Asset Management Inc. ("SBAM"), 7 World Trade Center, New York,
New York 10048, is the Adviser to the Value Equity Fund. SBAM is an indirect
wholly-owned subsidiary of Citigroup, Inc. John B. Cunningham, a Vice President
of SBAM from 1995-1998 and a Director of SBAM since 1998, is primarily
responsible for the day-to-day management of the Value Equity Fund. Prior to
1995, Mr. Cunningham was an Associate in the Investment Banking Group of Salomon
Brothers, Inc.
Adviser to the Balanced Fund
OpCap Advisors ("OpCap"), One World Financial Center, New York, New York 10281,
is the Adviser to the Balanced Fund. OpCap is a majority owned subsidiary of
Oppenheimer Capital. Oppenheimer Capital has been an investment advisory firm
since 1969 and has $59.8 billion of assets under management as of March 31,
1999. OpCap has been an investment adviser since 1987. Oppenheimer Capital and
OpCap are indirect, wholly-owned subsidiaries of PIMCO Advisors L.P. ("PIMCO
Advisors"). PIMCO Advisors has two general partners: PIMCO Partners, G.P., a
California general partnership, and PIMCO Advisors Holdings L.P., an NYSE-listed
Delaware limited partnership of which PIMCO Partners, GP is the sole general
partner. Colin Glinsman is the portfolio manager for the Balanced Fund. Mr.
Glinsman is the chief investment officer and a managing director of Oppenheimer
Capital and has been with Oppenheimer Capital since 1989.
Performance of the Advisers
Each Adviser manages assets of numerous client accounts that have investment
objectives and strategies that are similar to those of the corresponding Fund
that they manage. These client accounts consist of individuals, institutions,
and other mutual funds. Listed below is "composite performance" for each Adviser
with regard to all of these similarly managed accounts. Composite performance is
essentially the Adviser's "average" performance with regard to such accounts,
net of fees and expenses. The composite performance information shown below is
based on a composite of all accounts of each Adviser (and its predecessors, if
any) having substantially similar investment objectives, policies and strategies
as the corresponding Fund, adjusted to give effect to the applicable Fund's
estimated annualized expenses (without giving effect to any expense waivers or
reimbursements) during its first fiscal year. This composite data is provided to
illustrate the past performance of the Adviser in managing similar accounts and
does not represent the performance of any Fund. You should not consider this
performance data as an indication of future performance of any Fund or any
Adviser.
<TABLE>
<CAPTION>
------------------- --------- -------- -------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average Average Average
Name of Adviser Total Total Total Annual Annual Annual
Investment Inception Return Return Return Total Total Total
Objective Date One Five Ten Return Return Return
Year Years Years One Five Ten
Ended Ended Ended Years Year Years
12/31/98 12/31/98 12/31/98 Ended Ended Ended
Or From 12/31/98 12/31/98 12/31/98
Inception Or From
Inception
------------------- --------- -------- -------- -------- --------- --------- --------- ---------
------------------- --------- -------- -------- -------- --------- --------- --------- ---------
Morgan Stanley Aggressive
Asset Management Equity
------------------- --------- -------- -------- -------- --------- --------- --------- ---------
------------------- --------- -------- -------- -------- --------- --------- --------- ---------
Goldman Sachs Large
Asset Management Cap
Growth
------------------- --------- -------- -------- -------- --------- --------- --------- ---------
------------------- --------- -------- -------- -------- --------- --------- --------- ---------
J.P. Morgan Structured
Investment Equity
Management Inc.
------------------- --------- -------- -------- -------- --------- --------- --------- ---------
------------------- --------- -------- -------- -------- --------- --------- --------- ---------
Salomon Brothers Large
Asset Management Cap
Inc. Value
------------------- --------- -------- -------- -------- --------- --------- --------- ---------
------------------- --------- -------- -------- -------- --------- --------- --------- ---------
OpCap Advisors Balanced
------------------- --------- -------- -------- -------- --------- --------- --------- ---------
</TABLE>
Valuing a Fund's Assets
A Fund's investments are valued based on market value or, if no market value is
available, based on fair value as determined under guidelines set by the Board.
All assets and liabilities initially expressed in foreign currency values will
be converted into U.S. dollar values.
--All short-term dollar-denominated investments that mature in 60 days or
less are valued on the basis of "amortized" cost which the Board has determined
represents fair value.
--Securities mainly traded on a U.S. exchange are valued at the last sale
price on that exchange or, if no sales occurred during the day, at the current
quoted bid price.
--Securities mainly traded on a non-U.S. exchange are generally valued
according to the preceding closing values on that exchange. However, if an event
which may change the value of a security occurs after that time, the "fair
value" might be adjusted under guidelines set by the Board.
--Securities that are not traded on an exchange and securities for which
market quotations are not readily available will be valued in good faith at fair
value by, or under guidelines established by, the Board.
Pricing of Fund Shares
Each Fund's per share price (also known as "net asset value" or "NAV") is
determined at the close of trading (normally 4:00 p.m., Eastern time) every day
that the New York Stock Exchange (NYSE) is open for business. If the NYSE closes
at any other time, or if an emergency exists, the time at which the NAV is
calculated may differ. Each Fund calculates the price per share based on the
values of the securities it owns. The price per share is calculated separately
for each Fund by dividing the value of a Fund's assets, minus all liabilities,
by the number of the Fund's outstanding shares.
Purchasing and Redeeming Shares
The per share price received will be the price next determined after a Fund
receives and accepts a purchase or redemption order. Payments for redemptions
generally will be made no later than seven days after receipt of a redemption
request, and generally on the date of receipt.
Investors may purchase or redeem shares of the Funds in connection with variable
annuity contracts and variable life insurance policies offered through insurance
company separate accounts. Individuals may not place orders directly with the
Funds. You should refer to the prospectus of your variable insurance contract
for information on how to select specific Funds as investment options for your
contract and how to redeem monies from the Funds.
Orders received by the Funds are effected only on days when the NYSE is open for
trading (Business Days). The insurance company separate accounts purchase and
redeem shares of each Fund at the Fund's net asset value per share calculated as
of the close of the NYSE (generally 4:00 p.m. ET) although purchases and
redemptions may be executed the next morning. Redemption proceeds paid by wire
transfer will normally be wired in federal funds on the next Business Day after
the Fund receives actual notice of the redemption order, but may be paid within
three Business Days after receipt of actual notice of the order (or longer as
permitted by the SEC). The Funds may suspend the right of redemption under
certain extraordinary circumstances in accordance with the rules of the SEC. In
addition, each Fund reserves the right to suspend the offering of its shares for
any period of time, and reserves the right to reject any specific purchase
order. The Funds do not assess any fees when they sell or redeem their shares.
The Funds reserve the right to refuse to sell their shares if the request to
purchase or sell shares is based on market timing decisions as determined by the
Manager.
Transfers
The separate account issuing your variable contract may transfer assets between
the Funds consistent with timely receipt of all information necessary to process
transfer requests. The Funds reserve the right to limit or terminate these
transfer privileges at any time. Transfers may be restricted or refused if a
Fund receives or anticipates receiving transfer orders affecting significant
portions of a Fund's assets and thus possibly resulting in adverse consequences
for investors.
Fees and Expenses
Breakdown of Expenses
Investors in the Funds will incur various operating costs which are described
below. Each Fund pays a management fee for the management of its investments and
business affairs. Each Fund also pays its own operational expenses (see below).
Some of the Funds may engage in active trading to achieve their investment
objectives. As a result, a Fund may incur higher brokerage and other transaction
costs.
Management Fees
The Manager is entitled to receive from each Fund a management fee, payable
quarterly, at an annual rate as a percentage of average daily net assets of the
Fund as set forth in the table below.
<TABLE>
<CAPTION>
----------------------------------------------- ----------------------------------------------
<S> <C>
Aggressive Equity Fund 0.95%
----------------------------------------------- ----------------------------------------------
----------------------------------------------- ----------------------------------------------
Growth Equity Fund 0.85%
----------------------------------------------- ----------------------------------------------
----------------------------------------------- ----------------------------------------------
Structured Equity Fund 0.75%
----------------------------------------------- ----------------------------------------------
----------------------------------------------- ----------------------------------------------
Value Equity Fund 0.85%
----------------------------------------------- ----------------------------------------------
----------------------------------------------- ----------------------------------------------
Balanced Fund 0.85%
----------------------------------------------- ----------------------------------------------
</TABLE>
The Manager compensates the Advisers from the management fee it receives. No
additional management fees are paid by the Funds to the Advisers.
Operational Expenses
Each Fund pays other operational expenses not assumed by the Manager. These
expenses may include, among others, the following: fees for Fund accounting and
Fund administration, fees related to the purchase, sale or loan of securities
such as brokers' commissions; fees of independent accountants and legal counsel;
expenses of preparing and printing shareholder annual and semi-annual reports;
bank transaction charges; custodian fees and expenses; federal, state or local
income or other taxes; independent Trustee compensation; SEC fees; and costs of
Trustee and shareholder meetings.
All of these expenses that are incurred by the Fund will be passed on to
shareholders through a daily charge made to the assets held in the Funds, which
will be reflected in share prices.
The Manager has currently agreed to reduce its fees or reimburse the Funds for
expenses above certain limits. Currently this limit is set so that no Fund will
incur expenses (not including management fees, or fees related to the purchase,
sale or loan of portfolio securities such as brokers' commissions) that exceed
.30% of its assets. These fee reductions or expense reimbursements, which may be
terminated at any time without notice, can decrease a Fund's expenses and
increase its performance.
Additional Fund Information
Tax Information
Shares of the Funds are owned for federal tax purposes by life insurance company
separate accounts established in connection with variable contracts, not by the
owners of these variable contracts. Owners of variable contracts should refer to
the prospectuses for these contracts for a description of the tax consequences
of owning contracts and receiving distributions or other contract related
payments. Each Fund intends to comply with the federal tax diversification and
other federal tax requirements with which it must comply in order for variable
contracts to qualify for the tax treatment described in the applicable variable
contract prospectus. A Fund's failure to comply with these requirements could
cause the holder of a variable contract based on a separate account that
invested in whole or in part in that Fund to be subject to current taxation on
all income on the contract, unless the Internal Revenue Service permits
correction of the failure, which cannot be assured.
Dividends and Other Distributions
Each Fund intends to distribute substantially all of its income and capital
gains each year. All dividend and capital gain distributions will automatically
be reinvested in additional shares of the Funds.
Performance
From time to time, the Funds may advertise yield and total return figures. Yield
is a measure of past dividend income. Total return includes both past dividend
income plus realized and unrealized capital appreciation (or depreciation).
Yield and total return should not be used to predict the future performance of a
Fund. Yields and total returns are presented net of the Funds' operating
expenses. Fund performance information does not reflect any fees or charges
imposed under an insurance contract.
Year 2000 Preparation
Allstate Life is heavily dependent upon complex computer systems for all phases
of its operations, including customer service, and policy and contract
administration. As a wholly-owned subsidiary of Allstate Life, the Manager is
also heavily dependent upon these computer systems in connection with its duties
in regard to the Funds. Since many of Allstate Life's older computer software
programs recognize only the last two digits of the year in any date, some
software may fail to operate properly in or after the year 1999, if the software
is not reprogrammed or replaced ("Year 2000 Issue"). Allstate Life believes that
many of its service providers and suppliers also have Year 2000 Issues which
could adversely affect Allstate Life. In 1995, Allstate Life commenced a plan
intended to mitigate and/or prevent the adverse effects of Year 2000 Issues.
These strategies include normal development and enhancement of new and existing
systems, upgrades to operating systems already covered by maintenance agreements
and modifications to existing systems to make them Year 2000 compliant. The plan
also includes Allstate Life actively working with its major external service
providers and suppliers (including the Advisers and the Funds' other service
providers) to assess their compliance efforts and Allstate Life's exposure to
them. Allstate Life presently believes that it will resolve the Year 2000 Issue
in a timely manner, and that the financial impact will not materially affect its
results of operations, liquidity or financial position. The Manager also
believes that the Year 2000 Issue will not materially harm the Funds or their
shareholders. However, there can be no assurances that the Year 2000 Issue will
not adversely affect the Funds and their shareholders or issuers of securities
purchased by the Funds.
Custodian, Transfer Agent, Fund Accountant and Administrator
Investors Bank & Trust Company is the custodian, transfer agent, and fund
accountant and administrator.
Other Information
The Statement of Additional Information (SAI) provides more detailed information
about the Funds and is legally considered to be a part of this prospectus. The
Funds' annual and semi-annual reports provide additional information about the
Funds' investments. The annual report includes a discussion of the market
conditions and investment strategies that significantly affected a Fund's
performance during its last fiscal year. Copies of the SAI, the annual and
semi-annual reports, and other information may be obtained, at no cost, by
contacting the Manager at _________________. Questions pertaining to the Funds
may also be directed to _________________.
Information can also be reviewed and copied at the Public Reference Room of the
Securities and Exchange Commission in Washington, D.C. For a fee, text-only
copies can be obtained by writing to the Public Reference Room of the SEC,
Washington, D.C. 20549-6009. You can also call 1-800-SEC-0330. Additionally,
information about the Funds can be obtained on the SEC's Internet website at
http://www.sec.gov.
<PAGE>
PART B
LSA VARIABLE SERIES TRUST
Aggressive Equity Fund
Growth Equity Fund
Equity Fund
Value Equity Fund
Balanced Fund
STATEMENT OF ADDITIONAL INFORMATION
October __, 1999
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the current Prospectus dated October , 1999 of the
Funds. To obtain the Prospectus please contact LSA Asset Management LLC (the
"Manager"), a wholly-owned subsidiary of Allstate Life Insurance Company
("Allstate Life") at 3100 Sanders Road, Suite J5B, Northbrook, Illinois 60062 or
call 1-800-XXX-XXXX. This Statement of Additional Information is intended to
provide additional information about the activities and operations of the Funds
and should be read in conjunction with the Prospectus.
You can review the Funds' Prospectus as well as other reports relating to
the Funds at the Public Reference Room of the Securities and Exchange Commission
("SEC").
You can get text-only copies:
For a fee by writing to or calling the Public Reference Room of the SEC,
Washington, D.C. 20549-6009. Telephone: 1-800-SEC-0330. Free from the
SEC's Internet website at http://www.sec.gov.
<PAGE>
TABLE OF CONTENTS PAGE
- ----------------- ----
The Trust and the Funds B -
Investment Objectives and Policies B -
Board of Trustees B -
Capital Structure B -
Control Persons B -
Investment Management Arrangements B -
Fund Expenses B -
Portfolio Transactions and Brokerage B -
Determination of Net Asset Value B -
Purchase and Redemption of Shares B -
Suspension of Redemptions and Postponement
of Payments B -
Investment Performance B -
Taxes B -
Custodian and Transfer Agent Services B -
Administrator and Accounting Agent B -
Independent Public Accountants B -
Financial Statements B -
Appendix A B -
<PAGE>
THE TRUST AND THE FUNDS
LSA Variable Series Trust (the "Trust") presently consists of five
portfolios: the Aggressive Equity Fund, the Growth Equity Fund, the Structured
Equity Fund, the Value Equity Fund, and the Balanced Fund (each referred to as a
"Fund" and together as the "Funds"). The Trust is registered as an open-end,
management investment company under the Investment Company Act of 1940 ("1940
Act"). The Trust was formed as a Delaware business trust on March 2, 1999.
Shares of the Funds are sold exclusively to insurance company separate accounts
as a funding vehicle for variable life and/or variable annuity contracts,
including separate accounts of Allstate Life and its subsidiaries.
LSA Asset Management LLC (the "Manager") is a wholly-owned subsidiary of
Allstate Life and is the investment manager of each Fund. The specific
investments of each Fund are managed on a day-to-day basis by investment
advisers selected by the Manager who are called the "Advisers".
INVESTMENT OBJECTIVES AND POLICIES
A. Fundamental Restrictions of the Funds
Each Fund has adopted the following fundamental investment restrictions
which may not be changed without approval of a majority of the applicable Fund's
outstanding voting securities. Under the 1940 Act, a "majority of the
outstanding voting securities" means the approval of the lesser of (1) the
holders of 67% or more of the shares of a Fund represented at a meeting if the
holders of more than 50% of the outstanding shares of the Fund are present in
person or by proxy or (2) the holders of more than 50% of the outstanding shares
of the Fund. Those investment policies that are not fundamental investment
restrictions may be changed by the Board of Trustees of the Trust (the "Board")
without a shareholder vote under the 1940 Act. In addition, each Fund's
investment objective may be changed without a shareholder vote.
Each Fund may not:
1. Issue senior securities. For purposes of this restriction, the
issuance of shares of common stock in multiple classes or series, obtaining of
short-term credits as may be necessary for the clearance of purchases and sales
of portfolio securities, short sales against the box, the purchase or sale of
permissible options and futures transactions (and the use of initial and
maintenance margin arrangements with respect to futures contracts or related
options transactions), the purchase or sale of securities on a when issued or
delayed delivery basis, permissible borrowings entered into in accordance with a
Fund's investment policies, and reverse repurchase agreements are not deemed to
be issuances of senior securities.
2. Borrow money, except from banks and then only if immediately after
each such borrowing there is asset coverage of at least 300% (including the
amount borrowed) as defined in the 1940 Act. For purposes of this investment
restriction, reverse repurchase agreements, mortgage dollar rolls, short sales,
futures contracts, options on futures contracts, securities or indices, when
issued and delayed delivery transactions and securities lending shall not
constitute borrowing for purposes of this limitation to the extent they are
covered by a segregated account consisting of appropriate liquid assets or by an
offsetting position.
3. Act as an underwriter, except to the extent that in connection with
the disposition of portfolio securities a Fund may be deemed to be an
underwriter for purposes of the Securities Act of 1933 (the "1933 Act").
4. Purchase or sell real estate, except that a Fund may (i) acquire or
lease office space for its own use, (ii) invest in securities of issuers that
invest in real estate or interests therein, (e.g., real estate investment
trusts), (iii) invest in securities that are secured by real estate or interests
therein, (iv) purchase and sell mortgage-related securities, (v) hold and sell
real estate acquired by the Fund as a result of the ownership of securities and
(vi) invest in real estate limited partnerships.
5. Invest in commodities, except that a Fund may (i) invest in
securities of issuers that invest in commodities, and (ii) engage in permissible
options and futures transactions and forward foreign currency contracts, entered
into in accordance with the Fund's investment policies.
6. Make loans, except that a Fund may (i) lend portfolio securities in
accordance with the Fund's investment policies in amounts up to 33 1/3% of the
Fund's total assets (including collateral received) taken at market value, (ii)
enter into fully collateralized repurchase agreements, and (iii) purchase debt
obligations in which the Fund may invest consistent with its investment
policies.
7. Purchase the securities of any issuer (other than obligations issued
or guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the Fund's total assets
would be invested in the securities of companies whose principal business
activities are in the same industry, except that this limitation does not apply
to the Aggressive Equity Fund.
In addition, each Fund, except the Aggressive Equity Fund, will operate
as a "diversified" fund within the meaning of the 1940 Act. This means that with
respect to 75% of a Fund's total assets, a Fund will not purchase securities of
an issuer (other than cash, cash items or securities issued or guaranteed by the
U.S. government, its agencies, instrumentalities or authorities), if
o such purchase would cause more than 5% of the Fund's total assets
taken at market value to be invested in the securities of such issuer; or
o such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the Fund.
If a percentage restriction on investment or utilization of assets as
set forth above is adhered to at the time an investment is made, a later change
in percentage resulting from changes in the values of a Fund's assets will not
be considered a violation of the restriction; provided, however, that the asset
coverage requirement applicable to borrowings under Section 18(f)(1) of the 1940
Act shall be maintained in the manner contemplated by that Section.
B. Miscellaneous Investment Practices
The following discussion provides additional information about the types
of securities which may be purchased by one or more of the Funds, including
information about risk factors. An investor in a Fund would be exposed to all of
the investment risks associated with the securities purchased by that Fund.
Therefore, these risks should be considered carefully by all prospective
investors. In addition, due to the myriad of factors that affect investment
results, it is not possible to identify every possible risk factor.
All investment limitations that are expressed as a percentage of a
Fund's assets are applied as of the time a Fund purchases a particular security,
except those limitations relating to a Fund's asset coverage requirements
applicable to certain borrowings under Section 18 of the 1940 Act. Not all Funds
will necessarily engage in all of the strategies discussed below, even where it
is permissible for a Fund to do so.
Money Market Instruments and Temporary Investment Strategies
The Funds may hold cash items and invest in money market instruments
under appropriate circumstances as determined by the Manager or the Advisers.
Each Fund may invest up to 100% of its assets in cash or money market
instruments for temporary defensive purposes.
Money market instruments include (but are not limited to): (1) banker's
acceptances; (2) obligations of governments (whether U.S. or non-U.S.) and their
agencies and instrumentalities; (3) short-term corporate obligations, including
commercial paper, notes, and bonds; (4) other short-term debt obligations; (5)
obligations of U.S. banks, non-U.S. branches of U.S. banks (Eurodollars), U.S.
branches and agencies of non-U.S. banks (Yankee dollars), and non-U.S. branches
of non-U.S. banks; (6) asset-backed securities; and (7) repurchase agreements.
Money market instruments are subject, to a limited extent, to credit
risk, which is the possibility that the issuer of a security will fail to repay
interest and principal in a timely manner. Eurodollar and Yankee obligations
have the same risks, such as income risk and credit risk, as U.S. money market
instruments. Other risks of Eurodollar and Yankee obligations include the
possibility that a foreign government will not let U.S. dollar-denominated
assets leave the country; the possibility that the banks that issue Eurodollar
obligations may not be subject to the same regulations as U.S. banks; and the
possibility that adverse political or economic developments will affect
investments in a foreign country.
Certificates of Deposit and Bankers' Acceptances
Certificates of deposit are receipts issued by a depository institution
in exchange for the deposit of funds. The issuer agrees to pay the amount
deposited plus interest to the bearer of the receipt on the date specified on
the certificate. The certificate usually can be traded in the secondary market
prior to maturity. Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Repurchase Agreements
Each Fund is permitted to enter into fully collateralized repurchase
agreements. The Funds' Board has established standards for evaluation of the
creditworthiness of the banks and securities dealers with which the Funds may
engage in repurchase agreements. The Board also monitors on a quarterly basis
the Advisers' compliance with such standards. The Fund will enter into
repurchase agreements only with banks and broker/dealers believed by the Manager
to present minimal credit risks in accordance with guidelines approved by the
Board of Trustees and in consultation with the Advisers. The Manager will review
and monitor the creditworthiness of such institutions, and will consider the
capitalization of the institution, any rating of the institution or its debt by
independent rating agencies and other relevant factors.
A repurchase agreement is an agreement by which the seller of a security
agrees to repurchase the security sold to a Fund at a mutually agreed upon time
and price. It may also be viewed as the loan of money by a Fund to the seller of
the security. The resale price would be in excess of the purchase price,
reflecting an agreed upon market interest rate.
The Advisers will monitor such transactions to ensure that the value of
underlying collateral will be at least equal at all times to the total amount of
the repurchase obligation, including the accrued interest. If the seller
defaults, the Fund could realize a loss on the sale of the underlying security
to the extent that the proceeds of sale, including accrued interest, are less
than the resale price (including interest).
Further, a Fund could experience delays in liquidating the underlying
securities while it enforces its rights to the collateral, below normal levels
of income, decline in value of the underlying securities or a lack of access to
income during this period. A Fund may also incur unanticipated expenses
associated with enforcing its rights in connection with a repurchase agreement
transaction.
The Growth Equity Fund may, together with other registered investment
companies managed by GSAM or its affiliates, transfer uninvested cash balances
into a single joint account, the daily aggregate balance of which will be
invested in one or more repurchase agreements. Similarly, the Aggressive Equity
Fund may, together with other registered investment companies managed by MSAM or
its affiliates, transfer uninvested cash balances into a single joint account,
the daily aggregate balance of which will be invested in one or more repurchase
agreements.
Reverse Repurchase Agreements
Each Fund, except the Growth Equity Fund, may enter into reverse
repurchase agreements. Reverse repurchase agreements involve sales by a Fund of
portfolio assets concurrently with an agreement by a Fund to repurchase the same
assets at a later date at a fixed price. Reverse repurchase agreements carry the
risk that the market value of the securities which a Fund is obligated to
repurchase may decline below the repurchase price. A reverse repurchase
agreement is viewed as a collateralized borrowing by a Fund. Borrowing magnifies
the potential for gain or loss on the portfolio securities of a Fund and,
therefore, increases the possibility of fluctuation in a Fund's net asset value.
A Fund will establish a segregated account with its custodian bank in which the
Fund will maintain liquid assets equal in value to a Fund's obligations in
respect of any reverse repurchase agreements.
Debt Securities
Each Fund is permitted to invest in debt securities including: (1)
securities issued or guaranteed as to principal or interest by the U.S.
Government, its agencies or instrumentalities; (2) non-convertible debt
securities issued or guaranteed by U.S. corporations or other issuers (including
foreign governments or corporations); (3) asset-backed securities; (4)
mortgage-related securities, including collateralized mortgage obligations
("CMO's"); and (5) securities issued or guaranteed as to principal or interest
by a sovereign government or one of its agencies or political subdivisions,
supranational entities such as development banks, non-U.S. corporations, banks
or bank holding companies, or other non-U.S. issuers. Debt securities may be
classified as investment grade debt securities and non-investment grade debt
securities.
Investment Grade Debt Securities
Each Fund is permitted under its investment policies to invest in debt
securities rated within the four highest rating categories (i.e., Aaa, Aa, A or
Baa by Moody's or AAA, AA, A or BBB by S&P) (or, if unrated, securities of
comparable quality as determined by an Adviser). These securities are generally
referred to as "investment grade securities." Each rating category has within it
different gradations or sub-categories. If a Fund is authorized to invest in a
certain rating category, the Fund is also permitted to invest in any of the
sub-categories or gradations within that rating category. If a security is
downgraded to a rating category which does not qualify for investment, the
Adviser will use its discretion in determining whether to hold or sell based
upon its opinion on the best method to maximize value for shareholders over the
long term. Debt securities carrying the fourth highest rating (i.e., "Baa" by
Moody's and "BBB" by S&P), and unrated securities of comparable quality (as
determined by an Adviser) are viewed to have adequate capacity for payment of
principal and interest, but do involve a higher degree of risk than that
associated with investments in debt securities in the higher rating categories
and such securities lack outstanding investment characteristics and do have
speculative characteristics. Ratings made available by S&P and Moody's are
relative and subjective and are not absolute standards of quality. Although
these ratings are initial criteria for selection of portfolio investments, an
Adviser also will make its own evaluation of these securities. Among the factors
that will be considered are the long-term ability of the issuers to pay
principal and interest and general economic trends.
Below Investment Grade Debt Securities
Securities rated below investment grade are commonly referred to as
"high yield-high risk securities" or "junk bonds". Each rating category has
within it different gradations or sub-categories. For instance the "Ba" rating
for Moody's includes "Ba3", "Ba2" and "Ba1". Likewise the S&P rating category of
"BB" includes "BB+", "BB" and "BB-". See Appendix A for a description of the
ratings of the ratings services. If a Fund is authorized to invest in a certain
rating category, the Fund is also permitted to invest in any of the
sub-categories or gradations within that rating category. Securities in the
highest category below investment grade are considered to be of poor standing
and predominantly speculative. These securities are considered speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations. Accordingly, it is possible that
these types of factors could, in certain instances, reduce the value of
securities held by a Fund with a commensurate effect on the value of a Fund's
shares. If a security is downgraded, the Adviser will use its discretion in
determining whether to hold or sell based upon its opinion on the best method to
maximize value for shareholders over the long term.
The Value Equity Fund has no limit on the amount of assets it may invest
in non-investment grade convertible debt securities; it may invest up to 5% in
non-investment grade, non-convertible debt securities and does not expect to
invest more than 10% of total assets in non-investment grade securities of any
type.
The Structured Equity Fund and the Aggressive Equity Fund may each
invest up to 10% of total assets in non-investment grade convertible debt
securities.
The Balanced Fund may invest up to 25% of its total assets in below
investment grade debt securities.
The Growth Equity Fund may invest up to 10% of its assets in below
investment grade debt securities.
Junk bonds pay higher interest yields in an attempt to attract
investors. Junk bonds may be issued by small, less-seasoned companies, or by
larger companies as part of a corporate restructuring such as a merger,
acquisition or leveraged buy out. However, junk bonds have special risks that
make them riskier investments than investment-grade securities. They may be
subject to greater market fluctuations and risk of loss of income and principal
than lower-yielding, investment-grade securities. There may be less of a market
for them and therefore they may be harder to sell at an acceptable price. There
is a relatively greater possibility that the issuer's earnings may be
insufficient to make the payments of interest due on the bonds. The issuers' low
creditworthiness may increase the potential for its insolvency.
These risks mean that the Funds investing in junk bonds may not achieve
the expected income from lower-grade securities, and that the net asset value
per share of such Funds may be affected by declines in the value of these
securities. However, the Funds' limitations on investing in junk bonds may
reduce some of these risks.
The market value of certain of these securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher quality bonds. In addition, medium and lower rated
securities and comparable unrated securities generally present a higher degree
of credit risk. The risk of loss due to default by these issuers is
significantly greater because medium and lower rated securities and unrated
securities of comparable quality generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness.
Mortgage-Related Securities
Each Fund (other than the Structured Equity Fund) may invest in pools of
mortgage loans made by lenders such as savings and loan institutions, mortgage
bankers, commercial banks and others and in other types of mortgages backed
securities. Pools of mortgage loans are assembled for sale to investors (such as
the Funds) by various governmental, government-related and private
organizations. A Fund may also invest in similar mortgage-related securities
which provide funds for multi-family residences or commercial real estate
properties.
In general, there are several risks associated with mortgage-related
securities. One is the risk that the monthly cash inflow from the underlying
loan may be insufficient to meet the monthly payment requirements of the
mortgage-related security.
Prepayment of principal by mortgagors or mortgage foreclosures will
shorten the term of the underlying mortgage pool for a mortgage-related
security. Early returns of principal will affect the average life of the
mortgage-related securities remaining in a Fund. The occurrence of mortgage
prepayments is affected by factors including the level of interest rates,
general economic conditions, the location and age of the mortgage and other
social and demographic conditions. In periods of rising interest rates, the rate
of prepayment tends to decrease, thereby lengthening the average life of a pool
of mortgage-related securities. Conversely, in periods of falling interest rates
the rate of prepayment tends to increase, thereby shortening the average life of
a pool. Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yield of a Fund. Because
prepayments of principal generally occur when interest rates are declining, it
is likely that a Fund will have to reinvest the proceeds of prepayments at lower
interest rates than those at which the assets were previously invested. If this
occurs, a Fund's yield will correspondingly decline. Thus, mortgage-related
securities may have less potential for capital appreciation in periods of
falling interest rates than other fixed-income securities of comparable
maturity, although these securities may have a comparable risk of decline in
market value in periods of rising interest rates. To the extent that a Fund
purchases mortgage-related securities at a premium, unscheduled prepayments,
which are made at par, will result in a loss equal to any unamortized premium.
Collateralized Mortgage Obligations ("CMOs") are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
a Fund invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities.
Mortgage-related securities may not be readily marketable. To the extent
any of these securities are not readily marketable in the judgment of the
Adviser, the investment restriction limiting a Fund's investment in illiquid
investments to not more than 15% of the value of its net assets is applicable.
See Illiquid Securities herein.
The value of these securities may be significantly affected by interest
rates, the market's perception of the issuers and the creditworthiness of the
parties involved. These securities may also be subject to prepayment risk which
is the risk that prepayments of the underlying mortgages may shorten the life of
the investment, adversely affecting yield to maturity. The yield characteristics
of the mortgage securities differ from those of traditional debt securities.
Among the major differences are that interest and principal payments are made
more frequently on mortgage securities, usually monthly, and that principal may
be prepaid at any time because the underlying mortgage loans or other assets
generally permit prepayment at any time. Evaluation of the risks associated with
prepayment and determination of the rate at which prepayment will occur, is
influenced by a variety of economic, geographic, demographic, social and other
factors including interest rate levels, changes in housing needs, net equity
built by mortgagors in the mortgaged properties, job transfers, and unemployment
rates. If a Fund purchases these securities 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. Conversely, if a Fund purchases these securities at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will reduce yield to maturity. Amounts available for reinvestment
are likely to be greater during a period of declining interest rates and, as a
result, are likely to be reinvested at lower interest rates than during a period
of rising interest rates. Accelerated prepayments on securities purchased by a
Fund at a premium also impose a risk of loss of principal because the premium
may not have been fully amortized at the time the principal is repaid in full.
Mortgage securities differ from conventional bonds in that principal is
paid back over the life of the mortgage securities rather than at maturity. As a
result, the holder of the mortgage securities (i.e., a Fund) receives monthly
scheduled payments of principal and interest, and may receive unscheduled
principal payments representing prepayments on the underlying mortgages. As
noted, the mortgage loans underlying mortgage-backed securities are generally
subject to a greater rate of principal prepayments in a declining interest rate
environment and to a lesser rate of principal prepayments in an increasing
interest rate environment. Under certain interest and prepayment scenarios, a
Fund may fail to recover the full amount of its investment in mortgaged-backed
securities notwithstanding any direct or indirect governmental or agency
guarantee. Since faster than expected prepayments must usually be invested in
lower yielding securities, mortgage-backed securities are less effective than
conventional bonds or types of U.S. government securities in "locking in" a
specified interest rate.
REITs are pooled investment vehicles that invest primarily in either
real estate or real estate related loans. The value of a REIT is affected by
changes in the value of the properties owned by the REIT or securing mortgage
loans held by the REIT. REITs are dependent upon the ability of the REITs'
managers, and are subject to heavy cash flow dependency, default by borrowers
and the qualification of the REITs under applicable regulatory requirements for
favorable income tax treatment. REITs are also subject to risks generally
associated with investments in real estate including possible declines in the
value of real estate, adverse general and local economic conditions,
environmental problems and changes in interest rates. To the extent that assets
underlying a REIT are concentrated geographically by property type or in certain
other respects, these risks may be heightened. A Fund that invests in a REIT
will indirectly bear its proportionate share of any expenses, including
management fees, paid by a REIT in which it invests.
Asset-Backed Securities
Each Fund (other than the Structured Equity Fund) may invest in
asset-backed securities. The securitization techniques used for asset-backed
securities are similar to those used for mortgage-related securities. The
collateral for these securities has included home equity loans, automobile and
credit card receivables, boat loans, computer leases, airplane leases, mobile
home loans, recreational vehicle loans and hospital accounts receivables. The
Funds may invest in these and other types of asset-backed securities that may be
developed in the future. These securities may be subject to the risk of
prepayment or default. The ability of an issuer of asset-backed securities to
enforce its security interest in the underlying securities may be limited.
Asset-backed securities entail certain risks not presented by
mortgage-backed securities. The collateral underlying asset-backed securities
may entail features that make them less effective as security for payments than
real estate collateral. Debtors may have the right to set off certain amounts
owed on the credit cards or other obligations underlying the asset-backed
security, such as credit card receivables, or the debt holder may not have a
first (or proper) security interest in all of the obligations backing the
receivable because of the nature of the receivable or state or federal laws
granting protection to the debtor. Certain collateral may be difficult to locate
in the event of default, and recoveries on depreciated or damaged collateral may
not support payments on these securities.
Equity Securities
Each Fund may invest in equity securities which include common stocks,
preferred stocks (including convertible preferred stock) and rights to acquire
such securities (such as warrants). In addition, the Funds may invest in
securities such as bonds, debentures and corporate notes which are convertible
into common stock at the option of the holder. These convertible debt securities
are considered equity securities for purposes of the Funds' investment policies
and limitations. Generally, the Funds' equity securities will consist mostly of
common stocks.
The value of a company's stock may fall as a result of factors which
directly relate to that company, such as lower demand for the company's products
or services or poor management decisions. A stock's value may also fall because
of economic conditions which affect many companies, such as increases in
production costs. The value of a company's stock may also be affected by changes
in financial market conditions that are not directly related to the company or
its industry, such as changes in interest rates or currency exchange rates. In
addition, a company's stock generally pays dividends only after the company
makes required payments to holders of its bonds and other debt. For this reason,
the value of the stock will usually react more strongly than the bonds and other
debt to actual or perceived changes in the company's financial condition or
progress.
Warrants
The Funds may invest in warrants, which are certificates that give the
holder the right to buy a specific number of shares of a company's stocks at a
stipulated price within a certain time limit (generally, two or more years).
Because a warrant does not carry with it the right to dividends or voting rights
with respect to the securities which it entitles a holder to purchase, and
because it does not represent any rights in the assets of the issuer, warrants
may be considered more speculative than certain other types of investments.
Also, the value of a warrant does not necessarily change in tandem with the
value of the underlying securities, and a warrant ceases to have value if it is
not exercised prior to its expiration date.
Small Capitalization Securities
Each Fund may invest in equity securities (including securities issued
in initial public offerings) of companies with market capitalizations within the
range represented by the Russell 2000 Index ("Small Capitalization Securities").
Because the issuers of Small Capitalization Securities tend to be smaller or
less well-established companies, they may have limited product lines, market
share or financial resources and may have less historical data with respect to
operations and management. As a result, Small Capitalization Securities are
often less marketable and experience a higher level of price volatility than
securities of larger or more well-established companies. In addition, companies
whose securities are offered in initial public offerings may be more dependent
on a limited number of key employees. Because securities issued in initial
public offerings are being offered to the public for the first time, the market
for such securities may be inefficient and less liquid.
Non-U.S. Securities
Each Fund is permitted to invest a portion of its assets in non-U.S.
securities, including American Depositary Receipts ("ADRs") and Global
Depositary Receipts ("GDRs") and other similar types of instruments. ADRs are
certificates issued by a U.S. bank or trust company and represent the right to
receive securities of a non-U.S. issuer deposited in a domestic bank or non-U.S.
branch of a U.S. bank. ADRs are traded on a U.S. securities exchange, or in an
over-the-counter market, and are denominated in U.S. dollars. GDRs are
certificates issued globally and evidence a similar ownership arrangement. GDRs
are traded on non-U.S. securities exchanges and are denominated in non-U.S.
currencies. The value of an ADR or a GDR will fluctuate with the value of the
underlying security, will reflect any changes in exchange rates and otherwise
will involve risks associated with investing in non-U.S. securities. When
selecting securities of non-U.S. issuers, the Manager or the respective Adviser
will evaluate the economic and political climate and the principal securities
markets of the country in which an issuer is located.
Investing in securities issued by non-U.S. issuers involves
considerations and potential risks not typically associated with investing in
obligations issued by U.S. issuers. Less information may be available about
non-U.S. issuers compared with U.S. issuers. For example, non-U.S. companies
generally are not subject to uniform accounting, auditing and financial
reporting standards or to other regulatory practices and requirements comparable
to those applicable to U.S. companies. In addition, the values of non-U.S.
securities are affected by changes in currency rates or exchange control
regulations, restrictions or prohibitions on the repatriation of non-U.S.
currencies, application of non-U.S. tax laws, including withholding taxes,
changes in governmental administration or economic or monetary policy (in the
U.S. or outside the U.S.) or changed circumstances in dealings between nations.
Costs are also incurred in connection with conversions between various
currencies.
Investing in non-U.S. sovereign debt will expose a Fund to the direct or
indirect consequences of political, social or economic changes in the countries
that issue the securities. The ability and willingness of sovereign obligors in
developing and emerging countries or the governmental authorities that control
repayment of their external debt to pay principal and interest on such debt when
due may depend on general economic and political conditions with the relevant
country. Many foreign countries have historically experienced, and may continue
to experience, high rates of inflation, high interest rates, exchange rate trade
difficulties and unemployment. Many foreign countries are also characterized by
political uncertainty or instability. Additional factors which may influence the
ability or willingness to service debt include, but are not limited to, a
country's cash flow situation, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of its debt service burden to
the economy as a whole, and its government's policy towards the International
Monetary Fund, the World Bank and other international agencies.
From time to time, a Fund may invest in securities of issuers located in
emerging countries. Compared to the United States and other developed countries,
developing countries may have relatively unstable governments, economies based
on only a few industries, and securities markets that are less liquid and trade
a small number of securities. Prices on these exchanges tend to be volatile and,
in the past, securities in these countries have offered greater potential for
gain (as well as loss) than securities of companies located in developed
countries.
"Emerging markets" are located in the Asia-Pacific region, Eastern
Europe, Latin and South America and Africa. Security prices in these markets can
be significantly more volatile than in more developed countries, reflecting the
greater uncertainties of investing in less established markets and economies.
Political, legal and economic structures in many of these emerging market
countries may be undergoing significant evolution and rapid development, and
they may lack the social, political, legal and economic stability
characteristics of more developed countries. Emerging market countries may have
failed in the past to recognize private property rights. They may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions on repatriation
of assets, and may have less protection of property rights than more developed
countries. Their economies may be predominantly based on only a few industries,
may be highly vulnerable to changes in local or global trade conditions, and may
suffer from extreme and volatile debt burdens or inflation rates. Local
securities markets may trade a small number of securities and may be unable to
respond effectively to increases in trading volume, potentially making prompt
liquidation of substantial holdings difficult or impossible at times. A Fund may
be required to establish special custodian or other arrangements before making
investments in securities of issuers located in emerging market countries.
Securities of issuers located in these countries may have limited marketability
and may be subject to more abrupt or erratic price movements.
Currency Transactions
A Fund may engage in currency transactions to hedge the value of
portfolio securities denominated in particular currencies against fluctuations
in relative value. Currency transactions include forward currency contracts,
currency swaps, exchange-listed and over-the-counter ("OTC") currency futures
contracts and options thereon, and exchange listed and OTC options on
currencies.
Forward currency contracts involve a privately negotiated obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. Currency swaps are agreements to exchange
cash flows based on the notional difference between or among two or more
currencies. See "Swap Agreements."
A Fund may enter into currency transactions only with counterparties
deemed creditworthy by the Manager under standards established by the Board and
the Manager and in consultation with the Advisers.
A Fund may also enter into options and futures contracts relative to a
foreign currency to hedge against fluctuations in foreign currency rates. The
use of forward currency transactions and options and futures contracts relative
to a foreign currency to protect the value of a Fund's assets against a decline
in the value of a currency does not eliminate potential losses arising from
fluctuations in the value of a Fund's underlying securities. A Fund may, to the
extent it invests in foreign securities, purchase or sell foreign currencies on
a spot basis and may also purchase or sell forward foreign currency exchange
contracts for hedging purposes and to seek to protect against anticipated
changes in future foreign currency exchange rates. If a Fund enters into a
forward foreign currency exchange contract to buy foreign currency, the Fund
will segregate cash or liquid assets in an amount equal to the value of the
Fund's total assets committed to the consummation of the forward contract, or
otherwise cover its position in a manner permitted by the SEC.
A Fund would incur costs in connection with conversions between various
currencies. A Fund may hold foreign currency received in connection with
investments in foreign securities when, in the judgment of the Adviser, it would
be beneficial to convert such currency into U.S. dollars at a later date, based
on anticipated changes in the relevant exchange rate. See "Options and Futures
Contracts" for a discussion of risk factors relating to foreign currency
transactions including options and futures contracts related thereto.
Options and Futures Contracts
In seeking to protect against the effect of changes in equity market
values, currency exchange rates or interest rates that are adverse to the
present or prospective position of the Funds, and for cash flow management, a
Fund may employ certain hedging and risk management techniques. These techniques
include the purchase and sale of options, futures and options on futures
involving equity and debt securities and foreign currencies, aggregates of
equity and debt securities, indices of prices of equity and debt securities and
other financial indices. Although these hedging transactions are intended to
minimize the risk of loss due to a decline in the value of the hedged security,
asset class or currency, certain of them may limit any potential gain that might
be realized should the value of the hedged security increase. A Fund may engage
in these types of transactions for the purpose of enhancing returns. The use of
options can also increase a Fund's transaction costs.
The techniques described herein will not always be available to the
Funds, and it may not always be feasible for a Fund to use these techniques even
where they are available. For example, the cost of entering into these types of
transactions may be prohibitive in some situations. In addition, a Fund's
ability to engage in these transactions may also be limited by tax
considerations and certain other legal considerations.
A Fund may write covered call options and purchase put and call options
on individual securities as a partial hedge against an adverse movement in the
security and in circumstances consistent with the objective and policies of the
Fund. This strategy limits potential capital appreciation in the portfolio
securities subject to the put or call option.
The Funds may also write covered put and call options and purchase put
and call options on foreign currencies to hedge against the risk of foreign
exchange fluctuations on foreign securities the particular Fund holds in its
portfolio or that it intends to purchase. For example, if a Fund enters into a
contract to purchase securities denominated in foreign currency, it could
effectively establish 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, the Fund could hedge against
such a decline by purchasing a put option on the foreign currency involved.
In addition, a Fund may purchase put and call options and write covered
put and call options on aggregates of equity and debt securities, and may enter
into futures contracts and options thereon for the purchase or sale of
aggregates of equity and debt securities, indices of equity and debt securities
and other financial indices. Aggregates are composites of equity or debt
securities that are not tied to a commonly known index. An index is a measure of
the value of a group of securities or other interests. An index assigns relative
values to the securities included in that index, and the index fluctuates with
changes in the market value of those securities.
A Fund may write covered options only. "Covered" means that, so long as
a Fund is obligated as the writer of a call option on particular securities or
currency, it (1) will own either the underlying securities or currency or an
option to purchase the same underlying securities or currency having an
expiration date not earlier than the expiration date of the covered option and
an exercise price equal to or less than the exercise price of the covered
option, or (2) will establish or maintain with its custodian for the term of the
option a segregated account consisting of liquid assets. A Fund will cover any
put option it writes on particular securities or currency by maintaining a
segregated account with its custodian as described above.
To hedge against fluctuations in currency exchange rates, a Fund may
purchase or sell foreign currency futures contracts, and write put and call
options and purchase put and call options on such futures contracts. For
example, a Fund may use foreign currency futures contracts when it anticipates a
general weakening of the foreign currency exchange rate that could adversely
affect the market values of the Fund's foreign securities holdings. In this
case, the sale of futures contracts on the underlying currency may reduce the
risk of a reduction in market value caused by foreign currency variations. This
provides an alternative to the liquidation of securities positions in the Fund
and resulting transaction costs. When the Fund anticipates a significant foreign
exchange rate increase while intending to invest in a non-U.S. security, the
Fund may purchase a foreign currency futures contract to hedge against a rise in
foreign exchange rates pending completion of the anticipated transaction. Such a
purchase of a futures contract would serve as a temporary measure to protect the
Fund against any rise in the foreign exchange rate that may add additional costs
to acquiring the non-U.S. security position. The Fund similarly may use futures
contracts on equity and debt securities to hedge against fluctuations in the
value of securities it owns or expects to acquire or to increase or decrease
equity exposure in managing cash flows.
The Funds also may purchase call or put options on foreign currency
futures contracts to obtain a fixed foreign exchange rate at limited risk. A
Fund may purchase a call option on a foreign currency futures contract to hedge
against a rise in the foreign exchange rate while intending to invest in a
non-U.S. security of the same currency. A Fund may purchase put options on
foreign currency futures contracts to hedge against a decline in the foreign
exchange rate or the value of its non-U.S. securities. A Fund may write a
covered call option on a foreign currency futures contract as a partial hedge
against the effects of declining foreign exchange rates on the value of non-U.S.
securities.
Options on indexes are settled in cash, not in delivery of securities.
The exercising holder of an index option receives, instead of a security, cash
equal to the difference between the closing price of the securities index and
the exercise price of the option. When a Fund writes a covered option on an
index, a Fund will be required to deposit and maintain liquid assets with a
custodian equal in value to the aggregate exercise price of a put or call option
pursuant to the requirements and the rules of the applicable exchange. If, at
the close of business on any day, the market value of the deposited securities
falls below the contract price, the Fund will deposit with the custodian
additional liquid assets equal in value to the deficiency.
Each Fund may purchase and sell futures contracts, and purchase and
write call and put options an futures contracts, in order to seek to increase
total return or to hedge against changes in interest rates, securities prices
or, to the extent a Fund invests in foreign securities, currency exchange rates,
or to otherwise manage their term structures, sector selection and durations in
accordance with their investment objectives and policies.
To the extent that a Fund enters into futures contracts, options on
futures contracts and options on foreign currencies that are traded on an
exchange regulated by the Commodities Futures Trading Commission ("CFTC"), in
each case that are not for "bona fide hedging" purposes (as defined by
regulations of the CFTC), the aggregate initial margin and premiums required to
establish those positions may not exceed 5% of the liquidation value of the
Fund's portfolio, after taking into account the unrealized profits and
unrealized losses on any such contracts the Fund has entered into. However, the
"in-the-money" amount of such options may be excluded in computing the 5% limit.
Adoption of this guideline will not limit the percentage of a Fund's assets at
risk to 5%.
A Fund's use of options, futures and options thereon and forward
currency contracts (as described under "Currency Transactions") involves certain
investment risks and transaction costs to which it might not be subject were
such strategies not employed. Such risks include: C dependence on the ability of
an Adviser to predict movements in the prices of individual securities,
fluctuations in the general securities markets or market sections and movements
in interest rates and currency markets;
o imperfect correlation between movements in the price of the
o securities or currencies hedged or used for cover;
o the fact that skills and techniques needed to trade options,
futures contracts and options thereon or to use forward currency
contracts are different from those needed to select the
securities in which a Fund invests;
o lack of assurance that a liquid secondary market will exist for
any particular option, futures contract, option thereon or
forward contract at any particular time, which may affect a
Fund's ability to establish or close out a position;
o possible impediments to effective portfolio management or the
ability to meet current obligations caused by the segregation of
a large percentage of a Fund's assets to cover its obligations;
and
o the possible need to defer closing out certain options, futures
contracts, options thereon and forward contracts in order to
continue to qualify for the beneficial tax treatment afforded
"regulated investment companies" under the Internal Revenue Code
of 1986, as amended, (the "Code"). In the event that the
anticipated change in the price of the securities or currencies
that are the subject of such a strategy does not occur, it may
be that a Fund would have been in a better position had it not
used such a strategy at all. The Funds' ability to engage in
certain investment strategies, including hedging techniques, may
be limited by tax considerations, cost considerations and other
factors.
Transactions in futures contracts and options on futures involve
brokerage costs, require margin deposits, and in the case of options obligating
a Fund to purchase securities may require the Fund to establish a segregated
account consisting of cash or liquid securities in an amount equal to the
underlying value of such futures contracts and options to the extent not covered
by an offsetting position.
While transactions in futures contracts and options on futures may
reduce certain risks, these transactions themselves entail certain other risks.
For example, unanticipated changes in interest rates or securities prices may
result in a poorer overall performance for a Fund than if it had not entered
into any futures contracts or options transactions.
Perfect correlation between a Fund's futures positions and portfolio
positions is impossible to achieve. There are no futures contracts based upon
individual securities, except certain U.S. government securities. In the event
of an imperfect correlation between a futures position and a portfolio position
which is intended to be protected, the desired protection may not be obtained
and the Fund may be exposed to risk of loss.
Some futures contracts or options on futures may be inherently illiquid
or may become illiquid under adverse market conditions. In addition, during
periods of market volatility, a commodity exchange may suspend or limit trading
in a futures contract or related option, which may make the instrument
temporarily illiquid and difficult to price. Commodity exchanges may also
establish daily limits on the amount that the price of a futures contract or
related option can vary from the previous day's settlement price. Once the daily
price limit is reached no trades may be made that day at a price beyond the
limit. This may prevent a Fund from closing out positions and limiting its
losses.
The successful utilization of hedging and risk management transactions
requires skills different from those needed in the selection of a Fund's
portfolio securities and depends on an Adviser's ability to predict correctly
the direction and degree of movements in interest rates. Although it is believed
that use of the hedging and risk management techniques described above will
benefit the Funds, if an Adviser's judgment about the direction or extent of the
movement in interest rates is incorrect, a Fund's overall performance would be
worse than if it had not entered into any such transactions. For example, if a
Fund had purchased an interest rate swap or an interest rate floor to hedge
against its expectation that interest rates would decline but instead interest
rates rose, such Fund would lose part or all of the benefit of the increased
payments it would receive as a result of the rising interest rates because it
would have to pay amounts to its counterparties under the swap agreement or
would have paid the purchase price of the interest rate floor.
Swap Agreements
A Fund may enter into interest rate swaps, currency swaps, and other
types of swap agreements such as caps, collars, and floors. The Aggressive
Equity Fund may invest up to 10% of its assets in these types of instruments.
The Growth Equity Fund, will not enter into credit, currency, index, interest
rate and mortgage swaps and up to 10% of its total assets may be invested in
equity swaps. The Structured Equity Fund may invest up to 10% of its assets in
equity swaps. In a typical interest rate swap, one party agrees to make regular
payments equal to a floating interest rate multiplied by a "notional principal
amount," in return for payments equal to a fixed rate multiplied by the same
amount, for a specified period of time. If a swap agreement provides for
payments in different currencies, the parties might agree to exchange (swap) the
notional principal amount as well. Swaps may also depend on other prices or
rates, such as the value of an index or mortgage prepayment rates. Equity swaps
allow the parties to a swap agreement to exchange the dividend income or other
component of return on an equity investment (for example, a group of equity
securities or an index) for a component of return on another non-equity or
equity investment.
In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments equal to the extent that a specified interest rate
exceeds an agreed-upon level, while the seller of an interest rate floor is
obligated to make payments equal to the extent that a specified interest rate
falls below an agreed-upon level. An interest rate collar combines elements of
buying a cap and selling a floor.
Swap agreements will tend to shift a Fund's investment exposure from one
type of investment to another. For example, if a Fund agreed to exchange
floating rate payments for fixed rate payments, the swap agreement would tend to
decrease the Fund's exposure to rising interest rates. Caps and floors have an
effect similar to buying or writing options. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of a Fund's
investments and its share price and yield.
A Fund will usually enter into interest rate swaps on a net basis, i.e.,
where the two parties make net payments with a Fund receiving or paying, as the
case may be, only the net amount of the two payments. The net amount of the
excess, if any, of a Fund's obligations over its entitlement with respect to
each interest rate swap will be covered by liquid assets having an aggregate net
asset value at least equal to the accrued excess maintained by the Fund's
custodian in a segregated account. If a Fund enters into a swap on other than a
net basis, the Fund will maintain in the segregated account the full amount of
the Fund's obligations under each such swap. A Fund may enter into swaps, caps,
collars and floors with member banks of the Federal Reserve System, members of
the New York Stock Exchange or other entities determined to be creditworthy by
an Adviser, pursuant to procedures adopted and reviewed on an ongoing basis by
the Board and the Manager. If a default occurs by the other party to such
transaction, a Fund will have contractual remedies pursuant to the agreements
related to the transaction but such remedies may be subject to bankruptcy and
insolvency laws which could affect such Fund's rights as a creditor.
A Fund may invest in equity swaps. As noted, equity swaps allow one
party to exchange the dividend income or other components of return on an equity
investment for a component of return on another non-equity or equity investment.
An equity swap may be used by a Fund to invest in a market without owning or
taking physical custody of particular securities in circumstances in which
direct investment may be restricted for legal reasons or is otherwise
impractical.
The swap market has grown substantially in recent years with a large
number of banks and financial services firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively liquid. Caps, collars and floors are more recent
innovations and they are less liquid than swaps. There can be no assurance,
however, that a Fund will be able to enter into interest rate swaps or to
purchase interest rate caps, collars or floors at prices or on terms an Adviser
believes are advantageous to such Fund. In addition, although the terms of
interest rate swaps, caps, collars and floors may provide for termination, there
can be no assurance that a Fund will be able to terminate an interest rate swap
or to sell or offset interest rate caps, collars or floors that it has
purchased. Because interest rate swaps, caps, collars and floors are privately
negotiated transactions rather than publicly traded, they may be considered to
be illiquid securities. To the extent that an Adviser does not accurately
analyze and predict the potential relative fluctuation of the components swapped
with another party, a Fund may suffer a loss. Equity swaps are very volatile. To
the extent that an Adviser does not accurately analyze and predict the potential
relative fluctuation of the components swapped with another party, a Fund may
suffer a loss. The value of some components of an equity swap (such as the
dividends on a common stock) may also be sensitive to changes in interest rates.
Furthermore, during the period a swap is outstanding, a Fund may suffer a loss
if the counterparty defaults.
Structured Investments
Structured Investments are derivative securities that are convertible
into, or the value of which is based when the value of, other debt or equity
securities or indices or other factors. Currency exchange rates, interest rates
(such as the prime lending rate and LIBOR) and stock indices (such as the S&P
500) may be used. The amount a Fund receives when it sells a Structured
Investment or at maturity of a Structured Investment is not fixed, but is based
on the price of the underlying security or index or other factor. Particular
Structured Investments may be designed so that they move in conjunction with or
differently from their underlying security or index in terms of price or
volatility. It is impossible to predict whether the underlying index or price of
the underlying security will rise or fall, but prices of the underlying indices
and securities (and, therefore, the prices of Structured Investments) will be
influenced by the same types of political and economic events that affect
particular issuers of fixed income and equity securities and capital markets
generally. Structured Investments also may trade differently from their
underlying securities. Structured Investments generally trade on the secondary
market, which is fairly developed and liquid. However, the market for such
securities may be shallow compared to the market for the underlying securities
or the underlying index. Accordingly, periods of high market volatility may
affect the liquidity of Structured Investments, making high volume trades
possible only with discounting.
Structured Investments are a relatively new innovation and may be
designed to have various combinations of equity and fixed income
characteristics. The following sections describe 4 common types of Structured
Investments. A Fund may invest in other Structured Investments, including those
that may be developed in the future, to the extent that the Structured
Investments are otherwise consistent with the Fund's investment objective and
policies.
LYONS
Liquid Yield Option Notes ("LYONs") differ from ordinary debt
securities, in that the amount received prior to maturity is not fixed but is
based on the price of the issuer's common stock. LYONs are zero-coupon notes
that sell at a large discount from face value. For an investment in LYONs, the
Fund will not receive any interest payments until the notes mature, typically in
15 to 20 years, when the notes are redeemed at face, or par, value. The yield on
LYONs is typically lower-than-market rate for debt securities of the same
maturity, due in part to the fact that the LYONs are convertible into common
stock of the issuer at any time at the option of the holder of the LYONs.
Commonly, the LYONs are redeemable by the issuer at any time after an initial
period or if the issuer's common stock is trading at a specified price level or
better or, at the option of the holder, upon certain fixed dates. The redemption
price typically is the purchase price of the LYONs plus accrued original issue
discount on the date of redemption, which amounts to the lower-than-market
yield. A Fund would receive only the lower-than-market yield unless the
underlying common stock increase in value at a substantial rate. LYONs are an
attractive investment when it appears that they will increase in value due to
the rise in value of the underlying common stock.
PERCS
Preferred Equity Redemption Cumulative Stock ("PERCS") technically is
preferred stock with some characteristics of common stock. PERCS are mandatorily
convertible into common stock after a period of time, usually three years,
during which the investors' capital gains are capped, usually at 30%. Commonly,
PERCS may be redeemed by the issuer at any time or if the issuer's common stock
is trading at a specified price level or better. The redemption price starts at
the beginning of the PERCS duration period at a price that is above the cap by
the amount of the extra dividends the PERCS holder is entitled to receive
relative to the common stock over the duration of the PERCS and declines to the
cap price shortly before maturity of the PERCS. In exchange for having the cap
on capital gains and giving the issuer the option to redeem the PERCS at any
time or at the specified common stock price level, a Fund may be compensated
with a substantially higher dividend yield than that on the underlying common
stock. Investors that seek current income find PERCS attractive because PERCS
provide a high dividend income than that paid with respect to a company's common
stock.
ELKS
Equity-Linked Securities ("ELKS") differ from ordinary debt securities,
in that the principal amount received at maturity is not fixed but is based on
the price of the issuer's common stock. ELKS are debt securities commonly issued
in fully registered form for a term of three years under a trust indenture. At
maturity, the holder of ELKS will be entitled to receive a principal amount
equal to the lesser of a cap amount, commonly in the range of 30% to 55% greater
than the current price of the issuer's common stock, or the average closing
price per share of the issuer's common stock, or the average closing price per
share of the issuer's common stock, subject to adjustment as a result of certain
dilution events, for the 10 trading days immediately prior to maturity. Unlike
PERCS, ELKS are commonly not subject to redemption prior to maturity. ELKS
usually bear interest during the three-year term at a substantially higher rate
than the dividend yield on the underlying common stock. In exchange for having
the cap on the return that might have been received as capital gains on the
underlying common stock, a Fund may be compensated with the higher yield,
contingent on how well the underlying common stock performs. Investors that seek
current income find ELKS attractive because ELKS provide a higher dividend
income than that paid with respect to a company's common stock. The return on
ELKS depends on the creditworthiness of the issuer of the securities, which may
be the issuer of the underlying securities or a third party investment banker or
other lender. The creditworthiness of such third party issuer of ELKS may, and
often does, exceed the creditworthiness of the issuer of the underlying
securities. The advantage of using ELKS over traditional equity and debt
securities is that the former are income producing vehicles that may provide a
higher income than the dividend income on the underlying securities while
allowing some participation in the capital appreciation of the underlying equity
securities. Another advantage of using ELKS is that they may be used as a form
of hedging to reduce the risk of investing in the generally more volatile
underlying equity securities.
Structured Notes
Structured Notes are derivative securities for which the amount of
principal repayments and/or interest payments is based upon the movement of one
or more "factors". These factors include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and LIBOR) and
stock indices (such as the S&P 500). In some cases, the impact of the movements
of these factors may increase or decrease through the use of mulipliers or
deflators. Structured Notes may be designed to have particular quality and
maturity characteristics and may vary from money market quality to below
investment grade. Depending on the factor used and use of multipliers or
deflators, however, changes in interest rates and movement of the factor may
cause significant price fluctuations or may cause particular Structured Notes to
become illiquid. A Fund would use Structured Notes to tailor its investments to
the specific risks and returns an Adviser wishes to accept while avoiding or
reducing certain other risks.
Risk Management
A Fund may employ non-hedging risk management techniques. Risk
management strategies are used to keep a Fund fully invested and to reduce the
transaction costs associated with incoming and outgoing cash flows. The
objective where equity futures are used to "equitize" cash is to match the
notional value of all futures contracts to a Fund's cash balance. The notional
value of futures and of the cash is monitored daily. As the cash is invested in
securities and/or paid out to participants in redemptions, the Adviser
simultaneously adjusts the futures positions. Through such procedures, a Fund
not only gains equity exposure from the use of futures, but also benefits from
increased flexibility in responding to a Fund's cash flow needs. Additionally,
because it can be less expensive to trade a list of securities as a package or
program trade rather than as a group of individual orders, futures provide a
means through which transaction costs can be reduced. Such non-hedging risk
management techniques are not speculative, but because they involve leverage
they include, as do all leveraged transactions, the possibility of losses or
gains that are greater than if these techniques involved the purchase and sale
of the securities themselves.
Illiquid Securities
Each Fund is permitted to invest in illiquid securities. No illiquid
securities will be acquired if upon the purchase thereof more than 15% of a
Fund's net assets would consist of illiquid securities. "Illiquid securities"
are securities that may not be sold or disposed of in the ordinary course of
business within seven days at approximately the price used to determine a Fund's
net asset value. Each Fund may purchase certain restricted securities commonly
known as rule 144A securities that can be resold to institutions and which may
be determined to be liquid pursuant to policies and guidelines of the Board. A
Fund may not be able to sell illiquid securities when an Adviser considers it
desirable to do so or may have to sell such securities at a price that is lower
than the price that could be obtained if the securities were more liquid. A sale
of illiquid securities may require more time and may result in higher dealer
discounts and other selling expenses than does the sale of liquid securities.
Illiquid securities also may be more difficult to value due to the
unavailability of reliable market quotations for such securities, and investment
in illiquid securities may have an adverse impact on net asset value. Further,
the purchase price and subsequent valuation of illiquid securities normally
reflect a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.
Under current interpretations of the Staff of the Securities and
Exchange Commission, the following types of securities in which a Fund may
invest will be considered illiquid:
o repurchase agreements maturing in more than seven days;
o certain restricted securities (securities whose public resale is
subject to legal or contractual restrictions);
o options, with respect to specific securities, not traded on a
national securities exchange that are not readily marketable;
and
o any other securities in which a Fund may invest that are not
readily marketable.
Short Sales
A Fund may make short sales of securities. A short sale is a transaction
in which a Fund sells a security it does not own in anticipation that the market
price of that security will decline. A Fund expects to make short sales both to
obtain capital gains from anticipated declines in securities and as a form of
hedging to offset potential declines in long positions in the same or similar
securities. The short sale of a security is considered a speculative investment
technique. When a Fund makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
in order to satisfy its obligation to deliver the security upon conclusion of
the sale. A Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities. A
Fund's obligation to replace the borrowed security will be secured by collateral
deposited with the broker-dealer, usually cash, U.S. Government securities or
other liquid high grade debt obligations. A Fund will also be required to
deposit in a segregated account established and maintained with such Fund's
custodian, liquid assets to the extent necessary so that the value of both
collateral deposits in the aggregate is at all times equal to the greater of the
price at which the security is sold short or 100% of the current market value of
the security sold short. Depending on arrangements made with the broker-dealer
from which it borrowed the security, a Fund may not receive any payments
(including interest) on its collateral deposited with such broker-dealer. If the
price of the security sold short increases between the time of the short sale
and the time a Fund replaces the borrowed security, a Fund will incur a loss.
Although a Fund's gain is limited to the price at which it sold the security
short, its potential loss is theoretically unlimited. In a "short sale against
the box," at the time of the sale, a Fund owns or has the immediate and
unconditional right to acquire at no additional cost the security and maintains
that right at all times when the short position is open. A Fund may make short
sales of securities or maintain a short position, provided that at all times
when a short position is open the Fund owns an equal amount of such securities
or securities convertible into or exchangeable for, without payment of any
further consideration, an equal amount of the securities of the same issuer as
the securities sold short (a short sale against-the-box).
As a result of recent tax legislation, short sales may not generally be
used to defer the recognition of gain for tax purposes with respect to
appreciated securities in a Fund's portfolio.
When-Issued and Delayed-Delivery Securities
Each Fund is permitted to purchase or sell securities on a when-issued
or delayed-delivery basis. When-issued or delayed-delivery transactions arise
when securities are purchased or sold with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous price and
yield at the time of entering into the transaction. While the Funds generally
purchase securities on a when-issued or delayed delivery basis with the
intention of acquiring the securities, the Funds may sell the securities before
the settlement date if an Adviser deems it advisable. The purchase of securities
on a when-issued basis involves a risk of loss if the value of the security to
be purchased declines prior to the settlement date. At the time a Fund makes the
commitment to purchase securities on a when-issued or delayed delivery basis,
the Fund will record the transaction and thereafter reflect the value, each day,
of such security in determining the net asset value of the Fund. At the time of
delivery of the securities, the value may be more or less than the purchase
price. A Fund will maintain, in a segregated account, liquid assets having a
value equal to or greater than the Fund's purchase commitments in respect of any
obligations relating to when-issued or delayed delivery securities; a Fund will
likewise segregate securities sold on a delayed-delivery basis.
Investing in Other Mutual Funds
Each Fund is permitted to invest in other mutual funds including mutual
funds which are not registered under the 1940 Act. Each Fund may invest in
mutual funds located outside the United States. Investments in other mutual
funds will involve the indirect payment of a portion of the expenses, including
advisory fees, of such other mutual funds. Pursuant to Section 12(d)(1) of the
1940 Act, a Fund will not purchase a security of an investment company, if as a
result, (1) more than 10% of the Fund's total assets would be invested in
securities of other investment companies, (2) such purchase would result in more
than 3% of the total outstanding voting securities of any one such investment
company being held by the Fund, or (3) more than 5% of the Fund's total assets
would be invested in any one such investment company; unless an exemption from
the limitations of Section 12(d)(1) is available.
The Funds may also purchase Standard & Poor's Depository Receipts
("SPDRs"). SPDRs are American Stock Exchange - traded securities that represent
ownership in the SPDR Trust, a trust which has been established to accumulate
and hold a portfolio of common stocks that is intended to track the price
performance and dividend yield of the S&P 500. With regard to each Fund, SPDRs
and other similar types of instruments would be included in the 10% limitation
on investments in other investment companies.
Portfolio Securities Lending
Each of the Funds may lend its portfolio securities to broker/dealers
and other institutions as a means of earning interest income. The borrower is
required to deposit as collateral, liquid assets that at all times will be at
least equal to 100% of the market value of the loaned securities and such amount
will be maintained in a segregated account of the respective Fund. While the
securities are on loan the borrower will pay the respective Fund any income
accruing thereon.
Delays or losses could result if a borrower of portfolio securities
becomes bankrupt or defaults on its obligation to return the loaned securities.
The Funds may lend securities only if: (1) each loan is fully secured by
appropriate collateral at all times; and (2) the value of all loaned securities
and borrowings of the Fund (not including transactions that are covered by a
segregated account or an offsetting position) would not be more than 33-1/3% of
the Fund's total assets taken at the time of the loan (including collateral
received in connection with any loans).
Under present regulatory policies, loans of portfolio securities may be
made to financial institutions such as brokers or dealers and are required to be
secured continuously by collateral in cash, cash equivalents or U.S. Government
securities maintained on a current basis at an amount at least equal to the
market value of the securities loaned. A Fund is required to have the right to
call a loan and obtain the securities loaned at any time on five days' notice.
For the duration of a loan, a Fund continues to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned and also
receives compensation from investment of the collateral. A Fund does not have
the right to vote any loaned securities having voting rights during the
existence of the loan, but a Fund could call the loan in anticipation of an
important vote to be taken among holders of the securities or the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit there are risks of delay in recovering, or even
loss of rights in, the collateral should the borrower of the securities default.
However, the loans are made only to firms deemed by the Advisers to be of good
standing under guidelines established by the Manager and the Board, and when, in
the judgment of an Adviser, the money which can be earned by loaning the
particular securities justifies the attendant risks.
BOARD OF TRUSTEES
The Board of Trustees of the Trust (the Board) is responsible for
overseeing all operations of the Funds, including supervising the Manager. The
Manager is responsible for overseeing the Advisers and establishing and
monitoring investment guidelines for the Trust. The Trustees and officers of the
Trust, some of whom are directors and officers of Allstate Life and affiliates
thereof, and their principal business occupations for the last five years are
set forth below. Trustees who are deemed to be "interested persons" of the Trust
under the 1940 Act are indicated by an asterisk next to their respective names.
Name, Address, Age and Position with the Funds Michael J. Velotta (Age 52),*
3100 Sanders Road, Northbrook, Illinois 60062, Vice President, Secretary,
General Counsel, and Director (1992) Director (1993-Present) of Allstate Life
Financial Services, Inc.; Director (1992-Present) Vice President, Secretary and
General Counsel (1993-Present) Allstate Life Insurance Company; Director
(1992-Present) Vice President, Secretary and General Counsel (1993-Present)
Allstate Life Insurance Company of New York.
Sole Trustee
President of the Trust
Chief Financial Officer of the Trust
<PAGE>
Compensation of Officers and Directors
The Funds pay no salaries or compensation to any officer or Trustee
affiliated with the Manager. The chart below sets forth the fees to be paid by
the Funds each fiscal year to the non-interested Trustees and certain other
information as of September 30, 1999.
<TABLE>
<CAPTION>
------------------- ------------------ ------------------ ------------------ -----------------
Aggregate Pension or Estimated Annual Total
Compensation Retirement Benefits Upon Compensation
From Trust Benefits Accrual Retirement from the Funds
as Part of Fund and Complex
Expenses Paid to Trustee
------------------- ------------------ ------------------ ------------------ -----------------
------------------- ------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Name of Person, $10,000 -0- -0- $10,000
Position
------------------- ------------------ ------------------ ------------------ -----------------
</TABLE>
*As of September 30, 1999 there were five Funds in the Trust.
CAPITAL STRUCTURE
The Trust was organized under Delaware law on March 2, 1999. The Trust
is a Delaware Business Trust and has the authority to authorize and issue an
unlimited number of shares. The Board may reclassify authorized shares to
increase or decrease the allocation of shares among the Funds or to add any new
Funds. The Board has the power, from time to time and without shareholder
approval, to classify and reclassify existing and new Funds into one or more
classes.
CONTROL PERSONS
As of September 30, 1999, a separate account of Allstate Life owned 100%
of the shares of the Funds.
<PAGE>
Voting
Shareholders are entitled to vote on a matter if: (i) a shareholder vote
is required under the 1940 Act; (ii) the matter concerns an amendment to the
Declaration of Trust that would adversely affect to a material degree the rights
and preferences of any Fund or any class thereof; or (iii) the Trustees
determine that it is necessary or desirable to obtain a shareholder vote. The
1940 Act requires a shareholder vote under various circumstances, including to
change any fundamental policy of a Fund. Shareholders of the Funds receive one
vote for each dollar of net asset value owned on the record date. However, only
shareholders of a Fund that is affected by a particular matter are entitled to
vote on that matter. Voting rights are non-cumulative and cannot be modified
without a majority vote of shareholders.
Other Rights
Each Fund share representing interests in a Fund, when issued and paid
for in accordance with the terms of the offering, will be fully paid and
non-assessable. These shares have no pre-emptive, subscription or conversion
rights and are redeemable. There are no shareholder pre-emptive rights. Upon
liquidation of a Fund, the shareholders of that Fund shall be entitled to share,
pro rata, in any assets of the Fund after discharge of all liabilities and
payment of the expenses of liquidation.
INVESTMENT MANAGEMENT ARRANGEMENTS
LSA Asset Management LLC, the Manager, located at 3100 Sanders Road, Northbrook,
Illinois 60062, serves as the investment adviser to the Trust and, accordingly,
as investment manager to each of the Funds. The Manager is a wholly owned
subsidiary of Allstate Life. Allstate Life and its subsidiaries are wholly owned
subsidiaries of Allstate Insurance Company. Allstate Insurance Company is the
second largest property/casualty writer in the U.S. Allstate Insurance Company
is a wholly owned subsidiary of the Allstate Corporation. Allstate Life,
incorporated in 1957 in Illinois, has established a record of financial strength
that has consistently resulted in superior ratings. A.M. Best Company assigns an
A+ (Superior) to Allstate Life. Standard & Poor's Insurance Rating Services
assigns an AA+ (Very Strong) financial strength rating and Moody's Investors
Service, Inc. assigns an Aa2 (Excellent) financial strength rating to Allstate
Life.
The Manager provides investment management services to each Fund
pursuant to an Investment Management Agreement with the Trust (the "Management
Agreement). The services provided by the Manager consist of (among other things)
directing and supervising each Adviser, reviewing and evaluating the performance
of each Adviser and determining whether or not any Adviser should be replaced.
The Manager and its affiliates will furnish all facilities and personnel
necessary in connection with providing these services. The Management Agreement,
after being initially approved, continues in force for two years; thereafter it
will continue in effect if such continuance is specifically approved at least
annually at a meeting called for the purpose of voting on the Management
Agreement by the Trustees and by a majority of the Board members who are not
parties to the Management Agreement or interested persons of any such party. The
Manager pays all fees of the Advisers. The Advisers serve as independent
contractors of the Manager.
The Management Agreement is terminable, with respect to a Fund without
penalty on not more than 60 days' nor less than 30 days' written notice by (1)
the Trust when authorized either by (a) in the case of a Fund, a majority vote
of the Fund's shareholders or (b) a vote of a majority of the Board or (2) the
Manager. The Management Agreement will automatically terminate in the event of
its assignment. The Management Agreement provides that neither the Manager nor
its personnel shall be liable for any error of judgment or mistake of law or for
any loss arising out of any investment or for any act or omission in its
services to the Funds, except for willful misfeasance, bad faith or gross
negligence or reckless disregard of its or their obligations and duties under
the Management Agreement.
The Trust's Prospectus contains a description of fees payable to the
Manager for services under the Management Agreement. The Manager, not any Fund,
pays the fees of the Advisers.
The Advisers
The Manager has entered into an advisory agreement for each Fund
pursuant to which the Manager has appointed an Adviser to carry out the
day-to-day investment and reinvestment of the assets of the relevant Fund. Under
the direction of the Manager, and, ultimately, of the Board, each Adviser is
responsible for making all of the day-to-day investment decisions for the
respective Fund (or portion of a Fund) in accordance with the Fund's investment
objective, guidelines and policies.
As noted, the Manager pays each Adviser a fee for its services from the
Manager's own resources. A Fund pays no additional management fees for the
services of the Advisers. Each Adviser furnishes at its own expense all
facilities and personnel necessary in connection with providing these services.
Goldman Sachs Asset Management ("GSAM") is a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"). Goldman Sachs provides a wide range
of fully discretionary investment advisory services including quantitatively
driven and actively managed U.S. and international equity portfolios, U.S. and
global fixed income portfolios, commodity and currency products, and money
markets. The Goldman Sachs Group, L.P., which controls GSAM, has merged into The
Goldman Sachs Group Inc. as a result of an initial public offering. GSAM
receives a fee from the Manager, calculated as a percentage of the average daily
net assets of the Fund, at the following annual rate: .45% of the first $50
million; .40% up to the next $200 million; .35% up to the next $250 million; and
.30% in excess of $500 million.
Salomon Brothers Asset Management Inc. ("SBAM"), together with its
affiliates, manages a wide spectrum of equity and fixed income products for both
institutional and private investors, including corporations, pension funds,
public funds, central banks, insurance companies, supranational organizations,
endowments and foundations. SBAM is an indirect, wholly owned subsidiary of
Citigroup Inc. and manages over $27 billion in assets as of March 31, 1999. SBAM
receives a fee from the Manager, calculated daily as a percentage of the average
daily net assets of the Fund, at the following annual rate: .40% of the first
$250 million; .35% up to the next $250 million; and .30% in excess of $500
million.
J.P. Morgan Investment Management Inc. ("JPMIM"), 522 Fifth Avenue, New
York, New York 10036, is the Adviser to the Structured Equity Fund. JPMIM is a
wholly owned subsidiary of J.P. Morgan &Co. Incorporated. JPMIM manages employee
benefit funds of corporations, labor unions and state and local governments and
the accounts of other institutional investors, including investment companies.
JPMIM receives a fee from the Manager, calculated as a percentage of the average
daily net assets of the Fund at the following annual rate: .35% of the first
$250 million; and .30% in excess of $250 million.
Morgan Stanley Asset Management ("MSAM"), with principal offices at 1221
Avenue of the Americas, New York, New York 10020, conducts a worldwide portfolio
management business and provides a broad range of portfolio management services
to customers in the United States and abroad. Morgan Stanley Dean Witter & Co.
("MSDW") is the direct parent of MSAM. MSDW is a preeminent global financial
services firm that maintains leading market positions in each of its three
primary businesses: B securities, asset management and credit services. MSAM
receives a fee from the Manager, calculated daily as a percentage of the average
daily net assets of the Fund, at the following annual rate: .50% of the first
$150 million; .45% on the next $100 million; .40% up to the next $250 million;
and .35% in excess of $500 million.
OpCap Advisors ("OpCap"), One World Financial Center, New York, New York 10281,
is the Adviser to the Balanced Fund. OpCap is a majority owned subsidiary of
Oppenheimer Capital. Oppenheimer Capital and OpCap are indirect, wholly owned
subsidiaries of PIMCO Advisors L.P. ("PIMCO Advisors"). PIMCO Advisors has two
general partners: PIMCO Partners, G.P., a California general partnership, and
PIMCO Advisors Holdings L.P., an NYSE-listed Delaware limited partnership of
which PIMCO Partners, GP is the sole general partner. Colin Glinsman is the
portfolio manager for the Balanced Fund. Mr. Glinsman is the chief investment
officer and a managing director of Oppenheimer Capital and has been a securities
analyst with Oppenheimer Capital since 1989. OpCap receives a fee from the
Manager, calculated daily as a percentage of the average daily net assets of the
Fund, at the following annual rate: .40% of the first $250 million; and .35% in
excess of $250 million.
Organizational and portfolio manager information for each Adviser is
also provided in the Trust's prospectus.
FUND EXPENSES
Each Fund assumes and pays the following costs and expenses to the
extent they are not assumed by the Manager: interest; taxes, brokerage charges
(which may be paid to broker-dealers affiliated with the Manager or an Adviser);
costs of preparing, printing and filing any amendments or supplements to the
registration forms of each Fund and its securities; all federal and state
registration, qualification and filing costs and fees, issuance and redemption
expenses, transfer agency and dividend and distribution disbursing costs and
expenses; custodian fees and expenses; accounting, auditing and legal expenses;
fidelity bond and other insurance premiums; fees and salaries of trustees,
officers and employees (if any) of the Funds other than those who are also
officers or employees of the Manager or its affiliates; industry membership
dues; all annual and semiannual reports and prospectuses mailed to each Fund's
shareholders as well as all quarterly, annual and any other periodic report
required to be filed with the SEC or with any state; any notices required by a
federal or state regulatory authority; and any proxy solicitation materials
directed to each Fund's shareholders as well as all printing, mailing and
tabulation costs incurred in connection therewith, and any expenses incurred in
connection with the holding of meetings of each Fund's shareholders, and other
miscellaneous expenses related directly to the Funds' operations and interest.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Funds have no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to any policy
established by the Manager and the Board, the Advisers are responsible for
making the day-to-day investment decisions for each Fund and the placing of its
portfolio transactions. In placing orders, it is the policy of each Fund to
obtain the most favorable net results, taking into account various factors,
including price, dealer spread or commission, if any, size of the transaction
and difficulty of execution. While the Advisers generally seek competitive
spreads or commissions, they may direct brokerage transactions to broker/dealers
who also sell variable annuity and variable life insurance contracts issued by
Allstate Life and its affiliates and the sale of such contracts may be taken
into account by Manager and/or the Advisers when allocating brokerage
transactions. In addition, the Advisers may direct brokerage transactions to
broker-dealers with which they are affiliated subject to principles of best
execution and procedures established by the Board.
The Advisers will generally deal directly with the dealers who make a
market in the securities involved (unless better prices and execution are
available elsewhere) if the securities are traded primarily in the
over-the-counter market. Such dealers usually act as principals for their own
account. On occasion, securities may be purchased directly from the issuer.
Bonds and money market securities are generally traded on a net basis and do not
normally involve either brokerage commissions or transfer taxes.
While the Advisers seek to obtain the most favorable net results in
effecting transactions in a Fund's portfolio securities, dealers who provide
supplemental investment research to an Adviser may receive orders for
transactions for the Funds. Such supplemental research services ordinarily
consist of assessments and analyses of the business or prospects of a company,
industry, or economic sector. If, in the judgment of an Adviser, a Fund will
benefit by such supplemental research services, the Fund may pay spreads or
commissions to brokers or dealers furnishing such services which are in excess
of spreads or commissions which another broker or dealer may charge for the same
transaction. Information so received will be in addition to and not in lieu of
the services required to be performed under the Management Agreement or the
advisory agreements between the Manager and the Advisers. The expenses of the
Advisers will not necessarily be reduced as a result of the receipt of such
supplemental information. The Advisers may use such supplemental research in
providing investment advice to their client accounts other than those for which
the transactions are made. Similarly, the Funds may benefit from such research
obtained by the Advisers for portfolio transactions for other client accounts.
Investment decisions for the Funds will be made independently from those
of any other clients that may be (or in the future may be) managed by the
Manager, the Advisers or their affiliates. If, however, accounts managed by an
Adviser are simultaneously engaged in the purchase of the same security, then,
pursuant to general authorization of the Board and the Manager, available
securities may be allocated to each Fund in a manner an Adviser deems to be
fair. Such allocation and pricing may affect the amount of brokerage commissions
paid by each Fund. In some cases, this system might adversely affect the price
paid by a Fund (for example, during periods of rapidly rising or falling
interest rates) or limit the size of the position obtainable for a Fund (for
example, in the case of a small issue).
Securities held by any Fund may also be held by other funds and other
clients for which the Advisers or their respective affiliates provide investment
advice. Because of different investment objectives or other factors, a
particular security may be bought by the Advisers for one or more clients when
one or more of the Advisers' clients are selling the same security. If purchases
or sales of securities arise for consideration at or about the same time for any
Fund or client accounts (including other funds) for which the Manager or an
Adviser acts as an investment adviser (including the Funds described herein),
transactions in such securities will be made, insofar as feasible, for the
respective Funds and other client accounts in a manner deemed equitable to all
and in accordance with procedures established by the Board. To the extent that
transactions on behalf of more than one client of the Advisers or their
respective affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is based on the prices of
a Fund's underlying securities as of the close of trading of the New York Stock
Exchange on each day the Exchange is open for business. The New York Stock
Exchange usually closes at 4:00 p.m. (ET) though it may close earlier on any
given day. The Funds will be closed for business and will not price their shares
on the following business holidays: New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Equity securities are valued at the last sales price reported on
principal securities exchanges (domestic or foreign). If no sale took place on
such day, then such securities are valued at the mean between the bid and asked
prices. Securities quoted in foreign currencies are translated into U.S. dollars
at the exchange rate at the end of the reporting period. Options are valued at
the last sales price; if no sales took place on such day, then options are
valued at the mean between the bid and asked prices. Securities for which market
quotations are not readily available and all other assets are valued in good
faith at fair value by, or under guidelines established by, the Funds' Board.
Short-term debt securities with a maturity of more than 60 days when
purchased are valued based on market quotations until the remaining days to
maturity become less than 61 days. From such time until maturity, the
investments are valued at amortized cost. Under the amortized cost method of
valuation, an instrument is valued at cost and the interest payable at maturity
upon the instrument is accrued as income, on a daily basis, over the remaining
life of the instrument. Neither the amount of daily income nor the net asset
value is affected by unrealized appreciation or depreciation of the Fund's
investments assuming the instrument's obligation is paid in full on maturity. In
periods of declining interest rates, the indicated daily yield on shares of the
portfolio computed using amortized cost may tend to be higher than a similar
computation made using a method of valuation based upon market prices and
estimates. In periods of rising interest rates, the indicated daily yield
computed using amortized cost may tend to be lower than a similar computation
made using a method of valuation based upon market prices and estimates. For all
Funds, securities with remaining maturities of less than 60 days are valued at
amortized cost, which approximates market value. Debt securities (other than
short-term obligations) are valued on the basis of valuations furnished by an
unaffiliated pricing service which determines valuations for normal
institutional size trading units of debt securities.
PURCHASE AND REDEMPTION OF SHARES
For information regarding the purchase of Fund shares, or how a
shareholder may have a Fund redeem his/her shares, see "Purchase and Redemption
of Fund Shares" in the Funds' Prospectus.
SUSPENSION OF REDEMPTIONS AND POSTPONEMENT OF PAYMENTS
A Fund may not suspend a shareholder's right of redemption, or postpone
payment for a redemption for more than seven days, unless the New York Stock
Exchange (NYSE) is closed for other than customary weekends or holidays, or
trading on the NYSE is restricted, or for any period during which an emergency
exists as a result of which (1) disposal by a Fund of securities owned by it is
not reasonably practicable, or (2) it is not reasonably practicable for a Fund
to fairly determine the value of its assets, or for such other periods as the
SEC may permit for the protection of investors.
INVESTMENT PERFORMANCE
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN QUOTATIONS.
Average annual total return quotations for the Funds are computed by
finding the average annual compounded rates of return that would cause a
hypothetical investment made on the first day of a designated period to equal
the ending redeemable value of such hypothetical investment on the last day of
the designated period in accordance with the following formula:
P(1+T)n = ERV
<TABLE>
<CAPTION>
Where:
<S> <C> <C>
P = a hypothetical initial payment of n = number of years
$1,000, less the maximum sales
load applicable to a Fund
T = average annual total return ERV = ending redeemable value of the
hypothetical $1,000 initial payment made
at the beginning of the designated period
(or fractional portion thereof)
</TABLE>
The computation above assumes that all dividends and distributions made by a
Fund are reinvested at net asset value during the designated period. The average
annual total return quotation is determined to the nearest 1/100 of 1%.
One of the primary methods used to measure performance is "total
return." "Total return" will normally represent the percentage change in value
of a Fund, or of a hypothetical investment in a Fund, over any period up to the
lifetime of the class. Unless otherwise indicated, total return calculations
will assume the reinvestment of all dividends and capital gains distributions
and will be expressed as a percentage increase or decrease from an initial
value, for the entire period or for one or more specified periods within the
entire period.
Total return percentages for periods longer than one year will usually
be accompanied by total return percentages for each year within the period
and/or by the average annual compounded total return for the period. The income
and capital components of a given return may be separated and portrayed in a
variety of ways in order to illustrate their relative significance. Performance
may also be portrayed in terms of cash or investment values, without
percentages. Past performance cannot guarantee any particular future result. In
determining the average annual total return (calculated as provided above),
recurring fees, if any, that are charged to all shareholder accounts are taken
into consideration.
Each Fund's average annual total return quotations and yield quotations
as they may appear in the Prospectus, this SAI or in advertising are calculated
by standard methods prescribed by the SEC.
Each Fund may also publish its distribution rate and/or its effective
distribution rate. A Fund's distribution rate is computed by dividing the most
recent monthly distribution per share annualized, by the current net asset value
per share. A Fund's effective distribution rate is computed by dividing the
distribution rate by the ratio used to annualize the most recent monthly
distribution and reinvesting the resulting amount for a full year on the basis
of such ratio. The effective distribution rate will be higher than the
distribution rate because of the compounding effect of the assumed reinvestment.
A Fund's yield is calculated using a standardized formula (set forth below), the
income component of which is computed from the yields to maturity of all debt
obligations held by the Fund based on prescribed methods (with all purchase and
sales of securities during such period included in the income calculation on a
settlement date basis), whereas the distribution rate is based on a Fund's last
monthly distribution. A Fund's monthly distribution tends to be relatively
stable and may be more or less than the amount of net investment income and
short-term capital gain actually earned by the Fund during the month.
Other data that may be advertised or published about each Fund include
the average portfolio quality, the average portfolio maturity and the average
portfolio duration.
STANDARDIZED YIELD QUOTATIONS. The yield of a Fund is computed by
dividing the Fund's net investment income per share during a base period of 30
days, or one month, by the maximum offering price per share of the Fund on the
last day of such base period in accordance with the following formula:
2[(a-b)+1)6-1]
---
cd
<TABLE>
<CAPTION>
Where:
<S> <C> <C>
a = net investment income earned c = the average daily number of
during the period attributable to shares of the subject class
the subject class outstanding during the period
that were entitled to receive dividends
b = net expenses accrued for the d = the maximum offering price per
period attributable to the subject share of the subject
class
</TABLE>
Net investment income will be determined in accordance with rules established by
the SEC.
NON-STANDARDIZED PERFORMANCE. In addition, in order to more completely
represent a Fund's performance or more accurately compare such performance to
other measures of investment return, a Fund also may include in advertisements,
sales literature and shareholder reports other total return performance data
("Non-Standardized Performance"). Non-Standardized Performance may be quoted for
the same or different periods as those for which Standardized Return data is
quoted; it may consist of an aggregate or average annual percentage rate of
return, actual year-by-year rates or any combination thereof. Non-Standardized
Performance may or may not take sales charges (if any) into account; performance
data calculated without taking the effect of sales charges into account will be
higher than data including the effect of such charges. All Non-Standardized
Performance will be advertised only if the standard performance data for the
same period, as well as for the required periods, is also presented.
GENERAL INFORMATION. From time to time, the Funds may advertise their
performance compared to similar funds using certain unmanaged indices, reporting
services and publications.
The Standard & Poor's 500 Composite Stock Price Index is a well
diversified list of 500 companies representing the U.S. Stock Market. The Index
is a broad-based measurement of changes in stock-market conditions based on the
average performance of 500 widely held common stocks. The Standard & Poor's
MidCap 400 Index is designed to represent price movements in the mid cap U.S.
equity market. It contains companies chosen by the Standard & Poor's Index
Committee for their size, liquidity and industry representation. None of the
companies in the S&P 400 overlap with those in the S&P 500 Index or the S&P 600
Index. Decisions about stocks to be included and deleted are made by the
Committee which meets on a regular basis. S&P 400 stocks are market cap
weighted; each stock influences the Index in proportion to its relative market
capitalization. The range of capitalization of companies in the Index as of
April 30, 1999 was $202 million to $14.4 billion. The inception year of the S&P
MidCap 400 Index is 1982. The Index is rebalanced as needed. S&P 400 companies
which merge or are acquired are immediately replaced in the Index; other
companies are replaced when the Committee decides they are no longer
representative.
The Standard and Poor's Small Cap 600 index is designed to represent
price movements in the small cap U.S. equity market. It contains companies
chosen by the Standard & Poor's Index Committee for their size, industry
characteristics, and liquidity. None of the companies in the S&P 600 overlap
with the S&P 500 or the S&P 400 (MidCap Index). The S&P 600 is weighted by
market capitalization. REITs are not eligible for inclusion.
The NASDAQ Composite OTC Price Index is a market value-weighted and
unmanaged index showing the changes in the aggregate market value of
approximately 3,500 stocks.
The Lehman Government Bond Index is a measure of the market value of all
public obligations of the U.S. Treasury; all publicly issued debt of all
agencies of the U.S. Government and all quasi-federal corporations; and all
corporate debt guaranteed by the U.S. Government. Mortgage backed securities,
bonds and foreign targeted issues are not included in the Lehman Government Bond
Index.
The Lehman Government/Corporate Bond Index is a measure of the market
value of approximately 5,900 bonds with a face value currently in excess of $3.5
trillion. Issues must have at least one year to maturity and an outstanding par
value of at least $100 million for U.S. Government issues and $50 million for
all others.
The Russell 2000 Index represents the bottom two thirds of the largest
3000 publicly traded companies domiciled in the U.S. Russell uses total market
capitalization to sort its universe to determine the companies that are included
in the Index. Only common stocks are included in the Index. REITs are eligible
for inclusion.
The Russell 2500 Index is a market value-weighted, unmanaged index
showing total return (i.e., principal changes with income) in the aggregate
market value of 2,500 stocks of publicly traded companies domiciled in the
United States. The Index includes stocks traded on the New York Stock Exchange
and the American Stock Exchange as well as in the over-the-counter market.
The Morgan Stanley Capital International EAFE Index (the "EAFE Index")
is an unmanaged index, which includes over 1,000 companies representing the
stock markets of Europe, Australia, New Zealand and the Far East. The EAFE Index
is typically shown weighted by the market capitalization. However, EAFE is also
available weighted by Gross Domestic Product (GDP). These weights are modified
on July 1st of each year to reflect the prior year's GDP. Indices with dividends
reinvested constitute an estimate of total return arrived at by reinvesting one
twelfth of the month end yield at every month end.
The Lehman Brothers High Yield BB Index is a measure of the market value
of public debt issues with a minimum par value of $100 million and rated Ba1-Ba3
by Moody's. All bonds within the index are U.S. dollar denominated,
non-convertible and have at least one year remaining to maturity.
In addition, from time to time in reports and promotions:
o a Fund's performance may be compared to other groups of mutual
funds tracked by: (a) Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets; (b) Morningstar,
Inc., another widely used independent research from which ranks
mutual funds by overall performance, investment objectives, and
assets; or (c) other financial or business publications, such as
Business Week, Money Magazine, Forbes and Barron's which provide
similar information;
o the Consumer Price Index (measure for inflation) may be used to
assess the real rate of return from an investment in the Fund;
o other statistics such as GNP, and net import and export figures
derived from governmental publications, e.g., The Survey of
Current Business or other independent parties, e.g., the
Investment Company Institute, may be used to illustrate
investment attributes to a Fund or the general economic,
business, investment or financial environment in which a Fund
operates;
o various financial, economic and market statistics developed by
brokers, dealers and other persons may be used to illustrate
aspects of a Fund's performance;
o the effect of tax-deferred compounding on a Fund's investment
returns, or on returns in general, may be illustrated by graphs,
charts, etc. where such graphs or charts would compare, at
various points in time, the return from an investment in a Fund
(or returns in general) on a tax-deferred basis (assuming
reinvestment of capital gains and dividends and assuming one or
more tax rates) with the return on a taxable basis; and
o the sectors or industries in which a Fund invests may be
compared to relevant indices or surveys (e.g., S&P Industry
Surveys) in order to evaluate a Fund's historical performance or
current or potential value with respect to the particular
industry or sector.
TAXES
Each Fund is treated as a separate entity for federal income tax
purposes. Each Fund intends to elect to be treated, and intends to qualify for
each taxable year, as a separate "regulated investment company" under Subchapter
M of the Internal Revenue Code (the "Code"). As such and by complying with the
applicable provisions of the Code regarding the sources of its income, the
timing of its distributions, and the diversification of its assets, each Fund
will not be subject to federal income tax on taxable income (including net
realized capital gains) which is distributed to shareholders in accordance with
the timing and other requirements of the Code.
Qualification of a Fund for treatment as a regulated investment company
under the Code requires, among other things, that (a) at least 90% of a Fund's
gross income for its taxable year, without offset for losses from the sale or
other disposition of stock or securities or other transactions, be derived from
interest, dividends, payments with respect to securities loans and gains from
the sale or other disposition of stock or securities or foreign currencies, or
other income (including but not limited to gains from options, futures, or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies; (b) each Fund distribute to its shareholders
for each taxable year (in compliance with certain timing requirements) as
dividends at least 90% of the sum of its taxable and any tax-exempt net
investment income, the excess of net short-term capital gain over net long-term
capital loss and any other net income for that year (except for the excess, if
any, of net long-term capital gain over net short-term capital loss, which need
not be distributed in order for the Fund to qualify as a regulated investment
company but is taxed to the Fund if it is not distributed); and (c) each Fund
diversify its assets so that, at the close of each quarter of its taxable year,
(i) at least 50% of the fair market value of its total (gross) assets is
comprised of cash, cash items, U.S. Government securities, securities of other
regulated investment companies and other securities limited in respect of any
one issuer to no more than 5% of the fair market value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer and (ii) no
more than 25% of the fair market value of its total assets is invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies) or of two or more issuers
controlled by the Fund and engaged in the same, similar, or related trades or
businesses.
Each Fund also intends to comply with the separate diversification
requirements imposed by Section 817(h) of the Code and the regulations
thereunder on certain insurance company separate accounts. These requirements,
which are in addition to the diversification requirements imposed on a Fund by
the 1940 Act and Subchapter M of the Code, place certain limitations on assets
of each insurance company separate account used to fund variable contracts.
Because Section 817(h) and those regulations treat the assets of the Fund as
assets of the related separate account, these regulations are imposed on the
assets of a Fund. Specifically, the regulations provide that, after a one year
start-up period or except as permitted by the "safe harbor" described below, as
of the end of each calendar quarter or within 30 days thereafter no more than
55% of the total assets of a Fund may be represented by any one investment, no
more than 70% by any two investments, no more than 80% by any three investments
and no more than 90% by any four investments. For this purpose, all securities
of the same issuer are considered a single investment, and each U.S. Government
agency and instrumentality is considered a separate issuer. Section 817(h)
provides, as a safe harbor, that a separate account will be treated as being
adequately diversified if the diversification requirements under Subchapter M
are satisfied and no more than 55% of the value of the account's total assets is
attributable to cash and cash items (including receivables), U.S. Government
securities and securities of other regulated investment companies. Failure by a
Fund to both qualify as a regulated investment company and satisfy the Section
817(h) requirements would generally cause the variable contracts to lose their
favorable tax status and require a contract holder to include in ordinary income
any income accrued under the contracts for the current and all prior taxable
years. Under certain circumstances described in the applicable Treasury
regulations, inadvertent failure to satisfy the applicable diversification
requirements may be corrected, but such a correction would require a payment to
the Internal Revenue Service based on the tax contract holders would have
incurred if they were treated as receiving the income on the contract for the
period during which the diversification requirements were not satisfied. Any
such failure may also result in adverse tax consequences for the insurance
company issuing the contracts. Failure by a Fund to qualify as a regulated
investment company would also subject the Fund to federal and state income
taxation on all of its taxable income and gain, whether or not distributed to
shareholders.
Under certain circumstances, the Fund will be subject to a 4%
nondeductible federal excise tax on any amounts required to be but not
distributed under a prescribed formula. The formula requires that a Fund
distribute (or be deemed to have distributed) to its shareholders during each
calendar year at least 98% of the Fund's ordinary income for the calendar year,
at least 98% of the excess of its capital gains over its capital losses realized
during the one-year period ending on October 31 of such year, and any income or
gain (as so computed) from the prior calendar year that was not distributed for
such year and on which the Fund paid no income tax. Each Fund intends generally
to seek to avoid liability for this tax.
Any dividend declared by a Fund in October, November or December as of a
record date in such a month and paid the following January will be treated for
federal income tax purposes as received by shareholders on December 31 of the
year in which it is declared.
If a Fund acquires any equity interest in certain foreign corporations
that receive at least 75% of their annual gross income from passive sources
(such as interest, dividends, certain rents and royalties, or capital gains) or
hold at least 50% of their assets in investments producing such passive income
("passive foreign investment companies"), that Fund could be subject to federal
income tax and additional interest charges on "excess distributions" received
from such companies or gain from the sale of stock in such companies, even if
all income or gain actually received by the Fund is timely distributed to its
shareholders. The Fund would not be able to pass through to its shareholders any
credit or deduction for such a tax. Certain elections may ameliorate these
adverse tax consequences, but any such election could require the applicable
Fund to recognize taxable income or gain (subject to tax distribution
requirements) without the concurrent receipt of cash. These investments could
also result in the treatment of associated capital gains as ordinary income. Any
Fund that is permitted to invest in foreign corporations may limit and/or manage
its holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
Foreign exchange gains and losses realized by a Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency futures and options, foreign currency forward
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code. Section 988 generally
causes such gains and losses to be treated as ordinary income and losses and may
affect the amount, timing and character of distributions to shareholders. Any
such transactions that are not directly related to a Fund's investment in stock
or securities, possibly including speculative currency positions or currency
derivatives not used for hedging purposes, could under future Treasury
regulations produce income not among the types of "qualifying income" from which
the Fund must derive at least 90% of its annual gross income. Income for
investments in commodities, such as gold and certain related derivative
instruments, is also not treated as qualifying income under this test. If the
net foreign exchange loss for a year treated as ordinary loss under Section 988
were to exceed a Fund's investment company taxable income computed without
regard to such loss, the resulting overall ordinary loss for such year would not
be deductible by the Fund or shareholders in future years.
A Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes in
some cases.
Investments in debt obligation that are at risk of default may present
special tax issues. Tax rules may not be entirely clear about issues such as
when a Fund may cease to accrue interest, original issue discount, or market
discount, when and to what extent deductions may be taken for bad debts or
worthless securities, how payments received on obligations in default should be
allocated between principal and income, and whether exchanges of debt
obligations in a workout context are taxable. These and any other issues will be
addressed by a Fund, in the event it invests in such securities, in order to
seek to ensure that it distributes sufficient income to preserve its status as a
regulated investment company and does not become subject to federal income or
excise tax.
Each Fund that invests in certain pay in-kind securities ("PIKs") (debt
securities whose interest payments may be made either in cash or in-kind), zero
coupon securities, deferred payment securities, or certain increasing rate
securities (and, in general, any other securities with original issue discount
or with market discount if the Fund elects to include market discount in income
currently) must accrue income on such investments prior to the receipt of the
corresponding cash payments. However, each Fund must distribute, at least
annually, all or substantially all of its net income, including such accrued
income, to shareholders to qualify as a regulated investment company under the
Code and avoid federal income tax. Therefore, a Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to leverage itself by borrowing the cash, to satisfy distribution
requirements.
Redemptions and exchanges of Fund shares are potentially taxable
transactions for shareholders that are subject to tax. Shareholders should
consult their own tax advisers to determine whether any particular transaction
in Fund shares is properly treated as a sale for tax purposes, as the following
discussion assumes, and to ascertain its tax consequences in their particular
circumstances. Any loss realized by a shareholder upon the redemption, exchange
or other disposition of shares with a tax holding period of six months or less
will be treated as a long-term capital loss to the extent of any amounts treated
as distribution of long-term capital gain with respect to such shares. Losses on
redemptions or other dispositions of shares may be disallowed under wash sale
rules in the event of other investments in the same Fund (including through
automatic reinvestment of dividends and distributions) within a period of 61
days beginning 30 days before and ending 30 days after a redemption or other
disposition of shares. In such a case, the disallowed portion of any loss would
be included in the federal tax basis of the shares acquired in the other
investments.
Limitations imposed by the Code on regulated investment companies like
the Fund may restrict a Fund's ability to enter into futures, options and
currency forward transactions.
Certain options, futures and forward foreign currency transactions
undertaken by a Fund may cause the Fund to recognize gains or losses from
marking to market even though its securities or other positions have not been
sold or terminated and affect the character as long-term or short-term (or, in
the case of certain currency forwards, options and futures, as ordinary income
or loss) and timing of some capital gains and losses realized by the Fund. Also,
certain of a Fund's losses on its transactions involving options, futures and
forward foreign currency contracts and/or offsetting or successor portfolio
positions may be deferred rather than being taken into account currently
calculating the Fund's taxable income or gains. These transactions may therefore
affect the amount, timing and character of a Fund's distributions to
shareholders. Certain of the applicable tax rules may be modified if the Fund is
eligible and chooses to make one or more of certain tax elections that may be
available. The Funds will take into account the special tax rules (including
consideration of available elections) applicable to options, futures or forward
contracts in order to minimize any potential adverse tax consequences.
The tax rules applicable to dollar rolls, currency swaps and interest
rate swaps, caps, floors and collars may be unclear in some respects, and the
Funds may be required to limit participation in such transactions in order to
qualify as regulated investment companies. Additionally, the Fund may be
required to recognize gain, but not loss, if any option, collar, futures
contract, swap, short sale or other transaction that is not subject to the
market-to-market rules is treated as a constructive sale of an appreciated
financial position in the Fund's portfolio under Section 1259 of the Code. The
Fund may have to sell portfolio securities under disadvantageous circumstances
to generate cash, or borrow cash, to satisfy these distribution requirements.
The foregoing discussion relates solely to U.S. federal income tax law
as applicable to the Funds and certain aspects of their distributions. The
discussion does not address special tax rules applicable to insurance companies.
<PAGE>
CUSTODIAN, TRANSFER AGENT, FUND ACCOUNTANT AND ADMINISTRATOR
Investors Bank & Trust Company, 200 Clarendon Street, Boston,
Massachusetts 02116, provides the Funds with transfer agent, accounting,
administrative and custodial services.
INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements of the Trust will be audited by Deloitte &
Touche LLP, Two Prudential Plaza, 180 North Stetson Avenue, Chicago, Illinois
60601-6779, independent public accountants, for the periods indicated in their
report.
<PAGE>
APPENDIX A
Description of S & P, Moody's, Fitch and Duff ratings:
S & P
Bond Ratings
AAA
Bonds rated AAA have the highest rating assigned by the S & P. Capacity
to pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay
principal.
A
Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher rated
categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than bonds in higher rated categories.
BB
Bonds rated BB have less near-term vulnerability to default than other
speculative grade debt. However, they face major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
B
Bonds rated B have a greater vulnerability to default but presently have
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC
Bonds rated CCC have a current identifiable vulnerability to default and
are dependent upon favorable business, financial and economic conditions to meet
timely payments of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
CC
The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C
The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating.
D
Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
S & P's letter ratings may be modified by the addition of a plus (+) or
a minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
Commercial Paper Rating
An S & P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Issues assigned an A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1
This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
designation.
A-2
Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-3
Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B
Issues carrying this designation are regarded as having only speculative
capacity for timely repayment.
C
This designation is assigned to short-term obligations with doubtful
capacity for payment.
D
Issues carrying this designation are in default, and payment of interest
and/or repayment of principal is in arrears.
Moody's
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 generally are referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are 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.
<PAGE>
A
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and, therefore, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca
Bonds which are rated Ca present obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category and in
the categories below B. The modifier 1 indicates a ranking for the security in
the higher end of a rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of a rating
category.
Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper rating assigned
by Moody's. Issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations, and ordinarily will be evidenced by leading
market positions in well established industries, high rates of return on funds
employed, conservative capitalization structures with moderate reliance on debt
and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations. This
ordinarily will be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be subject
to more variation. Capitalization characteristics, while still appropriate, may
be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers (or related supporting institutions) rated Prime-3 (P-3) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirements for relatively
high financial leverage.
Adequate alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Not Prime do not fall
within any of the Prime rating categories.
Fitch
Bond Rating
The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of specific debt issue or class of debt. The ratings take into
consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
<PAGE>
AAA
Bonds rated AAA are considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA
Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F1+.
A
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB
Bonds rated BB are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B
Bonds rated B are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC
Bonds rated CCC have certain identifiable characteristics, which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC
Bonds rated CC are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C
Bonds rated C are in imminent default in payment of interest or
principal.
DDD, DD and D
Bonds rated DDD, DD and D are in actual default of interest and/or
principal payments. Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or reorganization of
the obligor. DDD represents the highest potential for recovery on these bonds
and D represents the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA category covering 12-36 months.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating analysis,
the short-term rating places greater emphasis than bond ratings on the existence
of liquidity necessary to meet the issuer's obligations in a timely manner.
F-1+
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2
Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
F-3
Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate; however,
near-term adverse changes could cause these securities to be rated below
investment grade.
F-S
Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near-term adverse changes in financial and economic conditions.
D
Default. Issues assigned this rating are in actual or imminent payment
default.
Duff
Bond Ratings
AAA
Bonds rated AAA are considered highest credit quality. The risk factors
are negligible, being only slightly more than for risk-free U.S. Treasury debt.
AA
Bonds rated AA are considered high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
<PAGE>
A
Bonds rated A have protection factors which are average but adequate.
However, factors are more variable and greater in periods of economic stress.
BBB
Bonds rated BBB are considered to have below average protection factors
but still considered sufficient for prudent investment. There may be
considerable variability in risk for bonds in this category during economic
cycles.
BB
Bonds rated BB are below investment grade but are deemed by Duff as
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 the category.
B
Bonds rated B are below investment grade and possess the 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 quality rating within
this category or into a higher or lower quality rating grade.
CCC
Bonds rated CCC are well below investment grade securities. Such bonds
may be in default or have considerable uncertainty as to timely payment of
interest, preferred dividends and/or principal. Protection factors are narrow
and risk can be substantial with unfavorable economic or industry conditions
and/or with unfavorable company developments.
DD
Defaulted debt obligations. Issuer has failed to meet scheduled
principal and/or interest payments.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating category.
Commercial Paper Rating
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small. Paper rated
Duff-3 is regarded as having satisfactory liquidity and other protection
factors. Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected. Paper rated Duff-4 is regarded as having speculative
investment characteristics. Liquidity is not sufficient to insure against
disruption in debt service. Operating factors and market access may be subject
to a high degree of variation. Paper rated Duff-5 is in default. The issuer has
failed to meet scheduled principal and/or interest payments.
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS:
(a) Declaration of Trust*
(b) By-Laws of the Trust*
(c) Inapplicable
(d1) Form of Management Agreement*
(d2) Advisory Agreement with respect to Structured Equity Fund* Advisory
Agreement with respect to Growth Equity Fund* Advisory Agreement with
respect to Value Equity Fund* Advisory Agreement with respect to
Aggressive Equity Fund* Advisory Agreement with respect to Balanced
Value Fund*
(e) Inapplicable
(f) Inapplicable
(g) Custodian Agreement*
(h) Other Material Contracts
(h1) Administration Agreement*
(h2) Transfer Agency and Service Agreement*
(h3) Participation Agreement*
(i) Opinion of Counsel*
(j) Consent of Independent Accountants*
(k) Inapplicable
(l) Investment letter of initial shareholder*
(m) Inapplicable
(n) Inapplicable
(o) Inapplicable
* (to be filed by pre-effective amendment)
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE TRUST
[To Be Provided By Pre-Effective Amendment]
ITEM 25. INDEMNIFICATION
Under Article VII, Section 2 of the Trust's Declaration of Trust, the
Trustees shall not be responsible or liable in any event for any neglect or
wrong-doing of any officer, agent, employee, Investment Adviser or any principal
underwriter of the Trust, nor shall any Trustee be responsible for the act or
omission of any other Trustee, and the Trust out of its assets shall indemnify
and hold harmless each and every Trustee from and against any and all claims and
demands whatsoever arising out of or related to each Trustee's performance of
his or her duties as Trustee of the Trust; provided that nothing herein
contained shall indemnify, hold harmless or protect any Trustee from or against
any liability to the Trust or any Shareholder to which he or she would otherwise
be subject by reason of wilful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be permitted to Trustees, officers
and controlling persons of the Trust pursuant to the foregoing provisions, or
otherwise, the Trust has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Trust of expenses incurred or paid by a Trustee,
officer or controlling person of the Trust 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, the Trust 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 express in the 1933 Act
and will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
LSA Asset Management LLC (the "Manager") serves as investment adviser to
each Fund.
Set forth below are the names, principal business addresses and
positions of each director and officer of the Manager. Unless otherwise noted,
the principal business address of these individuals is 3100 Sanders Road, J5B,
Northbrook, Illinois 60062. Unless otherwise specified, none of the officers and
directors of the Manager serve as officers and Trustees of the Trust.
POSITIONS AND OFFICES POSITION AND OFFICES
NAME WITH THE MANAGER WITH THE REGISTRANT
[To be provided by pre-effective amendment]
ITEM 27. PRINCIPAL UNDERWRITERS
Inapplicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The Declaration of Trust, By-laws, minute books of the Registrant and
certain investment adviser records are in the physical possession of LSA Asset
Management LLC at 3100 Sanders Road, J5B, Northbrook, Illinois 60062. All other
accounts, books and other documents required to be maintained under Section
31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder
are in the physical possession of IBT at 200 Clarendon Street, Boston,
Massachusetts 02116.
ITEM 29. MANAGEMENT SERVICES
Inapplicable
ITEM 30. UNDERTAKINGS
Inapplicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, as amended, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Northbrook and the State of Illinois on the 11th
day of June, 1999.
Michael J. Velotta
-------------------------
(Sole Trustee)
By:/s/ Michael J. Velotta
----------------------------
Michael J. Velotta
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 11th day of June, 1999.
SIGNATURE TITLE DATE
- ------------------- ------------------- June 11, 1999
Michael J. Velotta President and Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
[To be Filed by Pre-effective Amendment]