<PAGE> 1
Registration Nos. 33-11182
811-4969
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
---
Post-Effective Amendment No. 19 [X]
---
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 22 [X]
VARIABLE INVESTORS SERIES TRUST
--------------------------------------------------
(Exact Name of Registrant as specified in charter)
2122 York Road
Oak Brook, Illinois 60523
- ---------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (630)586-5000
Arnold R. Bergman
Secretary
Variable Investors Series Trust
2122 York Road
Oak Brook, Illinois 60523
(Name and Address of Agent for Service)
Copy to:
Raymond A. O'Hara III, Esq.
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
- ---
X on May 1, 1998 pursuant to paragraph (b)
- ---
60 days after filing pursuant to paragraph (a)(1)
- ---
on May 1, 1998 pursuant to paragraph (a)(1)
- ---
75 days after filing pursuant to paragraph (a)(2)
- ---
on (date) pursuant to paragraph (a)(2) of rule 485.
- ---
1
<PAGE> 2
If appropriate, check the following box:
_____ this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
Title of securities being registered: Interests under Variable Annuity Contracts
2
<PAGE> 3
VARIABLE INVESTORS SERIES TRUST
CROSS REFERENCE SHEET
(as required by Rule 404(c))
<TABLE>
<CAPTION>
Item No. in
Form N-1A Location
- --------- --------
<S> <C>
PART A
Item 1. Cover Page.............................................. Cover Page
Item 2. Synopsis................................................ Summary
Item 3. Condensed Financial Information......................... The Trust's Financial History; Financial
Highlight
Item 4. General Description of Registrant....................... Cover Page; The Trust; Investment
Objectives and Policies of the Portfolios;
Policies and Techniques Applicable to All Portfolios;
Additional Information
Item 5. Management of the Fund.................................. Management of the Trust;
Additional Information
Item 6. Capital Stock and Other Securities...................... Sales and Redemptions; Net Asset Value;
Tax Status, Dividends and Distributions; Additional
Information
Item 7. Purchase of Securities Being Offered.................... The Trust; Net Asset Value; Sales and
Redemptions
Item 8. Redemption or Repurchase................................ Sales and Redemptions; Net Asset Value
Item 9. Pending Legal Proceedings............................... Not Applicable
PART B
Item 10. Cover Page.............................................. Cover Page
Item 11. Table of Contents....................................... Cover Page
Item 12. General Information and History......................... Not Applicable
Item 13. Investment Objectives and Policies...................... Investment Objectives and Policies of the
Trust; Investment Restrictions; Portfolio
Turnover
Item 14. Management of the Fund.................................. Management of the Trust
Item 15. Control Persons and Principal Holders of Securities..... Management of the Trust
Item 16. Investment Advisory and Other Services.................. Management of the Trust;
Independent Auditors; Custodian
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
PART B
Item 17. Brokerage Allocation.................................... Management of the Trust
(Brokerage and Research Services)
Item 18. Capital Stock and Other Securities...................... Sales and Redemptions; Net Asset
Value; Tax Status, Dividends and
Distributions; Organization and
Capitalization; Additional
Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered................................ Determination of Net Asset Value;
Sales and Redemptions
Item 20. Tax Status.............................................. Taxes; Dividends and Distributions
Item 21. Underwriters............................................ Not Applicable
Item 22. Calculations of Yield Quotations of Money Market........ Performance Information
Funds
Item 23. Financial Statements.................................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration
Statement.
4
<PAGE> 5
PART A
5
<PAGE> 6
VARIABLE INVESTORS SERIES TRUST
PROSPECTUS
_____, 1998
TABLE OF CONTENTS
SUMMARY
THE TRUST
THE TRUST'S FINANCIAL HISTORY
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
POLICIES AND TECHNIQUES APPLICABLE TO ALL PORTFOLIOS
MANAGEMENT OF THE TRUST
SALES AND REDEMPTIONS
NET ASSET VALUE
PERFORMANCE INFORMATION
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
ADDITIONAL INFORMATION
Variable Investors Series Trust (the "Trust") is an open-end, series management
investment company which currently offers shares of beneficial interest of eight
series (the "Portfolios"), each of which represents the entire interest in a
separate portfolio of investments. The Portfolios are: Small Cap Growth
Portfolio, World Equity Portfolio, Growth Portfolio, Matrix Equity Portfolio,
Growth & Income Portfolio, Multiple Strategies Portfolio, High Income Bond
Portfolio and U.S. Government Bond Portfolio.
This Prospectus sets forth concisely the information about the Trust that a
prospective investor should know before purchasing shares of the Trust through
certain variable annuity contracts and variable life insurance policies offered
by participating insurance companies. Please read it carefully and retain it for
future reference. A Statement of Additional Information dated May ____ is
available without charge upon request and may be obtained by calling First
Variable Advisory Services Corp. at (800) 228-1035. The Statement of Additional
Information, which is incorporated by reference into this Prospectus, has been
filed with the Securities and Exchange Commission. The mailing address of the
Trust is 2122 York Road, Oak Brook, IL 60523.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The High Income Bond Portfolio invests primarily in high yield, higher-risk
securities and therefore may not be suitable for all investors.
SHARES OF THE PORTFOLIOS ARE AVAILABLE AND ARE BEING MARKETED EXCLUSIVELY AS A
POOLED FUNDING VEHICLE FOR LIFE INSURANCE COMPANIES WRITING VARIABLE LIFE
INSURANCE POLICIES AND VARIABLE ANNUITY CONTRACTS.
6
<PAGE> 7
SUMMARY
THE TRUST
The Trust is an open-end series management investment company which is currently
offering shares of eight Portfolios, each of which has distinct investment
objectives and policies. See Investment Objectives and Policies of the
Portfolios. Additional Portfolios may be added to the Trust in the future. This
Prospectus will be supplemented to reflect the addition of new Portfolios. The
investment objectives and policies of each Portfolio may, unless otherwise
specifically stated, be changed by the Board of Trustees of the Trust without a
vote of the shareholders.
INVESTMENT ADVISER AND SUB-ADVISERS
Subject to the authority of the Board of Trustees of the Trust, First Variable
Advisory Services Corp. ("Adviser") serves as the Trust's investment adviser and
has responsibility for the overall management of the investment strategies and
policies of the Portfolios. Adviser has engaged Sub-Advisers for each Portfolio
to make investment decisions and place orders. The Sub-Advisers for the
Portfolios are:
PORTFOLIO SUB-ADVISER
--------- -----------
Small Cap Growth Portfolio Pilgrim Baxter & Associates, Ltd.
World Equity Portfolio Keystone Investment Management Co.
Growth Portfolio Value Line, Inc.
Matrix Equity Portfolio State Street Global Advisors, a division
of State Street Bank and Trust Company
Growth & Income Portfolio Warburg Pincus Asset Management, Inc.
Multiple Strategies Portfolio Value Line, Inc.
High Income Bond Portfolio Federated Investment Counseling
U.S. Government Bond Portfolio Strong Capital Management, Inc.
Prior to April 1, 1994, INVESCO Capital Management, Inc. had acted as investment
adviser to the Portfolios of the Trust.
For additional information concerning the Adviser and the Sub-Advisers,
including a description of advisory and sub-advisory fees, see Management of the
Trust.
THE PORTFOLIOS
Small Cap Growth Portfolio. The Small Cap Growth Portfolio seeks capital
appreciation. The Portfolio will invest, under normal conditions, at least 65%
of its total assets in securities of companies with small capitalizations
(market capitalizations or annual revenues under $1 billion at the time of
purchase).
World Equity Portfolio. The World Equity Portfolio seeks maximum long-term total
return by investing primarily in common stocks, and securities convertible into
common stocks, traded in securities markets located around the world, including
the United States. Total return consists of current income, including dividends,
interest, and discount accruals, plus capital appreciation less capital
depreciation, and includes return from changes in the value of the U.S. dollar
compared to the value of the foreign currency in which a security is
denominated, as well as return from the security itself.
Growth Portfolio. The Growth Portfolio seeks capital growth by investing
primarily in a diversified portfolio of common stocks and securities convertible
into or exchangeable for common stocks, including convertible preferred stock,
convertible debentures, warrants, and options. As a secondary objective, the
Growth Portfolio may seek current income when consistent with its primary
investment objective.
Matrix Equity Portfolio. The investment objective of the Matrix Equity Portfolio
is capital appreciation and current income. The Portfolio will seek to achieve
its investment objective by investing in a diversified portfolio that is
selected by the Sub-Adviser on the basis of its proprietary analytical model.
Sector weights are normally maintained at a similar level to that of the S&P 500
Index. The Portfolio will invest at least 65% of its total assets in equity
securities. (Prior to May 1, 1997, the Matrix Equity Portfolio was known as the
"Tilt Utility Portfolio" and had different policies, but maintained the same
investment objective).
Growth & Income Portfolio. The Growth & Income Portfolio's investment objectives
are to provide growth of capital and income. The Portfolio seeks to achieve its
objectives by investing in equity securities, fixed income securities and money
market
7
<PAGE> 8
instruments. The portion of the Portfolio invested at any given time in each of
these asset classes will vary depending on market conditions, and there may be
extended periods when the Portfolio is primarily invested in one of them. In
addition, the amount of income derived from the Portfolio will fluctuate
depending on the composition of the Portfolio's holdings and will tend to be
lower when a higher portion of the Portfolio is invested in equity securities.
The Portfolio may also purchase without limitation dollar-denominated American
Depository Receipts ("ADRs"). ADRs are issued by domestic banks and evidence
ownership of underlying foreign securities.
Multiple Strategies Portfolio. The Multiple Strategies Portfolio seeks to
achieve as high a level of total return over an extended period of time as the
Adviser and Sub-Adviser consider consistent with prudent investment risk. Total
return consists of current income including dividends, interest, and discount
accruals, plus capital appreciation, less capital depreciation. The Multiple
Strategies Portfolio will invest in equity securities, bonds, and money market
instruments in varying proportions, depending upon the Sub-Adviser's assessment
of prevailing economic conditions and conditions in the financial markets.
High Income Bond Portfolio. The High Income Bond Portfolio seeks to obtain as
high a level of current income as is believed to be consistent with prudent
investment management. As a secondary objective, the High Income Bond Portfolio
seeks capital appreciation when consistent with its primary objective. The
Portfolio seeks to achieve its investment objectives by investing primarily in
fixed-income securities rated lower than A. Many of the high yield securities in
which the Portfolio may invest are commonly referred to as "junk bonds". For
special risks involved with investing in such securities (including, among
others, risks of default and illiquidity) see Investment Objectives and Policies
of the Portfolios-High Income Bond Portfolio.
U.S. Government Bond Portfolio. The U.S. Government Bond Portfolio seeks current
income and preservation of capital through investment primarily in securities
issued or guaranteed as to principal and interest by the U.S. Government or by
its agencies, authorities, or instrumentalities.
All of the Portfolios may invest in types of securities or use investment
techniques that may involve certain special considerations and risks, as
described below under Investment Objectives and Policies of the Portfolios and
Policies and Techniques Applicable to All Portfolios. In particular, the High
Income Bond Portfolio may invest in securities which are considered to be of
poor standing and are predominantly speculative. Such securities may be subject
to greater market fluctuations and risk of loss of income and principal than
lower yielding, higher rated fixed-income securities.
Investments by the World Equity Portfolio and certain of the other Portfolios in
foreign securities may be affected by adverse political, diplomatic, and
economic developments, changes in foreign currency exchange rates, taxes or
other assessments imposed on distributions with respect to those investments,
and other factors affecting foreign investments generally.
The Small Cap Growth Portfolio, the World Equity Portfolio, and certain of the
other Portfolios may invest in stocks and convertible securities that are traded
in the over-the-counter market, which may not be as liquid as exchange-listed
stocks. In addition, the Small Cap Growth Portfolio, the World Equity Portfolio,
and certain of the other Portfolios may invest in securities of small
capitalization companies and, therefore, may experience greater price volatility
than investment companies that invest in more established, larger capitalized
companies.
Additional risks may include risks relating to the creditworthiness of the
parties with whom the Trust enters into certain transactions and the risk that
use of the Trust's investment policies and techniques in certain cases may not
be successful. Use by a Portfolio of the options and futures strategies and the
foreign currency exchange transactions described in this Prospectus and the
Statement of Additional Information involves risks relating to the liquidity of
the options, futures, and currency markets, and to market risks generally.
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of certain life insurance
companies as a funding vehicle for the variable annuity contracts and variable
life insurance contracts offered by those companies. No fee is charged upon the
sale or redemption of the Trust's shares. See Sales and Redemptions.
THE TRUST
The Trust is intended to be the funding vehicle for variable annuity contracts
("VA contracts") and variable life insurance policies ("VLI policies") to be
offered by life insurance company separate accounts. The Trust currently does
not foresee any disadvantages to the holders of VA contracts and VLI policies
arising from the fact that the interests of the holders of such contracts and
policies may differ. Nevertheless, the Board of Trustees of the Trust intends to
monitor events in order to identify
8
<PAGE> 9
any material irreconcilable conflicts which may possibly arise and to determine
what action, if any, should be taken in response thereto. As of the date of this
Prospectus, First Variable Life Insurance Company ("First Variable Life") is the
only life insurance company that uses the Trust to fund its separate accounts.
The Trust may make its shares available to additional life insurance companies
from time to time. The VA contracts and the VLI policies are described in the
separate prospectuses issued by the life insurance companies. The Trust assumes
no responsibility for such prospectuses.
THE TRUST'S FINANCIAL HISTORY
The following tables present financial highlights for the life of each
of the Portfolios, except that the information relating to the Growth, Multiple
Strategies, High Income Bond and U.S. Government Bond Portfolios is presented
only for the Portfolios' ten most recent fiscal years. Ernst & Young LLP, whose
report appears in the Statement of Additional Information, has audited the
financial highlights for the Trust for the period ended December 31, 1997 and
1996.
Further information about the performance of the Trust is contained in
the Trust's December 31, 1997 Annual Report which may be obtained without charge
by calling the Adviser at (800)228-1035.
9
<PAGE> 10
SMALL CAP GROWTH PORTFOLIO (1)
Year or period ended December 31,
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1997 1996 1995 (2)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 16.050 $ 12.638 $ 10.000
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Loss (0.152) (0.091) (0.042)
Net Realized and Unrealized Gain
on Investments 0.243 3.560 3.047
----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 0.091 3.469 3.005
----------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income (0.000) (0.000) (0.000)
From Net Realized Capital Gains (0.435) (0.000) (0.367)
In Excess of Net Realized Capital Gains (0.128) (0.057) (0.000)
----------- ----------- -----------
Total Distributions (0.563) (0.057) (0.367)
----------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD $ 15.578 $ 16.050 $ 12.638
----------- ----------- -----------
TOTAL RETURN (3)(4) 0.73% 27.39% 30.08%(5)
- ----------------------------------------------------------------------------------------
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's) $ 18,254 $ 13,803 $ 3,813
Ratio of Operating Expenses to
Average Net Assets (6) 1.35% 1.35% 1.35%(7)
Ratio of Operating Expenses to
Average Net Assets before
Expense Reductions (8) 1.35% 1.35% 1.38%(7)
Ratio of Net Investment Loss
to Average Net Assets (1.06)% (0.90)% (0.79%)(7)
Portfolio Turnover Rate 104.72% 72.66% 73.76%(5)
Average Commission per Share (9) $ 0.05 $ 0.05 --
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Prior to May 1, 1997, the Portfolio was known as the "Small Cap
Portfolio."
(2) From commencement of operations May 4, 1995.
(3) Total returns would have been lower had certain expenses not been borne by
the adviser or its affiliates.
(4) The performance of the Portfolio shown on this page does not reflect
expenses and charges of the applicable separate accounts and variable
products, all of which vary to a considerable extent and are described in
your product's prospectus.
(5) Not annualized.
(6) Net Investment Income is after payment or reimbursement of certain
expenses by affiliates in 1997, 1996 and 1995. (See Note C to the Trust's
financial statements.) Had affiliates not undertaken to waive their fees
and/or pay or reimburse expenses related to the Portfolio, the Ratio of
Operating Expenses to Average Net Assets would have been as follows: 1997
- 1.79%; 1996 - 2.38%; 1995 - 9.00%.
(7) Annualized.
(8) For fiscal years ending after September 1, 1995, the Portfolio is required
to calculate an expense ratio without expense reductions.
(9) For fiscal years beginning on or after September 1, 1995, the Portfolio is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate does not reflect mark-ups,
mark-downs or spreads on shares traded on a principal basis.
10
<PAGE> 11
WORLD EQUITY PORTFOLIO
Year or Period Ended December 31,
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 (1) 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 15.062 $ 13.823 $ 11.752 $ 11.348 $ 10.177
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.068 0.016 0.014 0.013 0.086
Net Realized and Unrealized
Gain (Loss) on Investments 1.392 1.647 2.872 1.119 1.679
----------- ----------- ----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 1.460 1.663 2.886 1.132 1.765
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income (0.161) (0.013) (0.000) (0.023) (0.091)
In Excess of Net Investment Income (0.126) (0.051) (0.000) (0.000) (0.007)
From Net Realized Capital Gains (2.056) (0.360) (0.815) (0.698) (0.496)
In Excess of Net Realized Capital Gains (0.095) (0.000) (0.000) (0.007) (0.000)
----------- ----------- ----------- ----------- -----------
Total Distributions (2.438) (0.424) (0.815) (0.728) (0.594)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD $ 14.084 $ 15.062 $ 13.823 $ 11.752 $ 11.348
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (2) (3) 9.98% 12.33% 24.32% 10.02% 17.32%
- -------------------------------------------------------------------------------------------------------------------------
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's) $ 24,772 $ 24,534 $ 18,191 $ 11,500 $ 12,230
Ratio of Operating Expenses to
Average Net Assets (4) 1.20% 1.20% 1.20% 1.20% 1.20%
Ratio of Operating Expenses to
Average Net Assets before
Expense Reductions (5) 1.20% 1.20% 1.20% -- --
Ratio of Net Investment Income (Loss) to
Average Net Assets 0.25% 0.10% 0.12% 0.16% 0.92%
Portfolio Turnover Rate 120.50% 61.14% 97.85% 110.12% 78.50%
Average Commission per Share (7) $ 0.00 $ 0.02 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1992 1991 1990 1989 1988 (6)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 10.377 $ 9.734 $ 11.031 $ 10.044 $ 10.388
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.128 0.154 0.375 0.312 (0.421)
Net Realized and Unrealized
Gain (Loss) on Investments (0.319) 0.645 (1.533) 1.399 0.077
----------- ----------- ----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS (0.191) 0.799 (1.158) 1.711 (0.344)
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income (0.009) (0.156) (0.139) (0.179) (0.000)
In Excess of Net Investment Income (0.000) (0.000) (0.000) (0.000) (0.000)
From Net Realized Capital Gains (0.000) (0.000) (0.000) (0.545) (0.000)
In Excess of Net Realized Capital Gains (0.000) (0.000) (0.000) (0.000) (0.000)
----------- ----------- ----------- ----------- -----------
Total Distributions (0.009) (0.156) (0.139) (0.724) (0.000)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD $ 10.177 $ 10.377 $ 9.734 $ 11.031 $ 10.044
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (2) (3) (1.83)% 8.22% (10.51)% 17.06% (3.31)%(8)
- ------------------------------------------------------------------------------------------------------------------------
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's) $ 9,280 $ 8,304 $ 7,255 $ 2,408 $ 1,259
Ratio of Operating Expenses to
Average Net Assets (4) 1.20% 1.11% 0.95% 1.28% 11.84%(9)
Ratio of Operating Expenses to
Average Net Assets before
Expense Reductions (5) -- -- -- -- --
Ratio of Net Investment Income (Loss) to
Average Net Assets 1.34% 1.40% 2.15% 1.38% (8.84)%(9)
Portfolio Turnover Rate 103.43% 79.97% 62.06% 61.13% 27.14%(8)
Average Commission per Share (7) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On April 1, 1994, FVAS became investment adviser. Prior to that date,
results were achieved by former investment advisers.
(2) Total returns would have been lower had certain expenses not been borne by
the adviser or its affiliates.
(3) The performance of the Portfolio shown on this page does not reflect
expenses and charges of the applicable separate accounts and variable
products, all of which vary to a considerable extent and are described in
your product's prospectus.
(4) Net Investment Income is after payment or reimbursement of certain
expenses by affiliates in 1997, 1996 and 1995 and waiver of business
management fee and payment or reimbursement of certain other expenses by
affiliates in 1994, 1993, 1992, 1991, 1990, 1989 and 1988. (See Note C to
the Trust's financial statements.) Had affiliates not undertaken to waive
their fees and/or pay or reimburse expenses related to the Portfolio, the
Ratio of Operating Expenses to Average Net Assets would have been as
follows: 1997 - 1.47%; 1996 - 1.50%; 1995 - 1.67%; 1994 - 2.22%; 1993 -
1.79%; 1992 - 2.26%; 1991 - 2.93%: 1990 - 4.25%; 1989 - 2.56%; 1988 -
11.84%.
(5) For fiscal years ending after September 1, 1995, the Portfolio is required
to calculate an expense ratio without expense reductions.
(6) Commenced investment operations on June 10, 1988.
(7) For fiscal years beginning on or after September 1, 1995, the Portfolio is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate does not reflect mark-ups,
mark-downs or spreads on shares traded on a principal basis.
(8) Not annualized.
(9) Annualized.
11
<PAGE> 12
GROWTH PORTFOLIO (1)
Year or Period Ended December 31,
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 (2) 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 30.623 $ 25.866 $ 20.056 $ 20.390 $ 20.454
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (Loss) (0.082) (0.063) 0.007 0.173 0.468
Net Realized and Unrealized
Gain (Loss) on Investments 7.226 6.736 7.419 (0.335) 1.401
----------- ----------- ----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 7.144 6.673 7.426 (0.162) 1.869
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income (0.000) (0.000) (0.173) (0.086) (0.436)
In Excess of Net Investment Income (0.000) (0.002) (0.000) (0.000) (0.373)
From Net Realized Capital Gains (3.065) (1.914) (1.443) (0.086) (1.124)
----------- ----------- ----------- ----------- -----------
Total Distributions (3.065) (1.916) (1.616) (0.172) (1.933)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD $ 34.702 $ 30.623 $ 25.866 $ 20.056 $ 20.390
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (3 (4) 23.62% 25.74% 37.12% (0.79)% 9.09%
- ---------------------------------------------------------------------------------------------------------------------
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's) $ 65,273 $ 54,565 $ 42,919 $ 30,815 $ 42,530
Ratio of Operating Expenses to
Average Net Assets (5) 1.10% 1.17% 1.17% 1.20% 1.20%
Ratio of Operating Expenses to
Average Net Assets before
Expense Reductions (6) 1.10% 1.17% 1.17% -- --
Ratio of Net Investment Income (Loss)
to Average Net Assets (6) (0.25)% (0.23)% 0.01% 0.78% 1.74%
Portfolio Turnover Rate 54.74% 67.82% 166.87% 155.12% 6.05%
Average Commission per Share (8) $ 0.05 $ 0.05 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 26.290 $ 21.250 $ 22.910 $ 17.923 $ 15.657
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (Loss) 0.254 0.571 0.595 1.172 0.341
Net Realized and Unrealized
Gain (Loss) on Investments (2.256) 6.727 (1.333) 5.038 2.282
----------- ----------- ----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS (2.002) 7.298 (0.738) 6.210 2.623
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income (0.254) (0.571) (0.596) (1.223) (0.357)
In Excess of Net Investment Income (0.000) (0.000) (0.000) (0.000) (0.000)
From Net Realized Capital Gains (3.580) (1.687) (0.326) (0.000) (0.000)
----------- ----------- ----------- ----------- -----------
Total Distributions (3.834) (2.258) (0.922) (1.223) (0.357)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD $ 20.454 $ 26.290 $ 21.250 $ 22.910 $ 17.923
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (3) (4) (7.59)% 34.37% (3.20)% 34.73% 16.72%(8)
- ------------------------------------------------------------------------------------------------------------------------
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's) $ 52,538 $ 54,877 $ 39,902 $ 33,598 $ 23,327
Ratio of Operating Expenses to
Average Net Assets (5) 1.16% 0.99% 0.95% 0.97% 1.02%(9)
Ratio of Operating Expenses to
Average Net Assets before
Expense Reductions (6) -- -- -- -- --
Ratio of Net Investment Income (Loss)
to Average Net Assets (6) 1.06% 2.12% 3.03% 5.69% 1.86%(9)
Portfolio Turnover Rate 133.30% 69.04% 98.22% 91.29% 95.01%(8)
Average Commission per Share (8) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Prior to May 1, 1997, the Portfolio was known as the "Common Stock
Portfolio."
(2) On April 1, 1994, FVAS became investment adviser. Prior to that date,
results were achieved by former investment advisers.
(3) Total returns would have been lower had certain expenses not been borne by
the adviser or its affiliates.
(4) The performance of the Portfolio shown on this page does not reflect
expenses and charges of the applicable separate accounts and variable
products, all of which vary to a considerable extent and are described in
your product's prospectus.
(5) Net Investment Income is after payment or reimbursement of certain
expenses by affiliates in 1995 and waiver of business management fee and
payment or reimbursement of certain other expenses by affiliates in 1994,
1993, 1992, 1991, 1990, 1989 and 1988. (See Note C to the Trust's
financial statements.) Had affiliates not undertaken to waive their fees
and/or pay or reimburse expenses related to the Portfolio, the Ratio of
Operating Expenses to Average Net Assets would have been as follows: 1995
- 1.17%; 1994 - 1.33%; 1993 - 1.21%; 1992 - 1.16%; 1991 - 1.00%: 1990 -
1.13%; 1989 - 1.18%; 1988 - 1.23%.
(6) For fiscal years ending after September 1, 1995, the Portfolio is required
to calculate an expense ratio without expense reductions.
(7) For fiscal years beginning on or after September 1, 1995, the Portfolio is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate does not reflect mark-ups,
mark-downs or spreads on shares traded on a principal basis.
(8) Not annualized.
(9) Annualized.
12
<PAGE> 13
MATRIX EQUITY PORTFOLIO (1)
Year or Period Ended December 31,
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 (2) 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 15.254 $ 15.704 $ 12.372 $ 14.650 $ 13.891
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.287 0.659 0.559 0.521 0.314
Net Realized and Unrealized Gain
(Loss) on Investments 2.965 0.063 3.560 (0.651) 2.171
----------- ----------- ----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 3.252 0.722 4.119 (0.130) 2.485
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income (0.291) (0.654) (0.494) (0.521) (0.296)
In Excess of Net Investment Income (3) (0.000) (0.000) (0.000) (0.000) (0.170)
From Net Realized Capital Gains (3.940) (0.518) (0.293) (1.627) (1.260)
----------- ----------- ----------- ----------- -----------
Total Distributions (4.231) (1.172) (0.787) (2.148) (1.726)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD $ 14.275 $ 15.254 $ 15.704 $ 12.372 $ 14.650
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (4) (5) 22.05% 4.62% 33.45% (1.05)% 17.87%
- ---------------------------------------------------------------------------------------------------------------------
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's) $ 14,521 $ 14,448 $ 16,018 $ 12,312 $ 15,251
Ratio of Operating Expenses to
Average Net Assets (6) 1.15% 1.15% 1.15% 1.16% 1.20%
Ratio of Operating Expenses to
Average Net Assets before
Expense Reductions (7) 1.18% 1.15% 1.17% -- --
Ratio of Net Investment Income
to Average Net Assets 1.63% 3.74% 3.89% 3.16% 1.85%
Portfolio Turnover Rate 169.75% 19.41% 48.20% 193.40% 109.57%
Average Commission per Share (9) $ 0.03 $ 0.03 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1992 1991 1990 1989 1988 (8)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 14.057 $ 12.183 $ 12.948 $ 10.66 $ 10.522
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.326 0.477 0.349 0.420 0.276
Net Realized and Unrealized Gain
(Loss) on Investments (0.168) 3.140 (0.689) 2.424 0.201
----------- ----------- ----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 0.158 3.617 (0.340) 2.844 0.477
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income (0.324) (0.475) (0.352) (0.492) (0.248)
In Excess of Net Investment Income (3) (0.000) (0.000) (0.000) (0.000) (0.000)
From Net Realized Capital Gains (0.000) (1.268) (0.073) (0.064) (0.091)
----------- ----------- ----------- ----------- -----------
Total Distributions (0.324) (1.743) (0.425) (0.556) (0.339)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD $ 13.891 $ 14.057 $ 12.183 $ 12.948 $ 10.660
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (4) (5) 1.12% 29.79% (2.61)% 26.73% 4.53%(10)
- ----------------------------------------------------------------------------------------------------------------------
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's) $ 12,693 $ 11,156 $ 7,865 $ 1,410 $ 675
Ratio of Operating Expenses to
Average Net Assets (6) 1.20% 1.12% 0.95% 1.12% 1.10%(11)
Ratio of Operating Expenses to
Average Net Assets before
Expense Reductions (7) -- -- -- -- --
Ratio of Net Investment Income
to Average Net Assets 2.49% 3.54% 4.80% 4.37% 5.36%(11)
Portfolio Turnover Rate 308.39% 113.97% 47.58% 49.18% 24.58%(10)
Average Commission per Share (9) -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Prior to May 1, 1997, the Portfolio was known as the "Tilt Utility
Portfolio" and had different investment policies.
(2) On April 1, 1994, FVAS became investment adviser. Prior to that date,
results were achieved by former investment advisers.
(3) For 1996, amount was less than $0.001 per share.
(4) Total returns would have been lower had certain expenses not been borne by
the adviser or its affiliates.
(5) The performance of the Portfolio shown on this page does not reflect
expenses and charges of the applicable separate accounts and variable
products, all of which vary to a considerable extent and are described in
your product's prospectus.
(6) Net Investment Income is after payment or reimbursement of certain
expenses by affiliates in 1997, 1996 and 1995 and waiver of business
management fee and payment or reimbursement of certain other expenses by
affiliates in 1994, 1993, 1992, 1991, 1990, 1989 and 1988. (See Note C to
the Trust's financial statements.) Had affiliates not undertaken to waive
their fees and/or pay or reimburse expenses related to the Portfolio, the
Ratio of Operating Expenses to Average Net Assets would have been as
follows: 1997 - 1.54%; 1996 - 1.48%; 1995 - 1.51%; 1994 -1.60%; 1993 -
1.59%; 1992 - 1.64%; 1991 - 1.74%: 1990 - 2.78%; 1989 - 1.97%; 1988 -
6.10%.
(7) For fiscal years ending after September 1, 1995, the Portfolio is required
to calculate an expense ratio without expense reductions.
(8) Commenced investment operations on June 16, 1988.
(9) For fiscal years beginning on or after September 1, 1995, the Portfolio is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate does not reflect mark-ups,
mark-downs or spreads on shares traded on a principal basis.
(10) Not annualized.
(11) Annualized.
13
<PAGE> 14
GROWTH & INCOME PORTFOLIO
Year or Period Ended December 31,
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1997 1996 1995 (1)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 12.421 $ 11.171 $ 10.000
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.127 0.070 0.045
Net Realized and Unrealized Gain
on Investments 3.351 1.291 1.266
----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 3.478 1.361 1.311
----------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income (0.127) (0.070) (0.045)
In Excess of Net Investment Income (0.000) (0.001) (0.000)
From Net Realized Capital Gains (1.205) (0.040) (0.095)
----------- ----------- -----------
Total Distributions (1,332) (0.111) (0.140)
----------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD $ 14.567 $ 12.421 $ 11.171
----------- ----------- -----------
TOTAL RETURN (2) (3) 28.20% 12.15% 13.09%(4)
- --------------------------------------------------------------------------------------
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's) $ 21,061 $ 10,300 $ 3,335
Ratio of Operating Expenses to
Average Net Assets (5) 1.25% 1.25% 1.25%(6)
Ratio of Operating Expenses to
Average Net Assets before
Expense Reductions (7) 1.25% 1.26% 1.49%(6)
Ratio of Net Investment Income
to Average Net Assets 1.05% 0.82% 1.17%(6)
Portfolio Turnover Rate 162.94% 131.85% 33.49%(4)
Average Commission per Share (8) $ 0.06 $ 0.06 --
- --------------------------------------------------------------------------------------
</TABLE>
(1) From commencement of operations May 31, 1995.
(2) Total returns would have been lower had certain expenses not been borne by
the adviser or its affiliates.
(3) The performance of the Portfolio shown on this page does not reflect
expenses and charges of the applicable separate accounts and variable
products, all of which vary to a considerable extent and are described in
your product's prospectus.
(4) Not annualized.
(5) Net Investment Income is after payment or reimbursement of certain
expenses by affiliates in 1997, 1996 and 1995. (See Note C to the Trust's
financial statements.) Had affiliates not undertaken to waive their fees
and/or pay or reimburse expenses related to the Portfolio, the Ratio of
Operating Expenses to Average Net Assets would have been as follows: 1997
- 1.60%; 1996 - 2.63%; 1995 - 7.27%.
(6) Annualized.
(7) For fiscal years ending after September 1, 1995, the Portfolio is required
to calculate an expense ratio without expense reductions.
(8) For fiscal years beginning on or after September 1, 1995, the Portfolio is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate does not reflect mark- ups,
mark-downs or spreads on shares traded on a principal basis.
14
<PAGE> 15
MULTIPLE STRATEGIES PORTFOLIO
Year or Period Ended December 31,
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 (1) 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 12.699 $ 12.043 $ 10.022 $ 12.182 $ 11.785
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.103 0.143 0.137 0.236 0.424
Net Realized and Unrealized
Gain (Loss) on Investments 2.629 2.069 3.086 (0.711) 0.835
----------- ----------- ----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 2.732 2.212 3.223 (0.475) 1.259
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income (0.103) (0.144) (0.136) (0.235) (0.424)
In Excess of Net Investment Income (2) (0.000) (0.000) (0.000) (0.008) (0.000)
From Net Realized Capital Gains (1.170) (1.412) (1.066) (1.418) (0.438)
In Excess of Net Realized Capital Gains (0.000) (0.000) (0.000) (0.024) (0.000)
----------- ----------- ----------- ----------- -----------
Total Distributions (1.273) (1.556) (1.202) (1.685) (0.862)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD $ 14.158 $ 12.699 $ 12.043 $ 10.022 $ 12.182
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (3) (4) 21.79% 18.29% 32.24% (3.91)% 10.52%
- ------------------------------------------------------------------------------------------------------------------------
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's) $ 35,119 $ 31,884 $ 26,380 $ 21,150 $ 24,522
Ratio of Operating Expenses to
Average Net Assets (5) 1.19% 1.20% 1.20% 1.20% 1.20%
Ratio of Operating Expenses to
Average Net Assets before
Expense Reductions (6) 1.19% 1.20% 1.20% -- --
Ratio of Net Investment Income
to Average Net Assets 0.69% 1.16% 1.14% 1.74% 3.20%
Portfolio Turnover Rate 45.87% 92.21% 161.10% 153.64% 25.57%
Average Commission per Share (7) $ 0.05 $ 0.05 -- -- --
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 12.515 $ 10.790 $ 10.888 $ 9.481 $ 9.220
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.499 0.536 0.506 0.643 0.475
Net Realized and Unrealized
Gain (Loss) on Investments (0.060) 1.989 (0.089) 1.421 0.259
----------- ----------- ----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 0.439 2.525 0.417 2.064 0.734
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income (0.506) (0.526) (0.515) (0.657) (0.473)
In Excess of Net Investment Income (2) (0.000) (0.000) (0.000) (0.000) (0.000)
From Net Realized Capital Gains (0.663) (0.274) (0.000) (0.000) (0.000)
In Excess of Net Realized Capital Gains (0.000) (0.000) (0.000) (0.000) (0.000)
----------- ----------- ----------- ----------- -----------
Total Distributions (1.169) (0.800) (0.515) (0.657) (0.473)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD $ 11.785 $ 12.515 $ 10.790 $ 10.888 $ 9.481
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (3) (4) 3.62% 23.43% 3.86% 21.80% 7.97%
- -------------------------------------------------------------------------------------------------------------------------
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's) $ 26,012 $ 26,916 $ 20,994 $ 12,475 $ 8,511
Ratio of Operating Expenses to
Average Net Assets (5) 1.20% 1.11% 0.95% 0.95% 0.98%
Ratio of Operating Expenses to
Average Net Assets before
Expense Reductions (6) -- -- -- -- --
Ratio of Net Investment Income
to Average Net Assets 3.73% 4.49% 5.87% 6.74% 4.41%
Portfolio Turnover Rate 52.11% 61.17% 66.25% 93.19% 95.21%
Average Commission per Share (7) -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On April 1, 1994, FVAS became investment adviser. Prior to that date,
results were achieved by former investment advisers.
(2) For 1997 and 1996, amount was less than $0.001 per share.
(3) Total returns would have been lower had certain expenses not been borne by
the adviser or its affiliates.
(4) The performance of the Portfolio shown on this page does not reflect
expenses and charges of the applicable separate accounts and variable
products, all of which vary to a considerable extent and are described in
your product's prospectus.
(5) Net Investment Income is after payment or reimbursement of certain
expenses by affiliates in 1997, 1996 and 1995 and waiver of business
management fee and payment or reimbursement of certain other expenses by
affiliates in 1994, 1993, 1992, 1991, 1990, 1989 and 1988. (See Note C to
the Trust's financial statements.) Had affiliates not undertaken to waive
their fees and/or pay or reimburse expenses related to the Portfolio, the
Ratio of Operating Expenses to Average Net Assets would have been as
follows: 1997 - 1.21%; 1996 - 1.32%; 1995 - 1.33%; 1994 - 1.48%; 1993 -
1.35%; 1992 - 1.24%; 1991 - 1.22%: 1990 - 1.41%; 1989 - 1.03%; 1988 -
1.28%.
(6) For fiscal years ending after September 1, 1995, the Portfolio is required
to calculate an expense ratio without expense reductions.
(7) For fiscal years beginning on or after September 1, 1995, the Portfolio is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate does not reflect mark-ups,
mark-downs or spreads on shares traded on a principal basis.
15
<PAGE> 16
HIGH INCOME BOND PORTFOLIO
Year or Period Ended December 31,
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 (1) 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.173 $ 8.589 $ 7.914 $ 9.704 $ 9.492
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.640 0.596 0.779 1.018 0.848
Net Realized and Unrealized
Gain (Loss) on Investments 0.598 0.624 0.717 (1.711) 0.567
----------- ----------- ----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 1.238 1.220 1.496 (0.693) 1.415
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income (0.681) (0.596) (0.779) (1.005) (0.849)
In Excess of Net Investment Income (0.010) (0.040) (0.042) (0.006) (0.000)
From Net Realized Capital Gains (0.000) (0.000) (0.000) (0.075) (0.354)
In Excess of Net Realized Capital Gains (0.000) (0.000) (0.000) (0.011) (0.000)
----------- ----------- ----------- ----------- -----------
Total Distributions (0.691) (0.636) (0.821) (1.097) (1.203)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD $ 9.720 $ 9.173 $ 8.589 $ 7.914 $ 9.704
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (2) (3) 13.54% 14.20% 18.98% (7.08)% 14.91%
- ----------------------------------------------------------------------------------------------------------------------
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's) $ 17,916 $ 12,835 $ 8,764 $ 7,771 $ 14,496
Ratio of Operating Expenses to
Average Net Assets (4) 1.20% 1.18% 1.20% 1.20% 1.20%
Ratio of Operating Expenses to
Average Net Assets before
Expense Reductions (5) 1.20% 1.20% 1.21% -- --
Ratio of Net Investment Income
to Average Net Assets 7.15% 7.96% 8.62% 8.70% 8.04%
Portfolio Turnover Rate 91.54% 105.48% 82.15% 200.19% 90.82%
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.187 $ 7.911 $ 9.179 $ 9.674 $ 9.568
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.972 0.878 0.959 1.414 1.042
Net Realized and Unrealized
Gain (Loss) on Investments 0.481 1.258 (1.253) (0.491) 0.106
----------- ----------- ----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 1.453 2.136 (0.294) 0.923 1.148
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income (0.975) (0.860) (0.974) (1.418) (1.042)
In Excess of Net Investment Income (0.000) (0.000) (0.000) (0.000) (0.000)
From Net Realized Capital Gains (0.173) (0.000) (0.000) (0.000) (0.000)
In Excess of Net Realized Capital Gains (0.000) (0.000) (0.000) (0.000) (0.000)
----------- ----------- ----------- ----------- -----------
Total Distributions (1.148) (0.860) (0.974) (1.418) (1.042)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD $ 9.492 $ 9.187 $ 7.911 $ 9.179 $ 9.674
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (2) (3) 15.77% 27.01% (3.13)% 9.47% 11.96%
- ----------------------------------------------------------------------------------------------------------------------
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's) $ 12,448 $ 8,386 $ 4,396 $ 3,124 $ 2,912
Ratio of Operating Expenses to
Average Net Assets (4) 1.20% 1.13% 0.95% 1.01% 1.04%
Ratio of Operating Expenses to
Average Net Assets before
Expense Reductions (5) -- -- -- -- --
Ratio of Net Investment Income
to Average Net Assets 9.70% 10.54% 11.92% 11.14% 10.20%
Portfolio Turnover Rate 166.27% 41.14% 47.87% 78.64% 29.91%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On April 1, 1994, FVAS became investment adviser. Prior to that date,
results were achieved by former investment advisers.
(2) Total returns would have been lower had certain expenses not been borne by
the adviser or its affiliates.
(3) The performance of the Portfolio shown on this page does not reflect
expenses and charges of the applicable separate accounts and variable
products, all of which vary to a considerable extent and are described in
your product's prospectus.
(4) Net Investment Income is after payment or reimbursement of certain
expenses by affiliates in 1997, 1996 and 1995 and waiver of business
management fee and payment or reimbursement of certain other expenses by
affiliates in 1994, 1993, 1992, 1991, 1990, 1989 and 1988. (See Note C to
the Trust's financial statements.) Had affiliates not undertaken to waive
their fees and/or pay or reimburse expenses related to the Portfolio, the
Ratio of Operating Expenses to Average Net Assets would have been as
follows: 1997 - 1.64%; 1996 - 1.99%; 1995 - 2.04%; 1994 - 2.03%; 1993 -
1.59%; 1992 - 1.68%; 1991 - 2.15%: 1990 - 2.46%; 1989 - 1.49%; 1988 -
1.59%.
(5) For fiscal years ending after September 1, 1995, the Portfolio is required
to calculate an expense ratio without expense reductions.
16
<PAGE> 17
U.S. GOVERNMENT BOND PORTFOLIO
Year or Period Ended December 31,
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 (1) 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.938 $ 10.510 $ 9.718 $ 10.923 $ 10.659
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.630 0.629 0.765 0.690 0.674
Net Realized and Unrealized
Gain (Loss) on Investments 0.299 (0.385) 1.191 (0.986) 0.328
----------- ----------- ----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 0.929 0.244 1.956 (0.296) 1.002
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income (0.617) (0.610) (0.765) (0.690) (0.673)
In Excess of Net Investment Income (0.000) (0.000) (0.045) (0.000) (0.000)
From Net Realized Capital Gains (0.068) (0.206) (0.354) (0.105) (0.062)
In Excess of Net Realized Capital Gains (0.021) (0.000) (0.000) (0.112) (0.000)
Tax Return of Capital (0.000) (0.000) (0.000) (0.002) (0.003)
----------- ----------- ----------- ----------- -----------
Total Distributions (0.706) (0.816) (1.164) (0.909) (0.738)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD $ 10.161 $ 9.938 $ 10.510 $ 9.718 $ 10.923
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (2) (3) 9.37% 2.36% 20.18% (2.72)% 9.38%
- -----------------------------------------------------------------------------------------------------------------------
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's) $ 9,679 $ 10,734 $ 11,618 $ 14,444 $ 20,710
Ratio of Operating Expenses to
Average Net Assets (4) 0.85% 0.85% 0.85% 0.85% 0.85%
Ratio of Operating Expenses to
Average Net Assets before
Expense Reductions (5) 0.86% 0.85% 0.85% -- --
Ratio of Net Investment Income
to Average Net Assets 5.86% 5.80% 6.18% 5.65% 5.20%
Portfolio Turnover Rate 124.75% 244.96% 252.94% 289.71% 27.84%
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 11.372 $ 10.610 $ 10.474 $ 9.863 $ 9.859
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.886 0.628 0.623 0.771 0.604
Net Realized and Unrealized
Gain (Loss) on Investments (0.187) 0.929 0.174 0.611 0.008
----------- ----------- ----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 0.699 1.557 0.797 1.382 0.612
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income (0.887) (0.614) (0.636) (0.771) (0.605)
In Excess of Net Investment Income (0.000) (0.000) (0.000) (0.000) (0.000)
From Net Realized Capital Gains (0.525) (0.181) (0.025) (0.000) (0.003)
In Excess of Net Realized Capital Gains (0.000) (0.000) (0.000) (0.000) (0.000)
Tax Return of Capital (0.000) (0.000) (0.000) (0.000) (0.000)
----------- ----------- ----------- ----------- -----------
Total Distributions (1.412) (0.795) (0.661) (0.771) (0.608)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD $ 10.659 $ 11.372 $ 10.610 $ 10.474 $ 9.863
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (2) (3) 6.13% 14.70% 7.66% 13.99% 6.20%
- -------------------------------------------------------------------------------------------------------------------------
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's) $ 24,280 $ 35,544 $ 18,922 $ 10,999 $ 6,996
Ratio of Operating Expenses to
Average Net Assets (4) 0.85% 0.85% 0.85% 0.87% 0.89%
Ratio of Operating Expenses to
Average Net Assets before
Expense Reductions (5) -- -- -- -- --
Ratio of Net Investment Income
to Average Net Assets 6.41% 7.15% 7.91% 8.24% 7.78%
Portfolio Turnover Rate 133.86% 125.90% 70.39% 103.34% 62.12%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On April 1, 1994, FVAS became investment adviser. Prior to that date,
results were achieved by former investment advisers.
(2) Total returns would have been lower had certain expenses not been borne by
the adviser or its affiliates.
(3) The performance of the Portfolio shown on this page does not reflect
expenses and charges of the applicable separate accounts and variable
products, all of which vary to a considerable extent and are described in
your product's prospectus.
(4) Net Investment Income is after payment or reimbursement of certain
expenses by affiliates in 1997, 1996 and 1995 and waiver of business
management fee and payment or reimbursement of certain other expenses by
affiliates in 1994, 1993, 1992, 1991, 1990, 1989 and 1988. (See Note C to
the Trust's financial statements.) Had affiliates not undertaken to waive
their fees and/or pay or reimburse expenses related to the Portfolio, the
Ratio of Operating Expenses to Average Net Assets would have been as
follows: 1997 - 1.73%; 1996 - 1.66%; 1995 - 1.59%; 1994 - 1.45%; 1993 -
1.30%; 1992 - 1.17%; 1991 - 1.04%: 1990 - 1.29%; 1989 - 1.17%; 1988 -
1.23%.
(5) For fiscal years ending after September 1, 1995, the Portfolio is required
to calculate an expense ratio without expense reductions.
17
<PAGE> 18
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies as described below. The
differences in objectives and policies among the Portfolios can be expected to
affect the return of each Portfolio and the degree of market and financial risk
to which each Portfolio is subject. The investment objective(s) and policies of
each Portfolio may, unless otherwise specifically stated, be changed by the
Trustees of the Trust without a vote of the shareholders. Such changes may
result in a Portfolio having an investment objective(s) which differs from that
which an investor may have considered at the time of investment. There is no
assurance that any Portfolio will achieve its objective(s). United States
Treasury Regulations applicable to portfolios that serve as the funding vehicles
for variable annuity and variable life insurance contracts generally require
that such portfolios invest no more than 55% of the value of their assets in one
investment, no more than 70% in two investments, no more than 80% in three
investments, and no more than 90% in four investments. The Portfolios intend to
comply with the requirements of these Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
If the securities rating of a debt security held by a Portfolio declines below
the minimum rating for securities in which the Portfolio may invest, the
Portfolio will not be required to dispose of the security, but the Portfolio's
Sub-Adviser will consider whether continued investment in the security is
consistent with the Portfolio's investment objective.
Each of the Portfolios is subject to certain additional investment policies and
may engage in additional investment techniques. See Policies and Techniques
Applicable to All Portfolios for a description of those policies and techniques
and the Portfolios to which they apply.
SMALL CAP GROWTH PORTFOLIO
The Small Cap Growth Portfolio, formerly known as the "Small Cap Portfolio",
seeks capital appreciation. The Portfolio will invest, under normal conditions,
at least 65% of its total assets in securities of companies with small
capitalizations (market capitalizations or annual revenues under $1 billion at
time of purchase). The Portfolio will normally be as fully invested as
practicable in common stocks, but also may invest up to 5% of its assets in
warrants and rights to purchase common stocks. In the opinion of the
Sub-Adviser, there may be times when the shareholders' interests are best served
and the investment objective is more likely to be achieved by having varying
amounts of the Portfolio's assets invested in convertible securities. The
Sub-Adviser believes that the Portfolio generally will have at least 50% of its
assets invested in common stocks and convertible securities traded in the
over-the-counter market and that at certain times that percentage may be
substantially higher. Convertible securities have characteristics similar to
both fixed income and equity securities. Because of the conversion feature, the
market value of convertible securities tends to move together with the market
value of the underlying common stock. As a result, the Portfolio's selection of
convertible securities is based, to a great extent, on the potential for capital
appreciation that may exist in the underlying stock. The value of convertible
securities is also affected by prevailing interest rates, the credit quality of
the issuer, and any call provisions.
The Portfolio will seek to achieve its objective by investing in companies
believed by the Sub-Adviser to have an outlook for strong growth in earnings and
the potential for significant capital appreciation. Securities will be sold when
the Sub-Adviser believes that anticipated appreciation is no longer probable,
alternative investments offer superior appreciation prospects, or the risk of a
decline in market price is too great. Because of its policy with respect to the
sales of investments, the Portfolio may from time to time realize short-term
gains or losses. The Portfolio will likely have somewhat greater volatility than
the stock market in general, as measured by the S&P 500 Index. Because the
investment techniques employed by the Sub-Adviser are responsive to near-term
earnings trends of the companies whose securities are owned by the Portfolio,
trading activity can be expected to be fairly high.
The Portfolio may hold up to five percent of its assets (exclusive of
convertible bonds) in investment grade corporate or government bonds (i.e.,
bonds rated in one of the top four rating categories by a nationally recognized
statistical rating organization ("NRSRO") or deemed to be of comparable quality
by the Portfolio's Sub-Adviser).
The Portfolio may invest up to 15% of its total assets in foreign issuers. The
Portfolio may invest in ADRs and GDRs. Investing in securities of foreign
issuers involves considerations not typically associated with investing in
securities of companies organized and
18
<PAGE> 19
operated in the U.S. Foreign securities generally are denominated and pay
dividends or interest in foreign currencies. The Small Cap Growth Portfolio may
hold from time to time various foreign currencies pending their investment in
foreign securities or their conversion into U.S. dollars. The value of the
assets of the Small Cap Growth Portfolio as measured in U.S. dollars may
therefore be affected favorably or unfavorably by changes in exchange rates.
There may be less publicly available information concerning foreign issuers than
is available with respect to U.S. issuers. Foreign securities may not be
registered with the U.S. Securities and Exchange Commission, and generally,
foreign companies are not subject to uniform accounting, auditing and financial
reporting requirements comparable to those applicable to U.S. issuers. (See
Foreign Investments under Policies and Techniques Applicable to all Portfolios).
The Portfolio may invest up to 10% of its net assets in illiquid securities,
including securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale. Securities that
have legal or contractual restrictions on resale but have a readily available
market are not deemed illiquid for purposes of this limitation. The Portfolio's
Sub-Adviser will monitor the liquidity of such restricted securities under the
supervision of the Adviser and the Board of Trustees. See Investment Objectives
and Policies of the Trust-Illiquid Securities in the Statement of Additional
Information.
The Small Cap Growth Portfolio may write covered call options, buy put options,
buy call options and write put options, without limitation except as noted in
this paragraph. Such options may relate to particular securities or to various
indexes and may or may not be listed on a national securities exchange and
issued by the Options Clearing Corporation. The Small Cap Growth Portfolio may
also invest in futures contracts and options on futures contracts (index futures
contracts or interest rate futures contracts, as applicable) for hedging
purposes so long as aggregate initial margins and premiums required do not
exceed 5% of its net assets, after taking into account any unrealized profits
and losses on any such contracts it has entered into. However, the Small Cap
Growth Portfolio may not write put options or purchase or sell futures contracts
or options on futures contracts to hedge more than its total assets unless
immediately after any such transaction the aggregate amount of premiums paid for
put options and the amount of margin deposits on its existing futures positions
do not exceed 5% of its total assets.
The Small Cap Growth Portfolio will engage in unlisted over-the-counter options
only with broker/dealers deemed creditworthy by the Sub-Adviser. Closing
transactions in certain options are usually effected directly with the same
broker/dealer that effected the original option transaction. The Portfolio bears
the risk that the broker/dealer will fail to meet its obligations. There is no
assurance that the Portfolio will be able to close an unlisted option position.
Furthermore, unlisted options are not subject to the protections afforded
purchasers of listed options by the Options Clearing Corporation, which performs
the obligations of its members who fail to do so in connection with the purchase
or sale of options. Over-the-counter options and assets used to cover written
over-the-counter options are deemed to be illiquid and, therefore, together with
other illiquid securities, cannot exceed the Portfolio's 10% limitation on
illiquid securities described above.
For a further discussion of options and futures, including special risk factors
relating thereto, see Policies and Techniques Applicable to all Portfolios in
this Prospectus and Investment Objectives and Policies of the Trust in the
Statement of Additional Information.
For temporary defensive purposes, when the Sub-Adviser determines that market
conditions warrant, the Portfolio may invest up to 100% of its assets in cash
and money market instruments (consisting of securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities; certificates of deposit,
time deposits and bankers acceptances issued by banks or savings and loan
associations having net assets of at least $500 million as stated on their most
recently published financial statements; commercial paper rated in one of the
two highest rating categories by at least one NRSRO; repurchase agreements
evidencing such securities; and, to the extent permitted by applicable law, and
the Portfolio's investment restrictions, shares of other investment companies
investing solely in money market securities). To the extent the Portfolio is
invested in temporary defensive instruments, it will not be pursuing its
investment objective. See Policies and Techniques Applicable to All Portfolios
and the Statement of Additional Information.
Common Stocks. Investments in common stocks in general are subject to market
risks that may cause their prices to fluctuate over time. Therefore, an
investment in the Small Cap Growth Portfolio may be more suitable for long-term
investors who can bear the risk of these fluctuations. The Portfolio invests
primarily in securities of issuers with small market capitalizations. While the
Sub-Adviser intends to invest Portfolio assets in small capitalization companies
that have strong balance sheets and that the Sub-Adviser's research indicates
should exceed informed consensus of earnings expectations, any investment in
small capitalization companies involves greater risk than that customarily
associated with investments in larger, more established companies. This
19
<PAGE> 20
increased risk may be due to the greater business risks of small size, limited
markets and financial resources, narrow product lines and frequent lack of
management depth. The securities of small companies are often traded in the
over-the-counter market and may not be traded in volumes typical on a national
securities exchange. Thus, the securities of smaller companies are likely to be
less liquid, and subject to more abrupt or erratic market movements, than
securities of larger, more established companies.
Over-the-Counter Market. The Small Cap Growth Portfolio invests primarily in
over-the-counter stocks. In contrast to the securities exchanges, the
over-the-counter market is not a centralized facility which limits trading
activity to securities of companies which initially satisfy certain defined
standards. Any security can be traded in the over-the-counter market as long as
an individual or firm is willing to make a market in the security. Since there
are no minimum requirements for a company's assets or earnings or the number of
its shareholders in order for its stock to be traded over-the-counter, there is
a great diversity in the size and profitability of companies whose stocks trade
in this market, ranging from relatively small little-known companies to
well-established corporations. Generally, the volume of trading in an unlisted
stock is less than the volume of trading in a listed stock. This means that the
degree of market liquidity of some stocks in which the Small Cap Growth
Portfolio invests may be relatively limited. When the Portfolio disposes of such
a stock it may have to offer the shares at a discount from recent prices or sell
the shares in small lots over an extended period of time.
Fixed Income Securities. Interest rates will affect the market value of certain
fixed-income security investments made by the Small Cap Growth Portfolio. During
periods of falling interest rates, the values of fixed-income securities
generally rise. Conversely, during periods of rising interest rates, the values
of such securities generally decline. The Small Cap Growth Portfolio may invest
in debt rated in the fourth highest rating category by an NRSRO. Changes by an
NRSRO in the ratings of any fixed-income security and in the ability of an
issuer to make payments of interest and principal may also affect the value of
these investments. Changes in the value of portfolio securities will not affect
cash income derived from these securities, but will affect the Portfolio's net
asset value.
Debt rated in the fourth highest rating category by an NRSRO is generally
regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories. Such debt lacks outstanding investment characteristics
and has speculative characteristics as well.
WORLD EQUITY PORTFOLIO
The investment objective of the World Equity Portfolio is to seek maximum
long-term total return by investing primarily in common stocks, and securities
convertible into common stocks, traded in securities markets located around the
world, including the United States.
The World Equity Portfolio may at times invest up to 100% of its assets in
securities principally traded in markets outside the United States. In unusual
market circumstances where the Sub-Adviser believes that foreign investing may
involve undue risks, 100% of the Portfolio's assets may be invested in the
United States. The World Equity Portfolio is a diversified portfolio.
Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in common stocks, convertible securities, and warrants to purchase common
stocks and convertible securities. The Portfolio may invest the remainder of its
assets in securities of the U.S. Government or of any foreign government or any
supranational entity, in debt securities of any issuer rated A or better at the
time of purchase by Standard & Poor's or Moody's or of comparable quality as
determined by the Sub-Adviser, and in cash and money market instruments.
Examples of supranational entities include the International Bank for
Reconstruction and Development (the "World Bank"), the European Steel and Coal
Community, the Asian Development Bank, and the InterAmerican Development Bank.
At times the common stock portion of the Portfolio will be invested primarily in
securities of issuers with small market capitalizations (market capitalizations
or annual revenues under $1 billion at time of purchase). While the Sub-Adviser
intends to invest Portfolio assets in small capitalization companies that have
strong balance sheets and that the Sub-Adviser's research indicates should
exceed informed consensus of earnings expectations, any investment in small
capitalization companies involves greater risk than that customarily associated
with investments in larger, more established companies. This increased risk may
be due to the greater business risks of small size, limited markets and
financial resources, narrow product lines and frequent lack of management depth.
The securities of small companies are often traded in the over-the-counter
market and may not be traded in
20
<PAGE> 21
volumes typical on a national securities exchange. Thus, the securities of
smaller companies are likely to be less liquid, and subject to more abrupt or
erratic market movements, than securities of larger, more established companies.
Many of the small capitalization companies in which the Portfolio will invest
are traded in the over-the-counter market. In contrast to the securities
exchanges, the over-the-counter market is not a centralized facility which
limits trading activity to securities of companies which initially satisfy
certain defined standards. Any security can be traded in the over-the-counter
market as long as an individual or firm is willing to make a market in the
security. Since there are no minimum requirements for a company's assets or
earnings or the number of its shareholders in order for its stock to be traded
over-the-counter, there is a great diversity in the size and profitability of
companies whose stocks trade in this market, ranging from relatively small
little-known companies to well-established corporations. Generally, the volume
of trading in an unlisted common stock is less than the volume of trading in a
listed stock. This means that the degree of market liquidity of some stocks in
which the Portfolio invests may be relatively limited. When the Portfolio
disposes of such a stock it may have to offer the shares at a discount from
recent prices or sell the shares in small lots over an extended period of time.
The Portfolio may also invest up to 20% of total assets in common stocks and
related securities of issuers headquartered in emerging market countries. These
are countries which typically have a Gross Domestic Product per capita below
$8,000. The risks of investing in foreign markets are generally intensified for
investments in developing markets. Additional risks of investing in such markets
include (i) less social, political, and economic stability; (ii) the smaller
size of the securities markets in such countries and the lower volume of
trading, which may result in a lack of liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Portfolio's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interest; and (iv) less developed legal
structures governing private or foreign investment or allowing for judicial
redress for injury to private property.
Based on its analysis of the prevailing global economic and investment
environment, the Sub-Adviser will seek to identify those countries and
industrial sectors it expects to benefit in that environment. Within those
countries and industrial sectors, the Sub-Adviser will seek to invest the
Portfolio's assets in securities of companies likely to show earnings growth
from improving profit margins, new products, and/or increased market shares and
in securities of companies whose potential for growth is not fully reflected in
the prices of the companies' stock. Under normal circumstances, the Portfolio
will seek to have represented among its investments issuers located in at least
five different countries (one of which may be the United States).
For additional information relating to investments in securities traded in
foreign securities markets, see Foreign Investments under Policies and
Techniques Applicable to All Portfolios.
The Portfolio may engage in a variety of foreign currency exchange transactions
to protect against uncertainty in the levels of future currency exchange rates.
These transactions may include the purchase and sale of foreign currencies and
options on foreign currencies and the purchase and sale of currency forward
contracts and currency futures contracts and related options. The Portfolio's
use of such transactions may be limited by tax considerations. For a discussion
of these transactions, see Policies and Techniques Applicable to All Portfolios,
below.
GROWTH PORTFOLIO
The Growth Portfolio, previously known as the "Common Stock Portfolio," seeks
capital growth by investing primarily in a diversified portfolio of common
stocks and securities convertible into or exchangeable for common stocks,
including convertible preferred stock, convertible debentures, warrants, and
options. As a secondary objective, the Growth Portfolio may seek current income
when consistent with its primary investment objective. Securities are selected
on the basis of their issuers' long-term potential for expanding their earnings,
profitability, and size and on the basis of potential increases in market
recognition of their securities. The Portfolio attempts to achieve its primary
objective by focusing on the long-range view of a company's prospects through
analysis of its management, financial structure, product development, marketing
ability, and other relevant factors. Types of securities held by the Portfolio
will vary depending on the Sub-Adviser's analysis of those industries offering
the best possibilities for long-term growth. In addition, the Sub-Adviser will
consider general economic factors to determine whether under present business
conditions a portfolio of common stocks with capital growth potential or a more
conservative portfolio including preferred stocks and defensive common stocks
would be more appropriate.
The Portfolio may invest up to 10% of its assets in equity securities of foreign
issuers. For additional information relating to investments in securities traded
in foreign securities markets, see Foreign Investments under Policies and
Techniques Applicable to All Portfolios.
21
<PAGE> 22
The investment emphasis of the Growth Portfolio is on equities, primarily common
stocks and, to a lesser extent, securities convertible into common stocks, and
rights to subscribe for common stocks. Under normal circumstances, the Growth
Portfolio will maintain at least 80% of its net assets in equity securities
except during defensive periods. The Growth Portfolio may, as a temporary
defensive measure and to provide for redemptions, hold other types of securities
including non-convertible preferred stocks and debt securities, government and
money market securities including loan participation agreements, or cash.
MATRIX EQUITY PORTFOLIO
The investment objective of the Matrix Equity Portfolio is capital appreciation
and current income. The Portfolio will seek to achieve its investment objective
by investing in a diversified portfolio of equity securities that is selected by
the Sub-Adviser on the basis of its proprietary analytical model. Each security
will be ranked according to two separate and uncorrelated measures: value and
the momentum of Wall Street sentiment. The value measure compares a company's
assets, projected earnings growth and cash flow growth with its stock price
within the context of its historical valuation. The measure of Wall Street
sentiment examines changes in Wall Street analysts' earnings estimates and ranks
stocks by the strength and consistency of those changes. These two measures are
combined to create a single composite score of each stock's attractiveness. The
scores are then plotted on a matrix according to their relative attractiveness.
Sector weights are maintained at a similar level to the S&P 500 Index to avoid
unintended exposure to factors such as the direction of the economy, interest
rates, energy prices and inflation. There is no guarantee that the Portfolio
will actually match the returns of the S&P 500 Index.
The Portfolio will invest at least 65% of its total assets in equity securities.
However, the Portfolio may invest temporarily for defensive purposes, without
limitation, in certain short-term fixed income securities. Such securities may
be used to invest uncommitted cash balances or to maintain liquidity to meet
shareholder redemptions. These securities include obligations issued or
guaranteed as to principal and interest by the US Government, its agencies or
instrumentalities and repurchase agreements collateralized by these obligations,
commercial paper, bank certificates of deposit, bankers' acceptances and time
deposits.
Strategic Transactions. The Portfolio may purchase and sell exchange-listed and
over-the-counter put and call options on securities, financial futures,
fixed-income indices and other financial instruments and purchase and sell
financial futures contracts. The Portfolio may also enter into various currency
transactions such as currency forward contracts, currency futures contracts,
currency swaps or options on currencies or currency futures. Collectively, all
of the above are referred to as "Strategic Transactions." Strategic Transactions
are transactions which may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Portfolio, to protect the Portfolio's unrealized gains in the value of its
portfolio securities, to manage the effective interest rate exposure of the
Portfolio, or to protect against changes in currency exchange rates. Any or all
of these hedging techniques may be used at any time and there is no particular
strategy that dictates the use of one technique rather than another, as use of
any Strategic Transaction is a function of numerous variables including market
conditions. The ability of the Portfolio to utilize these Strategic Transactions
successfully will depend on the ability of State Street Global Advisors to
predict pertinent market movements, which cannot be assured. The Portfolio will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the view of State Street Global Advisors as to certain market movements is
incorrect, the risk that the use of such Strategic Transactions could result in
losses greater than if they had not been used. Use of put and call options may
result in losses to the Portfolio, force the sale of portfolio securities at
inopportune times or for prices other than at current market values, limit the
amount of appreciation the Portfolio can realize on its investments or cause the
Portfolio to hold a security it might otherwise sell. The use of currency
transactions can result in the Portfolio incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements or the inability to deliver or receive a specified currency. The use
of options and futures transactions entails certain other risks. In particular,
the variable degree of correlation between price movements of futures contracts
and price movements in the related portfolio position of the Portfolio creates
the possibility that losses on the hedging instrument may be greater than gains
in the value of the Portfolio's position. In addition, futures and options
markets may not be liquid in all circumstances and certain over-the-counter
options may have no markets. As a result, in certain markets, the Portfolio
might not be able to close out a transaction without incurring substantial
losses, if at all. Although the contemplated use of these futures contracts and
options thereon should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time they tend to limit any potential
gain which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than
22
<PAGE> 23
would purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized. For a further discussion of
these transactions, see Policies and Techniques Applicable to All Portfolios.
Other Investment Policies. To the extent consistent with the Portfolio's
investment objective and investment restrictions, the Portfolio may invest in
the following investments and may use the following investment techniques: U.S.
Government Securities, repurchase agreements (limited to 10% of the Portfolio's
net assets) and reverse repurchase agreements, forward commitments, when-issued
transactions (limited to 25% of the Portfolio's net assets), illiquid securities
(limited to 15% of the Portfolio's net assets in securities that are not readily
marketable and not more than 10% in securities of issuers which may not be sold
to the public without registration under the Securities Act of 1933), variable
amount master demand notes, lending Portfolio securities (limited to 33 1/3% of
the Portfolio's assets), obligations of foreign issuers which are US dollar
denominated, and ADRs (limited to 5% of the Portfolio's assets). For a further
discussion of these investments and transactions, see Policies and Techniques
Applicable to All Portfolios and Investment Objectives and Policies of the Trust
in the Statement of Additional Information.
Prior to May 1, 1997, the Matrix Equity Portfolio was known as the "Tilt Utility
Portfolio" and sought to achieve its investment objective by investing in a
diversified portfolio of common stocks and income securities issued by companies
engaged in the utilities industry.
GROWTH & INCOME PORTFOLIO
The Growth & Income Portfolio's investment objectives are to provide growth of
capital and income. The Growth & Income Portfolio seeks to achieve its growth
objective by investing in equity securities. Equity securities include common
stocks, securities which are convertible into common stocks and readily
marketable securities, such as rights and warrants, which derive their value
from common stock. Investments in common stocks in general are subject to market
risks that may cause their prices to fluctuate over time. The Growth & Income
Portfolio seeks to achieve its income objective by investing in various income
producing securities including fixed income securities and money market
instruments. Interest rates will affect the market value of certain fixed-income
security investments made by the Growth & Income Portfolio. During periods of
falling interest rates, the values of fixed-income securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. The portion of the Portfolio invested from time to
time in equity securities, fixed income securities and money market securities
will vary depending on market conditions and there may be extended periods when
the Portfolio is primarily invested in one of them. In addition, the amount of
income generated from the Portfolio will fluctuate depending, among other
things, on the composition of the Portfolio's holdings and the level of interest
and dividend income paid on those holdings. The Growth & Income Portfolio may
also purchase without limitation dollar-denominated ADRs. ADRs are issued by
domestic banks and evidence ownership of underlying foreign securities. The
Portfolio may also invest in Global Depository Receipts ("GDRs"). (See Foreign
Investments under Policies and Techniques Applicable to All Portfolios.)
The Growth & Income Portfolio may invest up to 10% of its total assets in
securities of foreign issuers. (See Foreign Investments under Policies and
Techniques Applicable to all Portfolios).
The Growth & Income Portfolio will not invest more than 15% of its net assets in
illiquid securities, including securities that are illiquid by virtue of the
absence of a readily available market or legal or contractual restrictions on
resale. Securities that have legal or contractual restrictions on resale but
have a readily available market are not deemed illiquid for purposes of this
limitation. The Portfolio's Sub-Adviser will monitor the liquidity of such
restricted securities under the supervision of the Adviser and the Board of
Trustees. See Investment Objectives and Policies of the Trust-Illiquid
Securities in the Statement of Additional Information.
The Growth & Income Portfolio may write covered call options, buy put options,
buy call options and write put options, without limitation except as noted in
this paragraph. Such options may relate to particular securities or currencies
or to various indexes and may or may not be listed on a national securities
exchange and issued by the Options Clearing Corporation. The Growth & Income
Portfolio may also invest in futures contracts (interest rate and securities
index futures contracts, as applicable) and purchase and write (sell) related
options that are traded on an exchange designated by the Commodity Futures
Trading Commission (the "CFTC.") Aggregate initial margin and premiums required
to establish positions other than those considered by the CFTC to be "bona fide
hedging" will not exceed 5% of the Growth & Income Portfolios net asset value,
after taking into account unrealized profits and unrealized losses on any such
futures contracts. Although the Growth & Income Portfolio is limited in the
amount of
23
<PAGE> 24
assets that may be invested in futures transactions, there is no overall limit
on the percentage of the Portfolio's assets that may be at risk with respect to
futures activities. However, the Growth & Income Portfolio may not write put
options or purchase or sell futures contracts or options on futures contracts to
hedge more than its total assets unless immediately after any such transaction
the aggregate amount of premiums paid for put options and the amount of margin
deposits on its existing futures positions do not exceed 5% of its total assets.
The Growth & Income Portfolio will engage in unlisted over-the-counter options
only with broker/dealers deemed creditworthy by the Sub-Adviser. Closing
transactions in certain options are usually effected directly with the same
broker/dealer that effected the original option transaction. The Portfolio bears
the risk that the broker/dealer will fail to meet its obligations. There is no
assurance that the Portfolio will be able to close an unlisted option position.
Furthermore, unlisted options are not subject to the protections afforded
purchasers of listed options by the Options Clearing Corporation, which performs
the obligations of its members who fail to do so in connection with the purchase
or sale of options. Over-the-counter options and assets used to cover written
over-the-counter options are deemed to be illiquid and, therefore, together with
other illiquid securities, cannot exceed the Portfolio's 15% limitation on
illiquid securities described above.
For a further discussion of options and futures, including special risk factors
relating thereto, see Policies and Techniques Applicable to all Portfolios in
this Prospectus and Investment Objectives and Policies of the Trust in the
Statement of Additional Information.
The Growth & Income Portfolio reserves the right, as a temporary defensive
measure, to invest without limit in cash and eligible, U.S. dollar-denominated
money market instruments, as well as securities subject to repurchase
agreements. The Portfolio's Sub-Adviser will determine when market conditions
warrant temporary defensive measures.
MULTIPLE STRATEGIES PORTFOLIO
The investment objective of the Multiple Strategies Portfolio is to achieve as
high a level of total return over an extended period of time as the Adviser and
Sub-Adviser consider consistent with prudent investment risk. Total return
consists of current income, including dividends, interest, and discount
accruals, plus capital appreciation less capital depreciation.
The Multiple Strategies Portfolio is a diversified portfolio investing in equity
securities, bonds, and money market instruments in varying proportions,
depending upon the Portfolio's Sub-Adviser's assessment of prevailing economic
conditions and conditions in the financial markets. The Portfolio's Sub-Adviser
will from time to time adjust the mix of investments among the three market
sectors to attempt to capitalize on perceived variations in return potential
produced by changing financial markets and economic conditions. Major changes in
investment mix may occur over several years or during a single year depending
upon market and economic conditions.
The Multiple Strategies Portfolio's investment policies for the stock and bond
are substantially identical to those which have been established for the Growth
Portfolio and the U.S. Government Bond Portfolio, except that, with respect to
bonds, it may invest in bonds rated at least BBB by Standard & Poor's or Baa by
Moody's or unrated bonds judged by the Portfolio's Sub-Adviser to be of
comparable quality. Debt rated in the fourth highest rating category by an NRSRO
is generally regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories. Such debt lacks outstanding investment
characteristics and has speculative characteristics as well. (For a description
of risks involved in investment in lower-rated securities, see High Income Bond
Portfolio, above, and the Statement of Additional Information.) The specific
securities held in the various sectors of the Multiple Strategies Portfolio
will, nevertheless, likely differ from the securities owned by that Portfolio.
The Multiple Strategies Portfolio may invest up to 25% of its assets in foreign
securities and in securities traded in foreign securities markets, see Foreign
Investments under Policies and Techniques Applicable to All Portfolios.
For a further discussion of money market instruments, see Money Market
Instruments under Investment Objectives and Policies of the Trust in the
Statement of Additional Information.
24
<PAGE> 25
HIGH INCOME BOND PORTFOLIO
The primary investment objective of the High Income Bond Portfolio is to obtain
as high a level of current income as is believed to be consistent with prudent
investment management. As a secondary objective, the High Income Bond Portfolio
seeks capital appreciation when consistent with its primary objective. The
Portfolio is a diversified portfolio that seeks to achieve its investment
objectives by investing primarily in fixed-income securities, including
corporate bonds and notes, discount bonds, zero-coupon bonds, convertible
securities, and preferred stocks and bonds issued with warrants. The High Income
Bond Portfolio invests primarily in high yield, higher-risk securities and
therefore may not be suitable for all investors. Many of the high yield
securities in which the Portfolio may invest are commonly referred to as "junk
bonds". There is no minimal acceptable rating for a security to be purchased or
held in the Portfolio, and the Portfolio may, from time to time, purchase or
hold securities rated in the lowest rating category or in unrated securities
determined by the Portfolio's Sub-Adviser to be of comparable quality.
Securities in the rating categories below Baa as determined by Moody's and BBB
as determined by Standard & Poor's are considered to be distinctly or
predominantly speculative. Consequently, although the securities in which the
Portfolio will invest can be expected to provide higher yields, such securities
may be subject to greater market fluctuations and risk of loss of income and
principal than lower yielding, higher-rated fixed-income securities. Because
investment in high yield securities entails relatively greater risk of loss of
income or principal, an investment in the Portfolio will not likely constitute a
complete investment program and may not be appropriate for all investors. For
special risks involved with investing in such securities (including, among
others, risks of default and illiquidity) see Special risks relating to high
income bonds below. Additional information regarding various bond ratings is set
forth in the Statement of Additional Information.
The High Income Bond Portfolio anticipates that under normal circumstances more
than 80% of its assets will be invested in fixed-income securities, including
convertible and non-convertible debt securities and, to a lesser extent,
preferred stock. The remaining assets of the Portfolio may be held in cash or
cash equivalents. Generally, not more than 10% of the Portfolio's total assets
will be invested in equity securities, including common stocks, warrants, or
rights.
The Sub-Adviser's selection and supervision of the High Income Bond Portfolio's
investments in lower-rated fixed-income securities involves continuous analysis
of individual issuers, general business conditions, and other factors which may
be too time consuming or too costly for the average investor. The furnishing of
these services does not, of course, guarantee successful results. The analysis
of issuers may include, among other things, historic and current financial
conditions, current and anticipated cash flow and borrowing requirements, value
of assets in relation to historical cost, strength of management, responsiveness
to business conditions, credit standing, and current and anticipated results of
operations. Analysis of general business conditions and other factors may
include anticipated changes in economic activity and interest rates, the
availability of new investment opportunities, and the economic outlook for
specific industries. The Sub-Adviser will not rely solely on the ratings
assigned by the rating services, and the Portfolio may invest, without limit, in
unrated securities if such securities offer, in the opinion of the Sub-Adviser,
a relatively high yield without undue risk.
When changing economic conditions and other factors cause the yield difference
between lower-rated and higher-rated securities to narrow, the High Income Bond
Portfolio may purchase higher-rated securities if the Sub-Adviser believes that
the risk of loss of income and principal may be substantially reduced with only
a relatively small reduction in yield. In addition, under unusual market or
economic conditions, the High Income Bond Portfolio may for temporary defensive
purposes hold up to 100% of its assets in cash or cash equivalents or in other
high quality investments which the Sub-Adviser believes are consistent with a
defensive posture. The yields on such investments in the short term will
generally be lower than the yields on lower-rated fixed-income securities.
Special risks relating to high income bonds. Investors should carefully consider
their ability to assume the risks of owning shares of a portfolio which invests
in lower-rated securities before making an investment in the Portfolio. The
lower ratings of certain securities held by the Portfolio reflect a greater
possibility that adverse changes in the financial condition of the issuer, or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by the Portfolio more volatile and could limit the Portfolio's ability to
sell its securities at prices approximating the values the Portfolio has placed
on such securities. The rating assigned to a security by Moody's or Standard &
Poor's does not reflect an assessment of the volatility of the security's market
value or of the liquidity of an investment in the security.
25
<PAGE> 26
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of the
Portfolio's assets. Conversely, during periods of rising interest rates, the
value of the Portfolio's assets will generally decline. The values of such
securities are also affected by changes in general economic conditions and
business conditions affecting the specific industries of their issuers. Changes
by recognized rating services in their ratings of any fixed-income security and
changes in the ability of an issuer to make payments of interest and principal
may also affect the value of these investments. Changes in the value of
Portfolio securities generally will not affect cash income derived from such
securities, but will affect the Portfolio's net asset value.
The table below shows the percentages of the Portfolio's assets invested at
December 31, 1997 in securities assigned to the various rating categories by
Moody's and Standard & Poor's.
<TABLE>
<CAPTION>
Related Securities
as Percentage of
Rating Portfolio's Assets
------ ------------------
<S> <C>
AAA/Aaa 3.010%
BBB/Baa 0.289%
BB/Ba 18.137%
B/B 69.113%
CCC/Caa 1.375%
Not Rated 3.510%
</TABLE>
Certain of the lower-rated securities in which the Portfolio invests are issued
to raise funds in connection with the acquisition of a company, in so-called
"leveraged buy-out" transactions. The highly leveraged capital structure of such
issuers may make them especially vulnerable to adverse changes in economic
conditions.
The Portfolio may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount
from their principal amount in lieu of paying interest periodically.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. Because zero-coupon
bonds do not pay current interest, their value is subject to greater fluctuation
in response to changes in market interest rates than bonds which pay interest
currently. Both zero-coupon and payment-in-kind bonds allow an issuer to avoid
the need to generate cash to meet current interest payments. Accordingly, such
bonds may involve greater credit risks than bonds paying interest currently.
Certain securities held by the Portfolio may permit the issuer at its option to
"call", or redeem, its securities. If an issuer were to redeem securities held
by the Portfolio during a time of declining interest rates, the Portfolio may
not be able to reinvest the proceeds in securities providing the same investment
return as the securities redeemed.
U.S. GOVERNMENT BOND PORTFOLIO
The investment objective of the U.S. Government Bond Portfolio is to seek
current income and preservation of capital, through investment primarily in U.S.
Government Securities. The Portfolio is a diversified portfolio. Under normal
circumstances, at least 80% of the Portfolio's assets will be invested in U.S.
Government Securities. The balance of the Portfolio's assets may be invested in
other securities rated at least BBB by Standard & Poor's or Baa by Moody's or,
if not rated, determined by the Portfolio's Sub-Adviser to be of comparable
quality, and in cash and money market instruments. (The investment objective of
this Portfolio was modified as of September 22, 1994.)
Certain U.S. Government Securities, such as U.S. Treasury bills, notes, and
bonds, and mortgage participation certificates guaranteed by the Government
National Mortgage Association ("Ginnie Mae") and Federal Housing Administration
debentures, are supported by the full faith and credit of the United States.
Other U.S. Government Securities are supported by the discretionary authority of
the U.S. Government to purchase the issuer's obligations (such as obligations of
Federal Home Loan Banks); while still others are supported only by the credit of
the agency, authority, or instrumentality itself (such as obligations of the
Tennessee
26
<PAGE> 27
Valley Authority and the Bank For Cooperatives). Tax considerations limit the
amount of the Portfolio's assets which may be invested in the obligations of a
single issuer (including the U.S. Treasury) of U.S. Government Securities.
The securities purchased by the Portfolio generally will be intermediate-term
bonds with remaining terms to maturity of five to ten years.
A significant portion of the securities held by the Portfolio may consist of
mortgage-backed certificates and other securities representing ownership
interests in mortgage pools, including collateralized mortgage obligations, some
of which may be backed by agencies or instrumentalities of the U.S. Government.
Interest and principal payments on the mortgages underlying mortgage-backed
securities are passed through to the holder of the mortgage-backed security.
Prepayments of principal and interest on mortgages underlying mortgage-backed
securities may shorten the effective maturity of certain of such obligations.
High interest rate mortgages are more likely to be prepaid than lower rate
mortgages. Consequently, the effective maturity of certain mortgage-backed
securities which pass through payments on or are secured by high rate mortgages
is likely to be shorter than that of obligations which pass through payments on
or are secured by lower rate mortgages. The rate of occurrence of prepayment and
of nonpayment on the underlying mortgages also is affected by other factors
including social and demographic conditions.
Mortgage-backed securities may offer yields higher than those available from
other types of U.S. Government Securities, but because of their prepayment
aspect are less effective than other types of securities as a means of "locking
in" attractive long-term interest rates. This is caused by the need to reinvest
prepayments of principal generally and the possibility of significant
unscheduled prepayments resulting from declines in mortgage interest rates.
These prepayments would have to be reinvested at the lower rates. As a result,
the Portfolio's mortgage-backed securities may have less potential for capital
appreciation during periods of declining interest rates than other U.S.
Government Securities of comparable maturities, although such obligations may
have a comparable risk of decline in market value during periods of rising
interest rates.
U.S. Government Securities and other high-quality bonds do not involve the
credit risks associated with investments in lower quality fixed-income
securities, although, as a result, the yields available from U.S. Government
Securities and other high-quality bonds are generally lower than the yields
available from many other fixed-income securities. Like other fixed-income
securities, however, the values of U.S. Government Securities and other
high-quality bonds change as interest rates fluctuate. Fluctuations in the value
of the Portfolio's securities will not affect interest income on securities
already held by the Portfolio, but will be reflected in the Portfolio's net
asset value. Since the magnitude of these fluctuations will generally be greater
at times when the Portfolio's average maturity is longer, under certain market
conditions the Portfolio may invest in short-term investments yielding lower
current income rather than investing in higher yielding intermediate-term
securities.
As described above, the Portfolio may invest in fixed income (i.e., debt)
securities rated Baa by Moody's or BBB by Standard & Poor's and comparable
unrated securities. Debt rated in the fourth highest rating category by an NRSRO
is generally regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories. Such debt lacks outstanding investment
characteristics and has speculative characteristics as well. (For a description
of risks involved in investment in lower-rated securities, see High Income Bond
Portfolio, above, and the Statement of Additional Information.)
POLICIES AND TECHNIQUES APPLICABLE TO ALL PORTFOLIOS
Except as otherwise noted below, the following descriptions of additional
investment policies and techniques are applicable to all of the Portfolios.
INVESTMENT STYLES
While each Portfolio has its own investment objectives, policies and
limitations, certain Portfolios are managed under a "growth" investment style,
or a blend of "value" and "growth" investment styles.
27
<PAGE> 28
Under a growth investment style, the portfolio manager seeks out stocks of
companies that are projected to grow at above-average rates and may appear
poised for a period of accelerated earnings. A growth style manager is willing
to pay a higher share price in the hope that the stock's earnings momentum will
carry the stock's price higher.
Under a value oriented investment style, the portfolio manager buys stocks that
are selling for less than their perceived market value. This would include
stocks that are currently under-researched or are temporarily out of favor. One
of the most common ways to identify value stocks is a low price-to-earnings
ratio. Other criteria include a high dividend yield, a strong financial position
and balance sheet, a recent company restructuring with the potential to realize
hidden values, strong management, and low price-to-book value (net value of the
company's assets).
On the date of this prospectus, the Portfolios categorized by a "growth" style
are: Small Cap Growth Portfolio, Growth Portfolio, Multiple Strategies
Portfolio, and the Portfolio categorized as "value" is the Growth & Income
Portfolio. The Portfolios categorized by a blend of value and growth styles are:
World Equity Portfolio and the Matrix Equity Portfolio.
FOREIGN INVESTMENTS
The High Income Bond Portfolio and U.S. Government Bond Portfolio may invest
without limit, except as applicable to securities generally, in securities
principally traded in foreign markets which meet the criteria applicable to the
Portfolio's domestic investments, and in certificates of deposit issued by
United States branches of foreign banks and foreign branches of United States
banks (except that, under normal market conditions, at least 80% of the assets
of the U.S. Government Bond Portfolio will be invested in U.S. Government
Securities). Investment by the Growth Portfolio, the Growth & Income Portfolio,
the Matrix Equity Portfolio, the Multiple Strategies Portfolio, and the Small
Cap Growth Portfolio in foreign securities is subject to the limitations set
forth above under Investment Objectives and Policies of the Portfolios. The
World Equity Portfolio may invest without limitation in securities of foreign
issuers.
The Portfolios may invest in securities of foreign issuers directly or in the
form of ADRs. ADRs are securities, typically issued by a U.S. financial
institution (a "depository"), that evidence ownership interests in a security or
a pool of securities issued by a foreign issuer and deposited with the
depository. ADRs include American Depository Shares and New York Shares.
The Growth & Income Portfolio, Small Cap Growth Portfolio and World Equity
Portfolio may also invest in GDRs. GDRs, which are sometimes referred to as
Continental Depository Receipts ("CDRs"), are securities, typically issued by a
non-U.S. financial institution, that evidence ownership interests in a security
or a pool of securities issued by either a U.S. or foreign issuer. ADRs, GDRs
and CDRs may be available for investment through "sponsored" or "unsponsored"
facilities. A sponsored facility is established jointly by the issuer of the
security underlying the receipt and a depository, whereas an unsponsored
facility may be established by a depository without participation by the issuer
of the receipt's underlying security. Holders of an unsponsored depository
receipt generally bear all the costs of the unsponsored facility. The depository
of an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited security or
to pass through to the holders of the receipts voting rights with respect to the
deposited securities.
Investments in the securities of foreign entities and securities denominated in
foreign currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or other
foreign or United States governmental laws or restrictions applicable to such
investments. Where a Portfolio invests in securities denominated or quoted in
currencies other than the United States dollar, changes in foreign currency
exchange rates may affect the value of investments in a Portfolio and the
accrued income and unrealized appreciation or depreciation of investments.
Changes in foreign currency exchange rates relative to the U.S. dollar will
affect the U.S. dollar value of a Portfolio's assets denominated in that
currency and a Portfolio's yield on such assets. With respect to certain foreign
countries, there is the possibility of expropriation of assets, confiscatory
taxation, political or social instability or diplomatic developments which could
affect investment in those countries. There may be less publicly available
information about a foreign security than about a United States security, and
foreign entities may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those of United States
entities. In addition, certain foreign investments made by a Portfolio may be
subject to foreign withholding taxes, which would reduce a Portfolio's total
return on such investments and the amounts available for distribution by a
Portfolio to its shareholders. Foreign financial markets, while growing in
volume, have, for the most part, substantially less volume than United States
markets, and securities of many foreign companies are less liquid and
28
<PAGE> 29
their prices more volatile than securities of comparable domestic companies. The
foreign markets also have different clearance and settlement procedures and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
assets of a Portfolio are not invested and no return is earned thereon. The
inability of a Portfolio to make intended security purchases due to settlement
problems could cause a Portfolio to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to a Portfolio due to subsequent declines in value of
the portfolio security or, if a Portfolio has entered into a contract to sell
the security, could result in possible liability to the purchaser. Costs
associated with transactions in foreign securities, including custodial costs
and foreign brokerage commissions, are generally higher than with transactions
in United States securities. In addition, a Portfolio will incur costs in
connection with conversions between various currencies. There is generally less
government supervision and regulation of exchanges, financial institutions and
issuers in foreign countries than there is in the United States.
Each Portfolio may engage in foreign currency exchange transactions in
connection with its foreign investments.
A more detailed explanation of foreign investments, and the risks associated
with them, is included in the Statement of Additional Information.
SECURITIES LOANS, REPURCHASE AGREEMENTS AND FORWARD COMMITMENTS
The Trust may lend portfolio securities of any Portfolio to broker-dealers and
may enter into repurchase agreements. These transactions must be fully
collateralized at all times, but involve some risk to a Portfolio if the other
party should default on its obligation and the Portfolio is delayed or prevented
from recovering the collateral. Each Portfolio may also purchase securities for
future delivery, which may increase its overall investment exposure and involves
a risk of loss if the value of the securities declines prior to the settlement
date.
The Trust may, on behalf of each of the Portfolios, enter into reverse
repurchase agreements, which involve the sale by the Portfolio of securities
held by it with an agreement to repurchase the securities at an agreed upon
price, date, and interest payment. The Portfolios will use the proceeds of the
reverse repurchase agreements to purchase securities either maturing, or under
an agreement to resell, at a date simultaneous with or prior to the expiration
of the reverse repurchase agreement. A Portfolio will use reverse repurchase
agreements when the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the reverse
repurchase transaction.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Each Portfolio which invests in foreign securities may engage in foreign
currency exchange transactions to protect against uncertainty in the level of
future currency exchange rates. The Portfolios may engage in foreign currency
exchange transactions in connection with the purchase and sale of portfolio
securities ("transaction hedging") and to protect against changes in the value
of specific portfolio positions ("position hedging").
A Portfolio may engage in transaction hedging to protect against a change in
foreign currency exchange rates between the date on which the Portfolio
contracts to purchase or sell a security and the settlement date, or to "lock
in" the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. The Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in a foreign currency.
If conditions warrant, a Portfolio may also enter into contracts to purchase or
sell foreign currencies at a future date ("forward contracts"), and may purchase
and sell foreign currency futures contracts, as a hedge against changes in
foreign currency exchange rates between the trade and settlement dates on
particular transactions and not for speculation. A foreign currency forward
contract is a negotiated agreement to exchange currency at a future time at a
rate or rates that may be higher or lower than the spot rate. Foreign currency
futures contracts are standardized exchange-traded contracts and have margin
requirements. For transaction hedging purposes, these Portfolios may also
purchase and sell call and put options on foreign currency futures contracts and
on foreign currencies.
A Portfolio may engage in position hedging to protect against a decline in value
relative to the U.S. dollar of the currencies in which their portfolio
securities are denominated or quoted (or an increase in value of a currency in
which securities the Portfolio expects to
29
<PAGE> 30
buy are denominated). For position hedging purposes, a Portfolio may purchase or
sell foreign currency futures contracts and foreign currency forward contracts,
and may purchase and sell put and call options on foreign currency futures
contracts and on foreign currencies. In connection with position hedging, a
Portfolio may also purchase or sell foreign currency on a spot basis. Hedging
transactions involve costs and may result in losses. A Portfolio may also engage
in foreign currency exchange transactions not involving the receipt or delivery
of U.S. dollars.
The currencies of certain Eastern European countries are not widely traded, and
the foreign currency exchange transactions described above may not be available
with respect to those currencies.
OPTIONS
For hedging purposes only, each Portfolio may write covered call options and
covered put options on securities it owns or in which it may invest. In
addition, for hedging purposes only, the Growth & Income Portfolio and the Small
Cap Growth Portfolio may buy put options, buy call options and write put
options. When a Portfolio writes a call option, it gives up the opportunity to
profit from any increase in the price of a security above the exercise price of
the option; when it writes a put option, a Portfolio takes the risk that it will
be required to purchase a security from the option holder at a price above the
current market price of the security. A Portfolio may terminate an option that
it has written prior to its expiration by entering into a closing purchase
transaction in which it purchases an option having the same terms as the option
written. A Portfolio may also from time to time buy and sell combinations of put
and call options on the same underlying security. The Portfolios' use of these
strategies may be limited by applicable law.
FUTURES CONTRACTS
To hedge against the effects of adverse market changes, each Portfolio may buy
and sell futures contracts on debt securities and securities indexes. In
addition, each Portfolio may, for hedging purposes, purchase and sell call and
put options on such futures or on securities indices themselves, and engage in
closing sale and purchase transactions with respect to such options.
When interest rates are rising or stock prices are falling, futures contracts
and related options can offset a decline in the value of a Portfolio's
securities. When rates are falling or stock prices are rising, futures contracts
and related options can secure better rates or prices for the Portfolio than
might later be available in the market when it makes anticipated purchases.
Initial margin deposits for futures contracts and premiums paid for outstanding
options on futures contracts may not be more than 5% of any Portfolio's total
assets. These transactions involve brokerage costs and require the Portfolio to
segregate assets to cover its futures contracts and related options positions.
The use of futures contracts may involve certain special risks. Futures
transactions involve costs and may result in losses. For example, a Portfolio
may lose the expected benefit of the transactions if interest rates or stock
prices move in an unanticipated manner. Such unanticipated changes in interest
rates or stock prices may also result in poorer overall performance by a
Portfolio than if the Portfolio had not entered into any futures and options
transactions. For more information, see Futures Contracts in the Statement of
Additional Information.
PORTFOLIO TURNOVER
It is expected that each Portfolio may have relatively high portfolio turnover,
which would involve brokerage and transactions costs. Portfolio turnover
generally involves some expense to a Portfolio, including brokerage commissions
or dealer mark-ups and other transaction costs on the sale of securities and
reinvestment in other securities. Portfolio turnover rates for each of the
Portfolios are shown in the section The Trust's Financial History.
BORROWING
Each of the Portfolios may borrow money to the extent permitted by each
Portfolio's Investment Restrictions contained in the SAI. For purposes of such
restrictions, short sales, the entry into currency transactions, options,
futures contracts, options on futures contracts, forward commitment transactions
and dollar roll transactions that are not accounted for as financing (and the
segregation of assets in connection with any of the foregoing) shall not
constitute borrowing.
30
<PAGE> 31
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER
Under an Investment Advisory Agreement dated September 22, 1994, First Variable
Advisory Services Corp. ("Adviser") manages the business and affairs of the
Portfolios and the Trust, subject to the control of the Board of Trustees of the
Trust. Adviser has served as investment adviser to all Portfolios of the Trust
since April 1, 1994. Adviser has had no previous experience in advising a mutual
fund.
Adviser is a Massachusetts corporation which was incorporated on October 8, 1993
and which is registered with the Securities and Exchange Commission as an
investment adviser under the Investment Advisers Act of 1940 ("Advisers Act").
Adviser is a wholly-owned subsidiary of First Variable Life, which is a
wholly-owned subsidiary of Irish Life of North America, Inc., a Delaware
corporation ("ILoNA"). ILoNA is a wholly-owned subsidiary of Irish Life plc
("Irish Life"). Irish Life was formed in 1939 through a consolidation of a
number of Irish and British Life offices transacting business in Ireland. As of
the end of 1997, the Irish Life consolidated group had in excess of $14 billion
in assets.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate a
continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies and restrictions and to determine from time to time securities to be
purchased, sold, retained or lent by the Trust and implement those decisions.
The Investment Advisory Agreement also provides that Adviser shall manage the
Trust's business and affairs and shall provide such services required for
effective administration of the Trust as are not provided by employees or other
agents engaged by the Trust. The Investment Advisory Agreement further provides
that Adviser shall furnish the Trust with office space and necessary personnel,
pay ordinary office expenses, pay all executive salaries of the Trust and
furnish, without expense to the Trust, the services of such members of its
organization as may be duly elected officers or Trustees of the Trust. The
Investment Advisory Agreement provides that Adviser may retain sub-advisers, at
Adviser's own cost and expense, for the purpose of making investment
recommendations and research information available to the Trust.
As full compensation for its services under the Investment Advisory Agreement,
the Trust pays Adviser a monthly fee at the annual rates shown in the table
below based on the average daily net assets of each Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO ADVISORY FEE (ANNUAL RATE ON AVERAGE DAILY NET ASSETS OF EACH PORTFOLIO)
--------- ------------------------------------------------------------------------
<S> <C>
Small Cap Growth .85 % of average net assets
World Equity .70 % of first $200 million
.625 % of next $300 million
.50 % of average net assets over and above $500 million
Growth .70 % of average net assets
Matrix Equity .65 % of first $100 million
.55 % of average net assets over and above $100 million
Growth & Income .75 % of average net assets
Multiple Strategies .70 % of average net assets
High Income Bond .70 % of first $40 million
.65 % of next $20 million
.55 % of next $15 million
.50 % of average net assets over and above $75 million
US Government Bond .60 % of first $200 million
</TABLE>
31
<PAGE> 32
.50% of average net assets over and above $200 million
The Adviser and First Variable Life have agreed that they will, if necessary,
pay the expenses of each Portfolio of the Trust until April 1, 1999 to the
extent that expenses of a Portfolio, other than Adviser's compensation, exceed
the annual rate of 0.50% of a Portfolio's average net assets (0.25% in the case
of the U.S. Government Bond Portfolio).
First Variable Life and the Adviser have entered into an Investment Advisory
Services Agreement, dated April 1, 1994, the purpose of which is to ensure that
the Adviser, which is minimally capitalized, has adequate facilities and
financing for the carrying on of its business. Under the terms of the Agreement,
First Variable Life is obligated to provide the Adviser with adequate
capitalization in order for the Adviser to meet any minimum capital
requirements. First Variable Life is further obligated to reimburse the Adviser
or assume payment for any obligation incurred by the Adviser and to provide the
Adviser with facilities and personnel sufficient for the Adviser to perform its
obligations under the Investment Advisory Agreement.
During fiscal 1997, total expenses, including investment advisory fees, of each
of the Portfolios amounted to the following percentages of average net assets,
reflecting an expense limitation in effect during the period: Growth Portfolio
(formerly, "Common Stock Portfolio") - 1.10%; Growth & Income Portfolio - 1.25%;
High Income Bond Portfolio - 1.20%; Matrix Equity Portfolio (formerly, "Tilt
Utility Portfolio") - 1.15%; Multiple Strategies Portfolio - 1.19%; Small Cap
Growth Portfolio (formerly, "Small Cap Portfolio") - 1.35%; U.S. Government Bond
Portfolio - .85%; and World Equity Portfolio - 1.20%. The expense limitation
currently in effect is described above.
SUB-ADVISERS
In accordance with each Portfolio's investment objective and policies and under
the supervision of Adviser and the Trust's Board of Trustees, each Portfolio's
Sub-Adviser is responsible for the day to day investment management of the
Portfolio, makes investment decisions for the Portfolio and places orders on
behalf of the Portfolio to effect the investment decisions made. The following
organizations act as Sub-Advisers to the Portfolios:
FEDERATED INVESTMENT COUNSELING ("FEDERATED"), Federated Investors Tower,
Pittsburgh, PA 15222, is the Sub-Adviser for the High Income Bond Portfolio.
Federated, organized as a Delaware business trust on April 11, 1989, is
registered as an investment adviser under the Advisers Act. Federated acts as
investment adviser to corporate clients, as well as sub-adviser to separate
accounts of variable annuity and life insurance products. As of December 31,
1997, Federated had $139.5 billion in assets under management and
administration.
Federated is a wholly-owned subsidiary of FII Holdings, Inc., which is a
wholly-owned subsidiary of Federated Investors, Inc., which in turn is a
wholly-owned subsidiary of Federated Investors.
Mr. Mark E. Durbiano is the portfolio manager for Federated for the High Income
Bond Portfolio. Mr. Durbiano joined Federated Investors in 1982 and is a Senior
Vice President of advisory affiliates of Federated. Mr. Durbiano is a Chartered
Financial Analyst and received his MBA in Finance from the University of
Pittsburgh.
Under the terms of the Sub-Advisory Agreement, Adviser pays to Federated, as
full compensation for services rendered under the Agreement, an annual fee equal
to:
- - .45 of 1% on an annualized basis of the first $40 million of net assets
under management; and .40 of 1% on an annualized basis of any net assets
under management over and above $40 million but not exceeding $60 million;
and .30 of 1% on an annualized basis of any net assets under management
over and above $60 million but not exceeding $75 million; and .25 of 1% on
an annualized basis of any net assets under management over and above $75
million.
VALUE LINE, INC. ("VALUE LINE"), 220 East 42nd Street, New York, NY 10017-5891,
is the Sub-Adviser for the Growth Portfolio and the Multiple Strategies
Portfolio.
Value Line was organized in 1982 and is the successor to substantially all of
the operations of Arnold Bernhard & Co., Inc. ("AB&Co."). Value Line was formed
as part of a reorganization of AB&Co., a sole proprietorship formed in 1931
which became a
32
<PAGE> 33
New York corporation in 1946. AB&Co. currently owns approximately 81% of the
outstanding shares of Value Line's stock. Jean Bernhard Buttner, Chairman, Chief
Executive Officer and President of Value Line, owns substantially all of the
voting stock of AB&Co. All of the non-voting stock is owned by or for the
benefit of the Bernhard family. Value Line currently acts as investment adviser
to the other Value Line mutual funds and furnishes investment counseling
services to private and institutional accounts with combined assets in excess of
$ 5 billion.
The day to day portfolio management of the Growth Portfolio and the Multiple
Strategies Portfolio is the responsibility of a committee composed of persons
who are officers or employees of Value Line.
For the services provided by Value Line, pursuant to the terms of the
Sub-Advisory Agreement, Adviser pays an annual gross sub-advisory fee equal to
.45% of the average daily net assets of each of the Growth and Multiple
Strategies Portfolios.
STRONG CAPITAL MANAGEMENT, INC. ("STRONG"), One Hundred Heritage Reserve, P.O.
Box 2936, Milwaukee, WI 53201, is the Sub-Adviser for the U.S. Government Bond
Portfolio.
Strong began conducting business in 1974. Since then, its principal business has
been providing continuous investment supervision for individuals, and
institutional accounts, such as pension funds and profit-sharing plans as well
as mutual funds. As of February 1, 1998, Strong had over $28 billion under
management. Mr. Richard S. Strong is the controlling shareholder of Strong.
Strong also acts as investment adviser for each of the mutual funds comprising
the Strong Family of Funds.
Mr. Bradley C. Tank is the portfolio manager for Strong for the U.S. Government
Bond Portfolio. Before joining the Advisor in June, 1990, Mr. Tank spent eight
years at Salomon Brothers, Inc., where he was a vice president and fixed income
specialist. Mr. Tank received his B.A. in 1980 from the University of
Wisconsin-Eau Claire and his M.B.A. in 1982 from the University of
Wisconsin-Madison, where he also completed the Applied Securities Analysis
Program. He has managed or co-managed the Strong Short-Term Bond and Government
Securities Funds since he joined Strong. In addition, Mr. Tank chairs the Fixed
Income Investment Committee.
Mr. John T. Bender also manages the U.S. Government Bond Portfolio for Strong.
Mr. Bender began his career with Strong in 1987 and after receiving his
bachelor's degree from Marquette University in 1988, he became an accountant in
Strong's shareholder and accounting compliance department. He subsequently
joined Strong's investment team as an equity trader, and later became a fixed
income research analyst and trader. He is both a Chartered Financial Analyst and
a Certified Public Accountant. He has co-managed Strong's Corporate Bond Fund
since January 1996 and Strong's Government Securities Fund since March 1997.
For the services provided by Strong, pursuant to the terms of the Sub-Advisory
Agreement, Adviser pays an annual fee to Strong as follows:
- - an annual rate of .35 of 1% of the Portfolio's average daily net asset
value of the first $200 million of the Portfolio's net assets under
management; and
- - an annual rate of .25 of 1% of the Portfolio's average daily net asset
value of any assets of the Portfolio under management over and above $200
million.
STATE STREET BANK AND TRUST COMPANY ("STATE STREET"), through its investment
management division State Street Global Advisors, Two International Place,
Boston, MA 02110, is the Sub-Adviser for the Matrix Equity Portfolio.
State Street Global Advisors provides the investment management for the
Portfolio. State Street Global Advisors is the investment management division of
State Street and had over $400 billion under management as of December 31, 1997.
State Street Global Advisors uses a team approach in managing the Portfolio. The
team of managers responsible for the Portfolio includes: Peter Stonberg, Richard
B. Weed, Ben J. Salm, David Hanna, Peter Wiley, Jennifer Bardsley and Jeff
Adams.
For the services provided by State Street, Adviser pays State Street monthly a
fee at the annual rate of .40% of the average daily net assets of the Portfolio
on the first $100 million of net assets under management and .30% of the average
daily net assets of the Portfolio on any net assets under management over and
above $100 million.
33
<PAGE> 34
KEYSTONE INVESTMENT MANAGEMENT COMPANY ("KEYSTONE INVESTMENT"), 200 Berkeley
Street, Boston, MA 02116-5034, is the Sub-Adviser for the World Equity
Portfolio.
Keystone Investment was organized in 1932 as a Delaware corporation. First Union
Keystone, Inc. ("Keystone") is the corporate parent of wholly-owned operating
subsidiaries, which include Keystone Investments. Keystone is a wholly-owned
subsidiary of FUNB-NC which, in turn, is owned by First Union Corporation
("First Union"). First Union is a publicly owned multibank holding company
registered under the federal Bank Holding Company Act of 1956, as amended. First
Union and its subsidiaries provide a broad range of financial services.
Mr. Gilman C. Gunn, III is the portfolio manager for Keystone Investment for the
foreign equity component of the World Equity Portfolio. Mr. J. Gary Craven is
the senior portfolio manager for Keystone Investment for the U.S. equity
component of the World Equity Portfolio.
Prior to joining Keystone Investment, Mr. Gunn spent 7 years in London as head
of Investment Research for Paribas Capital Markets. He spent two years in Kuwait
as Advisor to the Kuwait International Investment Company and also one year in
Thailand. Before going overseas, Mr. Gunn managed an $800 million bond portfolio
for The Chubb Corporation in New York. Mr. Gunn received his M.B.A. from N.Y.U.
and has been quoted extensively in The Wall Street Journal, Barrons, Business
Week, Forbes and international publications.
Mr. J. Gary Craven is a Senior Vice President, Senior Portfolio Manager and Head
of Keystone's Small Cap Growth Team. His broad career experience includes public
accounting, small business management and retail brokerage. At Invista Capital
Management, Gary served as an equity Analyst and Portfolio Manager on both
emerging growth and growth portfolios. He is a graduate of the University of
Iowa, has 13 years investment experience and is both a Certified Public
Accountant and a Chartered Financial Analyst.
For the services provided by Keystone, Adviser pays Keystone monthly an annual
fee as follows:
- - .45 of 1% on an annualized basis of the first $200 million of net assets
under management;
- - .375 of 1% on an annualized basis of any net assets under management over
and above $200 million but not exceeding $500 million; and
- - .25 of 1% on an annualized basis of any net assets under management over
and above $500 million.
WARBURG PINCUS ASSET MANAGEMENT, INC., ("WPAM") 466 Lexington Avenue, New York,
New York 10017-3147, is the Sub-Adviser for the Growth & Income Portfolio. WPAM
is a professional investment advisory firm which provides investment services to
investment companies, employee benefit plans, endowment funds, foundations and
other institutions and individuals. As of January 31, 1998, WPAM managed
approximately $19.9 billion of assets, including approximately $11.2 billion of
investment company assets. Incorporated in 1970, WPAM is indirectly controlled
by Warburg, Pincus & Co. ("WP&Co."), which has no business other than being a
holding company of WPAM and its affiliates. Lionel I. Pincus, the managing
partner of WP&Co., may be deemed to control both WP&Co. and WPAM.
Brian Posner, a managing director of WPAM, is responsible for the day-to-day
management of the Growth & Income Portfolio's investments. Prior to joining WPAM
in January 1997, Mr. Posner was an employee of Fidelity Investments ("Fidelity")
from 1987 until December, 1996. He was the vice president and portfolio manager
of the Fidelity Equity-Income II Fund (1992-December 1996); the portfolio
manager of the Fidelity Value Fund (1990-1992); assistant portfolio manager of
the Fidelity Equity-Income Fund (1989-1990); assistant portfolio manager of the
Fidelity Capital Appreciation Fund (1989); portfolio manager of the Fidelity
Select Property-Casualty Insurance Portfolio (1987-1990) and an equity analyst
(1987). Prior to joining Fidelity, Mr. Posner was a research associate at John
Nuveen and Co. and an analyst at Feldman Securities Corp. in Chicago.
For the services provided by WPAM, Adviser pays WPAM monthly an annual fee equal
to .50% of the average daily net assets of the Portfolio.
34
<PAGE> 35
PILGRIM BAXTER & ASSOCIATES, LTD. ("PILGRIM BAXTER"), 825 Duportail Road, Wayne,
Pennsylvania 19087, is the Sub-Adviser for the Small Cap Growth Portfolio.
Pilgrim Baxter is a professional investment management firm and registered
investment adviser that, along with its predecessors, has been in business since
1982. On April 28, 1995, Pilgrim Baxter became affiliated with United Asset
Management, a public company which currently manages over $197 billion through
investment management affiliates. As of December 31, 1997, Pilgrim Baxter had
discretionary management authority with respect to approximately $14 billion in
assets. In addition to advising the Portfolio, Pilgrim Baxter provides advisory
services to pension plans, profit sharing plans and other investment companies.
Michael D. Jones, CFA is responsible for the day-to-day management and Gary L.
Pilgrim, CFA is responsible for oversight management of the Small Cap Growth
Portfolio's investments. Mr. Jones has been a portfolio manager with Pilgrim
Baxter since February, 1995. From June, 1990 until February, 1995, Mr. Jones was
a portfolio manager with The Bank of New York. Prior thereto, from July, 1985 to
June, 1990, Mr. Jones was a portfolio manager and investment analyst at Fifth
Third Bank of Toledo. Mr. Pilgrim has been the Chief Investment Officer of
Pilgrim Baxter since 1985.
For the services provided by Pilgrim Baxter, Adviser pays Pilgrim Baxter monthly
an annual fee equal to .60% of the average daily net assets of the Portfolio.
SALES AND REDEMPTIONS
The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of each Portfolio based on, among other things, the
amount of premium payments to be invested and surrender and transfer requests to
be effected on that day pursuant to VA contracts and VLI policies. Orders
received by the Trust are effected on days on which the New York Stock Exchange
is open for trading, at the net asset value per share next determined after
receipt of the order. For orders received before 4:00 p.m. New York time, such
purchases and redemptions of shares of each Portfolio are effected at the
respective net asset values per share determined as of 4:00 p.m. New York time
on that day. See Net Asset Value, below and Determination of Net Asset Value in
the Trust's Statement of Additional Information. Payment for redemptions will be
made within seven days after receipt of a redemption request in good order. No
fee is charged to the separate accounts of the Participating Insurance Companies
when they redeem Portfolio shares. The Trust may suspend the sale of shares at
any time and may refuse any order to purchase shares.
The Trust may suspend the right of redemption of shares of any Portfolio and may
postpone payment for any period: (i) during which the New York Stock Exchange is
closed other than for customary weekend and holiday closings or during which
trading on the New York Stock Exchange is restricted; (ii) when the Securities
and Exchange Commission determines that a state of emergency exists which makes
the sale of portfolio securities or the determination of net asset value not
reasonably practicable; (iii) as the Securities and Exchange Commission may by
order permit for the protection of the security holders of the Trust; or (iv) at
any time when the Trust may, under applicable laws and regulations, suspend
payment on the redemption of its shares.
Should any conflict between VA contract and VLI policy holders arise which would
require that a substantial amount of net assets be withdrawn from the Trust,
orderly portfolio management could be disrupted to the potential detriment of
such contract and policy holders.
NET ASSET VALUE
Each Portfolio calculates the net asset value of a share by dividing the total
value of its assets, less liabilities, by the number of shares outstanding.
Shares are valued as of 4:00 p.m. on each day the New York Stock Exchange is
open.
Because foreign securities are quoted in foreign currencies which will be
translated into U.S. dollars at the New York cable transfer rates or at such
other value rates as the Trustees may determine in computing net asset value,
fluctuations in the value of such currencies in relation to the U.S. dollar will
affect the net asset value of shares of a Portfolio investing in foreign
securities even though there has not been any change in the values of such
securities.
35
<PAGE> 36
PERFORMANCE INFORMATION
Performance information for each of the Portfolios may be presented from time to
time in advertisements and sales literature. A Portfolio's "yield" is calculated
by dividing the Portfolio's annualized net investment income per share during a
recent 30-day period by the Portfolio's net asset value per share on the last
day of the period. A Portfolio's total return is quoted both for the life of the
Portfolio and for the one-year period and, where applicable, the five-year
period through the most recent calendar quarter and is determined by calculating
the change in value of a hypothetical $1,000 investment in the Portfolio for
each of those periods. (In the case of the Growth, Multiple Strategies, High
Income bond and U.S. Government Bond Portfolios, total return calculations are
presented for the one-, five-, and ten-year periods through the most recent
calendar quarter.) Total return calculations assume reinvestment of all
Portfolio distributions from net investment income and net realized gains.
All performance information presented for the Portfolios is based on past
performance and does not predict future performance. Any Portfolio performance
information presented will also include or be accompanied by performance
information for the insurance company separate accounts investing in the Trust
which will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec Research
Survey of Non-U.S. Equity Fund Returns, Frank Russell International Universe,
Sylvia Porter Personal Finance, and Financial Services Week. Any such
comparisons or rankings are based on past performance and the statistical
computation performed by publications and services, and are not necessarily
indications of future performance. Because the Portfolios are managed investment
vehicles investing in a wide variety of securities, the securities owned by a
Portfolio will not match those making up an index.
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
Each Portfolio of the Trust intends to qualify and elect to be treated as a
regulated investment company that is taxed under the rules of Subchapter M of
the Internal Revenue Code. As such an electing regulated investment company, a
Portfolio will not be subject to federal income tax on its net ordinary income
and net realized capital gains to the extent such income and gains are
distributed to the separate accounts of the Participating Insurance Companies
which hold its shares. For further information concerning federal income tax
consequences for the holders of the VA contracts and VLI policies and the
insurance companies issuing such contracts and policies, investors should
consult the prospectus used in connection with the issuance of their particular
contracts or policies.
Each of the Portfolios will declare and distribute dividends from net ordinary
income at least annually and will distribute its net realized capital gains, if
any, at least annually. Distributions of ordinary income and capital gains will
be made in shares of such Portfolios unless an election is made on behalf of a
separate account to receive distributions in cash. Participating Insurance
Companies will be informed at least annually about the amount and character of
distributions from the Trust for federal income tax purposes.
ADDITIONAL INFORMATION
The Trust was established as a Massachusetts business trust under the laws of
Massachusetts by an Agreement and Declaration of Trust dated December 23, 1986
(the "Declaration of Trust"). Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with Trust property or the
acts, obligations, or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of a Portfolio's property of any shareholder of
that Portfolio held personally liable for the claims and liabilities to which a
shareholder may become subject by reason of being or having been a shareholder.
Thus, the risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances in which the Portfolio itself
would be unable to meet its obligations. A copy of the Declaration of Trust is
on file with the Secretary of State of The Commonwealth of Massachusetts.
36
<PAGE> 37
The Trust has an unlimited authorized number of shares of beneficial interest.
Shares of the Trust are entitled to one vote per share (with proportional voting
for fractional shares) and are freely transferable, and, in liquidation of a
Portfolio, shareholders of the Portfolio are entitled to receive pro rata the
net assets of the Portfolio. Although no Portfolio is required to hold annual
meetings of its shareholders, shareholders have the right to call a meeting to
elect or remove Trustees or to take other actions as provided in the Declaration
of Trust. Shareholders have no preemptive rights. The Trust's transfer and
dividend-paying agent and custodian is State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110. State Street Bank and Trust
Company also provides certain administrative services to the Trust.
All of the shares of each of the Portfolios are currently owned by First
Variable Life and are allocated to its First Variable Life Annuity Funds A, E,
and M and to Separate Account VL. First Variable Life has agreed to vote its
shares in proportion to and in the manner instructed by variable contract
owners. The only person known to First Variable Life to own, of record or
beneficially, more than 20% of the outstanding accumulation units of Annuity
Funds A, E, M, or Separate Account VL, is the State of Arkansas which owned, on
March 31, 1998, a total of its accumulation units of Fund A, or 79% of the then
outstanding accumulation units (which is representative of 9.12% of the
outstanding shares of the Trust). The State's ownership of variable annuity
contracts arises pursuant to non-qualified deferred compensation plans sponsored
by the State for the benefit of plan participants. By virtue of the foregoing,
both First Variable Life and the State of Arkansas may be deemed to be
controlling persons of each of the Portfolios.
37
<PAGE> 38
PART B
38
<PAGE> 39
VARIABLE INVESTORS SERIES TRUST
FORM N-1A
PART B
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 19__
This Statement of Additional Information contains information which may be of
interest to investors but which is not included in the Prospectus of Variable
Investors Series Trust (the "Trust"). This Statement is not a prospectus and is
only authorized for distribution when accompanied or preceded by the Prospectus
of the Trust dated May 1, 19__ This Statement should be read together with the
Prospectus. Investors may obtain a free copy of the Prospectus by calling First
Variable Advisory Services Corp., the Trust's investment adviser, at (800)
228-1035.
TABLE OF CONTENTS
Part I Page
DEFINITIONS
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
INVESTMENT RESTRICTIONS
MANAGEMENT OF THE TRUST
DETERMINATION OF NET ASSET VALUE
TAXES
DIVIDENDS AND DISTRIBUTIONS
PERFORMANCE INFORMATION
SHAREHOLDER COMMUNICATIONS
ORGANIZATION AND CAPITALIZATION
PORTFOLIO TURNOVER
CUSTODIAN
INDEPENDENT AUDITORS
LEGAL COUNSEL
SHAREHOLDER LIABILITY
FIXED-INCOME SECURITY RATINGS
FINANCIAL STATEMENTS
39
<PAGE> 40
VARIABLE INVESTORS SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
DEFINITIONS
The "Trust" Variable Investors Series Trust.
"Adviser" First Variable Advisory Services Corp., the
Trust's investment adviser.
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
The Trust currently offers shares of beneficial interest of eight series (the
"Portfolios") with separate investment objectives and policies. The investment
objectives and policies of each of the Portfolios of the Trust are described in
the Prospectus. This Statement contains additional information concerning
certain investment practices and investment restrictions of the Trust.
Except as described below under "Investment Restrictions", the investment
objectives and policies described in the Prospectus and in this Statement are
not fundamental, and the Trustees may change the investment objectives and
policies of a Portfolio without an affirmative vote of shareholders of the
Portfolio.
Except as otherwise noted below, the following descriptions of certain
investment policies and techniques are applicable to all of the Portfolios.
OPTIONS
For hedging purposes only, each Portfolio may write covered call options and
covered put options on securities it owns or in which it may invest. In
addition, for hedging purposes only, the Growth & Income Portfolio and the Small
Cap Growth Portfolio may buy put options, buy call options and write put
options.
Covered call options. Each Portfolio may write covered call options on portfolio
securities and indexes as a limited form of hedging against a decline in the
price of securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the writer
to sell, a security at the exercise price at any time before the expiration
date. A call option is "covered" if the writer, at all times while obligated as
a writer, either owns the underlying securities (or comparable securities
satisfying the cover requirements of the securities exchanges), or has the right
to acquire such securities through immediate conversion of portfolio securities.
In return for the premium received when it writes a covered call option, the
Portfolio gives up some or all of the opportunity to profit from an increase in
the market price of the securities covering the call option during the life of
the option. The Portfolio retains the risk of loss should the price of such
securities decline. If the option expires unexercised, the Portfolio realizes a
gain equal to the premium, which may be offset by a decline in price of the
underlying security. If the option is exercised, the Portfolio realizes a gain
or loss equal to the difference between the Portfolio's cost for the underlying
security and the proceeds of sale (exercise price minus commissions) plus the
amount of the premium.
A Portfolio may terminate a call option that it has written before it expires by
entering into a closing purchase transaction. A Portfolio may enter into closing
purchase transactions in order to free itself to sell the underlying security or
to write another call on the security, realize a profit on a previously written
call option, or protect a security from being called in an unexpected market
rise. Any profits from a closing purchase transaction may be offset by a decline
in the value of the underlying security. Conversely, because increases in the
market price of a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from a closing purchase
transaction is likely to be offset in whole or in part by unrealized
appreciation of the underlying security owned by the Trust.
Covered put options. Each Portfolio may write covered put options on securities
and indexes as a limited form of hedging against an increase in the price of
securities that the Portfolio plans to purchase. A put option gives the
40
<PAGE> 41
holder the right to sell, and obligates the writer to buy, a security at the
exercise price at any time before the expiration date. A put option is "covered"
if the writer segregates cash and high-grade short-term debt obligations or
other permissible collateral equal to the price to be paid if the option is
exercised.
In addition to the receipt of premiums and the potential gains from terminating
such options in closing purchase transactions, the Portfolio also receives
interest on the cash and debt securities maintained to cover the exercise price
of the option. By writing a put option, the Portfolio assumes the risk that it
may be required to purchase the underlying security for an exercise price higher
than its then current market value, resulting in a potential capital loss unless
the security later appreciates in value.
A Portfolio may terminate a put option that it has written before it expires by
a closing purchase transaction. Any loss from this transaction may be partially
or entirely offset by the premium received on the terminated option.
Purchasing put and call options. Each Portfolio may also purchase put options to
protect portfolio holdings against a decline in market value. This protection
lasts for the life of the put option because the Portfolio, as a holder of the
option, may sell the underlying security or unit of the index at the exercise
price regardless of any decline in its market price. In order for a put option
to be profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction costs
that the Portfolio must pay. These costs will reduce any profit the Portfolio
might have realized had it sold the underlying security instead of buying the
put option.
Each Portfolio may purchase call options to hedge against an increase in the
price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the Portfolio
might have realized had it bought the underlying security at the time it
purchased the call option.
Combined Option Positions. A Portfolio may purchase and write options in
combination with each other to adjust the risk and return characteristics of the
overall position. For example, a Portfolio may purchase a put option and write a
call option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
Options on foreign securities. The Trust may, on behalf of each of the
Portfolios, purchase and sell options on foreign securities if in the opinion of
the Sub-Adviser of the particular Portfolio the investment characteristics of
such options, including the risks of investing in such options, are consistent
with the Portfolio's investment objectives. It is expected that risks related to
such options will not differ materially from risks related to options on U.S.
securities. However, position limits and other rules of foreign exchanges may
differ from those in the U.S. In addition, options markets in some countries,
many of which are relatively new, may be less liquid than comparable markets in
the U.S.
Risks involved in the sale of options. Options transactions involve certain
risks, including the risks that a Portfolio's Sub-Adviser will not forecast
interest rate or market movements correctly, that a Portfolio may be unable at
times to close out such positions, or that hedging transactions may not
accomplish their purpose because of imperfect market correlations. The
successful use of these strategies depends on the ability of a Portfolio's
Sub-Adviser to forecast market and interest rate movements correctly.
An exchange-listed option may be closed out only on an exchange which provides a
secondary market for an option of the same series. There is no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. If no secondary market were to exist, it would be
impossible to enter into a closing transaction to close out an option position.
As a result, a Portfolio may be forced to continue to hold, or to purchase at a
fixed price, a security on which it has sold an option at a time when a
Portfolio's Sub-Adviser believes it is inadvisable to do so.
41
<PAGE> 42
Higher than anticipated trading activity or order flow or other unforeseen
events might cause the Options Clearing Corporation or an exchange to institute
special trading procedures or restrictions that might restrict the Trust's use
of options. The exchanges have established limitations on the maximum number of
calls and puts of each class that may be held or written by an investor or group
of investors acting in concert. It is possible that the Trust and other clients
of a Sub-Adviser may be considered such a group. These position limits may
restrict the Trust's ability to purchase or sell options on particular
securities.
Options which are not traded on national securities exchanges may be closed out
only with the other party to the option transaction. For that reason, it may be
more difficult to close out unlisted options than listed options. Furthermore,
unlisted options are not subject to the protection afforded purchasers of listed
options by The Options Clearing Corporation.
Government regulations, particularly the requirements for qualification as a
"regulated investment company" under the Internal Revenue Code, may also
restrict the Trust's use of options.
FUTURES CONTRACTS
In order to hedge against the effects of adverse market changes, the Trust may,
on behalf of each Portfolio that may invest in debt securities, buy and sell
futures contracts on debt securities of the type in which the Portfolio may
invest and on indexes of debt securities. In addition, the Trust may, on behalf
of each Portfolio that may invest in equity securities, purchase and sell stock
index futures to hedge against changes in stock market prices. The Trust may
also, for hedging purposes, purchase and write options on futures contracts of
the type which such Portfolios are authorized to buy and sell and may engage in
related closing transactions. All such futures and related options will, as may
be required by applicable law, be traded on exchanges that are licensed and
regulated by the Commodity Futures Trading Commission (the "CFTC").
Futures on Debt Securities and Related Options. A futures contract on a debt
security is a binding contractual commitment which, if held to maturity, will
result in an obligation to make or accept delivery, during a particular month,
of securities having a standardized face value and rate of return. By purchasing
futures on debt securities -- assuming a "long" position -- the Trust will
legally obligate itself on behalf of the Portfolios to accept the future
delivery of the underlying security and pay the agreed price. By selling futures
on debt securities -- assuming a "short" position -- it will legally obligate
itself to make the future delivery of the security against payment of the agreed
price. Open futures positions on debt securities will be valued at the most
recent settlement price, unless that price does not in the judgment of persons
acting at the direction of the Trustees as to the valuation of the Trust's
assets reflect the fair value of the contract, in which case the positions will
be valued by or under the direction of the Trustees or such persons.
Positions taken in the futures markets are not normally held to maturity, but
are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures positions taken by the Trust on behalf of a
Portfolio will usually be liquidated in this manner, the Trust may instead make
or take delivery of the underlying securities whenever it appears economically
advantageous to the Portfolio to do so. A clearing corporation associated with
the exchange on which futures are traded assumes responsibility for such closing
transactions and guarantees that the Trust's sale and purchase obligations under
closed-out positions will be performed at the termination of the contract.
Hedging by use of futures on debt securities seeks to establish more certainly
than would otherwise be possible the effective rate of return on portfolio
securities. A Portfolio may, for example, take a "short" position in the futures
market by selling contracts for the future delivery of debt securities held by
the Portfolio (or securities having characteristics similar to those held by the
Portfolio) in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the Portfolio's portfolio securities. When
hedging of this character is successful, any depreciation in the value of
portfolio securities may substantially be offset by appreciation in the value of
the futures position.
On other occasions, the Portfolio may take a "long" position by purchasing
futures on debt securities. This would be done, for example, when the Trust
expects to purchase for the Portfolio particular securities when it has the
necessary cash, but expects the rate of return available in the securities
markets at that time to be less favorable than rates currently available in the
futures markets. If the anticipated rise in the price of the securities should
occur (with its concomitant reduction in yield), the increased cost to the
Portfolio of purchasing the securities may
42
<PAGE> 43
be offset, at least to some extent, by the rise in the value of the futures
position taken in anticipation of the subsequent securities purchase.
Successful use by the Trust of futures contracts on debt securities is subject
to the ability of a Portfolio's Sub-Adviser to predict correctly movements in
the direction of interest rates and other factors affecting markets for debt
securities. For example, if a Portfolio has hedged against the possibility of an
increase in interest rates which would adversely affect the market prices of
debt securities held by it and the prices of such securities increase instead,
the Portfolio will lose part or all of the benefit of the increased value of its
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Portfolio has
insufficient cash, it may have to sell securities to meet daily maintenance
margin requirements. The Portfolio may have to sell securities at a time when it
may be disadvantageous to do so.
The Trust may purchase and write put and call options on certain debt futures
contracts, as they become available. Such options are similar to options on
securities except that options on futures contracts give the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an option of the same series.
There is no guarantee that such closing transactions can be effected. The Trust
will be required to deposit initial margin and maintenance margin with respect
to put and call options on futures contracts written by it pursuant to brokers'
requirements, and, in addition, net option premiums received will be included as
initial margin deposits. See "Margin Payments" below. Compared to the purchase
or sale of futures contracts, the purchase of call or put options on futures
contracts involves less potential risk to the Trust because the maximum amount
at risk is the premium paid for the options plus transactions costs. However,
there may be circumstances when the purchase of call or put options on a futures
contract would result in a loss to the Trust when the purchase or sale of the
futures contracts would not, such as when there is no movement in the prices of
debt securities. The writing of a put or call option on a futures contract
involves risks similar to those risks relating to the purchase or sale of
futures contracts.
Index Futures Contracts and Options. Each Portfolio may invest in debt index
futures contracts and stock index futures contracts, and in related options. A
debt index futures contract is a contract to buy or sell units of a specified
debt index at a specified future date at a price agreed upon when the contract
is made. A unit is the current value of the index. Debt index futures in which
the Trust presently expects to invest are not now available, although the Trust
expects such futures contracts to become available in the future. A stock index
futures contract is a contract to buy or sell units of a stock index at a
specified future date at a price agreed upon when the contract is made. A unit
is the current value of the stock index.
The following example illustrates generally the manner in which index futures
contracts operate. The Standard & Poor's 100 Stock Index is composed of 100
selected common stocks, most of which are listed on the New York Stock Exchange.
The S&P 100 Index assigns relative weightings to the common stocks included in
the Index, and the Index fluctuates with changes in the market values of those
common stocks. In the case of the S&P 100 Index, contracts are to buy or sell
100 units. Thus, if the value of the S&P 100 Index were $180, one contract would
be worth $18,000 (100 units x $180). The stock index futures contract specifies
that no delivery of the actual stocks making up the index will take place.
Instead, settlement in cash must occur upon the termination of the contract,
with the settlement being the difference between the contract price and the
actual level of the stock index at the expiration of the contract. For example,
if a Portfolio enters into a futures contract to buy 100 units of the S&P 100
Index at a specified future date at a contract price of $180 and the S&P 100
Index is at $184 on that future date, the Portfolio will gain $400 (100 units x
gain of $4). If the Portfolio enters into a futures contract to sell 100 units
of the stock index at a specified future date at a contract price of $180 and
the S&P 100 Index is at $182 on that future date, the Portfolio will lose $200
(100 units x loss of $2).
Stock index futures contracts are currently traded with respect to the S&P 100
Index on the Chicago Mercantile Exchange, and with respect to other broad stock
market indexes, such as the New York Stock Exchange Composite Stock Index, which
is traded on the New York Futures Exchange, and the Value Line Composite Stock
Index, which is traded on the Kansas City Board of Trade, as well as with
respect to narrower "sub-indexes" such as the S&P 100 Energy Stock Index and the
New York Stock Exchange Utilities Stock Index. A Portfolio may purchase or sell
futures contracts with respect to any stock indexes. Positions in index futures
may be closed out only on an exchange or board of trade which provides a
secondary market for such futures.
43
<PAGE> 44
In order to hedge a Portfolio's investments successfully using futures contracts
and related options, the Trust must invest in futures contracts with respect to
indexes or sub-indexes the movements of which will, in its judgment, have a
significant correlation with movements in the prices of the Portfolio's
securities.
Options on index futures contracts are similar to options on securities except
that options on index futures contracts give the purchaser the right, in return
for the premium paid, to assume a position in an index futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option. Upon
exercise of the option, the holder would assume the underlying futures position
and would receive a variation margin payment of cash or securities approximating
the increase in the value of the holder's option position. If an option is
exercised on the last trading day prior to the expiration date of the option,
the settlement will be made entirely in cash based on the difference between the
exercise price of the option and the closing level of the index on which the
futures contract is based on the expiration date. Purchasers of options who fail
to exercise their options prior to the exercise date suffer a loss of the
premium paid.
As an alternative to purchasing and selling call and put options on index
futures contracts, each of the Portfolios which may purchase and sell index
futures contracts may purchase and sell call and put options on the underlying
indexes themselves to the extent that such options are traded on national
securities exchanges. Index options are similar to options on individual
securities in that the purchaser of an index option acquires the right to buy
(in the case of a call) or sell (in the case of a put), and the writer
undertakes the obligation to sell or buy (as the case may be), units of an index
at a stated exercise price during the term of the option. Instead of giving the
right to take or make actual delivery of securities, the holder of an index
option has the right to receive a cash "exercise settlement amount". This amount
is equal to the amount by which the fixed exercise price of the option exceeds
(in the case of a put) or is less than (in the case of a call) the closing value
of the underlying index on the date of the exercise, multiplied by a fixed
"index multiplier".
A Portfolio may purchase or sell options on stock indices in order to close out
its outstanding positions in options on stock indices which it has purchased. A
Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of call or
put options on an index involves less potential risk to the Trust because the
maximum amount at risk is the premium paid for the options plus transactions
costs. The writing of a put or call option on an index involves risks similar to
those risks relating to the purchase or sale of index futures contracts.
Margin Payments. When a Portfolio purchases or sells a futures contract, it is
required to deposit with its custodian an amount of cash, U.S. Treasury bills,
or other permissible collateral equal to a small percentage of the amount of the
futures contract. This amount is known as "initial margin". The nature of
initial margin is different from that of margin in security transactions in that
it does not involve borrowing money to finance transactions. Rather, initial
margin is similar to a performance bond or good faith deposit that is returned
to the Trust upon termination of the contract, assuming the Trust satisfies its
contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a process
known as "marking to market". These payments are called "variation margin" and
are made as the value of the underlying futures contract fluctuates. For
example, when a Portfolio sells a futures contract and the price of the
underlying debt security rises above the delivery price, the Portfolio's
position declines in value. The Portfolio then pays the broker a variation
margin payment equal to the difference between the delivery price of the futures
contract and the market price of the securities underlying the futures contract.
Conversely, if the price of the underlying security falls below the delivery
price of the contract, the Portfolio's futures position increases in value. The
broker then must make a variation margin payment equal to the difference between
the delivery price of the futures contract and the market price of the
securities underlying the futures contract.
When a Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS
Liquidity risks. Positions in futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
Although the Trust intends to purchase or sell futures only on
44
<PAGE> 45
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular time.
If there is not a liquid secondary market at a particular time, it may not be
possible to close a futures position at such time and, in the event of adverse
price movements, the Trust would continue to be required to make daily cash
payments of variation margin. However, in the event financial futures are used
to hedge portfolio securities, such securities will not generally be sold until
the financial futures can be terminated. In such circumstances, an increase in
the price of the portfolio securities, if any, may partially or completely
offset losses on the financial futures.
In addition to the risks that apply to all options transactions, there are
several special risks relating to options on futures contracts. The ability to
establish and close out positions in such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
such a market will develop. Although the Trust generally will purchase only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. In the event no such market exists
for particular options, it might not be possible to effect closing transactions
in such options with the result that the Trust would have to exercise the
options in order to realize any profit.
Hedging risks. There are several risks in connection with the use by a Portfolio
of futures contracts and related options as a hedging device. One risk arises
because of the imperfect correlation between movements in the prices of the
futures contracts and options and movements in the underlying securities or
index or movements in the prices of the Trust's securities which are the subject
of the hedge. A Portfolio's Sub-Adviser will, however, attempt to reduce this
risk by purchasing and selling, to the extent possible, futures contracts and
related options on securities and indexes the movements of which will, in its
judgment, correlate closely with movements in the prices of the underlying
securities or index and the Trust's portfolio securities sought to be hedged.
Successful use of futures contracts and options by a Portfolio for hedging
purposes is also subject to a Portfolio's Sub-Adviser's ability to predict
correctly movements in the direction of the market. It is possible that, where a
Portfolio has purchased puts on futures contracts to hedge its portfolio against
a decline in the market, the securities or index on which the puts are purchased
may increase in value and the value of securities held in the portfolio may
decline. If this occurred, the Portfolio would lose money on the puts and also
experience a decline in value in its portfolio securities. In addition, the
prices of futures, for a number of reasons, may not correlate perfectly with
movements in the underlying securities or index due to certain market
distortions. First, all participants in the futures market are subject to margin
deposit requirements. Such requirements may cause investors to close futures
contracts through offsetting transactions which could distort the normal
relationship between the underlying security or index and futures markets.
Second, the margin requirements in the futures markets are less onerous than
margin requirements in the securities markets in general, and as a result the
futures markets may attract more speculators than the securities markets do.
Increased participation by speculators in the futures markets may also cause
temporary price distortions. Due to the possibility of price distortion, even a
correct forecast of general market trends by a Portfolio's Sub-Adviser may still
not result in a successful hedging transaction over a very short time period.
Other Risks. Portfolios will incur brokerage fees in connection with their
futures and options transactions. In addition, while futures contracts and
options on futures will be purchased and sold to reduce certain risks, those
transactions themselves entail certain other risks. Thus, while a Portfolio may
benefit from the use of futures and related options, unanticipated changes in
interest rates or stock price movements may result in a poorer overall
performance for the Portfolio than if it had not entered into any futures
contracts or options transactions. Moreover, in the event of an imperfect
correlation between the futures position and the portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Portfolio may be exposed to risk of loss.
FORWARD COMMITMENTS
The Trust may, on behalf of each Portfolio, enter into contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments") if the Portfolio holds, and maintains until the
settlement date in a segregated account with its custodian, cash or high-grade
debt obligations in an amount sufficient to meet the purchase price, or if the
Portfolio enters into offsetting contracts for the forward sale of other
securities it owns. Forward commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
45
<PAGE> 46
the risk of decline in the value of the Portfolio's other assets. Where such
purchases are made through dealers, the Portfolio relies on the dealer to
consummate the sale. The dealer's failure to do so may result in the loss to the
Portfolio of an advantageous yield or price.
Although a Portfolio will generally enter into forward commitments with the
intention of acquiring securities for its portfolio or for delivery pursuant to
options contracts it has entered into, a Portfolio may dispose of a commitment
prior to settlement if a Portfolio's Sub-Adviser deems it appropriate to do so.
A Portfolio may realize short-term profits or losses upon the sale of forward
commitments.
REPURCHASE AGREEMENTS
On behalf of each Portfolio, the Trust may enter into repurchase agreements. A
repurchase agreement is a contract under which the Portfolio acquires a security
for a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Portfolio to resell such security
at a fixed time and price (representing the Portfolio's cost plus interest). It
is the Trust's present intention to enter into repurchase agreements only with
member banks of the Federal Reserve System and securities dealers meeting
certain criteria as to creditworthiness and financial condition established by
the Trustees of the Trust and only with respect to obligations of the U.S.
government or its agencies or instrumentalities or other high quality short term
debt obligations. Repurchase agreements may also be viewed under the Investment
Company Act of 1940, as amended ("1940 Act"), as loans made by the Trust which
are collateralized by the securities subject to repurchase. The Sub-Advisers
will monitor such transactions to ensure that the value of the underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including the interest factor. If the seller defaults,
the Trust could realize a loss on the sale of the underlying security to the
extent that the proceeds of sale including accrued interest are less than the
resale price provided in the agreement including interest. In addition, if the
seller should be involved in bankruptcy or insolvency proceedings, the Trust may
incur delay and costs in selling the underlying security or may suffer a loss of
principal and interest if the Trust is treated as an unsecured creditor and
required to return the underlying collateral to the seller's estate.
REVERSE REPURCHASE AGREEMENTS
The Trust may, on behalf of each of the Portfolios, enter into reverse
repurchase agreements, which involve the sale by the Portfolio of securities
held by it with an agreement to repurchase the securities at an agreed upon
price, date, and interest payment. The Portfolios will use the proceeds of the
reverse repurchase agreements to purchase securities either maturing, or under
an agreement to resell, at a date simultaneous with or prior to the expiration
of the reverse repurchase agreement. A Portfolio will use reverse repurchase
agreements when the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the reverse
repurchase transaction. Reverse repurchase agreements into which the Portfolios
will enter require that the market value of the underlying security and other
collateral equal or exceed the repurchase price (including interest accrued on
the security), and require the Portfolios to provide additional collateral if
the market value of such security falls below the repurchase price at any time
during the term of the reverse repurchase agreement. The Trust's ability to
enter into reverse repurchase agreements may be limited by tax considerations.
Reverse repurchase agreements are considered to be borrowings under the 1940
Act, and may be entered into only for temporary or emergency purposes. While
reverse repurchase transactions are outstanding, a Portfolio will maintain in a
segregated account with its custodian or a qualified sub-custodian, cash, U.S.
Government securities or other liquid, high-grade debt securities of an amount
at least equal to the market value of the securities, plus accrued interest,
subject to the agreement and will monitor the account to ensure that such value
is maintained.
WHEN-ISSUED SECURITIES
The Trust may, on behalf of each Portfolio, from time to time purchase
securities on a "when-issued" basis. Debt securities are often issued on this
basis. The price of such securities, which may be expressed in yield terms, is
fixed at the time a commitment to purchase is made, but delivery and payment for
the when-issued securities take place at a later date. Normally, the settlement
date occurs within one month of the purchase. During the period between purchase
and settlement, no payment is made by a Portfolio and no interest accrues to the
Portfolio. To the extent that assets of a Portfolio are held in cash pending the
settlement of a purchase of securities, that Portfolio would earn no income.
While the Trust may sell its right to acquire when-issued securities prior to
the settlement date, the Trust intends actually to acquire such securities
unless a sale prior to settlement appears
46
<PAGE> 47
desirable for investment reasons. At the time a Portfolio makes the commitment
to purchase a security on a when-issued basis, it will record the transaction
and reflect the amount due and the value of the security in determining the
Portfolio's net asset value. The market value of the when-issued securities may
be more or less than the purchase price payable at the settlement date. Each
Portfolio will establish a segregated account in which it will maintain cash and
U.S. Government Securities or other high-grade debt obligations at least equal
in value to commitments for when-issued securities. Such segregated securities
either will mature or, if necessary, be sold on or before the settlement date.
LOANS OF PORTFOLIO SECURITIES
The Trust may lend the portfolio securities of any Portfolio, provided: (1) the
loan is secured continuously by collateral consisting of U.S. Government
Securities, cash, or cash equivalents adjusted daily to have market value at
least equal to the current market value of the securities loaned; (2) the Trust
may at any time call the loan and regain the securities loaned; (3) the Trust
will receive any interest or dividends paid on the loaned securities; and (4)
the aggregate market value of securities of any Portfolio loaned will not at any
time exceed one-third of the total assets of the Portfolio. In addition, it is
anticipated that the Portfolio may share with the borrower some of the income
received on the collateral for the loan or that it will be paid a premium for
the loan. Before the Portfolio enters into a loan, a Portfolio's Sub-Adviser
considers all relevant facts and circumstances including the creditworthiness of
the borrower. The risks in lending portfolio securities, as with other
extensions of credit, consist of possible delay in recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.
Although voting rights, or rights to consent, with respect to the loaned
securities pass to the borrower, the Trust retains the right to call the loans
at any time on reasonable notice, and it will do so in order that the securities
may be voted by the Trust if the holders of such securities are asked to vote
upon or consent to matters materially affecting the investment. The Trust will
not lend portfolio securities to borrowers affiliated with the Trust.
FOREIGN SECURITIES
The High Income Bond Portfolio and U.S. Government Bond Portfolio may invest
without limit, except as applicable to securities generally, in foreign
securities which meet the criteria applicable to the Portfolio's domestic
investments, and in certificates of deposit issued by United States branches of
foreign banks and foreign branches of United States banks (except that, under
normal market conditions, at least 80% of the assets of the U.S. Government Bond
Portfolio will be invested in U.S. Government Securities). Investment by the
Growth Portfolio, the Growth & Income Portfolio, the Matrix Equity Portfolio,
the Multiple Strategies Portfolio, and the Small Cap Growth Portfolio in foreign
securities is subject to the limitations set forth in the Trust's Prospectus
under Investment Objectives and Policies of the Portfolios.
Investments in foreign securities may involve considerations different from
investments in domestic securities due to limited publicly available
information, non-uniform accounting standards, lower trading volume and possible
consequent illiquidity, greater volatility in price, the possible imposition of
withholding or confiscatory taxes, the possible adoption of foreign governmental
restrictions affecting the payment of principal and interest, expropriation of
assets, nationalization, or other adverse political or economic developments.
Foreign companies may not be subject to auditing and financial reporting
standards and requirements comparable to those which apply to U.S. companies.
Foreign brokerage commissions and other fees are generally higher than in the
United States. It may be more difficult to obtain and enforce a judgment against
a foreign issuer.
In addition, to the extent that any Portfolio's foreign investments are not
United States dollar-denominated, the Portfolio may be affected favorably or
unfavorably by changes in currency exchange rates or exchange control
regulations and may incur costs in connection with conversion between
currencies.
In determining whether to invest in securities of foreign issuers, the
investment advisor of a Portfolio seeking current income will consider the
likely impact of foreign taxes on the net yield available to the Portfolio and
its shareholders. Income received by a Portfolio from sources within foreign
countries may be reduced by withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. It is impossible to determine the effective rate
of foreign tax in advance since the amount of a Portfolio's assets to be
invested in various countries is not known, and tax laws and their
interpretations may change from time to time and may change without advance
notice. Any such taxes paid by a Portfolio will reduce its net income available
for distribution to shareholders.
47
<PAGE> 48
FOREIGN CURRENCY TRANSACTIONS
The Trust may engage in currency exchange transactions, on behalf of its
Portfolios which may invest in foreign securities, to protect against
uncertainty in the level of future foreign currency exchange rates. The Trust
may engage in both "transaction hedging" and "position hedging".
When it engages in transaction hedging, the Trust enters into foreign currency
transactions with respect to specific receivables or payables of a Portfolio
generally arising in connection with the purchase or sale of its portfolio
securities. The Trust will engage in transaction hedging when it desires to
"lock in" the U.S. dollar price of a security it has agreed to purchase or sell,
or the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the Trust will attempt to protect a Portfolio
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
The Trust may purchase or sell a foreign currency on a spot (or cash) basis at
the prevailing spot rate in connection with transaction hedging. The Trust may
also enter into contracts to purchase or sell foreign currencies at a future
date ("forward contracts") and purchase and sell foreign currency futures
contracts.
For transaction hedging purposes the Trust may also purchase exchange-listed and
over-the-counter call and put options on foreign currency futures contracts and
on foreign currencies. A put option on a futures contract gives the Trust the
right to assume a short position in the futures contract until expiration of the
option. A put option on currency gives the Trust the right to sell a currency at
an exercise price until the expiration of the option. A call option on a futures
contract gives the Trust the right to assume a long position in the futures
contract until the expiration of the option. A call option on currency gives the
Trust the right to purchase a currency at the exercise price until the
expiration of the option. The Trust will engage in over-the-counter transactions
only when appropriate exchange-traded transactions are unavailable and when, in
the opinion of the Portfolio's investment adviser, the pricing mechanism and
liquidity are satisfactory and the participants are responsible parties likely
to meet their contractual obligations.
When it engages in position hedging, the Trust enters into foreign currency
exchange transactions to protect against a decline in the values of the foreign
currencies in which securities held by a Portfolio are denominated or are quoted
in their principle trading markets or an increase in the value of currency for
securities which a Portfolio expects to purchase. In connection with position
hedging, the Trust may purchase put or call options on foreign currency and
foreign currency futures contracts and buy or sell forward contracts and foreign
currency futures contracts. The Trust may also purchase or sell foreign currency
on a spot basis.
The precise matching of the amounts of foreign currency exchange transactions
and the value of the portfolio securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the values of those securities
between the dates the currency exchange transactions are entered into and the
dates they mature.
It is impossible to forecast with precision the market value of a Portfolio's
portfolio securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for the Trust to purchase additional
foreign currency on behalf of a Portfolio on the spot market (and bear the
expense of such purchase) if the market value of the security or securities
being hedged is less than the amount of foreign currency the Trust is obligated
to deliver and if a decision is made to sell the security or securities and make
delivery of the foreign currency. Conversely, it may be necessary to sell on the
spot market some of the foreign currency received upon the sale of the portfolio
security or securities of a Portfolio if the market value of such security or
securities exceeds the amount of foreign currency the Trust is obligated to
deliver on behalf of the Portfolio.
To offset some of the costs to a Portfolio of hedging against fluctuations in
currency exchange rates, the Trust may write covered call options on those
currencies.
Transaction and position hedging do not eliminate fluctuations in the underlying
prices of the securities which a Portfolio owns or intends to purchase or sell.
They simply establish a rate of exchange which one can achieve at some future
point in time. Additionally, although these techniques tend to minimize the risk
of loss due to a
48
<PAGE> 49
decline in the value of the hedged currency, they tend to limit any potential
gain which might result from the increase in the value of such currency.
A Portfolio may also seek to increase its current return by purchasing and
selling foreign currency on a spot basis, and by purchasing and selling options
on foreign currencies and on foreign currency futures contracts, and by
purchasing and selling foreign currency forward contracts.
Currency Forward and Futures Contracts. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the CFTC, such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign currency futures
contracts in certain respects. For example, the maturity date of a forward
contract may be any fixed number of days from the date of the contract agreed
upon by the parties, rather than a predetermined date in a given month. Forward
contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Trust may either accept or
make delivery of the currency specified in the contract, or at or prior to
maturity enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract. Closing transactions with respect to futures contracts are effected on
a commodities exchange; a clearing corporation associated with the exchange
assumes responsibility for closing out such contracts.
Positions in foreign currency futures contracts and related options may be
closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although the Trust intends to purchase or
sell foreign currency futures contracts and related options only on exchanges or
boards of trade where there appears to be an active secondary market, there is
no assurance that a secondary market on an exchange or board of trade will exist
for any particular contract or option or at any particular time. In such event,
it may not be possible to close a futures or related option position and, in the
event of adverse price movements, the Trust would continue to be required to
make daily cash payments of variation margin on its futures positions.
Foreign Currency Options. Options on foreign currencies operate similarly to
options on securities, and are traded primarily in the over-the-counter market,
although options on foreign currencies have recently been listed on several
exchanges. Such options will be purchased or written only when a Portfolio's
Sub-Adviser believes that a liquid secondary market exists for such options.
There can be no assurance that a liquid secondary market will exist for a
particular option at any specific time. Options on foreign currencies are
affected by all of those factors which influence exchange rates and investments
generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign currencies
and there is no regulatory requirement that quotations available through dealers
or other market sources be firm or revised on a timely basis. Available
quotation information is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(less than $1 million) where rates may be less favorable. The interbank market
in foreign currencies is a global, around-the-clock market. To the extent that
the U.S. options
49
<PAGE> 50
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements may take place in the underlying markets
that cannot be reflected in the U.S. options markets.
Foreign Currency Conversion. Although foreign exchange dealers do not charge a
fee for currency conversion, they do realize a profit based on the difference
(the "spread") between prices at which they buy and sell various currencies.
Thus, a dealer may offer to sell a foreign currency to the Trust at one rate,
while offering a lesser rate of exchange should the Trust desire to resell that
currency to the dealer.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Matrix Equity Portfolio may enter are interest rate, currency and index swaps
and the purchase or sale of related caps, floors and collars. The Portfolio
expects to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Portfolio anticipates
purchasing at a later date. The Portfolio intends to use these transactions as
hedges and not as speculative investments and will not sell interest rate caps
or floors where it does not own securities or other instruments providing the
income stream the Portfolio may be obligated to pay. Interest rate swaps involve
the exchange by the Portfolio with another party of their respective commitments
to pay or receive interest, e.g., an exchange of floating rate payments for
fixed rate payments with respect to a notional amount of principal. A currency
swap is an agreement to exchange cash flows on a notional amount of two or more
currencies based on the relative value differential among them. An index swap is
an agreement to swap cash flows on a notional amount based on changes in the
values of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the
Sub-Adviser and the Portfolio believe such obligations do not constitute senior
securities under 1940 Act, as amended, and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Portfolio will not enter into
any swap, cap, floor or collar transaction unless, at the time of entering into
such transaction, the unsecured long-term debt of the counterparty, combined
with any credit enhancements, is rated at least "A" by S&P or Moody's or has an
equivalent equity rating from an NRSRO or is determined to be of equivalent
credit quality by the Sub-Adviser. If there is a default by the counterparty,
the Portfolio may have contractual remedies pursuant to the agreements related
to the transaction. The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting both as principals
and agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
With respect to swaps, the Portfolio will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate with its custodian an amount of cash or liquid
high-grade securities having a value equal to the accrued excess. Caps, floors
and collars require segregation of assets with a value equal to a Portfolio's
net obligation, if any.
ZERO-COUPON SECURITIES
Zero-coupon securities in which a Portfolio may invest are debt
obligations which are generally issued at a discount and payable in full at
maturity, and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities usually trade at a deep discount from their
face or par value and are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest. As a result, the net asset value of
shares of a Portfolio investing in zero-coupon securities may fluctuate over a
greater range than shares of other Portfolios of the Trust and other mutual
funds investing in securities making current distributions of interest and
having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by the
U.S. Treasury or other short-term debt obligations, and longer-term bonds or
notes and their unmatured interest coupons which have been separated
50
<PAGE> 51
by their holder, typically a custodian bank or investment brokerage firm. A
number of securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold them
in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are owned ostensibly by the
bearer or holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of zero-coupon
securities by accounting separately for the beneficial ownership of particular
interest coupons and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program, a
Portfolio will be able to have its beneficial ownership of U.S. Treasury
zero-coupon securities recorded directly in the book-entry record-keeping system
in lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest coupons by
the holder, the stripped coupons are sold separately. The principal or corpus is
sold at a deep discount because the buyer receives only the right to receive a
future fixed payment on the security and does not receive any rights to periodic
cash interest payments. Once stripped or separated, the corpus and coupons may
be sold separately. Typically, the coupons are sold separately or grouped with
other coupons with like maturity dates and sold in such bundled form. Purchasers
of stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero-coupon securities issued directly by the
obligor.
LOWER GRADE SECURITIES
The High Income Bond Portfolio may invest a substantial portion of its assets in
medium or lower grade corporate debt securities or in unrated securities
determined by the Portfolio's Sub-Adviser to be of comparable quality entailing
certain risks. See "Special Risks Relating to High Income Bonds" in the
Prospectus. Such lower grade securities are rated BB or B by S&P or Ba or B by
Moody's and are commonly referred to as "junk bonds." Investment in such
securities involves special risks, as described herein. Liquidity relates to the
ability of the Portfolio to sell a security in a timely manner at a price which
reflects the value of that security. As discussed below, the market for lower
grade securities is considered generally to be less liquid than the market for
investment grade securities. The relative illiquidity of some of the Portfolio's
portfolio securities may adversely affect the ability of the Portfolio to
dispose of such securities in a timely manner and at a price which reflects the
value of such security in the Sub-Adviser's judgment. The market for less liquid
securities tends to be more volatile than the market for more liquid securities
and market values of relatively illiquid securities may be more susceptible to
change as a result of adverse publicity and investor perceptions than are the
market values of higher grade, more liquid securities.
The Portfolio's net asset value will change with changes in the value of its
portfolio securities. Because the Portfolio will invest in fixed income
securities, the Portfolio's net asset value can be expected to change as general
levels of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed income securities can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities can be expected to decline. Net asset value and market value
may be volatile due to the Portfolio's investment in lower grade and less liquid
securities. Volatility may be greater during periods of general economic
uncertainty.
The Portfolio's investments are valued pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which the Portfolio may
invest, there may be relatively inactive trading in such securities and the
ability of the Sub-Adviser to accurately value such securities may be adversely
affected. During periods of reduced market liquidity and in the absence of
readily available market quotations for securities held in the Portfolio's
portfolio, the responsibility of the Sub-Adviser to value the Portfolio's
securities becomes more difficult and the Sub-Adviser's judgment may play a
greater role in the valuation of the Portfolio's securities due to the reduced
availability of reliable objective data. To the extent that the Portfolio
invests in illiquid securities and securities which are restricted as to resale,
the Portfolio may incur additional risks and costs.
51
<PAGE> 52
Lower grade securities generally involve greater credit risk than higher grade
securities. A general economic downturn or a significant increase in interest
rates could severely disrupt the market for lower grade securities and adversely
affect the market value of such securities. In addition, in such circumstances,
the ability of issuers of lower grade securities to repay principal and to pay
interest, to meet projected financial goals and to obtain additional financing
may be adversely affected. Such consequences could lead to an increased
incidence of default for such securities and adversely affect the value of the
lower grade securities in the Portfolio's portfolio and thus the Portfolio's net
asset value. The secondary market prices of lower grade securities are less
sensitive to changes in interest rates than are those for higher rated
securities, but are more sensitive to adverse economic changes or individual
issuer developments. Adverse publicity and investor perceptions, whether or not
based on rational analysis, may also affect the value and liquidity of lower
grade securities.
Yields on the Portfolio's portfolio securities can be expected to fluctuate over
time. In addition, periods of economic uncertainty and changes in interest rates
can be expected to result in increased volatility of the market prices of the
lower grade securities in the Portfolio's portfolio and thus in the net asset
value of the Portfolio. Net asset value and market value may be volatile due to
the Portfolio's investment in lower grade and less liquid securities. Volatility
may be greater during periods of general economic uncertainty. The Portfolio may
incur additional expenses to the extent it is required to seek recovery upon a
default in the payment of interest or a repayment of principal on its portfolio
holdings, and the Portfolio may be unable to obtain full recovery thereof. In
the event that an issuer of securities held by the Portfolio experiences
difficulties in the timely payment of principal or interest and such issuer
seeks to restructure the terms of its borrowings, the Portfolio may incur
additional expenses and may determine to invest additional capital with respect
to such issuer or the project or projects to which the Portfolio's portfolio
securities relate.
The Portfolio will rely on the Sub-Adviser's judgment, analysis and experience
in evaluating the creditworthiness of an issue. In this evaluation, the
Sub-Adviser will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters. The Sub-Adviser also may consider, although it does not rely primarily
on, the credit ratings of S&P and Moody's in evaluating fixed-income securities.
Such ratings evaluate only the safety of principal and interest payments, not
market value risk. Additionally, because the creditworthiness of an issuer may
change more rapidly than is able to be timely reflected in changes in credit
ratings, the Sub-Adviser continuously monitors the issuers of such securities
held in the Portfolio's portfolio. The Portfolio may, if deemed appropriate by
the Sub-Adviser, retain a security whose rating has been downgraded, or whose
rating has been withdrawn.
SHORT SALES "AGAINST THE BOX"
The Growth & Income Portfolio may engage in short sales "against the box." In a
short sale, the Portfolio sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. The Portfolio may
engage in short sales if at the time of the short sale it owns or has the right
to obtain, at no additional cost, an equal amount of the security being sold
short. This investment technique is known as a short sale "against the box." In
a short sale, a seller does not immediately deliver the securities sold and is
said to have a short position in those securities until delivery occurs. If the
Portfolio engages in a short sale, the collateral for the short position will be
maintained by the Portfolio's custodian or a qualified sub-custodian. While the
short sale is open, the Portfolio will maintain in a segregated account an
amount of securities equal in kind and amount to the securities sold short or
securities convertible into or exchangeable for such equivalent securities.
These securities constitute the Portfolio's long position. The Portfolio will
not engage in short sales against the box for speculative purposes. The
Portfolio may, however, make a short sale as a hedge, when it believes that the
price of a security may decline, causing a decline in the value of a security
owned by the Portfolio (or a security convertible or exchangeable for such
security), or when the Portfolio wants to sell the security at an attractive
current price, but also wishes to defer recognition of gain or loss for federal
income tax purposes and for purposes of satisfying certain tests applicable to
regulated investment companies under the Internal Revenue Code. In such case,
any future losses in the Portfolio's long position should be reduced by a gain
in the short position. Conversely, any gain in the long position should be
reduced by a loss in the short position. The extent to which such gains or
losses are reduced will depend upon the amount of the security sold short
relative to the amount the Portfolio owns. There will be certain additional
transaction costs associated with short sales against the box, but the Portfolio
will endeavor to offset these costs with the income from the investment of the
cash proceeds of short sales.
52
<PAGE> 53
INVESTMENT COMPANY SHARES
The Small Cap Growth Portfolio and the Matrix Equity Portfolio may invest in
shares of money market mutual funds, except as set forth under "Investment
Restrictions" below. Since such funds pay management fees and other expenses,
shareholders of the Portfolios would indirectly pay both Portfolio expenses and
the expenses of underlying funds with respect to Portfolio assets invested
therein. Applicable regulations prohibit the Portfolios from acquiring the
securities of other investment companies if, as a result of such acquisition,
the Portfolio owns more than 3% of the total voting stock of the company; more
than 5% of the Portfolio's total assets are invested in securities of any one
investment company; or more than 10% of the total assets of the Portfolio are
invested in securities (other than treasury stock) issued by all investment
companies.
SECTION 4(2) PAPER
The Growth & Income Portfolio may invest in commercial paper which is issued in
reliance on the "private placement" exemption from registration which is
afforded by Section 4(2) of the Securities Act of 1933, as amended (the "1933
Act") ("Section 4(2) Paper"). Section 4(2) paper is restricted as to disposition
under the federal securities laws and is generally sold to institutional
investors such as the Portfolio which agree that they are purchasing the paper
for investment and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors through or with the assistance of
investment dealers who make a market in the Section 4(2) paper, thereby
providing liquidity. See "Illiquid Securities" below.
ILLIQUID SECURITIES
A Portfolio may not invest more than 10% (except 15% with respect to the Growth
& Income Portfolio and the Matrix Equity Portfolio) of its net assets in
illiquid securities, including repurchase agreements which have a maturity of
longer than seven days and securities that are illiquid by virtue of the absence
of a readily available market or legal or contractual restrictions on resale.
Securities that have legal or contractual restrictions on resale but have a
readily available market are not considered illiquid for purposes of this
limitation. The Portfolios' Sub-Advisers will monitor the liquidity of such
restricted securities under the supervision of the Adviser and the Board of
Trustees. Repurchase agreements subject to demand are deemed to have a maturity
equal to the notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the 1933 Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the 1933 Act including repurchase
agreements, commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be readily resold or
on an issuer's ability to honor a demand for repayment. The fact that there are
contractual or legal restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such investments.
RULE 144A SECURITIES
The SEC adopted Rule 144A which allows for a broader institutional trading
market for securities otherwise subject to restriction on resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements
of the 1933 Act for resales of certain securities to qualified institutional
buyers. The Adviser and Sub-Advisers anticipate that the market for certain
restricted securities such as institutional commercial paper will
53
<PAGE> 54
expand further as a result of this relatively new regulation and the development
of automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the NASD.
The Sub-Advisers and the Adviser will monitor the liquidity of restricted
securities in the Portfolios under the supervision of the Board of Trustees. In
reaching liquidity decisions, the Sub-Advisers and the Adviser may consider,
inter alia, the following factors: (1) the unregistered nature of the security;
(2) the frequency of trades and quotes for the security; (3) the number of
dealers wishing to purchase or sell the security and the number of other
potential purchasers; (4) dealer undertakings to make a market in the security
and (5) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
CONVERTIBLE SECURITIES
The Growth, Growth & Income, Small Cap Growth and World Equity Portfolios of the
Trust may invest in convertible securities such as bonds, notes and preferred
stocks which are convertible or exchangeable for common stocks. Convertible
securities have characteristics similar to both fixed income and equity
securities. Because of the conversion feature, the market value of convertible
securities tends to move together with the market value of the underlying common
stock. As a result, a Portfolio's selection of convertible securities is based,
to a great extent, on the potential for capital appreciation that may exist in
the underlying stock. The value of convertible securities is also affected by
prevailing interest rates, the credit quality of the issuer, and any call
provisions.
RIGHTS OFFERINGS AND PURCHASE WARRANTS
The Growth, Growth & Income, Matrix Equity, High Income Bond, Small Cap Growth
and World Equity Portfolios of the Trust may invest in rights offerings and
purchase warrants which are privileges issued by a corporation which enable the
owner to subscribe to and purchase a specified number of shares of the
corporation at a specified price during a specified period of time. Subscription
rights normally have a short lifespan to expiration. The purchase of rights or
warrants involves the risk that a Portfolio could lose the purchase value of a
right or warrant if the right to subscribe to additional shares is not executed
prior to the rights and warrants expiration. Also, the purchase of rights and/or
warrants involves the risk that the effective price paid for the right and/or
warrant added to the subscription price of the related security may exceed the
value of the subscribed security's market price such as when there is no
movement in the level of the underlying security.
MONEY MARKET INSTRUMENTS
Certain of the instruments listed below may be purchased by the Portfolios in
accordance with their investment policies and all Portfolios may purchase such
instruments to invest otherwise idle cash or for defensive purposes.
Bankers' Acceptance. A bill of exchange or time draft drawn on and accepted by a
commercial bank. It is used by corporations to finance the shipment and storage
of goods and to furnish dollar exchange. Maturities are generally six months or
less.
Certificate of Deposit. A negotiable interest bearing instrument with a specific
maturity. Certificates of deposit are issued by banks and savings and loan
institutions in exchange for the deposit of funds and normally can be traded in
the secondary market prior to maturity. Certificates of deposit generally carry
penalties for early withdrawal.
Commercial Paper. The term used to designate unsecured short-term promissory
notes issued by corporations and other entities. Maturities on these issues
typically vary from a few days to nine months.
U.S. Government Securities. U.S. Government direct obligations consist of bills,
notes and bonds issued by the U.S. Treasury. U.S. Government Agency Securities
are issued by certain federal agencies that have been established as
instrumentalities of the U.S. Government to supervise and finance certain types
of activities. Issues of these agencies, while not direct obligations of the
U.S. Government, are either backed by the full faith and credit of the United
States, guaranteed by the Treasury or supported by the issuing agency's right to
borrow from the Treasury, or supported only by the credit of the
instrumentality. U.S. Treasury obligations also include separately traded
interest and principal component parts of such obligations that are transferable
through the
54
<PAGE> 55
federal book-entry system and which are known as Separately Traded Registered
Interest and Principal Securities ("STRIPS") and Coupon Under Book Entry
Safekeeping ("CUBES").
INVESTMENT RESTRICTIONS
The following investment restrictions may not be changed with respect to any
Portfolio without the approval of a majority of the outstanding voting
securities of that Portfolio. Under the 1940 Act and the rules thereunder,
"majority of the outstanding voting securities" of a Portfolio means the lesser
of (1) 67% of the shares of that Portfolio present at a meeting if the holders
of more than 50% of the outstanding shares of that Portfolio are present in
person or by proxy, and (2) more than 50% of the outstanding shares of that
Portfolio. Any investment restrictions which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by or on behalf of, a
Portfolio, as the case may be.
FUNDAMENTAL INVESTMENT RESTRICTIONS (All Portfolios except Growth & Income
Portfolio, Matrix Equity Portfolio and Small Cap Growth Portfolio)
The Trust may not, on behalf of a Portfolio:
(1) as to 75% of the value of the Portfolio's total assets, invest more than
5% of the value of the total assets of the Portfolio in the securities
(other than U.S. Government Securities) of any one issuer;
(2) invest more than 25% of the value of its total assets in the securities
(other than U.S. Government Securities), of issuers in a single industry;
(3) borrow money except from banks as a temporary measure for extraordinary or
emergency purposes or by entering into reverse repurchase agreements (the
Trust is required to maintain asset coverage (including borrowings) of
300% for all borrowings);
(4) make loans to other persons, except loans of portfolio securities and
except to the extent that the purchase of debt obligations in accordance
with its investment objectives and policies or entry into repurchase
agreements may be deemed to be loans;
(5) invest more than 10% of the total assets of a Portfolio (taken at market
value) in illiquid securities, including repurchase agreements maturing in
more than seven days;
(6) purchase the securities of any issuer if such purchase would cause more
than 10% of the voting securities of such issuer to be held by a
Portfolio;
(7) purchase or sell any commodity contract or purchase or write any put or
call option or any combination thereof, except that each Portfolio may
purchase and sell futures contracts based on debt securities, indexes of
securities, and foreign currencies and purchase and write options on
securities, futures contracts which it may purchase, securities indexes,
and foreign currencies. (Securities denominated in gold or other precious
metals or whose value is determined by the value of gold or other precious
metals are not considered to be commodity contracts);
(8) purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities, and
except that it may make margin payments in connection with futures
contracts and related options;
(9) make short sales of securities unless such Portfolio owns an equal amount
of such securities or owns securities which, without payment of any
further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short;
(10) underwrite securities issued by other persons except to the extent that,
in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws;
(11) purchase or sell real estate, although it may purchase and sell securities
which are secured by or represent interests in real estate,
mortgage-related securities, securities of companies principally engaged
in the real
55
<PAGE> 56
estate industry and participation interests in pools of real estate
mortgage loans, and it may liquidate real estate acquired as a result of
default on a mortgage;
(12) make investments for the purpose of gaining control of a company's
management; and
(13) issue any class of securities which is senior to a Portfolio's shares of
beneficial interest except as permitted under the Investment Company Act
of 1940 or by order of the SEC.
FUNDAMENTAL INVESTMENT RESTRICTIONS (GROWTH & INCOME PORTFOLIO ONLY)
The Growth & Income Portfolio may not:
(1) Borrow money, except from banks or by entering into reverse repurchase
agreements for temporary purposes and then in amounts not in excess of 30%
of the value of the Portfolio's total assets at the time of such
borrowing, and only if after such borrowing there is asset coverage of at
least 300 percent for all borrowings of the Portfolio; or mortgage, pledge
or hypothecate any of the Portfolio's assets except as may be necessary in
connection with such borrowing or reverse repurchase agreements; or
purchase portfolio securities while borrowings and reverse repurchase
agreements in excess of 5% of the Portfolio's net assets are outstanding.
(This borrowing provision is not for investment leverage, but solely to
facilitate management of the Portfolio's securities by enabling the
Portfolio to meet redemption requests where the liquidation of portfolio
securities is deemed to be disadvantageous or inconvenient);
(2) Purchase securities of any one issuer, other than securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, if
immediately after and as a result of such purchase more than 5% of the
Portfolio's total assets would be invested in the securities of such
issuer, or more than 10% of the outstanding voting securities of such
issuer would be owned by the Portfolio, except that up to 25% of the value
of the Portfolio's assets may be invested without regard to this 5%
limitation;
(3) Purchase securities on margin, except for short-term credit necessary for
clearance of portfolio transactions, except that the Portfolio may
establish margin accounts in connection with currency transactions and its
use of options, futures contracts and options on futures contracts;
(4) Underwrite securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio may
be deemed an underwriter under Federal securities laws;
(5) Make short sales of securities or maintain a short position or write or
sell puts, calls, straddles, spreads or combinations thereof, except that
the Portfolio may purchase and sell puts and call options on securities,
stock indices and currencies; enter into forward currency contracts and
futures contracts; and purchase and sell options on futures contracts;
(6) Purchase or sell real estate, provided that the Portfolio may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein;
(7) Purchase or sell commodities or commodity contracts, except that the
Portfolio may purchase and sell futures contracts and related options and
purchase and sell currencies on a forward commitment or delayed-delivery
basis or options on currencies;
(8) Invest in oil, gas or mineral-related programs or leases except that the
Portfolio may invest in securities of companies that invest in or sponsor
oil, gas, or mineral exploration or development programs;
(9) Make loans, except that the Portfolio may purchase or hold fixed income
securities (including loan participations and assignments and structured
securities) in accordance with its investment objective, policies and
limitations and except that the Portfolio may lend portfolio securities
and enter into repurchase agreements;
(10) Purchase any securities issued by any other investment company except in
connection with the merger, consolidation or acquisition of all the
securities or assets of such an issuer or otherwise permitted by the 1940
Act; or
56
<PAGE> 57
(11) Make investments for the purpose of exercising control or management.
In addition to the foregoing enumerated investment limitations, the
Portfolio may not (a) invest more than 5% of its total assets (taken at
the time of purchase) in securities of issuers (including their
predecessors) with less than three years of continuous operations, and (b)
purchase any securities which would cause, at the time of purchase, more
than 25% of the value of the total assets of the Portfolio to be invested
in the obligations of issuers in any industry (exclusive of the U.S.
Government and its agencies and instrumentalities).
NONFUNDAMENTAL POLICIES (GROWTH & INCOME PORTFOLIO ONLY)
In addition to the foregoing, and the policies set forth in the Prospectus with
respect to the Growth & Income Portfolio, the Growth & Income Portfolio has
adopted additional investment restrictions which may be amended by the Board of
Trustees without a vote of shareholders.
The Growth & Income Portfolio may not:
(1) Pledge, mortgage or hypothecate its assets, except to the extent necessary
to secure permitted borrowings and to the extent related to the deposit of
assets in escrow and in connection with the writing of covered put and
call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures
contracts, and options on futures contracts.
(2) Invest more than 15% of the Portfolio's net assets in securities which may
be illiquid because of legal or contractual restrictions on resale or
securities for which there are no readily available market quotations. For
purposes of this limitation, repurchase agreements with maturities greater
than seven days shall be considered illiquid securities. In no event will
the Portfolio's investment in restricted and illiquid securities exceed
15% of the Portfolio's assets.
(3) Purchase any security if as a result the Portfolio would then have more
than 5% of its total assets invested in securities of companies (including
predecessors) that have been in continuous operation for fewer than three
years.
(4) Purchase or retain securities of any company if, to the knowledge of the
Portfolio, any of the Trust's officers or Trustees or any officer or
director of the Adviser or Sub-Adviser individually owns more than 1/2 of
1% of the outstanding securities of such company and together they own
beneficially more than 5% of the securities.
(5) Invest in warrants (other than warrants acquired by the Portfolio as part
of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would
exceed 5% of the value of the Portfolio's net assets.
(6) Make additional investments (including rollovers) if the Portfolio's
borrowings exceed 5% of its net assets.
FUNDAMENTAL INVESTMENT RESTRICTIONS (MATRIX EQUITY PORTFOLIO ONLY)
The Matrix Equity Portfolio may not:
(1) With respect to 75% of its total assets, purchase any securities (other
than obligations guaranteed by the United States Government or by its
agencies or instrumentalities), if, as a result, more than 5% of the
Portfolio's total assets (determined at the time of investment) would then
be invested in securities of a single issuer or, if, as a result, the
Portfolio would hold more than 10% of the outstanding voting securities of
an issuer.
(2) Issue senior securities, borrow money from banks or enter into reverse
repurchase agreements with banks in the aggregate in excess of 33 1/3% of
the Portfolio's total assets (after giving effect to any such borrowing);
which amount includes no more than 5% in borrowings and reverse repurchase
agreements with any entity for temporary purposes. The Portfolio will not
mortgage, pledge or hypothecate any assets other than in connection with
issuances, borrowings, hedging transactions and risk management
techniques.
57
<PAGE> 58
(3) Make loans of money or property to any person, except (i) to the extent
the securities in which the Portfolio may invest are considered to be
loans, (ii) through the loan of portfolio securities, and (iii) to the
extent that the Portfolio may lend money or property in connection with
maintenance of the value of, or the Portfolio's interest with respect to,
the securities owned by the Portfolio.
(4) Buy any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with Strategic Transactions nor short
term credits as may be necessary for the clearance of transactions is
considered the purchase of a security on margin.
(5) Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except in connection with
Strategic Transactions.
(6) Act as an underwriter of securities, except to the extent the Portfolio
may be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(7) Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Portfolio of its
rights under agreements related to portfolio securities would be deemed to
constitute such control or participation.
(8) Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition and except as permitted under
the Investment Company Act of 1940, as amended.
(9) Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs except pursuant to
the exercise by the Portfolio of its rights under agreements relating to
portfolio securities.
(10) Purchase or sell real estate, commodities or commodity contracts, except
to the extent that the securities that the Portfolio may invest in are
considered to be interests in real estate, commodities or commodity
contracts or to the extent the Portfolio exercises its rights under
agreements relating to portfolio securities (in which case the Portfolio
may liquidate real estate acquired as a result of a default on a
mortgage), and except to the extent that Strategic Transactions the
Portfolio may engage in are considered to be commodities or commodities
contracts.
FUNDAMENTAL INVESTMENT RESTRICTIONS (SMALL CAP GROWTH PORTFOLIO ONLY)
The Small Cap Growth Portfolio may not:
(1) With respect to 75% of its assets, purchase more than 10% of the
outstanding voting securities of any one issuer.
(2) Pledge any of its assets, except that the Portfolio may pledge assets
having a value of not more than 5% of its total assets in order to secure
permitted borrowings. Such borrowings may not exceed 5% of the value of
the Portfolio's assets and can be made only as a temporary measure for
extraordinary or emergency purposes.
(3) Make short sales of securities or maintain a short position or write or
sell puts, calls, straddles, spreads or combinations thereof, except that
the Portfolio may purchase and sell puts and call options on securities,
stock indices and currencies; enter into forward currency contracts and
futures contracts; and purchase and sell options on futures contracts.
(4) Make loans except by the purchase of bonds or other debt obligations of
types commonly offered publicly or privately and purchased by financial
institutions, including investment in repurchase agreements, provided that
the Portfolio will not make any investment in repurchase agreements
maturing in more than seven days if such investments, together with any
other illiquid securities held by the Portfolio, would exceed 10% of the
value of its net assets.
58
<PAGE> 59
(5) Purchase the securities of an issuer if, at the time thereof, such
purchase would cause more than 10% of the Portfolio's total assets to be
invested in securities for which there is no readily available market.
This limitation does not include any Rule 144A restricted security that
has been determined by, or pursuant to procedures established by, the
Board, based on trading markets for such security, to be liquid.
(6) Invest in the securities of other open-end investment companies, or invest
in the securities of closed-end investment companies except through
purchase in the open market in a transaction involving no commission or
profit to a sponsor or dealer (other than the customary broker's
commission) or as part of a merger, consolidation or other acquisition.
(7) Engage in the underwriting of securities of other issuers, except that the
Portfolio may sell an investment position even though it may be deemed to
be an underwriter as that term is defined in the Securities Act of 1933.
(8) Purchase or sell real estate, commodities or commodity contracts.
(9) Invest in interests in oil, gas or other mineral exploration or
development programs.
NONFUNDAMENTAL POLICIES (SMALL CAP GROWTH PORTFOLIO ONLY)
In addition to the foregoing, and the policies set forth in the Prospectus with
respect to the Small Cap Growth Portfolio, the Small Cap Growth Portfolio has
adopted additional investment restrictions which may be amended by the Board of
Trustees without a vote of shareholders.
The Small Cap Growth Portfolio may not:
(1) Purchase more than 10% of the outstanding voting securities of any one
issuer.
(2) Purchase the security of any one issuer if such purchase would cause more
than 5% of the Portfolio's net assets (determined at the time of the
purchase) to be invested in the securities of such issuer except United
States Government securities.
(3) Invest in the securities of foreign issuers if, at the time of
acquisition, more than 15% of the value of the Portfolio's total assets
would be invested in such securities.
(4) Invest more than 5% of its assets in companies having a record, together
with predecessors, of less than three years continuous operation.
(5) Purchase securities which are not registered under the Securities Act of
1933, except that the Portfolio may invest in securities of foreign
issuers.
(6) Make short sales or purchase securities on margin; but it may obtain such
short-term credits as are necessary for the clearance of purchases and
sales of securities.
(7) Invest (i) more than 5% of its net assets in warrants or (ii) more than 2%
of its net assets in warrants which are not traded on the New York Stock
Exchange or the American Stock Exchange.
(8) Purchase or retain securities of an issuer if, to the knowledge of the
Portfolio, an officer, trustee, partner or director of the Portfolio or
any investment adviser of the Portfolio owns beneficially more than 1/2 of
1% of the shares or securities of such issuer and all such officers,
trustees, partners and directors owning more than 1/2 of 1% of such shares
or securities together own more than 5% of such shares or securities.
59
<PAGE> 60
MANAGEMENT OF THE TRUST
<TABLE>
<CAPTION>
Name, Address and Age Position Held With the Trust Principal Occupation During Past 5 Years
- --------------------- ---------------------------- ----------------------------------------
<S> <C> <C>
John M. Soukup* President and Trustee President and Director, First Variable Life
2122 York Road Insurance Company ("First Variable") and
Oak Brook, IL 60523 President and Director of Adviser and First
Age: 43 Variable Capital Services, Inc. ("FVCS") since
June, 1997; prior to June 1997, Market
Development Officer, Fortis
Paul G. Chenault Trustee Private Trustee; prior to 1995, Senior Vice
15 Falling Brook President and Chief Investment Officer, X.L.
Cincinnati, OH 45241 Investments, Ltd., Hamilton, Bermuda
Age: 64
Wesley E. Horton Trustee Private Trustee and Investor
1100 Country Club Circle
North Palm Beach, FL 33408
Age: 76
W. Lawrence Howe Trustee Consultant; Director, Lone Star Life Insurance
6220 Topsail Road Company; Director, Howe-Weaver
At Harbor Hills
Lady Lake, FL 32159
Age: 73
Laird E. Wiggin Trustee Managing Director, The E/W Group, Inc., a
The E/W Group, Inc. financial management and operations consulting
59 Rainbow Road firm
East Granby, CT 06026-0169
Age: 59
Norman A. Fair* Trustee Vice President, Treasurer and Asst. Sec., Irish
2211 York Rd, Suite 202 Life of North America, Inc., Director and
Oak Brook, IL 60523 Assistant Sec. of First Variable and Director
Age: 53 of Adviser; prior to 1994, Senior Vice President
and Chief Financial Officer, Interstate
Assurance Company (an affiliate of Adviser)
Arnold R. Bergman Secretary Vice President, General Counsel and Secretary of
2122 York Road First Variable, Secretary and Clerk of Adviser,
Oak Brook, IL 60523 and Secretary of FVCS; prior to February 1995,
Age: 47 Counsel, Aetna Life Insurance and Annuity Company
Timothy Suffish Assistant Treasurer Assistant Treasurer of Adviser; prior to March
2122 York Road 1997, Staff Consultant, Price Waterhouse
Oak Brook, IL 60523
Age: 27
</TABLE>
- ----------
* Interested person of the Trust within the meaning of the 1940 Act.
As of March 31, 1998, certain officers and Trustees of the Trust held
beneficial interests in shares of the Trust through the purchase of variable
annuity or variable life insurance contracts. The amount owned beneficially by
the officers and Trustees is less than 1 percent of each Portfolio's outstanding
shares.
60
<PAGE> 61
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
Each Trustee of the Trust who is not an interested person of the Trust or
Adviser receives an annual fee of $10,000, an additional fee of $1,500 for each
Trustees' meeting attended in person, $750 for each Board Meeting attended
through teleconference facilities and Committee Meeting attended (if held on a
day other than when a Board of Trustees meeting is held). With respect to fiscal
1997, the Trust paid Trustees' fees aggregating $60,000. The following table
shows 1997 compensation by Trustee.
COMPENSATION TABLE
<TABLE>
<CAPTION>
==================================================================================================================
(1) (2) Aggregate (3) Pension or (4) Estimated (5) Total Compensation
Compensation Retirement Benefits Annual From Registrant
Name of from Accrued As Part of Benefits and Trust Complex
Person/Position Registrant(1) Trust Expenses Upon Retirement Paid to Trustees
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Paul G. Chenault $15,000 None None $15,000
Trustee (elected 3/19/96)
Wesley E. Horton $15,000 None None $15,000
Trustee
W. Lawrence Howe $15,000 None None $15,000
Trustee
Laird E. Wiggin $15,000 None None $15,000
Trustee
John M. Soukup None None None None
President and Trustee
Norman A. Fair None None None None
Trustee
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects increase of annual fee from $8,000 to $10,000, effective July 1,
1997.
The Agreement and Declaration of Trust of the Trust provides that the Trust will
indemnify its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Trust, except if it is determined in the manner specified in
the Agreement and Declaration of Trust that they have not acted in good faith in
the reasonable belief that their actions were in the best interests of the Trust
or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its shareholders by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of his or her duties. The Trust,
at its expense, may provide liability insurance for the benefit of its Trustees
and officers.
Under the Investment Advisory Agreement between the Trust and Adviser (the
"Investment Advisory Agreement"), Adviser, at its expense, provides the
Portfolios with investment advisory services and advises and assists the
officers of the Trust in taking such steps as are necessary or appropriate to
carry out the decisions of its Trustees regarding the conduct of business of the
Trust and each Portfolio. The fees to be paid under the Investment Advisory
Agreement are set forth in the Trust's prospectus.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate a
continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies and restrictions and to determine from time to time securities to be
purchased, sold, retained or lent by the Trust and implement those decisions,
subject always to the provisions of the Trust's Agreement and Declaration of
Trust and By-laws, and of the 1940 Act, and subject further to such policies and
instructions as the Trustees may from time to time establish.
The Investment Advisory Agreement further provides that Adviser shall furnish
the Trust with office space and necessary personnel, pay ordinary office
expenses, pay all executive salaries of the Trust and furnish, without
61
<PAGE> 62
expense to the Trust, the services of such members of its organization as may be
duly elected officers or Trustees of the Trust.
Under the Investment Advisory Agreement, the Trust is responsible for all its
other expenses including, but not limited to, the following expenses: legal,
auditing or accounting expenses, Trustees' fees and expenses, insurance
premiums, brokers' commissions, taxes and governmental fees, expenses of issue
or redemption of shares, expenses of registering or qualifying shares for sale,
reports and notices to shareholders, and fees and disbursements of custodians,
transfer agents, registrars, shareholder servicing agents and dividend
disbursing agents, and certain expenses with respect to membership fees of
industry associations.
The Investment Advisory Agreement provides that Adviser may retain sub-advisers,
at Adviser's own cost and expense, for the purpose of making investment
recommendations and research information available to the Trust.
During fiscal 1995, 1996 and 1997, each of the Portfolios paid fees to their
investment advisers pursuant to the Investment Advisory Agreements in effect at
the time as follows:
<TABLE>
<CAPTION>
Portfolio 1995 1996 1997
- --------- -------- -------- --------
<S> <C> <C> <C>
Small Cap Growth Portfolio $ 13,610 $ 73,697 $142,715
World Equity Portfolio $104,408 $153,378 $178,910
Growth Portfolio $262,290 $343,480 $431,634
Matrix Equity Portfolio $ 91,889 $102,375 $ 92,883
Growth & Income Portfolio $ 8,192 $ 53,346 $119,612
Multiple Strategies Portfolio $166,507 $193,474 $237,374
High Income Bond Portfolio $ 49,056 $ 67,009 $105,244
U.S. Government Bond Portfolio $ 74,445 $ 66,078 $ 57,609
</TABLE>
State Street Bank and Trust Company ("State Street") provides certain
accounting, transfer agency, and other services to the Trust. Expenses incurred
and payable to State Street for such services in 1995, 1996 and 1997 were
$362,933, $507,830 and $543,486, respectively.
The Investment Advisory Agreement provides that neither the Adviser nor any
director, officer or employee of Adviser will be liable for any loss suffered by
the Trust in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of obligations and duties.
The Investment Advisory Agreement may be terminated without penalty by vote of
the Trustees, as to any Portfolio by the shareholders of that Portfolio, or by
Adviser on 60 days written notice. The Agreement also terminates without payment
of any penalty in the event of its assignment. In addition, the Investment
Advisory Agreement may be amended only by a vote of the shareholders of the
affected Portfolio(s), and provides that it will continue in effect from year to
year only so long as such continuance is approved at least annually with respect
to each Portfolio by vote of either the Trustees or the shareholders of the
Portfolio, and, in either case, by a majority of the Trustees who are not
"interested persons" of Adviser. In each of the foregoing cases, the vote of the
shareholders is the affirmative vote of a "majority of the outstanding voting
securities" as defined in the 1940 Act.
MANAGEMENT OF THE INVESTMENT ADVISER
The directors and officers of Adviser are: John M. Soukup, President and
Director, John V. Egan, Vice President and Treasurer, Norman A. Fair, Director,
Martin Sheerin, Director and Arnold R. Bergman, Secretary. The address of Mr.
Soukup, Mr. Egan, Mr. Sheerin and Mr. Bergman is the same as that of the
Adviser. The address of Mr. Fair is 2211 York Road, Suite 202, Oak Brook,
Illinois 60523.
62
<PAGE> 63
SUB-ADVISERS
Each of the Sub-Advisers described in the Prospectus serves as Sub-Adviser to
one or more of the Portfolios of the Trust pursuant to separate written
agreements. Certain of the services provided by, and the fees paid to, the
Sub-Advisers are described in the Prospectus under "Management of the Trust -
Sub-Advisers."
MANAGEMENT OF THE SUB-ADVISERS
FEDERATED INVESTMENT COUNSELING ("FEDERATED"). The trustees of Federated are
John F. Donahue; J. Christopher Donahue; John W. McGonigle; and Mark D. Olson.
The executive officers of Federated are John Fisher, President; William D.
Dawson, III, Executive Vice President; Henry A. Frantzen, Executive Vice
President; J. Thomas Madden, Executive Vice President; Joseph M. Balestrino,
Senior Vice President; Drew J. Collins, Senior Vice President; Jonathan C.
Conley, Senior Vice President; Deborah A. Cunningham, Senior Vice President;
Mark E. Durbiano, Senior Vice President; Sandra L. McInerney, Senior Vice
President; J. Alan Minteer, Senior Vice President; Susan M. Nason, Senior Vice
President; Mary Jo Ochson, Senior Vice President; Robert J. Ostrowski, Senior
Vice President; Charles A. Ritter, Senior Vice President.
VALUE LINE, INC. ("VALUE LINE"). The executive officers and directors of Value
Line are: Jean Bernhard Buttner, Chairman, Chief Executive Officer and
President; Samuel Eisenstadt, Senior Vice President and Director; David T.
Henigson, Vice President, Treasurer and Director; Howard A. Brecher, Vice
President, Secretary and Director; Harold Bernard, Jr., Director; William S.
Kanaga, Director; W. Scott Thomas, Director; and Linda S. Wilson, Director.
STRONG CAPITAL MANAGEMENT, INC. ("STRONG"). The executive officers and directors
of Strong are: Richard S. Strong, Chairman, Chief Investment Officer and
Director; Richard T. Weiss, Director; Joseph R. DeMartine, Senior Vice President
and Chief Marketing Officer; Michael E. Fisher, Senior Vice President; Thomas P.
Lemke, Chief Operating Officer, Senior Vice President, Secretary and Chief
Compliance Officer; Stephen J. Shenkenberg, Vice President, Assistant Secretary,
Acting General Counsel and Deputy Chief Compliance Officer; Thomas M. Zoeller,
Chief Financial Officer and Treasurer of Strong Capital Management, Inc.;
Kenneth M. Landis, Senior Vice President and Chief Information Officer; John A.
Flanagan, Senior Vice President and Treasurer of Funds; Jeffrey L. Kubik, Senior
Vice President.
STATE STREET BANK AND TRUST COMPANY ("STATE STREET"). State Street is a
wholly-owned subsidiary of State Street Corporation (previously, "State Street
Boston Corporation"), a publicly held bank holding company.
KEYSTONE INVESTMENT MANAGEMENT COMPANY ("KEYSTONE INVESTMENT") (formerly,
Keystone Custodian Funds, Inc.). The directors and executive officers of
Keystone Investment are: Albert H. Elfner, III, Chairman of the Board, Chief
Executive Officer and President; Edward F. Godfrey, Senior Vice President and
Chief Operating Officer; W. Douglas Munn, Senior Vice President, Chief Financial
Officer and Treasurer; Rosemary D. Van Antwerp, Senior Vice President and
Secretary; Christopher P. Conkey, Senior Vice President and Chief Investment
Officer - Fixed Income; Gilman C. Gunn, III, Senior Vice President and Chief
Investment Officer - International; J. Gary Craven, Senior Vice President and
Chief Investment Officer - Small Cap Equities; Walter T. McCormick, Senior Vice
President and Chief Investment Officer - Growth and Income; James F. Angelos,
Vice President and Chief Compliance Officer; Herbert L. Bishop, Jr., Richard M.
Cryan, Maureen E. Cullinane, Donald C. Dates, Senior Vice Presidents; and John
D. Rogol, Vice President and Controller.
WARBURG PINCUS ASSET MANAGEMENT, INC. ("WPAM"). The directors and executive
officers of WPAM are: John L. Furth, Chairman of the Board of Directors and
Managing Director; Lionel I. Pincus, Director, Chief Executive Officer and
Managing Director; John L. Vogelstein, Director and Managing Director; Susan
Black, Managing Director; Stephen Distler, Managing Director and Treasurer;
Harold W. Ehrlich, Managing Director; Richard H. King, Managing Director;
Stephen J. Lurito, Managing Director; S. Scott Marsch III, Managing Director;
Anthony G. Orphanos, Managing Director; Eugene L. Podsiadlo, Managing Director;
Arnold M. Reichman, Managing Director and Ass't. Secretary; Roger Reinlieb,
Managing Director; Sheila N. Scott, Managing Director; Paul N. Edwards, Managing
Director; Brady T. Lipp, Managing Director; Lynn C. Martin, Managing Director;
Maryanne Mullarkey, Managing Director; Sharon B. Parente, Managing Director;
Brian Posner, Managing Director; Harold E. Sharon, Managing Director; John
Zarro, III, Managing Director; Eugene P. Grace, Senior Vice President and Ass't.
Secretary; and Robert E. Rescoe, Laxmi C. Bhandari, Kyle F. Frey,
63
<PAGE> 64
Robert S. Janis, Vincent McBride, Christopher M. Nawn, Steven G. Rung, Donald C.
Schultheis, Barbara Tarmy, M. Anthony Van Daalen, Donna Vandenbulcke, and
Patricia F. Widener, Senior Vice Presidents.
PILGRIM BAXTER & ASSOCIATES, LTD. ("PILGRIM BAXTER"). The executive officers and
directors of Pilgrim Baxter are: Paul J. Hondros, President and Chief Operating
Officer; Gary L. Pilgrim, CFA, Chief Investment Officer and Director; Harold J.
Baxter, Director, Chairman of the Board of Directors and Chief Executive
Officer; John M. Zerr, General Counsel and Secretary; and Eric C. Schneider,
Chief Financial Officer.
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Trust of negotiated brokerage commissions. Such commissions vary
among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities often involve the payment of
fixed brokerage commissions, which are generally higher than those in the United
States. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid by the Trust usually
includes an undisclosed dealer commission or mark-up. In underwritten offerings,
the price paid by the Trust includes a disclosed, fixed commission or discount
retained by the underwriter or dealer.
It is currently intended that the Sub-Advisers will place all orders for the
purchase and sale of portfolio securities for the Trust and buy and sell
securities for the Trust through a substantial number of brokers and dealers. In
so doing, the Sub-Advisers will use their best efforts to obtain for the Trust
the best price and execution available. In seeking the best price and execution,
the Sub-Advisers, having in mind the Trust's best interests, will consider all
factors they deem relevant, including, by way of illustration, price, the size
of the transaction, the nature of the market for the security, the amount of the
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience, and financial stability of the broker-dealer
involved, and the quality of service rendered by the broker-dealer in other
transactions.
It has for many years been a common practice in the investment advisory business
for advisers of investment companies and other institutional investors to
receive research, statistical, and quotation services from broker-dealers which
execute portfolio transactions for the clients of such advisers. Consistent with
this practice, the Sub-Advisers may receive research, statistical, and quotation
services from any broker-dealers with which they place the Trust's portfolio
transactions. These services, which in some cases may also be purchased for
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities, and recommendations as
to the purchase and sale of securities. Some of these services may be of value
to the Sub-Advisers and/or their affiliates in advising various of their clients
(including the Trust), although not all of these services are necessarily useful
and of value in managing the Trust. The management fees paid by the Trust are
not reduced because the Sub-Advisers and/or their affiliates may receive such
services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, a
Sub-Adviser may cause a Portfolio to pay a broker-dealer which provides
brokerage and research services to the Sub-Adviser an amount of disclosed
commission for effecting a securities transaction for the Portfolio in excess of
the commission which another broker-dealer would have charged for effecting that
transaction. A Sub-Adviser's authority to cause a Portfolio to pay any such
greater commissions is also subject to such policies as the Adviser or the
Trustees may adopt from time to time.
INVESTMENT DECISIONS. Investment decisions for the Trust and for the other
investment advisory clients of the Sub-Advisers are made with a view to
achieving their respective investment objectives and after consideration of such
factors as their current holdings, availability of cash for investment, and the
size of their investments generally. Frequently, a particular security may be
bought or sold for only one client or in different amounts and at different
times for more than one but less than all clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling the security. In addition, purchases or sales of the same security
may be made for two or more clients of a Sub-Adviser on the same day. In such
event, such transactions will be allocated among the clients in a manner
believed by the Sub-Adviser to be equitable to each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by the Trust. Purchase and sale orders for the Trust may be
combined with those of other clients of a Sub-Adviser in the interest of
achieving the most favorable net results for the Trust.
64
<PAGE> 65
In fiscal 1995, 1996 and 1997, none of the Portfolios paid any underwriting
commissions. In fiscal 1995, 1996 and 1997, the Portfolios paid brokerage
commissions in the following aggregate amounts:
Brokerage Commissions
<TABLE>
<CAPTION>
Portfolio 1995 1996 1997
- --------- -------- -------- --------
<S> <C> <C> <C>
Small Cap Growth Portfolio $ 2,786 $ 10,236 $ 25,503
World Equity Portfolio $133,115 $ 74,687 $117,732
Growth Portfolio $117,033 $ 54,598 $ 55,485
Matrix Equity Portfolio $ 17,239 $ 8,611 $ 35,930
Growth & Income Portfolio $ 6,654 $ 33,704 $ 69,861
Multiple Strategies Portfolio $ 64,158 $ 31,780 $ 23,215
High Income Bond Portfolio - 0 - - 0 - -0-
U.S. Government Bond Portfolio - 0 - - 0 - -0-
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined daily as of 4:00
p.m. on each day the New York Stock Exchange is open for trading. The New York
Stock Exchange is normally closed on the following national holidays: New Year's
Day, Martin Luther King Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving, and Christmas.
The net asset value of the shares of each of the Portfolios is determined by
dividing the total assets of the Portfolio, less all liabilities, by the total
number of shares outstanding. Securities traded on a national securities
exchange or quoted on the NASDAQ National Market System are valued at their
last-reported sale price on the principal exchange or reported by NASDAQ or, if
there is no reported sale, and in the case of over-the-counter securities not
included in the NASDAQ National Market System, at a bid price estimated by a
broker or dealer. Debt securities, including zero-coupon securities, and certain
foreign securities will be valued by a pricing service. Other foreign securities
will be valued by the Trust's custodian. Securities for which current market
quotations are not readily available and all other assets are valued at fair
value as determined in good faith by the Trustees, although the actual
calculations may be made by persons acting pursuant to the direction of the
Trustees.
If any securities held by a Portfolio are restricted as to resale, their fair
value is generally determined as the amount which the Trust could reasonably
expect to realize from an orderly disposition of such securities over a
reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the restrictions
on disposition of the securities (including any registration expenses that might
be borne by the Trust in connection with such disposition). In addition,
specific factors are also generally considered, such as the cost of the
investment, the market value of any unrestricted securities of the same class
(both at the time of purchase and at the time of valuation), the size of the
holding, the prices of any recent transactions or offers with respect to such
securities, and any available analysts' reports regarding the issuer.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the New
York Stock Exchange. The values of these securities used in determining the net
asset value of the Trust's shares are computed as of such times. Also, because
of the amount of time required to collect and process trading information as to
large numbers of securities issues, the values of certain securities (such as
convertible bonds and U.S. Government Securities) are determined based on market
quotations collected earlier in the day at the latest practicable time prior to
the close of the Exchange. Occasionally, events affecting
65
<PAGE> 66
the value of such securities may occur between such times and the close of the
Exchange which will not be reflected in the computation of the Trust's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value, in the
manner described above.
The proceeds received by each Portfolio for each issue or sale of its shares,
and all income, earnings, profits, and proceeds thereof, subject only to the
rights of creditors, will be specifically allocated to such Portfolio, and
constitute the underlying assets of that Portfolio. The underlying assets of
each Portfolio will be segregated on the Trust's books of account, and will be
charged with the liabilities in respect of such Portfolio and with a share of
the general liabilities of the Trust. Expenses with respect to any two or more
Portfolios may be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can otherwise
be fairly made.
TAXES
Each Portfolio of the Trust intends to qualify each year and elect to be taxed
as a regulated investment company under Subchapter M of the United States
Internal Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal income
tax on any of its net investment income or net realized capital gains that are
distributed to the separate accounts of the Participating Insurance Companies
which hold its shares. As a Massachusetts business trust, a Portfolio under
present law will not be subject to any excise or income taxes in Massachusetts.
In order to qualify as a "regulated investment company," a Portfolio must, among
other things, (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other dispositions of stock, securities, or foreign currencies, and other income
(including gains from options, futures, or forward contracts) derived with
respect to its business of investing in such stock, securities, or currencies;
and (b) 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, and other securities limited
generally with respect to any one issuer to not more than 5% of the total assets
of the Portfolio and 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 other
regulated investment companies). In order to receive the favorable tax treatment
accorded regulated investment companies and their shareholders, moreover, a
Portfolio must distribute at least 90% of its interest, dividends, net
short-term capital gain, and certain other income each year.
With respect to investment income and gains received by a Portfolio from sources
outside the United States, such income and gains may be subject to foreign taxes
which are withheld at the source. The effective rate of foreign taxes in which a
Portfolio will be subject depends on the specific countries in which its assets
will be invested and the extent of the assets invested in each such country and
therefore cannot be determined in advance.
The state and local tax effects of distributions received from a Portfolio on
the separate accounts of Participating Insurance Companies, and any special tax
considerations associated with foreign investments of the Trust, should be
examined by such Companies with regard to their own tax situation.
A Portfolio's ability to use options, futures, and forward contracts and other
hedging techniques, and to engage in certain other transactions, may be limited
by tax considerations. A Portfolio's transactions in foreign-currency-
denominated debt instruments and its hedging activities will likely produce a
difference between its book income and its taxable income. This difference may
cause a portion of the Portfolio's distributions of book income to constitute
returns of capital for tax purposes or require the Portfolio to make
distributions exceeding book income in order to permit the Trust to continue to
qualify, and be taxed under Subchapter M of the Code, as a regulated investment
company.
Under federal income tax law, a portion of the difference between the purchase
price of zero-coupon securities in which a Portfolio has invested and their face
value ("original issue discount") is considered to be income to the Portfolio
each year, even though the Portfolio will not receive cash interest payments
from these securities. This original issue discount (imputed income) will
comprise a part of the net investment income of the Portfolio which
66
<PAGE> 67
must be distributed to shareholders in order to maintain the qualification of
the Portfolio as a regulated investment company and to avoid federal income tax
at the level of the Portfolio.
This discussion of the federal income tax and state tax treatment of the Trust
and its shareholders is based on the law as of the date of this Statement of
Additional Information. It does not describe in any respect the tax treatment or
offsets of any insurance or other product pursuant to which investments in the
Trust may be made.
DIVIDENDS AND DISTRIBUTIONS
Each of the Portfolios will declare and distribute dividends from net investment
income, if any, and will distribute its net realized capital gains, if any, at
least annually. Both dividends and capital gain distributions will be made in
shares of such Portfolios unless an election is made on behalf of a separate
account to receive dividends and capital gain distributions in cash.
PERFORMANCE INFORMATION
(a) A Portfolio's yield is presented for a specified 30-day period (the "base
period"). Yield is based on the amount determined by (i) calculating the
aggregate of dividends and interest earned by the Portfolio during the base
period less expenses accrued for that period, and (ii) dividing that amount by
the product of (A) the average daily number of shares of the Portfolio
outstanding during the base period and entitled to receive dividends and (B) the
net asset value per share of the Portfolio on the last day of the base period.
The result is annualized on a compounding basis to determine the Portfolio's
yield. For this calculation, interest earned on debt obligations held by a
Portfolio is generally calculated using the yield to maturity (or first expected
call date) of such obligations based on their market values (or, in the case of
receivables-backed securities such as Ginnie Maes, based on cost). Dividends on
equity securities are accrued daily at their stated dividend rates. The yield of
each of the following Portfolios for the 30-day period ended December 31, 1997
was as follows:
High Income Bond Portfolio 8.98%
U.S. Government Bond Portfolio 6.54%
(b) The total return of each of the following Portfolios for the one-year and
five-year periods ending December 31, 1996, and the average annual total return
for the life of each Portfolio through that date were as follows:
<TABLE>
<CAPTION>
One-Year Five-Year Life of
Period Period Portfolio
------ ------ ---------
<S> <C> <C> <C>
Small Cap Growth Portfolio(3) 0.73% -- 21.22%
World Equity Portfolio 9.98% 14.68% 8.25%
Growth Portfolio(1) 23.62% 18.21% 15.87%
Matrix Equity Portfolio 22.05% 14.73% 13.56%
Growth & Income Portfolio(2) 28.20% -- 20.65%
Multiple Strategies Portfolio 21.79% 15.15% 13.47%
High Income Bond Portfolio 13.54% 10.50% 11.15%
U.S. Government Bond Portfolio 9.37% 7.44% 8.55%
</TABLE>
(1) The average annual total return for the Growth, Multiple Strategies, High
Income Bond and U.S. Government Bond Portfolios (initially established as FVL
Growth Fund, Inc.) is shown for each of the one-, five-, and ten-year periods
ended December 31, 1997.
(2) The average annual total return for the Growth & Income Portfolio is shown
for a one-year period and for the life of the Portfolio (inception May 31,
1995).
(3) The average annual total return for the Small Cap Growth Portfolio is shown
for a one-year period and for the life of the Portfolio (inception May 4, 1995).
Total return of a Portfolio for periods longer than one year is determined by
calculating the actual dollar amount of investment return on a $1,000 investment
in the Portfolio made at the beginning of each period, then calculating the
average annual compounded rate of return which would produce the same investment
return on the $1,000 investment over the same period. Total return for a period
of one year or less is equal to the actual investment return on a $1,000
investment in the Portfolio during that period. Total return calculations assume
that all Portfolio distributions are reinvested at net asset value on their
respective reinvestment dates.
67
<PAGE> 68
From time to time, Adviser may reduce its compensation or assume expenses in
respect of the operations of a Portfolio in order to reduce the Portfolio's
expenses. Any such waiver or assumption would increase a Portfolio's yield and
total return during the period of the waiver or assumption.
SHAREHOLDER COMMUNICATIONS
Owners of policies and contracts issued by Participating Insurance Companies for
which shares of one or more Portfolios are the investment vehicle are entitled
to receive from the Participating Insurance Companies unaudited semi-annual
financial statements and audited year-end financial statements certified by the
Trust's independent public accountants. Each report will show the investments
owned by the Portfolio and the market value thereof and will provide other
information about the Portfolio and its operations.
Participating Insurance Companies with inquiries regarding the Trust may call
the Trust's investment adviser, First Variable Advisory Services Corp. at (800)
228-1035 or write First Variable Advisory Services Corp. at 2122 York Road,
Oak Brook, IL 60523.
ORGANIZATION AND CAPITALIZATION
The Trust is an open-end investment company established under the laws of the
Commonwealth of Massachusetts by Agreement and Declaration of Trust dated
December 23, 1986.
Shares entitle their holders to one vote per share, with fractional shares
voting proportionally; however, separate vote will be taken by each Portfolio on
matters affecting an individual Portfolio. For example, a change in a
fundamental investment policy for the Growth Portfolio would be voted upon only
by shareholders of the Growth Portfolio. Additionally, approval of the
Investment Advisory Agreement is a matter to be determined separately by each
Portfolio. Approval by the shareholders of one Portfolio is effective as to that
Portfolio. Shares have noncumulative voting rights. Although the Trust is not
required to hold annual meetings of its shareholders, shareholders have the
right to call a meeting to elect or remove Trustees or to take other actions as
provided in the Declaration of Trust. Shares have no preemptive or subscription
rights, and are transferable. Shares are entitled to dividends as declared by
the Trustees, and if a Portfolio were liquidated, the shares of that Portfolio
would receive the net assets of that Portfolio. The Trust may suspend the sale
of shares at any time and may refuse any order to purchase shares.
Additional Portfolios may be created from time to time with different investment
objectives or for use as funding vehicles for different variable life insurance
policies or variable annuity contracts. Any additional Portfolios may be managed
by investment advisers or sub-advisers other than the current Adviser and
Sub-Advisers. In addition, the Trustees have the right, subject to any necessary
regulatory approvals, to create more than one class of shares in a Portfolio,
with the classes being subject to different charges and expenses and having such
other different rights as the Trustees may prescribe and to terminate any
Portfolio of the Trust.
The Growth Portfolio is the successor to FVL Growth Trust, Inc., a Maryland
corporation.
PORTFOLIO TURNOVER
The portfolio turnover rate of a Portfolio is defined by the Securities and
Exchange Commission as the ratio of the lesser of annual sales or purchases to
the monthly average value of the portfolio, excluding from both the numerator
and the denominator securities with maturities at the time of acquisition of one
year or less. Portfolio turnover generally involves some expense to a Portfolio,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities.
Portfolio turnover rates for each of the Portfolios are presented in the Trust's
prospectus.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
021160 is the custodian of the Trust's assets. The custodian's responsibilities
include safeguarding and controlling the Trust's cash and securities, handling
the receipt and delivery of securities, and collecting interest and dividends on
the Trust's investments.
68
<PAGE> 69
INDEPENDENT AUDITORS
The Trust's independent auditor is Ernst & Young LLP, 200 Clarendon Street,
Boston, Massachusetts 02116. The financial statements and financial highlights
of the Trust incorporated by reference into this Statement of Additional
Information have been audited by Ernst & Young LLP, independent auditors, to the
extent and for the periods indicated in their report which appears in the 1997
Variable Investors Series Trust Report to Contract Owners, and have been so
incorporated into this Statement of Additional Information in reliance on their
report given on their authority as experts in accounting and auditing.
LEGAL COUNSEL
Legal matters in connection with the offering are being passed upon by Blazzard,
Grodd & Hasenauer, P.C., Westport, Connecticut.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the Agreement
and Declaration of Trust disclaims shareholder liability for acts or obligations
of the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of a Portfolio's property for all loss and expense of any
shareholder held personally liable for the obligations of a Portfolio. Thus the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Portfolio would be unable to
meet its obligations.
FIXED-INCOME SECURITY RATINGS
The rating services' descriptions of corporate bonds are:
Moody's Investors Service, Inc.:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"Gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
69
<PAGE> 70
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Standard & Poor's Corporation:
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB-B-CCC -- Bonds rated BB, B and CCC are regarded, on balance, as predominately
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. While such bonds will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
FINANCIAL STATEMENTS
The financial statements for the Trust at December 31, 1997 and for the year
then ended, and financial highlights, appearing in the 1997 Variable Investors
Series Trust Annual Report to Contract Owners and the report thereon of Ernst &
Young LLP, independent auditors, also appearing therein, are incorporated by
reference into this Statement of Additional Information.
The Trust's 1997 Annual Report to Contract Owners is enclosed with this
Statement of Additional Information.
70
<PAGE> 71
PART C
<PAGE> 72
FORM N-1A
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) The Financial Statements filed as part of this Registration Statement are
as follows:
Statements of Assets and Liabilities as of December 31, 1997*
Statements of Operations for the Year Ended December 31, 1997*
Statements of Changes in Net Assets for the Years Ended December 31,
1996 and 1997*
Schedules of Investments, December 31, 1997
Small Cap Portfolio
World Equity Portfolio
Growth Portfolio
Matrix Equity Portfolio
Growth and Income Portfolio
Multiple Strategies Portfolio
High Income Bond Portfolio
U.S. Government Bond Portfolio
Notes to Financial Statements - December 31, 1997*
Financial Highlights*
Report
Report of Ernst & Young LLP, Independent Auditors*
* Included in the Trust's Annual Report, dated December 31, 1996, filed as
Exhibit 12 hereto.
(b) Exhibits
1. Agreement and Declaration of Trust.
2. By-Laws, as amended to March 19, 1987.
3. Not applicable
4. Not applicable
5. (a) Investment Advisory Agreement between First Variable
Advisory Services Corp. and the Registrant as amended
May 1, 1995.
(b) Form of Sub-Advisory Agreements between the Sub-Advisers and
the Registrant.
i) Sub-Advisory Agreement between Warburg, Pincus
Counsellor, Inc. and the Registrant
ii) Sub-Advisory Agreement between Pilgrim Baxter &
Associates, LTD and the Registrant
iii) Sub-Advisory Agreement between State Street Bank and
Trust Company and the Registrant
iv) Sub-Advisory Agreement between Value Line, Inc. and the
Registrant
v) Sub-Advisory Agreement between Strong/Corneliuson
Capital Management, Inc. and the Registrant
vi) Sub-Advisory Agreement between Federated Investment
Counseling and the Registrant
vii) Sub-Advisory Agreement between Keystone Investment
Management Company and the Registrant -- Incorporated by
reference to Registrant's Proxy statement filed pursuant
to Section 14(a) of the
<PAGE> 73
Securities Exchange Act of 1934, File No.
33-11182/811-04969, as filed electronically on
November 12, 1996)
6. Not applicable
7. Not applicable
8. Form of Custodian Agreement between the Registrant and State Street
Bank and Trust Company.
9. (a) Form of Transfer Agency and Service Agreement between the
Registrant and State Street Bank and Trust Company.
(b) Form of Subadministration Agreement for Reporting and
Accounting Services between the Registrant and State Street
Bank and Trust Company.
(c) Expense Reimbursement Agreement.
10. Consent of Blazzard, Grodd & Hasenauer, P.C.
11. Consent of Ernst & Young LLP, Independent Auditors
12. Financial Statements - incorporated herein by reference to the
Trust's Annual Report dated December 31, 1997, as filed
electronically with the Securities and Exchange Commission on or
about March 2, 1998.
13. Not applicable
14. Not applicable
15. Not applicable
16. Schedule of computation of performance information
27. Financial Data Schedules
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of April 1, 1997, all of the shares of each of the Portfolios then
operating were owned by First Variable Life Insurance Company pursuant to
variable annuity contracts issued to contract owners of First Variable Annuity
Fund A, First Variable Annuity Fund E, and First Variable Annuity Fund M and
variable life insurance policies issued to policyholders of Separate Account
VL.
ITEM 27. INDEMNIFICATION
The information required by this item is incorporated by reference to the
Registrant's initial Registration Statement on Form N-1A (File No. 33-11182).
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
First Variable Advisory Services Corp. ("Adviser") is the investment
adviser to the Registrant. Adviser is a wholly-owned subsidiary of First
Variable Life Insurance Company ("First Variable"), which is a wholly-owned
subsidiary of Irish Life of North America, Inc. ("ILoNA"). ILoNA is a
wholly-owned subsidiary of Irish Life plc.
There is set forth below information as to any other business, vocation, or
employment of a substantial nature in which each director or officer of the
Registrant's investment adviser is, or at any time during the past two fiscal
years has been, engaged for his or her own account or in the capacity of
director, officer, employee, partner, or trustee.
<PAGE> 74
<TABLE>
<CAPTION>
NAME AND TITLE BUSINESS AND OTHER CONNECTIONS
<S> <C>
John M. Soukup President and Trustee of the Trust; President
President and and Director, First Variable; and President and
Director Director, First Variable Capital Services, Inc
("FVCS").
Norman A. Fair Vice President, Treasurer & Asst. Sec., ILoNA;
Director Director and Assistant Secretary, First Variable;
Trustee of the Trust; Director, FVCS; and officer
and/or director of other ILoNA subsidiaries.
Martin Sheerin Vice President and Chief Actuary, First Variable.
Director
Arnold R. Bergman Secretary of the Trust; Vice President and
Secretary and Secretary, First Variable; Director and Secretary,
Clerk FVCS.
Kari Stanway Assistant Vice President of the Trust; Assistant
Assistant Vice Vice President, First Variable Life
President
Timothy Suffish Assistant Treasurer of the Trust.
Assistant
Treasurer
</TABLE>
With respect to information regarding the Sub-Advisers, reference is hereby
made to "Management of the Trust" in the Prospectus and to "Management of the
Sub-Advisers" in the Statement of Additional Information. For information as
to the business, profession, vocation or employment of a substantial nature of
each of the officers and directors of the Sub-Advisers, reference is made to
the current Form ADVs of the Sub-Advisers (except with respect to State Street
Bank and Trust Company) filed under the Investment Advisers Act of 1940,
incorporated herein by reference, the file numbers of which are as follows:
Strong/Corneliuson Capital Management, Inc.
File No. 801-10724
Keystone Investment Management Company
File No. 801-8327
Value Line, Inc.
File No. 801-625
Federated Investment Counseling
File No. 801-34611
Warburg Pincus Asset Management, Inc.
File No. 801-07321
Pilgrim Baxter & Associates, Ltd.
File No. 801-48872
ITEM 29. PRINCIPAL UNDERWRITER
Not applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Persons maintaining physical possession of accounts, books, and other
documents required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and the Rules promulgated thereunder include the Registrant's
Secretary; the Registrant's investment adviser, First Variable Advisory
Services Corp.; and the Registrant's custodian, State Street Bank and Trust
Company. The address of the Secretary, First Variable Advisory Services Corp.,
and First Variable Life Insurance Company is 2122 York Road, Oak Brook, IL
60523; and the address of State Street Bank and Trust Company is 225 Franklin
Street, Boston, Massachusetts 02110.
ITEM 31. MANAGEMENT SERVICES
None.
ITEM 32. UNDERTAKING
<PAGE> 75
The Registrant will furnish each person to whom a prospectus is delivered with
a copy of the Registrant's latest Annual Report upon request and without
charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Boston, and the Commonwealth of Massachusetts, on the 16th day of April,
1998.
VARIABLE INVESTORS SERIES TRUST
/s/John M. Soukup
--------------------------------
John M. Soukup
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement of Variable Investors Series Trust has been signed
below by the following persons in the capacities indicated and on the dates
indicated.
<TABLE>
<CAPTION>
Date
<S> <C>
/s/John M. Soukup April 9,1998
---------------------------
John M. Soukup
President and Trustee
/s/Paul G. Chenault April 15, 1998
---------------------------
Paul G. Chenault
Trustee
/s/Wesley E. Horton April 12, 1998
---------------------------
Wesley E. Horton
Trustee
/s/Norman A. Fair April 14, 1998
---------------------------
Norman A. Fair
Trustee and Principal
Accounting Officer
/s/W. Lawrence Howe April 14, 1998
---------------------------
W. Lawrence Howe
Trustee
/s/Laird E. Wiggin April 15, 1998
---------------------------
Laird E. Wiggin
Trustee
/s/Timothy Suffish April 9, 1998
---------------------------
Timothy Suffish
Assistant Treasurer
</TABLE>
<PAGE> 76
EXHIBITS TO
POST EFFECTIVE AMENDMENT NO. 19 TO
FORM N-1A
FOR
VARIABLE INVESTORS SERIES TRUST
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE NO.
<S> <C> <C>
EX-99.B.1 Agreement and Declaration of Trust
EX-99.B.2 By-Laws, as amended to March 19, 1987
EX-99.B.5(a) Investment Advisory Agreement between First Variable Advisory
Services Corp. and the Registrant, as amended May 1, 1995
EX-99.B.5(b) Form of Sub-Advisory Agreements between the Sub-Advisers and
the Registrant
i) Sub-Advisory Agreement between Warburg, Pincus
Counsellor, Inc. and the Registrant
ii) Sub-Advisory Agreement between Pilgrim Baxter &
Associates, LTD and the Registrant
iii) Sub-Advisory Agreement between State Street Bank
and Trust Company and the Registrant
iv) Sub-Advisory Agreement between Value Line, Inc.
and the Registrant
v) Sub-Advisory Agreement between Strong/Corneliuson
Capital Management, Inc. and the Registrant
vi) Sub-Advisory Agreement between Federated
Investment Counseling and the Registrant
EX-99.B.8 Form of Custodian Agreement between the Registrant and State
Street Bank and Trust Company
EX-99.9(a) Form of Transfer Agency and Service Agreement between the
Registrant and State Street Bank and Trust Company
EX-99.9(b) Form of Subadministration Agreement for Reporting and
Accounting Services between the Registrant and State Street
Bank and Trust Company
EX-99.9(c) Expense Reimbursement Agreement
EX-99.B10. Consent of Blazzard, Grodd & Hasenauer P.C.
EX-99.B11. Consent of Ernst & Young LLP, Independent Auditors
EX-99.B16. Schedule of Computation of Performance Information
EX-27 Financial Data Schedules
</TABLE>
<PAGE> 1
EXHIBIT 99.B.1
EX-99.B.1 Agreement and Declaration of Trust
77
<PAGE> 2
VARIABLE INVESTORS SERIES TRUST
AGREEMENT AND DECLARATION OF TRUST
This AGREEMENT AND DECLARATION OF TRUST made at Springfield,
Massachusetts, this 23rd day of December, 1986, by the Trustees hereunder, and
by the holders of shares of beneficial interest to be issued hereunder as
hereinafter provided.
WITNESSETH that
WHEREAS, this Trust has been formed to carry on the business of
an investment company; and
WHEREAS, the Trustees have agreed to manage all property coming into their
hands as trustees of a Massachusetts business trust in accordance with the
provisions hereinafter set forth;
NOW, THEREFORE, the Trustees hereby declare that they will hold all cash,
securities and other assets, which they may from time to time acquire in any
manner as Trustees hereunder IN TRUST to manage and dispose of the same upon the
following terms and conditions for the benefit of the holders from time to time
of Shares in this Trust as hereinafter set forth.
ARTICLE I
NAME AND DEFINITIONS
Name
Section 1. This Trust shall be known as "Variable Investors Series Trust"
and the Trustees shall conduct the business of the Trust under that name or any
other name as they may from time to time determine.
Definitions
Section 2. Whenever used herein, unless otherwise required by the context
or specifically provided:
(a) The "Trust" refers to the Massachusetts business trust
established by this Agreement and Declaration of Trust, as amended from
time to time;
(b) "Trustees" refers to the Trustees of the Trust named herein or
elected in accordance with Article IV;
(c) "Shares" mean the transferable units of interest into which the
beneficial interest in the Trust shall be divided from time to time or, if
more than one series or class of Shares is authorized by the Trustees, the
units into which each series or class of Shares shall be divided from time
to time;
(d) "Shareholder" means a record owner of Shares;
(e) The "1940 Act" refers to the Investment Company Act of 1940 and
the Rules and Regulations thereunder, all as amended from time to time;
(f) The terms "Affiliated Person", "Assignment", "Commission",
"Interested Person", "Principal Underwriter" and "Majority Shareholder
Vote" (the 67% or 50% requirement of the
<PAGE> 3
third sentence of Section 2(a) (42) of the 1940 Act, whichever may be
applicable) shall have the meanings given them in the 1940 Act;
(g) "Declaration of Trust" shall mean this Agreement and Declaration
of Trust as amended or restated from time to time; and
(h) "By-Laws" shall mean the By-Laws of the Trust as amended from
time to time.
ARTICLE II
PURPOSE
The purpose of the Trust is to provide investors a managed
investment primarily in securities, commodities and debt instruments.
ARTICLE III
SHARES
Division of Beneficial Interest
Section 1. The Shares of the Trust shall be issued in one or more series
as the Trustees may, without Shareholder approval, authorize. Each series shall
be preferred over all other series in respect of the assets allocated to that
series. The Shares of any series may be issued in two or more classes, as the
Trustees may, without Shareholder approval, authorize. Unless the Trustees have
authorized the issuance of Shares of a series in two or more classes, each Share
of a series shall represent an equal proportionate interest in the assets and
liabilities of the series with each other Share of the same series, none having
priority or preference over another. If the Trustees have authorized the
issuance of Shares of a series in two or more classes, then the classes may have
such variations as to dividend, redemption, and voting rights, net asset values,
expenses borne by the classes, and other matters as the Trustees have
authorized. The number of Shares authorized shall be unlimited, and the Shares
so authorized may be represented in part by fractional shares. The Trustees may
from time to time divide or combine the Shares of any series or any class of a
series into a greater or lesser number without thereby changing the
proportionate beneficial interests represented by such Shares in the series.
Ownership of Shares
Section 2. The ownership of shares shall be recorded on the books of the
Trust or its transfer or similar agent. No certificates certifying the ownership
of shares shall be issued except as the Trustees may otherwise determine from
time to time. The Trustees may make such rules as they consider appropriate for
the issuance of Share certificates, the transfer of Shares and similar matters.
The record books of the Trust as kept by the Trust or any transfer or similar
agent of the Trust, as the case may be, shall be conclusive as to who are the
Shareholders of each series and as to the number of Shares of each series and
class held from time to time by each shareholder.
Investments in the Trust; Assets of the Series
Section 3. The Trustees shall accept investments in the Trust from such
persons and on such terms and, subject to any requirements of law, for such
consideration, which may consist of cash or tangible or intangible property or a
combination thereof, as they from time to time authorize.
All consideration received by the Trust for the issue or sale of shares of
each series, together with all income, earnings, profits, and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation thereof,
and any funds or payments derived from any reinvestment of such proceeds in
<PAGE> 4
whatever form the same may be, shall irrevocably belong to the series of Shares
with respect to which the same were received by the Trust for all purposes,
subject only to the rights of creditors, and shall be so handled upon the books
of account of the Trust and are herein referred to as "assets of" such series.
No Preemptive Rights
Section 4. Shareholders shall have no preemptive or other right to
receive, purchase or subscribe for any additional Shares or other securities
issued by the Trust.
Status of Shares and Limitation of Personal Liability
Section 5. Shares shall be deemed to be personal property giving only the
rights provided in this instrument. Every Shareholder by virtue of having become
a Shareholder shall be held to have expressly assented and agreed to the terms
hereof and to have become a party hereto. The death of a Shareholder during the
continuance of the Trust shall not operate to terminate the same nor entitle the
representative of any deceased Shareholder to an accounting or to take any
action in court or elsewhere against the Trust or the Trustees, but only to the
rights of said decedent under this Trust. Ownership of Shares shall not entitle
the Shareholder to any title in or to the whole or any part of the Trust
property or right to call for a partition or division of the same or for an
accounting, nor shall the ownership of Shares constitute the Shareholders
partners. Neither the Trust nor the Trustees, nor any officer, employee or agent
of the Trust shall have any power to bind personally any Shareholder, nor except
as specifically provided herein to call upon any Shareholder for the payment of
any sum of money or assessment whatsoever other than such as the Shareholder may
at any time personally agree to pay.
ARTICLE IV
THE TRUSTEES
Election
Section 1. The number of Trustees shall be fixed by the Trustees, except
that, subsequent to any sale of Shares pursuant to a public offering, there
shall be not fewer than three Trustees. Any vacancies occurring in the board of
Trustees may be filled by the Trustees if, immediately after filling any such
vacancy, at least two-thirds of the Trustees then holding office shall have been
elected to such office by the Shareholders. In the event that at any time fewer
than a majority of the Trustees then holding office were elected to such office
by the Shareholders, the Trustees shall call a meeting of Shareholders for the
purpose of electing Trustees. Each Trustee elected by the Shareholders or by the
Trustees shall serve until the next meeting of Shareholders and until the
election and qualification of his or her successor, or until he or she sooner
dies, resigns or is removed. At any meeting called for such purpose, a Trustee
may be removed with or without cause, by vote of a majority of the outstanding
Shares. The initial Trustees, each of whom shall serve until the first meeting
of Shareholders at which Trustees are elected and until his or her successor is
elected and qualified, or until he or she sooner dies, resigns or is removed,
shall be George W. Siguler and such other persons as the Trustee or Trustees
then in office shall, prior to any sales of Shares pursuant to a public
offering, appoint. By note of a majority of the Trustees then in office, the
Trustees may remove a Trustee with or without cause.
Effect of Death, Resignation, etc. of a Trustee
Section 2. The death, declination, resignation, retirement, removal, or
incapacity of the Trustees, or any one of them, shall not operate to annul the
Trust or to revoke any existing agency created pursuant to the terms of this
Declaration of Trust.
Powers
<PAGE> 5
Section 3. Subject to the provisions of this Declaration of Trust, the
business of the Trust shall be managed by the Trustees, and they shall have all
powers necessary or convenient to carry out that responsibility. Without
limiting the foregoing, the Trustees may adopt By-Laws not inconsistent with
this Declaration of Trust providing for the conduct of the business of the Trust
and may amend and repeal them to the extent that such By-Laws do not reserve
that right to the Shareholders; they may fill vacancies in their number,
including vacancies resulting from increases in their number, and may elect and
remove such officers and appoint and terminate such agents as they consider
appropriate; they may appoint from their own number, and terminate, any one or
more committees consisting of two or more Trustees, including an executive
committee which may, when the Trustees are not in session, exercise some or all
of the power and authority of the Trustees as the Trustees may determine; they
may appoint an advisory board, the members of which shall not be Trustees and
need not be Shareholders; they may employ one or more custodians of the assets
of the Trust and may authorize such custodians to employ subcustodians and to
deposit all or any part of such assets in a system or systems for the central
handling of securities, retain a transfer agent or a Shareholder services agent,
or both, provide for the distribution of Shares by the Trust, through one or
more principal underwriters or otherwise, set record dates for the determination
of Shareholders with resect to various matters, and in general delegate such
authority as they consider desirable to any officer of the Trust, to any
committee of the Trustees and to any agent or employee of the Trust or to any
such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have power and
authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, write
options on and lease any or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of ownership,
with respect to stock or other securities or property; and to execute and
deliver proxies or powers of attorney to such person or persons as the
Trustees shall deem proper, granting to such person or persons such power
and discretion with relation to securities or property as the Trustees
shall deem proper;
(d) To exercise powers and rights of subscription or otherwise which
in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form, or in the
name of the Trustees or of the Trust or in the name of a custodian,
subcustodian or other depository or a nominee or nominees or otherwise;
(f) To allocate assets, liabilities and expenses of the Trust to a
particular series or class of Shares or to apportion the same among two or
more series or classes of Shares, provided that any liabilities or
expenses incurred by a particular series of Shares shall be payable solely
out of the assets of that series;
(g) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer, any security of
which is or was held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer, and
to pay calls or subscriptions with respect to any security held in the
Trust;
(h) To join with other security holders in acting through a
committee, depositary, voting trustee or otherwise, and in that connection
to deposit any security with, or transfer any security to, any such
committee, depositary or trustee, and to delegate to them such power and
authority with relation to any security (whether or not so deposited or
transferred) as the Trustees shall
<PAGE> 6
deem proper, and to agree to pay, and to pay, such portion of the expenses
and compensation of such committee, depositary or trustee as the Trustees
shall deem proper;
(i) To compromise, arbitrate or otherwise adjust claims in favor of
or against the Trust on any matter in controversy, including but not
limited to claims for taxes;
(j) To enter into joint ventures, general or limited partnerships
and any other combinations or associations;
(k) to borrow funds;
(l) To endorse or guarantee the payment of any notes or other
obligations of any person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof; and to mortgage and pledge
the Trust property or any part thereof to secure any of or all of such
obligations;
(m) To purchase and pay for entirely out of Trust property such
insurance as they may deem necessary or appropriate for the conduct of the
business, including, without limitation, insurance policies insuring the
assets of the Trust and payment of distributions and principal on its
portfolio investments, and insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, investment advisers or managers,
principal underwriters, or independent contractors of the Trust
individually against all claims and liabilities of every nature arising by
reason of holding, being or having held any such office or position, or by
reason of any action alleged to have been taken or omitted by any such
person as Shareholder, Trustee, officer, employee, agent, investment
adviser or manager, principal underwriter, or independent contractors,
including any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify
such person against such liability; and
(n) To pay pensions for faithful service, as deemed appropriate by
the Trustees, and to adopt, establish and carry out pension,
profit-sharing, share bonus, share purchase, savings, thrift and other
retirement, incentive and benefit plans, trusts and provisions, including
the purchasing of life insurance and annuity contracts as a means of
providing such retirement and other benefits, for any or all of the
Trustees, officers, employees and agents of the Trust.
The Trustees shall not in any way be bound or limited by any present or
future law or custom in regard to investments by Trustees. Except as otherwise
provided herein or from time to time in the By-Laws, any action to be taken by
the Trustees may be taken by a majority of the Trustees present at a meeting of
the Trustees (a quorum being present), within or without Massachusetts,
including any meeting held by means of a conference telephone or other
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time and participation by such means
shall constitute presence in person at a meeting, or by written consents of a
majority of the Trustees then in office.
Payment of Expenses by Trust
Section 4. The Trustees are authorized to pay or to cause to be paid out
of the principal or income of the Trust, or partly out of principal and partly
out of income, as they deem fair, all expenses, fees, charges, taxes and
liabilities incurred or arising in connection with the Trust, or in connection
with the management thereof, including, but not limited to, the Trustees'
compensation and such expenses and charges for the services of the Trust's
officers, employees, investment adviser or manager, principal underwriter,
auditor, counsel, custodian, transfer agent, Shareholder servicing agent, and
such other agents or independent contractors and such other expenses and charges
as the Trustees may deem necessary or proper to incur; provided, however, that
all expenses, fees, charges, taxes and liabilities incurred or arising
<PAGE> 7
in connection with a particular series of Shares, as determined by the Trustees,
shall be payable solely out of the assets of that series.
Ownership of Assets of the Trust
Section 5. Title to all of the assets of each series of Shares and of the
Trust shall at all times be considered as vested in the Trustees.
Advisory, Management and Distribution
Section 6. Subject to a favorable Majority shareholder Vote, the Trustees
may, at any time and from time to time, contract for exclusive or nonexclusive
advisory and/or management services with Monarch Investment Management
Corporation, a Massachusetts corporation, or any other corporation, trust,
association or other organization (the "Adviser"), every such contract to comply
with such requirements and restrictions as may be set forth in the By-Laws; and
any such contract may contain such other terms interpretive of or in addition to
said requirements and restrictions as the Trustees may determine, including,
without limitation, authority to determine from time to time what investments
shall be purchased, held, sold or exchanged and what portion, if any, of the
assets of the Trust shall be held uninvested and to make changes in the Trust's
investments. The Trustees may also, at any time and from time to time, contract
with Monarch Securities, Inc. or any other corporation, trust, association or
other organization, appointing it exclusive or nonexclusive distributor or
principal underwriter for the Shares, every such contract to comply with such
requirements and restrictions as may be set forth in the By-Laws; and any such
contract may contain such other terms interpretive of or in addition to said
requirements and restrictions as the Trustees may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust is a
shareholder, director, officer, partner, trustee, employee, manager,
adviser, principal underwriter, or distributor or agent of or for any
corporation, trust, association, or other organization, or of or for any
parent or affiliate of any organization, with which an advisory or
management contract, or principal underwriter's or distributor's contract,
or transfer, shareholder services or other agency contract may have been
or may hereafter be made, or that any organization, or any parent or
affiliate thereof, is a Shareholder or has an interest in the Trust, or
that
(ii) any corporation, trust, association or other organization with
which an advisory or management contract or principal underwriter's or
distributor's contract, or transfer, shareholder services or other agency
contract may have been or may hereafter be made also has an advisory or
management contract, or principal underwriter's or distributor's contract,
or transfer, shareholder services or other agency contract with one or
more other corporations, trusts, associations, or other organizations, or
has other business or interests
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same or create any liability or accountability to the Trust or its Shareholders.
ARTICLE V
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Voting Powers
Section 1. The Shareholders shall have power to vote only (i) for the
election or removal of Trustees as provided in Article IV, Section 1, (ii) with
respect to any Adviser as provided in Article IV, Section 6, (iii) with respect
to any termination of this Trust to the extent and as provided in Article IX,
<PAGE> 8
Section 4, (iv) with respect to any amendment of this Declaration of Trust to
the extent and as provided in Article IX, Section 7, (v) to the same extent as
the stockholders of a Massachusetts business corporation as to whether or not a
court action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the Shareholders,
and (vi) with respect to such additional matters relating to the Trust as may be
required by law, this Declaration of Trust, the By-Laws or any registration of
the Trust with the Securities and Exchange Commission (or any successor agency)
or any state, or as the Trustees may consider necessary or desirable. Each whole
Share shall be entitled to one vote as to any matter on which it is entitled to
vote and each fractional Share shall be entitled to a proportionate fractional
vote. Notwithstanding any other provision of this Declaration of Trust, on any
matter submitted to a vote of Shareholders, all Shares of the Trust then
entitled to vote shall be voted in the aggregate and not by individual series;
except (1) when required by the 1940 Act, Shares shall be voted by individual
series; and (2) when the Trustees have determined that the matter affects only
the interests of one or more series or classes of Shares, then only Shareholders
of such series or classes of Shares, as the case may be, shall be entitled to
vote thereon. Shares may be voted in person or by proxy. A proxy with respect to
Shares held in the name of two or more persons shall be valid if executed by any
one of them unless at or prior to exercise of the proxy the Trust receives a
specific written notice to the contrary from any one of them. A proxy purporting
to be executed by or on behalf of a Shareholder shall be deemed valid unless
challenged at or prior to its exercise and the burden of proving invalidity
shall rest on the challenger. Until Shares are issued, the Trustees may exercise
all rights of Shareholders and may take any action required by law, this
Declaration of Trust or by By-Laws to be taken by Shareholders.
Voting Power and Meetings
Section 2. Meetings of Shareholders of the Trust or of any series or class
of Shares may be called by the Trustees or such other person or persons as may
be specified in the By-Laws and held from time to time for the purpose of taking
action upon any matter requiring the vote or the authority of the Shareholders
of the Trust or any series or class of Shares as herein provided or upon any
other matter deemed by the Trustees to be necessary or desirable. Meetings of
Shareholders of the Trust or of any series or class of Shares shall be called by
the Trustees or such other person or persons as may be specified in the By-Laws
upon written application by shareholders holding at least 10% of the outstanding
Shares of the Trust, if Shareholders of all series are required hereunder to
vote in the aggregate and not by individual series or class of Shares at such
meeting, or of any series or class of Shares, as the case may be, if
Shareholders of such series or class of Shares are entitled hereunder to vote by
individual series of class of Shares at such meeting, requesting that a meeting
be called for a purpose requiring action by the Shareholders as provided herein
or in the By-Laws. The Shareholders shall be entitled to at least seven days
written notice of any meeting of the Shareholders.
Quorum and Required Vote
Section 3. Thirty per cent (30%) of the Shares entitled to vote shall be a
quorum for the transaction of business at a Shareholders' meeting, except that
where any provision of law or of this Declaration of Trust permits or requires
that holders of any series or class of Shares shall vote as a series or class,
as the case may be, then thirty percent (30%) of the aggregate number of Shares
of that series or that class entitled to vote shall be necessary to constitute a
quorum for the transaction of business by that series or class. Any lesser
number, however, shall be sufficient for adjournments. Any adjourned session or
sessions may be held within a reasonable time after the date set for the
original meeting without the necessity of further notice. Except when a larger
vote is required by any provision of this Declaration of Trust or by By-Laws, a
majority of the Shares voted shall decide any questions and a plurality shall
elect a Trustee, provided that where any provision of law or of this Declaration
of Trust permits or requires that the holders of any series or class of Shares
shall vote as a series or class, as the case may be, then a majority of the
Shares of that series or that class voted on the matter shall decide that matter
insofar as that series or subseries is concerned.
Action by Written Consent
<PAGE> 9
Section 4. Any action taken by Shareholders may be taken without a meeting
if a majority of Shareholders entitled to vote on the matter (or such larger
proportion thereof as shall be required by any express provision of this
Declaration of Trust or the By-Laws) consent to the action in writing and such
written consents are filed with the records of the meetings of Shareholders.
Such consent shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
Additional Provisions
Section 5. The By-Laws may include further provisions for Shareholders'
votes and meetings and related matters.
ARTICLE VI
DISTRIBUTIONS, REDEMPTIONS AND REPURCHASES,
AND DETERMINATION OF NET ASSET VALUE
Distributions
Section 1. The Trustees may, but need not, each year distribute to the
Shareholders of each series or class of Shares such income and gains, accrued or
realized, as the Trustees may determine, after providing for actual and accrued
expenses and liabilities (including such reserves as the Trustees may establish)
determined in accordance with good accounting practices. The Trustees shall have
full discretion to determine which items shall be treated as income and which
items as capital and their determination shall be binding upon the Shareholders.
Distributions of each year's income of each series or class of Shares, if any be
made, may be made in one or more payments, which shall be in Shares, in cash or
otherwise and on a date or dates and as of a record date or dates determined by
the Trustees. At any time and from time to time in their discretion, the
Trustees may distribute to the Shareholders of any one or more series or classes
of Shares as of a record date or dates determined by the Trustees, in Shares, in
cash or otherwise, all or part of any gains realized on the sale or disposition
of property of the series or classes of shares or otherwise, or all or part of
any other principal of the Trust attributable to the series or classes of
Shares. Each distribution pursuant to this Section 1 shall be made ratably to
each Shareholder of a series or class of Shares in such proportion as the net
asset value of the Shares held by such Shareholder bears to the total net assets
of the series or class of Shares on the applicable record date thereof, provided
that no distribution need be made on Shares purchased pursuant to orders
received, or for which payment is made, after such time or times as the Trustees
may determine. Any such distribution paid in Shares will be paid at the net
asset value thereof as determined in accordance with Section 7 of Article VI of
this Declaration of Trust.
Redemptions and Repurchases
Section 2. Any holder of Shares of the Trust may by presentation of a
written request, together with his certificates, if any, for such Shares, in
proper form for transfer, at the office of the Trust or at a principal office of
a transfer agent appointed by the Trust, redeem his Shares for the net asset
value thereof determined and computed in accordance with the provisions of this
Section 2 and the provisions of Section 7 of Article VI of this Declaration of
Trust.
Upon receipt by the Trust or its transfer agent of such written request
for redemption of Shares, such Shares shall be redeemed at the net asset value
per share of the appropriate series or class of Shares, if applicable, next
determined after such Shares are tendered in proper order for transfer to the
Trust or determined as of such other time fixed by the Trustees as may be
permitted or required by the 1940 Act, provided that no such tender shall be
required in the case of Shares for which a certificate or certificates have not
been issued, and in such case such Shares shall be redeemed at the net asset
value per share of the appropriate series or class of shares, if applicable,
next determined after such demand has been received or determined at such other
time fixed by the Trustees as may be permitted or required by the 1940 Act.
<PAGE> 10
The obligation of the Trust to redeem its shares as set forth above in
this Section 2 shall be subject to the conditions that during any time of
emergency, as hereinafter defined, such obligation may be suspended by the Trust
by or under authority of the Trustees for such period or periods during such
time of emergency as shall be determined by or under authority of the Trustees.
If there is such a suspension, any Shareholder may withdraw any demand for
redemption and any tender of Shares which has been received by the Trust during
any such period and any tender of Shares, the applicable net asset value of
which would but for such suspension be calculated as of a time during such
period. Upon such withdrawal, the Trust shall return to the Shareholder the
certificates therefore, if any. For the purposes of any such suspension, "time
of emergency" shall mean, either with respect to all Shares or any series or
class of Shares, any period during which:
a. the New York Stock Exchange is closed other than for
customary weekend and holiday closings; or
b. the Trustees or authorized officers of the Trust shall have
determined, in compliance with any applicable rules and regulations of the
Securities and Exchange Commission, either that trading on the New York
Stock Exchange is restricted, or that an emergency exists as a result of
which (i) disposal by the Trust of securities owned by it is not
reasonably practicable or (ii) it is not reasonably practicable for the
Trust fairly to determine the current value of its net assets; or
c. the suspension or postponement of such obligations is permitted
by order of the Securities and Exchange Commission.
The Trust may also purchase, repurchase or redeem Shares in accordance
with such other methods, upon such other terms and subject to such other
conditions as the Trustees may from time to time authorize at a price not
exceeding the net asset value of such Shares in effect when the purchase or
repurchase or any contract to purchase or repurchase is made.
Payment in Kind
Section 3. Subject to any generally applicable limitation imposed by the
Trustees, any payment on redemption of shares may, if authorized by the
Trustees, be made wholly or partly in kind, instead of in cash. Such payment in
kind shall be made by distributing securities or other property constituting, in
the opinion of the Trustees, a fair representation of the various types of
securities and other property then held by the series of Shares being redeemed
(but not necessarily involving a portion of each of the series' holdings) and
taken at their value used in determining the net asset value of the Shares in
respect of which payment is made.
Redemptions at the Option of the Trust
Section 4. The Trust shall have the right at its option and at any time to
redeem Shares of any Shareholder at the net asset value thereof as determined in
accordance with Section 7 of Article VI of this Declaration of Trust; (i) if at
such time such Shareholder owns fewer Shares than, or Shares having an aggregate
net asset value of less than, an amount determined from time to time by the
Trustees; or (ii) to the extent that such Shareholder owns Shares of a
particular series or class of Shares equal to or in excess of a percentage of
the outstanding Shares of that series or class determined from time to time by
the Trustees; or (iii) to the extent that such Shareholder owns Shares of the
Trust representing a percentage equal to or in excess of such percentage of the
aggregate number of outstanding Shares of the Trust or the aggregate net asset
value of the Trust determined from time to time by the Trustees.
Dividends, Distributions, Redemptions and Repurchases
Section 5. No dividend or distribution (including, without limitation, any
distribution paid upon termination of the Trust or of any series) with respect
to, nor any redemption or repurchase of, the Shares of any series shall be
effected by the Trust other than form the assets of such series.
<PAGE> 11
Additional Provisions Relating to Redemptions and Repurchases
Section 6. The completion of redemption of Shares shall constitute a full
discharge of the Trust and the Trustees with respect to such shares, and the
Trustees may require that any certificate or certificates issued by the Trust to
evidence the ownership of such Shares shall be surrendered to the Trustees for
cancellation or notation.
Determination of Net Asset Value
Section 7. The term "net asset value" of the Shares of each series or
class of Shares shall mean: (i) the value of all the assets of the applicable
series or class of Shares; (ii) less total liabilities properly allocated to
such series or class of Shares; (iii) divided by the number of Shares of such
series or class of Shares outstanding in each case at the time of each
determination. The "number of Shares of such series or class of Shares
outstanding" for the purposes of such computation shall be exclusive of any
Shares of such series or class of Shares to be redeemed and not then redeemed as
to which the redemption price has been determined, but shall include Shares of
such series or class of Shares presented for repurchase and not then repurchased
and Shares of such series or class of Shares to be redeemed and not then
redeemed as to which the redemption price has not been determined and Shares of
such series or class of Shares the sale of which has been confirmed. Any
fractions involved in the computation of net asset value per share shall be
adjusted to the nearer cent unless the Trustees shall determine to adjust such
fractions to a fraction of a cent.
The Trustees, or any officer or officers or agent of this Trust designated
for the purpose of the Trustees, shall determine the net asset value of the
Shares of each series and class of Shares, and the Trustees shall fix the times
as of which the net asset value of the Shares of each series and class of Shares
shall be determined and shall fix the periods during which any such net asset
value shall be effective as to sales, redemptions and repurchases of, and other
transactions in, the Shares of such series or class of Shares, except as such
times and periods for any such transaction may be fixed by other provisions of
this Declaration of Trust or by the By-Laws.
In valuing the portfolio investments of any series for determination of
net asset value per share of such series, securities for which market quotations
are readily available shall be valued at prices which, in the opinion of the
Trustees, or any officer or officers or agent of the Trust designated for the
purpose by the Trustees most nearly represent the market value of such
securities, which may, but need not, be the most recent bid price obtained from
one or more of the market makers for such securities; other securities and
assets shall be valued at fair value as determined by or pursuant to the
direction of the Trustees. Notwithstanding the foregoing short-term debt
obligations, commercial paper, and repurchase agreements may be, but need not
be, valued on the basis of quoted yields for securities of comparable maturity,
quality and type, or on the basis of amortized cost. In determination of net
asset value of any series or class of Shares, dividends receivable and accounts
receivable for investments sold and for Shares sold shall be stated at the
amounts to be received therefor; and income receivable accrued daily on bonds
and notes owned shall be stated at the amount to be received. Any other assets
shall be stated at fair value as determined by the Trustees or such officer,
officers or agent pursuant to the Trustees' authority, except that no value
shall be assigned to good will, furniture, lists, reports, statistics or other
noncurrent assets other than real estate. Liabilities of any series or class of
Shares for accounts payable for investments purchased and for Shares tendered
for redemption and not then redeemed as to which the redemption price has been
determined shall be stated at the amounts payable therefor. In determining net
asset value of any series or class of Shares, the person or persons making such
determination on behalf of the Trust may include in liabilities such reserves,
estimated accrued expenses and contingencies as such person or persons may in
its, his or their best judgment deem fair and reasonable under the
circumstances. Any income dividends and gains distributions payable by the Trust
shall be deducted as of such time or times on the record date therefor as the
Trustees shall determine.
The manner of determining the net assets of any series of class of Shares
or of determining the net asset value of the Shares of any series or class of
Shares may from time to time be altered as necessary or
<PAGE> 12
desirable in the judgment of the Trustees to conform to any other method
prescribed or permitted by any applicable law or regulation.
Determinations under this Section 7 made in good faith and in accordance
with the provisions of the 1940 Act shall be binding on all parties concerned.
ARTICLE VII
COMPENSATION AND LIMITATION
OF LIABILITY OF TRUSTEES
Compensation
Section 1. The Trustees as such shall be entitled to reasonable
compensation from the Trust; they may fix the amount of their compensation.
Nothing herein shall in any way prevent the employment of any Trustee for
advisory, management, legal, accounting, investment banking or other services
and payment for the same by the Trust.
Limitation of Liability
Section 2. The Trustees shall not be responsible or liable in any event
for any neglect or wrongdoing of any officer, agent, employee, adviser or
principal underwriter of the Trust, nor shall any Trustee be responsible for the
act or omission of any other Trustee, but nothing herein contained shall protect
any Trustee against any liability to which he or she would otherwise be subject
by reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
Every note, bond, contract, instrument, certificate, Share or undertaking
and every other act or thing whatsoever executed or done by or on behalf of the
Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been executed or done only in or with respect to
their or his or her capacity as Trustees or Trustee, and such Trustees or
Trustee shall not be personally liable thereon.
ARTICLE VIII
INDEMNIFICATION
Trustees, Officers, etc.
Section 1. The Trust shall indemnify each of its Trustees and officers
(including persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest as a
shareholder, creditor or otherwise) (hereinafter referred to as a "Covered
Person") against all liabilities and expenses, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such person may be or may have been
threatened, while in office or thereafter, by reason of being or having been
such a Trustee or officer, except with respect to any matter as to which such
Covered Person shall have been finally adjudicated in a decision on the merits
in any such action, suit or other proceeding not to have acted in good faith in
the reasonable belief that such Covered person's action was in the best
interests of the Trust and except that no Covered Person shall be indemnified
against any liability to the Trust or its Shareholders to which such Covered
Person would otherwise be subject by reason of wilful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
such Covered Person's office. Expenses, including counsel fees so incurred by
any such Covered Person (but excluding amounts paid in satisfaction of
judgments, in compromise or as fines or penalties), may be paid from time to
time by the Trust in advance of the final disposition of any such action, suit
or proceeding upon receipt
<PAGE> 13
of an undertaking by or on behalf of such Covered Person to repay amounts so
paid to the Trust if it is ultimately determined that indemnification of such
expenses is not authorized under this Article; provided that (a) such covered
Personal shall provide security for his undertaking, (b) the Trust shall be
insured against losses arising by reason of such Covered Person's failure to
fulfill his undertaking, or (c) a majority of the Trustees who are disinterested
persons and who are not Interested Persons (provided that a majority of such
Trustees then in office act on the matter), or independent legal counsel in a
written opinion, shall determine, based on a review of readily available facts
(but not a full trial-type inquiry), that there is reason to believe such
Covered Person ultimately will be entitled to indemnification.
Compromise Payment
Section 2. As to any matter disposed of (whether by a compromise payment,
pursuant to a consent decree or otherwise) without an adjudication in a decision
on the merits by a court, or by any other body before which the proceeding was
brought, that such Covered Person either (a) did not act in good faith in the
reasonable belief that such Covered Person's action was in the best interests of
the Trust or (b) is liable to the Trust or its Shareholders by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Covered Person's office, indemnification shall
be provided if (a) approved as in the best interest of the Trust, after notice
that it involves such indemnification, by a least a majority of the Trustees who
are disinterested persons and are not Interested Persons (provided that a
majority of such Trustees then in office act on the matter); upon a
determination, based upon a review if readily available facts (but not a full
trial-type inquiry) that such Covered Person acted in good faith in the
reasonable belief that such Covered Person's action was in the best interests of
the Trust and is not liable to the Trust of its Shareholders by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Covered Person's office, or (b) there has been
obtained an opinion in writing of independent legal counsel, based upon a review
of readily available facts (but not a full-trial type inquiry) to the effect
that such Covered Person appears to have acted in good faith in the reasonable
belief that such Covered Person's action was in the best interests of the Trust
and that such indemnification would not protect such Covered Person against any
liability to the Trust to which such Covered Person would otherwise be subject
by reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office. Any approval
pursuant to this Section shall not prevent the recovery from any Covered Person
of any amount paid to such Covered Person in accordance with this Section as
indemnification if such Covered Person is subsequently adjudicated by a court of
competent jurisdiction not to have acted in good faith in the reasonable belief
that such Covered Person's action was in the best interests of the Trust or to
have been liable to the Trust or its Shareholders by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Covered Person's office.
Indemnification Not Exclusive
Section 3. The right of indemnification hereby provided shall not be
exclusive of or affect any other rights to which any such Covered Person may be
entitled. As used in this Article VIII, the term "Covered Person" shall include
such person's heirs, executors and administrators, and a "disinterested person"
is a person against whom none of the actions, suits or other proceedings in
question or another action, suit, or other proceeding on the same or similar
grounds is then or has been pending. Nothing contained in this article shall
affect any rights to indemnification to which personnel of the Trust, other than
Trustees and officers, and other persons may be entitled by contract or
otherwise under law, nor the power of the Trust to purchase and maintain
liability insurance on behalf of such person.
Shareholders
Section 4. In case any Shareholder or former Shareholder shall be held to
be personally liable solely by reason of his or her being or having been a
Shareholder and not because of his or her acts or omissions or for some other
reason, the Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled to be
held harmless from and indemnified against all loss and expense arising from
<PAGE> 14
such liability, but only out of the assets of the particular series of Shares of
which he or she is or was a Shareholder.
ARTICLE IX
MISCELLANEOUS
Trustees, Shareholders, etc. Not Personally Liable: Notice
Section 1. All persons extending credit to, contracting with or having any
claim against the Trust or a particular series of Shares shall look only to the
assets of the Trust or the assets of that particular series of Shares for
payment under such credit, contract or claim and neither the Shareholders nor
the Trustees, nor any of the Trust's officers, employees or agents, whether
past, present or future, shall be personally liable therefor. Nothing in this
Declaration of Trust shall protect any Trustee against any liability to which
such Trustee would otherwise be subject by reason of wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate or undertaking made or
issued by the Trustees or by any officers or officer shall give notice that this
Declaration of Trust is on file with the Secretary of The Commonwealth of
Massachusetts and shall recite that the same was executed or made by or on
behalf of the Trust or by them as Trustees or Trustee or as officers or officer
and not individually and that the obligations of such instrument are not binding
upon any of them or the Shareholders individually but are binding only upon the
assets and property of the Trust, and may contain such further recital as he or
she or they may deem appropriate, but the omission thereof shall not operate to
bind any Trustees or officers or officer or Shareholders or Shareholder
individually.
Trustee's Good Faith Action, Expert Advice, No Bond or Surety
Section 2. The exercise by the Trustees of their powers and discretions
hereunder shall be binding upon everyone interested. A Trustee shall be
liability for his or her own wilful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office of
Trustee, and for nothing else, and shall not be liable for errors or judgment or
mistakes of fact or law. The Trustees may take advice of counsel or other
experts with respect to the meaning and operation of this Declaration of Trust,
and shall be under no liability for any act or omission in accordance with such
advice or for failing to follow such advice. The Trustees shall not be required
to give any bond as such, nor any surety if a bond is required.
Liability of Third Persons Dealing with Trustees
Section 3. No person dealing with the Trustees shall be bound to make any
inquiry concerning the validity of any transaction made or to be made by the
Trustees or to see to the application of any payments made or property
transferred to the Trust or upon its order.
Duration and Termination of Trust
Section 4. Unless terminated as provided herein, the Trust shall continue
without limitation of time. The Trust may be terminated at any time by vote of
Shareholders holding at least a majority of the Shares of each series entitled
to vote or by the Trustees by written notice to the Shareholders Any series of
Shares may be terminated at any time by vote of Shareholders holding at least a
majority of the Shares of such series entitled to vote or by the Trustees by
written notice to the Shareholders of such series.
Upon termination of the Trust or of any one or more series of Shares,
after paying or otherwise providing for all charges, taxes, expenses and
liabilities, whether due or accrued or anticipated as may be determined by the
Trustees, the Trust shall in accordance with such procedures as the Trustees
consider
<PAGE> 15
appropriate reduce the remaining assets to distributable form in cash or shares
or other securities, or any combination thereof, and distribute the proceeds to
each Shareholder of the series involved, ratably according to the aggregate net
asset value of Shares of such series or class of Shares held by such Shareholder
on the date of termination.
Filing of Copies, References, Headings
Section 5. The original or a copy of this instrument and of each amendment
hereto shall be kept at the office of the Trust where it may be inspected by any
Shareholder. A copy of this instrument and of each amendment hereto shall be
filed by the Trust with the Secretary of The Commonwealth of Massachusetts and
with the Clerk of the City of Springfield, as well as any other governmental
office where such filing may from time to time be required. Anyone dealing with
the Trust may rely on a certificate by an officer of the Trust as to whether or
not any such amendments have been made and as to any matters in connection with
the Trust hereunder; and, with the same effect as if it were the original, may
rely on a copy certified by an officer of the Trust to be a copy of this
instrument or of any such amendments. In this instrument and in any such
amendment, references to this instrument, and all expressions like "herein"'
"hereof"' and "hereunder"' shall be deemed to refer to this instrument as
amended or affected by any such amendments. Headings are placed herein for
convenience of reference only and shall not be taken as a part hereof or control
or affect the meaning, construction or effect of this instrument. This
instrument may be executed in any number of counterparts, each of which shall be
deemed an original.
Applicable Law
Section 6. This Declaration of Trust is made in The Commonwealth of
Massachusetts, and it is created under and is to be governed by and construed
and administered according to the laws of said Commonwealth. The Trust shall be
of the type commonly called a Massachusetts business trust, and without limiting
the provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
Amendments
Section 7. This Declaration of Trust may be amended at any time by an
instrument in writing signed by a majority of the then Trustees when authorized
so to do by a vote of Shareholders holding a majority of the Shares of each
series entitled to vote, except that an amendment which shall affect the holders
of one or more series of Shares but not the holders of all outstanding series
shall be authorized by vote of the Shareholders holding a majority of the Shares
entitled to vote of each series affected and no vote of Shareholders of a series
not affected shall be required. Any amendment which shall affect the holders of
Shares of any class of a series but not the holders of all Shares of such series
shall be authorized by vote of the Shareholders holding a majority of the Shares
of such class entitled to vote, and no vote of Shareholders of the classes not
affected shall be required. Amendments having the purpose of changing the name
of the Trust or of supplying any omission, curing any ambiguity or curing,
correcting or supplementing any defective or inconsistent provision contained
herein shall not require authorization by Shareholder vote.
<PAGE> 16
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal in
the City of Springfield, Massachusetts, for himself and his assigns, as of the
day and year first above written.
/s/ George W. Siguler
--------------------------------
George W Siguler
THE COMMONWEALTH OF MASSACHUSETTS
Hampden, ss. December 23, 1986
Then personally appeared the above-named George W. Siguler, and
acknowledged the foregoing instrument to be his free act and deed, before me.
/s/ Charlotte A. Panaia
--------------------------------
Notary Public
My commission expires:
(Notary's Seal)
<PAGE> 1
EX-99.B.2 By-Laws, as amended to March 19, 1987
<PAGE> 2
BY-LAWS
OF
VARIABLE INVESTORS SERIES TRUST
As Amended to March 19, 1987
Section 1. Agreement and Declaration of Trust and Principal Office
1.1 Agreement and Declaration of Trust. These By-Laws shall be subject to the
Agreement and Declaration of Trust, as from time to time in effect (the
"Declaration of Trust"), of Variable Investors Series Trust, a Massachusetts
business trust established by the Declaration of Trust (the "Trust").
1.2 Principal Office of the Trust. The principal office of the Trust shall be
located in Springfield, Massachusetts.
Section 2. Shareholders
2.1 Shareholder Meetings. A meeting of the shareholders of the Trust or of any
one or more series of shares or classes of shares may be called at any time by
the Trustees, by the president or, if the Trustees and the president shall fail
to call any meeting of shareholders for a period of 30 days after written
application of one or more shareholders who hold at least 10% of all outstanding
shares of the Trust, if shareholders of all series are required under the
Declaration of Trust to vote in the aggregate and not by individual series at
such meeting, or of any series or class of shares, if shareholders of such
series or class are entitled under the Declaration of Trust to vote by
individual series or class at such meeting, then such shareholders may call such
meeting. If the meeting is a meeting of the shareholders of one or more series
or classes of shares, but not a meeting of all shareholders of the Trust, then
only the shareholders of such one or more series or classes shall be entitled to
notice of and to vote at the meeting. Each call of a meeting shall state the
place, date, hour and purposes of the meeting.
2.2 Place of Meetings. All meetings of the shareholders shall be held at the
principal office of the Trust, or, to the extent permitted by the Declaration of
Trust, at such other place within the United States as shall be designated by
the Trustees or the president of the Trust.
2.3 Notice of Meetings. A written notice of each meeting of shareholders,
stating the place, date and hour and the purposes of the meeting, shall be given
at least seven days before the meeting to each shareholder entitled to vote
there at by leaving such notice with him or at his residence or usual place of
business or by mailing it, postage prepaid, and addressed to such shareholder at
his address as it appears in the records of the Trust. Such notice shall be
given by the secretary or an assistant secretary or by an officer designated by
the Trustees. No notice of any meeting of shareholders need be given to a
shareholder if a written waiver of notice, executed before or after the meeting
by such shareholder or his attorney thereunto duly authorized, is filed with the
records of the meeting.
2.4 Ballots. No ballot shall be required for any election unless requested by a
shareholder present or represented at the meeting and entitled to vote in the
election.
2.5 Proxies. Shareholders entitled to vote may vote either in person or by proxy
in writing dated not more than six months before the meeting named therein,
which proxies shall be filed with the secretary or other person responsible to
record the proceedings of the meeting before being voted. Unless otherwise
specifically limited by their terms, such proxies shall entitle the holders
thereof to vote at any adjournment of such meeting but shall not be valid after
the final adjournment of such meeting.
<PAGE> 3
Section 3. Trustees
3.1 Committees and Advisory Board. The Trustees may appoint from their number an
executive committee and other committees. Except as the Trustees may otherwise
determine, any such committee may make rules for conduct of its business. The
Trustees may appoint an advisory board to consist of not less than two nor more
than five members. The members of the advisory board shall be compensated in
such manner as the Trustees may determine and shall confer with and advise the
Trustees regarding the investments and other affairs of the Trust. Each member
of the advisory board shall hold office until the first meeting of the Trustees
following the next meeting of the shareholders and until his successor is
elected and qualified, or until he sooner dies, resigns, is removed, or becomes
disqualified, or until the advisory board is sooner abolished-by the Trustees.
3.2 Regular Meetings. Regular meetings of the Trustees may be held without call
or notice at such places and at such times as the Trustees may from time to time
determine, provided that notice of the first regular meeting following any such
determination shall be given to absent Trustees.
3.3 Special Meetings. Special meetings of the Trustees may be held at any time
and at any place designated in the call of the meeting, when called by the
president or the treasurer or by two or more Trustees, sufficient notice thereof
being given to each Trustee by the secretary or an assistant secretary or by the
officer or one of the Trustees calling the meeting.
3.4 Notice. It shall be sufficient notice to a Trustee to send notice by mail at
least forty-eight hours or by telegram at least twenty-four hours before the
meeting addressed to the Trustee at his or her usual or last known business or
residence address or to give notice to him or her in person or by telephone at
least twenty-four hours before the meeting. Notice of a meeting need not be
given to any Trustee if a written waiver of notice, executed by him or her
before or after the meeting, is filed with the records of the meeting, or to any
Trustee who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to him or her. Neither notice of a meeting nor a
waiver of a notice need specify the purposes of the meeting.
3.5 Quorum. At any meeting of the Trustees one-third of the Trustees then in
office shall constitute a quorum; provided, however, a quorum shall not be less
than two, unless there are fewer than two Trustees then in office. Any meeting
may be adjourned from time to time by a majority of the votes cast upon the
question, whether or not a quorum is present, and the meeting may be held as
adjourned without further notice.
3.6 Number of Independent Directors. For the period until May 2, 1989, no person
shall be elected to serve as a Trustee of the Trust unless immediately following
such election the composition of the Board of Trustees shall comply with
Sections 15(f)(1)(A) and 16(b) of the Investment Company Act of 1940.
Notwithstanding any other provision of these By-Laws, this Section 3.6 may not
be amended, modified, or repealed without the approval of a majority of the
outstanding voting securities of the Trust. This Section 3.6 shall be void and
of no effect, without any action by the Trustees or Shareholders of the Trust,
at all times following May 1, 1989.
Section 4. Officers and Agents
4.1 Enumeration; Qualification. The officers of the Trust shall be president, a
treasurer, a secretary and such other officers, if any, as the Trustees from
time to time may in their discretion elect or appoint. The Trust may also have
such agents, if any, as the Trustees from time to time may in their discretion
appoint. Any officer may be but none need be a Trustee or shareholder. Any two
or more offices may be held by the same person.
<PAGE> 4
4.2 Powers. Subject to the other provisions of these By-Laws, each officer shall
have, in addition to the duties and powers herein and in the Declaration of
Trust set forth, such duties and powers as are commonly incident to his or her
office as if the Trust were organized as a Massachusetts business corporation
and such other duties and powers as the Trustees may from time to time
designate, including without limitation the power to make purchases and sales of
portfolio securities of the Trust pursuant to recommendations of the Trust's
investment adviser in accordance with the policies and objectives of the Trust
set forth in its prospectus and with such general or specific instructions as
the Trustees may from time to time have issued.
4.3 Election. The president, the treasurer and the secretary shall be elected
annually by the Trustees. Other officers, if any, may be elected or appointed by
the Trustees at said meeting or at any other time.
4.4 Tenure. The president, the treasurer and the secretary shall hold office
until their respective successors are chosen and qualified, or in each case
until he or she sooner dies, resigns, is removed or becomes disqualified. Each
other officer shall hold office at the pleasure of the Trustees. Each agent
shall retain his or her authority at the pleasure of the Trustees.
4.5 President and Vice Presidents. The president shall be the chief executive
officer of the Trust. The president shall preside at all meetings of the
shareholders and of the Trustees at which he or she is present, except as
otherwise voted by the Trustees. Any vice president shall have such duties and
powers as shall be designated from time to time by the Trustees.
4.6 Treasurer and Controller. The treasurer shall be the chief financial officer
of the Trust and, subject to any arrangement made by the Trustees with a bank or
trust company or other organization as custodian or transfer or shareholder
services agent, shall be in charge of its valuable papers and shall have such
duties and powers as shall be designated from time to time by the Trustees or by
the president. Any assistant treasurer shall have such duties and powers as
shall be designated from time to time by the Trustees.
The Controller shall be the chief accounting officer of the Trust and shall be
in charge of its books of account and accounting records. The Controller shall
be responsible for preparation of financial statements of the Trust and shall
have such other duties and powers as may be designated from time to time by the
Trustees or the President.
4.7 Secretary and Assistant Secretaries. The secretary shall record all
proceedings of the shareholders and the Trustees in books to be kept therefor,
which books shall be kept at the principal office of the Trust. In the absence
of the secretary from any meeting of shareholders or Trustees, an assistant
secretary, or if there be none or he or she is absent, a temporary clerk chosen
at the meeting shall record the proceedings thereof in the aforesaid books.
Section 5. Resignations and Removals
Any Trustee, officer or advisory board member may resign at any time by
delivering his or her resignation in writing to the president, the treasurer or
the secretary or to a meeting of the Trustees. The Trustees may remove any
officer elected by them with or without cause by the vote of a majority of the
Trustees then in office. Except to the extent expressly provided in a written
agreement with the Trust, no Trustee, officer, or advisory board member
resigning, and no officer or advisory board member removed shall have any right
to any compensation for any period following his or her resignation or removal,
or any right to damages on account of such removal.
Section 6. Vacancies
<PAGE> 5
A vacancy in any office may be filled at any time. Each successor shall hold
office for the unexpired term, and in the case of the president, the treasurer
and the secretary, until his or her successor is chosen and qualified, or in
each case until he or she sooner dies, resigns, is removed or becomes
disqualified.
Section 7. Shares of Beneficial Interest
7.1 Share Certificates. No certificates certifying the ownership of shares shall
be issued except as the Trustees may otherwise authorize. In the event that the
Trustees authorize the issuance of share certificates, subject to the provisions
of Section 7.3, each shareholder shall be entitled to a certificate stating the
number of shares owned by him or her, in such form as shall be prescribed from
time to time by the Trustees. Such certificate shall be signed by the president
or a vice president and by the treasurer or an assistant treasurer. Such
signatures may be facsimiles if the certificate is signed by a transfer agent or
by a registrar, other than a Trustee, officer or employee of the Trust. In case
any officer who has signed or whose facsimile signature has been placed on such
certificate shall have ceased to be such officer before such certificate is
issued, such certificate may be issued by the Trust with the same effect as if
he or she were such officer at the time of its issue.
In lieu of issuing certificates for shares, the Trustees or the transfer
agent may either issue receipts therefor or may keep accounts upon the books of
the Trust for the record holders of such shares, who shall in either case be
deemed, for all purposes hereunder, to be the holders of certificates for such
shares as if they had accepted such certificates and shall be held to have
expressly assented and agreed to the terms hereof.
7.2 Loss of Certificates. In the case of the alleged loss or destruction or the
mutilation of a share certificate, a duplicate certificate may be issued in
place thereof, upon such terms as the Trustees may prescribe.
7.3 Discontinuance of Issuance of Certificates. The Trustees may at any time
discontinue the issuance of share certificates and may, by written notice to
each shareholder, require the surrender of share certificates to the Trust for
Cancellation. Such surrender and cancellation shall not affect the ownership of
shares in the Trust.
Section 8. Record Date and Closing Transfer Books
The Trustees may fix in advance a time, which shall not be more than 60 days
before the date of any meeting of shareholders or the date for the payment of
any dividend or making of any other distribution to shareholders, as the record
date for determining the shareholders having the right to notice and to vote at
such meeting and any adjournment thereof or the right to receive such dividend
or distribution, and in such case only shareholders of record on such record
date shall have such right, notwithstanding any transfer of shares on the books
of the Trust after the record date; or without fixing such record date the
Trustees may for any of such purposes close the transfer books for all or any
part of such period.
Section 9. Seal
The seal of the Trust shall, subject to alteration by the Trustees, consist of a
flat-faced circular die with the word "Massachusetts" together with the name of
the Trust and the year of its organization, cut or engraved thereon; but, unless
otherwise required by the Trustees, the seal shall not be necessary to be placed
on, and its absence shall not impair the validity of, any document, instrument
or other paper executed and delivered by or on behalf of the Trust.
<PAGE> 6
Section 10. Execution of Papers
Except as the Trustees may generally or in particular cases authorize the
execution thereof in some other manner, all deeds, leases, transfers, contracts,
bonds, notes, checks, drafts and other obligations made, accepted or endorsed by
the Trust shall be signed, and all transfers of securities standing in the name
of the Trust shall be executed, by the president or by one of the vice
presidents or by the treasurer or by whosoever else shall be designated for that
purpose by the vote of the Trustees and need not bear the seal of the Trust.
Section 11. Fiscal Year
Except as from time to time otherwise provided by the Trustees, the fiscal year
of the Trust shall end on December 31.
Section 12. Amendments
These By-Laws may be amended or repealed, in whole or in part, by a majority of
the Trustees then in office at any meeting of the Trustees, or by one or more
writings signed by such a majority.
<PAGE> 1
EX-99.B.5(a) Investment Advisory Agreement between First
Variable Advisory Services Corp. and the
Registrant as amended May 1, 1995
<PAGE> 2
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of the 22nd day of September, 1994 between VARIABLE
INVESTORS SERIES TRUST, an unincorporated business trust organized under the
laws of the Commonwealth of Massachusetts (the "Trust"), and FIRST VARIABLE
ADVISORY SERVICES CORP., a Massachusetts corporation (the "Adviser").
W I T N E S S E T H :
WHEREAS, the Trust is engaged in business as an open-end management
investment company and is registered as such under the Investment Company Act of
1940, as amended (the "Act");
WHEREAS, the Trust is authorized to issue separate series, each of which
offers a separate class of shares of common stock, each having its own
investment objective or objectives, policies and limitations;
WHEREAS, the Trust currently offers shares in seven series, designated as
the Cash Management Portfolio, Common Stock Portfolio, High Income Bond
Portfolio, World Equity Portfolio, Multiple Strategies Portfolio, Tilt Utility
Portfolio and U.S. Government Bond Portfolio ("Current Series"), and the Trust
may offer shares of one or more additional series in the future;
WHEREAS, the Adviser is registered as an investment adviser under
the Investment Advisers Act of 1940; and
WHEREAS, the Trust desires to retain the Adviser to render investment
management and administrative services to the Trust with respect to each Current
Series as indicated on the signature page in the manner and on the terms and
conditions hereinafter set forth;
NOW, THEREFORE, the parties hereto agree as follows:
1. Services of the Adviser.
1.1 Investment Management Services. The Adviser shall act as the
investment adviser to the Trust and, as such, shall (i) obtain and evaluate such
information relating to the economy, industries, business, securities markets
and securities as it may deem necessary or useful in discharging its
responsibilities hereunder, (ii) formulate a continuing program for the
investment of the assets of the Trust in a manner consistent with its investment
objectives, policies and restrictions, and (iii) determine from time to time
securities to be purchased, sold, retained or lent by the Trust, and implement
those decisions, including the selection of entities with or through which such
purchases, sales or loans are to be effected; provided, that the Adviser will
place orders pursuant to its investment determinations either directly with the
issuer or with a broker or dealer, and if with a broker or dealer, (a) will
attempt to obtain the best net price and most favorable execution of its orders,
and (b) may nevertheless in its discretion purchase and sell portfolio
securities from and to brokers and dealers who provide the Adviser with
research, analysis, advice and similar services and pay such brokers and dealers
in return a higher commission or spread than may be charged by other brokers or
dealers. The Trust hereby authorizes any entity or person associated with the
Adviser or any Sub-Adviser retained by Adviser pursuant to Section 7 of this
Agreement, which is a member of a national securities exchange, to effect any
transaction on the exchange for the account of the Trust which is permitted by
Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T)
thereunder, and the Trust hereby consents to the retention of compensation for
such transactions in accordance with Rule 11a2-2(T)(a)(iv).
The Adviser shall carry out its duties with respect to the Trust's
investments in accordance with applicable law and the investment objectives,
policies and restrictions set forth in the Trust's then-current
<PAGE> 3
Prospectus and Statement of Additional Information, and subject to such further
limitations as the Trust may from time to time impose by written notice to the
Adviser.
1.2 Administrative Services. The Adviser shall manage the Trust's business
and affairs and shall provide such services required for effective
administration of the Trust as are not provided by employees or other agents
engaged by the Trust; provided, that the Adviser shall not have any obligation
to provide under this Agreement any direct or indirect services to Trust
shareholders, any services related to the distribution of Trust shares, or any
other services which are the subject of a separate agreement or arrangement
between the Trust and the Adviser. Subject to the foregoing, in providing
administrative services hereunder, the Adviser shall:
1.2.1 Office Space, Equipment and Facilities. Furnish without cost to the
Trust, or pay the cost of, such office space, office equipment and office
facilities as are adequate for the Trust's needs.
1.2.2 Personnel. Provide, without remuneration from or other cost to the
Trust, the services of individuals competent to perform all of the Trust's
executive, administrative and clerical functions which are not performed by
employees or other agents engaged by the Trust or by the Adviser acting in some
other capacity pursuant to a separate agreement or arrangement with the Trust.
1.2.3 Agents. Assist the Trust in selecting and coordinating the
activities of the other agents engaged by the Trust, including the Trust's
shareholder servicing agent, custodian, independent auditors and legal counsel.
1.2.4 Trustees and Officers. Authorize and permit the Adviser's directors,
officers and employees who may be elected or appointed as Trustees or officers
of the Trust to serve in such capacities, without remuneration from or other
cost to the Trust.
1.2.5 Books and Records. Assure that all financial, accounting and other
records required to be maintained and preserved by the Trust are maintained and
preserved by it or on its behalf in accordance with applicable laws and
regulations.
1.2.6 Reports and Filings. Assist in the preparation of (but not pay for)
all periodic reports by the Trust to its shareholders and all reports and
filings required to maintain the registration and qualification of the Trust and
Trust shares, or to meet other regulatory or tax requirements applicable to the
Trust, under federal and state securities and tax laws.
1.3 Additional Series. In the event that the Trust from time to time
designates one or more series in addition to the Current Series ("Additional
Series"), it shall notify the Adviser in writing. If the Adviser is willing to
perform services hereunder to the Additional Series, it shall so notify the
Trust in writing. Thereupon, the Trust and the Adviser shall enter into an
Addendum to this Agreement for the Additional Series and the Additional Series
shall be subject to this Agreement.
2. Expenses of the Trust.
2.1 Expenses to be Paid by Adviser. The Adviser shall pay all salaries,
expenses and fees of the officers, Trustees and employees of the Trust who are
officers, directors or employees of the Adviser.
In the event that the Adviser pays or assumes any expenses of the Trust
not required to be paid or assumed by the Adviser under this Agreement, the
Adviser shall not be obligated hereby to pay or assume the same or any similar
expense in the future; provided, that nothing herein contained shall be deemed
to relieve the Adviser of any obligation to the Trust under any separate
agreement or arrangement between the parties.
<PAGE> 4
2.2 Expenses to be Paid by the Trust. The Trust shall bear all expenses of
its operation, except those specifically allocated to the Adviser under this
Agreement or under any separate agreement between the Trust and the Adviser.
Subject to any separate agreement or arrangement between the Trust and the
Adviser, the expenses hereby allocated to the Trust, and not to the Adviser,
include, but are not limited to:
2.2.1 Custody. All charges of depositories, custodians, and other agents
for the transfer, receipt, safekeeping, and servicing of its cash, securities,
and other property.
2.2.2 Shareholder Servicing. All expenses of maintaining and servicing
shareholder accounts, including but not limited to the charges of any
shareholder servicing agent, dividend disbursing agent or other agent engaged by
the Trust to service shareholder accounts.
2.2.3 Shareholder Reports. All expenses of preparing, setting in type,
printing and distributing reports and other communications to shareholders.
2.2.4 Prospectuses. All expenses of preparing, setting in type, printing
and mailing annual or more frequent revisions of the Trust's Prospectus and
Statement of Additional Information and any supplements thereto and of supplying
them to shareholders.
2.2.5 Pricing and Portfolio Valuation. All expenses of computing the
Trust's net asset value per share, including any equipment or services obtained
for the purpose of pricing shares or valuing the Trust's investment portfolio.
2.2.6 Communications. All charges for equipment or services used for
communications between the Adviser or the Trust and any custodian, shareholder
servicing agent, portfolio accounting services agent, or other agent engaged by
the Trust.
2.2.7 Legal and Accounting Fees. All charges for services and expenses of
the Trust's legal counsel and independent auditors.
2.2.8 Trustees' Fees and Expenses. All compensation of Trustees other than
those affiliated with the Adviser, all expenses incurred in connection with such
unaffiliated Trustees' services as Trustees, and all other expenses of meetings
of the Trustees and committees of the Trustees.
2.2.9 Shareholder Meetings. All expenses incidental to holding meetings of
shareholders, including the printing of notices and proxy materials, and proxy
solicitation therefor.
2.2.10 Federal Registration Fees. All fees and expenses of registering and
maintaining the registration of the Trust under the Act and the registration of
the Trust's shares under the Securities Act of 1933 (the "1933 Act"), including
all fees and expenses incurred in connection with the preparation, setting in
type, printing, and filing of any Registration Statement, Prospectus and
Statement of Additional Information under the 1933 Act or the Act, and any
amendments or supplements that may be made from time to time.
2.2.11 State Registration Fees. All fees and expenses of qualifying and
maintaining the qualification of the Trust and of the Trust's shares for sale
under securities laws of various states or jurisdictions, and of registration
and qualification of the Trust under all other laws applicable to the Trust or
its business activities (including registering the Trust as a broker-dealer, or
any officer of the Trust or any person as agent or salesman of the Trust in any
state).
2.2.12 Share Certificates. All expenses of preparing and transmitting
the Trust's share certificates.
<PAGE> 5
2.2.13 Confirmations. All expenses incurred in connection with the issue
and transfer of Trust shares, including the expenses of confirming all share
transactions.
2.2.14 Bonding and Insurance. All expenses of bond, liability, and other
insurance coverage required by law or regulation or deemed advisable by the
Trustees of the Trust, including, without limitation, such bond, liability and
other insurance expenses that may from time to time be allocated to the Trust in
a manner approved by its Trustees.
2.2.15 Brokerage Commissions. All brokers' commissions and other charges
incident to the purchase, sale or lending of the Trust's portfolio securities.
2.2.16 Taxes. All taxes or governmental fees payable by or with respect to
the Trust to federal, state or other governmental agencies, domestic or foreign,
including stamp or other transfer taxes.
2.2.17 Trade Association Fees. All fees, dues and other expenses incurred
in connection with the Trust's membership in any trade association or other
investment organization.
2.2.18 Nonrecurring and Extraordinary Expenses. Such nonrecurring and
extraordinary expenses as may arise, including the costs of actions, suits, or
proceedings to which the Trust is a party and the expenses the Trust may incur
as a result of its legal obligation to provide indemnification to its officers,
Trustees and agents.
3. Advisory Fee.
3.1 Fee. As compensation for all services rendered, facilities provided
and expenses paid or assumed by the Adviser under this Agreement, the Trust
shall pay the Adviser on the last day of each month, or as promptly as possible
thereafter, a fee calculated at the annual rate of the average daily net assets
of each series of the Trust as set forth below:
3.1.1 Cash Management Portfolio. 0.50% of the first $70 million of
average net assets and 0.45% of average net assets over and above $70 million.
3.1.2 Common Stock Portfolio. 0.70% of average net assets.
3.1.3 High Income Bond Portfolio. 0.70% of the first $40 million of
average net assets, 0.65% of average net assets over and above $40 million but
not exceeding $60 million, 0.55% of average net assets over and above $60
million but not exceeding $75 million, and 0.50% of average net assets over and
above $75 million.
3.1.4 World Equity Portfolio. 0.70% of the first $200 million of average
net assets, 0.625% of average net assets over and above $200 million but not
exceeding $500 million, and 0.50% of average net assets over and above $500
million.
3.1.5 Multiple Strategies Portfolio. 0.70% of average net assets.
3.1.6 Tilt Utility Portfolio. 0.65% of the first $100 million of average
net assets and 0.55% of average net assets over and above $100 million.
3.1.7 U.S. Government Bond Portfolio. 0.60% of the first $200 million of
average net assets and 0.50% of average net assets over and above $200 million.
4. Records.
<PAGE> 6
4.1 Tax Treatment. The Adviser shall maintain the books and records of the
Trust in such a manner that treats each series as a separate entity for federal
income tax purposes.
4.2 Ownership. All records required to be maintained and preserved by the
Trust pursuant to the provisions or rules or regulations of the Securities and
Exchange Commission under Section 31(a) of the Act and maintained and preserved
by the Adviser on behalf of the Trust are the property of the Trust and shall be
surrendered by the Adviser promptly on request by the Trust; provided, that the
Adviser may at its own expense make and retain copies of any such records.
5. Reports to Adviser.
The Trust shall furnish or otherwise make available to the Adviser such
copies of the Trust's Prospectus, Statement of Additional Information, financial
statements, proxy statements, reports, and other information relating to its
business and affairs as the Adviser may, at any time or from time to time,
reasonably require in order to discharge its obligations under this Agreement.
6. Reports to the Trust.
The Adviser shall prepare and furnish to the Trust such reports,
statistical data and other information in such form and at such intervals as the
Trust may reasonably request.
7. Retention of Sub-Adviser(s).
Subject to the Trust's obtaining the initial and periodic approvals
required under Section 15 of the Act, the Adviser may retain a sub-adviser(s),
at the Adviser's own cost and expense, for the purpose of making investment
recommendations and research information available to the Adviser. Retention of
a sub-adviser(s) shall in no way reduce the responsibilities or obligations of
the Adviser under this Agreement and the Adviser shall be responsible to the
Trust for all acts or omissions of the sub-adviser(s) in connection with the
performance of the Adviser's duties hereunder.
8. Services to Other Clients.
Nothing herein contained shall limit the freedom of the Adviser or any
affiliated person of the Adviser to render investment management and
administrative services to other investment companies, to act as investment
adviser or investment counselor to other persons, firms or corporations, or to
engage in other business activities.
9. Limitation of Liability of Adviser and its Personnel.
Neither the Adviser nor any director, officer or employee of the Adviser
performing services for the Trust at the direction or request of the Adviser in
connection with the Adviser's discharge of its obligations hereunder shall be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with any matter to which this Agreement relates, and the
Adviser shall not be responsible for any action of the Trustees of the Trust in
following or declining to follow any advice or recommendation of the Adviser;
provided, that nothing herein contained shall be construed (i) to protect the
Adviser against any liability to the Trust or its shareholders to which the
Adviser would otherwise be subject by reason of willful misfeasance, bad faith,
or gross negligence in the performance of the Adviser's duties, or by reason of
the Adviser's reckless disregard of its obligations and duties under this
Agreement, or (ii) to protect any director, officer or employee of the Adviser
who is or was a Trustee or officer of the Trust against any liability of the
Trust or its shareholders to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's office with the Trust.
10. No Personal Liability of Trustees or Shareholders.
<PAGE> 7
This Agreement is made by the Trust pursuant to authority granted by the
Trustees, and the obligations created hereby are not binding on any of the
Trustees or shareholders of the Trust individually, but bind only the property
of the Trust.
11. Effect of Agreement.
Nothing herein contained shall be deemed to require the Trust to take any
action contrary to its Declaration of Trust or its By-Laws or any applicable
law, regulation or order to which it is subject or by which it is bound, or to
relieve or deprive the Trustees of the Trust of their responsibility for and
control of the conduct of the business and affairs of the Trust.
12. Term of Agreement.
The term of this Agreement shall begin on the date first above written,
and unless sooner terminated as hereinafter provided, this Agreement shall
remain in effect through September 21, 1996. Thereafter, this Agreement shall
continue in effect with respect to the Trust from year to year, subject to the
termination provisions and all other terms and conditions hereof; provided, such
continuance with respect to the Trust is approved at least annually by vote of
the holders of a majority of the outstanding voting securities of the Trust or
by the Trustees of the Trust; provided, that in either event such continuance is
also approved annually by the vote, cast in person at a meeting called for the
purpose of voting on such approval, of a majority of the Trustees of the Trust
who are not parties to this Agreement or interested persons of either party
hereto; and provided further that the Adviser shall not have notified the Trust
in writing at least sixty (60) days prior to September 21, 1996, or at least
sixty (60) days prior to September 21 of any year thereafter that it does not
desire such continuation. The Adviser shall furnish to the Trust, promptly upon
its request, such information as may reasonably be necessary to evaluate the
terms of this Agreement or any extension, renewal or amendment thereof.
13. Amendment or Assignment of Agreement.
Any amendment to this Agreement shall be in writing signed by the parties
hereto; provided, that no such amendment shall be effective unless authorized on
behalf of the Trust (i) by resolution of the Trust's Trustees, including the
vote or written consent of a majority of the Trust's Trustees who are not
parties to this Agreement or interested persons of either party hereto, and (ii)
by vote of a majority of the outstanding voting securities of the Trust. This
Agreement shall terminate automatically and immediately in the event of its
assignment.
14. Termination of Agreement.
This Agreement may be terminated at any time by either party hereto,
without the payment of any penalty, upon sixty (60) days' prior written notice
to the other party; provided, that in the case of termination by the Trust, such
action shall have been authorized (i) by resolution of the Trust's Board of
Trustees, including the vote or written consent of Trustees of the Trust who are
not parties to this Agreement or interested persons of either party hereto, or
(ii) by vote of a majority of the outstanding voting securities of the Trust.
15. Interpretation and Definition of Terms.
Any question of interpretation of any term or provision of this Agreement
having a counterpart in or otherwise derived from a term or provision of the Act
shall be resolved by reference to such term or provision of the Act and to
interpretation thereof, if any, by the United States courts, or, in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the Securities and Exchange Commission validly issued pursuant to the Act.
Specifically, the terms "vote of a majority of the outstanding voting
securities," "interested persons," "assignment" and "affiliated person," as used
in this Agreement shall have the meanings assigned to them by Section 2(a) of
the Act. In addition, when the
<PAGE> 8
effect of a requirement of the Act reflected in any provision of this Agreement
is modified, interpreted or relaxed by a rule, regulation or order of the
Securities and Exchange Commission, whether of special or of general
application, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
16. Captions.
The captions in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or otherwise
affect their construction or effect.
17. Execution in Counterparts.
This Agreement may be executed simultaneously in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized and their
respective seals to be hereunto affixed, as of the day and year first above
written.
VARIABLE INVESTORS SERIES TRUST for its
Cash Management Portfolio, Common Stock
Portfolio, High Income Bond Portfolio,
World Equity Portfolio, Multiple
Strategies Portfolio, Tilt Utility
Portfolio and U.S. Government Bond
Portfolio
Attest:
/s/RAYMOND A. O'HARA III By: /s/MARK E. REYNOLDS
- ----------------------------- ----------------------------------
Mark E. Reynolds
Treasurer
FIRST VARIABLE ADVISORY SERVICES CORP.
Attest:
/s/RAYMOND A. O'HARA III By: /s/MARK E. REYNOLDS
- ----------------------------- ----------------------------------
Mark E. Reynolds
Treasurer
<PAGE> 9
ADDENDUM TO INVESTMENT ADVISORY AGREEMENT
BETWEEN VARIABLE INVESTORS SERIES TRUST
AND
FIRST VARIABLE ADVISORY SERVICES CORP.
The Investment Advisory Agreement ("Agreement") between Variable Investors
Series Trust (the "Trust") and First Variable Advisory Services Corp. (the
"Adviser") dated September 22, 1994, is hereby amended to add two Additional
Series to the Trust in accordance with Section 1.3 of the Agreement. The two
Additional Series being added pursuant to this Addendum are the Growth & Income
Portfolio and the Small Cap Portfolio. The fees to be paid to the Adviser, with
respect to each Additional Series, are as follows:
GROWTH & INCOME PORTFOLIO. 0.75% of average net assets.
SMALL CAP PORTFOLIO. 0.85% of average net assets.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
signed by their respective officers thereunto duly authorized and their
respective seals to be hereunto affixed, as of this 1st day of May, 1995.
VARIABLE INVESTORS SERIES TRUST
for its Growth & Income Portfolio and
Small Cap Portfolio
Attest:
_________________________ By:_____________________________________
FIRST VARIABLE ADVISORY SERVICES CORP.
Attest:
_________________________ By:_____________________________________
<PAGE> 1
EX-99.B.5(b) Form of Sub-Advisory Agreements between the Sub-Advisers
and the Registrant
<PAGE> 2
VARIABLE INVESTORS SERIES TRUST
SUB-ADVISORY AGREEMENT
This Agreement is made between FIRST VARIABLE ADVISORY SERVICES CORP., a
Massachusetts corporation and a wholly-owned subsidiary of First Variable Life
Insurance Company ("Life Company"), having its principal place of business in
Boston, Massachusetts (hereinafter referred to as "Adviser"), and WARBURG,
PINCUS COUNSELLORS, INC., a Delaware corporation, having its principal place of
business in New York, New York (hereinafter referred to as "Sub-Adviser").
WHEREAS, Variable Investors Series Trust (the "Trust"), an open-end diversified
management investment company, as that term is defined in the Investment Company
Act of 1940, as amended ("Act"), that is registered as such with the Securities
and Exchange Commission has appointed Adviser as investment adviser for all its
portfolios including the Growth & Income Portfolio; and
WHEREAS, Sub-Adviser is engaged in the business of rendering investment
management services; and
WHEREAS, Adviser desires to retain Sub-Adviser to provide certain investment
management services for the Growth & Income Portfolio (the "Portfolio") of the
Trust as more fully described below;
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree
as follows:
1. Adviser hereby retains Sub-Adviser to assist Adviser in its capacity as
investment adviser for the Portfolio. Subject to the oversight and review of
Adviser and the Board of Trustees of the Trust, Sub-Adviser shall manage the
investment and reinvestment of the assets of the Portfolio. Sub-Adviser will
determine in its discretion, subject to the oversight and review of Adviser, the
investments to be purchased or sold, will provide Adviser with records
concerning its activities which Adviser or the Trust is required to maintain,
and will render regular reports to Adviser and to officers and Trustees of the
Trust concerning its discharge of the foregoing responsibilities. The services
of Sub-Adviser hereunder are not to be deemed exclusive, and the Sub-Adviser
shall be free to render similar services to others.
2. Neither the Trust, Adviser, nor affiliated persons of the Trust or Adviser
shall give any information or make any representations or statements concerning
Sub-Adviser, except with the prior permission of Sub-Adviser.
3. Sub-Adviser, in its supervision of the investments of the Portfolio, will
be guided by the Portfolio's investment objectives and policies and the
provisions and restrictions contained in the Declaration of Trust and By-Laws of
the Trust and as set forth in the Registration Statement and exhibits as may be
on file with the Securities and Exchange Commission, all as communicated by
Adviser to Sub-Adviser.
4. Adviser shall pay to Sub-Adviser, for all services rendered to the
Portfolio by Sub-Adviser hereunder, the fees set forth in Exhibit A attached
hereto. During the term of this Agreement, Sub-Adviser will bear all expenses
incurred by it in the performance of its duties hereunder, which shall not
include expenses of the Trust or the Portfolio, such as brokerage fees and
commissions and taxes.
5. The term of this Agreement shall begin on the date of its execution and
shall remain in effect for two years from that date and from year to year
thereafter, subject to the provisions for termination and all of the other terms
and conditions hereof if: (a) such continuation shall be specifically approved
at least annually by the vote of a majority of the Trustees of the Trust,
including a majority of the Trustees who are not "interested persons", as
defined in Section 2(a)(19) of the Act, of any party (other than as Trustees of
the Trust) cast in person at a meeting called for that purpose; and (b) Adviser
shall not have notified the
<PAGE> 3
Trust in writing at least sixty (60) days prior to the anniversary date of this
Agreement in any year thereafter that it does not desire such continuation with
respect to the Portfolio.
6. Notwithstanding any provision in this Agreement, it may be terminated at
any time without the payment of any penalty, by the Trustees of the Trust or by
a vote of a majority of the outstanding voting securities of the Portfolio, as
defined in Section 2(a)(42) of the Act, on sixty (60) days' written notice to
Sub-Adviser, or by Adviser or Sub-Adviser upon not less than sixty (60) days'
written notice to the other party. Section 9 of this Agreement shall survive any
termination of this Agreement.
7. This Agreement may not be assigned by Adviser or Sub-Adviser and shall
automatically terminate in the event of any assignment. Sub-Adviser may employ
or contract with such other person, persons, corporation, or corporations at its
own cost and expense as it shall determine in order to assist it in carrying out
this Agreement.
8. Sub-Adviser represents and warrants that the Portfolio will at all times
be invested in such a manner as to ensure compliance with Section 817(h) of the
Internal Revenue Code of 1986, as amended and Treasury Regulations Section
1.817-5, relating to the diversification requirements for variable annuity,
endowment, or life insurance contracts and any amendments or other modifications
to such Section or Regulations; provided, however, that Adviser shall promptly
provide Sub-Adviser with copies of such Section 817(h) and Regulation Section
1.817-5 as currently in effect and as modified or amended from time to time.
Sub-Adviser will be relieved of this obligation and shall be held harmless when
(i) the Portfolio is invested in compliance with the requirements of Section
817(h) and/or Regulation Section 1.817-5 as most recently provided to
Sub-Adviser by Adviser or (ii) when direction from the Adviser or Trustees
causes non-compliance with Section 817(h) and/or Regulation Section 1.817-5.
Sub-Adviser agrees to provide quarterly reports to Adviser, executed by a duly
authorized officer of Sub-Adviser, within seven (7) days of the close of each
calendar quarter certifying as to compliance with said Section or Regulations.
In addition to the quarterly reports, Adviser may request and Sub-Adviser agrees
to provide Section 817 diversification compliance reports at more frequent
intervals, as reasonably requested by Adviser.
9. In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the obligations or duties under this Agreement on the part
of Sub-Adviser ("disabling conduct"), neither Sub-Adviser, any affiliated person
of Sub-Adviser nor any person who controls Sub-Adviser, within the meaning of
Section 15 of the Securities Act of 1933, as amended (the "1933 Act") shall be
liable to Adviser, the Trust, the Portfolio or to any shareholder for any act or
omission in the course of or connected in any way with rendering services or for
any losses that may be sustained in the purchase, holding, or sale of any
security.
10. The Sub-Adviser shall place all orders for the purchase and sale of
portfolio securities for the account of the Portfolio with broker-dealers
selected by the Sub-Adviser. In executing portfolio transactions and selecting
broker-dealers, the Sub-Adviser will use its best efforts to seek best execution
on behalf of the Portfolio. In assessing the best execution available for any
transaction, the Sub-Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any (all for the specific transaction and
on a continuing basis). In evaluating the best execution available, and in
selecting the broker-dealer to execute a particular transaction, the Sub-Adviser
may also consider the brokerage and research services (as those terms are used
in Section 28(e) of the Securities Exchange Act of 1934 ("1934 Act")) provided
to the Portfolio and/or other accounts over which the Sub-Adviser, an affiliate
of the Sub-Adviser (to the extent permitted by law) or another investment
adviser of the Portfolio exercises investment discretion. The Sub-Adviser is
authorized to cause the Portfolio to pay a broker-dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Portfolio which is in excess of the amount of commission
another broker-dealer would have charged for effecting that transaction if, but
only if, the Sub-Adviser determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research
<PAGE> 4
services provided by such broker-dealer viewed in terms of that particular
transaction or in terms of all of the accounts over which investment discretion
is so exercised.
11. This Agreement may be amended at any time by agreement of the parties,
provided that the amendment shall be approved both by the vote of a majority of
the Trustees of the Trust, including a majority of the Trustees who are not
"interested persons," as defined in Section 2(a)(19) of the Act, of any party to
this Agreement (other than as Trustees of the Trust) cast in person at a meeting
called for that purpose, and on behalf of the Portfolio by the holders of a
majority of the outstanding voting securities of the Portfolio, as defined in
Section 2(a)(42) of the Act.
12. This Agreement shall be construed in accordance with and governed by the
laws of the Commonwealth of Massachusetts.
13. This Agreement will become binding on the parties hereto upon their
execution of the attached Exhibit A to this Agreement.
14. It is understood that any information or recommendation supplied by the
Sub-Adviser in connection with the performance of its obligations hereunder is
to be regarded as confidential and for use only by the Adviser, the Trust or
such persons as the Adviser may designate in connection with the Portfolio. It
is also understood that any information supplied to Sub-Adviser in connection
with the performance of its obligations hereunder, particularly, but not
necessarily limited to, any list of securities which, on a temporary basis, may
not be bought or sold for the Portfolio, is to be regarded as confidential and
for use only by the Sub-Adviser in connection with its obligation to provide
investment advice and other services to the Portfolio.
15. Each party to this Agreement hereby acknowledges that it is registered as
an investment adviser under the Investment Advisers Act of 1940, it will use its
reasonable best efforts to maintain such registration, and it will promptly
notify the other if it ceases to be so registered, if its registration is
suspended for any reason, or if it is notified by any regulatory organization or
court of competent jurisdiction that it should show cause why its registration
should not be suspended or terminated.
<PAGE> 5
EXHIBIT A
VARIABLE INVESTORS SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Adviser hereunder, Adviser shall pay to
Sub-Adviser and Sub-Adviser agrees to accept as full compensation for all
services rendered hereunder, an annual fee as follows:
GROWTH & INCOME PORTFOLIO
.50 of 1% on an annualized basis of the average daily net assets
of the Portfolio.
Such fees shall accrue daily and be paid monthly.
Witness the due execution hereof this 1st day of June, 1995.
FIRST VARIABLE ADVISORY SERVICES CORP.
Attest
__________________________ By:________________________________
WARBURG, PINCUS COUNSELLORS, INC.
Attest:
__________________________ By:_________________________________
<PAGE> 6
VARIABLE INVESTORS SERIES TRUST
SUB-ADVISORY AGREEMENT
This Agreement is made between FIRST VARIABLE ADVISORY SERVICES CORP., a
Massachusetts corporation and a wholly-owned subsidiary of First Variable Life
Insurance Company ("Life Company"), having its principal place of business in
Boston, Massachusetts (hereinafter referred to as "Adviser"), and PILGRIM BAXTER
& ASSOCIATES, LTD., a Delaware corporation, having its principal place of
business in Wayne, Pennsylvania (hereinafter referred to as "Sub-Adviser").
WHEREAS, Variable Investors Series Trust (the "Trust"), an open-end diversified
management investment company, as that term is defined in the Investment Company
Act of 1940, as amended ("Act"), that is registered as such with the Securities
and Exchange Commission has appointed Adviser as investment adviser for all its
portfolios including the Small Cap Portfolio; and
WHEREAS, Sub-Adviser is engaged in the business of rendering investment
management services; and
WHEREAS, Adviser desires to retain Sub-Adviser to provide certain investment
management services for the Small Cap Portfolio (the "Portfolio") of the Trust
as more fully described below;
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree
as follows:
1. Adviser hereby retains Sub-Adviser to assist Adviser in its capacity as
investment adviser for the Portfolio. Subject to the oversight and review of
Adviser and the Board of Trustees of the Trust, Sub-Adviser shall manage the
investment and reinvestment of the assets of the Portfolio. Sub-Adviser will
determine in its discretion, subject to the oversight and review of Adviser, the
investments to be purchased or sold, will provide Adviser with records
concerning its activities which Adviser or the Trust is required to maintain,
and will render regular reports to Adviser and to officers and Trustees of the
Trust concerning its discharge of the foregoing responsibilities. The services
of Sub-Adviser hereunder are not to be deemed exclusive, and the Sub-Adviser
shall be free to render similar services to others.
2. Sub-Adviser, in its supervision of the investments of the Portfolio, will
be guided by the Portfolio's investment objectives and policies and the
provisions and restrictions contained in the Declaration of Trust and By-Laws of
the Trust and as set forth in the Registration Statement and exhibits as may be
on file with the Securities and Exchange Commission, all as communicated by
Adviser to Sub-Adviser.
3. Adviser shall pay to Sub-Adviser, for all services rendered to the
Portfolio by Sub-Adviser hereunder, the fees set forth in Exhibit A attached
hereto. During the term of this Agreement, Sub-Adviser will bear all expenses
incurred by it in the performance of its duties hereunder.
4. The term of this Agreement shall begin on the date of its execution and
shall remain in effect for two years from that date and from year to year
thereafter, subject to the provisions for termination and all of the other terms
and conditions hereof if: (a) such continuation shall be specifically approved
at least annually by the vote of a majority of the Trustees of the Trust,
including a majority of the Trustees who are not "interested persons", as
defined in Section 2(a)(19) of the Act, of any party (other than as Trustees of
the Trust) cast in person at a meeting called for that purpose; and (b) Adviser
shall not have notified the Trust in writing at least sixty (60) days prior to
the anniversary date of this Agreement in any year thereafter that it does not
desire such continuation with respect to the Portfolio.
5. Notwithstanding any provision in this Agreement, it may be terminated at
any time without the payment of any penalty, by the Trustees of the Trust or by
a vote of a majority of the outstanding voting securities of the Portfolio, as
defined in Section 2(a)(42) of the Act, on sixty (60) days' written notice to
<PAGE> 7
Sub-Adviser, or by Adviser or Sub-Adviser upon not less than sixty (60) days'
written notice to the other party.
6. This Agreement may not be assigned by Adviser or Sub-Adviser and shall
automatically terminate in the event of any assignment. Sub-Adviser may employ
or contract with such other person, persons, corporation, or corporations at its
own cost and expense as it shall determine in order to assist it in carrying out
this Agreement.
7. Sub-Adviser represents and warrants that the Portfolio will at all times
be invested in such a manner as to ensure compliance with Section 817(h) of the
Internal Revenue Code of 1986, as amended and Treasury Regulations Section
1.817-5, relating to the diversification requirements for variable annuity,
endowment, or life insurance contracts and any amendments or other modifications
to such Section or Regulations; provided, however, that Adviser shall promptly
provide Sub-Adviser with copies of such Section 817(h) and Regulation Section
1.817-5 as currently in effect and as modified or amended from time to time.
Sub-Adviser will be relieved of this obligation and shall be held harmless when
(i) the Portfolio is invested in compliance with the requirements of Section
817(h) and/or Regulation Section 1.817-5 as most recently provided to
Sub-Adviser by Adviser or (ii) when direction from the Adviser or Trustees
causes non-compliance with Section 817(h) and/or Regulation Section 1.817-5.
Sub-Adviser agrees to provide quarterly reports to Adviser, executed by a duly
authorized officer of Sub-Adviser, within seven (7) days of the close of each
calendar quarter certifying as to compliance with said Section or Regulations.
In addition to the quarterly reports, Adviser may request and Sub-Adviser agrees
to provide Section 817 diversification compliance reports at more frequent
intervals, as reasonably requested by Adviser.
8. In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the obligations or duties under this Agreement on the part
of Sub-Adviser, Sub-Adviser shall not be liable to Adviser, the Trust, the
Portfolio or to any shareholder for any act or omission in the course of or
connected in any way with rendering services or for any losses that may be
sustained in the purchase, holding, or sale of any security.
9. The Sub-Adviser shall place all orders for the purchase and sale of
portfolio securities for the account of the Portfolio with broker-dealers
selected by the Sub-Adviser. In executing portfolio transactions and selecting
broker-dealers, the Sub-Adviser will use its best efforts to seek best execution
on behalf of the Portfolio. In assessing the best execution available for any
transaction, the Sub-Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any (all for the specific transaction and
on a continuing basis). In evaluating the best execution available, and in
selecting the broker-dealer to execute a particular transaction, the Sub-Adviser
may also consider the brokerage and research services (as those terms are used
in Section 28(e) of the Securities Exchange Act of 1934 ("1934 Act")) provided
to the Portfolio and/or other accounts over which the Sub-Adviser, an affiliate
of the Sub-Adviser (to the extent permitted by law) or another investment
adviser of the Portfolio exercises investment discretion. The Sub-Adviser is
authorized to cause the Portfolio to pay a broker-dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Portfolio which is in excess of the amount of commission
another broker-dealer would have charged for effecting that transaction if, but
only if, the Sub-Adviser determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer viewed in terms of that particular transaction or
in terms of all of the accounts over which investment discretion is so
exercised.
10. This Agreement may be amended at any time by agreement of the parties,
provided that the amendment shall be approved both by the vote of a majority of
the Trustees of the Trust, including a majority of the Trustees who are not
"interested persons," as defined in Section 2(a)(19) of the Act, of any party to
this Agreement (other than as Trustees of the Trust) cast in person at a meeting
called for that
<PAGE> 8
purpose, and on behalf of the Portfolio by the holders of a majority of the
outstanding voting securities of the Portfolio, as defined in Section 2(a)(42)
of the Act.
11. This Agreement shall be construed in accordance with and governed by the
laws of the Commonwealth of Massachusetts.
12. This Agreement will become binding on the parties hereto upon their
execution of the attached Exhibit A to this Agreement.
13. It is understood that any information or recommendation supplied by the
Sub-Adviser in connection with the performance of its obligations hereunder is
to be regarded as confidential and for use only by the Adviser, the Trust or
such persons as the Adviser may designate in connection with the Portfolio. It
is also understood that any information supplied to Sub-Adviser in connection
with the performance of its obligations hereunder, particularly, but not
necessarily limited to, any list of securities which, on a temporary basis, may
not be bought or sold for the Portfolio, is to be regarded as confidential and
for use only by the Sub-Adviser in connection with its obligation to provide
investment advice and other services to the Portfolio.
14. Each party to this Agreement hereby acknowledges that it is registered as
an investment adviser under the Investment Advisers Act of 1940, it will use its
reasonable best efforts to maintain such registration, and it will promptly
notify the other if it ceases to be so registered, if its registration is
suspended for any reason, or if it is notified by any regulatory organization or
court of competent jurisdiction that it should show cause why its registration
should not be suspended or terminated.
<PAGE> 9
EXHIBIT A
VARIABLE INVESTORS SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Adviser hereunder, Adviser shall pay to
Sub-Adviser and Sub-Adviser agrees to accept as full compensation for all
services rendered hereunder, an annual fee as follows:
SMALL CAP PORTFOLIO
.50 of 1% on an annualized basis of the average daily net assets of the
Portfolio.
Such fees shall accrue daily and be paid monthly.
Witness the due execution hereof this 1st day of June, 1995.
FIRST VARIABLE ADVISORY SERVICES CORP.
Attest:
/s/Arnold R. Bergman By: /s/Mark E. Reynolds
- --------------------------- ---------------------------------
PILGRIM BAXTER & ASSOCIATES, LTD.
Attest:
By:
- --------------------------- ---------------------------------
<PAGE> 10
SUB-ADVISORY AGREEMENT
AGREEMENT dated as of September 22, 1994, among STATE STREET BANK AND
TRUST COMPANY, a Massachusetts trust company (the "Sub-Adviser"), FIRST VARIABLE
ADVISORY SERVICES CORP. (the "Adviser") and VARIABLE INVESTORS SERIES TRUST (the
"Trust").
An Investment Advisory Agreement (the "Advisory Agreement") dated
September 22, 1994, between the Adviser and the Trust on behalf of the Tilt
Utility Portfolio (the "Portfolio"), provides that the Adviser shall manage the
investment of the Portfolio's assets in accordance with the Trust's prospectus
and statement of additional information (the "Prospectus") and may delegate
responsibilities to a sub-adviser.
1. The Sub-Adviser will manage the investment and reinvestment of the assets
of the Portfolio in accordance with the Prospectus and will perform the
other services herein set forth, subject to the supervision of the Adviser
and the Board of Trustees of the Trust.
2. In carrying out its obligations hereunder, the Sub-Adviser shall:
(a) evaluate such economic, statistical and financial information and
undertake such investment research as it shall believe advisable;
(b) purchase and sell securities and other investments for the Portfolio
in accordance with the procedures described in the Prospectus; and
(c) provide such reports and data in hard copy and machine readable form
as are requested by Adviser.
3. The Adviser shall pay the Sub-Adviser monthly a fee at the annual rate of
.40% of the average daily net assets of the Portfolio on the first $100
million of net assets under management and .30% of the average daily net
assets of the Portfolio on any net assets under management over and above
$100 million. During the term of this Agreement, the Sub-Adviser will bear
all expenses incurred by it in the performance of its duties hereunder.
4. The Sub-Adviser shall be free to render similar services to others so long
as its services hereunder are not impaired thereby.
5. This Agreement shall become effective as of the date of its execution, and
(a) unless otherwise terminated, shall continue until two years from its
date of execution and from year to year thereafter so long as approved
annually in accordance with the Investment Company Act of 1940, as
amended, and the rules thereunder (the "1940 Act"); (b) may be terminated
without penalty on sixty (60) days' written notice to the Sub-Adviser (i)
by the Adviser, (ii) by vote of the Board of Trustees of the Trust or
(iii) by vote of a majority of the outstanding voting securities of the
Portfolio; (c) shall automatically terminate in the event of its
assignment; and (d) may be terminated without penalty by the Sub-Adviser
on sixty (60) days' written notice to the Adviser and the Trust.
6. This Agreement may be amended in accordance with the 1940 Act.
7. For the purpose of this Agreement, the terms "vote of a majority of the
outstanding voting securities" and "assignment" shall have their
respective meanings defined in the 1940 Act and exemptions and
interpretations issued by the Securities and Exchange Commission under the
1940 Act.
8. Sub-Adviser represents and warrants that the Portfolio will at all times
be invested in such a manner as to ensure compliance with Section 817(h)
of the Internal Revenue Code of 1986, as
<PAGE> 11
amended and Treasury Regulations Section 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life
insurance contracts and any amendments or other modifications to such
Section or Regulations. Sub-Adviser agrees to provide quarterly reports to
Adviser, executed by a duly authorized officer of Sub-Adviser, within
seven (7) days of the close of each calendar quarter certifying as to
compliance with said Section or Regulations. In addition to the quarterly
reports, Adviser may request and Sub-Adviser agrees to provide Section 817
diversification compliance reports at more frequent intervals, as
reasonably requested by Adviser.
9. In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Sub-Adviser or reckless disregard of its obligations and
duties hereunder, the Sub-Adviser shall not be subject to any liability to
the Adviser, the Trust or the Portfolio, or to any shareholder of the
Trust or the Portfolio for any act or omission in the course of, or
connected with, rendering services hereunder.
10. The Sub-Adviser shall provide marketing support to the Adviser in
connection with the sale of Trust shares and/or Life Company variable
insurance contracts, as reasonably requested by the Adviser. Such support
shall include, but not necessarily be limited to, presentations by
representatives of the Sub-Adviser at investment seminars, conferences and
other industry meetings. Any materials utilized by the Adviser which
contain any information relating to the Sub-Adviser shall be submitted to
the Sub-Adviser for approval prior to use, not less than five (5) business
days before such approval is needed by the Adviser. Any materials utilized
by the Sub-Adviser which contain any information relating to the Adviser,
the Life Company (including any information relating to its separate
accounts or variable insurance contracts) or the Trust shall be submitted
to the Adviser for approval prior to use, not less than five (5) business
days before such approval is needed by the Sub-Adviser.
VARIABLE INVESTORS SERIES TRUST
By: /s/Mark E. Reynolds
-----------------------------------
Title: Mark E. Reynolds, Treasurer
FIRST VARIABLE ADVISORY SERVICES CORP.
By: /s/Mark E. Reynolds
-----------------------------------
Title: Mark E. Reynolds, Treasurer
STATE STREET BANK AND TRUST COMPANY
By:
------------------------------------
Title:
A copy of the document establishing the Trust is filed with the Secretary of the
Commonwealth of Massachusetts. This Agreement is executed by officers not as
individuals and is not binding upon any of the Trustees, officers or
shareholders of the Trust individually but only upon the assets of the
Portfolio.
<PAGE> 12
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the 22nd day of September, 1994, between FIRST
VARIABLE ADVISORY SERVICES CORP., a corporation organized under the laws of the
Commonwealth of Massachusetts and a wholly-owned subsidiary of First Variable
Life Insurance Company ("Life Company"), and having its principal place of
business in Boston, Massachusetts (the "Adviser"), and VALUE LINE, INC., a
corporation organized under the laws of the state of New York and having its
principal place of business at 220 East 42nd Street, New York, NY 10017
("Sub-Adviser").
WHEREAS, the Adviser is engaged principally in the business of rendering
investment management services and is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, the Sub-Adviser is engaged principally in the business of
rendering investment management services and is registered as an investment
adviser under the Advisers Act; and
WHEREAS, Variable Investors Series Trust, a Massachusetts business trust
(the "Trust"), engages in business as an open-end management investment company
and is so registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Trust is authorized to issue shares of beneficial interest in
separate series, with each such series representing interests in a separate
portfolio of securities and other assets; and
WHEREAS, the Trust currently offers shares in several series including the
Common Stock Portfolio and Multiple Strategies Portfolio, such series together
with all other series subsequently established by the Trust with respect to
which the Sub-Adviser renders management and investment advisory services
pursuant to the terms of this Agreement, being herein collectively referred to
as the "Portfolios" and individually as a "Portfolio"; and
WHEREAS, pursuant to the Investment Advisory Agreement, as of even date
herewith, between the Trust and the Adviser (the "Advisory Agreement"), the
Adviser is required to perform investment advisory services for the Portfolios.
NOW, THEREFORE, WITNESSETH: That it is hereby agreed between the parties
hereto as follows:
1. APPOINTMENT OF SUB-ADVISER.
(a) Common Stock Portfolio and Multiple Strategies Portfolio. The Adviser
hereby employs the Sub-Adviser to provide investment advisory services to the
Common Stock Portfolio and the Multiple Strategies Portfolio for the period and
on the terms herein set forth. The Sub-Adviser accepts such appointment and
agrees to render the services herein set forth, for the compensation herein
provided.
(b) Additional Portfolios. In the event that the Trust establishes one or
more additional series of shares other than the Common Stock Portfolio and the
Multiple Strategies Portfolio with respect to which the Adviser desires to
retain the Sub-Adviser to render investment advisory services hereunder, the
Adviser shall so notify the Sub-Adviser in writing, indicating the advisory fee
to be payable with respect to the additional series of shares. If the
Sub-Adviser is willing to render such services on the terms provided for herein,
it shall so notify the Adviser in writing, whereupon such series shall become a
Portfolio hereunder.
<PAGE> 13
2. DUTIES OF ADVISER AND SUB-ADVISER.
(i) Delivery of Documents. The Adviser has furnished the Sub-Adviser with
true copies of each of the following:
(a) The Trust's Declaration of Trust, as filed with the Secretary of
State of the Commonwealth of Massachusetts and all amendments thereto
(such Declaration of Trust, as presently in effect and as it shall from
time to time be amended, is herein called the "Declaration");
(b) The Trust's By-Laws and amendments thereto (such By-laws, as
presently in effect and shall from time to time be amended, are herein
called the "By-Laws");
(c) Resolutions of the Trust's Board of Trustees authorizing the
appointment of the Adviser and Sub-Adviser and approving the Advisory
Agreement and this Agreement;
(d) The Trust's Notification of Registration on Form N-8A under the
1940 Act as filed with the Securities and Exchange Commission on January
2, 1987 and all amendments thereto;
(e) The Trust's current Registration Statement on Form N-1A under
the Securities Act of 1933, as amended ("1933 Act") (File No. 33-11182)
and the 1940 Act (File No. 811-4969) as most recently filed with the
Securities and Exchange Commission (the "Registration Statement");
(f) The Trust's most recent prospectus (such prospectus, as
presently in effect and all amendments and supplements thereto are herein
called the "Prospectus");
(g) All resolutions of the Board of Trustees of the Trust pertaining
to the management of the assets of the Portfolios; and
(h) Copies of the Advisory Agreement dated September 22, 1994
between the Trust and the Adviser relating to the Portfolios.
The Adviser will furnish the Sub-Adviser from time to time with
copies of all amendments of or supplements to the foregoing, but, with
respect to items (a), (b) or (h), only if such amendments or supplements
relate to or affect the obligations of the Sub-Adviser hereunder.
(ii) The Sub-Adviser, at its own expense, shall furnish the following
services to the Trust:
(a) Investment Program. The Sub-Adviser is hereby authorized and
directed and hereby agrees, subject to the stated investment objective and
policies of the Portfolios as set forth in the Trust's current
Registration Statement and subject to the supervision of the Adviser and
the Board of Trustees of the Trust, to (i) develop and furnish an
investment program and strategy for each Portfolio as may from time to
time in the circumstances appear most appropriate to the achievement of
the investment objective of each Portfolio as stated in the aforesaid
Registration Statement, (ii) provide research and analysis relative to the
investment program and investments of each Portfolio, (iii) determine from
time to time what securities and other investments will be purchased,
held, sold or exchanged by each Portfolio and what portion, if any, of the
assets of each Portfolio shall be held in cash or cash equivalents, and
(iv) make changes on behalf of the Trust in the investments of each
Portfolio. In accordance with paragraph 2(ii)(b), the Sub-Adviser shall
arrange for the placing of all orders for the purchase and sale of
securities and other investments for each Portfolio's account. The
Sub-Adviser will make its officers and employees
<PAGE> 14
available to meet with the Adviser's officers and directors on due notice
at reasonable times to review the investments and investment program of
each Portfolio in the light of current and prospective economic and market
conditions.
In the performance of its duties hereunder, the Sub-Adviser is and
shall be an independent contractor and unless otherwise expressly provided
or authorized shall have no authority to act for or represent any
Portfolio or the Trust in any way or otherwise be deemed to be an agent of
any Portfolio, the Trust or of the Adviser.
(b) Portfolio Transactions. In connection with the management of the
investment and reinvestment of the assets of each Portfolio, the
Sub-Adviser, acting by its own officers, directors or employees or by a
duly authorized subcontractor, is authorized to select the broker or
dealers that will execute purchase and sale transactions for the Trust.
In executing portfolio transactions and selecting brokers or
dealers, if any, the Sub-Adviser will use its best efforts to seek on
behalf of a Portfolio the best overall terms available. In assessing the
best overall terms available for any transaction, the Sub-Adviser shall
consider all factors it deems relevant, including the breadth of the
market and the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of
the commission, if any (for the specific transaction and on a continuing
basis). In evaluating the best overall terms available, and in selecting
the broker or dealer, if any, to execute a particular transaction, the
Sub-Adviser may also consider the brokerage and research services (as
those terms are defined in Section 28(e) of the Securities Exchange Act of
1934) provided to any Portfolio of the Trust and/or other accounts over
which the Sub-Adviser exercises investment discretion. With the prior
approval of the Trustees, the Sub-Adviser may pay to a broker or dealer
who provides such brokerage and research services a commission for
executing a portfolio transaction which is in excess of the amount of
commission which another broker or dealer would have charged for effecting
that transaction if, but only if, the Sub-Adviser determines in good faith
that such commission was reasonable in relation to the value of the
brokerage and research services provided. Such prior approval may be
obtained from the Trustees with respect to the Sub-Adviser's investment
program and need not be obtained on a transaction-by-transaction basis.
The Sub-Adviser will advise the Portfolios' custodian and the
Adviser promptly of each purchase and sale of a portfolio security,
specifying the name of the issuer, the description and amount or number of
shares of the security purchased, the market price, the commission and
gross or net price, the trade date and settlement date and the identity of
the effecting broker or dealer.
The Sub-Adviser shall, upon due notice from the Adviser, provide
such periodic and special reports describing any such research, advice or
other services received and the incremental commissions, net price or
other consideration to which they relate.
Notwithstanding the foregoing, the Sub-Adviser agrees that the
Adviser shall have the right to identify securities that may not be
purchased on behalf of any Portfolio and/or brokers and dealers through
which portfolio transactions on behalf of the Portfolio may not be
effected, including, without limitation, brokers or dealers affiliated
with the Adviser. The Sub-Adviser shall refrain from purchasing such
securities for the Portfolio or directing any portfolio transaction to any
such broker or dealer on behalf of the Portfolio, unless and until the
written approval of the Adviser to do so is obtained. In addition, the
Sub-Adviser agrees that it shall not direct portfolio transactions for the
Portfolio through any broker or dealer that is an "affiliated person" of
the Sub-Adviser (as that term is defined in the Act or interpreted under
applicable rules and regulations of the Securities and Exchange
Commission) without the prior written approval of the Adviser and in no
event shall the Sub-Adviser direct portfolio transactions on behalf of the
Portfolio to any broker/dealer in recognition of sales of shares of any
investment company or receipt of research or other service without prior
approval of the Adviser.
<PAGE> 15
(c) Reports. The Sub-Adviser shall render to the Board of Trustees
of the Trust such periodic and special reports as the Board of Trustees
may request with respect to matters relating to the duties of the
Sub-Adviser set forth herein.
(d) Attendance of Board Meetings. The Sub-Adviser's Portfolio
manager shall attend at least two (2) regularly scheduled meetings of the
Board of Trustees of the Trust annually and shall attend such additional
meetings of the Board of Trustees as is deemed necessary or advisable by
the Board of Trustees and/or the Adviser, all as reasonably requested by
the Board of Trustees and/or the Adviser.
(e) Marketing Expenses. The Sub-Adviser shall not be responsible for
the payment of any marketing expenses with respect to the distribution of
Trust shares and/or Life Company variable insurance contracts.
3. SUB-ADVISORY FEE.
For the services to be provided by the Sub-Adviser as provided in
Paragraph 2 hereof, the Adviser shall pay to the Sub-Adviser an annual gross
sub-advisory fee equal to .45% of the average daily net assets of the
Portfolios.
Such fees shall be accrued daily and paid as soon as practicable after the
last day of each calendar month but not later than 30 days thereafter. A late
payment penalty of 1 1/2% shall be applied for every month or fraction thereof
that payment is delayed beyond 30 days.
The Sub-Adviser may from time to time and for such periods as it deems
appropriate reduce its compensation hereunder to the extent the Sub-Adviser may,
by notice to the Adviser, voluntarily declare.
In the case of commencement or termination of this Agreement with respect
to any Portfolio during any calendar month, the fee with respect to such
Portfolio for that month shall be reduced proportionately based upon the number
of calendar days during which it is in effect, and the fee shall be computed
based upon the average daily net assets of such Portfolio for the days during
which it is in effect.
<PAGE> 16
4. EXPENSES.
During the term of this Agreement, the Sub-Adviser will bear all expenses
incurred by it in the performance of its duties hereunder.
5. REPRESENTATION AND WARRANTY.
COMPLIANCE WITH APPLICABLE REGULATIONS.
In performing its duties hereunder, the Sub-Adviser
(i) shall establish compliance procedures (copies of which shall be
provided to the Adviser, and shall be subject to review and approval by
the Adviser) reasonably calculated to ensure compliance at all times with:
all applicable provisions of the 1940 Act and the Advisers Act, and any
rules and regulations adopted thereunder; Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"); Section 817(h) of the Code
and Treasury Regulations Section 1.817-5 relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts
and any amendments or other modifications to such Section or Regulations,
which compliance procedures shall include regular quarterly reports to be
provided within seven (7) days of the close of each calendar quarter by
the Sub-Adviser to the Adviser, which reports will be executed by a duly
authorized officer of the Sub-Adviser and will certify as to compliance
with said Section or Regulations, and more frequent Section 817
diversification compliance reports as reasonably requested by the Adviser;
the provisions of the Registration Statement; the provisions of the
Declaration and the By-laws of the Trust, as the same may be amended from
time to time; and any other applicable provisions of state, federal or
foreign law.
(ii) acknowledges that the Trust has adopted a written code of ethics
complying with the requirements of Rule 17j-1 under the Act and that the
Sub-Adviser and certain of its employees, officers and directors may be
subject to reporting requirements thereunder and, accordingly, agrees that
it shall, on a timely basis, furnish, and shall cause its employees,
officers and directors to furnish, to the Adviser and/or to the Trust, all
reports and information required to be provided under such code of ethics
with respect to such persons.
(iii) agrees that all records it maintains for the Trust are the property
of the Trust and further agrees to surrender promptly to the Trust any
such records upon the Trust's request all in accordance with Rule 31a-3
under the 1940 Act.
6. LIABILITY OF SUB-ADVISER.
Neither the Sub-Adviser nor the officers, directors, employees, agents,
legal representatives or controlling persons (collectively, "Related Persons")
of the Sub-Adviser shall be liable for any error of judgment or mistake of law,
or for any loss suffered by any Portfolio or its shareholders in connection with
the matters to which this Agreement relates; provided that, except as set forth
in the succeeding paragraph, no provision of this Agreement shall be deemed to
protect the Sub-Adviser or its Related Persons against any liability to which it
might otherwise be subject by reason of any willful misfeasance, bad faith or
gross negligence or the reckless disregard of the Sub-Adviser's obligations and
duties under this Agreement (each of which is hereby referred to as a "Culpable
Act").
Neither the Sub-Adviser nor its Related Persons shall be liable for any
error of judgment or mistake of law, or for any loss suffered by the Adviser or
its Related Persons in connection with the matters to which this Agreement
relates; provided that this provision shall not be deemed to protect the
Sub-Adviser or its Related Persons against any liability to which it might
otherwise be subject by reason of any
<PAGE> 17
Culpable Act by the Sub-Adviser or its Related Persons or arising out of the
negligence of the Sub-Adviser or its Related Persons.
The Sub-Adviser and its Related Persons shall incur no liability arising
from the failure of any Service Provider to provide complete and accurate
information to the Sub-Adviser, it being the intention that, in performing
hereunder, the Sub-Adviser and its Related Persons may rely on the accuracy of
all information received from the Trust, the Adviser or from any Service
Provider and on all instructions and directions received from the Adviser or the
Trust.
7. DURATION AND TERMINATION OF THIS AGREEMENT.
(a) Duration. This Agreement shall become effective with respect to the
Common Stock Portfolio and the Multiple Strategies Portfolio on the date hereof
and, with respect to any additional Portfolio(s), on the date of receipt by the
Adviser of notice from the Sub-Adviser in accordance with Paragraph 1(b) hereof
that the Sub-Adviser is willing to serve as Sub-Adviser with respect to such
Portfolio(s). Unless terminated as herein provided, this Agreement shall remain
in full force and effect for two years from the date hereof with respect to the
Common Stock Portfolio and the Multiple Strategies Portfolio and, with respect
to each additional Portfolio, for two years from the date on which such
Portfolio becomes a Portfolio hereunder. Subsequent to such initial periods of
effectiveness, this Agreement shall continue in full force and effect for
periods of one year thereafter with respect to each Portfolio so long as such
continuance with respect to any such Portfolio is approved at least annually (a)
by either the Trustees of the Trust or by vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of such Portfolio, and (b), in
either event, by the vote of a majority of the Trustees of the Trust who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval.
(b) Amendment. This Agreement may be amended by agreement of the parties,
provided that the amendment shall be approved both by the vote of a majority of
the Trustees of the Trust, including a majority of the Trustees who are not
parties to this Agreement or interested persons of any such party to this
Agreement cast in person at a meeting called for that purpose, and by the
holders of a majority of the outstanding voting securities of the Trust.
(c) Termination. This Agreement may be terminated with respect to any
Portfolio at any time, without payment of any penalty, by vote of the Trustees
of the Trust or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Portfolio, or by the Adviser or Sub-Adviser, in
each case on sixty (60) days' prior written notice to the other party. Upon the
effective date of termination of this Agreement, the Sub-Adviser shall deliver
all books and records of the Trust or any Portfolio held by it (i) to such
entity as the Trust may designate as a successor sub-adviser, or (ii) to the
Adviser.
(d) Automatic Termination. This Agreement shall automatically and
immediately terminate in the event of its assignment (as defined in the 1940
Act).
(e) Approval, Amendment or Termination by Individual Portfolio. Any
approval, amendment or termination of this Agreement by the holders of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
any Portfolio shall be effective to continue, amend or terminate this Agreement
with respect to any such Portfolio notwithstanding (i) that such action has not
been approved by the holders of a majority of the outstanding voting securities
of any other Portfolio affected thereby, and (ii) that such action has not been
approved by the vote of a majority of the outstanding voting securities of the
Trust, unless such action shall be required by any applicable law or otherwise.
<PAGE> 18
8. SERVICES NOT EXCLUSIVE.
The services of the Sub-Adviser to the Adviser in connection with the
Portfolios hereunder are not to be deemed exclusive, and the Sub-Adviser shall
be free to render similar services to others so long as its services hereunder
are not impaired thereby. It is understood that the persons employed by the
Sub-Adviser to assist it in the performance of its duties hereunder will not
devote their full time to such services and nothing hereunder contained shall be
deemed to limit or restrict the right of the Sub-Adviser to engage in or devote
time and attention to other businesses or to render services of whatever kind or
nature.
9. MISCELLANEOUS.
(a) Notices. All notices or other communications given under this
Agreement shall be made by guaranteed overnight delivery, telecopy or certified
mail; notice is effective when received. Notice shall be given to the parties at
the following addresses:
Adviser: Mark E. Reynolds
Treasurer
First Variable Advisory Services Corp.
Federal Reserve Building
600 Atlantic Avenue, 28th Floor
Boston, MA 02210-2220
Sub-Adviser: Value Line, Inc.
220 East 42nd Street
New York, NY 10017
ATTN: John Moore
with a copy to the Chairman
(b) Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder shall not
be thereby affected.
(c) Applicable Law. This Agreement shall be construed in accordance
with and governed by the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the Adviser and the Sub-Adviser have caused this
Agreement to be executed as of the date first set forth above.
<PAGE> 19
FIRST VARIABLE ADVISORY SERVICES CORP.
ATTEST:
By: _________________________ By: _______________________________
Mark E. Reynolds
Its: ________________________ Its: ______________________________
Treasurer
VALUE LINE, INC.
ATTEST:
By: _________________________ By: _______________________________
Its: ________________________ Its: ______________________________
<PAGE> 20
VARIABLE INVESTORS SERIES TRUST
SUB-ADVISORY AGREEMENT
This Agreement is made between FIRST VARIABLE ADVISORY SERVICES CORP., a
Massachusetts corporation and a wholly-owned subsidiary of First Variable Life
Insurance Company ("Life Company"), having its principal place of business in
Boston, Massachusetts (hereinafter referred to as "Adviser"), and
STRONG/CORNELIUSON CAPITAL MANAGEMENT, INC., a Wisconsin corporation, having its
principal place of business in Menomonee Falls, Wisconsin (hereinafter referred
to as "Sub-Adviser").
WHEREAS, Variable Investors Series Trust (the "Trust"), an open-end diversified
management investment company, as that term is defined in the Investment Company
Act of 1940, as amended ("1940 Act"), that is registered as such with the
Securities and Exchange Commission has appointed Adviser as investment adviser
for all its portfolios including the U.S. Government Bond Portfolio; and
WHEREAS, Sub-Adviser is engaged in the business of rendering investment
management services; and
WHEREAS, Adviser desires to retain Sub-Adviser to provide certain investment
management services for the U.S. Government Bond Portfolio (referred to
hereinafter as the "Portfolio") of the Trust as more fully described below;
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree
as follows:
1. Adviser hereby retains Sub-Adviser to act as investment adviser for the
Portfolio, subject to the oversight and review of Adviser and the Board of
Trustees of the Trust, and subject to the terms of this Agreement.
Sub-Adviser shall manage the investment and reinvestment of the assets of
the Portfolio and is hereby authorized and directed, and hereby agrees,
subject to the stated investment policies and restrictions of the
Portfolio as set forth in the Trust's current prospectus and statement of
additional information as currently in effect and as supplemented or
amended from time to time and subject to the directions of the Adviser and
the Trust's Board of Trustees, to purchase, hold and sell investments for
the account of the Portfolio and to monitor on a continuous basis the
performance of such investments.
2. The Sub-Adviser is authorized, subject to the supervision of the Adviser
and the Board of Trustees of the Trust, to place orders for the purchase
and sale of the Portfolio's investments with or through such persons,
brokers or dealers as it may determine, and to negotiate commissions to be
paid on such transactions in accordance with the Portfolio's policy with
respect to brokerage as set forth in the prospectus. The Sub-Adviser may,
on behalf of the Portfolio, pay brokerage commissions to a broker which
provides brokerage and research services to the Sub-Adviser in excess of
the amount another broker would have charged for effecting the
transaction, provided (i) the Sub-Adviser determines in good faith that
the amount is reasonable in relation to the value of the brokerage and
research services provided by the executing broker in terms of the
particular transaction or in terms of the Sub-Adviser's overall
responsibilities with respect to the Portfolio and the accounts as to
which the Sub-Adviser exercises investment discretion, (ii) such payment
is made in compliance with Section 28(e) of the Securities Exchange Act of
1934, as amended, and any other applicable laws and regulations, and (iii)
in the opinion of the Sub-Adviser, the total commissions paid by the
Portfolio will be reasonable in relation to the benefits to the Portfolio
over the long term. It is recognized that the services provided by such
brokers may be useful to the Sub-Adviser in connection with the
Sub-Adviser's services to other clients. On occasions when the Sub-Adviser
deems the purchase or sale of a security to be in the best interests of
the Portfolio as well as other clients of the Sub-Adviser, the
Sub-Adviser, to the extent permitted by applicable laws and regulations,
may, but shall be under no obligation to, aggregate the securities to be
sold or purchased in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event, allocation
of securities so sold or purchased, as well as the expenses incurred in
the transaction, will be made by the Sub-Adviser in the manner the
Sub-Adviser considers to be the most equitable and consistent with its
fiduciary obligations to the Portfolio and to such other clients.
3. The Sub-Adviser will maintain all books and records required to be
maintained pursuant to the 1940 Act and the rules and regulations
promulgated thereunder with respect to transactions made by it on behalf
of the Portfolio including, without limitation, the books and records
required by subsections (b)(1), (5), (6), (7), (9), (10) and (11) and
subsection (f) of Rule 31a-1 under the 1940 Act and shall timely furnish
to the
<PAGE> 21
Adviser all information relating to the Sub-Adviser's services hereunder
needed by the Adviser to keep such other books and records of the
Portfolio required by Rule 31a-1 under the 1940 Act. The Sub-Adviser will
also preserve all such books and records for the periods prescribed in
Rule 31a-2 under the 1940 Act. The Sub-Adviser further agrees that all
books and records maintained hereunder shall be made available to the
Portfolio or the Adviser at any time upon request, including telecopy
without delay, during any business day.
4. From time to time as the Adviser or the Portfolio may request, the
Sub-Adviser will furnish the requesting party reports on portfolio
transactions and reports on investments held in the portfolio, all in such
detail as the Adviser or the Portfolio may reasonably request.
5. The Sub-Adviser acknowledges receipt of a Custody Agreement dated as of
April 30, 1988, for the Portfolio and agrees to comply at all times with
all requirements relating to such agreement. The Sub-Adviser shall provide
the Adviser, and the Adviser shall provide the Portfolio's custodian, on
each business day with information relating to all transactions concerning
the Portfolio's assets.
6. The Sub-Adviser agrees to act in accordance with the Trust's Declaration
of Trust, By-Laws, currently effective registration statement under the
1940 Act, including any amendments or supplements thereto, and Notice of
Eligibility under Rule 4.5 of the Commodity Exchange Act ("CEA"), if
applicable, (collectively, "Governing Instruments and Regulatory Filings")
and any instructions or directions of the Trust, its Board of Trustees or
the Adviser. The Sub-Adviser acknowledges receipt of the Trust's Governing
Instruments and Regulatory Filings. The Adviser hereby agrees to provide
to the Sub-Adviser any amendments, supplements or other changes to the
Governing Instruments and Regulatory Filings as soon as practicable after
such materials become available and, upon receipt by the Sub-Adviser, the
Sub-Adviser will act in accordance with such amended, supplemented or
otherwise changed Governing Instruments and Regulatory Filings.
7. The Sub-Adviser shall direct the custodian as to how to vote such proxies
as may be necessary or advisable in connection with any matters submitted
to a vote of shareholders of securities held by the Portfolio.
8. Adviser shall pay to Sub-Adviser, for all services rendered to the
Portfolio by Sub-Adviser hereunder, the fees set forth in Exhibit A
attached hereto. During the term of this Agreement, Sub-Adviser will bear
all expenses incurred by it in the performance of its duties hereunder.
9. The Sub-Adviser shall provide marketing support to the Adviser in
connection with the sale of Trust shares and/or Life Company variable
insurance contracts, as reasonably requested by the Adviser. Such support
shall include, but not necessarily be limited to, presentations by
representatives of the Sub-Adviser at investment seminars, conferences and
other industry meetings. Any materials utilized by the Adviser which
contain any information relating to the Sub-Adviser shall be submitted to
the Sub-Adviser for approval prior to use, not less than five (5) business
days before such approval is needed by the Adviser. Any materials utilized
by the Sub-Adviser which contain any information relating to the Adviser,
the Life Company (including any information relating to its separate
accounts or variable insurance contracts) or the Trust shall be submitted
to the Adviser for approval prior to use, not less than five (5) business
days before such approval is needed by the Sub-Adviser.
10. The term of this Agreement shall begin on the date of its execution and
shall remain in effect for two years from that date and from year to year
thereafter, subject to the provisions for termination and all of the other
terms and conditions hereof if: (a) such continuation shall be
specifically approved at least annually by the vote of a majority of the
Trustees of the Trust, including a majority of the Trustees who are not
"interested persons", as defined in Section 2(a)(19) of the Act, of any
party to this Agreement (other than as Trustees of the Trust), cast in
person at a meeting called for that purpose; and (b) Adviser shall not
have notified the Sub-Adviser in writing at least sixty (60) days prior to
the anniversary date of this Agreement in any year thereafter that it does
not desire such continuation with respect to the Portfolio.
11. Notwithstanding any provision herein to the contrary, this Agreement may
be terminated at any time, without the payment of any penalty, by the
Trustees of the Trust or by a vote of a majority of the outstanding voting
securities of the Portfolio, as defined in Section 2(a)(42) of the Act, on
sixty (60) days' written notice to Sub-Adviser, or by Adviser or
Sub-Adviser upon not less than sixty (60) days' written notice to the
other party.
<PAGE> 22
12. This Agreement may not be assigned by Adviser or Sub-Adviser without the
prior written consent of the parties hereto and shall automatically
terminate in the event of any assignment without such consent. Sub-Adviser
may employ or contract with such other person, persons, corporation, or
corporations at its own cost and expense as it shall determine in order to
assist it in carrying out this Agreement.
13. Sub-Adviser represents and warrants that the Portfolio will at all times
be invested in such a manner as to ensure compliance with Section 817(h)
of the Internal Revenue Code of 1986, as amended and Treasury Regulations
Section 1.817-5, relating to the diversification requirements for variable
annuity, endowment, or life insurance contracts and any amendments or
other modifications to such Section or Regulations.
14. The Adviser represents and warrants to the Sub-Adviser as follows:
(a) The Adviser is registered as an investment adviser under the
Investment Advisers Act;
(b) The Adviser has filed a notice of exemption pursuant to Rule 4.14
under the CEA with the Commodity Futures Trading Commission (the
"CFTC") and the National Futures Association;
(c) The Adviser is a corporation duly organized and validly existing
under the laws of the Commonwealth of Massachusetts with the power
to own and possess its assets and carry on its business as it is now
being conducted;
(d) The execution, delivery and performance by the Adviser of this
Agreement are within Adviser's powers and have been duly authorized
by all necessary action on the part of its shareholders, and no
action by or in respect of, or filing with, any governmental body,
agency or official is required on the part of the Adviser for the
execution, delivery and performance by the Adviser of this
Agreement, and the execution, delivery and performance by the
Adviser of this Agreement do not contravene or constitute a default
under (i) any provision of applicable law, rule or regulation, (ii)
the Adviser's governing instruments, or (iii) any agreement,
judgment, injunction, order, decree or other instrument binding upon
the Adviser;
(e) This Agreement is a valid and binding agreement of the Adviser;
(f) The Adviser and any affiliated person of the Adviser have not:
(i) within the past 10 years been convicted of any felony or
misdemeanor involving the purchase or sale of any securities
or arising out of their conduct as an underwriter, broker,
dealer, investment adviser, municipal securities dealer,
government securities broker, government securities dealer,
transfer agent, or entity or person required to be registered
under the CEA, or as an affiliated person, salesman, or
employee of any investment company, bank, insurance company,
or entity or person required to be registered under the CEA;
or
(ii) except as previously disclosed, by reason of any misconduct,
been permanently or temporarily enjoined by an order, judgment
or decree of any court of competent jurisdiction or other
governmental authority from acting as an underwriter, broker,
dealer, investment adviser, municipal securities dealer,
government securities broker, government securities dealer,
transfer agent, or entity or person required to be registered
under the CEA, or an affiliated person, salesman, or employee
of any investment company, bank, insurance company, or entity
or person required to be registered under the CEA or from
engaging in or continuing any conduct or practice in
connection with any such activity or in connection with the
purchase or sale of any security; or
<PAGE> 23
(iii) been a party to litigation or other adversarial proceedings
involving any former or current client;
(g) The Adviser acknowledges that it received a copy of the
Sub-Adviser's Form ADV, part II "Brochure" at least 48 hours prior
to the execution of this Agreement.
15. In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the obligations or duties under this Agreement on
the part of Sub-Adviser, Sub-Adviser shall not be liable to Adviser, the
Trust, the Portfolio or to any shareholder for any act or omission in the
course of or connected in any way with rendering services or for any
losses that may be sustained in the purchase, holding, or sale of any
security.
16. This Agreement may be amended at any time by agreement of the parties,
provided that the amendment shall be approved both by the vote of a
majority of the Trustees of the Trust, including a majority of the
Trustees who are not "interested persons," as defined in Section 2(a)(19)
of the Act, of any party to this Agreement (other than as Trustees of the
Trust), cast in person at a meeting called for that purpose, and by a vote
of a majority of the outstanding voting securities of the Portfolio, as
defined in Section 2(a)(42) of the Act.
17. This Agreement shall be construed in accordance with and governed by the
laws of the Commonwealth of Massachusetts.
18. This Agreement will become binding on the parties hereto upon their
execution of the attached Exhibit A to this Agreement.
<PAGE> 24
EXHIBIT A
VARIABLE INVESTORS SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Adviser hereunder, Adviser shall pay to
Sub-Adviser and Sub-Adviser agrees to accept as full compensation for all
services rendered hereunder, an annual fee (the "Sub-Advisory Fee") as follows:
U.S. GOVERNMENT BOND PORTFOLIO
An annual rate of .35 of 1% of the Portfolio's average daily net asset
value of the first $200 million of the Portfolio's net assets under management.
An annual rate of .25 of 1% of the Portfolio's average daily net asset
value of any net assets of the Portfolio under management over and above $200
million.
The Sub-Advisory Fee shall be accrued for each calendar day the
Sub-Adviser renders subadvisory services hereunder and the sum of the daily fee
accruals shall be paid monthly to the Sub-Adviser as soon as practicable
following the last day of each month, by wire transfer if so requested by the
Sub-Adviser, but no later than seven (7) calendar days thereafter. The daily fee
accruals on the first $200 million of the Portfolio's net assets will be
computed by multiplying the fraction of one (1) over the number of calendar days
in the year by the appropriate annual rate described above and multiplying the
product by the net asset value of the Portfolio as determined in accordance with
the Trust's prospectus as of the close of business on the previous business day
on which the Portfolio was open for business. The daily fee accruals on the
Portfolio's net assets in excess of $200 million will be computed by multiplying
the fraction of one (1) over the number of calendar days in the year by the
appropriate annual rate described above and multiplying the product by the
amount by which the net asset value of the Portfolio, as determined in
accordance with the Trust's prospectus as of the close of business on the
previous business day on which the Portfolio was open for business, exceeds $200
million.
Witness the due execution hereof this 22nd day of September, 1994.
FIRST VARIABLE ADVISORY SERVICES CORP.
Attest:
__________________________ By:___________________________________
Mark E. Reynolds, Treasurer
STRONG/CORNELIUSON CAPITAL MANAGEMENT, INC.
Attest:
__________________________ By:__________________________________
<PAGE> 25
VARIABLE INVESTORS SERIES TRUST
SUB-ADVISORY AGREEMENT
This Agreement is made between FIRST VARIABLE ADVISORY SERVICES CORP., a
Massachusetts corporation and a wholly-owned subsidiary of First Variable Life
Insurance Company ("Life Company"), having its principal place of business in
Boston, Massachusetts (hereinafter referred to as "Adviser"), and FEDERATED
INVESTMENT COUNSELING, a Delaware business trust, having its principal place of
business in Pittsburgh, Pennsylvania (hereinafter referred to as "Sub-Adviser").
WHEREAS, Variable Investors Series Trust (the "Trust"), an open-end diversified
management investment company, as that term is defined in the Investment Company
Act of 1940, as amended ("Act"), that is registered as such with the Securities
and Exchange Commission has appointed Adviser as investment adviser for all its
portfolios including the High Income Bond Portfolio and the Cash Management
Portfolio; and
WHEREAS, Sub-Adviser is engaged in the business of rendering investment
management services; and
WHEREAS, Adviser desires to retain Sub-Adviser to provide certain investment
management services for the High Income Bond Portfolio and the Cash Management
Portfolio (referred to hereinafter individually as the "Portfolio" or
collectively as the "Portfolios") of the Trust as more fully described below;
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree
as follows:
1. Adviser hereby retains Sub-Adviser to assist Adviser in its capacity as
investment adviser for the Portfolios. Subject to the oversight and review
of Adviser and the Board of Trustees of the Trust, Sub-Adviser shall
manage the investment and reinvestment of the assets of the Portfolios.
Sub-Adviser will determine in its discretion, subject to the oversight and
review of Adviser, the investments to be purchased or sold, will provide
Adviser with records concerning its activities which Adviser or the Trust
is required to maintain, and will render regular reports to Adviser and to
officers and Trustees of the Trust concerning its discharge of the
foregoing responsibilities.
2. Sub-Adviser, in its supervision of the investments of the Portfolios, will
be guided by each Portfolio's investment objectives and policies and the
provisions and restrictions contained in the Declaration of Trust and
By-Laws of the Trust and as set forth in the Registration Statements and
exhibits as may be on file with the Securities and Exchange Commission,
all as communicated by Adviser to Sub-Adviser.
3. Adviser shall pay to Sub-Adviser, for all services rendered to the
Portfolios by Sub-Adviser hereunder, the fees set forth in Exhibit A
attached hereto. During the term of this Agreement, Sub-Adviser will bear
all expenses incurred by it in the performance of its duties hereunder.
4. The term of this Agreement shall begin on the date of its execution and
shall remain in effect for two years from that date and from year to year
thereafter, subject to the provisions for termination and all of the other
terms and conditions hereof if: (a) such continuation shall be
specifically approved at least annually by the vote of a majority of the
Trustees of the Trust, including a majority of the Trustees who are not
"interested persons", as defined in Section 2(a)(19) of the Act, of any
party (other than as Trustees of the Trust) cast in person at a meeting
called for that purpose; and (b) Adviser shall not have notified the Trust
in writing at least sixty (60) days prior to the anniversary date of this
Agreement in any year thereafter that it does not desire such continuation
with respect to a Portfolio.
5. Notwithstanding any provision in this Agreement, it may be terminated at
any time without the payment of any penalty, by the Trustees of the Trust
or by a vote of a majority of the outstanding voting securities of a
Portfolio, as defined in Section 2(a)(42) of the Act, on sixty (60) days'
written notice to Sub-Adviser, or by Adviser or Sub-Adviser upon not less
than sixty (60) days' written notice to the other party.
6. This Agreement may not be assigned by Adviser or Sub-Adviser and shall
automatically terminate in the event of any assignment. Sub-Adviser may
employ or contract with such other person, persons, corporation, or
corporations at its own cost and expense as it shall determine in order to
assist it in carrying out this Agreement.
<PAGE> 26
7. Sub-Adviser represents and warrants that the Portfolios will at all times
be invested in such a manner as to ensure compliance with Section 817(h)
of the Internal Revenue Code of 1986, as amended and Treasury Regulations
Section 1.817-5, relating to the diversification requirements for variable
annuity, endowment, or life insurance contracts and any amendments or
other modifications to such Section or Regulations. Sub-Adviser will be
relieved of this obligation and shall be held harmless when direction from
the Adviser or Trustees causes non-compliance with Section 817(h) and/or
Regulation Section 1.817-5. Sub-Adviser agrees to provide quarterly
reports to Adviser, executed by a duly authorized officer of Sub-Adviser,
within seven (7) days of the close of each calendar quarter certifying as
to compliance with said Section or Regulations. In addition to the
quarterly reports, Adviser may request and Sub-Adviser agrees to provide
Section 817 diversification compliance reports at more frequent intervals,
as reasonably requested by Adviser.
8. In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the obligations or duties under this Agreement on
the part of Sub-Adviser, Sub-Adviser shall not be liable to Adviser, the
Trust, the Portfolios or to any shareholder for any act or omission in the
course of or connected in any way with rendering services or for any
losses that may be sustained in the purchase, holding, or sale of any
security.
9. This Agreement may be amended at any time by agreement of the parties,
provided that the amendment shall be approved both by the vote of a
majority of the Trustees of the Trust, including a majority of the
Trustees who are not "interested persons," as defined in Section 2(a)(19)
of the Act, of any party to this Agreement (other than as Trustees of the
Trust) cast in person at a meeting called for that purpose, and on behalf
of a Portfolio by the holders of a majority of the outstanding voting
securities of a Portfolio, as defined in Section 2(a)(42) of the Act.
10. Adviser is hereby expressly put on notice of the limitation of liability
as set forth in the Declaration of Trust of Sub-Adviser and agrees that
the obligations assumed by Sub-Adviser pursuant to this Agreement shall be
limited in any case to Sub-Adviser and its assets and shall not seek
satisfaction of any such obligation from the shareholders of Sub-Adviser,
the Trustees, officers, employees or agents of Sub-Adviser, or any of
them.
11. This Agreement shall be construed in accordance with and governed by the
laws of the Commonwealth of Massachusetts.
12. This Agreement will become binding on the parties hereto upon their
execution of the attached Exhibit A to this Agreement.
13. It is understood that any information or recommendation supplied by the
Sub-Adviser in connection with the performance of its obligations
hereunder is to be regarded as confidential and for use only by the
Adviser, the Trust or such persons as the Adviser may designate in
connection with the Portfolios. It is also understood that any information
supplied to Sub-Adviser in connection with the performance of its
obligations hereunder, particularly, but not limited to, any list of
securities which, on a temporary basis, may not be bought or sold for the
Portfolios, is to be regarded as confidential and for use only by the
Sub-Adviser in connection with its obligation to provide investment advice
and other services to the Portfolios.
14. Each party to this Agreement hereby acknowledges that it is registered as
an investment adviser under the Investment Advisers Act of 1940, it will
use its reasonable best efforts to maintain such registration, and it will
promptly notify the other if it ceases to be so registered, if its
registration is suspended for any reason, or if it is notified by any
regulatory organization or court of competent jurisdiction that it should
show cause why its registration should not be suspended or terminated.
15. The Sub-Adviser shall provide marketing support to the Adviser in
connection with the sale of Trust shares and/or Life Company variable
insurance contracts, as reasonably requested by the Adviser. Such support
shall include, but not necessarily be limited to, presentations by
representatives of the Sub-Adviser at investment seminars, conferences and
other industry meetings. Any materials utilized by the Adviser which
contain any information relating to the Sub-Adviser shall be submitted to
the Sub-Adviser for approval prior to use, not less than five (5) business
days before such approval is needed by the Adviser. Any materials utilized
by the Sub-Adviser which contain any information relating to the Adviser,
the Life Company (including any information relating to its separate
accounts or variable insurance contracts) or the
<PAGE> 27
Trust shall be submitted to the Adviser for approval prior to use, not
less than five (5) business days before such approval is needed by the
Sub-Adviser.
<PAGE> 28
EXHIBIT A
VARIABLE INVESTORS SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Adviser hereunder, Adviser shall pay to
Sub-Adviser and SubAdviser agrees to accept as full compensation for all
services rendered hereunder, an annual fee as follows:
HIGH INCOME BOND PORTFOLIO
.45 of 1 % on an annualized basis of the first $40 million of net assets
under management.
.40 of 1 % on an annualized basis of any net assets under management over
and above $40 million but not exceeding $60 million.
.30 of 1 % on an annualized basis of any net assets under management over
and above $60 million but not exceeding $75 million.
.25 of 1% on an annualized basis of any net assets under management over
and above $75 million.
CASH MANAGEMENT PORTFOLIO
.25 of 1 % on an annualized basis of the first $70 million of net assets
under management.
.20 of 1% on an annualized basis of any net assets under management over
and above $70 million.
Such fees shall accrue daily and be paid monthly.
Witness the due execution hereof this 17th day of June, 1994.
FIRST VARIABLE ADVISORY SERVICES CORP.
Attest:
______________________________ By: _________________________
FEDERATED INVESTMENT COUNSELING
Attest:
By: _________________________
<PAGE> 1
EX-99.B.8 Form of Custodian Agreement between the Registrant and State Street
Bank and Trust Company
<PAGE> 2
CUSTODIAN CONTRACT
BETWEEN VARIABLE INVESTORS SERIES TRUST AND
STATE STREET BANK AND TRUST COMPANY
TABLE OF CONTENTS
1. Employment of Custodian and Property to be Held By It.................... 1
2. Duties of the Custodian with Respect to Property of the Fund Held
by the Custodian in the United States.................................... 2
2.1 Holding Securities.................................................. 2
2.2 Delivery of Securities.............................................. 2
2.3 Registration of Securities.......................................... 5
2.4 Bank Accounts....................................................... 5
2.5 Availability of Federal Funds....................................... 6
2.6 Collection of Income................................................ 6
2.7 Payment of Fund Monies.............................................. 6
2.8 Liability for Payment in Advance of Receipt of Securities Purchased. 8
2.9 Appointment of Agents............................................... 8
2.10 Deposit of Fund Assets in Securities................................ 8
2.11 Fund Assets Held in the Custodian's Direct Paper System............. 10
2.12 Segregated Account.................................................. 11
2.13 Ownership Certificates for Tax Purposes............................. 12
2.14 Proxies............................................................. 12
2.15 Communications Relating to Portfolio Securities..................... 12
3. Duties of the Custodian with Respect to Property of the
Fund Held Outside of the United States................................... 12
3.1 Appointment of Foreign Sub-Custodians............................... 12
3.2 Assets to be Held................................................... 13
3.3 Foreign Securities Depositories..................................... 13
3.4 Agreements with Foreign Banking Institutions........................ 13
3.5 Access of Independent Accountants of the Fund....................... 14
3.6 Reports by Custodian................................................ 14
3.7 Transactions in Foreign Custody Account............................. 14
3.8 Liability of Foreign Sub-Custodians................................. 15
3.9 Liability of Custodian.............................................. 15
3.10 Reimbursement for Advances.......................................... 15
3.11 Monitoring Responsibilities......................................... 16
3.12 Branches of U.S. Banks.............................................. 16
3.13 Tax Law............................................................. 16
4. Payments for Sales or Repurchase or Redemptions of Shares of the Fund.... 17
5. Proper Instructions...................................................... 17
6. Actions Permitted Without Express Authority.............................. 18
7. Evidence of Authority.................................................... 18
8. Duties of Custodian With Respect to the Books of Account and
Calculation of Net Asset Value and Net Income............................ 19
9. Records.................................................................. 19
<PAGE> 3
10. Opinion of Fund's Independent Accountants................................ 19
11. Reports to Fund by Independent Public Accountants........................ 20
12. Compensation of Custodian................................................ 20
13. Responsibility of Custodian.............................................. 20
14. Effective Period, Termination and Amendment.............................. 21
15. Successor Custodian...................................................... 22
16. Interpretive and Additional Provisions................................... 23
17. Additional Funds......................................................... 24
18. Massachusetts Law to Apply............................................... 24
19. Prior Contracts.......................................................... 24
20. Shareholder Communications Election...................................... 24
<PAGE> 4
CUSTODIAN CONTRACT
This Contract between VARIABLE INVESTORS SERIES TRUST, a business trust
organized and existing under the laws of Massachusetts, having its principal
place of business at 1414 Main Street, Springfield, Massachusetts, hereinafter
called the "Fund", and STATE STREET BANK AND TRUST COMPANY, a Massachusetts
trust company, having its principal place of business at 225 Franklin Street,
Boston, Massachusetts, 02110, hereinafter called the "Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Fund intends to initially offer shares in seven series, Cash
Equity Portfolio, Equity Income Portfolio, High-Income Bond Portfolio, U.S.
Government Bond Portfolio, Common Stock Portfolio, Multiple Strategies
Portfolio, and World Equity Portfolio (such series together with all other
series subsequently - established by the Fund and made subject to this Contract
in .accordance with paragraph 17, being herein referred to as the
"Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets of
the Portfolios of the Fund, including securities which the Fund, on behalf of
the applicable Portfolio desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Declaration of
Trust. The Fund on behalf of the Portfolio(s) agrees to deliver to the Custodian
all securities and cash of the Portfolios, and all payments of income, payments
of principal or capital distributions received by it with respect to all
securities owned by the Portfolio(s) from time to time, and the cash
consideration received by it for such new or treasury shares of beneficial
interest of the Fund representing interests in the Portfolios, ("Shares") as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of a Portfolio held or received by the Portfolio and not delivered
to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall on behalf of the applicable Portfolio(s) from time to time
employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Trustees of the Fund on
behalf of the applicable Portfolio (s) , and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian. The Custodian may employ as sub-custodian
for the Fund's foreign securities on behalf of the applicable Portfolio(s) the
foreign banking institutions and foreign securities depositories designated in
Schedule A hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of each Portfolio all non-cash property, to be held by it in
the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to
Section 2.10 in a clearing agency which acts as a securities depository or
in a book-entry system authorized by the U.S. Department of the Treasury,
collectively referred to herein as "Securities System" and (b) commercial
paper of an issuer for which State Street Bank and Trust Company acts as
issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian pursuant to Section
2. 11.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by a Portfolio held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book
entry system account ("Direct Paper System Account") only upon receipt of
Proper Instructions from the Fund on behalf of the applicable Portfolio,
which may be continuing instructions when deemed appropriate by the
parties, and only in the following cases:
<PAGE> 5
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of
the Portfolio or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any agent appointed
pursuant to Section 2.9 or into the name or nominee name of any
sub-custodian appointed pursuant to Article 1; or for exchange for a
different number of bonds, certificates or other evidence
representing the same aggregate face amount or number of units;
provided that, in any such case, the new securities are to be
delivered to the Custodian;
7) Upon the sale of such securities for the account of the Portfolio,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom; provided
that in any such case, the Custodian shall have no responsibility or
liability for any loss arising from the delivery of such securities
prior to receiving payment for such securities except as may arise
from the Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts or temporary
securities for definitive securities; provided that, in any such
case, the new securities and cash, if any, are to be delivered to
the Custodian;
10) For delivery in connection with any loans of securities made by the
Portfolio, but only against receipt of adequate collateral as agreed
upon from time to time by the Custodian and the Fund on behalf of
the Portfolio, which may be in the form of cash or obligations
issued by the United States government, its agencies or
instrumentalities, except that in connection with any loans for
which collateral is to be credited to the Custodian's account in the
book-entry system authorized by the U.S. Department of the Treasury,
the Custodian will not be held liable or responsible for the
delivery of securities owned by the Portfolio prior to the receipt
of such collateral;
11) For delivery as security in connection with any borrowings by the
Fund on behalf of the Portfolio requiring a pledge of assets by the
Fund on behalf of the Portfolio, but only against receipt of amounts
borrowed;
12) For delivery in accordance with the provisions of any agreement
among the Fund on behalf of the Portfolio, the Custodian and a
broker-dealer registered under the Securities Exchange Act of 1934
(the "Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with the
rules of The Options Clearing Corporation and of -any registered
national securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in connection
with transactions by the Portfolio of the Fund;
13) For delivery in accordance with the provisions of any agreement
among the Fund on behalf of the Portfolio, the Custodian, and a
Futures Commission Merchant registered under the Commodity
<PAGE> 6
Exchange Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or any
similar organization or organizations, regarding account deposits in
connection with transactions by the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may
be described from time to time in the currently effective prospectus
and statement of additional information of the Fund, related to the
Portfolio ("Prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the
applicable Portfolio, a certified copy of a resolution of the Board
of Trustees or of the Executive Committee signed by an officer of
the Fund and certified by the Secretary or an Assistant Secretary,
specifying the securities of the Portfolio to be delivered, setting
forth the purpose for which such delivery is to be made, declaring
such purpose to be a proper corporate purpose, and naming the person
or persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund has authorized, in
writing the appointment of a nominee to be used in common with other
registered investment companies having the same investment adviser as the
Portfolio, or in the name or nominee name of any agent appointed pursuant
to Section 2.9 or in the name or nominee name of any sub-custodian
appointed pursuant to Article 1. All securities accepted by the Custodian
on behalf of the Portfolio under the terms of this Contract shall be in
"street name" or other good delivery form. If, however, the Fund directs
the Custodian to maintain securities in "street name", the Custodian shall
utilize its best efforts only to timely collect income due the Fund on
such securities and to notify. the Fund on a best efforts basis only of
relevant corporate actions including, without limitation, pendency of
calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Portfolio of
the Fund, subject only to draft or order by the Custodian acting pursuant
to the terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for the
account of the Portfolio, other than cash maintained by the Portfolio in a
bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the Custodian for a
Portfolio may be deposited by it to its credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust companies as
it may in its discretion deem necessary or desirable; provided, however,
that every such bank or trust company shall be qualified to act as a
custodian under the Investment Company Act of 1940 and that each such bank
or trust company and the funds to be deposited with each such bank or
trust company shall on behalf of each applicable Portfolio be approved by
vote of a majority of the Board of Trustees of the Fund. Such funds shall
be deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund on
behalf of each applicable Portfolio and the Custodian, the Custodian
shall, upon the receipt of Proper Instructions from the Fund on behalf of
a Portfolio, make federal funds available to such Portfolio as of
specified times agreed upon from time to time by the Fund and the
Custodian. in the amount of checks received in payment for Shares of such
Portfolio which are deposited into the Portfolio's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income, and other payments
with respect to registered domestic securities held hereunder to which
each Portfolio shall be entitled either by law or pursuant to custom in
the securities .business, and shall collect on a timely basis all income
and other payments with respect to bearer domestic securities if, on the
date of payment by the issuer, such securities are held by the Custodian
or its agent thereof and shall credit such income, as collected, to such
Portfolio's custodian account. without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when they become due
and shall collect interest when due on securities held hereunder. Income
due each Portfolio on securities loaned pursuant to the provisions of
Section 2.2 (10)
<PAGE> 7
shall be the responsibility of the Fund. The Custodian will have no duty
or responsibility in connection therewith, other than to provide the Fund
with such information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to which
the Portfolio is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the Fund
on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, the Custodian shall
pay out monies of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Portfolio but
only (a) against the delivery of such securities or evidence of
title to such options, futures contracts or options on futures
contracts to the Custodian (or any bank, banking firm or trust
company doing business in the United States or abroad which is
qualified under the Investment Company Act of 1940, as amended, to
act as a custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the Portfolio or
in the name of a nominee of the Custodian referred to in Section 2;
3 hereof or in proper form for transfer; (b) in the case of a
purchase effected through a Securities System, in accordance with
the conditions set forth in Section 2.10 hereof; (c) in the case of
a purchase involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.11; (d) in the case of repurchase
agreements entered into between the Fund on behalf of the Portfolio
and the Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either in
certificate form or through an entry crediting the Custodian's
account at the Federal Reserve Bank with such securities or (ii)
against delivery of the receipt evidencing purchase by the Portfolio
of securities owned by the Custodian along with written evidence of
the agreement by the Custodian to repurchase such securities from
the Portfolio or (e) for transfer to a time deposit account of the
Fund in any bank, whether domestic or foreign; such transfer may be
effected prior to receipt of a confirmation from a broker and/or the
applicable bank pursuant to Proper Instructions from the Fund as
defined in Article 5;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Portfolio
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following payments for
the account of the Portfolio: interest, taxes, management,
accounting, transfer agent and legal fees, and operating expenses of
the Fund whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares of the Portfolio declared
pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in addition
to Proper Instructions from the Fund on behalf of, the Portfolio, a
certified copy of a resolution of the Board of Trustees or of the
Executive Committee of the Fund signed by an officer of the Fund and
certified by its Secretary or an Assistant Secretary, specifying the
amount of such payment, setting forth the purpose for which such
payment is to be made, declaring such purpose to be a proper
purpose, and naming the person or persons to whom such payment is to
be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of domestic securities for the account of
a Portfolio is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written instructions from
the Fund on behalf of such Portfolio to so pay in advance, the Custodian
shall be absolutely liable to the Fund for such securities to the same
extent as if the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act
<PAGE> 8
of 1940, as amended, to act as a custodian, as its agent to carry out such
of the provisions of this Article 2 as the Custodian may from time to time
direct; provided, however, that the appointment of any agent shall not
relieve the Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may deposit
and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department
of the Treasury and certain federal agencies, collectively referred to
herein as "Securities System" in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a Securities
System provided that such securities are represented in an account
("Account") of the Custodian in the Securities System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a Securities System shall identify
by book-entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the Securities System
that such securities have been transferred to the Account, and (ii)
the making of an entry on the records of the Custodian to reflect
such payment and transfer for the account of the Portfolio. The
Custodian shall transfer securities sold for the account of the
Portfolio upon (i) receipt of advice from the Securities System that
payment for such securities has been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Portfolio.
Copies of all advices from the Securities System of transfers of
securities for the account of the Portfolio shall identify the
Portfolio, be maintained for the Portfolio by the Custodian and be
provided to the Fund at its request. Upon request, the Custodian
shall furnish the Fund on behalf of the Portfolio confirmation of
each transfer to or from the account of the Portfolio in the form of
a written advice or notice and shall furnish to the Fund on behalf
of the Portfolio copies of daily transaction sheets reflecting each
day's transactions in the Securities System for the account of the
Portfolio;
4) The Custodian shall provide the Fund for the Portfolio with any
report obtained by the Custodian on the Securities System's
accounting system, internal accounting control and procedures for
safeguarding securities deposited in the Securities System;
5) The Custodian shall have received from the Fund on behalf of the
Portfolio the initial or annual certificate, as the case may be,
required by Article 14 hereof; to the
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the
Portfolio for any loss or damage to the Portfolio resulting from use
of the Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or any such agent
to enforce effectively such rights as it may have against the
Securities System; at the election of the Fund, it shall be entitled
to be subrogated to the rights of the Custodian with respect to any
claim against the Securities System-em or any other person which the
Custodian may have as a consequence of any such loss or damage if
and to the extent that the Portfolio has not been made whole for any
such loss or damage.
2.11 Fund Assets Held in the Custodian' s Direct Paper System. The Custodian
may deposit and/or maintain securities owned by a Portfolio in the Direct
Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System
will be effected in the absence of Proper Instructions from the Fund
on behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct
Paper System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
<PAGE> 9
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to the
account of the Portfolio. The Custodian shall transfer securities
sold for the account of the Portfolio upon the making of an entry on
the records of the Custodian to reflect such transfer and receipt of
payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the
Portfolio, in the form of a written advice or notice, of Direct
Paper on the next business day following such transfer and shall
furnish to the Fund on behalf of the Portfolio copies of daily
transaction sheets reflecting each day's transaction in the
Securities System for the account of the Portfolio;
6) The Custodian shall provide the Fund on behalf of the Portfolio with
any report on its system of internal accounting control as the Fund
may reasonably request from time to time.
2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund on behalf of each applicable Portfolio
establish and maintain a segregated account or accounts for and on behalf
of each such Portfolio, into which account or accounts may be transferred
cash and/or securities, including securities maintained in an account by
the Custodian pursuant to Section. 2.10 hereof, .-(i) in accordance with
the provisions of any agreement among, the Fund on behalf of the
Portfolio, the Custodian and a broker-dealer registered under the Exchange
Act and a member of the NASD (or any futures commission merchant
registered under the Commodity Exchange Act) , relating to compliance,
with the rules of The Options Clearing Corporation and of any registered
national securities exchange (or the Commodity Futures Trading Commission
or any registered contract market) , or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Portfolios (ii) for purposes of segregating cash or
government securities in connection with options purchased, sold or
written by the Portfolio or commodity futures contracts or options thereon
purchased or sold by the Portfolio, (iii) for the purposes of compliance
by the Portfolio with the procedures required by Investment Company Act
Release No. 10666, or any subsequent release or releases of the Securities
and Exchange Commission relating to the maintenance of segregated accounts
by registered investment companies and (iv) for other proper corporate
purposes, but only, in the case of clause (iv) , upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the applicable
Portfolio, a certified copy of a resolution of the Board of Trustees or of
the Executive Committee signed by an officer of the Fund and certified by
the Secretary or an Assistant Secretary, setting forth the purpose or
purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Portfolio held by it and in
connection with transfers of securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.15 Communications Relating to Portfolio Securities. Subject to the provisions
of Section 2.3, the Custodian shall transmit promptly to the Fund for each
Portfolio all written information (including, without limitation, pendency
of calls and maturities of domestic securities and expirations of rights
in connection therewith and notices of exercise of call and put options
written by the Fund on behalf of the Portfolio and the maturity of futures
contracts purchased or sold by the Portfolio) received by the Custodian
from issuers of the securities being held for the Portfolio. With respect
to tender or exchange offers, the
<PAGE> 10
Custodian shall transmit promptly to the Portfolio all written information
received by the Custodian from issuers of the securities whose tender or
exchange is sought and from the party (or his agents) making the tender or
exchange offer. If the Portfolio desires to take action with respect to
any tender offer, exchange offer or any other similar transaction, the
Portfolio shall notify the Custodian at least three business days prior to
the date on which the Custodian is to take such action.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Portfolio I s
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto ("foreign sub-custodians") . Upon receipt
of "Proper Instructions", as defined in Section 5 of this Contract,
together with a certified resolution of the Fund's Board of Trustees, the
Custodian and the Fund may agree to amend Schedule A hereto from time to
time to designate additional foreign banking institutions and foreign
securities depositories to act as sub-custodian. Upon receipt of Proper
Instructions, the Fund may instruct the Custodian to cease the employment
of any one or more such sub-custodians for maintaining custody of the
Portfolio's assets.
3.2 Assets to be Held. The Custodian shall limit the securities .and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Portfolio's foreign securities transactions. The
Custodian shall identify on its books as belonging to the Fund, the
foreign securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Portfolios shall be
maintained in foreign securities depositories only through arrangements
implemented - by the foreign banking institutions serving as subcustodians
pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set forth
in Exhibit 1 hereto and shall provide that: (a) the assets of each
Portfolio will not be subject to any right, charge, security interest,
lien or claim of any kind in favor of the foreign banking institution or
its creditors or agent, except a claim of payment for their safe custody
or administration; (b) beneficial ownership for the assets of each
Portfolio will be freely transferable without the payment of money or
value other than for custody or administration;(c) adequate records will
be maintained identifying the assets as belonging to each applicable
Portfolio; (d) officers of or auditors employed by, or other
representatives of the Custodian, including to the extent permitted under
applicable law the independent public accountants for the Fund, will be
given access to the books and records of the foreign banking institution
relating to its actions under its agreement with the Custodian; and (e)
assets of the Portfolios held by the foreign sub-custodian will be subject
only to the instructions of the Custodian or its agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the Fund,
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian
insofar as such books and records relate to the performance of such
foreign banking institution under its agreement with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Portfolio(s) held by foreign sub-custodians,
including but not limited to an ,identification of entities having
possession of the Portfolio(s) securities and other assets and advices or
notifications of any transfers of securities to or from each custodial
account maintained by a foreign banking institution for the Custodian on
behalf of each applicable Portfolio indicating, as to securities acquired
for a Portfolio, the identity of the entity having physical possession of
such securities.
<PAGE> 11
3.7 Transactions in Foreign Custody Account. (a) Except as otherwise provided
in paragraph (b) of this Section 3.7, the provision of Sections 2.2 and
2.7 of this Contract shall apply, mutatis mutandis to the foreign
securities of the Fund held outside the United States by foreign
sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of each
applicable Portfolio and delivery of securities maintained for the account
of each applicable Portfolio may be effected in accordance with the
customary established securities trading or securities processing
practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering securities
to the purchaser thereof or to a dealer therefor (or an agent for such
purchaser or dealer) against a receipt with the expectation of receiving
later payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any
such nominee harmless from any liability as a holder of record of such
securities.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and the Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.9. Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.12 hereof, the Custodian shall not be liable
for any loss, damage,' cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this
paragraph 3.9, in delegating custody duties to State Street London Ltd.,
the Custodian shall not be relieved of any responsibility to the Fund for
any loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear incident or other losses under
circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to advance
cash or securities for any purpose for the benefit of a Portfolio
including the purchase or sale of foreign exchange or of contracts for
foreign exchange, or in the event that the Custodian or its nominee shall
incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except
such as may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct, any property at any time
held for the account of the applicable Portfolio shall be security
therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of
such Portfolios assets to the extent necessary to obtain reimbursement.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually to the
Fund, during the month of June, information ,concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection with
the initial approval of this Contract. In addition, the Custodian will
promptly inform the Fund in the event that the Custodian learns of a
material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order
from the Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that its
shareholders, equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders' equity has declined below
$200 million (in each case computed in accordance with generally accepted
U.S. accounting principles).
<PAGE> 12
3.12 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of the
Portfolios assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2 (a) (5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph 1 of this Contract.
(b) Cash held for each Portfolio of- the Fund in the United Kingdom shall
be maintained in an interest bearing account established for the Fund with
the Custodian's London branch, which account shall be subject to the
direction of the Custodian, State Street London Ltd. or both.
3.13 Tax Law. The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or
any state or political subdivision thereof. It shall be the responsibility
of the Fund to notify the Custodian of the obligations imposed on the Fund
or the Custodian as custodian of the Fund by the tax law of jurisdictions
other than those mentioned in the above sentence, including responsibility
for withholding and other taxes, assessments or other governmental
charges, certifications and governmental reporting. The sole
responsibility of the Custodian with regard to such tax law shall be to
use reasonable efforts to assist the Fund with respect to any claim for
exemption or refund under the tax law of jurisdictions for which the Fund
has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
The Custodian shall receive from the distributor for the Shares or from
the Transfer Agent of the Fund and deposit into the account of the appropriate
Portfolio such payments as are received for Shares of that Portfolio issued or
sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Portfolio and the Transfer Agent
of any receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Board of
Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the. Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing
signed or initialled by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board of Trustees of the Fund
accompanied by a detailed description of procedures approved by the Board of
Trustees, Proper Instructions may include communications effected directly
between electromechanical or electronic devices provided that the Board of
Trustees and the Custodian are satisfied that such procedures afford adequate
safeguards for the Portfolios, assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three - party agreement which requires a segregated asset account in
accordance with Section 2.12.
6. Actions Permitted without Express Authority
<PAGE> 13
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to
the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Portfolio except as
otherwise directed by the Board of Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Trustees of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Trustees pursuant to the Declaration of Trust as described in
such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Trustees of the Fund to keep the
books of account of each Portfolio and/or compute the net asset value per share
of the outstanding shares of each Portfolio or, if directed in writing to do so
by the Fund on behalf of the Portfolio, shall itself keep such books of account
and/or compute such net asset value per share. If so directed, the Custodian
shall also calculate daily the net income of the Portfolio as described in the
Fund's currently effective prospectus related to such Portfolio and shall advise
the Fund and the Transfer Agent daily of the total amounts of such net income
and, if instructed in writing by an officer of the Fund to do so, shall advise
the Transfer Agent periodically of the division of such net income among its
various components. The calculations of the net asset value per share and the
daily income of each Portfolio shall be made at the time or times described from
time to time in the Fund's currently effective prospectus related to such
Portfolio.
9. Records
The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company Act
of 1940, with particular attention to Section 31 thereof and Rules 3la-1 and
3la-2 thereunder. All such records shall be the property of the Fund and shall
at all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation of securities
owned by each Portfolio and held by the Custodian and shall, when requested to
do so by the Fund and for such compensation as shall be agreed upon between the
Fund and the Custodian, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund on behalf of
each applicable Portfolio may from time to time request, to obtain from year to
year favorable opinions from the Fund's independent accountants with
<PAGE> 14
respect to its activities hereunder in connection with the preparation of the
Fund's Form N-lA, and Form N-SAR or other annual reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, on behalf of each of the Portfolios
at such times as the Fund may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this Contract;
such reports, shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund on behalf of each applicable Portfolio and the Custodian.
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Article 3.9)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by paragraph 3.12 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody or any
securities or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance ' cash or securities for any purpose (including but not
limited to securities settlements, foreign exchange contracts and assumed
settlement) for the benefit of a Portfolio including the purchase or sale of
foreign exchange or of contracts for foreign exchange or in the event that the
Custodian or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any property
at any time held for the account of the applicable Portfolio shall be security
therefor and should the Fund fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of such Portfolio's
assets to the extent necessary to obtain reimbursement.
<PAGE> 15
14. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to a Portfolio act under
Section 2.10 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Trustees of the Fund has
approved the initial use of a particular Securities System by such Portfolio and
the receipt of an annual certificate of the Secretary or an Assistant Secretary
that the Board of Trustees has reviewed the use by such Portfolio of such
Securities System, as required in each case by Rule 17f-4 under the Investment
Company Act of 1940, as, amended and that the Custodian shall not with respect
to a, Portfolio act under Section 2.11 hereof in the absence of receipt of an
initial certificate of the Secretary or an Assistant Secretary that the Board of
Trustees has approved the initial use ,of the Direct Paper System by such
Portfolio and the receipt of an ;annual certificate of the Secretary or an
Assistant Secretary that the Board of Trustees has reviewed the use by such
Portfolio of the Direct Paper System; provided further, however, that the Fund
shall not amend or terminate this Contract in contravention of any applicable
federal or state regulations, or any provision of the Declaration of Trust, and
further provided, that the Fund on behalf of one or more of the Portfolios may
at any time by action of its Board of Trustees (i) substitute another bank or
trust company for the Custodian by giving notice as described above to the
Custodian, or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller of
the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
15. Successor Custodian
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Trustees of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the of f ice of the
Custodian, duly endorsed and in the form for transfer, all securities of each
applicable Portfolio then held by it hereunder and shall transfer to an account
of the successor custodian all of the securities of each such Portfolio held in
a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of Trustees
of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract on behalf of each applicable Portfolio and to transfer
to an account of such successor custodian all of the securities of each such
Portfolio held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
<PAGE> 16
16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund on behalf of each of the Portfolios, may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Contract as
may in their joint opinion be consistent with the general tenor of this
Contract. Any such interpretive or additional provisions shall be in a writing
signed by both parties and shall be annexed hereto, provided that no such
interpretive or additional provisions shall contravene any applicable federal or
state regulations or any provision of the Declaration of Trust of the Fund. No
interpretive or additional provisions made as provided in the preceding sentence
shall be deemed to be an amendment of this Contract.
17. Additional Funds
In the event that the Fund establishes one or more series of Shares in
addition to Cash Equity Portfolio, Equity Income Portfolio, High Income Bond
Portfolio, U.S. Government Bond Portfolio, Common Stock Portfolio, Multiple
Strategies Portfolio, and World Equity Portfolio with respect to which it
desires to have the Custodian render services as custodian under the terms
hereof, it shall so notify the Custodian in writing, and if the Custodian agrees
in writing to provide such services, such series of Shares shall become a
Portfolio hereunder.
18. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
19. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund on behalf of each of the Portfolios and the Custodian
relating to the custody of the Fund's assets.
20. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name, address,
and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address and share positions.
<PAGE> 17
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Trustees of VARIABLE INVESTORS
SERIES TRUST for use as sub-custodians for the Fund's securities and other
assets:
(Insert banks and securities depositories)
Certified:
_____________________________
Fund's Authorized Officer
_____________________________
Date:
<PAGE> 18
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the day of , 199 .
ATTEST VARIABLE INVESTORS SERIES TRUST
________________________________ By _____________________________________
ATTEST STATE STREET BANK AND TRUST COMPANY
________________________________ By _____________________________________
<PAGE> 1
EX-99.9(a) Form of Transfer Agency and Service Agreement between the Registrant
and State Street Bank and Trust Company
<PAGE> 2
TRANSFER AGENCY AND SERVICE AGREEMENT
TABLE OF CONTENTS
Article 1 Terms of Appointment; Duties of the Bank....................... 2
Article 2 Fees and Expenses.............................................. 6
Article 3 Representations and Warranties of the Bank..................... 7
Article 4 Representations and Warranties of the Fund..................... 7
Article 5 Data Access and Proprietary Information........................ 8
Article 6 Indemnification................................................ 10
Article 7 Standard of Care............................................... 13
Article 8 Covenants of the Fund and the Bank............................. 13
Article 9 Termination of Agreement....................................... 14
Article 10 Additional Funds............................................... 15
Article 11 Assignment..................................................... 15
Article 12 Amendment...................................................... 16
Article 13 Massachusetts Law to Apply..................................... 16
Article 14 Force Majeure.................................................. 16
Article 15 Consequential Damages.......................................... 16
Article 16 Merger of Agreement............................................ 17
Article 17 Limitations of Liability of the Trustees
and the Shareholders........................................... 17
Article 18 Counterparts................................................... 17
<PAGE> 3
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the day of , 1993, by and between
VARIABLE INVESTORS SERIES TRUST, a Massachusetts business trust, having its
principal office and place of business at 1414 Main Street, Springfield,
Massachusetts (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company having its principal office and place of business at
225 Franklin Street, Boston, Massachusetts 02110 (the "Bank") .
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Fund intends to initially offer shares in seven series, Cash
Management Portfolio, Equity Income Portfolio, High Income Bond Portfolio, U.S.
Government Bond Portfolio, Common Stock Portfolio, Multiple Strategies Portfolio
and World Equity Portfolio (each such series, together with all other series
subsequently established by the Fund and made subject to this Agreement in
accordance with Article 10, being herein referred to as a "Portfolio", and
collectively as the "Portfolios");
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Bank
as its transfer agent, dividend disbursing agent, custodian of certain
retirement plans and agent in connection with certain other activities, and the
Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment--Duties of the Bank
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund, on behalf of the Portfolios, hereby employs and appoints
the Bank to act as, and the Bank agrees to act as its transfer agent for the
authorized and issued shares of beneficial interest of the Fund representing
interests in each of the respective Portfolios ("Shares"), dividend disbursing
agent, custodian of certain retirement plans and agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of each
of the respective Portfolios of the Fund ("Shareholders") and set out in the
currently effective prospectus and statement of additional information
("prospectus") of the Fund on behalf of the applicable Portfolio, including
without limitation any periodic investment plan or periodic withdrawal program.
1.02 The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund on behalf of each of the Portfolios, as applicable
and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the purchase of Shares,
and promptly deliver payment and appropriate documentation
thereof to the Custodian of the Fund authorized pursuant to
the Declaration of Trust of the Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate shareholder
account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation thereof
to the Custodian;
(iv) In respect to the transactions in items (i), (ii) and (iii)
above, the Bank shall execute transactions directly with
broker-dealers authorized by the Fund who shall thereby be
deemed to be acting on behalf of the Fund;
(v) At the appropriate time as and when it receives monies paid
to it by the Custodian with respect to any redemption, pay
over or cause to be paid over in the appropriate manner such
monies as instructed by the redeeming Shareholders;
(vi) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vii) Prepare and transmit payments for dividends and distributions
declared by the Fund on behalf of the applicable Portfolio;
(viii) Issue replacement certificates for those certificates alleged
to have been lost, stolen or destroyed upon receipt by the
Bank of indemnification satisfactory to the Bank and
<PAGE> 4
protecting the Bank and the Fund, and the Bank at its option,
may issue replacement certificates in place of mutilated
stock certificates upon presentation thereof and without such
indemnity;
(ix) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(x) Record the issuance of Shares of the Fund and maintain
pursuant to SEC Rule 17Ad-10(e) a record of the total number
of Shares which are authorized, based upon data provided to
it by the Fund, and issued and outstanding. The Bank shall
also provide the Fund on a regular basis with the total
number of Shares which are authorized and issued
and-outstanding and shall have no obligation, when recording
the issuance of, Shares, to monitor the issuance of such
Shares or to take cognizance of any laws relating to the
issue or sale of such Shares, which functions shall be the
sole responsibility of the Fund.
(b) In addition to and neither in lieu nor in contravention of the
services set forth in the above paragraph (a), the Bank shall: ( i) perform the
customary services of a transfer agent, dividend disbursing agent, custodian of
certain retirement plans and, as relevant, agent in connection with
accumulation, open-account or similar plans (including without limitation any
periodic investment plan or periodic withdrawal program), including but not
limited to: maintaining all Shareholder accounts, preparing Shareholder meeting
lists, mailing proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on U.S. resident and non-resident alien
accounts, preparing and filing U.S. Treasury Department Forms 1099 and other
appropriate forms required with respect to dividends and distributions by
federal authorities for all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all purchases and
redemptions of Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for Shareholders, and
providing Shareholder account information and (ii):provide a system which will
enable the Fund to monitor the total number of Shares sold in each State.
(c) In addition, the Fund shall (i) identify to the Bank in writing
those transactions and assets to be treated as exempt from blue sky reporting
for each State and (ii) verify the establishment of transactions for each State
on the system prior to activation and thereafter monitor the daily activity for
each State. The responsibility of the Bank for the Fund's blue sky State
registration status is solely limited to the initial establishment of
transactions subject to blue sky compliance by the Fund and the reporting of
such transactions to the Fund as provided-above.
(d) Procedures as to who shall provide certain of these services in
Article 1 may be established from time to time by agreement between the Fund on
behalf of each Portfolio and the Bank per the attached service responsibility
schedule. The Bank may at times perform only a portion of these services and the
Fund or its agent may perform these services on the Fund's behalf.
(e) The Bank shall provide additional services on behalf of the Fund
(i.e., escheatment services) which may be agreed upon in writing between the
Fund and the Bank.
Article 2 Fees and-Expenses
2.01 For performance by the Bank pursuant to this Agreement, the
Fund agrees on behalf of each of the Portfolios to pay the Bank an annual
maintenance fee for each Shareholder account as set out in the initial fee
schedule attached hereto. Such fees and out-of-pocket expenses and advances
identified under Section 2.02 below may be changed from time to time subject to
mutual written agreement between the Fund and the Bank.
2.02 In addition to the fee paid under Section 2.01 above, the Fund
agrees on behalf of each of the Portfolios to reimburse the Bank for
out-of-pocket expenses, including but not limited to confirmation production,
postage,, forms, telephone, microfilm, microfiche, tabulating proxies, records
storage or advances incurred by the Bank for the items set out in the fee
schedule attached hereto. In addition, any other expenses incurred by the Bank
at the request or with the consent of the Fund, will be reimbursed by the Fund
on behalf of the applicable Portfolio.
2.03 The Fund agrees on behalf of each of the Portfolios to pay all
fees and reimbursable expenses within five days following the mailing of the
respective billing notice. Postage for mailing of dividends, proxies, Fund
reports and other mailings to all Shareholder accounts shall be advanced to the
Bank by the Fund at least seven (7) days prior to the mailing date of such
materials.
<PAGE> 5
Article 3 Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
3.01 It is a trust company duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in the
Commonwealth of Massachusetts.
3.03 It is empowered under applicable laws and by its Charter and
By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that:
4.01 It is a business trust duly organized and existing and in good
standing under the laws of Massachusetts.
4.02 It is empowered under applicable laws and by its Declaration of
Trust and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Declaration of Trust
and By-Laws have been taken to authorize it to enter into and perform this
Agreement.
4.04 It is an open-end and diversified management investment company
registered under the Investment Company Act of 1940, as amended.
4.05 A registration statement under the Securities Act of 1933, as
amended on behalf of each of the Portfolios is currently effective and will
remain effective, and appropriate state securities law filings have been made
and will continue to be made, with respect to all Shares of the Fund being
offered for sale.
Article 5 Data Access and Proprietary Information
5.01 The Fund acknowledges that the data bases, computer programs,
screen format, report formats, interactive design techniques, and documentation
manuals furnished to the Fund by the Bank as part of the Fund's ability to
access certain Fund-related data ("Customer Data") maintained by the Bank on
data bases under the control and ownership of the Bank or other third party
("Data Access Services") constitute copyrighted, trade secret, or other
proprietary information (collectively, "Proprietary Information") of substantial
value to the Bank or other third party. In no event shall Proprietary
Information be deemed Customer Data. The Fund agrees to treat all Proprietary
Information as proprietary to the Bank and further agrees that it shall not
divulge any Proprietary Information to any person or organization except as may
be provided hereunder. Without limiting the foregoing, the Fund agrees for
itself and its employees and agents:
(a) to access Customer Data solely from locations as may be
designated in writing by the Bank and solely in accordance
with the Bank's applicable user documentation;
(b) to refrain from copying or duplicating in any way the
Proprietary Information;
(c) to refrain from obtaining unauthorized access to any portion
of the Proprietary Information, and if such access is
inadvertently obtained, to inform in a timely manner of such
fact and dispose of such information in accordance with the
Bank's instructions;
(d) to refrain from causing or allowing third-party data required
hereunder from being retransmitted to any other computer
facility or other location, except with the prior written
consent of the Bank;
(e) that the Fund shall have access only to those authorized
transactions agreed upon by the parties;
<PAGE> 6
(f) to honor all reasonable written requests made by the Bank to
protect at the Bank's expense the rights of the. Bank in
Proprietary Information at common law, under federal copyright
law and under other federal or state law.
Each party shall take reasonable efforts to advise its employees of their
obligations pursuant to this Article 5. The obligations of this Article shall
survive any earlier termination of this Agreement.
5.02 If the Fund notifies the Bank that any of the Data Access
Services do not operate in material compliance with the most recently issued
user documentation for such services, the Bank shall endeavor in a timely manner
to correct such failure. Organizations from which the Bank may obtain certain
data included in the Data Access Services are solely responsible for the
contents of such data and the Fund agrees to make no claim against the Bank
arising out of the contents of such third-party data, including, but not limited
to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND
SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS,
AS AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE
EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
5.03 If the transactions available to the Fund include the ability
to originate electronic instructions to the Bank in order to (i) effect the
transfer or movement of cash of Shares or (ii) transmit Shareholder information
or other information (such transactions constituting a "COEFI"), then in such
event the Bank shall be entitled to rely on the validity and authenticity of
such instruction without undertaking any further inquiry as long as such
instruction is undertaken in conformity with security procedures established by
the Bank from time to time.
Article 6 Indemnification
6.01 The Bank shall not be responsible for, and the Fund shall on
behalf of the applicable Portfolio indemnify and hold the Bank harmless from and
against, any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to:
(a) All actions of the Bank or its agent or subcontractors required
to be taken pursuant to this Agreement, provided that such actions are taken in
good faith and without negligence or willful misconduct.
(b) The Fund's lack of good faith, negligence or willful misconduct
which arise out of the breach of any representation or warranty of the Fund
hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records, documents or services which (i) are
received by the Bank or its agents or subcontractors, and (ii) have been
prepared, maintained or performed by the Fund or any other person or firm on
behalf of the Fund including but not limited to any previous transfer agent or
registrar.
(d) The reliance on, or the carrying out by the Bank or its agents
or subcontractors of any instructions or requests of the Fund on behalf of the
applicable Portfolio.
(e) The offer or sale of Shares in violation of any requirement
under the federal securities laws or regulations or the securities laws or
regulations of any state that such Shares be registered in such state or in
violation of any stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of such Shares in such
state.
6.02 At any time the Bank may apply to any officer of the Fund for
instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by the Bank under this
Agreement, and the Bank and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund on behalf of the applicable Portfolio for any
action taken or omitted by it in reliance upon such instructions or upon the
opinion of such counsel. The Bank, its agents and subcontractors shall be
protected and indemnified in acting upon any paper or document furnished by or
on behalf of the Fund, reasonably believed to be genuine and to have been signed
by the proper person or persons, or upon any instruction, information, data,
records or documents provided the Bank or its agents or subcontractors by
machine readable input, telex, CRT data entry or other similar means authorized
by the Fund, and shall not be held to have notice of any change of authority of
any person, until receipt of written notice thereof from the Fund. The Bank, its
agents and subcontractors shall also be protected and indemnified in recognizing
stock certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officers of the Fund, and the, proper
countersignature of any former transfer agent or former registrar, or of a
co-transfer agent or co-registrar.
6.03 In order that the indemnification provisions contained in this
Article 6 shall apply, upon the assertion of a claim for which the Fund may be
required to indemnify the Bank, the Bank shall promptly notify
<PAGE> 7
the Fund of such assertion, and shall keep the Fund advised with respect to all
developments concerning such claim. The Fund shall have the option-to
participate with the Bank in the defense of such claim or to defend against said
claim in its own name or in the name of the Bank. The Bank shall in no case
confess any claim or make any compromise in any case in which the Fund may be
required to indemnify the Bank except with the Fund's prior written consent.
Article 7 Standard of Care
7.01 The Bank shall at all times act in good faith and agrees to use
its best efforts within reasonable limits to insure the accuracy of all services
performed under this Agreement, but assumes no responsibility and shall not be
liable for loss or damage due to errors unless said errors are caused by its
negligence, bad faith, or willful misconduct of that of its employees.
Article 8 Covenants of the Fund and the Bank
8.01 The Fund shall on behalf of each of the Portfolios promptly
furnish to the Bank the following:
(a) A certified copy of the resolution of the Trustees of the Fund
authorizing the appointment of the Bank and the execution and delivery of this
Agreement.
(b) A copy of the Declaration of Trust and By-Laws of the Fund and
all amendments thereto.
8.02 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
8.03 The Bank shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940, as amended,
and the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
8.04 The Bank and the Fund agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other person, except as may be required by law.
8.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify the Fund and
to secure instructions from an authorized officer of the Fund as to such
inspection. The Bank reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person.
Article 9 Termination of Agreement
9.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days written notice to the other.
9.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and material will
be borne by the Fund on behalf of the applicable Portfolio(s). Additionally, the
Bank reserves the right to charge for any other reasonable expenses associated
with such termination and/or a charge equivalent to the average of three (3)
months' fees.
Article 10 Additional Funds
10.01 In the event that the Fund establishes one or more series of
Shares in addition to Cash Management Portfolio, Equity Income Portfolio, High
Income Bond Portfolio, U.S. Government Bond Portfolio, Common Stock Portfolio,
Multiple Strategies Portfolio and World Equity Portfolio with respect to which
it desires to have the Bank render services as transfer agent under the terms
hereof, it shall so notify the Bank in writing, and if the Bank agrees in
writing to provide such services, such series of Shares shall become a Portfolio
hereunder.
Article 11 Assignment
<PAGE> 8
11.01 Except as provided in Section 11.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
11.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
11.03 The Bank may, without further consent on the part of the Fund,
subcontract for the performance hereof with (i) Boston Financial Data Services,
Inc., a Massachusetts corporation ("BFDS") which is duly registered as a
transfer agent pursuant to Section 17A(c) (1) of the Securities Exchange Act of
1934, as amended ("Section 17A (c) (1)") , (ii) a BFDS subsidiary duly
registered as a transfer agent pursuant to Section 17A(c) (1) or (iii) a BFDS
affiliate; provided, however, that the Bank shall be as fully responsible to the
Fund for the acts and omissions of any subcontractor as it is for its own acts
and omissions.
Article 12 Amendment
12.01 This Agreement may be amended or modified BY a written
agreement executed by both parties and authorized or approved BY a resolution of
the Trustees of the Fund.
Article 13 Massachusetts Law to Apply
13.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the commonwealth of
Massachusetts.
Article 14 Force Majeure
14.01 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
Article 15 Consequential Damages
15.01 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act hereunder.
Article 16 Merger of Agreement
16.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
Article 17 Limitations of Liability of the Trustees and Shareholders
17.01 A copy of the Declaration of Trust of the Trust is on file
with the Secretary of the Commonwealth of Massachusetts, and notice is hereby
given that this instrument is executed on behalf of the Trustees of the Trust as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of the Trustees or Shareholders individually but are
binding only upon the assets and property of the Fund.
Article 18 Counterparts
18.01 This Agreement may be executed by the parties hereto on any
number of counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
VARIABLE INVESTORS SERIES TRUST:
ATTEST:
_____________________ BY:_________________________________
STATE STREET BANK AND TRUST COMPANY
ATTEST:
_____________________ BY:_________________________________
<PAGE> 10
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES *
Service Performed
Responsibility
Bank Fund
---- ----
1. Receives orders for the purchase of Shares.
2. Issue Shares and hold Shares in Shareholders accounts.
3. Receive redemption requests.
4. Effect transactions 1-3 above directly with broker-dealers.
5. Pay over monies to redeeming Shareholders.
6. Effect transfers of Shares.
7. Prepare and transmit dividends and distributions.
8. Issue Replacement Certificates.
9. Reporting of abandoned property.
10. Maintain records of account.
11. Maintain and keep a current and accurate control book for each
issue of securities.
12. Mail proxies.
13. Mail Shareholder reports.
14. Mail prospectuses to current Shareholders.
15. Withhold taxes on U.S. resident and non-resident alien accounts.
16. Prepare and file U.S. Treasury Department forms.
17. Prepare and mail account and confirmation statements for
Shareholders.
18. Provide Shareholder account information.
19. Blue sky reporting.
* Such services are more fully described in Article 1.02(a), (b) and (c)
of the Agreement.
VARIABLE INVESTORS SERIES TRUST:
ATTEST:
_____________________ BY:_________________________________
STATE STREET BANK AND TRUST COMPANY
ATTEST:
_____________________ BY:_________________________________
<PAGE> 1
EX-99.9(b) Form of Subadministration Agreement for Reporting and Accounting
Services between the Registrant and State Street Bank and Trust
Company
<PAGE> 2
SUBADMINISTRATION AGREEMENT
for
REPORTING AND ACCOUNTING SERVICES
Agreement dated as of April 1, 19994 between FIRST VARIABLE ADVISORY
SERVICES, INC. (the "Manager"), STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company (the "Bank") and VARIABLE INVESTORS SERIES TRUST, a
Massachusetts business trust (the "Fund").
WHEREAS, the Manager has been appointed manager of the Fund, including
each portfolio or series thereof if applicable (the "Portfolio (s) 11), an
open-end diversified management investment company registered under the
Investment Company Act of 1940, as amended (the "Investment Company Act"), and
the Manager has accepted such appointment;
WHEREAS, the Manager and the Fund have entered into a management agreement
(the "Management Agreement") pursuant to which the Manager will provide
management, administrative and other services to the Fund and certain of said
services are commonly referred to as those performed by an administrator;
WHEREAS, the Bank provides management, subadministrative, and other
services to investment companies and others; and
WHEREAS, the Manager desires to retain the Bank to render certain
sub-administrative and other services with respect to the Fund and its
Portfolios as listed on Schedule A attached hereto, together with such
additional Portfolios as may be offered by the Fund from time to time and with
respect to which it is agreed by the Manager and the Bank this Agreement shall
apply, and the Bank is willing to render such services on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, the parties hereto agree as follows:
1. Appointment of Sub-Administrator
The Manager with the consent of the Fund hereby appoints the Bank to act
as sub-administrator with respect to the Fund and each Portfolio for purposes of
reporting and accounting exclusively to the Manager and the Fund for the period
and on the terms set forth in this Agreement. The Bank accepts such appointment
and agrees to render the services stated herein and to provide the office
facilities and the personnel required by it to perform such services. In
connection with such appointment, the Manager will deliver or cause the Fund to
deliver to the Bank copies of each of the following documents and will deliver
to it all future amendments and supplements, if any:
A. Certified copies of the Agreement and Declaration of Trust of the
Fund as presently in effect and as amended from time to time;
B. A certified copy of the Fund's By-Laws as presently in effect and as
amended from time to time;
C. The Fund's most recent registration statement on Form N-lA as filed
with, and, if applicable, declared effective by the U.S. Securities
and Exchange Commission, and all amendments thereto;
D. Each resolution of the Trustees of the Fund authorizing the original
issue of its shares;
E. Certified copies of the resolutions of the Fund's Trustees
authorizing: (1) this Agreement, (2) certain officers and employees
of the Manager and the Fund to give instructions to the Bank
pursuant to this Agreement and (3) certain officers and employees of
the Manager or the Fund to sign checks and pay expenses on behalf of
the Manager or the Fund, respectively;
F. A copy of the Management Agreement;
G. A copy of the investment advisor agreement between the Fund and the
Advisor;
H. A copy of the Custodian Agreement between the Fund and its
custodian;
<PAGE> 3
I. A copy of the Transfer Agency and Services Agreement between the
Fund and its transfer agent; and
J. Such other certificates, documents or opinions which the Bank may,
in its reasonable discretion, deem necessary or appropriate in the
proper performance of its duties.
2. Representation and Warranties of the Bank
The Bank represents and warrants to the Manager and the Fund that:
A. It is a Massachusetts trust company, duly organized and existing in
good standing under the laws of the Commonwealth of Massachusetts;
B. It is duly qualified to carry on its business in the Commonwealth of
Massachusetts;
C. It is empowered under applicable laws and by its Charter and By-Laws
to enter into and perform the services contemplated in this
Agreement;
D. All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement; and
E. it has and will continue to have and maintain the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
3. Authorized Shares
The Manager certifies to the Bank that, as of the close of business on the
date of this Agreement, the Fund is authorized to issue shares of beneficial
interest, and that the Trustees of the Fund have the power to classify or
reclassify unissued shares, from time to time, into one or more series, and that
it presently offers shares in the authorized amounts as set forth in Schedule:A
attached hereto.
4. Reporting and Accounting Services
The Bank shall discharge the responsibilities set forth in Schedule B
hereof subject to the control of the Manager in accordance with procedures
established from time to time between the Manager and the Bank.
It is the responsibility of the Manager and/or its outside legal counsel
and accountants to notify the Bank in a timely manner of any change to any rule,
regulation, law or statute that will affect the services to be provided
hereunder. Without limiting the obligations or responsibilities of any of the
parties hereto, the Bank and the Manager agree that all services provided
hereunder are subject to review and correction by the Fund's accountants and
legal counsel and the services provided by Bank shall not constitute the
practice of public accountancy or law.
5. Services to be Obtained by the Manager or the Fund
The Manager and/or the Fund shall provide for any of its own:
A. Organizational expenses;
B. Services of an independent accountant;
C. Services of outside legal and tax counsel (including such counsel's
review of the Fund's registration statement, proxy materials,
federal and state tax qualification as a regulated investment
company, and other reports and materials prepared by the Bank under
this Agreement);
D. Any services contracted f or by either the Manager or the Fund
directly from parties other than the Bank;
<PAGE> 4
E. Trading operations and brokerage fees, commissions and transfer
taxes in connection with the purchase and sale of securities for the
Fund;
F. Investment advisory services;
G. Taxes, insurance premiums and other fees and expenses applicable to
its operation;
H. Costs incidental to any meetings of shareholders including,- but not
limited to, legal and accounting fees, proxy filing fees and the
preparation, printing and mailing of any proxy materials;
I. Administration of and costs incidental to Trustees' meetings,
including fees and expenses of Trustees;
J. The salary and expenses of any officer or employee, of the Fund or
the Manager;
K. Costs incidental to the preparation, printing and distribution of
the Fund's registration statements and any amendments thereto, and
shareholder reports;
L. All applicable registration fees and filing fees required under the
securities laws of the United States and state regulatory
authorities;
M. Preparation and filing of the Fund's tax returns, Form N-lA, Annual
Report and Semi-Annual Report on Form N-SAR, and all notices,
registrations and amendments associated with applicable tax and
securities laws of the United States and state regulatory
authorities; and
N. Fidelity bond and directors' and officers' liability insurance.
6. Fees
The Bank shall receive from the Manager or the Fund such compensation for
the Bank's services provided and the expenses incurred pursuant to this
Agreement as may be agreed to from time to time in a written fee schedule
approved by the parties hereto and initially set forth herein in Schedule C
attached hereto. In addition, the Bank shall be reimbursed by the Manager for
the reasonable out-of-pocket costs incurred by it in connection with this
Agreement.
7. Instructions
At any time the Bank may apply to any officer of the Manager or the Fund
for instructions and may consult with legal counsel for the Fund or the Manager
as directed by the Manager, or its own outside legal counsel, the outside
counsel for the Fund or the outside auditors for the Fund at the expense of the
Fund, with respect to any matter arising in connection with the services to be
performed by the Bank under this Agreement. The Bank shall not be liable and
shall be indemnified by the Manager and the Fund for any action taken or omitted
by it without negligence and in good faith in reliance upon such instructions or
upon any paper or document reasonably believed by it to be genuine and to have
been signed by the proper person or persons. The Bank shall not be held to have
notice of any change of authority of any person until receipt of written notice
thereof from the Manager or the Fund.
8. Limitation of Liability and Indemnification
a. The Bank shall be responsible for the performance of only such
duties as are set forth herein and shall have no responsibility for
the actions or activities of any other party including other service
providers not acting upon instructions of, at the direction of, or
in reliance upon the Bank. The Bank shall have no . liability for
any loss or damage resulting from the performance or nonperformance
of its duties hereunder except to the extent caused by or resulting
from the negligence or willful misconduct of the Bank, its officers
or employees. In any event, the Bank's liability shall be limited
to its total annual compensation earned and fees paid during the
preceding twelve months for any liability suffered by the Manager or
the Fund including, but not limited to, any liability relating to
qualification of the Fund as a regulated investment company or any
<PAGE> 5
liability relating to the Fund's compliance with any federal or
state tax or securities statute, regulation or ruling.
b. The Manager and the Fund shall indemnify and hold the Bank harmless
from all loss, cost, damage and expense, including reasonable
expenses f or counsel, incurred by the Bank resulting from any
claim, demand, action or suit in connection with the Bank's
acceptance of this Agreement, any action or omission by it in the
performance of its duties hereunder, or as a result of acting upon
any instructions reasonably believed by it to have been executed by
a duly authorized officer of the Manager or of the Fund, provided
that this indemnification shall not apply to actions or omissions of
the Bank, its officers, employees or agents in cases of its or their
own gross negligence or willful misconduct.
c. The Manager and the Fund will be entitled to participate at their
own expense in the defense, or, if either so elects, to assume the
defense of any suit brought to enforce any liability subject to the
indemnification provided above. In the event the Manager or the
Fund elects to assume the defense of any such suit and retain such
counsel, the Bank or any of its affiliated persons named as
defendant or defendants in the suit may retain additional counsel
but shall bear the fees and expenses of such counsel unless the
Manager or the Fund, as the case may be, shall have-specifically
authorized the retaining of such counsel.
d. The indemnification contained herein shall survive the termination
of this Agreement.
e. This Section 8 shall not apply with respect to services covered by
the Custodian Agreement or the Transfer Agency and Services
Agreement.
9. Confidentiality
The Bank agrees that, except as otherwise required by law, it will keep
confidential the terms of this Agreement, all records and information in its
possession relating to the Fund-or its shareholders or shareholder accounts and
will not disclose the same to any person except at the request or with the
written consent of the Fund.
10. Compliance with Governmental Rules and Regulations
The Manager and the Fund assume full responsibility for complying with all
applicable requirements of the Investment Company Act, the Securities Act of
1933, the Securities Exchange Act of 1934, and the Internal Revenue Code of
1986, all as amended, and any laws, rules and regulations issued thereunder,
provided that such assumption shall not limit the Bank's obligation to perform
all of its duties hereunder in accordance with the terms hereof.
The Bank shall maintain and preserve for the periods prescribed such
records relating to the services to be performed by the Bank under this
Agreement as are required pursuant to the Investment Company Act and such other
records as may be agreed upon by the parties. All such records shall at all
times remain the respective properties of the Manager or the Fund, shall be
readily accessible during normal business hours to each, and shall be promptly
surrendered upon the termination of the Agreement or otherwise on written
request. Records shall be surrendered in usable machine-readable form.
11. Status of the Bank
The services of the Bank to the Manager and the Fund are not to be deemed
exclusive, and the Bank shall be free to render similar services to others. The
Bank shall be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Manager or the Fund, as the case
may be from time to time, have no authority to act or represent either the
Manager or the Fund in any way or otherwise be deemed an agent of either the
Manager or of the, Fund.
12. Printed Matter
Neither the Manager nor the Bank shall publish or circulate any printed
matter which contains any reference to the other party without such party's
prior written approval. The Fund or the Manager may circulate
<PAGE> 6
such printed matter as. refers in accurate terms to the Bank's appointment
hereunder provided that the Bank is given a copy of such material prior to its
first use.
13. Term, Amendment and Termination
This Agreement may be modified or amended from time to time by mutual
agreement between the parties hereto. The Agreement shall remain in effect for a
period of one year from the date hereof and shall automatically continue in
effect thereafter unless terminated by a party at the end of such period or
thereafter on sixty (60) days' prior written notice. Upon termination of this
Agreement entirely or with respect to a Portfolio, the Manager or the Fund shall
pay to the Bank such compensation as may be due under the terms hereof as of the
date of such termination including reasonable out-of-pocket expenses associated
with such termination.
14. Notices
Any notice or other communication authorized or required by this Agreement
to be given to any party mentioned herein shall be sufficiently given if
addressed to such party and mailed post prepaid or delivered to its principal
office.
15. Non-Assignability
This Agreement shall not be assigned by any of the parties hereto without
the prior consent in writing of the other parties.
16. Successors
This Agreement shall be binding on and shall inure to t benefit of the
Manager, the Fund and the Bank and their respective successors.
17. Entire Agreement
This Agreement (and the Fund Profile and Compliance Manual) contains the
entire understanding between the parties hereto and supersedes all previous
representations, warranties commitments regarding the services to be performed
hereunder whether oral or in writing. This Agreement cannot be modified
terminated except in accordance with its terms or by a writing signed by all
parties.
18. Governing Law
This Agreement shall be construed and the provision thereof interpreted
under and in accordance with the laws of the Commonwealth of Massachusetts.
19. Limitations of Liability to the Trustees and Shareholder
A copy of the Declaration of Trust of the Fund is on file with the
Secretary of the Commonwealth of Massachusetts, and notice is hereby given that
this instrument is executed on behalf of the Trustees of the Trust as Trustees
and not individually and that the obligations of this instrument are not binding
upon any of the Trustees or Shareholders individually but are binding only upon
the assets and property of the Fund.
<PAGE> 7
FIRST VARIABLE ADVISORY SERVICES, INC.
By: /s/ Mark E. Reynolds
Name: Mark E. Reynolds
Title: Treasurer and Secretary
STATE STREET BANK AND TRUST COMPANY
By: /s/ Ronald E. Logne
Name: Ronald E. Longe
Title: Executive Vice President
VARIABLE INVESTORS SERIES TRUST
By: /s/ Mark E. Reynolds
Name: Mark E. Reynolds
Title: Vice President, Treasurer and Secretary
<PAGE> 8
SCHEDULE A
TO
SUBADMINISTRATION AGREEMENT
Portfolio Authorized Shares and Class
(unlimited authorization and
single class unless otherwise noted.)
- - Cash-Management Portfolio __________________________________
- - Common Stock Portfolio __________________________________
- - Equity Income Portfolio __________________________________
- - High Income Bond Portfolio __________________________________
- - Multiple Strategies Portfolio __________________________________
- - U.S. Government Bond Portfolio __________________________________
- - World Equity Portfolio __________________________________
<PAGE> 9
SCHEDULE B
TO
SUBADMINISTRATION AGREEMENT
Reporting and Accounting Services Provided by the Bank
(a) Oversee the determination and publication of the Fund's net asset value in
accordance with the Fund's policy as instructed by the Manager;
(b) Oversee the maintenance by the Bank and Fund of certain books and records
of the Fund as required under Rule 3la-l(b)(4) of the Investment Company
Act of 1940;
(c) Prepare the Fund's federal, state and local income tax returns for review
by the independent accountants and filing by the treasurer;
(d) Review the appropriateness of and arrange for payment of the Fund's
expenses;
(e) Perform such compliance reviews of the Fund as may be agreed upon between
the Manager and the Bank;
(f) Prepare for review and approval by officers of the Fund financial
information for the Fund's semi-annual and annual reports, proxy
statements and other communications with shareholders;
(g) Prepare for review by an officer and counsel of the Fund certain periodic
financial reports required by the Securities and Exchange Commission as
may be mutually agreed upon;
(h) Prepare reports relating to the business and affairs of the Fund as may be
mutually agreed upon;
(i) Make such reports and recommendations to the Trustees concerning the
performance of the independent accountants as the Trustees may reasonably
request or deem appropriate;
(j) Make such reports and recommendations to the Trustees concerning the
performance and fees of the Fund's custodian and transfer and dividend
disbursing agent as the Trustees may reasonably request or deem
appropriate;
(k) Oversee and review calculations of fees paid to the Manager, the
investment adviser, the custodian, and the transfer agent;
(l) Consult with the Fund's officers, independent accountants, legal counsel,
custodian and transfer and dividend disbursing agent in establishing the
accounting policies of the Fund;
(m) Review implementation by the Fund of any dividend reinvestment programs
authorized by the Trustees;
(n) Provide such assistance to the Manager, the adviser, the custodian, the
transfer agent and the Fund's counsel and auditors as may be mutually
agreed upon to properly carry on the business and operations of the Fund;
and
(o) Respond to or refer to the Fund's officers or transfer agent any
shareholder inquiries relating to the Fund.
Certain- details of the scope of the Bank's services hereunder shall be
documented in the Compliance Manual and Fund Profile as agreed upon by the
Manager, the Fund, and the Bank from time to time.
<PAGE> 1
EX-99.9(c) Expense Reimbursement Agreement
<PAGE> 2
February 20, 1998
Variable Investors Series Trust
10 Post Office Square, 12th floor
Boston, MA 02109
Re: Expense Limitation
Dear Sirs:
The undersigned, First Variable Advisory Services Corp. ("FVAS") and First
Variable Life Insurance Company ("First Variable"), have entered into an
Agreement dated April 1, 1994 ("Expense Reimbursement Agreement") (a copy of
which is attached hereto) with Variable Investors Series Trust ("Trust") under
the terms of which FIRST VARIABLE has undertaken and agreed that it will, if
necessary, pay the expenses of each portfolio of the Trust ("Portfolio") until
April 1, 1999, to the extent that expenses of a Portfolio, other than
compensation of FVAS, exceed the annual rate of 0.50% of the Portfolio's average
net assets (except 0.25% with respect to the U.S. Government Bond Portfolio).
First Variable desires that each of the Portfolios of the Trust remain an
attractive investment medium to holders of variable products issued by its
separate accounts and that the Trust continue to offer shares of each of the
Portfolios to the separate accounts of First Variable. In consideration thereof,
and as an inducement to you to continue to offer shares to the separate
accounts, FVAS and First Variable hereby undertake and agree with the Trust that
they will, if necessary, continue to pay expenses of each of such Portfolios
until April 1, 1999 to the extent that expenses of a Portfolio, other than the
compensation of FVAS, exceed the annual rate of 0.50% of the Portfolio's average
net assets (0.25% in the case of the U.S. Government Bond Portfolio).
FIRST VARIABLE LIFE INSURANCE COMPANY
BY: /s/ John M. Soukup
John M. Soukup, President
FIRST VARIABLE ADVISORY SERVICES CORP.
BY: /s/ John V. Egan
John V. Egan, Treasurer
Agreed and accepted
VARIABLE INVESTORS SERIES TRUST
BY: /s/ Arnold R. Bergman
Arnold R. Bergman, Secretary
<PAGE> 3
April 1, 1994
Variable Investors Series Trust
600 Atlantic Avenue, 28th Floor
Boston, Massachusetts 02210
Re: Expense Limitations
Dear Sirs:
The undersigned, First variable Advisory Services Corp, ("FVAS"), and
First Variable Life Insurance Company ('First Variable"), provide to Variable
Investors Series Trust (the "Trust") Investment Advisory and other services in
respect of the operations of the Trust (the "Services"). Certain separate
accounts of First Variable offer shares of the various portfolios of the Trust
as investment media under variable insurance or annuity products issued by such
separate accounts. Such separate accounts, together with certain separate
accounts of Monarch Life Insurance Company, are the only shareholders of record
of each of such portfolios.
First Variable desires that each of the portfolios of the Trust remain an
attractive investment medium to holders of variable products issued by its
separate accounts and those issued by Monarch and that the Trust continue to
offer shares of each of the portfolios to the separate accounts of First
Variable and Monarch. In consideration thereof and as an inducement to you to
continue to offer shares to the separate accounts, FVAS and First Variable
hereby undertake and agree with the Trust that they will, if necessary, pay
expenses of each of such portfolio until April 1, 1995 to the extent that
expenses of a portfolio, other than the compensation of FVAS, exceed the annual
rate of 0.50% of the portfolio's average net assets (0.25% in the case of the
Cash Management Portfolio and the U.S. Government Bond Portfolio).
FIRST VARIABLE LIFE
INSURANCE COMPANY
By: /s/ David V. Whitt
David V. Whitt
President
FIRST VARIABLE ADVISORY
SERVICES CORP.
By: /s/ Mark E. Reynolds
Mark E. Reynolds
Treasurer
Agreed and accepted
VARIABLE INVESTORS SERIES TRUST
By: /s/ L. Gregory Gloeckner
L. Gregory Gloeckner
Vice President
<PAGE> 1
EX-99.B10 Consent of Blazzard, Grodd & Hasenauer P.C.
<PAGE> 2
BLAZZARD, GRODD & HASENAUER, P.C.
ATTORNEYS AT LAW CONNECTICUT OFFICE:
943 POST ROAD EAST - P.O. BOX
5108
NORSE N. BLAZZARD** WESTPORT, CONNECTICUT
06881-5108
LESLIE E. GRODD* TELEPHONE (203) 226-7866
JUDITH A. HASENAUER** FACSIMILE (203) 454-4028
WILLIAM E. HASENAUER*
RAYMOND A. O'HARA III*
LYNN KORMAN STONE* FLORIDA OFFICE:
MAUREEN M. MURPHY* SUITE 213, OCEANWALK MALL
101 NORTH OCEAN DRIVE
* Admitted in Connecticut HOLLYWOOD, FLORIDA 33019
** Admitted in Connecticut & TELEPHONE (305) 920-6590
Florida
FACSIMILE (305) 920-6902
April 13, 1998
CONSENT OF COUNSEL
We consent to the reference to our Firm under the caption "Legal Counsel"
contained in the Statement of Additional Information which forms a part of
Post-Effective Amendment No. 19 to the Variable Investors Series Trust
Registration Statement on Form N-1A, File Nos. 33-11182 and 811-04969.
/s/ Blazzard, Grodd & Hasenauer, P.C.
-------------------------------------
BLAZZARD, GRODD & HASENAUER, P.C.
<PAGE> 1
EX-99.B11. Consent of Ernst & Young LLP, Independent Auditors
<PAGE> 2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "The Trust's
Financial History" in the Prospectus and "Independent Auditors" and "Financial
Statements" in the Statement of Additional Information included in
Post-Effective Amendment No. 19 to the Registration Statement (Form N-1A, No.
33-11182) of Variable Investors Series Trust.
We also consent to the incorporation by reference of our report dated February
9, 1998 on the Small Cap Growth, World Equity, Growth, Matrix Equity, Growth &
Income, Multiple Strategies, High Income Bond and U.S. Government Bond
Portfolios of Variable Investors Series Trust, included in the 1997 Annual
Report to Contract Owners.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
April 13, 1998
<PAGE> 1
EX-99.B16. Schedule of Computation of Performance Information
<PAGE> 2
VIST SMALL CAP GROWTH PORTFOLIO
(PREVIOUSLY KNOWN AS THE "VIST SMALL CAP PORTFOLIO")
SCHEDULE FOR COMPUTATION OF
TOTAL RETURN FIGURES INCLUDED IN THE
STATEMENT OF ADDITIONAL INFORMATION
The following reflects the calculation of the Small Cap Growth Portfolio's
average annual total return ("T") for the one year and life of Portfolio periods
ended December 31, 1997, which has been included in the Statement of Additional
Information: In the following equations, "ERV" represents the Redeemable Value
at the end of each time period, "n" represents the period of time and "P"
represents the amount of the initial investment, i.e., $10,000. The calculation
assumes reinvestment of all dividends and distributions. The formula for
calculating average annual total return is:
ERV
T = n square root of --- -1
P
PERIOD JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
n = 1
ERV = 10,073
P = $10,000
10,073
T = 1 square root of ------ -1
10,000
T = .0073 or .73%
PERIOD MAY 4, 1995 (INCEPTION OF PORTFOLIO) THROUGH DECEMBER 31, 1997
n = 2.66
ERV = 16,684
P = $10,000
16,684
T = 2.66 square root of ------ -1
10,000
T = .2122 or 21.22%
<PAGE> 3
VIST WORLD EQUITY PORTFOLIO
SCHEDULE FOR COMPUTATION OF
TOTAL RETURN FIGURES INCLUDED IN THE
STATEMENT OF ADDITIONAL INFORMATION
The following reflects the calculation of the World Equity Portfolio's
average annual total return ("T") for the one year, five year and life of
Portfolio periods ended December 31, 1997, which have been included in the
Statement of Additional Information: In the following equations, "ERV"
represents the Redeemable Value at the end of each time period, "n" represents
the period of time and "P" represents the amount of the initial investment,
i.e., $10,000. The calculation assumes reinvestment of all dividends and
distributions. The formula for calculating average annual total return is:
ERV
T = n square root of --- -1
P
PERIOD JUNE 10, 1988 THROUGH DECEMBER 31, 1997
n = 9.56
ERV = 21,337
P = $10,000
21,337
T = 9.56 square root of ------ -1
10,000
T = .0825 or 8.25%
FIVE YEAR PERIOD JANUARY 1, 1993 THROUGH DECEMBER 31, 1997
n = 5
ERV = 19.835
P = $10,000
19,835
T = 5 square root of ------ -1
10,000
T = .1468 or 14.68%
ONE YEAR PERIOD JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
n = 1
ERV = 10,998
P = $10,000
10,998
T = 1 square root of ------ -1
10,000
T = .0998 or 9.98%
<PAGE> 4
VIST GROWTH PORTFOLIO
(PREVIOUSLY KNOWN AS THE "VIST COMMON STOCK PORTFOLIO")
SCHEDULE FOR COMPUTATION OF
TOTAL RETURN FIGURES INCLUDED IN THE
STATEMENT OF ADDITIONAL INFORMATION
The following reflects the calculation of the Growth Portfolio's average
annual total return ("T") for the one year, five year and ten year periods ended
December 31, 1997, which have been included in the Statement of Additional
Information: In the following equations, "ERV" represents the Redeemable Value
at the end of each time period, "n" represents the period of time and "P"
represents the amount of the initial investment, i.e., $10,000. The calculation
assumes reinvestment of all dividends and distributions. The formula for
calculating average annual total return is:
ERV
T = n square root of --- -1
P
TEN YEAR PERIOD JANUARY 1, 1988 THROUGH DECEMBER 31, 1997
n = 10
ERV = 43,622
P = $10,000
43,622
T = 10 square root of ------ -1
10,000
T = .1587 or 15.87%
FIVE YEAR PERIOD JANUARY 1, 1993 THROUGH DECEMBER 31, 1997
n = 5
ERV = 23,082
P = $10,000
23,082
T = 5 square root of ------ -1
10,000
T = .1821 or 18.21%
ONE YEAR PERIOD JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
n = 1
ERV = 12,362
P = $10,000
12,362
T = 1 square root of ------ -1
10,000
T = .2362 or 23.62%
<PAGE> 5
VIST MATRIX EQUITY PORTFOLIO
(PREVIOUSLY KNOWN AS THE "VIST TILT UTILITY PORTFOLIO")
SCHEDULE FOR COMPUTATION OF
TOTAL RETURN FIGURES INCLUDED IN THE
STATEMENT OF ADDITIONAL INFORMATION
The following reflects the calculation of the Matrix Equity Portfolio's
average annual total return ("T") for the one year, five year and life of
Portfolio periods ended December 31, 1997, which have been included in the
Statement of Additional Information: In the following equations, "ERV"
represents the Redeemable Value at the end of each time period, "n" represents
the period of time and "P" represents the amount of the initial investment,
i.e., $10,000. The calculation assumes reinvestment of all dividends and
distributions. The formula for calculating average annual total return is:
ERV
T = n square root of --- -1
P
PERIOD JUNE 16, 1988 THROUGH DECEMBER 31, 1997
n = 9.55
ERV = 33,682
P = $10,000
33,682
T = 9.55 square root of ------ -1
10,000
T = .1356 or 13.56%
FIVE YEAR PERIOD JANUARY 1, 1993 THROUGH DECEMBER 31, 1997
n = 5
ERV = 19,879
P = $10,000
19,879
T = 5 square root of ------ -1
10,000
T = .1473 or 14.73%
ONE YEAR PERIOD JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
n = 1
ERV = 12,205
P = $10,000
12,205
T = 1 square root of ------ -1
10,000
T = .2205 or 22.05%
<PAGE> 6
VIST GROWTH & INCOME PORTFOLIO
SCHEDULE FOR COMPUTATION OF
TOTAL RETURN FIGURES INCLUDED IN THE
STATEMENT OF ADDITIONAL INFORMATION
The following reflects the calculation of the Growth & Income Portfolio's
average annual total return ("T") for the one year and life of Portfolio periods
ended December 31, 1997 which have been included in the Statement of Additional
Information: In the following equations, "ERV" represents the Redeemable Value
at the end of each time period, "n" represents the period of time and "P"
represents the amount of the initial investment, i.e., $10,000. The calculation
assumes reinvestment of all dividends and distributions. The formula for
calculating average annual total return is:
ERV
T = n square root of --- -1
P
ONE YEAR PERIOD JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
n = 1
ERV = 12,820
P = $10,000
12,820
T = 1 square root of ------ -1
10,000
T = .2820 or 28.20%
PERIOD MAY 31, 1995 (PORTFOLIO INCEPTION DATE) THROUGH DECEMBER 31, 1997
n = 2.59
ERV = 16,261
P = $10,000
16,261
T = 2.59 square root of ------ -1
10,000
T = .2065 or 20.65%
<PAGE> 7
VIST MULTIPLE STRATEGIES PORTFOLIO
SCHEDULE FOR COMPUTATION OF
TOTAL RETURN FIGURES INCLUDED IN THE
STATEMENT OF ADDITIONAL INFORMATION
The following reflects the calculation of the Multiple Strategies
Portfolio's average annual total return ("T") for the one year, five year and
ten year periods ended December 31, 1997, which have been included in the
Statement of Additional Information: In the following equations, "ERV"
represents the Redeemable Value at the end of each time period, "n" represents
the period of time and "P" represents the amount of the initial investment,
i.e., financial statements based on our audits. We conducted our audits of these
financial statements in $10,000. The calculation assumes reinvestment of all
dividends and distributions. The formula for calculating average annual total
return is:
ERV
T = n square root of --- -1
P
TEN YEAR PERIOD JANUARY 1, 1988 THROUGH DECEMBER 31, 1997
n = 10
ERV = 30,837
P = $10,000
30,837
T = 10 square root of ------ -1
10,000
T = .1192 or 11.92%
FIVE YEAR PERIOD JANUARY 1, 1993 THROUGH DECEMBER 31, 1997
n = 5
ERV = 20,245
P = $10,000
20,245
T = 5 square root of ------ -1
10,000
T = .1515 or 15.15%
ONE YEAR PERIOD JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
n = 1
ERV = 12,179
P = $10,000
12,179
T = 1 square root of ------ -1
10,000
T = .2179 or 21.79%
<PAGE> 8
VIST HIGH INCOME PORTFOLIO
30-DAY COMPUTATION
30 DAYS ENDED DECEMBER 31, 1997
A = Dividend and interest income
B = Expenses accrued for the period
C = Average daily number of shares outstanding during the period that was
entitled to receive dividends
D = Maximum offering price on the last day of the month
a-b (6)
YIELD = 2[( --- + 1) - 1]
cd
121,530.28 - 17,491.19 (6)
YIELD = 2[( ---------------------- + 1) -1]
1,730,206.52 x 9.720
YIELD = .0753935 or 7.53935%
<PAGE> 9
EXHIBIT 16
VIST U.S. GOVERNMENT BOND PORTFOLIO
30-DAY COMPUTATION
30 DAYS ENDED DECEMBER 31, 1997
A = Dividend and interest income
B = Expenses accrued for the period
C = Average daily number of shares outstanding during the period that was
entitled to receive dividends
D = Maximum offering price on the last day of the month
a-b (6)
YIELD = 2[( ---- + 1) -1]
cd
55,298.68 - 6,616.63 (6)
YIELD = 2[( -------------------- + 1) -1]
886,377.86 x 10.161
YIELD = .0657455 or 6.57455%
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 08
<NAME> SMALL CAP GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 16125
<INVESTMENTS-AT-VALUE> 18362
<RECEIVABLES> 149
<ASSETS-OTHER> 9
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18520
<PAYABLE-FOR-SECURITIES> 189
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 77
<TOTAL-LIABILITIES> 266
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16171
<SHARES-COMMON-STOCK> 1172
<SHARES-COMMON-PRIOR> 860
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (154)
<ACCUM-APPREC-OR-DEPREC> 2237
<NET-ASSETS> 18254
<DIVIDEND-INCOME> 18
<INTEREST-INCOME> 30
<OTHER-INCOME> 0
<EXPENSES-NET> 227
<NET-INVESTMENT-INCOME> (179)
<REALIZED-GAINS-CURRENT> 485
<APPREC-INCREASE-CURRENT> 232
<NET-CHANGE-FROM-OPS> 538
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 634
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 747
<NUMBER-OF-SHARES-REDEEMED> 478
<SHARES-REINVESTED> 43
<NET-CHANGE-IN-ASSETS> 4450
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (5)
<GROSS-ADVISORY-FEES> 143
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 300
<AVERAGE-NET-ASSETS> 16793
<PER-SHARE-NAV-BEGIN> 16.050
<PER-SHARE-NII> (0.152)
<PER-SHARE-GAIN-APPREC> 0.243
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> (0.563)
<PER-SHARE-NAV-END> 15.578
<EXPENSE-RATIO> 1.35
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 07
<NAME> WORLD EQUITY PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 20852
<INVESTMENTS-AT-VALUE> 24708
<RECEIVABLES> 42
<ASSETS-OTHER> 413
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25163
<PAYABLE-FOR-SECURITIES> 60
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 331
<TOTAL-LIABILITIES> 391
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20800
<SHARES-COMMON-STOCK> 1759
<SHARES-COMMON-PRIOR> 1629
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (28)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (129)
<ACCUM-APPREC-OR-DEPREC> 4129
<NET-ASSETS> 24772
<DIVIDEND-INCOME> 307
<INTEREST-INCOME> 65
<OTHER-INCOME> 0
<EXPENSES-NET> 307
<NET-INVESTMENT-INCOME> 65
<REALIZED-GAINS-CURRENT> 3236
<APPREC-INCREASE-CURRENT> (875)
<NET-CHANGE-FROM-OPS> 2426
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 439
<DISTRIBUTIONS-OF-GAINS> 3289
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 403
<NUMBER-OF-SHARES-REDEEMED> 539
<SHARES-REINVESTED> 266
<NET-CHANGE-IN-ASSETS> 237
<ACCUMULATED-NII-PRIOR> 127
<ACCUMULATED-GAINS-PRIOR> 143
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 179
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 374
<AVERAGE-NET-ASSETS> 25532
<PER-SHARE-NAV-BEGIN> 15.062
<PER-SHARE-NII> 0.068
<PER-SHARE-GAIN-APPREC> 1.392
<PER-SHARE-DIVIDEND> (0.287)
<PER-SHARE-DISTRIBUTIONS> (2.151)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.084
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 45061
<INVESTMENTS-AT-VALUE> 67747
<RECEIVABLES> 88
<ASSETS-OTHER> 18
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 67853
<PAYABLE-FOR-SECURITIES> 2103
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 477
<TOTAL-LIABILITIES> 2580
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42140
<SHARES-COMMON-STOCK> 1881
<SHARES-COMMON-PRIOR> 1782
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 447
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 22686
<NET-ASSETS> 65273
<DIVIDEND-INCOME> 350
<INTEREST-INCOME> 173
<OTHER-INCOME> 0
<EXPENSES-NET> 678
<NET-INVESTMENT-INCOME> (155)
<REALIZED-GAINS-CURRENT> 5049
<APPREC-INCREASE-CURRENT> 7862
<NET-CHANGE-FROM-OPS> 12756
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 5388
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 368
<NUMBER-OF-SHARES-REDEEMED> 427
<SHARES-REINVESTED> 158
<NET-CHANGE-IN-ASSETS> 10708
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 786
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 432
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 678
<AVERAGE-NET-ASSETS> 61656
<PER-SHARE-NAV-BEGIN> 30.623
<PER-SHARE-NII> (0.082)
<PER-SHARE-GAIN-APPREC> 7.226
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (3.065)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 34.702
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 03
<NAME> MATRIX EQUITY PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 12751
<INVESTMENTS-AT-VALUE> 14416
<RECEIVABLES> 135
<ASSETS-OTHER> 90
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14641
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 120
<TOTAL-LIABILITIES> 120
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12522
<SHARES-COMMON-STOCK> 1017
<SHARES-COMMON-PRIOR> 947
<ACCUMULATED-NII-CURRENT> 50
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 284
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1665
<NET-ASSETS> 14521
<DIVIDEND-INCOME> 387
<INTEREST-INCOME> 10
<OTHER-INCOME> 0
<EXPENSES-NET> 164
<NET-INVESTMENT-INCOME> 233
<REALIZED-GAINS-CURRENT> 3205
<APPREC-INCREASE-CURRENT> (602)
<NET-CHANGE-FROM-OPS> 2836
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 233
<DISTRIBUTIONS-OF-GAINS> 3143
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 105
<NUMBER-OF-SHARES-REDEEMED> 272
<SHARES-REINVESTED> 237
<NET-CHANGE-IN-ASSETS> 74
<ACCUMULATED-NII-PRIOR> 50
<ACCUMULATED-GAINS-PRIOR> 222
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 93
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 220
<AVERAGE-NET-ASSETS> 14276
<PER-SHARE-NAV-BEGIN> 15.254
<PER-SHARE-NII> .287
<PER-SHARE-GAIN-APPREC> 2.965
<PER-SHARE-DIVIDEND> (0.291)
<PER-SHARE-DISTRIBUTIONS> (3.940)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.275
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 09
<NAME> GROWTH AND INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 18856
<INVESTMENTS-AT-VALUE> 21204
<RECEIVABLES> 478
<ASSETS-OTHER> 8
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21690
<PAYABLE-FOR-SECURITIES> 569
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 60
<TOTAL-LIABILITIES> 629
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18542
<SHARES-COMMON-STOCK> 1446
<SHARES-COMMON-PRIOR> 829
<ACCUMULATED-NII-CURRENT> 1
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 170
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2348
<NET-ASSETS> 21061
<DIVIDEND-INCOME> 287
<INTEREST-INCOME> 80
<OTHER-INCOME> 0
<EXPENSES-NET> 199
<NET-INVESTMENT-INCOME> 168
<REALIZED-GAINS-CURRENT> 1908
<APPREC-INCREASE-CURRENT> 1748
<NET-CHANGE-FROM-OPS> 3824
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 167
<DISTRIBUTIONS-OF-GAINS> 1588
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 663
<NUMBER-OF-SHARES-REDEEMED> 169
<SHARES-REINVESTED> 123
<NET-CHANGE-IN-ASSETS> 10761
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (150)
<GROSS-ADVISORY-FEES> 120
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 255
<AVERAGE-NET-ASSETS> 15979
<PER-SHARE-NAV-BEGIN> 12.421
<PER-SHARE-NII> 0.127
<PER-SHARE-GAIN-APPREC> 3.351
<PER-SHARE-DIVIDEND> (0.127)
<PER-SHARE-DISTRIBUTIONS> (1.205)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.567
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 05
<NAME> MULTIPLE STRATEGIES PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 27223
<INVESTMENTS-AT-VALUE> 35864
<RECEIVABLES> 174
<ASSETS-OTHER> 12
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 36050
<PAYABLE-FOR-SECURITIES> 842
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 89
<TOTAL-LIABILITIES> 931
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26391
<SHARES-COMMON-STOCK> 2481
<SHARES-COMMON-PRIOR> 2511
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 87
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8641
<NET-ASSETS> 35119
<DIVIDEND-INCOME> 152
<INTEREST-INCOME> 487
<OTHER-INCOME> 0
<EXPENSES-NET> 404
<NET-INVESTMENT-INCOME> 235
<REALIZED-GAINS-CURRENT> 2477
<APPREC-INCREASE-CURRENT> 3814
<NET-CHANGE-FROM-OPS> 6526
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 235
<DISTRIBUTIONS-OF-GAINS> 2650
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 655
<NUMBER-OF-SHARES-REDEEMED> 893
<SHARES-REINVESTED> 208
<NET-CHANGE-IN-ASSETS> 3235
<ACCUMULATED-NII-PRIOR> 10
<ACCUMULATED-GAINS-PRIOR> 250
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 237
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 409
<AVERAGE-NET-ASSETS> 33904
<PER-SHARE-NAV-BEGIN> 12.699
<PER-SHARE-NII> .103
<PER-SHARE-GAIN-APPREC> 2.629
<PER-SHARE-DIVIDEND> (0.103)
<PER-SHARE-DISTRIBUTIONS> (1.170)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.158
<EXPENSE-RATIO> 1.19
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 04
<NAME> HIGH INCOME BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 16316
<INVESTMENTS-AT-VALUE> 17632
<RECEIVABLES> 368
<ASSETS-OTHER> 9
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18009
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 93
<TOTAL-LIABILITIES> 93
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17139
<SHARES-COMMON-STOCK> 1843
<SHARES-COMMON-PRIOR> 1399
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (86)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (453)
<ACCUM-APPREC-OR-DEPREC> 1316
<NET-ASSETS> 17916
<DIVIDEND-INCOME> 30
<INTEREST-INCOME> 1227
<OTHER-INCOME> 0
<EXPENSES-NET> 181
<NET-INVESTMENT-INCOME> 1076
<REALIZED-GAINS-CURRENT> (33)
<APPREC-INCREASE-CURRENT> 888
<NET-CHANGE-FROM-OPS> 1931
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1185
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1263
<NUMBER-OF-SHARES-REDEEMED> 941
<SHARES-REINVESTED> 122
<NET-CHANGE-IN-ASSETS> 5081
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (44)
<OVERDIST-NET-GAINS-PRIOR> (353)
<GROSS-ADVISORY-FEES> 105
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 247
<AVERAGE-NET-ASSETS> 15049
<PER-SHARE-NAV-BEGIN> 9.173
<PER-SHARE-NII> 0.640
<PER-SHARE-GAIN-APPREC> 0.598
<PER-SHARE-DIVIDEND> (0.691)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.720
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 06
<NAME> U.S. GOVERNMENT BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 8801
<INVESTMENTS-AT-VALUE> 9062
<RECEIVABLES> 645
<ASSETS-OTHER> 48
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9755
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 76
<TOTAL-LIABILITIES> 76
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9419
<SHARES-COMMON-STOCK> 953
<SHARES-COMMON-PRIOR> 1080
<ACCUMULATED-NII-CURRENT> 5
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (6)
<ACCUM-APPREC-OR-DEPREC> 261
<NET-ASSETS> 9679
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 644
<OTHER-INCOME> 0
<EXPENSES-NET> 81
<NET-INVESTMENT-INCOME> 563
<REALIZED-GAINS-CURRENT> 39
<APPREC-INCREASE-CURRENT> 239
<NET-CHANGE-FROM-OPS> 841
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 553
<DISTRIBUTIONS-OF-GAINS> 79
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 155
<NUMBER-OF-SHARES-REDEEMED> 344
<SHARES-REINVESTED> 62
<NET-CHANGE-IN-ASSETS> (1055)
<ACCUMULATED-NII-PRIOR> 22
<ACCUMULATED-GAINS-PRIOR> 7
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 58
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 166
<AVERAGE-NET-ASSETS> 9599
<PER-SHARE-NAV-BEGIN> 9.938
<PER-SHARE-NII> 0.630
<PER-SHARE-GAIN-APPREC> 0.299
<PER-SHARE-DIVIDEND> (0.617)
<PER-SHARE-DISTRIBUTIONS> (0.089)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.161
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
