PFPC Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406
Via EDGAR
December 1, 2000
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549-1004
RE: Kelmoore Strategy(TM) Variable Funds (the "Funds") -- (File No. 333-88877)
Definitive Prospectus and Statement of Additional Information
To the Staff of the Commission:
Pursuant to Rule 497(c) of the General Rules and Regulations under the
Securities Act of 1933, as amended, enclosed herewith please find the final form
of the Prospectus and Statement of Additional Information each dated August 15,
2000, for the above-referenced Fund. The Funds commenced operations on November
27, 2000.
If you have any questions concerning the foregoing, please call the
undersigned at (610) 239-4741. Thank you.
Very truly yours,
/s/ Sandra L. Adams
Sandra L. Adams
Senior Regulatory Administrator
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THE KELMOORE STRATEGY(TM) VARIABLE FUNDS
[GRAPHIC OMITTED]
PROSPECTUS
Kelmoore Strategy(TM) Variable Fund
Kelmoore Strategy(TM) Variable Eagle Fund
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AUGUST 15, 2000
This prospectus contains important information about the
Kelmoore Strategy(TM) Variable Fund
and the Kelmoore Strategy(TM) Variable Eagle Fund
which are available only through the purchase of a variable annuity contract
or variable life insurance policy
through a separate account of an insurance company.
This prospectus should be accompanied
by the prospectus for such contract.
These prospectuses contain important information.
Please read them before investing and keep them for future reference.
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.
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CONTENTS
RISK/RETURN SUMMARY 1
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KELMOORE STRATEGY(TM) VARIABLE FUND
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What is the Fund's Primary Goal? 1
What is the Fund's Main Strategy? 1
What are the Fund's Main Risks? 2
Who may want to invest in the Fund? 3
KELMOORE STRATEGY(TM) VARIABLE EAGLE FUND
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What is the Fund's Primary Goal? 4
What is the Fund's Main Strategy? 4
What are the Fund's Main Risks? 4
Who may want to invest in the Fund? 5
BAR CHART AND PERFORMANCE TABLE 6
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MAIN STRATEGY 6
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MAIN RISKS 9
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MANAGEMENT OF THE FUNDS 10
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PURCHASE AND REDEMPTION OF SHARES 12
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DIVIDENDS, DISTRIBUTIONS AND TAXES 13
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SPECIAL INFORMATION ABOUT THE FUNDS 14
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FINANCIAL HIGHLIGHTS 14
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ADDITIONAL INFORMATION BACK COVER
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Shareholder Reports BACK COVER
Statement of Additional Information BACK COVER
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RISK/RETURN SUMMARY
What are the Funds?
The Kelmoore Strategy(TM) Variable Fund and the Kelmoore
Strategy(TM) Variable Eagle Fund (each a "Fund" and
collectively the "Funds") are mutual funds that are available
only through the purchase of a variable annuity contract or
variable life insurance policy issued through a separate
account of an insurance company. Before you invest, please
read this prospectus along with the prospectus describing the
variable annuity contract or variable life insurance policy
("Variable Contract"). Keep both prospectuses for future
reference.
Only insurance company separate accounts may purchase shares
of the Funds. You may not invest directly in the Funds. You
should read the Variable Contract prospectus for information
about:
o Purchasing the Variable Contract
o The terms of the Variable Contract
o Expenses related to purchasing the Variable Contract
KELMOORE STRATEGY(TM) VARIABLE FUND
WHAT IS THE FUND'S PRIMARY GOAL?
The Fund's primary goal is to maximize realized gains from
writing covered options on common stocks. This goal cannot be
changed without shareholder approval. As with any mutual fund,
there is no guarantee that a Fund will achieve its goal.
WHAT IS THE FUND'S MAIN STRATEGY?
The Fund's main strategy is to purchase the common stocks of a
limited number of large companies which have strong financial
fundamentals and to continually sell or "write" related
covered call options against substantially all the shares of
stock it owns. The Fund will consist primarily of mid and
large cap leaders in finance, consumer goods, manufacturing,
resources and technology.
When the Fund purchases a stock, it simultaneously writes
covered call options on the stock. The options written by the
Fund are considered "covered" because the Fund owns the stock
against which the options are written. As a result, the number
of covered call options the Fund can write against any
particular stock is limited by the number of shares of that
stock the Fund holds.
To maximize options premiums generated, Kelmoore Investment
Company, Inc. (the "Adviser") writes as many covered call
options on the stocks the Fund owns as it can in order to
maximize gains. The Adviser writes options of a duration and
exercise price which provide the Fund with the highest
expected return.
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The Fund will typically hold no more than forty common stocks.
This number may fluctuate at the discretion of the Adviser.
The issuers of stocks selected for investment by the Fund will
have a market capitalization in excess of $10 billion and will
tend to have most of the following characteristics:
o considered to be industry leaders
o have strong financial fundamentals
o are widely-held and have a high daily trading volume
o are multi-national corporations
o have relatively stable prices and dividends
WHAT ARE THE FUND'S MAIN RISKS?
As with any mutual fund, the value of the Fund's investments,
and therefore the value of the Fund's shares, will fluctuate.
If the net asset value of shares declines below the price you
paid, you will lose money. The performance of the Fund may
also vary substantially from year to year. The Fund by itself
does not constitute a balanced investment program. The
principal risks associated with an investment in the Fund
include:
RISKS OF INVESTING IN STOCKS:
o stock market risk, or the risk that the price of the
securities owned by the Fund may fall due to changing
economic, political or market conditions
o selection risk, or the risk that the stocks or
sectors owned by the Fund will underperform the stock
market as a whole or certain sectors of the stock
market
RISKS OF WRITING COVERED CALL OPTIONS:
o risk of limiting gains on stocks in a rising market
o risk of unanticipated exercise of the option
o lack of liquid options market
o decreases in option premiums
OTHER RISKS:
o lack of liquidity in connection with purchases and
sales of portfolio securities
o relatively higher cost of options trades
o forced liquidation of securities underlying the
options
o loss of part or all of your money invested in the
Fund
An investment in the Fund is not a deposit of any bank and is
not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
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WHO MAY WANT TO INVEST IN THE FUND?
Kelmoore Strategy(TM) Variable Fund may be appropriate for you
if you:
o are seeking to maximize short-term capital gains in
the form of dividends and are willing to assume more
risk to increase the level of those gains
o can accept the risks of investing in a portfolio of
common stocks and their related options
o are seeking a disciplined and continual reinvestment
of premiums generated from writing options can
tolerate performance which can vary substantially
from year to year
You should NOT invest in this Fund if you are seeking capital
appreciation or predictable levels of income or are investing
for a short period of time.
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KELMOORE STRATEGY(TM) VARIABLE EAGLE FUND
WHAT IS THE FUND'S PRIMARY GOAL?
The Fund's primary goal is to maximize realized gains from
writing covered options on common stocks. This goal cannot be
changed without shareholder approval. As with any mutual fund,
there is no guarantee that a Fund will achieve its goal.
WHAT IS THE FUND'S MAIN STRATEGY?
The main strategy of the Kelmoore Strategy(TM) Variable Eagle
Fund is to purchase the common stocks of a limited number of
Technology, Communications and Financial companies which have
strong financial fundamentals, and to continually sell or
"write" related covered call options against substantially all
of the shares of stock it owns. The Adviser generally seeks
over time to maintain a balance of the Fund's assets invested
among these three sectors. In addition, the Fund may from time
to time purchase a stock not in the market sectors noted above
if particularly attractive options may be sold against the
stock. The Fund will consist primarily of mid and large cap
leaders in Technology and Communications.
When the Fund purchases a stock, it simultaneously writes
covered call options on the stock. The options written by the
Fund are considered "covered" because the Fund owns the stock
against which the options are written. As a result, the number
of covered call options the Fund can write against any
particular stock is limited by the number of shares of that
stock the Fund holds.
To maximize options premiums generated, the Adviser writes as
many covered call options on the stocks the Fund owns as it
can. The Adviser writes options of a duration and exercise
price which provide the Fund with the highest expected return.
The Fund will typically hold no more than thirty common
stocks. This number may fluctuate at the discretion of the
Adviser. The issuers of stock selected for investment by the
Fund will have a market capitalization in excess of $500
million and will tend to have most of the following
characteristics:
o considered to be leading edge technology companies
o have a commanding marketing position
o are widely-held and have a high daily trading volume
o have strong financial fundamentals
o have a higher volatility than the stocks selected by
the Kelmoore Strategy(TM) Variable Fund
WHAT ARE THE FUND'S MAIN RISKS?
As with any mutual fund, the value of the Fund's investments,
and therefore the value of the Fund's shares, will fluctuate.
If the net asset value of your shares
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declines below the price you paid, you will lose money. The
performance of the Fund may also vary substantially from year
to year. The principal risks associated with an investment in
the Fund include:
RISKS OF INVESTING IN STOCKS:
o enhanced stock market risk, or the risk that the
price of the securities owned by the Fund may fall
due to changing economic, political or market
conditions
o enhanced selection risk, or the risk that the stocks
of sectors selected by the Fund will substantially
underperform the stock market as a whole or certain
sectors of the stock market
o financial risk, or the risk that the stock may file
bankruptcy proceedings or be acquired on unfavorable
terms to the stockholders
o technology risk, or the risk that new products,
systems or information will be developed and
introduced to the marketplace substantially reducing
the value of the stock
RISKS OF WRITING COVERED CALL OPTIONS:
o risk of limiting gains on stocks in a rising market
o risk of unanticipated exercise of the option
o lack of liquid options markets
o decreases in option premiums
OTHER RISKS:
o lack of liquidity in connection with purchases and
sales of portfolio securities
o relatively higher cost of options trades
o forced liquidation of securities underlying the
options
o loss of part or all of your money invested in the
Fund
WHO MAY WANT TO INVEST IN THE FUND?
Kelmoore Strategy(TM) Variable Eagle Fund may be appropriate
for you if you:
o are seeking to maximize short-term capital gains in
the form of dividends and are willing to assume more
risk to increase the level of those gains
o can accept the risks of investing in a portfolio of
common stocks and their related options
o are seeking a disciplined and continual reinvestment
of premiums generated from writing options
o can tolerate performance which can vary substantially
from year to year
o can accept wide variation in the value of the Fund's
shares which could cause a capital loss upon
redemption of shares
You should NOT invest in this Fund if you are seeking capital
appreciation or predictable levels of income or are investing
for a short period of time.
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BAR CHART AND PERFORMANCE TABLE
Although past performance of a fund is no guarantee of how it
will perform in the future, historical performance may give
you some indication of the risks of investing in a mutual
fund. Performance demonstrates how a fund's returns have
varied over time. The Funds are recently organized and
therefore have no performance history. Performance information
will be included in the Prospectus when the Funds complete a
full calendar year of operation. Each Fund's annual returns
will also be compared to the returns of a benchmark index. As
with all mutual funds, past performance does not indicate
future results. The investment objective, policies and
management of the Funds are the same as the Kelmoore
Strategy(TM) Fund and the Kelmoore Strategy(TM) Eagle Fund
which are publicly offered "retail" mutual funds.
Notwithstanding the general similarities, the retail funds and
these Funds are separate mutual funds that will have different
investment performance, and the Funds make no representation
that their performance will be comparable to any other mutual
fund.
MAIN STRATEGY
To generate option premiums, the Funds each purchase the
common stocks of a limited number of companies and
simultaneously write covered call options on these stocks. As
the options are exercised or expire, and the proceeds or
underlying stock become available for reinvestment or cover,
the Funds repeat the process.
The fundamentals of selling covered call options are as
follows:
THE FUND SELLS THE OPTION
Selling a call option is selling the right to an option buyer
the right to purchase a specified number of shares (100 shares
equals one option contract) from the Fund, at a specified
price (the "exercise price") on or before a specified date
(the "expiration date"). The call option is covered because
the Fund owns, and has segregated, the shares of stock on
which the option is based. A segregated account is established
with the Fund's custodian to hold separately either the shares
of stock or cash equal to the value of the Fund's obligation
under the option. This eliminates certain risks associated
with selling uncovered, or "naked" options.
THE FUND COLLECTS A PREMIUM
For the right to purchase the underlying stock, the buyer of a
call option pays a fee or "premium" to the Fund. The premium
is paid at the time the option is purchased, and is not
refundable to the buyer, regardless of what happens to the
stock price.
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IF THE OPTION IS EXERCISED
The buyer of the option may elect to purchase the stock
(exercise, or "call" the option) at the exercise price at any
time before the option expires. The Fund is then obligated to
deliver the shares at that price. Options are normally
exercised on or before the expiration date if the market price
of the stock exceeds the exercise price of the option.
Generally, if the exercise price plus the option premium are
higher than the price the Fund originally paid to purchase the
stock, the Fund will realize a gain on the sale of the stock;
if the exercise price and premium are lower, the Fund will
realize a loss. By selling a covered call option, the Fund
foregoes the opportunity to benefit from an increase in price
of the underlying stock above the exercise price.
IF THE OPTION EXPIRES
If the market price of the stock does not exceed the exercise
price, the call option will likely expire without being
exercised. The Fund keeps the premium and the stock. The Fund
then expects to sell new call options against those same
shares of stock. This process is repeated until: a) an option
is exercised, or b) the stock is sold because it no longer
meets the Adviser's investment criteria, a corporate event
such as a merger or reorganization has occurred, or the
proceeds are used to fund redemptions.
OTHER FEATURES
The call options written by each Fund are listed for trading
on one or more domestic securities exchanges and are issued by
the Options Clearing Corporation ("OCC"). If a dividend is
declared on stock underlying a covered call option written by
the Fund, the dividend is paid to the Fund and not the owner
of the covered call option.
For the Kelmoore Strategy(TM) Variable Fund, to decrease the
risks of volatile or reduced premiums, the Adviser seeks to
select underlying common stocks of larger companies which have
high trading volumes and relatively stable prices and
dividends. To reduce stock selection risk, the companies the
Adviser selects generally are considered to be industry
leaders and to have strong financial fundamentals. In
addition, to reduce overall market risk, the Adviser normally
invests across five different industry sectors.
For the Kelmoore Strategy(TM) Variable Eagle Fund, the
Adviser seeks to select underlying common stocks of high
growth companies which have high trading volumes, increased
volatility and a greater price fluctuation than the stocks
held by the Kelmoore Strategy(TM) Variable Fund. To reduce
stock selection risk, the Adviser selects stocks that are
generally considered to be industry leaders and have strong
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financial fundamentals. In addition, to reduce overall market
risk, the Adviser normally invests across three industry
sectors.
To reduce transaction costs and to avoid realizing capital
gains or losses on portfolio stocks, the Adviser seeks, when
practical, to hold portfolio stocks and to enter into closing
purchase transactions before call options a Fund writes are
exercised. It may be impractical in certain circumstances to
effect such closing purchase transactions in a timely or
advantageous manner, for example, if the option is exercised
unexpectedly or if the market for the option is illiquid.
SECURED PUT OPTIONS
A Fund may also write secured put options either to earn
additional option premiums (anticipating that the price of the
underlying security will remain stable or rise during the
option period and the option will therefore not be exercised)
or to acquire the underlying security at a net cost below the
current value. Secured put option writing entails the Fund's
sale of a put option to a third party for a premium and the
Fund's concurrent deposit of liquid assets (cash or U.S.
government securities) into a segregated account equal to the
option's exercise price. A put option gives the buyer the
right to put (sell) the stock underlying the option to the
Fund at the exercise price at any time during a specified time
period.
The Funds will only write secured put options in circumstances
where the Fund desires to acquire the security underlying the
option at the exercise price specified in the option. Put
options written by a Fund are listed for trading on one or
more domestic securities exchanges and are issued by the OCC.
When a Fund writes secured put options, it bears the risk of
loss if the value of the underlying stock declines below the
exercise price. If the option is exercised, the Fund could
incur a loss if it is required to purchase the stock
underlying the put option at a price significantly greater
than the current market price of the stock. While the Fund's
gain on a put option is limited to the interest earned on the
liquid assets securing the put option plus the premium
received from the purchaser of the put option, the Fund risks
the entire loss in the value of the stock.
TEMPORARY DEFENSIVE POSITION
In attempting to respond to adverse market, economic,
political or other conditions, each Fund may invest up to 100%
of its assets in cash or cash equivalents. When a Fund takes a
temporary defensive position, it may not achieve its stated
investment objective.
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MAIN RISKS
INVESTING IN EQUITY SECURITIES
Investing in equity securities includes the risks inherent in
investing in stocks and the stock market generally. The value
of securities in which each Fund invests, and therefore each
Fund's net asset value, will fluctuate due to economic,
political and market conditions. As with any mutual fund which
invests in equity securities, there is also the risk that the
securities or sectors selected by a Fund will underperform the
stock market or certain sectors of the market or that the
amount of any dividends paid on the securities will be
reduced.
WRITING COVERED CALL OPTIONS
When a Fund writes covered call options, it forgoes the
opportunity to benefit from an increase in the value of the
underlying stock above the exercise price, but continues to
bear the risk of a decline in the value of the underlying
stock. While the Fund receives a premium for writing the call
option, the price the Fund realizes from the sale of the stock
upon exercise of the option could be substantially below its
prevailing market price. The purchaser of the call option may
exercise the call at any time during the option period (the
time between when the call is written and when it expires).
Alternatively, if the value of the stock underlying the call
option is below the exercise price, the call is not likely to
be exercised, and the Fund could have an unrealized loss on
the stock, offset by the amount of the premium received by the
Fund when it wrote the option.
There is no assurance that a liquid market will be available
at all times for a Fund to write call options or to enter into
closing purchase transactions. In addition, the premiums the
Fund receives for writing call options may decrease as a
result of a number of factors, including a reduction in
interest rates generally, a decline in stock market volumes or
a decrease in the price volatility of the underlying
securities.
LACK OF LIQUIDITY
A Fund's investment strategy may result in a lack of liquidity
in connection with purchases and sales of portfolio
securities. As long as the writer of a covered option (the
Fund) is obligated under the option, the writer will continue
to own the underlying securities subject to the option. Until
that time, the Fund will not sell the underlying securities.
The Fund may therefore be unable to sell existing stocks in
its portfolio to take advantage of new investment
opportunities, and the cash available to the Fund to purchase
new stocks may consist primarily of proceeds received from the
sale of new Fund shares.
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MANAGEMENT OF THE FUNDS
BOARD OF TRUSTEES
The Fund's shareholders elect a Board of Trustees. The
Trustees oversee each Fund's activities.
INVESTMENT ADVISER
Kelmoore Investment Company, Inc. is the investment adviser
for each Fund. The Adviser manages each Fund's investments and
supervises the daily business affairs of the Funds. The
Adviser is a registered investment adviser and broker-dealer.
The Funds intend to place substantially all transactions in
both stocks and options with the Adviser in its capacity as a
registered broker-dealer. The Adviser was established in 1992
by Ralph M. Kelmon, Jr., who is the principal shareholder. The
Adviser offers investment advisory and brokerage services to
individual clients, trusts, corporations, institutions and
private investment funds using the same investment strategy
that the Funds employ. The Adviser manages the Kelmoore
Strategy(TM) Fund and the Kelmoore Strategy(TM) Eagle Fund,
open-end mutual funds with total assets in excess of $275
million. The Adviser's principal address is 2471 East Bayshore
Road, Suite 501, Palo Alto, California 94303.
ADVISORY FEES
Under an investment advisory agreement between the Funds and
the Adviser, each Fund has agreed to pay the Adviser a monthly
fee at the annual rate of 1.00% of its average daily net
assets. The Adviser has voluntarily undertaken to waive all or
a portion of its fee and to reimburse certain expenses of the
Funds so that the total operating expenses of each Fund for
the initial fiscal year will not exceed 2.25%. The Adviser
reserves the right to terminate this undertaking at any time,
in its sole discretion. Any waiver or reimbursement by the
Adviser is subject to reimbursement by the respective Fund
within the first three years of the Fund's operations, to the
extent such reimbursement by the Fund would not cause total
operating expenses to exceed any current expense limitation.
PORTFOLIO MANAGER
The primary portfolio manager for each Fund is Matthew Kelmon.
Mr. Kelmon has been Vice President of Trading for the Adviser
from 1994 to the present. Mr. Kelmon manages the day-to-day
trading activities of the Adviser and is responsible for
designing and implementing the in-house software system
(OPTRACKER(TM)) used in the investment process. Mr. Kelmon has
been responsible for the day-to-day management and
implementation of The Kelmoore Strategy(TM) for private
accounts and limited partnerships from 1994 to the present.
Mr. Kelmon also heads up the equity selection committee of the
Adviser.
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PRINCIPAL DISTRIBUTOR
It is anticipated that each Fund will place substantially all
of its transactions, both in stocks and options with the
Adviser in its capacity as a broker dealer. As the level of
option writing increases, the level of commissions paid by the
Fund to the Adviser increases. Because the Adviser receives
compensation based on the amount of transactions completed,
there is an incentive on the part of the Adviser to effect as
many transactions as possible. While the Fund does not intend
to trade the stocks in its portfolio actively, it is in the
interest of the Funds to write as many options as possible,
thereby maximizing the premiums it receives. In practice, the
number of options written at any time will be limited to the
value of the stocks and other assets in the Funds' portfolio
used to cover or secure those options. Brokerage commissions
are often greater in relation to options premiums than in
relation to the price of the underlying stocks.
DISTRIBUTION PLAN
The Funds have adopted Distribution (12b-1) Plans that allow
each Fund to pay distribution and/or service fees for the sale
and distribution of its shares and for services provided to
shareholders. Each distribution plan permits the Fund to pay
the Adviser, as the Fund's distributor, an annual fee not to
exceed 0.25% of the average daily net assets of the Fund. The
Adviser may use this fee to compensate sponsoring insurance
companies for providing services in connection with Fund
shares. These services may include the following costs: (a) of
printing and mailing prospectuses and reports to prospective
variable contract owners; (b) relating to the development,
preparation, printing and mailing of advertisements, sales
literature and other promotional materials intended for use by
the life insurance company; (c) of holding seminars and sales
meetings designed to promote sales of Fund shares; (d) of
obtaining information and providing explanations to variable
contract owners regarding the Funds' investment objectives and
policies and other information about the Funds; (e) of
training sales personnel regarding the Funds; (f) of
compensating sales personnel in connection with the allocation
of cash values and premiums of the variable contracts; (g) of
personal service and/or maintenance of variable contract owner
accounts with respect to Fund shares attributable to such
accounts; and (h) of financing any other activity that the
Trust's Board of Trustees determines is primarily intended to
result in the sale of the Funds' shares. Payments may also be
made to financial institutions, industry professionals and
broker-dealers for providing distribution assistance relating
to the sale of the Funds' shares. Because these fees are paid
out of each Fund's assets on an on-going basis, over time
these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
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PURCHASE AND REDEMPTION OF SHARES
Each Fund continuously offers its shares to insurance
companies for the funding of Variable Contracts. Shares are
offered at the net asset value ("NAV") per share next
determined after the Fund or its designated agent receives and
accepts a proper purchase request. Shares of the Funds are not
sold directly to the public. The insurance company submits
purchase and redemption orders to the Funds based on
allocation instructions for premium payments, transfer
instructions and surrender or partial withdrawal requests
which are furnished to the insurance company by such Variable
Contract owners. The insurance companies are designated agents
of the Funds. The Funds, the transfer agent and distributor
reserve the right to reject any purchase order in whole or in
part.
The Funds will ordinarily make payment for redeemed shares
within seven (7) business days after the Fund or its
designated agent receives and accepts a proper redemption
order. A proper redemption order will contain all the
necessary information and signatures required to process the
redemption order. The redemption price will be the NAV per
share next determined after the Fund or its designated agent
receives and accepts the shareholder's request in proper form.
The Funds may suspend the right of redemption or postpone the
date of payment during any period when trading on the New York
Stock Exchange ("NYSE") is restricted or the NYSE is closed
for other than weekends and holidays, when an emergency makes
it not reasonably practicable for each Fund to dispose of its
assets or calculate its net asset value or as permitted by the
Securities and Exchange Commission.
Please read the accompanying prospectus for the Variable
Contract for a complete description of the insurance product
through which the Funds are offered including associated fees
and any restrictions on purchases or withdrawals.
HOW IS SHARE PRICE CALCULATED?
The NAV for the Funds is calculated each day the Funds are
open for business as of the close of regular trading on the
NYSE, normally 4:00 p.m., Eastern time. The NAV per share is
calculated by taking the value of the Fund's investments and
other assets, subtracting the liabilities, and then dividing
by the number of the Fund's outstanding shares. Each Fund's
investments are valued based on market value or, if market
value is not readily available, based on fair value as
determined in good faith by or at the direction of the Fund's
board of trustees.
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If the NYSE closes early, the Fund will normally consider the
closing price of a security to be its price at 4:00 p.m.
Eastern time.
The NYSE is typically closed and shares of the Funds will not
be priced on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund intends to distribute substantially all of its
income and capital gains to its shareholders. Distributions of
any net realized long-term capital gains will be made at least
annually. The Funds will declare and pay monthly distributions
from net investment income and any net realized short-term
capital gain. Net investment income consists of dividends and
interest accrued on portfolio investments less accrued
expenses. All dividends and capital gains distributions will
be automatically reinvested at net asset value.
Each Fund intends to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended,
in order to be relieved of federal income tax on that part of
its net investment income and realized capital gains it
distributes to shareholders. To qualify, the Fund must meet
certain relatively complex income and diversification tests.
The loss of such status would result in the Fund being subject
to federal income tax on its taxable income and gains.
Federal tax regulations require that mutual funds offered
through insurance company separate accounts must meet certain
diversification requirements to preserve the tax-deferral
benefits provided by the variable contracts. These
requirements must be met at the end of each quarter of the
year, or within 30 days thereafter. The Adviser intends to
diversify each Fund's investments in accordance with those
requirements. The prospectus for the Variable Contracts
describe the federal income tax treatment of distributions
from such a contract.
Dividends paid by each Fund from its ordinary income and
distributions of net short-term capital gains are includable
in the insurance company's gross income. The tax treatment of
such dividends and distributions depends upon the insurance
company's tax status.
You should consult with your own tax adviser regarding the tax
consequences of your investment in the separate account,
including the application of state and local taxes which may
differ from the federal income tax consequences described.
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SPECIAL INFORMATION ABOUT THE FUNDS
The Funds may offer shares to both variable annuity and
variable life insurance policy separate accounts, and directly
to qualified plans. The Trustees do not anticipate that this
arrangement will disadvantage any Variable Contract owners or
plan participants. The Funds' Board of Trustees monitors
events for the existence of any material irreconcilable
conflict between or among Variable Contract owners and plan
participants. If a material irreconcilable conflict arises,
one or more separate accounts or plans may withdraw their
investment in the Funds. This could possibly force the Fund to
sell portfolio securities at unfavorable prices. The insurance
companies or plans will bear the expenses of establishing
separate portfolios for variable annuity and variable life
insurance separate accounts and plans if such action becomes
necessary; however, ongoing expenses that are ultimately borne
by Variable Contract owners and plan participants will likely
increase due to the loss of the economies of scale benefits
that can be provided to mutual funds with substantial assets.
FINANCIAL HIGHLIGHTS
Financial highlights will be included in the prospectus after
the Funds have a performance history. This information will
reflect financial results for a single Fund share. The total
returns in the table will represent the rates of return that
an investor would have earned on an investment in the Fund,
assuming reinvestment of all dividends and distributions.
14
<PAGE>
ADDITIONAL INFORMATION
SHAREHOLDER REPORTS:
Additional information about each Fund's investments will be
available in the annual and semi-annual reports to
shareholders. In the annual report, a discussion of the market
conditions and investment strategies that significantly
affected the Fund's performance during its last fiscal year
will be included.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI contains additional information about each of the
Funds. It is incorporated by reference into this Prospectus.
To request a free copy of the current annual report,
semi-annual report or SAI, or if you have questions about
investing in the Funds, please write or call:
Kelmoore Investment Company, Inc.
2471 E. Bayshore Road, Suite 501
Palo Alto, CA 94303
(800) 929-1417
You may visit the SEC's website (http://www.sec.gov) to view
reports and other information about the Funds. Copies of this
information may be obtained, after paying a duplicating fee,
by electronic request at the following e-mail address:
[email protected], or by writing the Commission's Public
Reference Section, Washington, D.C. 20549-0102. Call (202)
942-8090 for information on the operation of the Public
Reference Room. In order to assist you in obtaining this
information, the following is the Funds' registration number
under the Investment Company Act of 1940: 811-09625.
THE KELMOORE STRATEGY(TM) TRANSFER AGENT
VARIABLE TRUST PFPC Inc.
2471 E. Bayshore Road 3200 Horizon Drive
Suite 501 P.O. Box 61503
Palo Alto, CA 94303 King of Prussia, PA
19406-0903
INVESTMENT ADVISER CUSTODIAN
AND DISTRIBUTOR PFPC Trust Company
Kelmoore Investment Company, Inc. 400 Bellevue Parkway
2471 E. Bayshore Road Wilmington, DE 19809
Suite 501
Palo Alto, CA 94303
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FOR
KELMOORE STRATEGY(TM) VARIABLE TRUST
Kelmoore Strategy(TM) Variable Fund
Kelmoore Strategy(TM) Variable Eagle Fund
August 15, 2000
Shares of the Funds are available only through the purchase of a variable
annuity contract or variable life insurance policy issued through a separate
account of an insurance company ("Variable Contract"). The investment adviser of
the Funds is Kelmoore Investment Company, Inc. (the "Adviser"). The Funds'
distributor is Kelmoore Investment Company, Inc. (the "Distributor").
The Prospectus for the Funds is dated August 15, 2000. The Prospectus provides
the basic information an investor should know about the Funds before investing
and may be obtained without charge by calling the Funds at (800) 929-1417. This
Statement of Additional Information ("SAI") is not a prospectus and should be
read in conjunction with the Funds' Prospectus, and is incorporated by reference
in its entirety into the Prospectus. This SAI is not an offer of shares of the
Funds for which an investor has not received the Prospectus.
<PAGE>
TABLE OF CONTENTS
PAGE
----
GENERAL INFORMATION AND HISTORY......................................3
INVESTMENT STRATEGIES AND RELATED RISKS .............................3
OTHER STRATEGIES.....................................................4
INVESTMENT RESTRICTIONS .............................................6
MANAGEMENT OF THE TRUST..............................................7
OTHER SERVICES......................................................10
PURCHASE, REDEMPTION AND PRICING OF SHARES .........................11
DISTRIBUTIONS AND TAXES.............................................12
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS ...................14
SHARES OF BENEFICIAL INTEREST.......................................15
PERFORMANCE INFORMATION ............................................16
FINANCIAL STATEMENTS ...............................................17
2
<PAGE>
GENERAL INFORMATION AND HISTORY
The Kelmoore Strategy(TM) Variable Fund and the Kelmoore Strategy(TM) Variable
Eagle Fund (each a "Fund" and collectively the "Funds") are diversified series
of the Kelmoore Strategy(TM) Variable Trust (the "Trust"), a Delaware business
trust organized on October 4, 1999 as an open-end management investment company.
The Funds employ Kelmoore Investment Company, Inc. (the "Adviser") to serve as
their investment adviser. Currently, the Trust has two series authorized and
outstanding. The Trust was established for the purpose of providing a vehicle
for the investment of assets of separate accounts of insurance companies for
Variable Contracts. Shares of the Funds are offered solely to these separate
accounts.
INVESTMENT STRATEGIES AND RELATED RISKS
The Prospectus discusses the investment objective of each Fund and the principal
strategies to be employed to achieve that objective. This section contains
supplemental information concerning types of securities and other instruments in
which the Funds may invest, additional strategies that the Funds may utilize and
certain risks associated with such investments and strategies.
Common Stock. Common stock represents an equity (ownership) interest in a
company or other entity. This ownership interest often gives the Funds the right
to vote on measures affecting the company's organization and operations.
Although common stocks generally have had a history of long-term growth in
value, their prices are often volatile in the short-term and can be influenced
by both general market risk and specific corporate risks.
Options on Securities. The writing and purchase of options is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. The
successful use of options depends in part on the ability of the Adviser to
predict future price fluctuations.
Each Fund may write (sell) call and put options on any security in which it may
invest. These options will be listed on securities exchanges. Exchange-traded
options in the United States are issued by the Options Clearing Corporation (the
"OCC"), a clearing organization affiliated with the exchanges on which options
are listed. The OCC, in effect, gives its guarantee to every exchange-traded
option transaction.
Each Fund receives a premium for each option it writes. The premium received
will reflect, among other things, the current market price of the underlying
security, the relationship of the exercise price to the market price, the
historical price volatility of the underlying security, the option period,
supply and demand and interest rates.
All call and put options written by each Fund are covered (or secured). A
written call option is typically covered by maintaining the securities subject
to the option in a segregated account. A written call option may also be covered
by (i) maintaining cash or liquid securities in a segregated account with a
value at least equal to the respective Fund's obligation under the option, (ii)
entering into an offsetting forward commitment and/or (iii) purchasing an
offsetting option or any other option which, by virtue of its exercise price or
otherwise, reduces the Fund's net exposure on its written option position.
Put options written by each Fund will be secured by (i) maintaining cash or
liquid securities in a segregated account with a value at least equal to the
Fund's obligation under the option, (ii) entering into an offsetting forward
commitment and/or (iii) purchasing an offsetting option or any other option
which, by virtue of its exercise price or otherwise, reduces the Fund's net
exposure on its written option position.
The obligation of an option writer is terminated upon the exercise of the
option, the option's expiration or by effecting a closing purchase transaction.
ADDITIONAL RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance a
liquid secondary market will exist for any particular exchange-traded option or
at any particular time. If a Fund is unable to effect a closing
3
<PAGE>
purchase transaction with respect to options it has written, the Fund will not
be able to sell the underlying securities or dispose of assets held in a
segregated account until the options expire or are exercised.
Reasons for the absence of a liquid secondary market may include the following:
(i) there may be insufficient trading interest in certain options; (ii)
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the OCC may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options). If trading were
discontinued, the secondary market on that exchange (or in that class or series
of options) would cease to exist. However, outstanding options on that exchange
that had been issued by the OCC as a result of trades on that exchange would
normally continue to be exercisable or expire in accordance with their terms.
There can be no assurance that higher trading activity, order flow or other
unforeseen events might not, at times, render certain of the facilities of the
OCC or various exchanges inadequate. Such events have, in the past, resulted in
the institution by an exchange of special procedures, such as trading rotations,
restrictions on certain types of orders, trading halts or suspensions with
respect to one or more options.
The writer of an option lacks the ability to control when an option will be
exercised. Although the Funds will generally only write options whose expiration
dates are between one and four months from the date the option is written, it is
not possible for the Funds to time the receipt of exercise notices. This
prevents the Funds from receiving income on a scheduled basis and may inhibit
the Funds from fully utilizing other investment opportunities.
The OCC sets option expiration dates and exercise prices, which depend on the
range of prices in the underlying stock's recent trading history. Option periods
usually range from 30 days to 120 days but can have longer durations. Written
options have predetermined exercise prices set below, equal to or above the
current market price of the underlying stock. The premium a Fund receives for
writing an option will reflect, among other things, the current market price of
the underlying security, the relationship of the exercise price to the market
price, the historical price volatility of the underlying security, the option
period, supply and demand and interest rates. Each Fund's overall return will,
in part, depend on the ability of the Adviser to accurately predict price
fluctuations in underlying securities in addition to the effectiveness of the
Adviser's strategy in terms of stock selection. To assist the Adviser in
selecting which options to write, the Adviser utilizes an in-house computer
program called "OPTRACKER(TM)".
The size of the premiums each Fund receives for writing options may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option writing activities.
Each securities exchange on which options trade has established limitations
governing the maximum number of puts and calls in each class (whether or not
covered or secured) that may be written by a single investor, or group of
investors, acting in concert (regardless of whether the options are written on
the same or different exchanges or are held or written in one or more accounts
or through one or more brokers). It is possible that the Funds and other clients
advised by the Adviser may constitute such a group. These position limits may
restrict the number of options the Funds may write on a particular security. An
exchange may order the liquidation of positions found to be above such limits or
impose other sanctions.
OTHER STRATEGIES
Repurchase Agreements. The Funds may enter into repurchase agreements with
approved banks and broker-dealers. In a repurchase agreement, the Fund purchases
securities with the understanding they will be repurchased by the seller at a
set price on a set date. This allows the Fund to keep its assets at work but
retain flexibility to pursue longer-term investments upon repurchase.
4
<PAGE>
Repurchase agreements involve risks. For example, if a seller defaults, the Fund
will suffer a loss if the proceeds from the sale of the collateral are below the
repurchase price. If the seller becomes bankrupt, the Fund may be delayed or
incur additional costs in selling the collateral. To help minimize risk,
collateral must be held with the Fund's custodian in an amount at least equal to
the repurchase price, including accrued interest.
Borrowing. Each Fund may borrow money in amounts up to 10% of the value of its
total assets at the time of such borrowings for temporary purposes, and is
authorized to borrow money in excess of the 10% limit as provided by the
Investment Company Act of 1940, as amended, (the "1940 Act") (not to exceed 30%
of the Fund's total assets) in order to meet redemption requests. This borrowing
may be unsecured. The Fund will not make any additional purchases of securities
at any time its borrowings exceed 10% of its assets. The 1940 Act requires the
Fund to maintain continuous asset coverage of 300% of the amount it has
borrowed. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund may be required to sell some of its
portfolio holdings within three (3) days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. Borrowing may exaggerate the effect
on net asset value of any increase or decrease in the market value of the Fund.
Money borrowed will be subject to interest costs that may or may not be
recovered by an appreciation of the securities purchased. The Fund may also be
required to maintain average balances in connection with borrowing or to pay a
commitment or other fees to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest rate.
The Fund may, in connection with permissible borrowings, transfer securities
owned by the Fund as collateral.
Investment Company Securities. Each Fund may invest in securities issued by
other investment companies but intends to invest only in money market mutual
funds as a temporary investment. As a shareholder of another investment company,
the Fund would bear its pro rata portion of the other investment company's
expenses, including advisory fees. These expenses would be in addition to the
expenses the Fund bears directly. The Fund intends to limit its investments in
securities issued by other investment companies so that immediately after a
purchase of such securities is made: (i) not more than 5% of the value of the
Fund's total assets will be invested in the securities of any one investment
company; (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group; and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund.
Illiquid Securities. Each Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities generally include securities that
cannot readily be sold within seven days in the ordinary course of business at
approximately the price at which the Fund has valued the securities. Such
securities include, but are not limited to, restricted securities (securities
the disposition of which is restricted under the federal securities laws),
securities that may be resold pursuant to Rule 144A under the Securities Act of
1933, as amended, but that are deemed to be illiquid, and repurchase agreements
with maturities in excess of seven days.
Temporary Investments. To maintain cash for redemptions, distributions and
temporary defensive purposes, each Fund may invest in money market mutual funds
and in investment grade short-term fixed income securities, including short-term
U.S. government securities, negotiable certificates of deposit, commercial paper
and banker's acceptances and repurchase agreements.
Portfolio Turnover. The portfolio turnover rate for each Fund is calculated by
dividing the lesser of the purchases or sales of portfolio investments for the
reporting period by the monthly average value of the portfolio investments owned
during the reporting period. The calculation excludes all options written by the
Fund that expire in less than one year.
Under certain market conditions, the Funds' portfolio turnover rate is likely to
be higher than that of other mutual funds. This would be the case, for example,
if the Fund writes a substantial number of call options and the market prices of
the underlying securities appreciates, causing the options to be exercised. The
Funds may also engage in short-term trading (purchase and sale of security in a
relatively brief period of time) in response to stock market conditions or
changes in economic trends and developments. Although the Funds' annual turnover
5
<PAGE>
rate cannot be accurately predicted, it is estimated this rate will not exceed
approximately 100% for the current fiscal year assuming normal market
conditions. A 100% annual turnover rate would occur if all of the Fund's
securities were replaced one time during a one-year period.
Other Investments. Subject to prior disclosure to shareholders, the Board of
Trustees may, in the future, authorize the Funds to invest in securities other
than those listed here and in the Prospectus, provided that such investment
would be consistent with the respective Fund's investment objective and that it
would not violate any fundamental investment policies or restrictions applicable
to the Fund.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions are
considered fundamental, which means they may be changed only by approval of the
holders of a majority of the respective Fund's outstanding shares, defined in
the 1940 Act as the lesser of: (1) 67% or more of the Fund's outstanding shares
present at a meeting, if the holders of more than 50% of the Fund's outstanding
shares are present in person or represented by proxy, or (2) more than 50% of
the Fund's outstanding shares.
1. A Fund may not purchase securities that would cause more than 25% of the
value of the Fund's total assets at the time of such purchase to be
invested in the securities of any particular industry (excluding U.S.
Government securities), but if it is deemed appropriate for the achievement
of the Fund's investment objective, up to 25% of the Fund's total assets
may be invested in any one industry.
1. A Fund may not issue senior securities, mortgage or pledge assets, or
borrow money, except (i) a Fund may borrow money from banks in amounts up
to 30% of its total assets (including the amount borrowed); (ii) a Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities; and (iii) a Fund may engage in
options transactions as permitted by the 1940 Act and enter into collateral
arrangements relating thereto.
2. A Fund may not make loans to other persons, except (i) through the lending
of the Fund's portfolio securities provided that any such loans not exceed
30% of the Fund's total assets (taken at market value); or (ii) through the
use of repurchase agreements or the purchase of short-term obligations.
3. A Fund may not purchase or sell commodities or real estate (including
limited partnership interests but excluding securities secured by real
estate or interests therein) in the ordinary course of business, (except
the Fund may engage in options transactions as permitted by the 1940 Act
and enter into collateral arrangements relating thereto, and the Fund may
hold and sell, for the Fund's portfolio, real estate acquired as a result
of the Fund's ownership of securities).
5. A Fund may not underwrite securities of other issuers except to the extent
the Fund may be considered to be an underwriter under the Securities Act of
1933 in connection with the purchase and sale of portfolio securities.
6. A Fund, with respect to 75% of its total assets, will not invest more than
5% of its total assets in the securities of any single issuer, or own more
than 10% of the outstanding voting securities of any one issuer, other than
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
Non-Fundamental Investment Restrictions. The following restrictions are imposed
by management of the Funds and may be changed by the Board of Trustees without
shareholder approval at any time.
1. A Fund may not invest in a company for the purpose of exercising control or
management of the company.
6
<PAGE>
2. A Fund may not purchase securities on margin, except that a Fund may obtain
such short-term credits as are necessary for the clearance of purchases and
sales of securities, and provided that margin payments in connection with
options will not constitute purchasing securities on margin.
3. A Fund may not invest more than 15% of its net assets in illiquid
securities. A security is illiquid if it cannot be disposed of in seven
days at a price approximately equal to the price at which the Fund is
valuing the security. Repurchase agreements with deemed maturities in
excess of seven days are subject to this 15% limit.
If a percentage restriction is adhered to at the time of investment, a later
change in percentage resulting from a change in values or assets will not
constitute a violation of such restriction.
MANAGEMENT OF THE TRUST
The Board of Trustees is responsible for overseeing and monitoring the
management of the Funds. The Board of Trustees meets periodically throughout the
year to oversee each Fund's operations, review contractual arrangements with
companies that provide services to the Funds and review each Fund's performance.
The Board of Trustees elects the officers of the Trust to supervise actively its
day-to-day operations.
The Trustees and officers of the Trust and their ages, addresses and principal
occupations during the past five years are set forth below. Their titles may
have varied during the five year period.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
POSITION HELD WITH PRINCIPAL OCCUPATION DURING THE
NAME, ADDRESS AND AGE THE TRUST PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shawn K. Young, CPA* President, Treasurer Chief Financial Officer, Kelmoore Investment
2471 E. Bayshore Road and Trustee Company, Inc. from 12/99 to present. Formerly, a
Suite 501 Senior Manager at Ernst & Young, one of the "big 5"
Palo Alto, CA 94303 accounting firms from 6/99 to 12/99. Partner (1/95 to
6/99) and manager (11/90 to 12/95) with Friar, Harper
Age 36 & Arendt, CPAs, a regional accounting firm.
-------------------------------------------------------------------------------------------------------------------------
Michael Romanchak* Chairman of the Board President and Director, Kelmoore Investment
2471 E. Bayshore Road Company, Inc. from 7/95 to the present.
Suite 501 Formerly, First Vice President, Comerica Bank,
Palo Alto, CA 94303 from 7/92 to 7/95.
Age 49
-------------------------------------------------------------------------------------------------------------------------
R. Michael Law Trustee Vice President, Comerica Bank, Oakland,
155 Grand Avenue California from 1/87 to present.
Suite 402
Oakland, CA 94612
Age 39
----------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Michael Stepanian Trustee Attorney, Law Offices of Michael Stepanian in
819 Eddy Street San Francisco, California from 1/66 to present.
San Francisco, CA 94109
Age 61
----------------------------------------------------------------------------------------------------------------------
Robert T. Lanz Trustee Partner, BDO Seidman, LLP, an accounting firm
19600 Moray Court located in San Jose, California from 10/98 to
Saratoga, CA 95070 present. Formerly, Partner, Meredith, Cardozo,
Lanz & Chici, LLP, an accounting firm, from 1/95
Age 58 to 10/98.
----------------------------------------------------------------------------------------------------------------------
Tamara B. Heiman Secretary Executive Vice President and Director of
2471 E. Bayshore Road Marketing, Kelmoore Investment Company, Inc.
Suite 501 from 3/99 to present. Formerly, Vice President,
Palo Alto, CA 94303 Investment Advisory Services for Josephthal &
Co., a NYSE broker/dealer from 8/97 to 3/99.
Age 29 Formerly, Vice President, Director of Asset
Management for First Allied Securities, a
national independent broker dealer, from 8/94 to
3/99.
----------------------------------------------------------------------------------------------------------------------
</TABLE>
*AN ASTERISK INDICATES A TRUSTEE WHO MAY BE DEEMED TO BE AN "INTERESTED PERSON"
OF THE TRUST (AS THAT TERM IS DEFINED IN THE 1940 ACT). MR. ROMANCHAK AND MS.
YOUNG ARE CONSIDERED "INTERESTED PERSONS" OF THE TRUST DUE TO THEIR AFFILIATION
WITH THE ADVISER.
Members of the Audit Committee of the Board of Trustees are Messrs. Law and
Lanz. The Audit Committee members make recommendations to the Trustees regarding
the selection of auditors and confer with the auditors regarding the scope and
results of the audit.
Members of the Nominating Committee of the Board of Trustees are Messrs.
Stepanian, Law and Lanz. The Nominating Committee is responsible for the
selection and nomination of disinterested Trustees.
Members of the Valuation Committee of the Board of Trustees are Ms. Young, Mr.
Matthew Kelmon and Mr. R. Michael Law. The Valuation Committee is responsible
for fair value pricing of the Fund's portfolio securities.
Each Trustee of the Fund who is not an affiliated person of the Adviser or
Distributor, as defined in the 1940 Act, receives an annual retainer of $4,000
per year (payable in equal installments at the end of each quarter) plus
reimbursement for certain travel and other out-of-pocket expenses incurred with
attending such meetings.
The following table estimates the compensation expected to be paid by the Trust
during the Fund's fiscal year ending December 31, 2000 to the persons who are to
serve as Trustees during such period:
8
<PAGE>
--------------------------------------------------------------------------------
TOTAL COMPENSATION FROM
ESTIMATED COMPENSATION THE COMPLEX PAID TO
NAME OF TRUSTEE FROM THE TRUST TRUSTEE
--------------------------------------------------------------------------------
Shawn K. Young $ 0 $ 0
Michael Romanchak 0 0
R. Michael Law 4,000 4,000
Michael Stepanian 4,000 4,000
Robert T. Lanz 4,000 4,000
NOTE: THE TRUSTEES AND OFFICERS AFFILIATED WITH THE ADVISER ARE NOT COMPENSATED
BY THE TRUST FOR THEIR SERVICES. THE TRUST DOES NOT HAVE ANY RETIREMENT PLAN FOR
ITS TRUSTEES.
Investment Adviser. The Trust has employed Kelmoore Investment Company, Inc.
(the "Adviser") as its investment adviser. The Adviser, an SEC registered
investment adviser organized in 1992, has been managing the Kelmoore
Strategy(TM)Fund, open-end mutual fund, since May 3, 1999 and the Kelmoore
Strategy(TM)Eagle Fund, an open-end fund, since June 28, 2000. As of June 30,
2000, the Adviser managed approximately $400 million of assets, consisting of
discretionary brokerage accounts and the assets of the Kelmoore Strategy(TM)Fund
and the Kelmoore Strategy(TM) Eagle Fund. Through his ownership and voting
control of more than 25% of the outstanding shares of the Adviser, Ralph M.
Kelmon, Jr. is considered to control the Adviser. Mr. Kelmon is the Chief
Executive Officer and Chairman of the Board of the Adviser. Mr. Kelmon is the
father of Matthew Kelmon, the primary portfolio manager for the Funds, and Shawn
K. Young, President and Treasurer of the Trust.
The Adviser manages each Fund's investments consistent with its investment
objectives, policies and limitations. The Adviser also makes recommendations
with respect to other aspects and affairs of the Funds. The Adviser also
furnishes the Funds with certain administrative services, office space and
equipment. All other expenses incurred in the operation of the Funds are borne
by the Funds. The Adviser also supervises the provision of services by third
parties such as the Funds' transfer agent and custodian. Under the Investment
Advisory Agreement, the Adviser will not be liable for any error of judgment or
mistake of fact or law or for any loss by the Funds in connection with the
performance of the Investment Advisory Agreement, except a loss from a breach of
a fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard of its
obligations or duties under the Investment Advisory Agreement.
For providing investment advisory and other services and assuming certain Fund
expenses, each Fund pays the Adviser a monthly fee at the annual rate of 1.00%
of the value of the Fund's average daily net assets. For the Funds' initial
fiscal years ending December 31, 2000 and December 31, 2001, the Adviser has
voluntarily agreed to waive its fees and reimburse expenses so that each Fund's
annual operating expenses will not exceed 2.25%. The Adviser may terminate this
waiver at any time. Any waiver or reimbursement by the Adviser is subject to
reimbursement by the Fund within the following three years, to the extent such
reimbursement by the Fund would not cause total operating expenses to exceed any
current expense limitation. Additionally, the Adviser has agreed to reimburse
all expenses incurred in connection with the organization of the Funds, subject
to recoupment described above.
The Investment Advisory Agreement (the "Agreement") for the Kelmoore
Strategy(TM) Variable Fund was approved by the Trustees, including a majority of
the Trustees who are not "interested persons" of the Fund, on March 2, 2000. The
Trustees approved the addition of the Kelmoore Strategy(TM) Variable Eagle Fund
to the Agreement on
9
<PAGE>
July 28, 2000. The Agreement, as it applies to each Fund, is for an initial term
of two years and continues in effect from year to year thereafter if such
continuance is approved annually by the Trustees or by a vote of a majority of
the outstanding shares of the respective Fund, and, in either case, by the vote
of a majority of the Trustees who are not parties to the Agreement or
"interested persons" of any party to the Agreement, voting in person at a
meeting called for the purpose of voting on such approval. The Agreement may be
terminated at any time without penalty by the Trustees, by vote of a majority of
the outstanding shares of the respective Fund or by the Adviser, upon sixty
days' written notice. The Agreement terminates automatically if assigned.
Code of Ethics. To mitigate the possibility that the Funds will be adversely
affected by personal trading of employees, the Funds and the Adviser have
adopted Codes of Ethics under Rule 17j-1 of the 1940 Act. These Codes contain
policies restricting securities trading in personal trading accounts of Trustees
and others who normally come into possession of information on portfolio
transactions.
Expenses. In addition to fees of the Adviser, each Fund is responsible for
payment of the following, including, but not limited to: fees and expenses of
disinterested Trustees (including any independent counsel to the disinterested
Trustees); fees and expenses for independent audits and auditors; legal fees;
interest expenses; fees and commissions; taxes; insurance premiums; charges of
administrators, custodians and transfer agents or other service providers;
bookkeeping expenses; and costs of obtaining quotations for portfolio securities
and the pricing of Fund shares.
Name. The word "Kelmoore" is used by the Trust with the Adviser's consent and
the Trust has a non-exclusive license to use the name "Kelmoore Strategy(TM)"
and the word "Kelmoore" in the name of any fund. If the Adviser ceases to be the
investment adviser of the Funds, the Adviser may require the Trust and the Funds
to delete the word "Kelmoore" from their names and cease to otherwise use the
word "Kelmoore."
OTHER SERVICES
Distributor. Kelmoore Investment Company, Inc., 2471 East Bayshore Road, Suite
501, Palo Alto, CA 94303 (the "Distributor") serves as the distributor
(principal underwriter) of each Fund's shares, which are offered on a continuous
basis.
The Distributor serves as the principal distributor of the Funds' shares
pursuant to a Distribution Agreement with the Funds. The Distribution Agreement
is renewable annually provided its renewal is approved by a majority of the
Trustees who are not parties to the Distribution Agreement or interested persons
of parties to the Distribution Agreement and who have no direct or indirect
financial interest in the Distribution Agreement or any related distribution
plan. The Distribution Agreement may be terminated at any time, without the
payment of a penalty, on sixty days' written notice by the Distributor, by the
non-interested Trustees or by the vote of the holders of the lesser of: (a) 67%
of the Trust's shares present at a meeting if the holders of more than 50% of
the outstanding shares are present in person or by proxy, or (b) more than 50%
of the outstanding shares of the Trust. The Distribution Agreement automatically
terminates if it is assigned. The Distributor does not receive any fee or other
compensation under the Distribution Agreement other than fees it receives in
accordance with the Distribution Plan described below.
Distribution Plan. The Trust has adopted a distribution plan in accordance with
Rule 12b-1 under the 1940 Act (the "Plan") for each of the Funds. The Plan
permits the Funds to pay the Distributor for remittance to a life insurance
company or an affiliate thereof for various costs incurred or paid in connection
with the distribution of shares of the Funds. The Trust may make quarterly
payments to the Distributor, for remittance to a life insurance company or any
affiliate thereof, in order to reimburse the life insurance company for eligible
expenses incurred or paid in an amount not to exceed 0.25% of the average daily
net assets of such Fund attributable to a life insurance company's variable
contract owners during that quarterly period.
Expenses payable pursuant to the Plan include, but are not limited to the
following costs: (a) of printing and mailing prospectuses and reports to
prospective variable contract owners; (b) relating to the development,
preparation, printing and mailing of advertisements, sales literature and other
promotional materials intended for
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use by the life insurance company; (c) of holding seminars and sales meetings
designed to promote sales of Fund shares; (d) of obtaining information and
providing explanations to variable contract owners regarding the Funds'
investment objectives and policies and other information about the Funds; (e) of
training sales personnel regarding the Funds; (f) of compensating sales
personnel in connection with the allocation of cash values and premiums of the
variable contracts; (g) of personal service and/or maintenance of variable
contract owner accounts with respect to Fund shares attributable to such
accounts; and (h) of financing any other activity that the Trust's Board of
Trustees determines is primarily intended to result in the sale of the Funds'
shares.
The Distributor provides the Trustees for their review, on a quarterly basis, a
written report of the amounts expended under the Plan.
The Plan is subject to annual approval by the Trustees. The Plan is terminable
at any time, without penalty, by a vote of a majority of the non-interested
Trustees or by vote of a majority of the outstanding shares of each of the
Funds. The Plan may not be amended to increase materially the amount that may be
spend for distribution by a Fund without the approval of a majority of the
outstanding voting securities of that Fund. Once terminated, no further payments
shall be made under the Plan notwithstanding the existence of any unreimbursed
current or carried forward distribution expenses.
The Plan was adopted because of its anticipated benefit to the Funds. These
anticipated benefits include increased promotion and distribution of the Funds'
shares, an enhancement in the Funds' ability to maintain accounts and improve
asset retention and increased stability of net assets for the Funds.
Administration and Transfer Agency Services. The Fund has entered into an
Administration and Accounting Services Agreement with PFPC Inc. ("PFPC"), 3200
Horizon Drive, King of Prussia, PA 19406. PFPC is an indirect, wholly owned
subsidiary of PNC Bank Corp. PFPC performs certain administrative and accounting
services for the Funds and is responsible for certain clerical, recordkeeping
and bookkeeping services. These services include determining the net asset value
per share of the Funds and filing various reports with the appropriate
regulatory agencies and preparing materials required by the SEC. The services
provided by PFPC as Administrator include regulatory compliance, assistance in
the preparation and filing of post-effective amendments to the Trust's
registration statement with the SEC, preparation of annual, semi-annual and
other reports to shareholders and the preparation of board meeting materials.
For the administrative and fund accounting services PFPC provides to the Funds,
PFPC is paid an annual fee calculated daily and paid monthly which is expected
to approximate 0.18% of net assets.
In addition to the services provided by PFPC to the Funds as Administrator, PFPC
also provides transfer agency and dividend disbursing services to the Funds
pursuant to a separate agreement.
Custodian. PFPC Trust Company, 400 Bellevue Parkway, Wilmington, DE 19809,
serves as custodian of the Funds' assets pursuant to a custodian agreement.
Legal Counsel. Sutherland Asbill & Brennan LLP, 1275 Pennsylvania Avenue, N.W.,
Washington, DC 20004-2415, serves as legal counsel to the Trust and the Adviser
and Distributor.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Each Fund is an investment vehicle for the separate accounts of Variable
Contracts offered by insurance companies. Individual Variable Contract holders
are not the shareholders of the Funds. Rather, a participating insurance company
and its separate accounts are the shareholders. The offering is without a sales
charge and is made at each Fund's net asset value per share. Shares of the Funds
are not offered to the general public. Each Fund reserves the right, in its sole
discretion, to refuse purchase orders. The procedures for redemption of Fund
shares under ordinary circumstances is set forth in the Prospectus and in the
separate prospectus relating to the Variable Contracts which accompanies the
Prospectus.
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The Funds' shares are purchased and redeemed at the net asset value per share.
The net asset value per share of each Fund is calculated on each day, Monday
through Friday, except days on which the New York Stock Exchange is closed. The
NYSE is currently scheduled to be closed on the following holidays: New Year's
Day, Martin Luther King Jr. Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and on the
preceding Friday or subsequent Monday when a holiday falls on a Saturday or
Sunday, respectively.
The Funds' net asset value per share is determined as of the close of regular
trading on the New York Stock Exchange, normally 4:00 p.m., Eastern Time, by
taking the value of all assets of the Fund, subtracting liabilities, dividing by
the number of shares outstanding and adjusting to the nearest cent.
The Funds' securities are valued based on market value or, where market
quotations are not readily available, based on fair value as determined in good
faith by or at the direction of the Board of Trustees. Equity securities traded
on an exchange or on the NASDAQ National Market System (the "NASDAQ"), will be
valued at the last sale price on the exchange or system in which they are
principally traded on the valuation date. If there is no sale on the valuation
date, securities traded principally on a U.S. exchange or the NASDAQ will be
valued at the mean between the closing bid and asked prices or on a foreign
exchange at the most recent closing price. Equity securities which are traded in
the over-the-counter market only, but which are not included in the NASDAQ, will
be valued at the last sale price on the valuation day or, if no sale occurs, at
the mean between the last bid and asked prices. Exchange traded options will be
valued at the last sale price in the market where such options are principally
traded or, if no sale occurs, at the mean between the last bid and asked price.
Debt securities with a remaining maturity of sixty days or more will be valued
using a pricing service if such prices are believed to accurately represent
market value. Debt securities and money market instruments with a remaining
maturity of less than sixty days will be valued at amortized cost. Valuations
may be obtained from independent pricing services approved by the Trustees.
When the Funds write a put or call option, it records the premium received as an
asset and equivalent liability, and thereafter adjusts the liability to the
market value of the option determined in accordance with the preceding
paragraph.
DISTRIBUTIONS AND TAXES
Distributions. All dividends and capital gains distributions paid by the Funds
will be automatically reinvested, at net asset value, in additional shares of
the Fund unless otherwise indicated. Each Fund currently intends to declare and
pay dividends, if any, on a monthly basis. There is no fixed dividend rate and
there can be no assurance that the Funds will pay any dividends or realize any
capital gains.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by the Funds, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of the Funds just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
Taxes. It is the policy of each Fund to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. As a result,
the Fund will not be subject to U.S. Federal income tax on any net income or
capital gains that it distributes to its shareholders, that is, the insurance
companies separate accounts. To meet these requirements and to meet other
requirements necessary for it to be relieved of federal income taxes on income
and gain it distributes to the separate investment accounts that invest in the
Fund, the Fund must, among other things:
1. derive at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
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(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;
2. diversify its holdings so that, at the close of each quarter of its taxable
year, (i) at least 50% of the value of its total assets consists of cash,
cash items, U.S. government securities, securities of other regulated
investment companies, and other securities limited generally with respect
to any one issuer to a value not greater than 5% of the total assets of the
Fund and to not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any issuer (other than U.S. government securities or
securities of other regulated investment companies); and
3. distribute in or with respect to each taxable year at least 90% of the sum
of its taxable net investment income, its net tax-exempt income, and the
excess, if any, of net short-term capital gains over net long-term capital
losses for such year.
Each Fund intends to declare capital gain and ordinary income dividends by the
end of each calendar year and to distribute such dividends no later than January
31 of the following year to the extent necessary to avoid the 4% excise tax on
undistributed regulated investment company income enacted by the Tax Reform Act
of 1986. The 4% excise tax applies to the excess of the required distribution
for the calendar year over the amount treated as distributed for that year. The
required distribution equals 98% of the Fund's ordinary income for the calendar
year plus 98% of its capital gain net income for the one year period ending
October 31 (or December 31, if the Fund so elects) and any shortfall of income
or gains from the prior year not previously so distributed.
The Treasury Department has issued Regulations under Internal Revenue Code
Section 817(h) that pertain to diversification requirements for variable annuity
and variable life insurance contracts. Each Fund intends to comply with the
diversification requirements. These requirements are in addition to the
diversification requirements imposed on the Fund by Subchapter M and the 1940
Act. The 817(h) requirements place certain limitations on the assets of each
separate account that may be invested in securities of a single issue. A
variable contract based upon a separate account will not receive favorable tax
treatment as an annuity or life insurance contract unless the separate account
and underlying regulated investment company investments are adequately
diversified. In determining whether a separate account is adequately
diversified, in certain circumstances the separate account can look through to
the assets of the regulated investment company in which it has invested.
The Regulations require the Funds' assets to be diversified so that no single
investment represents more than 55% of the value of the Fund's total assets, no
two investments represent more than 70% of the Fund's total assets, no three
investments represent more than 80% of the Fund's total assets and no four
investments represent more than 90% of the Fund's total assets. A "safe harbor"
is available to a separate account if it meets the diversification tests
applicable to registered investment companies and not more than 55% of its
assets constitute cash, cash items, government securities and securities of
other registered investment companies.
The applicable Regulations treat all securities of the same issuer as a single
investment. In the case of "government securities," each government agency or
instrumentality shall be treated as a separate issuer for the purpose of the
diversification test (although not for the purpose of the "safe harbor" test
described above). All securities of the same issuer, all interests in the same
real property project, and all interests in the same commodity are treated as a
single investment. The Trust intends to comply with these diversification
requirements. Failure of the Funds to satisfy the Section 817(h) requirements
would result in taxation of the applicable separate accounts, the insurance
companies variable life policies and variable annuity contracts, and tax
consequences to the holders thereof.
The foregoing is only a brief summary of important tax considerations that
generally affect the Funds. Prospective investors should consult their own tax
advisers with regard to the Federal tax consequences of the purchase, ownership,
or disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
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For a discussion of the impact on Variable Contract owners of income taxes an
insurer may owe as a result of (i) its ownership of shares of the Fund, (ii) its
receipt of dividends and distributions thereon, and (iii) its gains from the
purchase and sale thereof, reference should be made to the Prospectus for the
Variable Contract accompanying this Prospectus.
Backup Withholding. The Funds generally will be required to withhold U.S.
Federal income tax at the rate of 31% ("backup withholding") of all
distributions payable to shareholders who fail to provide the Funds with their
correct taxpayer identification number or to make required certifications, or
who have been notified by the IRS that they are subject to backup withholding.
Backup withholding is not an additional tax. Any amounts withheld may be
credited against the shareholder's U.S. Federal income tax liability.
Tax Implications of Options. When a Fund writes an option, there is no taxable
event and an amount equal to the premium received is recorded by the Fund as an
asset and an equivalent liability. The liability is thereafter valued to reflect
the current value of the option. If the option is not exercised and expires, or
if the Fund effects a closing purchase transaction, the Fund will realize a gain
(or a loss in the case of a closing purchase transaction where the cost exceeds
the original premium received) and the liability related to the option will be
extinguished. Any such gain or loss is a short-term capital gain or loss for
federal income tax purposes, except that any loss realized when the Fund closes
certain covered call options whose underlying security is trading above the
exercise price of the option will be long-term capital loss if the hypothetical
sale of the underlying security on the date of such transaction would have given
rise to a long-term capital gain. If a call option which the Fund has written on
any equity security is exercised, the Fund realizes a capital gain or loss
(long-term or short-term, depending on the holding period of the underlying
security) from the sale of the underlying security and the proceeds from such
sale are increased by the premium originally received. If a put option which the
Fund has written on an equity security is exercised, the amount of the premium
originally received will reduce the cost of the security which the Fund
purchases upon exercise of the option.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Each Fund intends to place substantially all its securities transactions,
including transactions involving options, through the Adviser in accordance with
procedures set forth in Rule 17e-1 under the 1940 Act. These procedures, which
have been adopted by the Board of Trustees, including a majority of the
non-interested Trustees, are reasonably designed to provide that any
commissions, fees or other compensation paid to the Adviser (or any affiliate)
are fair and reasonable when compared to commissions, fees and other
compensation received from other firms who engage in comparable transactions.
The Funds will not deal with the Adviser (or any affiliate) in any transaction
in which the Adviser (or any affiliate) acts as principal, except in accordance
with rules promulgated by the Securities and Exchange Commission.
The Adviser may utilize non-affiliated brokers, dealers or members of a
securities exchange to execute portfolio transactions on behalf of the Funds
and, like the Adviser, such firms may receive commissions for executing the
Funds' securities transactions. In effecting the purchase or sale of portfolio
securities from non-affiliated brokers, dealers or members of an exchange, the
Adviser will seek execution of trades either (1) at the most favorable and
competitive rate of commission charged by any broker, dealer or member of an
exchange, or (2) at a higher rate of commission charged, if reasonable in
relation to brokerage and research services provided to the Trust or the Adviser
by such member, broker or dealer. Such services may include, but are not limited
to, information as to the availability of securities for purchase or sale and
statistical or factual information or opinions pertaining to investments. The
Adviser may use brokerage and research services provided to it by brokers and
dealers in servicing all its clients.
The Adviser currently manages separate accounts that employ investment
strategies similar to those used by the Funds. At times, investment decisions
may be made to purchase or sell the same security for the Funds and one or more
of the other clients advised by the Adviser. When two or more of such clients
are simultaneously engaged in the purchase or sale of the same security, the
transactions will be allocated as to amount and price in a manner considered
equitable to each so that each receives, to the extent practicable, the average
price for such transaction.
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There may be circumstances in which such simultaneous transactions would be
disadvantageous to the Funds with respect to price and availability of
securities. In other cases, however, it is believed that transactions would be
advantageous to the Funds.
SHARES OF BENEFICIAL INTEREST
The Trust is a diversified, open-end investment management company. The
capitalization of the Trust consists solely of an unlimited number of shares of
beneficial interest with a par value of $0.001 per share. The Board of Trustees
has authorized two series with one class of shares issued currently. The Board
of Trustees has authority, without necessity of a shareholder vote, to create
any number of new funds or classes of shares at any time in the future. The
establishment and offering of additional funds will not alter the rights of the
Trust's shareholders.
As a beneficial owner, you receive one vote for each share of the Funds you own
and each fractional share you own shall be entitled to a proportionate
fractional vote. Each issued and outstanding share of the Funds is entitled to
participate equally in dividends and distributions declared and in the net
assets of the Fund upon liquidation or dissolution remaining after satisfaction
of outstanding liabilities. Under Delaware law, shareholders will be liable for
the obligations of the Fund only to the extent of their investment in the Fund.
When issued, shares are fully paid, non-assessable and freely transferable.
Shares do not have preemptive rights or subscription rights. Each Fund's shares
have equal voting rights. In any liquidation of a Fund, each shareholder is
entitled to receive his pro rata share of the net assets of the Fund. The
interests of shareholders in the Fund will not be evidenced by a certificate or
certificates representing shares of the Fund.
Unless otherwise required by the 1940 Act, the Trust is not required and does
not intend to hold regular annual shareholder meetings. As a result,
shareholders may not consider each year the election of Trustees or the
appointment of auditors. The Trust will be required to hold a meeting to elect
Trustees to fill any existing vacancies on the Board if, at any time, fewer than
a majority of the Trustees have been elected by the shareholders of the Trust.
In addition, the Trust Instrument provides that the holders of net less than
two-thirds of the outstanding shares of the Trust may remove persons serving as
Trustee either by declaration in writing or at a meeting called for such
purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of persons serving as Trustee if requested in writing to
do so by the holders of not less than 10% of the outstanding shares of the
Trust. To the extent required by applicable law, the Trustees shall assist
shareholders who seek to remove any person serving as Trustee.
Special shareholder meetings may be required for proposals requiring shareholder
approval as may be required by the 1940 Act, the Trust Instrument or By-Laws of
the Trust.
The insurance companies will be each Fund's sole shareholders of record, and
pursuant to the 1940 Act, such shareholders may be deemed to be in control of
the Fund. When a shareholder's meeting occurs, each insurance company solicits
and accepts voting instructions from its Variable Contract owners who have
allocated or transferred monies for an investment in the Fund as of the record
date of the meeting. Each shareholder then votes the Fund's shares that are
attributable to its interests in the Fund in which it is entitled to vote, in
proportion to the voting instructions received.
Each Fund is available through separate accounts relating to both variable
annuity and variable life insurance contracts, and directly to qualified plans.
The Funds do not currently foresee any disadvantages to Variable Contract owners
or plan participants arising from offering their shares to variable annuity and
variable life insurance policy separate accounts and plans, and the Board of
Trustees continuously monitors events for the existence of any material
irreconcilable conflict between or among Variable Contract owners and plans.
Material conflicts could result from, for example, (i) changes in state
insurance laws; (ii) changes in federal income tax laws; or (iii) differences in
voting instructions between those given by variable life owners and variable
annuity owners. If a material irreconcilable conflict arises, as determined by
the Board of Trustees, one or more separate accounts or plans may withdraw their
investment in the Fund. This could possibly require the Fund to sell
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portfolio securities at disadvantageous prices. Each insurance company or plan
will bear the expenses of establishing separate portfolios for its variable
annuity and variable life insurance separate accounts and plans if such action
becomes necessary. However, ongoing expenses that are ultimately borne by
Variable Contract owners and plan participants will likely increase due to the
loss of economies of scale benefits that can be provided to separate accounts
with substantial assets.
PERFORMANCE INFORMATION
The Funds' performance may be used from time to time in advertisements,
shareholder reports or other communications disseminated to existing or
prospective shareholders or Contract owners. THE FUNDS' PERFORMANCE DOES NOT
REFLECT THE VARIABLE CONTRACT FEES AND CHARGES. Past performance does not
indicate or project future performance. Performance information may include a
Fund's investment results and/or comparisons of its investment results to the
Fund's benchmark index or other various unmanaged indexes or results of other
mutual funds with similar investment objectives or investing or savings
vehicles. The Funds' performance will be calculated on a total return basis in
the manner set forth below.
A Fund may provide periodic and average annualized "total return" quotations.
The Fund's "total return" refers to the change in the value of an investment in
the Fund over a stated period based on any change in net asset value per share
and including the reinvestment of any dividends and distributions.
Quotations of total return and yield will not reflect Contract charges and
expenses. The prospectus for a Contract will contain information about
performance of the relevant separate account and Contract.
Total Return. Total return is calculated for the specified periods of time by
assuming a hypothetical investment of $1,000 in the Fund's shares. Each dividend
or other distribution is treated as having been reinvested at net asset value on
the payment date. The total returns stated are the percent that an original
investment would have increased during the applicable period.
Average Annual Total Return. Each Fund computes its average annual total return
by determining the average annual compounded rates of return during specified
periods that equate the initial amount invested to the ending redeemable value
of such investment. This is done by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
( ERV )(1/n)
AVERAGE ANNUAL TOTAL RETURN = (-----) -1
( P )
Where: ERV = ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 payment made at the
beginning of the period, assuming reinvestment of all
dividends and distributions
P = hypothetical initial payment of $1,000
n = number of years
Aggregate Annual Total Return. Each Fund may compute its aggregate total return
over a specified period which represents the cumulative change in the value of
an investment in the Fund for the specified period. The formula for calculating
aggregate total return is as follows:
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( ERV - P )
AGGREGATE TOTAL RETURN = -------
P
Where: ERV = ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 payment made at the
beginning of the period, assuming reinvestment of all
dividends and distributions
P = hypothetical initial payment of $1,000
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
payment dates during the period. The ending redeemable value (variable "ERV" in
each formula) is determined by assuming complete redemption of the hypothetical
investment and the deduction of all nonrecurring charges at the end of the
period covered by the computations. Such calculations are not indicative of
future results and do not take into account Federal, state and local taxes, if
any, that shareholders must pay on a current basis.
Since performance will vary from time to time depending upon market conditions,
the composition of the portfolio and operating expenses, any given performance
quotation should not be considered representative of the Fund's performance for
any specified period in the future. Performance data for the Fund should not be
used to compare an investment in the Fund's shares with bank deposits, savings
accounts and similar investment alternatives which often provide an agreed or
guaranteed fixed yield for a stated period of time.
Comparing Performance. Comparison of the quoted non-standardized performance of
various investments is valid only if performance is calculated in the same
manner. Since there are different methods of calculating performance, investors
should consider the effect of the methods used to calculate performance when
comparing performance of the Fund with performance quoted with respect to other
investment companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or to unmanaged
indices which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs.
Evaluations of a Fund's performance made by independent sources may also be used
in advertisements concerning the Fund. Sources for the Fund's performance
information could include the following: Barron's, Business Week, Changing
Times, Consumer Digest, Financial Times, Financial World, Forbes, Fortune,
Investor's Daily, Lipper Analytical Services, Inc.'s Mutual Fund Performance
Analysis, Money, Morningstar Inc., New York Times, Personal Investing News,
Personal Investor, Success, The Kiplinger's Magazine, U.S. News and World
Report, Value Line, Wall Street Journal, Weisenberger Investment Companies
Services and Working Women.
FINANCIAL STATEMENTS
Reports to Shareholders. Shareholders and Variable Contract owners will receive
unaudited semi-annual reports describing the Funds' investment operations and
annual financial statements audited by independent certified public accountants.
17