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. [ ]
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Post-Effective Amendment No. 22 [X]
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 25 [X]
VARIABLE INVESTORS SERIES TRUST
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(Exact Name of Registrant as specified in charter)
2122 York Road, Suite 300
Oak Brook, Illinois 60523
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (630)684-9200
Jeffery K. Hoelzel, Esq.
Secretary
Variable Investors Series Trust
2122 York Road, Suite 300
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)
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X on May 1, 2000 pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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on (date) pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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on (date) pursuant to paragraph (a)(2) of rule 485.
- -
If appropriate, check the following box:
_____ this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
Title of securities being registered: Investment Company Shares
2
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VARIABLE INVESTORS SERIES TRUST
CROSS REFERENCE SHEET
(as required by Rule 404(c))
Item No. Location
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PART A
<S> <C> <C>
Item 1. Front and Back Cover Pages............. Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments,
Risks and Performance.................. Summary; More About Portfolio
Investments; Appendix to
Prospectus
Item 3. Risk/Return Summary: Fee Table......... Not Applicable
Item 4. Investment Objectives, Principal
Investment Strategies, and Related
Risks.................................. Summary; More About Portfolio
Investments; Appendix to
Prospectus
Item 5. Management's Discussion of Fund
Performance............................ Not Applicable
Item 6. Management, Organization, and
Capital Structure...................... Management of the Trust
Item 7. Shareholder Information................ General Information About
the Trust
Item 8. Distribution Arrangements.............. General Information About
the Trust
Item 9. Financial Highlight Information........ Financial Highlights
PART B
Item 10. Cover Page and Table of Contents....... Cover Page and Table of Contents
Item 11. Fund History........................... Organization and Capitalization
Item 12. Description of the Fund and Its
Investments and Risks.................. Investment Objectives and Policies
of the Trust
Item 13. Management of the Fund................. Management of the Trust
Item 14. Control Persons and Principal
Holders of Securities.................. Control Persons and Principal
Holders of Securities
Item 15. Investment Advisory and Other
Services............................... Management of the Trust
Item 16. Brokerage Allocations and Other
Practices.............................. Management of the Trust - Brokerage
and Research Services
Item 17. Capital Stock and Other
Securities............................. Organization and Capitalization
Item 18. Purchase, Redemption and
Pricing of Shares...................... Determination of Net Asset Value
Item 19. Taxation of the Fund................... Taxes
Item 20. Underwriters........................... Not Applicable
Item 21. Calculation of Performance Data........ Performance Information
Item 22. Financial Statements................... Financial Statements
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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.
PART A
VARIABLE INVESTORS SERIES TRUST
2122 York Road, Suite 300
Oak Brook, Illinois 60523
Variable Investors Series Trust is a management investment company, sometimes
called a mutual fund. It is divided into the following different series or
Portfolios:
Small Cap Growth Portfolio
World Equity Portfolio
Growth Portfolio
Matrix Equity Portfolio
Growth & Income Portfolio
Multiple Strategies Portfolio
High Income Bond Portfolio
U.S. Government Bond Portfolio
The Securities and Exchange Commission has not approved or disapproved these
securities nor has it determined that this prospectus is accurate or complete.
It is a criminal offense to state otherwise.
Prospectus dated May 1, 2000
TABLE OF CONTENTS
SUMMARY
MORE ABOUT PORTFOLIO INVESTMENTS
GENERAL INFORMATION ABOUT THE TRUST
FINANCIAL HIGHLIGHTS
APPENDIX TO PROSPECTUS
SUMMARY
This Prospectus provides important information about Variable Investors Series
Trust (the "Trust") and its eight Portfolios. First Variable Advisory Services
Corp. (the "Adviser") serves as the investment adviser for all eight Portfolios
and employs Sub-Advisers to assist it in managing the Portfolios.
Individuals cannot invest in the shares of the Portfolios directly. Instead they
participate through variable annuity contracts and variable life insurance
policies (collectively, the "Contracts") issued by First Variable Life Insurance
Company ("First Variable Life"). You can participate either through a Contract
that you purchase yourself or through a Contract purchased by your employer.
Through your participation in the Contract, you indirectly participate in
Portfolio earnings or losses, in proportion to the amount of money you invest.
Depending on your Contract, if you withdraw your money before retirement, you
may incur charges and additional tax liabilities. For further information about
your Contract, please refer to your Contract prospectus.
The Contracts may be sold by banks. An investment in a Portfolio of the Trust
through a Contract is not a deposit of a bank and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
The investment objectives of the Portfolios may be changed without shareholder
approval.
Some of the Portfolios have names and investment objectives that are very
similar to certain publicly available mutual funds that are managed by the same
money managers. These Portfolios are not those publicly available mutual funds
and will not have the same performance. Different performance will result from
such factors as different implementation of investment policies, different cash
flows into and out of the Portfolios, different fees, and different sizes.
A Portfolio's performance may be affected by risks specific to certain types of
investments, such as foreign securities, derivative investments, non-investment
grade debt securities, initial public offerings (IPOs) or companies with
relatively small market capitalizations. IPOs and other investment techniques
may have a magnified performance impact on a Portfolio with a small asset base.
A Portfolio may not experience similar performance as its assets grow.
A Word About the Portfolios
The Portfolios offered in this Prospectus fall into three general investment
categories: growth, growth and income and income.
Growth Category
The goal of a Portfolio in the growth category is to increase the value of your
investment over the long term by investing mostly in stocks. Stocks are a type
of investment that can increase in value over a period of years. Companies sell
stock to get the money they need to grow. These companies often keep some of
their profits to reinvest in their business. As they grow, the value of their
stock may increase. This is how the value of your investment may increase.
The Trust's Growth Category includes:
* Small Cap Growth Portfolio
* World Equity Portfolio
* Growth Portfolio
The Growth Portfolio seeks current income as a secondary goal when consistent
with its primary goal of capital growth.
Growth and Income Category
The goal of a Portfolio in the growth and income category is to increase the
value of your investment over the long term and to provide income. Portfolios in
the growth and income category seek to conserve the value of your initial
investment and promote long-term growth and income by investing in equity
securities and income producing securities.
The Trust's Growth and Income Category includes:
* Growth and Income Portfolio
* Matrix Equity Portfolio
* Multiple Strategies Portfolio
Income Category
Unlike Portfolios in the growth category, where the objective is to make the
Portfolio's investments increase in value, Portfolios in the income category try
to keep the value of their investments from falling, while providing an increase
in the value of your investment through the income earned on the Portfolio's
investments. To meet this objective, a Portfolio in the income category buys
investments that are expected to pay interest to the Portfolio on a regular
basis.
The Trust's Income Category includes:
* U.S. Government Bond Portfolio
* High Income Bond Portfolio
Small Cap Growth Portfolio
Fact Sheet
Investment Sub-Adviser: Pilgrim Baxter & Associates, Ltd.
Investment Category: Growth
For more information about each type of investment, please read the section in
this prospectus called "More About Portfolio Investments."
Investment Objective
* seeks capital appreciation
Investment Strategy
The Portfolio invests primarily in equity securities of companies with small
capitalizations (market capitalizations or annual revenues under $1 billion at
time of purchase.)
The Sub-Adviser believes that generally at least 50% of the Portfolio's assets
will be invested in common stocks and convertible securities traded in the over-
the-counter market. Convertible securities have characteristics similar to both
fixed income and equity securities. At certain times that percentage may be
substantially higher. The Portfolio will seek to achieve its objective by
investing in companies which the Sub-Adviser believes have an outlook for strong
business momentum, growth in earnings and the potential for significant capital
appreciation.
The Portfolio will sell securities 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.
The Portfolio may invest up to 15% of its total assets in foreign issuers.
Primary Investments Percentage of Total Assets*
- ---------------------------------------------------------------
Securities of companies with At least 65%
small capitalizations (market
capitalizations or annual
revenues under $1 billion at
time of purchase)
- ----------------------------------------------------------------
* At time of purchase
Investment Risks
The principal risks of investing in the Portfolio are:
Market Risk: the risk that the value of the securities purchased by the
Portfolio will decline as a result of economic, political or market conditions
or an issuer's financial circumstances.
Small Capitalization Company Risk: the risk that small companies may be
generally subject to more abrupt or erratic market movements than securities of
larger, more established companies.
Liquidity Risk: the risk that the degree of market liquidity of some stocks in
which the Portfolio invests may be relatively limited in that the Portfolio
invests primarily in over-the-counter stocks.
Credit Risk: the risk that an issuer of a fixed income security owned by the
Portfolio may be unable to make interest or principal payments.
Interest Rate Risk: the risk that fluctuations in interest rates may affect the
value of the Portfolio's interest-paying fixed income securities.
Performance Information
The performance information presented herein is intended to help you evaluate
the potential risks of an investment in the Portfolio by showing changes in the
Portfolio's performance and comparing the Portfolio's performance with the
performance of a broad based market index. How the Portfolio performed in the
past is not necessarily an indication of how the Portfolio will perform in the
future.
This chart illustrates the Portfolio's annual returns since inception.
[The following table will be depicted as a bar chart in the printed material]
1995 30.08%
1996 27.39%
1997 0.73%
1998 -3.12%
1999 80.66%
The highest quarterly return for the Portfolio from May 4, 1995 (inception) to
December 31, 1999 was 59.48% (for the quarter ended 12/31/99) and the lowest
quarterly return was -22.70% (for the quarter ended 9/30/98).
This table compares the Portfolio's average annual returns to the returns of
the Russell 2000 Index for 1 calendar year and since inception.
PERFORMANCE TABLE
1 Year Since Inception
Small Cap Growth 80.66% 25.87%
Russell 2000 Index 21.26% 16.31%
The Russell 2000 Index is an unmanaged index consisting of the stocks of
2000 U.S.-based companies.
World Equity Portfolio
Fact Sheet
Investment Sub-Adviser: Evergreen Investment Management Co.
Investment Category: Growth
For more information about each type of investment, please read the section in
this prospectus called "More About Portfolio Investments."
Investment Objective
* seeks maximum long-term total return
Investment Strategy
The Portfolio will invest primarily in common stocks, and securities convertible
into common stocks, traded in securities markets located around the world,
including the United States. At times, the Portfolio may invest up to 100% of
its assets in securities principally traded in markets outside the United
States. The Portfolio may invest 100% of its assets in the United States in
unusual market circumstances where the Sub-Adviser believes that foreign
investing may involve undue risks. At times the Portfolio will invest the common
stock portion of the Portfolio primarily in securities of issuers with small
market capitalizations (market capitalizations or annual revenues under $1
billion at time of purchase.) The Sub-Adviser intends to invest portfolio assets
in small capitalization companies that have strong balance sheets and which its
research indicates should exceed informed consensus of earnings expectations.
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).
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.
Primary Investments Percent of Total Assets*
- -----------------------------------------------------------
*Common stocks, convertible At least 65%
securities and warrants to
purchase common stocks and
convertible securities
* Securities of the U.S. up to 35%
Government or of any foreign
government or any supra-
national entity. Examples of
supranational entities include
the International Bank for
Reconstruction and Development,
the European Steel and Coal
Community, the Asian
Development Bank, and the
InterAmerican Development Bank.
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. Cash and money
market instruments.
*Common stocks and related up to 20%
securities of issuers head-
quartered in emerging market
countries. Emerging market
countries generally include
countries in the initial
stage of their
industrialization with low
per capita income.
- --------------------------------------------------------
*At time of purchase
Investment Risks
The principal risks of investing in the Portfolio are:
Market Risk: the risk that the value of the securities purchased by the
Portfolio will decline as a result of economic, political or market conditions
or an issuer's financial circumstances.
Small Capitalization Company Risk: the risk that small companies may be
generally subject to more abrupt or erratic market movements than securities of
larger, more established companies.
Foreign Securities Risks
Political Risk: the risk that a change in a foreign government will occur and
that the assets of a company in which the Portfolio has invested will be
affected.
Currency Risk: the risk that a foreign currency will decline in value. The
Portfolio may trade in currencies other than the U.S. dollar. An increase in the
value of the U.S. dollar relative to a foreign currency will adversely affect
the value of the Portfolio.
Limited Information Risk: the risk that foreign companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies
and that less public information about their operations may exist.
Emerging Market Country Risk: the risks associated with investment in foreign
securities are heightened in connection with investments in the securities of
issuers in emerging markets, as these markets are generally more volatile than
the markets of developed countries.
Settlement and Clearance Risk: the risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace with
the volume of securities transactions and may cause delays.
Liquidity Risk: foreign markets may be less liquid and more volatile than U.S.
markets and offer less protection to investors; over-the-counter securities may
also be less liquid than exchange-traded securities.
Performance Information
The performance information presented herein is intended to help you evaluate
the potential risks of an investment in the Portfolio by showing changes in the
Portfolio's performance and comparing the Portfolio's performance to the
performance of a broad based market index. How the Portfolio performed in the
past is not necessarily an indication of how the Portfolio will perform in the
future.
This chart illustrates the Portfolio's annual returns for each of the last ten
years.
[The following table will be depicted as a bar chart in the printed material.]
1990 -10.51%
1991 8.22%
1992 -1.83%
1993 17.32%
1994 10.02%
1995 24.32%
1996 12.33%
1997 9.98%
1998 5.11%
1999 55.46%
The highest quarterly return for the Portfolio from January 1, 1990 to December
31, 1999 was 43.03% (for the quarter ended 12/31/99) and the lowest quarterly
return was -19.65% (for the quarter ended 9/30/98).
This table compares the Portfolio's average annual returns to the returns of
the MSCI World Index for 1, 5 and 10 calendar years.
PERFORMANCE TABLE
1 Year 5 Year 10 Year
World Equity 55.46% 20.21% 11.91%
MSCI World Index 24.93% 19.76% 11.42%
The MSCI World Index is comprised of stocks of the markets of Australia,
Europe, Asia, North and South America.
Growth Portfolio
Fact Sheet
Investment Sub-Adviser: Value Line, Inc.
Investment Category: Growth
For more information about each type of investment, please read the section in
this prospectus called "More About Portfolio Investments."
Investment Objective
* seeks capital growth
* seeks current income as a secondary objective when consistent with its
primary objective
Investment Strategy
The Portfolio invests primarily in a diversified portfolio of:
* common stocks
* securities convertible into or exchangeable for common stocks
including convertible preferred stock, convertible debentures,
warrants and options
The investment emphasis of the Portfolio is on equities, primarily common stocks
and, to a lesser extent, securities convertible into common stocks, and rights
to subscribe for common stocks.
Securities are selected on the basis of their issuers':
* long-term potential for expanding their earnings
* profitability
* size
* potential increases in market recognition of their securities
The Portfolio focuses 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.
Primary Investments Percent of Total Assets*
- -----------------------------------------------------------
Equity securities At least 80%
- -----------------------------------------------------------
* At time of purchase
Investment Risk
The principal risk of investing in the Portfolio is:
Market Risk: the risk that the value of the securities purchased by the
Portfolio will decline as a result of economic, political or market conditions
or an issuer's financial circumstances.
Performance Information
The performance information presented herein is intended to help you evaluate
the potential risks of an investment in the Portfolio by showing changes in the
Portfolio's performance and comparing the Portfolio's performance with the
performance of a broad based market index. How the Portfolio performed in the
past is not necessarily an indication of how the Portfolio will perform in the
future.
This chart illustrates the Portfolio's annual returns for each of the last ten
years.
[The following table will be depicted as a bar chart in the printed material.]
1990 -3.20%
1991 34.37%
1992 -7.59%
1993 9.09%
1994 -0.79%
1995 37.12%
1996 25.74%
1997 23.62%
1998 33.29%
1999 34.53%
The highest quarterly return for the Portfolio from January 1, 1990 to December
31, 1999 was 35.56% (for the quarter ended 9/30/94) and the lowest quarterly
return was -22.22% (for the quarter ended 6/30/94.
This table compares the Portfolio's average annual returns to the returns of
the S&P 500 Index for 1, 5 and 10 calendar years.
PERFORMANCE TABLE
1 Year 5 Year 10 Year
Growth 34.53% 30.77% 17.40%
S&P 500 Index 21.04% 28.54% 18.20%
The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity.
Growth & Income Portfolio
Fact Sheet
Investment Sub-Adviser: Credit Suisse Asset Management, LLC
Investment Category: Growth and Income
For more information about each type of investment, please read the section in
this prospectus called "More About Portfolio Investments."
Investment Objective
* seeks to provide growth of capital and income
Investment Strategy
The Portfolio seeks to achieve its growth objective by investing in equity
securities which include:
* common stocks
* securities convertible into common stocks and readily marketable
securities, such as rights and warrants, which derive their value from
common stock.
The Portfolio seeks to achieve its income objective by investing in various
income producing securities, including dividend-paying equity securities, equity
securities of non-dividend paying companies that engage in active share
repurchases, fixed income securities and money market instruments.
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 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"), which are securities convertible
into equity securities of foreign issuers.
Primary Investments Percent of Total Assets*
- ------------------------------------------------------------------
Equity securities, including common No minimum or maximum
stock, preferred stock, convertible
securities, rights and warrants
- ------------------------------------------------------------------
Fixed income securities, including No minimum or maximum
intermediate to long term invest-
ment grade corporate debt, mortgage-
backed securities and U.S.
Government securities
- ------------------------------------------------------------------
Cash and money market instruments, No minimum or maximum
including U.S. Government
securities, certificates of deposit,
short-term investment grade
corporate bonds, short term
securities and repurchase agreements
- -------------------------------------------------------------------
* At time of purchase
Investment Risk
The principal risks of investing in the Portfolio are:
Market Risk: the risk that the value of the securities purchased by the
Portfolio will decline as a result of economic, political or market conditions
or an issuer's financial circumstances.
Credit Risk: the risk that an issuer of a fixed income security owned by the
Portfolio may be unable to make interest or principal payments.
Interest Rate Risk: the risk that fluctuations in interest rates may affect the
value of the Portfolio's interest-paying fixed income securities.
Prepayment Risk: the risk that the holder of a mortgage underlying a
mortgage-backed security owned by the Portfolio will prepay principal,
particularly during periods of declining interest rates.
Performance Information
The performance information presented herein is intended to help you evaluate
the potential risks of an investment in the Portfolio by showing changes in the
Portfolio's performance and comparing the Portfolio's performance with the
performance of a broad based market index. How the Portfolio performed in the
past is not necessarily an indication of how the Portfolio will perform in the
future.
This chart illustrates the Portfolio's annual returns since inception.
[The following table will be depicted as a bar chart in the printed material.]
1995 13.09%
1996 12.15%
1997 28.20%
1998 12.43%
1999 6.27%
The highest quarterly return for the Portfolio from May 31, 1995 (inception) to
December 31, 1999 was 16.64% (for the quarter ended 12/31/98) and the lowest
quarterly return was -14.48% (for the quarter ended 9/30/98).
This table compares the Portfolio's average annual returns to the returns of
the S&P 500 Index for 1 calendar year and since inception.
PERFORMANCE TABLE
1 Year Since Inception
Growth & Income 6.27% 15.58%
S&P 500 Index 21.04% 26.97%
The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity.
Matrix Equity Portfolio
Fact Sheet
Investment Sub-Adviser: State Street Global Advisers, a division of State
Street Bank and Trust Company
Investment Category: Growth and Income
Investment Objective
* seeks capital appreciation and current income
Investment Strategy
The Portfolio will invest in a diversified portfolio of equity securities that
is selected by the Sub-Adviser on the basis of its proprietary analytical model.
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.
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.
Primary Investments Percent of Total Assets*
- -----------------------------------------------------
Equity securities At least 65%
- -----------------------------------------------------
* At time of purchase
Investment Risks
The principal risk of investing in the Portfolio is:
Market Risk: the risk that the value of the securities purchased by the
Portfolio will decline as a result of economic, political or market conditions
or an issuer's financial circumstances.
Performance Information
The performance information presented herein is intended to help you evaluate
the potential risks of an investment in the Portfolio by showing changes in the
Portfolio's performance and comparing the Portfolio's performance with the
performance of a broad based market index. How the Portfolio performed in the
past is not necessarily an indication of how the Portfolio will perform in the
future.
This chart illustrates the Portfolio's annual returns for each of the last ten
years.
[The following table will be depicted as a bar chart in the printed material.]
1990 -2.61%
1991 29.79%
1992 1.12%
1993 17.87%
1994 -1.05%
1995 33.45%
1996 4.62%
1997 22.05%
1998 21.11%
1999 14.14%
The highest quarterly return for the Portfolio from January 1, 1990 to December
31, 1999 was 21.93% (for the quarter ended 12/31/98) and the lowest quarterly
return was -13.60% (for the quarter ended 9/30/98).
This table compares the Portfolio's average annual returns to the returns of
the S&P 500 Index for 1, 5 and 10 calendar years.
PERFORMANCE TABLE
1 Year 5 Year 10 Year
Matrix Equity 14.14% 18.69% 13.39%
S&P 500 Index 21.09% 28.54% 18.20%
The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity.
Multiple Strategies Portfolio
Fact Sheet
Investment Sub-Adviser: Value Line, Inc.
Investment Category: Growth and Income
For more information about each type of investment, please read the section in
this prospectus called "More About Portfolio Investments."
Investment Objective
* seeks to achieve as high a level of total return as the Adviser and
Sub- Adviser consider consistent with prudent investment risk.
Investment Strategy
The Portfolio invests 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 Portfolio's investment policies for its stock component are substantially
identical to those which have been established for the Growth Portfolio. The
Portfolio's investment policies for its bond component are substantially
identical to those which have been established for the U.S. Government Bond
Portfolio with one exception. The Portfolio, unlike the U.S. Government Bond
Portfolio, 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.
The Portfolio will not hold the same securities as the Growth Portfolio and the
U.S. Government Bond Portfolio.
Primary Investments Percent of Total Assets*
- ---------------------------------------------------------------
Equity securities, including common No minimum or maximum
stock, preferred stock, convertible
securities, rights and warrants
- ---------------------------------------------------------------
Fixed income securities, including No minimum or maximum
intermediate to long term
investment grade corporate debt,
mortgage-backed securities and U.S.
Government securities
- ---------------------------------------------------------------
Cash and money market instruments, No minimum or maximum
including U.S. Government
securities, certificates of
deposit, short-term investment
grade corporate bonds, short
term securities and repurchase
agreements
- -----------------------------------------------------------
Foreign securities and up to 25%
securities traded in foreign
securities markets
- -----------------------------------------------------------
* At time of purchase
Investment Risks
The principal risks of investing in the Portfolio are:
Market Risk: the risk that the value of the securities purchased by the
Portfolio will decline as a result of economic, political or market conditions
or an issuer's financial circumstances.
Credit Risk: the risk that an issuer of a fixed income security owned by the
Portfolio may be unable to make interest or principal payments.
Interest Rate Risk: the risk that fluctuations in interest rates may affect the
value of the Portfolio's interest-paying fixed income securities.
Prepayment Risk: the risk that the holder of a mortgage underlying a
mortgage-backed security owned by the Portfolio will prepay principal,
particularly during periods of declining interest rates.
Foreign Securities Risks
Political Risk: the risk that a change in a foreign government will occur and
that the assets of a company in which the Portfolio has invested will be
affected.
Currency Risk: the risk that a foreign currency will decline in value. The
Portfolio may trade in currencies other than the U.S. dollar. An increase in the
value of the U.S. dollar relative to a foreign currency will adversely affect
the value of the Portfolio.
Limited Information Risk: the risk that foreign companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies
and that less public information about their operations may exist.
Emerging Market Country Risk: the risks associated with investment in foreign
securities are heightened in connection with investments in the securities of
issuers in emerging markets, as these markets are generally more volatile than
the markets of developed countries.
Settlement and Clearance Risk: the risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace with
the volume of securities transactions and may cause delays.
Liquidity Risk: foreign markets may be less liquid and more volatile than U.S.
markets and offer less protection to investors.
Performance Information
The performance information presented herein is intended to help you evaluate
the potential risks of an investment in the Portfolio by showing changes in the
Portfolio's performance and comparing the Portfolio's performance with the
performance of a broad based market index. How the Portfolio performed in the
past is not necessarily an indication of how the Portfolio will perform in the
future.
This chart illustrates the Portfolio's annual returns for each of the last ten
years.
[The following table will be depicted as a bar chart in the printed material.]
1990 0.95%
1991 23.43%
1992 3.62%
1993 10.52%
1994 -3.91%
1995 32.24%
1996 18.29%
1997 21.79%
1998 29.15%
1999 28.00%
The highest quarterly return for the Portfolio from January 1, 1990 to December
31, 1999 was 25.37% (for the quarter ended 9/30/94) and the lowest quarterly
return was -23.18% (for the quarter ended 6/30/94).
This table compares the Portfolio's average annual returns to the returns of the
S&P 500 Index and the Lehman Brothers Government/Corporate Bond Index for 1, 5
and 10 calendar years and since inception.
PERFORMANCE TABLE
1 Year 5 Year 10 Year or Since Inception
Multiple Strategies 28.00% 25.80% 16.09%
S&P 500 21.04% 28.54% 18.20%
Lehman Gov/Corp
Index -7.64% 8.99% 8.65%
The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity. The Lehman Brothers Government/
Corporate Bond Index is comprised of public obligations of the U.S. Treasury and
all publicly issued, fixed rate, nonconvertible corporate debt.
U.S. Government Bond Portfolio
Fact Sheet
Investment Sub-Adviser: Strong Capital Management, Inc.
Investment Categories: Income
For more information about each type of investment, please read the section in
this prospectus called "More About Portfolio Investments."
Investment Objective
* seeks current income and preservation of capital.
Investment Strategy
The Portfolio will invest primarily in 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. These include collateralized mortgage obligations. Some of the
mortgage-backed securities may be backed by agencies or instrumentalities of the
U.S. Government
Primary Investments Percent of Total Assets*
- --------------------------------------------------------------
U.S. Government Securities At least 80%
- --------------------------------------------------------------
Other debt securities rated at Up to 20%
least BBB by Standard & Poor's
or Baa by Moody's, or of
comparable quality; and in
cash and money market instruments.
- -------------------------------------------------------------
* At time of purchase
Investment Risks
The principal risks of investing in the Portfolio are:
Market Risk: the risk that the value of the securities purchased by the
Portfolio will decline as a result of economic, political or market conditions
or an issuer's financial circumstances.
Credit Risk: the risk that an issuer of a fixed income security owned by the
Portfolio may be unable to make interest or principal payments.
Interest Rate Risk: the risk that fluctuations in interest rates may affect the
value of the Portfolio's interest-paying fixed income securities.
Prepayment Risk: the risk that the holder of a mortgage underlying a
mortgage-backed security owned by the Portfolio will prepay principal,
particularly during periods of declining interest rates.
Performance Information
The performance information presented herein is intended to help you evaluate
the potential risks of an investment in the Portfolio by showing changes in the
Portfolio's performance and comparing the Portfolio's performance with the
performance of a broad based market index. How the Portfolio performed in the
past is not necessarily an indication of how the Portfolio will perform in the
future.
This chart below illustrates the Portfolio's annual returns for each of the last
ten years.
[The following table will be depicted as a bar chart in the printed material.]
1990 7.66%
1991 14.70%
1992 6.13%
1993 9.38%
1994 -2.72%
1995 20.18%
1996 2.36%
1997 9.37%
1998 7.79%
1999 -1.90%
The highest quarterly return for the Portfolio from January 1, 1990 to December
31, 1999 was 6.57% (for the quarter ended 6/30/95) and the lowest quarterly
return was -9.07% (for the quarter ended 3/31/94).
This table compares the Portfolio's average annual returns to the returns of
the Lehman Brothers Government Bond Index for 1, 5 and 10 calendar years.
PERFORMANCE TABLE
1 Year 5 Year 10 Year
U.S. Government Bond -1.90% 7.31% 7.09%
Lehman Govt. Bond
Index -8.26% 9.21% 8.66%
The Lehman Brothers Government Bond Index is comprised of public obligations of
the U.S. Treasury and all publicly issued debt of U.S. Government agencies.
High Income Bond Portfolio
Fact Sheet
Investment Sub-Adviser: Federated Investment Counseling
Investment Category: Income
For more information about each type of investment, please read the section in
this prospectus called "More About Portfolio Investments."
Investment Objective
* seeks to obtain a high level of current income as is believed to be
consistent with prudent investment management.
* seeks, as a secondary objective, capital appreciation when consistent
with its primary objective.
Investment Strategy
The Portfolio invests primarily in fixed income securities which include:
* corporate bonds and notes
* discount bonds
* zero-coupon bonds
* convertible securities
* preferred stocks
* bonds issued with warrants
* securities of foreign issuers
The Portfolio invests primarily in high yield, higher-risk securities commonly
known as "junk bonds."
As part of its securities selection process, the Sub-Adviser continuously
analyzes individual issuers, general business conditions and other factors which
may be too time consuming or too costly for the average investor. 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
* 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. The Portfolio may invest, without limit, in unrated securities if such
securities offer, in the Sub-Adviser's opinion, a relatively high yield without
undue risk.
Changing economic conditions and other factors may cause the yield difference
between lower-rated and higher-rated securities to narrow. When this occurs, the
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.
Primary Investments Percent of Total Assets*
- -----------------------------------------------------------------
Fixed income securities, including At least 80%
convertible and non-convertible
debt securities and, to a lesser
extent, preferred stock.
- ------------------------------------------------------------------
* At time of purchase
Investment Risks
The principal risks of investing in the Portfolio are:
Market Risk: the risk that the value of the securities purchased by the
Portfolio will decline as a result of economic, political or market conditions
or an issuer's financial circumstances.
Credit Risk: the risk that an issuer of a fixed income security owned by the
Portfolio may be unable to make interest or principal payments.
Interest Rate Risk: the risk that fluctuations in interest rates may affect the
value of the Portfolio's interest-paying fixed income securities. This risk is
enhanced with respect to zero coupon securities which tend to respond more to
changes in interest rates than do otherwise comparable debt obligations that
provide for periodic payment of interest.
The lower ratings of certain securities held by the Portfolio may enhance the
risks described above. Lower rated instruments, especially so called "junk
bonds," involve greater risks due to the financial health of the issuer and the
economy generally and their market prices can be more volatile.
Performance Information
The performance information presented herein is intended to help you evaluate
the potential risks of an investment in the Portfolio by showing changes in the
Portfolio's performance and comparing the Portfolio's performance with the
performance of a broad based market index. How the Portfolio performed in the
past is not necessarily an indication of how the Portfolio will perform in the
future.
This chart illustrates the Portfolio's annual returns for each of the last ten
years.
[The following table will be depicted as a bar chart in the printed material.]
1990 0.95%
1991 27.01%
1992 15.77%
1993 14.91%
1994 -7.08%
1995 18.98%
1996 14.20%
1997 13.54%
1998 3.04%
1999 1.83%
The highest quarterly return for the Portfolio from January 1, 1990 to December
31, 1999 was 11.25% (for the quarter ended 3/31/91) and the lowest quarterly
return was -14.39% (for the quarter ended 3/31/94).
This table compares the Portfolio's average annual returns to the returns of the
Lehman Single "B" Index and the First Boston High Yield Index for 1, 5 and 10
calendar years.
PERFORMANCE TABLE
1 Year 5 Year 10 Year or Since Inception
High Income Bond 1.83% 10.12% 9.44%
Lehman Single "B" 2.73% 9.20% 10.68%
First Boston High
Yield Index 3.28% 9.07% 11.06%
The Lehman Brothers Single "B" is comprised of securities with an issue size of
over $100 million which are fixed rate, U.S. dollar denominated and are rated
"high yield" by Moody's. The First Boston High Yield Index is designed to mirror
the investable universe of the high yield public debt market. Bonds in the Index
are U.S. dollar denominated and rated Split BBB and below.
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.
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).
As of 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.
MORE ABOUT PORTFOLIO INVESTMENTS
Certain of the investment techniques, instruments and risks associated with each
Portfolio are referred to in the discussion that follows. Additional information
appears in the Appendix to this Prospectus.
Equity Securities
Equity securities represent an ownership position in a company. The prices of
equity securities fluctuate based on changes in the financial condition of the
issuing company and on market and economic conditions. Companies sell equity
securities to get the money they need to grow.
Stocks are one type of equity security. Generally, there are two types of
stocks:
Common stock - Each share of common stock represents a part of the ownership of
a company. The holder of common stock participates in the growth of a company
through increasing stock price and dividends. If a company experiences
difficulty, a stock price can decline and dividends may not be paid.
Preferred stock - Each share of preferred stock allows the holder to receive a
dividend before the common stock shareholders receive dividends on their shares.
Other types of equity securities include, but are not limited to, convertible
securities, warrants, rights and foreign equity securities such as ADRs, GDRs,
EDRs and IDRs.
Fixed Income Securities
Fixed income securities include a broad array of short, medium and long term
obligations, including notes and bonds. Fixed income securities may have fixed,
variable or floating rates of interest, including rates of interest that vary
inversely at a multiple of a designated or floating rate, or that vary according
to changes in relative values of currencies. Fixed income securities generally
involve an obligation of the issuer to pay interest on either a current basis or
at the maturity of the security and to repay the principal amount of the
security at maturity.
Bonds are one type of fixed income security and are sold by governments on the
local, state and federal levels and by companies. Investing in a bond is like
making a loan for a fixed period of time at a fixed interest rate. During the
fixed period, the bond pays interest on a regular basis. At the end of the fixed
period, the bond matures and the investor usually gets back the principal amount
of the bond.
Fixed periods to maturity are categorized as:
* Short-term (generally less than 12 months)
* Intermediate- or Medium-term (one to ten years)
* Long-term (10 years or more)
Commercial paper - is a specific type of corporate or short-term note. In fact,
it is very short-term, being paid in less than 270 days. Most commercial paper
matures in 50 days or less.
Mortgage-backed securities - are securities representing interests in "pools" of
mortgage loans securitized by residential or commercial property. Payments of
interest and principal on these securities are generally made monthly, in
effect, "passing through" monthly payments made by individual borrowers on the
mortgage loans which underlie the securities.
U.S. Government securities - are obligations of, or guaranteed by the U.S.
Government or its agencies or instrumentalities. Some U.S. Government
securities, such as Treasury bills, notes, bonds and securities issued by GNMA,
are supported by the full faith and credit of the U.S.; others such as
securities issued by the Federal Home Loan Banks, are supported by the right of
the issuer to borrow from the U.S. Treasury; others such as those of FNMA, and
FHLMC are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations, while still others such as those of the
Student Loan Marketing Association, the Tennessee Valley Authority and the Small
Business Authority are supported only by the credit of the instrumentality. High
quality money market instruments may include:
* Cash and cash equivalents
* U.S. Government securities
* Certificates of deposit or other obligations of U.S. banks with total
assets in excess of $1 billion
* Corporate debt obligations with remaining maturities of 12 months or
less
* Commercial paper sold by corporations and finance companies
* Repurchase agreements, money market securities of foreign issuers
payable in U.S. dollars, asset-backed securities, loan participations
and adjustable rate securities
* Bankers' acceptances
* Time deposits
Bonds, commercial paper and mortgage-backed securities are not the only types of
fixed income securities. Other fixed income securities and instruments include,
but are not limited to,
* convertible bonds, debentures and notes
* asset-backed securities
* certificates of deposit
* fixed time deposits
* bankers' acceptances
* repurchase agreements
* reverse repurchase agreements
Money Market Instruments
All of the Portfolios may invest in high quality money market instruments. A
money market instrument is high quality when it is rated in one of the two
highest rating categories by S&P or Moody's or another nationally recognized
service, or if unrated, deemed high quality by the Adviser or a Sub-Adviser.
Foreign Securities
Foreign securities are the equity, fixed income or money market securities of
foreign issuers. Securities of foreign issuers include obligations of foreign
branches of U.S. banks and of foreign banks, common and preferred stocks, and
fixed income securities issued by foreign governments, corporations and
supranational organizations. They also include ADRs, GDRs, IDRs and EDRs.
ADRs are certificates issued by a U.S. bank or trust company and represent the
right to receive securities of a foreign issuer deposited in a domestic bank or
foreign branch of a U.S. Bank. GDRs, IDRs and EDRs are receipts evidencing an
arrangement with a non-U.S. bank.
Portfolio Turnover
Portfolio turnover occurs when a Portfolio sells its investments and buys new
ones. In some Portfolios, high portfolio turnover occurs when they engage in
frequent trading as part of their investment strategy.
High portfolio turnover may cause a Portfolio's expenses to increase. For
example, a Portfolio may have to pay brokerage fees and other related expenses.
A portfolio turnover rate of 100% or more a year is considered high. A high rate
increases a Portfolio's transaction costs and expenses.
Portfolio turnover rates for each Portfolio are found in the Financial
Highlights section of this Prospectus.
A Word About Risk
As described in the fact sheet for each Portfolio, participation in a Portfolio
involves risk - even the risk that you will receive a minimal return on your
investment or the value of your investment will decline. It is important for you
to consider carefully the following risks when you allocate purchase payments or
premiums to the Portfolios.
Market Risk
Market risk refers to the loss of capital resulting from changes in the price of
investments. Generally, equity securities are considered to be subject to market
risk. For example, market risk occurs when the expectations of lower corporate
profits in general cause the broad market of stocks to fall in price. When this
happens, even though a company may be experiencing a growth in profits, the
price of its stock could fall.
Growth Investing Risk
This investment approach has additional risk associated with it due to the
volatility of growth stocks. Growth companies usually invest a high portion of
earnings in their businesses, and may lack the dividends of value stocks that
can cushion prices in a falling market. Also, earnings disappointments often
lead to sharply falling prices because investors buy growth stocks in
anticipation of superior earnings growth.
Value Investing Risk
This investment approach has additional risk associated with it because the
Portfolio manager's judgment that a particular security is undervalued in
relation to the company's fundamental economic values may prove incorrect.
Credit Risk
Credit risk refers to the risk that an issuer of a fixed income security may be
unable to pay principal or interest payments due on the securities. To help the
Portfolios' Sub-Advisers decide which corporate and foreign fixed income
securities to buy, they rely on Moody's and S&P (two nationally recognized bond
rating services), and on their own research, to lower the risk of buying a fixed
income security of a company that may not pay the interest or principal on the
fixed income security.
The credit risk of a portfolio depends on the quality of its investments. Fixed
income securities that are rated as investment grade have ratings ranging from
AAA to BBB. These fixed income securities are considered to have adequate
ability to make interest and principal payments.
Interest Rate Risk
Interest rate risk refers to the risk that fluctuations in interest rates may
affect the value of interest paying securities in a Portfolio. Fixed income
securities such as U.S. Government bonds are subject to interest rate risk. If a
Portfolio sells a bond before it matures, it may lose money, even if the bond is
guaranteed by the U.S. Government. Say, for example, a Portfolio bought an
intermediate government bond last year that was paying interest at a fixed rate
of 6%, it will have to sell it at a discount (and realize a loss) to attract
buyers if they can buy new bonds paying an interest rate of 7%.
Risks of Investing in Below Investment Grade Bonds or Junk Bonds
Investing in below investment grade bonds, such as the lower quality, higher
yielding bonds called junk bonds, can increase the risks of loss for a
Portfolio. Junk bonds are bonds that are issued by small companies or companies
with limited assets or short operating histories. These companies are more
likely than more established or larger companies to default on the bonds and not
pay interest or pay back the full principal amount. Third parties may not be
willing to purchase the bonds from the Portfolios, which means they may be
difficult to sell and some may be considered illiquid. Because of these risks,
the companies issuing the junk bonds pay higher interest rates than companies
issuing higher grade bonds. The higher interest rates can give investors a
higher return on their investment.
Prepayment Risk
Prepayment risk is the risk that the holder of a mortgage underlying a mortgage-
backed security owned by the Portfolio will prepay principal, particularly
during periods of declining interest rates. This will reduce the stream of cash
payments that flow through to the Portfolio. Securities subject to prepayment
risk also pose a potential for loss when interest rates rise. Rising interest
rates may cause prepayments to occur at a slower rate than expected thereby
lengthening the maturity of the security and making it more sensitive to
interest rate changes.
Risks Associated with Foreign Securities
A foreign security is a security issued by an entity domiciled or incorporated
outside of the U.S. Among the principal risks of owning foreign securities are:
Political Risk: the risk that a change in a foreign government will occur and
that the assets of a company in which the Portfolio has invested will be
affected. In some countries there is the risk that the government may take over
the assets or operations of a company and/or that the government may impose
taxes or limits on the removal of a Portfolio's assets from that country.
Currency Risk: the risk that a foreign currency will decline in value. As long
as a Portfolio holds a security denominated in a foreign currency, its value
will be affected by the value of that currency relative to the U.S. dollar. An
increase in the value of the U.S. dollar relative to a foreign currency will
adversely affect the value of the Portfolio.
Liquidity Risk: foreign markets may be less liquid and more volatile than U.S.
markets and offer less protection to investors. Certain markets may require
payment for securities before delivery and delays may be encountered in settling
securities transactions. In some foreign markets there may not be protection
against failure by other parties to complete transactions.
Limited Information Risk: the risk that less government supervision of foreign
markets may occur. Foreign issuers may not be subject to the uniform accounting,
auditing and financial reporting standards and practices that apply to U.S.
issuers. In addition, less public information about their operations may exist.
Emerging Market Country Risk: the risks associated with investment in foreign
securities are heightened in connection with investments in the securities of
issuers in emerging markets countries. Such countries are generally defined as
countries in the initial stages of their industrialization cycles with low per
capita income. Although the markets of these developing countries offer higher
rates of return, they also pose additional risks to investors, including
immature economic structures, national policies restricting investments by
foreigners and different legal systems.
Settlement and Clearance Risk: the risks associated with the different clearance
and settlement procedures that are utilized in certain foreign markets. In
certain foreign markets, settlements may be unable to keep pace with the volume
of securities transactions, which may cause delays. If there is a settlement
delay, a Portfolio's assets may be uninvested and not earning returns. A
Portfolio also may miss investment opportunities or be unable to dispose of a
security because of these delays.
Managing Investment Risks
In pursuing their investment objectives, each Portfolio assumes investment risk.
The Portfolios try to limit their investment risk by diversifying their
investment portfolios across different industry sectors.
Defensive Investment Strategy
Under normal market conditions, none of the Portfolios intends to have a
substantial portion of its assets invested in cash or money market instruments,
although the U.S. Government Bond Portfolio will have a substantial portion of
its assets in U.S. Government securities. When a Sub-Adviser determines that
adverse market conditions exist, a Portfolio may adopt a temporary defensive
posture and invest entirely in cash and money market instruments. When a
Portfolio is invested in this manner, it may not be able to achieve its
investment objective.
Hedging Strategies
Each Portfolio may use investment strategies to limit the risk of price
fluctuations and preserve capital. The strategies which may be used by all the
Portfolios include, but are not limited to, financial futures contracts, options
on financial futures, options on broad market indices and options on securities.
Certain Portfolios may purchase and sell foreign currencies on a spot basis in
connection with the settlement of transactions traded in such foreign
currencies. These Portfolios may also hedge the risks associated with their
investments by entering into forward foreign currency contracts and foreign
currency futures and options contracts, generally in anticipation of making
investments in companies whose securities are denominated in those currencies.
These investments are often referred to as derivatives. Suitable derivatives
for hedging purposes may not always be available.
MANAGEMENT OF THE TRUST
The Adviser, a Massachusetts corporation, has been in the investment advisory
business since 1994. The Adviser's address is 2122 York Road, Suite 300, Oak
Brook, Illinois 60523. The Adviser has been the investment adviser for the Small
Cap Growth and Growth & Income Portfolios since their inception and for the
other Portfolios since April 1, 1994.
The Adviser is a wholly-owned subsidiary of First Variable Life, the ultimate
parent of which is Irish Life & Permanent plc., a leading insurance and
financial services group in Ireland with total assets of over $28
billion at May 1, 2000.
The Adviser oversees the Portfolio's day-to-day operations and supervises the
purchase and sale of Portfolio investments. The Adviser employs Sub-Advisers to
make investment decisions for each of the Portfolios.
The Adviser serves in its capacity as investment adviser through an investment
advisory agreement it enters into with the Trust. The Investment Advisory
Agreement provides for the Trust to pay all expenses not specifically assumed by
the Adviser. Examples of expenses paid by the Trust include custodial fees, and
the fees of outside legal and auditing firms. The Trust allocates these expenses
to each Portfolio in a manner approved by the Trustees. The Investment Advisory
Agreement is renewed each year by the Trustees.
Advisory Fees
Each Portfolio pays the Adviser a fee based on its average daily net asset
value. A Portfolio's net asset value is the total value of the Portfolio's
assets minus all liabilities.
During 1999, the most recent fiscal year of the Portfolios, each of the
Portfolios paid the Adviser the following percentage of its average daily net
assets as compensation for its services as investment adviser to the Portfolios:
Portfolio Advisory Fee Paid
- ------------ -----------------
Small Cap Growth .85%
World Equity .70%
Growth .70%
Matrix Equity .65%
Growth & Income .75%
Multiple Strategies .70%
High Income Bond .70%
U.S. Government Bond .60%
The percentage of net assets paid to the Adviser as an investment advisory fee
for certain Portfolios changes with the amount of net assets in the Portfolio.
Generally, the larger the net assets, the lower the fees as a percentage of net
assets.
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
U.S. Government Bond .60 % of first $200 million
.50% of average net assets over and above $200 million
</TABLE>
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, 2001 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) provided that the Adviser and First
Variable Life can terminate the expense reimbursement under certain
circumstances upon sixty (60) days' written notice to the Trust.
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 1999, 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 - 1.02%
Growth & Income Portfolio - 1.25%
High Income Bond Portfolio - 1.20%
Matrix Equity Portfolio - 1.15%
Multiple Strategies Portfolio - 1.10%
Small Cap Growth Portfolio - 1.35%
U.S. Government Bond Portfolio - .85%
World Equity Portfolio - 1.20%
The expense limitation currently in effect as of May 1, 2000 is described above.
Sub-Advisers
For all of the Portfolios, the Adviser works with Sub-Advisers, financial
service companies that specialize in certain types of investing. However, the
Adviser still retains ultimate responsibility for managing the Portfolios. The
Sub-Adviser's role is to make investment decisions for the Portfolios according
to each Portfolio's investment objectives and restrictions.
The following organizations act as Sub-Advisers to the Portfolio:
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,
1999, Federated had $125 billion in assets under management and administration.
Federated is a wholly-owned subsidiary of Federated Investors, Inc. All of the
Class A (voting) Shares of Federated Investors, Inc. are owned by a trust, the
trustees of which are John F. Donahue, Chairman and Trustee of Federated
Investors, Inc., Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher
Donahue, who is President and Trustee of Federated Investors, Inc.
Mr. Mark E. Durbiano is the portfolio manager for Federated for the High Income
Bond Portfolio. Mr. Durbiano joined Federated Investors in 1982, has been the
portfolio manager of the High Income Bond Portfolio since April 1, 1994, 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.
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 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.
Nancy L. Bendig is the portfolio manager for Value Line, Inc. for the Growth and
Multiple Strategies Portfolios. Ms. Bendig has been a portfolio manager for
Value Line, Inc. since 1994. She received her B.A. from Queens College and her
MBA from St. John's University.
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 December 31, 1999, Strong had over $38 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 co-manages the U.S. Government Bond Portfolio, the Bond Fund
and the Short-Term Bond Fund for Strong. He has over 15 years of investment
experience. Mr. Tank joined Strong as a portfolio manager in June 1990. He has
managed or co-managed the U.S. Government Bond Portfolio since he joined Strong.
For eight years prior to joining Strong, he worked for Salomon Brothers Inc. He
was a vice president and fixed income specialist for six years and for the two
years prior to that, a fixed income specialist. He received his bachelors degree
in English from the University of Wisconsin in 1980 and his Masters of Business
Administration in Finance from the University of Wisconsin in 1982, where he
also completed the Applied Securities Analysis Program. Mr. Tank chairs Strong's
Fixed Income Investment Committee.
Mr. Thomas A. Sontag co-manages the U.S. Government Bond Portfolio. He has over
15 years of industry experience. He joined Strong in November 1998 as a
co-portfolio manager of the U.S. Government Bond Portfolio. For 12 years prior
to joining Strong, Mr. Sontage worked at Bear Stearns & Co., most recently
serving as a Managing Director in the Fixed Income Department from 1990 to
November 1998. From September 1982 until December 1985, Mr. Sontag was employed
in the Fixed Income Department at Goldman Sachs & Co. Mr. Sontag received his
bachelors degree in Economics and Finance from the University of Wisconsin in
1981 and his Masters of Business Administration in Finance from the University
of Wisconsin in 1982.
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.
State Street Global Advisors uses a team approach in managing the Portfolio. The
team of managers is headed by Richard B. Weed. Mr. Weed has managed the
Portfolio since September 1996. Mr. Weed received his B.S. from Worcester
Institute, an M.S. from MIT Sloan School of Management and an M.S. from
Northeastern University. He is a member of the Boston Security Analyst Society.
EVERGREEN INVESTMENT MANAGEMENT COMPANY ("EVERGREEN INVESTMENT"), 200 Berkeley
Street, Boston, MA 02116-5034, is the Sub-Adviser for the World Equity
Portfolio.
Evergreen Investment (formerly known as Keystone Investment Management Company)
was organized in 1932 as a Delaware corporation. First Union Keystone, Inc.
("Keystone") is the corporate parent of wholly-owned operating subsidiaries,
which include Evergreen Investment. 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 Evergreen Investment for
the foreign equity component of the World Equity Portfolio. Mr. J. Gary Craven
is the senior portfolio manager for Evergreen Investment for the U.S. equity
component of the World Equity Portfolio. Messrs. Gunn and Craven have been the
portfolio managers since April 1994 and November 1996, respectively.
Prior to joining Evergreen 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.
CREDIT SUISSE ASSET MANAGEMENT, LLC, ("CSAM") 466 Lexington Avenue, New York,
New York 10017-3147, is the Sub-Adviser for the Growth & Income Portfolio. CSAM
is a member of Credit Suisse Asset Management, the institutional asset
management and mutual fund arm of Credit Suisse Group (Credit Suisse), one of
the world's leading banks. As of December 31, 1999, Credit Suisse Asset
Management companies managed approximately $72 billion in the U.S. and $203
billion globally. Credit Suisse Asset Management has offices in 14 countries,
including SEC-registered offices in New York and London; other offices (such as
those in Budapest, Frankfurt, Milan, Moscow, Paris, Prague, Sydney, Tokyo,
Warsaw and Zurich) are not registered with the U.S. Securities and Exchange
Commission.
Scott T. Lewis and Robert E. Rescoe are responsible for the day-to-day
management of the Portfolio. Mr. Lewis has been with CSAM since 1999 as a result
of the acquisition of Warburg Pincus Asset Management, Inc. (Warburg Pincus) by
Credit Suisse Group (Credit Suisse). Mr. Lewis joined Warburg Pincus in 1986 and
received B.S. and M.B.A. Degrees from New York University. Mr. Rescoe has been
with CSAM since 1999 as a result of the acquisition of Warburg Pincus by Credit
Suisse. Mr. Rescoe joined Warburg Pincus in 1993 and received a B.A. Degree in
Political Science from Tulane University and an M.B.A. Degree in Finance from
the University of Texas.
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 $30 billion through
investment management affiliates. In addition to advising the Portfolio,
Pilgrim Baxter provides advisory services to pension plans, profit sharing plans
and other investment companies.
Peter J. Niedland, CFA has been responsible for the day-to-day management of the
Portfolio since November 1998. Gary L. Pilgrim, CFA has been responsible for
oversight management of the Small Cap Growth Portfolio's investments since the
Portfolio's inception. Mr. Niedland worked on the development of Pilgrim
Baxter's proprietary research program, QRS. He received his B.A. from the
University of Richmond and is a Chartered Financial Analyst. Mr. Niedland has
been with Pilgrim Baxter since May 1993. Mr. Pilgrim has been the Chief
Investment Officer of Pilgrim Baxter since 1985.
Sub-Advisory Fees
Under the Sub-Advisory Agreements, the Adviser has agreed to pay each
Sub-Adviser a fee for its services out of the fees the Adviser receives from the
Portfolios. During 1999, the most recent fiscal year of the Portfolios, the
Adviser paid the Sub-Advisers fees based on the following percentages of each
Portfolio's average daily net assets:
Portfolio Sub-Advisory Fee Paid
- -------------------------------------------------------
Small Cap Growth .60%
World Equity .45%
Growth .45%
Matrix Equity .40%
Growth & Income .50%
Multiple Strategies .45%
High Income Bond .45%
U.S. Government Bond .35%
The percentage of net assets paid to the Sub-Advisers as fees for their services
for certain Portfolios changes with the amount of net assets in the Portfolio.
Generally the larger the net assets, the lower the fees as a percentage of net
assets.
Under the terms of each Sub-Advisory Agreement, the Adviser is obligated to pay
each Sub-Adviser, as full compensation for services rendered under the
Sub-Advisory Agreement with respect to each Portfolio, monthly fees at the
following annual rates based on the average daily net assets of each Portfolio:
Average Daily
Portfolio Net Assets Sub-Advisory Fee
- -------------------------------------------------------------------------
Small Cap Growth ---- .60%
World Equity First $200 million .45%
Next $300 million .375%
Over $500 million .25%
Growth ---- .45%
Matrix Equity First $100 million .40%
Over $100 million .30%
Growth & Income ---- .50%
Multiple Strategies ---- .45%
High Income Bond First $40 million .45%
Next $20 million .40%
Next $15 million .30%
Over $75 million .25%
U.S. Government Bond First $200 million .35%
Over $200 million .25%
GENERAL INFORMATION ABOUT THE TRUST
Distribution and Redemption
All Portfolios of the Trust sell shares to the separate accounts ("Variable
Accounts") of First Variable Life as a funding vehicle for the Contracts offered
by First Variable Life. No fee is charged upon the sale or redemption of the
Trust's shares. Expenses of the Trust are passed through to the Variable
Accounts of First Variable Life, and therefore, are ultimately borne by Contract
owners. In addition, other fees and expenses are assessed by First Variable Life
at the separate account level. (See the Prospectus for the Contract for a
description of all fees and charges relating to the Contract.)
Price of Shares
The Portfolios will buy or sell shares at the price determined at the end of
each day during which the New York Stock Exchange is open for trading (see Net
Asset Value, below). The Portfolios must receive your order by 4:00 p.m. Eastern
time for you to receive the price for that day. The Portfolios will buy or sell
shares for orders they receive after 4:00 p.m. at the price calculated for the
next day on which the New York Stock Exchange is open.
Placing Orders for Shares
The prospectus for your Contract describes the procedures for investing your
purchase payments or premiums in shares of the Portfolios. You may obtain a copy
of that prospectus, free of charge, from First Variable Life or from the person
who sold you the Contract. The Adviser and First Variable Life will not consider
an order to buy or sell shares in the Portfolios as received until the order
meets the requirements for documentation or signatures described in the
prospectus for your Contract. The Portfolios do not charge any fees for selling
(redeeming) shares.
Payment for Redemptions
Payment for orders to sell (redeem) shares will be made within seven days after
the Adviser receives the order.
Suspension or Rejection of Purchases and Redemptions
The Portfolios may suspend the offer of shares, or reject any specific request
to purchase shares from a Portfolio at any time. The Portfolios may suspend
their obligation to redeem shares or postpone payment for redemptions when the
New York Stock Exchange is closed or when trading is restricted on the Exchange
for any reason, including emergency circumstances established by the Securities
and Exchange Commission.
Right to Restrict Transfers
Neither the Trust nor the Variable Accounts are designed for professional market
timing organizations, other entities, or individuals using programmed, large
and/or frequent transfers. The Variable Accounts, in coordination with the
Trust, reserve the right to temporarily or permanently refuse exchange requests
if, in the Adviser's judgment, a Portfolio would be unable to invest effectively
in accordance with its investment objectives and policies, or would otherwise
potentially be adversely affected. In particular, a pattern of exchanges that
coincides with a "market timing" strategy may be disruptive to a Portfolio and
therefore may be refused. Investors should consult the Variable Account
prospectus that accompanies this Trust Prospectus for information on other
specific limitations on the transfer privilege.
Net Asset Value
The value or price of each share of each Portfolio (net asset value per share)
is calculated at the close of business, usually 4:00 p.m. Eastern time, of the
New York Stock Exchange, every day that the New York Stock Exchange is open for
business. The value of the shares held by each Portfolio at the end of the day,
is determined by dividing the total assets of the Portfolio, less all
liabilities, by the total number of shares outstanding. This value is provided
to First Variable Life, which uses it to calculate the value of your interest in
your Contract. It is also the price at which shares will be bought or sold in
the Portfolios for orders they received that day.
The value of the investments of the Portfolio is determined by obtaining market
quotations, where available, usually from pricing services. Short-term debt
instruments maturing in less than 60 days are valued at amortized cost.
Securities for which market quotations are not available are valued at their
fair value as determined, in good faith, by the Adviser based on policies
adopted by the Board of Trustees.
Some of the Portfolios trade securities on foreign markets or in foreign
currencies. Those markets are open at different times and occasionally on
different days than securities traded on the New York Stock Exchange. Exchange
rates for foreign currencies are usually determined at 1:00 p.m. Eastern time
rather than 4:00 p.m. Eastern time. These factors may mean that the value of the
securities held by these Portfolios may change after the close of business of
the New York Stock Exchange.
Dividends and Distributions
Each Portfolio will declare and distribute dividends from net ordinary income
and will distribute its net realized capital gains, if any, at least annually.
First Variable Life generally directs that all dividends and distributions of
the Portfolios be reinvested in the Portfolios under the terms of the Contracts.
Tax Matters
The Trust intends to qualify as a regulated investment company under the tax law
and, as such, distributes substantially all of each Portfolio's ordinary net
income and net capital gains each calendar year as a dividend to the separate
accounts funding the Contracts to avoid an excise tax on certain undistributed
amounts. The Trust expects to pay no income tax. Dividends are reinvested in
additional full and partial shares of the Portfolio as of the dividend payment
date.
The Trust and its Portfolios intend to comply with special diversification and
other tax law requirements that apply to investments under the Contracts. Under
these rules, shares of the Trust will generally only be available through the
purchase of a variable life insurance or annuity contract. Income tax
consequences to Contract owners who allocate purchase payments or premiums to
Trust shares are discussed in the prospectus for the Contracts that accompanies
this Prospectus.
Additional Information
This Prospectus sets forth concisely the information about the Trust and each
Portfolio that you should know before you invest money in a Portfolio. Please
read this Prospectus carefully and keep it for future reference. The Trust has
prepared and filed with the Securities and Exchange Commission (Commission) a
Statement of Additional Information that contains more information about the
Trust and the Portfolios. You may obtain a free copy of the Statement of
Additional Information from your registered representative who offers you the
Contract. You may also obtain copies by calling the Trust at 1-800-228-1035 or
by writing to the Trust at the following address: 2122 York Road, Suite 300, Oak
Brook, Illinois 60523.
Mixed and Shared Funding
The Portfolios may sell their shares to insurance companies as investments under
both variable annuity contracts and variable life insurance policies. We call
this mixed funding. The Portfolios may also sell shares to more than one
insurance company. We call this shared funding. Under certain circumstances,
there could be conflicts between the interests of the different insurance
companies, or conflicts between the different kinds of insurance products using
the Portfolios. If conflicts arise, the insurance company with the conflict
might be forced to redeem all of its interest in the Portfolio. If the Portfolio
is required to sell a large percentage of its assets to pay for the redemption,
it may be forced to sell the assets at a discounted price. The Board of Trustees
will monitor the interests of the insurance company shareholders for conflicts
to attempt to avoid problems.
Legal Proceedings
Neither the Trust nor any Portfolio is involved in any material legal
proceedings. Neither the Adviser nor any Sub-Adviser is involved in any legal
proceedings that if decided against any such party would materially affect the
ability of the party to carry out its duties to the Portfolios. None of such
persons is aware of any litigation that has been threatened.
FINANCIAL HIGHLIGHTS
The Financial Highlights table is intended to help you understand each
Portfolio's financial performance for the period shown. Certain information
reflects financial results for a single Portfolio share. The total return
figures in the table represent the rate that an investor would have earned on an
investment in the Trust (assuming reinvestment of all dividends and
distributions). Your total return would be less due to the fees and charges
under your variable annuity contract or variable life insurance policy. Ernst &
Young LLP has audited this information and its report and the Trust's financial
statements, are included in the Statement of Additional Information, which is
available upon request.
VARIABLE INVESTORS SERIES TRUST
SMALL CAP GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------ PERIOD ENDED
1999 1998 1997 1996 DECEMBER 31, 1995 (1)
---- ---- ---- ---- ---------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD...... $ 15.098 $ 15.578 $ 16.050 $ 12.638 $ 10.000
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Loss.................... (0.199)(5) (0.000) (0.152) (0.091) (0.042)
Net Realized and Unrealized Gain
(Loss) on Investments.............. 12.366 (0.480) 0.243 3.560 3.047
----------- ---------- ---------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS............ 12.167 (0.480) 0.091 3.469 3.005
----------- ---------- ---------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income............. (0.000) (0.000) (0.000) (0.000) (0.000)
From Net Realized Capital Gains........ (0.000) (0.000) (0.435) (0.057) (0.367)
In Excess of Net Realized Capital
Gains.............................. (0.000) (0.000) (0.128) (0.000) (0.000)
----------- ---------- ---------- ----------- -----------
Total Distributions.................... (0.000) (0.000) (0.563) (0.057) (0.367)
----------- ---------- ---------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD............ $ 27.265 $ 15.098 $ 15.578 $ 16.050 $ 12.638
=========== ========== ========== =========== ===========
TOTAL RETURN (2) (3)........................ 80.66% (3.12)% 0.73% 27.39% 30.08%
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's).... $ 19,098 $ 14,638 $ 18,254 $ 13,803 $ 3,813
RATIOS TO AVERAGE NET ASSETS:
Gross Expenses (4)................. 1.68% 1.84% 1.79% 2.38% 9.00%
Net Expenses (4)................... 1.35% 1.35% 1.35% 1.35% 1.35%
Net Investment Loss (4)............ (1.23)% (1.20)% (1.06)% (0.90)% (0.79)%
Portfolio Turnover Rate................ 172.48% 105.35% 104.72% 72.66% 73.76%
</TABLE>
(1) From commencement of operations May 4, 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) Annualized for periods of less than one year.
(5) Based on monthly average shares outstanding during the period.
See notes to financial statements.
64
<PAGE> 66
VARIABLE INVESTORS SERIES TRUST
WORLD EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
-CONTINUED-
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD...... $ 13.618 $ 14.084 $ 15.062 $ 13.823 $ 11.752
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income.................. 0.277 0.130 0.068 0.016 0.014
Net Realized and Unrealized Gain
on Investments..................... 7.176 0.593 1.392 1.647 2.872
-------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS............ 7.453 0.723 1.460 1.663 2.886
-------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
From Net Investment Income............. (0.070) (0.165) (0.161) (0.013) (0.000)
In Excess of Net Investment Income..... (0.000) (0.174) (0.126) (0.051) (0.000)
From Net Realized Capital Gains........ (0.157) (0.850) (2.056) (0.360) (0.815)
In Excess of Net Realized Capital
Gains.............................. (0.000) (0.000) (0.095) (0.000) (0.000)
-------- --------- --------- --------- ---------
Total Distributions.................... (0.227) (1.189) (2.438) (0.424) (0.815)
-------- --------- --------- --------- ---------
NET ASSET VALUE AT END OF PERIOD............ $ 20.844 $ 13.618 $ 14.084 $ 15.062 $ 13.823
======== ========= ========= ========= =========
TOTAL RETURN (1) (2)........................ 55.46% 5.11% 9.98% 12.33% 24.32%
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's).... $ 24,946 $ 23,400 $ 24,772 $ 24,534 $ 18,191
Ratios to average net assets:
Gross Expenses (3)................. 1.57% 1.51% 1.47% 1.50% 1.67%
Net Expenses (3)................... 1.20% 1.20% 1.20% 1.20% 1.20%
Net Investment Income (3).......... 1.71% 0.27% 0.25% 0.10% 0.12%
Portfolio Turnover Rate................ 163.67% 150.22% 120.50% 61.14% 97.85%
</TABLE>
(1) Total returns would have been lower had certain expenses not been borne
by the adviser or its affiliates.
(2) 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.
(3) Annualized for periods of less than one year.
See notes to financial statements.
65
<PAGE> 67
VARIABLE INVESTORS SERIES TRUST
GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
-CONTINUED-
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD...... $ 41.004 $ 34.702 $ 30.623 $ 25.866 $ 20.056
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (Loss)........... (0.219)(4) (0.000) (0.082) (0.063) 0.007
Net Realized and Unrealized Gain
on Investments..................... 13.957 11.465 7.226 6.736 7.419
-------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS............ 13.738 11.465 7.144 6.673 7.426
-------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
From Net Investment Income............. (0.000) (0.000) (0.000) (0.000) (0.173)
In Excess of Net Investment Income..... (0.000) (0.000) (0.000) (0.002) (0.000)
From Net Realized Capital Gains........ (1.724) (5.163) (3.065) (1.914) (1.443)
-------- --------- --------- --------- ---------
Total Distributions.................... (1.724) (5.163) (3.065) (1.916) (1.616)
-------- --------- --------- --------- ---------
NET ASSET VALUE AT END OF PERIOD............ $ 53.018 $ 41.004 $ 34.702 $ 30.623 $ 25.866
======== ========= ========= ========= =========
TOTAL RETURN (1) (2)........................ 34.53% 33.29% 23.62% 25.74% 37.12%
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's).... $ 78,815 $ 84,863 $ 65,273 $ 54,565 $ 42,919
Ratios to average net assets:
Gross Expenses (3)................. 1.02% 1.03% 1.10% 1.17% 1.17%
Net Expenses (3)................... 1.02% 1.02% 1.10% 1.17% 1.17%
Net Investment Income (Loss) (3)... (0.49)% (0.39)% (0.25)% (0.23)% 0.01%
Portfolio Turnover Rate................ 56.23% 86.91% 54.74% 67.82% 166.87%
</TABLE>
(1) Total returns would have been lower had certain expenses not been borne
by the adviser or its affiliates.
(2) 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.
(3) Annualized for periods of less than one year.
(4) Based on monthly average shares outstanding during the period.
See notes to financial statements.
66
<PAGE> 68
VARIABLE INVESTORS SERIES TRUST
MATRIX EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
-CONTINUED-
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD...... $ 16.351 $ 14.275 $ 15.254 $ 15.704 $ 12.372
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income.................. 0.011 0.047 0.287 0.659 0.559
Net Realized and Unrealized Gain
on Investments..................... 2.271 2.939 2.965 0.063 3.560
-------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS............ 2.282 2.986 3.252 0.722 4.119
-------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
From Net Investment Income............. (0.000) (0.056) (0.291) (0.654) (0.494)
In Excess of Net Investment Income..... (0.000) (0.041) (0.000) (0.000) (0.000)
From Net Realized Capital Gains........ (0.317) (0.813) (3.940) (0.518) (0.293)
-------- --------- --------- --------- ---------
Total Distributions.................... (0.317) (0.910) (4.231) (1.172) (0.787)
-------- --------- --------- --------- ---------
NET ASSET VALUE AT END OF PERIOD............ $ 18.316 $ 16.351 $ 14.275 $ 15.254 $ 15.704
======== ========= ========= ========= =========
TOTAL RETURN (1) (2)........................ 14.14% 21.11% 22.05% 4.62% 33.45%
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's).... $ 22,246 $ 22,251 $ 14,521 $ 14,448 $ 16,018
Ratios to average net assets:
Gross Expenses (3)................. 1.27% 1.48% 1.54% 1.48% 1.51%
Net Expenses (3)................... 1.15% 1.15% 1.15% 1.15% 1.15%
Net Investment Income (3).......... 0.06% 0.36% 1.63% 3.74% 3.89%
Portfolio Turnover Rate................ 127.65% 138.23% 169.75% 19.41% 48.20%
</TABLE>
(1) Total returns would have been lower had certain expenses not been borne
by the adviser or its affiliates.
(2) 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.
(3) Annualized for periods of less than one year.
See notes to financial statements.
67
<PAGE> 69
VARIABLE INVESTORS SERIES TRUST
GROWTH & INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
-CONTINUED-
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED
--------------------------------------------
1999 1998 1997 1996 DECEMBER 31, 1995 (1)
---- ---- ---- ---- ---------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD...... $ 15.901 $ 14.567 $ 12.421 $ 11.171 $ 10.000
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income.................. 0.103 0.112 0.127 0.070 0.045
Net Realized and Unrealized Gain
on Investments..................... 0.912 1.696 3.351 1.291 1.266
----------- ---------- ---------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS............ 1.015 1.808 3.478 1.361 1.311
----------- ---------- ---------- ----------- -----------
LESS DISTRIBUTIONS:
From Net Investment Income............. (0.000) (0.107) (0.127) (0.070) (0.045)
In Excess of Net Investment Income..... (0.000) (0.005) (0.000) (0.001) (0.000)
From Net Realized Capital Gains........ (0.377) (0.362) (1.205) (0.040) (0.095)
----------- ---------- ---------- ----------- -----------
Total Distributions.................... (0.377) (0.474) (1.332) (0.111) (0.140)
----------- ---------- ---------- ----------- -----------
NET ASSET VALUE AT END OF PERIOD............ $ 16.539 $ 15.901 $ 14.567 $ 12.421 $ 11.171
=========== ========== ========== =========== ===========
TOTAL RETURN (2) (3)........................ 6.27% 12.43% 28.20% 12.15% 13.09%
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's).... $ 27,132 $ 28,144 $ 21,061 $ 10,300 $ 3,335
RATIOS TO AVERAGE NET ASSETS:
Gross Expenses (4)................. 1.26% 1.33% 1.60% 2.63% 7.27%
Net Expenses (4)................... 1.25% 1.25% 1.25% 1.25% 1.25%
Net Investment Income (4).......... 0.59% 0.70% 1.05% 0.82% 1.17%
Portfolio Turnover Rate................ 94.46% 78.37% 162.94% 131.85% 33.49%
</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) Annualized for periods of less than one year.
See notes to financial statements.
68
<PAGE> 70
VARIABLE INVESTORS SERIES TRUST
MULTIPLE STRATEGIES PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
-CONTINUED-
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD...... $ 17.143 $ 14.158 $ 12.699 $ 12.043 $ 10.022
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income.................. 0.058 0.078 0.103 0.143 0.137
Net Realized and Unrealized Gain
on Investments..................... 4.638 4.035 2.629 2.069 3.086
-------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS............ 4.696 4.113 2.732 2.212 3.223
-------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
From Net Investment Income............. (0.000) (0.078) (0.103) (0.144) (0.136)
In Excess of Net Investment Income (1). (0.000) (0.000) (0.000) (0.000) (0.000)
From Net Realized Capital Gains........ (0.497) (1.050) (1.170) (1.412) (1.066)
-------- --------- --------- --------- ---------
Total Distributions.................... (0.497) (1.128) (1.273) (1.556) (1.202)
-------- --------- --------- --------- ---------
NET ASSET VALUE AT END OF PERIOD............ $ 21.342 $ 17.143 $ 14.158 $ 12.699 $ 12.043
======== ========= ========= ========= =========
TOTAL RETURN (2) (3)........................ 28.00% 29.15% 21.79% 18.29% 32.24%
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's).... $ 50,406 $ 43,296 $ 35,119 $ 31,884 $ 26,380
Ratios to average net assets:
Gross Expenses (4)................. 1.10% 1.15% 1.21% 1.32% 1.33%
Net Expenses (4)................... 1.10% 1.15% 1.19% 1.20% 1.20%
Net Investment Income (4).......... 0.30% 0.50% 0.69% 1.16% 1.14%
Portfolio Turnover Rate................ 60.70% 74.00% 45.87% 92.21% 161.10%
</TABLE>
(1) For 1998 and 1997, amount was less than $0.001 per share.
(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) Annualized for periods of less than one year.
See notes to financial statements.
69
<PAGE> 71
VARIABLE INVESTORS SERIES TRUST
HIGH INCOME BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
-CONTINUED-
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD...... $ 9.165 $ 9.720 $ 9.173 $ 8.589 $ 7.914
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income.................. 0.881 0.766 0.640 0.596 0.779
Net Realized and Unrealized Gain
(Loss) on Investments.............. (0.713) (0.471) 0.598 0.624 0.717
-------- ---------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS............ 0.168 0.295 1.238 1.220 1.496
-------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
From Net Investment Income............. (0.001) (0.691) (0.681) (0.596) (0.779)
In Excess of Net Investment Income..... (0.000) (0.148) (0.010) (0.040) (0.042)
From Net Realized Capital Gains........ (0.011) (0.011) (0.000) (0.000) (0.000)
-------- --------- --------- --------- ---------
Total Distributions.................... (0.012) (0.850) (0.691) (0.636) (0.821)
-------- --------- --------- --------- ---------
NET ASSET VALUE AT END OF PERIOD............ $ 9.321 $ 9.165 $ 9.720 $ 9.173 $ 8.589
======== ========= ========= ========= =========
TOTAL RETURN (1) (2)........................ 1.83% 3.04% 13.54% 14.20% 18.98%
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's).... $ 15,467 $ 21,516 $ 17,916 $ 12,835 $ 8,764
Ratios to average net assets:
Gross Expenses (3)................. 1.50% 1.46% 1.64% 1.99% 2.04%
Net Expenses (3)................... 1.20% 1.20% 1.20% 1.18% 1.20%
Net Investment Income (3).......... 7.50% 6.89% 7.15% 7.96% 8.62%
Portfolio Turnover Rate................ 38.23% 54.70% 91.54% 105.48% 82.15%
</TABLE>
(1) Total returns would have been lower had certain expenses not been borne
by the adviser or its affiliates.
(2) 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.
(3) Annualized for periods of less than one year.
See notes to financial statements.
70
<PAGE> 72
VARIABLE INVESTORS SERIES TRUST
U.S. GOVERNMENT BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
-CONTINUED-
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD...... $ 10.322 $ 10.161 $ 9.938 $ 10.510 $ 9.718
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income.................. 0.635 0.430 0.630 0.629 0.765
Net Realized and Unrealized Gain
(Loss) on Investments.............. (0.831) 0.360 0.299 (0.385) 1.191
-------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS............ (0.196) 0.790 0.929 0.244 1.956
-------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
From Net Investment Income............. (0.000) (0.427) (0.617) (0.610) (0.765)
In Excess of Net Investment Income..... (0.000) (0.008) (0.000) (0.000) (0.045)
From Net Realized Capital Gains........ (0.008) (0.192) (0.068) (0.206) (0.354)
In Excess of Net Realized
Capital Gains......................... (0.000) (0.002) (0.021) (0.000) (0.000)
-------- --------- --------- --------- ---------
Total Distributions.................... (0.008) (0.629) (0.706) (0.816) (1.164)
-------- --------- --------- --------- ---------
NET ASSET VALUE AT END OF PERIOD............ $ 10.118 $ 10.322 $ 10.161 $ 9.938 $ 10.510
======== ========= ========= ========= =========
TOTAL RETURN (1) (2)........................ (1.90)% 7.79% 9.37% 2.36% 20.18%
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period (000's).... $ 12,588 $ 15,470 $ 9,679 $ 10,734 $ 11,618
Ratios to average net assets:
Gross Expenses (3)................. 1.39% 1.59% 1.73% 1.66% 1.59%
Net Expenses (3)................... 0.85% 0.85% 0.85% 0.85% 0.85%
Net Investment Income (3).......... 5.48% 5.43% 5.86% 5.80% 6.18%
Portfolio Turnover Rate................ 68.89% 66.12% 124.75% 244.96% 252.94%
</TABLE>
(1) Total returns would have been lower had certain expenses not been borne
by the adviser or its affiliates.
(2) 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.
(3) Annualized for periods of less than one year.
See notes to financial statements.
INTERESTED IN LEARNING MORE?
The Statement of Additional Information incorporated by reference into this
prospectus contains additional information about the Trust's operations.
Further information about the Trust's investments is available in the Trust's
annual and semi-annual reports to shareholders. The Trust's annual report
discusses market conditions and investment strategies that significantly
affected the Trust's performance results during its last fiscal year.
The Trust can provide you with a free copy of these materials or other
information about the Trust. You may reach the Trust:
By Mail: 2122 York Road
Suite 300
Oak Brook,Illinois 60523
By Phone: 1-800-228-1035
Or you may view or obtain these documents from the Securities and Exchange
Commission:
* Call the Commission at 1-202-942-8090 for information on the operation
of the Public Reference Room
* Reports and other information about the Trust are available on the EDGAR
Database on the Commission's Internet site at http://www.sec.gov
* Copies of the information may be obtained, after paying a duplicating fee,
by electronic request at [email protected], or by writing the
Commission's Public Reference Section, Wash. D.C. 20549-0102.
On the Internet: www.sec.gov
The Trust's Investment Company Act filing number is 811-4969.
APPENDIX TO PROSPECTUS
DESCRIPTION OF CERTAIN INVESTMENTS, TECHNIQUES AND RISKS
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). The World Equity Portfolio may invest without limitation in
securities of foreign issuers. The other Portfolios may invest to a lesser
degree in foreign securities.
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.
Each Portfolio may engage in foreign currency exchange transactions in
connection with its foreign investments.
Foreign Securities Risk Considerations.
Although Portfolios that invest in foreign securities may reduce their overall
risk by providing further diversification, the Portfolios will be exposed to the
risks listed below. In addition, these risks may be heightened for investments
in developing countries:
* adverse effects from changing political, social or economic
conditions, diplomatic relations, taxation or investment regulations
* limitations on repatriation of assets
* expropriation
* costs associated with currency conversions
* less publicly available information because foreign securities and
issuers are generally not subject to the reporting requirements of the
SEC
* differences in financial evaluation because foreign issuers are not
subject to the domestic accounting, auditing and financial reporting
standards and practices
* lack of development or efficiency with respect to non-domestic
securities markets and brokerage practices (including higher,
non-negotiable brokerage costs)
* less liquidity (including due to delays in transaction settlement)
* more price volatility
* smaller options and futures markets, causing lack of liquidity for
these securities
* higher custodial and settlement costs
* change in net asset value of the Portfolio's shares on days when
shareholders will not be able to purchase or redeem Trust shares.
The World Equity Portfolio - Emerging Markets. The World Equity Portfolio may
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.
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 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.
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 Portfolio's 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 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 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.
These Portfolios will engage in unlisted over-the-counter options only with
broker/dealers deemed creditworthy by their respective Sub-Advisers. 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 Portfolios 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 each Portfolio's percentage limitation
on illiquid securities.
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.
BORROWING
Each of the Portfolios may borrow money to the extent permitted by each
Portfolio's Investment Restrictions contained in the Statement of Additional
Information. 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.
PART B
VARIABLE INVESTORS SERIES TRUST
FORM N-1A
PART B
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
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"). The Prospectus incorporates this Statement
by reference. 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, 2000. 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
Page
DEFINITIONS
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
INVESTMENT RESTRICTIONS
MANAGEMENT OF THE TRUST
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
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
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 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.
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 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.
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 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
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 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
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 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.
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.
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 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 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 hedging 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 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 (including bonds in default) 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.
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.
SMALL CAPITALIZATION COMPANIES
Certain Portfolios will invest in securities of issuers with small market
capitalizations. The Small Cap Growth Portfolio will invest primarily in such
securities. While the Sub-Adviser for the Small Cap Growth Portfolio 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 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.
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.
HIGH INCOME BOND PORTFOLIO - OTHER INVESTMENTS
In addition to the investments described in the Prospectus and in this
Statement, the High Income Bond Portfolio may also invest in equity securities.
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.
MORTGAGE-BACKED SECURITIES
A significant portion of the securities held by the U.S. Government Bond
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.
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 expand further
as a result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, 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, High Income Bond, 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 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 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
(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.
(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.
(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.
MANAGEMENT OF THE TRUST
The Trust is organized as a Massachusetts business trust. The overall
responsibility for the supervision of the affairs of the Trust vests in the
Trustees. The Trustees have entered into an Investment Advisory Agreement with
the Adviser to handle the day-to-day affairs of the Trust (see below). The
Trustees meet periodically to review the affairs of the Trust and to establish
certain guidelines which the Adviser is expected to follow in implementing the
investment policies and objectives 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: 45 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: 66
Wesley E. Horton Trustee Private Trustee and Investor
1100 Country Club Circle
North Palm Beach, FL 33408
Age: 78
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: 75
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: 61
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: 55 of Adviser; prior to 1994, Senior Vice President
and Chief Financial Officer, Interstate
Assurance Company (an affiliate of Adviser)
Jeffery K. Hoelzel Secretary Vice President, General Counsel & Secretary
2122 York Road of First Variable Life Insurance Company since
Oak Brook, IL 60523 1999; prior thereto attorney at Lord, Bissell &
Age: __ Brook in 1998 and 1999; prior thereto, attorney
at Ungaretti & Harris in 1997 and 1998; prior
thereto, Senior Vice President, General Counsel
& Secretary of Cova Financial Services Life
Insurance Company
Christopher S. Harden Vice President, Vice President and Treasurer of First Variable
2122 York Road Treasurer and since 1998; prior thereto, Vice President
Oak Brook, IL 60523 Principal Accounting of Cova Financial Services Life Insurance
Age: 42 Officer Company
Terri S. Bon Assistant Treasurer Assistant Vice President and Assistant Treasurer
2122 York Road of First Variable Life Insurance Company since
Oak Brook, IL 60523 1998; prior thereto, Assistant Vice President of
Age: __ Cova Financial Services Life Insurance Company
Kari J. Stanway Assistant Vice Vice President of First Variable Life Insurance
2122 York Road President Company since 2000; prior thereto, Assistant Vice
Oak Brook IL 60523 President of First Variable Life Insurance Company
Age: __ from 1997 to 1999; prior thereto, Senior
Consultant for the Optima Group
</TABLE>
- - ----------
* Interested person of the Trust within the meaning of the 1940 Act.
As of March 31, 2000, 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.
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
1999, the Trust paid Trustees' fees aggregating $70,000. The following table
shows 1999 compensation by Trustee. The Trust is the only Fund in the complex.
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 Trust Expenses Upon Retirement Paid to Trustees
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Paul G. Chenault $17,500 None None $17,500
Trustee
Wesley E. Horton $17,500 None None $17,500
Trustee
W. Lawrence Howe $17,500 None None $17,500
Trustee
Laird E. Wiggin $17,500 None None $17,500
Trustee
John M. Soukup None None None None
President and Trustee
Norman A. Fair None None None None
Trustee
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
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 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 1997, 1998 and 1999, each of the Portfolios paid fees to the
Adviser pursuant to the Investment Advisory Agreement as follows:
<TABLE>
<CAPTION>
Portfolio 1997 1998 1999
- - --------- ------ ----- ------
<S> <C> <C> <C>
Small Cap Growth Portfolio $142,715 $126,469 $106,925
World Equity Portfolio $178,910 $169,949 $143,773
Growth Portfolio $431,634 $490,627 $496,806
Matrix Equity Portfolio $ 92,883 $117,982 $146,479
Growth & Income Portfolio $119,612 $201,099 $217,470
Multiple Strategies Portfolio $237,374 $259,847 $316,341
High Income Bond Portfolio $105,244 $141,078 $132,321
U.S. Government Bond Portfolio $ 57,609 $ 68,415 $ 87,177
</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 1997, 1998 and 1999 were
$961,320, $955,494, and $955,501, 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, Norman A. Fair, Director, Martin Sheerin, Director and Jeffery K.
Hoelzel, Secretary. The address of Mr. Soukup, Mr. Sheerin and Mr. Hoelzel is
the same as that of the Adviser. The address of Mr. Fair is 2211 York Road,
Suite 202, Oak Brook, Illinois 60523.
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 J.
Christopher Donahue, Thomas R. Donahue, John B. Fisher, James F. Getz 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; David A. Briggs, 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; Jeffrey A. Kozemchak, Senior Vice President; Sandra L. McInerney,
Senior Vice President; Susan M. Nason, Senior Vice President; Mary Jo Ochson,
Senior Vice President; and Robert J. Ostrowski, 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; David A. Braaten, Anthony J. D'Amato, Bradley C. Tank and Thomas M.
Zoeller, Office of the Chief Executive; Thomas M. Zoeller, Senior Vice President
and Chief Financial Officer; Anthony J. D'Amato, Senior Vice President; Wallace
L. Head, Senior Vice President; Dennis A. Wallestad, Senior Vice President;
Elizabeth N. Cohernour, Senior Vice President and General Counsel; Stephen J.
Shenkenberg, Vice President, Deputy General Counsel, Chief Compliance Officer
and Secretary; Joseph J. Rhiel, Senior Vice President and Chief Information
Officer; John W. Widmer, Treasurer; and Richard T. Weiss, Director.
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.
EVERGREEN INVESTMENT MANAGEMENT COMPANY ("EVERGREEN INVESTMENT") (formerly,
Keystone Investment Management Company). The directors and executive officers of
Evergreen Investment are: W. Douglas Munn, Director, Chief Financial Officer,
Senior Vice President and Treasurer; Donald A. McMullen, Jr., Director; William
M. Ennis II, Director; Michael A. Koonce, Secretary & Chief Legal Counsel;
Christopher P. Conkey, President; Gilman C. Gunn, III, Chief Investment Officer
and Senior Vice President; J. Gary Craven, Chief Investment Officer and Senior
Vice President; Matthew D. Finn, Chief Investment Officer and Senior Vice
President; James F. Angelos, Chief Compliance Officer and Senior Vice President.
CREDIT SUISSE ASSET MANAGEMENT, LLC ("CSAM"). The directors and executive
officers of CSAM are: William W. Priest, Jr., Chief Executive Officer, Chairman
of Management Committee and Managing Director; Michael E. Guarasci, Sr., Chief
Financial Officer, Member of Management Committee and Managing Director of CSAM;
Laurence R. Smith, Chief Investment Officer, Member of Management Committee
and Managing Director, CSAM; Eugene Podsiadio, Head of Retail Distribution,
Member of Management Committee and Managing Director, CSAM; Timothy T.
Taussig, Head of Institutional Distribution, Member of Management Committee
and Managing Director, CSAM; Elizabeth B. Dater, Member of Management Committee
and Managing Director, CSAM; and Sheila N. Scott, Member of Management Committee
and Managing Director, CSAM.
PILGRIM BAXTER & ASSOCIATES, LTD. ("PILGRIM BAXTER"). The executive officers and
directors of Pilgrim Baxter are: Gary L. Pilgrim, CFA, President, 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 and Treasurer.
CODES OF ETHICS
To mitigate the possibility that a Portfolio will be adversely affected by
personal trading of employees, the Trust, the Adviser and the Sub-Advisers have
adopted Codes of Ethics under Rule 17j-1 of the 1940 Act. These Codes contain
policies restricting securities trading in personal accounts of the portfolio
managers and others who normally come into possession of information on
portfolio transactions. These Codes comply, in all material respects, with the
recommendations of the Investment Company Institute. Employees subject to the
Codes of Ethics may invest in securities for their own investment accounts,
including securities that may be purchased or held by the Trust.
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.
In fiscal 1997, 1998 and 1999, none of the Portfolios paid any underwriting
commissions. In fiscal 1997, 1998 and 1999, the Portfolios paid brokerage
commissions in the following aggregate amounts:
Brokerage Commissions
<TABLE>
<CAPTION>
Portfolio 1997 1998 1999
- - --------- -------- -------- ------
<S> <C> <C> <C>
Small Cap Growth Portfolio $ 25,503 $ 23,533 $ 13,181
World Equity Portfolio $117,732 $120,381 $119,781
Growth Portfolio $ 55,485 $ 83,459 $ 69,060
Matrix Equity Portfolio $ 35,930 $ 43,252 $ 40,226
Growth & Income Portfolio $ 69,861 $ 57,332 $ 70,207
Multiple Strategies Portfolio $ 23,215 $ 31,058 $ 31,052
High Income Bond Portfolio -0- $ 171 $ 114
U.S. Government Bond Portfolio -0- -0- $ -0-
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
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 Contract owners. No
person known to First Variable Life owns of record or beneficially more than 20%
of the total outstanding accumulation units of Annuity Funds A, E, M or Separate
Account VL.
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 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 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
Performance information for each of the Portfolios may be presented from to time
in advertisements and sales literature. 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
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.
(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, 1999
was as follows:
High Income Bond Portfolio 9.98%
U.S. Government Bond Portfolio 6.40%
(b) The total return of each of the following Portfolios for the one-year and
five-year periods ending December 31, 1999, and the average annual total return
for the life of each Portfolio through that date were as follows:
<TABLE>
<CAPTION>
One-Year Five-Year Ten-Year or
Period Period Since Inception
------ ------ ---------
<S> <C> <C> <C>
Small Cap Growth Portfolio(3) 80.66% N/A 25.87%
World Equity Portfolio 55.46% 20.21% 11.91%
Growth Portfolio(1) 34.53% 30.77% 17.40%
Matrix Equity Portfolio 14.14% 18.69% 13.39%
Growth & Income Portfolio(2) 6.27% N/A 15.58%
Multiple Strategies Portfolio 28.00% 25.80% 16.09%
High Income Bond Portfolio 1.83% 10.12% 9.44%
U.S. Government Bond Portfolio (1.90%) 7.31% 7.09%
</TABLE>
(1) The average annual total return for the Growth, Multiple Strategies, High
Income Bond and U.S. Government Bond Portfolios is shown for each of the one-,
five-, and ten-year periods ended December 31, 1999 (the Growth Portfolio was
initially established as FVL Growth Fund, Inc.).
(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.
From time to time, the 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 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.
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.
A 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 of
investments 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
02116 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. State Street Bank and Trust Company also acts as the
Trust's transfer and dividend-paying agent and provides certain administrative
services to the Trust.
INDEPENDENT AUDITORS
The Trust's independent auditor is Ernst & Young LLP, 233 South Wacker,
Chicago, Illinois 60606. 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 1999
Variable Investors Series Trust Report to Contract Owners.
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.
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.
D -- Debt rated 'D' is in default, and payment of interest and/or repayment of
principal is in arrears.
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.
D -- Debt rated 'D' is in default, and payment of interest and/or repayment of
principal is in arrears.
FINANCIAL STATEMENTS
The financial statements for the Trust at December 31, 1999 and for the year
then ended, and financial highlights, appearing in the 1999 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.
PART C
OTHER INFORMATION
Item 23. Exhibits
(a) Agreement and Declaration of Trust.*
(b) By-Laws, as amended to March 19, 1987.*
(c) Not applicable
(d)(1) Investment Advisory Agreement between First Variable
Advisory Services Corp. and the Registrant as amended
May 1, 1995.*
(d)(2) Sub-Advisory Agreement between Credit Suisse Asset
Management, LLC and the Registrant
(d)(3) Sub-Advisory Agreement between Pilgrim Baxter &
Associates, LTD and the Registrant*
(d)(4) Sub-Advisory Agreement between State Street Bank and
Trust Company and the Registrant*
(d)(5) Sub-Advisory Agreement between Value Line, Inc. and the
Registrant*
(d)(6) Sub-Advisory Agreement between Strong/Corneliuson
Capital Management, Inc. and the Registrant*
(d)(7) Sub-Advisory Agreement between Federated Investment
Counseling and the Registrant*
(d)(8) Sub-Advisory Agreement between Keystone Investment
Management Company and the Registrant.**
(e) Not applicable
(f) Not applicable
(g) Form of Custodian Agreement between the Registrant and State Street
Bank and Trust Company.*
(h)(1) Form of Transfer Agency and Service Agreement between the
Registrant and State Street Bank and Trust Company.*
(h)(2) Form of Subadministration Agreement for Reporting and
Accounting Services between the Registrant and State Street
Bank and Trust Company.*
(h)(3) Expense Reimbursement Agreement.*
(i)(1) Consent and Opinion of Counsel.
(j) Consent of Ernst & Young LLP, Independent Auditors
(k) Financial Statements - incorporated herein by reference to the Trust's
Annual Report dated December 31, 1999, as filed electronically with
the Securities and Exchange Commission on March 1, 2000.
(l) Not applicable
(m) Not applicable
(n) Financial Data Schedules.***
(o) Not applicable
(p)(1) Registrant's and Adviser's Code of Ethics
(p)(2) Sub-Adviser's Code of Ethics - Federated Investment Counseling
(to be filed by amendment)
(p)(3) Sub-Adviser's Code of Ethics - Value Line, Inc.
(to be filed by amendment)
(p)(4) Sub-Adviser's Code of Ethics - Strong Capital Management, Inc.
(p)(5) Sub-Adviser's Code of Ethics - State Street Bank and Trust Company
(to be filed by amendment)
(p)(6) Sub-Adviser's Code of Ethics - Credit Suisse Asset Management, LLC
(p)(7) Sub-Adviser's Code of Ethics - Pilgrim Baxter & Associates, Ltd.
(p)(8) Sub-Adviser's Code of Ethics - Evergreen Investment Management
Company (to be filed by amendment)
*Incorporated by reference to Registrant's Post-Effective Amendment No. 19 to
Form N-1A, File Nos. 33-11182/811-04969 as filed electronically on April 17,
1998.
**Incorporated by reference to Registrant's Proxy statement filed pursuant to
Section 14(a) of the Securities Exchange Act of 1934, File Nos. 33-11182/
811-04969, as filed electronically on November 12, 1996.
***Previously filed.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
None.
ITEM 25. 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 26. BUSINESS AND OTHER CONNECTIONS OF THE 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
ILona Financial Group, Inc., formerly known as Irish Life of North America,
Inc. ("ILona"). ILona is a wholly-owned subsidiary of Irish Life plc which
in turn is owned by Irish Life & Permanent plc.
There is set forth below information as to any other business, profession,
vocation, or employment of a substantial nature in which the investment adviser,
and each director, officer or partner of the Registrant's investment adviser is,
or has been engaged within the last two fiscal years for his or her own account
or in the capacity of director, officer, employee, partner, or trustee.
<TABLE>
<CAPTION>
NAME BUSINESS ACTIVITIES IN LAST
TWO FISCAL YEARS
<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
Jeffery K. Hoelzel Vice President, General Counsel & Secretary
Secretary and Clerk of First Variable Life Insurance Company since
1999; prior thereto attorney at Lord, Bissell &
Brook in 1998 and 1999; prior thereto, attorney
at Ungaretti & Harris in 1997 and 1998; prior
thereto, Senior Vice President, General Counsel
& Secretary of Cova Financial Services Life
Insurance Company
Kari Stanway Assistant Vice President of the Trust; Assistant
Assistant Vice Vice President, First Variable Life
President
</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 Capital Management, Inc.
File No. 801-10724
Evergreen Investment Management Company
File No. 801-8327
Value Line, Inc.
File No. 801-625
Federated Investment Counseling
File No. 801-34611
Credit Suisse Asset Management, LLC
File No. 801-37170
Pilgrim Baxter & Associates, Ltd.
File No. 801-48872
ITEM 27. PRINCIPAL UNDERWRITERS
Not applicable.
ITEM 28. 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 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets the requirements of
Securities Act Rule 485(b) and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, duly
authorized, in the City of Oak Brook, and the State of Illinois, on the 18th day
of April, 2000.
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 has been signed below by the following persons in the
capacities and on the dates indicated.
Date
/s/JOHN M. SOUKUP 4-18-00
---------------------------
John M. Soukup
President and Trustee
/s/PAUL G. CHENAULT 4-18-00
---------------------------
Paul G. Chenault
Trustee
/s/WESLEY E. HORTON 4-18-00
---------------------------
Wesley E. Horton
Trustee
/s/NORMAN A. FAIR 4-18-00
---------------------------
Norman A. Fair
Trustee
/s/W. LAWRENCE HOWE 4-18-00
---------------------------
W. Lawrence Howe
Trustee
/s/LAIRD E. WIGGIN 4-18-00
---------------------------
Laird E. Wiggin
Trustee
/s/CHRISTOPHER HARDEN 4-18-00
---------------------------
Christopher Harden
Treasurer and Principal
Accounting Officer
EXHIBITS TO
POST EFFECTIVE AMENDMENT NO. 22 TO
FORM N-1A
FOR
VARIABLE INVESTORS SERIES TRUST
INDEX TO EXHIBITS
EXHIBIT NO. PAGE NO.
EX-23(d)(2) Sub-Advisory Agreement between Credit Suisse Asset
Management, LLC and the Registrant
EX-23(i) Opinion and Consent of Counsel
EX-23(j) Consent of Independent Auditors
EX-23(p)(1) Registrant's and Adviser's Code of Ethics
(p)(4) Sub-Adviser's Code of Ethics - Strong
Capital Management, Inc.
(p)(6) Sub-Adviser's Code of Ethics - Credit Suisse
Asset Management, LLC
(p)(7) Sub-Adviser's Code of Ethics - Pilgrim Baxter &
Associates, Ltd.
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 CREDIT SUISSE
ASSET MANAGEMENT, LLC, a Delaware limited liability company 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 (the
"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 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 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. Notwithstanding any
provision in this Agreement, if the requisite approval of the Portfolio's
shareholders is not received within 150 days of the date of the acquisition
of Warburg Pincus Asset Management, Inc. by Credit Suisse Group, this Agreement
will terminate automatically.
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 noncompliance 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 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.
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 as of this 6th day of
July, 1999.
FIRST VARIABLE ADVISORY SERVICES CORP.
Attest:
/S/ARNOLD R. BERGMAN /S/JOHN M. SOUKUP
____________________ By:__________________________
CREDIT SUISSE ASSET MANAGEMENT, LLC
Attest:
/s/STUART J. COHEN /S/HAL LIEBES
____________________ By:__________________________
Hal Liebes
General Counsel
Blazzard, Grodd & Hasenauer, P.C.
943 Post Road East
Westport, CT 06880
(203) 226-7866
April 18, 2000
Board of Trustees
Variable Investors Series Trust
2122 York Road
Suite 300
Oak Brook, IL 60523
Re: Opinion of Counsel - Variable Investors Series Trust
-----------------------------------------------------
Gentlemen:
You have requested our Opinion of Counsel in connection with the filing with the
Securities and Exchange Commission of a Post-Effective Amendment to a
Registration Statement on Form N-1A with respect to Variable Investors Series
Trust.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to render
the opinions expressed below.
We are of the following opinions:
1. Variable Investors Series Trust ("Trust") is a valid and existing
unincorporated voluntary association, commonly known as a business trust.
2. The Trust is a business Trust created and validly existing pursuant to
the Massachusetts Laws.
3. All of the prescribed Trust procedures for the issuance of the shares
have been followed, and, when such shares are issued in accordance with the
Prospectus contained in the Registration Statement for such shares, all state
requirements relating to such Trust shares will have been complied with.
4. Upon the acceptance of purchase payments made by shareholders in
accordance with the Prospectus contained in the Registration Statement and upon
compliance with applicable law, such shareholders will have legally-issued,
fully paid, non-assessable shares of the Trust.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration.
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 the
Registration Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /s/RAYMOND A. O'HARA III
------------------------------
Raymond A. O'Hara III
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Auditors" and "Financial
Statements" in the Statement of Additional Information and to the incorporation
by reference of our report dated February 4, 2000 in the Registration Statement
(Form N-1A) of the Variable Investors Series Trust filed with the Securities and
Exchange Commission in this Post-Effective Amendment No. 22 to the Registration
Statement under the Securities Act of 1933 (File No. 33-11182) and this
Amendment No. 25 to the Registration Statement under the Investment Company Act
of 1940 (File No. 811-4969).
/S/ERNST & YOUNG LLP
Chicago, Illinois
April 14, 2000
VARIABLE INVESTORS SERIES TRUST
CODE OF ETHICS
This Code of Ethics ("Code") is adopted by:
Variable Investors Series Trust, a registered investment company ("Trust")
on behalf of its series (each series of which is referred to as a
"Portfolio") and First Variable Advisory Services Corp. ("Adviser"), the
investment adviser of all pursuant to Rule 17j-1 promulgated by the
Securities and Exchange Commission (the "Rule") under the Investment
Company Act of 1940.
Statement of General Principles
This Code is adopted in recognition of the general fiduciary principles
that govern personal investment activities of all individuals associated with
the Trust, Portfolio and the Adviser.
It is the duty at all times to place the interests of Portfolio
shareholders first. Priority must be given to Portfolio trades over
personal securities trades.
All personal securities transactions must be conducted consistent with this
Code and in such a manner as to avoid any actual or potential conflict of
interest or any abuse of an individual's position of trust and
responsibility.
Individuals should not take, inappropriate advantage of their positions
with the Trust.
November 1995
TABLE OF CONTENTS
Page
1. General Prohibitions
2. Definitions
Covered Persons
Access Person
Beneficial Interest
Compliance Department
Day
Designated Access Person
For his or her own account
Immediate Family
Investment Company
Related Issuer
Security
3. Required Compliance Procedures
3.1 Preclearance of Securities Transactions by Access Persons
3.2 Preclearance and Reports of Securities Transactions by
Disinterested Trustees
3.3 Non-Waiver
3.4 Post-Trade Monitoring of Precleared Transactions
3.5 Disclosure of Personal Holdings
3.6 Annual Certification of Compliance With Code of Ethics
4. Restrictions and Disclosure Requirements
4.1 Initial Public Offerings
4.2 Private Placements
4.3 Related Issuers
4.4 Blackout Periods
4.5 Same Day Price Switch
4.6 Short-term Trading Profits
4.7 Gifts
4.8 Service as Director of Publicly Traded Companies
5. Procedures with Regard to Dissemination of Information
6. Quarterly Reporting by Access Persons
6.1 General Requirement
6.2 Contents
7. Annual Report to Board of Trustees
8. Exceptions to Code
9. Compliance by Sub-Advisers that Manage Portfolios
1. General Prohibitions
No individual associated with the Trust, Portfolio, or the Adviser in connection
with the purchase or sale, directly or indirectly, by such person of a security
held or to be acquired by such Trust or Portfolio, shall:
Employ any device, scheme or artifice to defraud such Trust or Portfolio,
Make to such Trust or Portfolio any untrue statement of a material fact or
omit to state to such Trust or Portfolio a material fact necessary in order
to make the statements made, in light of the circumstances under which they
are made, not misleading;
Engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any such Trust or Portfolio;
Engage in any manipulative practice with respect to such Trust or
Portfolio;
Engage in any transaction in a security while in possession of material
nonpublic information regarding the security or the issuer of the security;
or
Engage in any transaction intended to raise, lower, or maintain the price
of any security or to create a false appearance of active trading.
2. Definitions
The following words have the following meanings, regardless of whether such
terms are capitalized or not in this Code:
Covered Persons - all "disinterested" Trustees and any Access Person.
Access Person - any Trustee of the Trust who is an "interested person" of
the Trust (as defined in the Investment Company Act of 1940), any officer of the
Trust, any director or officer of the Adviser and any employee of the Portfolio
or Adviser, (or of any company in a control relationship to the Portfolio, or
the Adviser) who in connection with his or her regular functions or duties,
makes, participates in, or obtains information regarding the purchase or sale of
a security by the Portfolio, or whose functions relate to the making of any
recommendations with respect to such purchases or sales.
Beneficial Interest - a person has a beneficial interest in an account in
which he or she may profit or share in the profit from transactions. Without
limiting the foregoing, a person has a beneficial interest when the securities
in the account are held:
(i) in his or her name;
(ii) in the name of any of his or her Immediate Family;
(iii)in his or her name as trustee for himself or herself or for his or
her Immediate Family;
(iv) in a trust in which he or she has a beneficial interest or is the
settlor with a power to revoke;
(v) by another person and he or she has a contract or an understanding
with such person that the securities held in that person's name are
for his or her benefit;
(vi) in the form of a right to acquisition of such security through the
exercise of warrants, options, rights, or conversion rights;
(vii) by a partnership of which he or she is a member;
(viii) by a corporation which he or she uses as a personal trading medium;
(ix) by a holding company which he or she controls; or
(x) any other relationship in which a person would have beneficial
ownership under Section 16 of the Securities Exchange Act of 1934 and
the rules and regulations thereunder, except that the determination of
direct or indirect beneficial interest shall apply to all securities
which an Access Person has or acquires.
Any person who wishes to disclaim a beneficial interest in any securities must
submit a written request to the Compliance Department explaining the reasons
therefor. Any disclaimers granted by the Compliance Department must be made in
writing. Without limiting the foregoing, if a disclaimer is granted to any
person with respect to shares held by a member or members of his or her
Immediate Family, the provisions of this Code of Ethics applicable to such
person shall not apply to any member or members of his or her Immediate Family
for which such disclaimer was granted.
Compliance Department - Adviser's Compliance Department.
Day - a calendar day.
Designated Access Person - Any Access Person who in the course of his/her
regular duties knows of or has access to information regarding transactions that
will be made or have been effected on behalf of any Portfolio. The Compliance
Department will maintain a list of the names of the Designated Access Persons.
For his or her own account - transactions in securities held in an
individual's own name or for any account in which he or she has beneficial
interest.
Immediate Family - any of the following relatives sharing the same
household with an individual: child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, sister-in-law, including adoptive
relationships.
Investment Company - each registered investment company and series thereof
for which the Adviser is the investment adviser.
Related Issuer - an issuer with respect to which an Investment Personnel or
his or her Immediate Family: (i) has a business relationship with such issuer or
any promoter, underwriter, officer, director, or employee of such issuer; or
(ii) is related to any officer, director or employee of such issuer.
Security - any option, stock or option thereon, instrument, bond,
debenture, preorganization certificate, investment contract, any other interest
commonly known as a security, and any security or instrument related to, but not
necessarily the same as, those held or to be acquired by a Portfolio; provided,
however, that the following shall not be considered a "security": securities
issued by the United States Government or government instrumentality, bankers'
acceptances, bank certificates of deposit, commercial paper, and shares of
registered open-end investment companies.
3. Required Compliance Procedures
3.1 Preclearance of Securities Transactions by Access Persons.
(a) Every Access Person and member of his or her Immediate Family must
obtain prior approval from the Compliance Department before executing any
personal securities transaction for his or her own account. Before
executing any such transaction, the Compliance Department shall determine
that:
(i) No Investment Company has a pending "buy" or "sell" order in that
security;
(ii) The security does not appear on any "restricted" list of the
Adviser; and
(iii)Such transaction is not short selling or option trading that is
economically opposite any pending transaction for any Investment
Company.
(b) The following securities are exempt from preclearance
requirements:
(i) Securities transactions where neither the Access Person nor his
or her Immediate Family knows of the transaction before it is
completed;
(ii) The acquisition of securities through stock dividends, dividend
reinvestments, stock splits, reverse stock splits, mergers,
consolidations, spin-offs, or other similar corporate
reorganizations or distributions generally applicable to all
holders of the same class of securities;
(iii)The acquisition of securities through the exercise of rights
issued by an issuer pro rata to all holders of a class of
securities, to the extent the rights were acquired in the issue,
and sales of such rights so acquired;
(iv) Repurchase agreements;
(v) Options on the Standard & Poor's "500" Composite Stock Price
Index; and
(vi) Other securities described on Attachment A hereto, as may be
amended from time to time.
The Compliance Department shall authorize preclearance of the
transaction for a period of two business days from the date of the
approval.
3.2 Preclearance and Reports of Securities Transactions by Disinterested
Trustees.
A disinterested Trustee of the Trust must obtain prior written
approval from the Compliance Department regarding a transaction in a
security for his or her own account or for his or her Immediate Family only
if such Trustee, at the time of that transaction, knew or, in the ordinary
course of fulfilling his or her official duties as a Trustee of the Trust,
should have known about any security that, during the 15-day period
immediately preceding the date of the transaction by the Trustee, was
purchased or sold by a Portfolio or was being considered by the Adviser for
purchase or sale by a Portfolio or was being considered by the Adviser for
purchase or sale by a Portfolio; and further provided, however , that this
prohibition shall not apply to de minimis transactions (e.g., transactions
involving a relatively small number of shares of a company with a large
market capitalization and high average daily trading volume).
A disinterested Trustee of the Trust need only report a transaction in
a security if such Trustee, at the time of that transaction, knew or, in
the ordinary course of fulfilling his or her official duties as a Trustee,
should have known that, during the 15-day period immediately preceding the
date of the transaction by that Trustee, such security was purchased or
sold by a Portfolio or was being considered for purchase or sale by the
Adviser.
Notwithstanding the foregoing, disinterested Trustees are required to
report to the Compliance Department in writing whenever they own
individually more than 1/2 of 1% of the outstanding shares of any publicly
held issuer, together with the number of shares so owned.
3.3 Non-Waiver.
Obtaining preclearance approval does not constitute a waiver of any
prohibitions, restrictions, or disclosure requirements in this Code of
Ethics.
3.4 Post-Trade Monitoring of Precleared Transactions.
After the Compliance Department has granted preclearance to an Access
Person or a Disinterested Trustee under Section 3.2 or member of his or her
Immediate Family with respect to any personal securities transaction, the
investment activity of such Access Person and member of his or her
Immediate Family shall be monitored by the Compliance Department to
ascertain that such activity conforms to the preclearance so granted and
the provisions of this Code.
3.5 Disclosure of Personal Holdings.
All Designated Access Persons are required to disclose all their
personal securities holdings and those of their Immediate Family to the
Compliance Department upon commencement of employment and thereafter on an
annual basis.
3.6 Annual Certification of Compliance With Code of Ethics.
All Covered Persons are required to certify annually in writing that
they have:
(a) read and understand the Code of Ethics and recognize that they are
subject thereto;
(b) complied with the requirements of the Code of Ethics;
(c) disclosed or reported all personal securities transactions
required to be disclosed or reported pursuant to the requirements of the
Code; and
(d) with respect to any blind trusts in which such person has a
beneficial interest, that such person has no direct or indirect influence
or control and no knowledge of any transactions therein.
4. Restrictions and Disclosure Requirements
4.1 Initial Public Offerings.
All Designated Access Persons and members of their Immediate Family
are prohibited from acquiring any securities in an initial public offering,
in order to preclude any possibility of their profiting improperly from
their positions on behalf of a Portfolio.
4.2 Private Placements.
(a) No Designated Access Person or member of his or her Immediate
Family may acquire any securities in private placements without prior
written approval by the Compliance Department.
(b) Prior approval shall take into account, among other factors,
whether the investment opportunity should be reserved for a Trust or
Portfolio and its shareholders and whether the opportunity is being offered
to an individual by virtue of his or her position or relationship to the
Trust or Portfolio.
(c) A Designated Access Person has (or a member of whose Immediate
Family has) acquired securities in a private placement is required to
disclose that investment to the Compliance Department when such Designated
Access Person plays a part in any subsequent consideration of an investment
in the issuer for any Trust or Portfolio. In any such circumstances, the
decision to purchase securities of the issuer for a Trust or Portfolio is
subject to an independent review by the Compliance Department or
individuals with no personal interest in the issuer. Such independent
review shall be made in writing.
4.3 Related Issuers.
Designated Access Persons of any Portfolio are required to disclose to
the Compliance Department when they play a part in any consideration of an
investment by a Trust or Portfolio in a Related Issuer. In any such
circumstances, the decision to purchase securities of the Related Issuer
for a Trust or Portfolio is subject to an independent review by the
Compliance Department or individuals with no personal interest in the
Related Issuer. Such independent review shall be made in writing.
4.4 Blackout Periods.
(a) No Access Person or member of his or her Immediate Family may
execute a securities transaction on a day during which any Investment
Company has a pending "buy" or "sell" order in that same security until
that order is executed or withdrawn; provided, however, that this
prohibition shall not apply to any such Access Person for de minimis
transactions (e.g., transactions involving a relatively small number of
shares of a company with a large market capitalization and high average
daily trading volume).
(b) No Designated Access Person or member of his or her Immediate
Family may buy or sell a security for his or her own account within seven
(7) Days before or after a Portfolio that he or she manages trades in that
security, provided, however, that this prohibition shall not apply to:
(i) Securities transactions effected in any account over which such
employee has no direct or indirect influence or control,
including blind trusts;
(ii) Securities transactions that are non-volitional on the part of
either the Access Person or the Portfolio;
(iii)Securities transactions where neither such Designated Access
Person nor his or her Immediate Family knows of the transaction
before it is completed;
(iv) The acquisition of securities through stock dividends, dividend
reinvestments, stock splits, reverse stock splits, mergers,
consolidations, spin-offs, or other similar corporate
reorganizations or distributions generally applicable to all
holders of the same class of securities;
(v) The acquisition of securities through the exercise of rights
issued by an issuer pro rata to all holders of a class of
securities, to the extent the rights were acquired in the issue,
and sales of such rights so acquired;
(vi) Repurchase agreements;
(vii)Options on the Standard & Poor's "500" Composite Stock Price
Index; and
(viii) Other securities described on Attachment A hereto, as may be
amended from time to time.
(c) Any profits on trades within the proscribed periods shall be
disgorged to the Portfolio.
(d) The foregoing blackout periods should not operate to the detriment
of any Investment Company. Without limiting the scope or meaning of this
statement, the following procedure is to be implemented under extraordinary
situations:
(i) If a Designated Access Person or member of his or her Immediate
Family has executed a transaction in a security for his or her
own account and within seven (7) Days thereafter such security is
considered for purchase or sale by such Portfolio, such
Designated Access Person shall submit a written memorandum to the
Compliance Department prior to the entering of the purchase or
sale order for the Portfolio. Such memorandum shall describe the
circumstances underlying the consideration of such transaction
for the Portfolio.
(ii) Based on such memorandum and other factors it deems relevant
under the specific circumstances, the Compliance Department shall
have authority to determine that the prior transaction by such
Designated Access Person or member of his or Immediate Family for
his or her own account shall not be considered a violation of the
provisions of paragraph (b) of this section.
(iii)The Compliance Department shall make a written record of any
determination made under paragraph (d)(ii) of this section,
including the reasons therefor. The Compliance Department shall
maintain records of any such memoranda and determinations and
provide copies thereof as part of its reports to the Board of
Trustees of the Trust.
4.5 Same Day Price Switch.
(a) If any Designated Access Person or member of his or her Immediate
Family purchases a security (other than a fixed income security) for his or
her own account, and subsequent thereto a Portfolio purchases the same
security during the same day, then, to the extent that the price paid per
share by the Portfolio for such purchase is less favorable than the price
paid per share by such employee, the Portfolio shall have the benefit of
the more favorable price per share.
(b) If any such Designated Access Person or member of his or her
Immediate Family sells a security for his or her own account and subsequent
thereto a Portfolio sells the same security during the same day, then, to
the extent that the price per share received by the Portfolio for such sale
is less favorable than the price per share received by the employee, the
Portfolio shall have the benefit of the more favorable price per share.
(c) An amount of money necessary to effectuate the price adjustment
shall be transferred from the account of the Designated Access Person
subject to the price adjustment policies, to the Portfolio's account. The
price adjustment shall be limited to the number of shares purchased or sold
by the Designated Access Person or the number of shares purchased or sold
by the Portfolio, whichever is smaller.
(d) Notwithstanding the foregoing, price switching shall not apply to:
(i) Securities transactions effected in any account over which such
Designated Access Person has no direct or indirect influence or
control, including blind trusts;
(ii) Securities transactions that are non-volitional on the part of
either the Designated Access Person or the Portfolio;
(iii)Securities transactions where neither the Designated Access
Person nor his or her Immediate Family knows of the transaction
before it is completed;
(iv) The acquisition of securities through stock dividends, dividend
reinvestments, stock splits, reverse stock splits, mergers,
consolidations, spin-offs, or other similar corporate
reorganizations or distributions generally applicable to all
holders of the same class of securities;
(v) The acquisition of securities through the exercise of rights
issued by an issuer pro rata to all holders of a class of
securities, to the extent the rights were acquired in the issue,
and sales of such rights so acquired;
(vi) Repurchase agreements;
(vii)Options on the Standard & Poor's "500" Composite Stock Price
Index; or
(viii) Other securities described on Attachment A hereto, as may be
amended from time to time.
4.6 Short-term Trading Profits.
(a) No Designated Access Person or member of his or her Immediate
Family may profit in the purchase and sale, or sale and purchase, of the
same (or equivalent) securities within sixty (60) Days, provided, however,
that this prohibition shall not apply to:
(i) Securities transactions effected in any account over which such
Designated Access Person has no direct or indirect influence or
control, including blind trusts;
(ii) Securities transactions that are non-volitional on the part of either
the Designated Access Person or the Portfolio;
(iii)Securities transactions where neither the Designated Access Person
nor his or her Immediate Family knows of the transaction before it is
completed;
(iv) The acquisition of securities through stock dividends, dividend
reinvestments, stock splits, reverse stock splits, mergers,
consolidations, spin-offs, or other similar corporate reorganizations
or distributions generally applicable to all holders of the same class
of securities;
(v) The acquisition of securities through the exercise of rights issued by
an issuer pro rata to all holders of a class of securities, to the
extent the rights were acquired in the issue, and sales of such rights
so acquired;
(vi) Repurchase agreements;
(vii)Options on the Standard & Poor's "500" Composite Stock Price Index;
and
(viii) Other securities described on Attachment A hereto, as may be amended
from time to time.
(b) Any profits on trades within the proscribed periods shall be
disgorged to a charity to be determined by the Compliance Department.
(c) In determining the applicability of this section, determinations
shall be made based upon a last-in, first-out ("LIFO") calculation;
provided, however, that such determinations shall be solely for purposes of
this Code of Ethics and shall not have any applicability for tax or other
purposes.
4.7 Gifts.
(a) All Designated Access Persons are prohibited from receiving any
gift or other thing of more than de minimis value from any person or entity
that does business with or on behalf of the Portfolio in any one year.
(b) All gifts described in Section 4.7(a) must be reported in writing
to the Compliance Department no more than 30 days after the end of each
calendar quarter.
(c) The foregoing restrictions do not apply to customary and
occasional (i) business meals, (ii) tickets to sports or cultural events,
or (iii) business entertainment.
4.8 Service as Director of Publicly Traded Companies.
Designated Access Persons are prohibited from serving on the Boards of
Directors of publicly traded companies, absent prior authorization based
upon the determination that such board service would not be inconsistent
with the interests of the Trust and its shareholders.
5. Procedures with Regard to Dissemination of Information.
(a) Access Persons shall not disclose to any disinterested Trustee of
the Trust information regarding the consideration or decision to purchase
or sell a particular security when it is contemplated that such action will
be taken within the next 15 days, unless it is:
(i) requested in writing by a disinterested Trustee of the Trust or
requested through a formal action of the Board of the Trust or any
committee thereof;
(ii) given because it is determined that the disinterested Trustee should
have the information so that he or she may effectively carry out his
or her duties; or
(iii)given so that the Adviser may carry out its duties as investment
adviser of a Portfolio.
(b) If any information regarding transactions contemplated by the
Portfolio is given to a disinterested Trustee, such disinterested Trustee
shall be advised at that time that he or she and any other Portfolio
Trustee receiving such information will be considered a Designated Access
Person with respect to any security held or to be acquired by the
Portfolio, as indicated in the information which has been disclosed, for
the next succeeding 22 days, and the Adviser shall so notify the Compliance
Department. At such time, the Trustee shall be reminded by the Adviser of
the provisions of Sections 3.2 and 3.5 of this Code.
(c) Subject to Sections 5(a) and 5(b), Access Persons are prohibited
from revealing information relating to current or anticipated investments,
portfolio transactions or activities of Portfolios except to persons whose
responsibilities require knowledge of the information.
6. Quarterly Reporting by Access Persons.
6.1 General Requirement.
Every Access Person shall report to the Trust and Compliance
Department the information described in Section 6.2 with respect to
transactions in any security in which such Access Person or member of his
or her Immediate Family has, or by reason of such transaction acquires, any
direct or indirect beneficial interest; provided, however, that no report
is required with respect to transactions effected for any account over
which such person does not have any direct or indirect influence or
control.
6.2 Contents.
Every report shall be made not later than 10 days after the end of the
calendar quarter in which the transaction to which the report relates was
effected, and shall contain the following information:
(i) The date of the transaction, the title and the number of shares,
and the principal amount of each security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition),
(iii) The price at which the transaction was effected; and
(iv) The name of the broker, dealer or bank with or through whom the
transaction was effected.
Unless otherwise stated, no report shall be construed as an admission
by the person making such report that he or she has any direct or indirect
beneficial interest in the security to which the report relates.
7. Annual Report to Board of Trustees.
The Adviser shall prepare an annual report to the Board of Trustees of
the Trust that:
(i) summarizes existing procedures concerning personal investing and any
changes in the procedures made during the past year;
(ii) identifies any violations requiring significant remedial action during
the past year; and
(iii)identifies any recommended changes in existing restrictions or
procedures based upon the Portfolio's experience under the Code of
Ethics, evolving industry practices, or developments in applicable
laws or regulations.
8. Exceptions to Code.
Exceptions to the requirements of this Code shall rarely, if ever, be
granted. However, the Compliance Department shall have authority to grant
exceptions on a case-by-case basis. Any exceptions granted must be in
writing and reported to the Trustees.
9. Compliance by Sub-Advisers that Manage Portfolios.
Any Sub-Adviser, as identified in the Trust's then current prospectus,
shall be deemed in compliance with this Code if the Code of Ethics of such
Sub-Adviser has been reviewed by the Adviser, and the Sub-Adviser, on a
quarterly basis, provides the Trust with a statement of compliance with the
Sub-Adviser's Code of Ethics.
ATTACHMENT A
Other Securities with respect to which the possibility of a conflict of interest
is considered remote, including:
purchases or sales over the course of a calendar quarter of the greater of
(i) 500 shares or less or (ii) shares costing an aggregate of $50,000 or
less of, in either case, an issuer with in excess of $1 billion market
capitalization and average daily reported volume of trading exceeding
100,000 shares
purchases or sales over the course of a calendar quarter of the greater of
(i) 500 shares or less or (ii) shares costing an aggregate of $50,000 or
less of, in either case, a company found on the Standard & Poor's 100
Index, a capitalization-weighted index based on 100 highly capitalized
stocks ("S&P 100")
purchases or sales over the course of a calendar quarter of investment
grade fixed income securities in an aggregate principal amount of $50,000
or less with respect to any one issuer
purchases or sales of futures contracts, options on futures contracts and
options on securities indexes provided that (i) the sum of the aggregate
amount of initial margin (in the case of futures contracts) and option
premiums (in the case of options on futures or securities indexes)
(together, "Exposure") payable with respect to any one underlaying security
or security index, as the case may be, does not exceed $25,000 in any one
day and (ii) Exposure for all outstanding positions with respect to any one
underlying security or security index, as the case may be, does not exceed
$100,000.
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
Strong Investments, Inc.,
and Flint Prairie, L. L. C.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Strong Capital Management, Inc.
October 22, 1999
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
Strong Investments, Inc.,
and Flint Prairie, L. L. C.
Dated October 22, 1999
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
I. INTRODUCTION.........................................................................................1
A. Fiduciary Duty..............................................................................1
1. Place the interests of Advisory Clients first...................................................1
2. Avoid taking inappropriate advantage of their position..........................................1
3. Conduct all Personal Securities Transactions in full compliance with this Code including both the
preclearance and reporting requirements............................................1
B. Appendices to the Code......................................................................1
1. Definitions 2
2. Contact Persons.................................................................................2
3. Disclosure of Personal Holdings in Securities...................................................2
4. Acknowledgment of Receipt of Code of Ethics and Limited Power of Attorney 2
5. Preclearance Request for Access Persons.........................................................2
6. Annual Code of Ethics Questionnaire.............................................................2
7. List of Broad-Based Indices.....................................................................2
8. Gift Policy 2
9. Insider Trading Policy..........................................................................2
10. Electronic Trading Authorization Form...........................................................2
11. Social Security Number/Tax Identification Form..................................................2
C. Application of the Code to Independent Fund Directors.......................................2
D. Application of the Code to Funds Subadvised by SCM..............................................2
II. PERSONAL SECURITIES TRANSACTIONS....................................................................2
A. Annual Disclosure of Personal Holdings by Access Persons....................................2
B. Preclearance Requirements for Access Persons................................................3
1. General Requirement.............................................................................3
2........Transactions Exempt from Preclearance Requirements..............................................3
a. ......Mutual Funds------3
b. ------No Knowledge------3
c. ------Certain Corporate Actions.......................................................................3
d. ------Rights------------3
e. ------Application to Commodities, Futures, Options on Futures and Options on Broad-Based Indices......3
f. ------Miscellaneous-----4
Table of Contents (continued)
C. Preclearance Requests.......................................................................4
1. Trade Authorization Request Forms...............................................................4
2. ......Review of Form..................................................................................4
3. ......Access Person Designees.........................................................................4
D. Prohibited Transactions.....................................................................5
1. Prohibited Securities Transactions.................................................5
a........Initial Public Offerings........................................................................5
b........Pending Buy or Sell Orders......................................................................5
c........Seven Day Blackout 5
d........Intention to Buy or Sell for Advisory Client....................................................6
e........60-Day Blackout...6
2. Always Prohibited Securities Transactions..........................................6
a........Inside Information 6
b........Market Manipulation 6
c........Large Positions in Registered Investment Companies..............................................6
d........Others............6
3. Private Placements.................................................................6
4. No Explanation Required for Refusals...............................................7
E. Execution of Personal Securities Transactions...............................................7
F. Length of Trade Authorization Approval......................................................7
G. Trade Reporting Requirements................................................................7
1........Reporting Requirement...........................................................................7
2........Disclaimers 8
3........Quarterly Review................................................................................8
4........Availability of Reports.........................................................................8
III. FIDUCIARY DUTIES...................................................................................9
A. Confidentiality.............................................................................9
B. Gifts.......................................................................................9
1........Accepting Gifts...9
2. Solicitation of Gifts...........................................................................9
3. Giving Gifts 9
C. Payments to Advisory Clients................................................................9
D. Corporate Opportunities.....................................................................9
E. Undue Influence............................................................................10
F. Service as a Director......................................................................10
G. ......Involvement in Criminal Matters or Investment-Related Civil Proceedings........................10
Table of Contents (continued)
IV. COMPLIANCE WITH THIS CODE OF ETHICS................................................................10
A. Code of Ethics Review Committee............................................................10
1........Membership, Voting, and Quorum.................................................................10
2........Investigating Violations of the Code...........................................................10
3........Annual Reports.................................................................................11
B. Remedies...................................................................................11
1. Sanctions 11
2........Sole Authority.................................................................................11
3........Review...11
C. Exceptions to the Code.....................................................................12
D. ......Compliance Certification.......................................................................12
E. ......Record Retention...............................................................................12
1........Code of Ethics.................................................................................12
2........Violations 12
3........Required Reports...............................................................................12
4........Access Person List.............................................................................12
F. Inquiries Regarding the Code...............................................................12
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
Strong Investments, Inc.,
and Flint Prairie, L. L. C.
Dated October 22, 1999
Table of Appendices
Appendix 1 (Definitions)...........................................................................13
Appendix 2 (Contact Persons).......................................................................16
Appendix 3 (Disclosure of Personal Holdings in Securities).........................................17
Appendix 4 (Acknowledgment of Receipt of Code of Ethics and
Limited Power of Attorney).........................................................18
Appendix 5 (Preclearance Request for Access Persons)...............................................19
Appendix 6 (Annual Code of Ethics Questionnaire)...................................................20
Appendix 7 (List of Broad-Based Indices)...........................................................23
Appendix 8 (Gift Policy)...........................................................................24
Appendix 9 (Insider Trading Policy)................................................................26
Appendix 10 (Electronic Trading Authorization Form) .................................................30
Appendix 11 (Social Security Number/Tax Identification Form) ........................................31
</TABLE>
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
Strong Investments, Inc.,
and Flint Prairie, L. L. C.
Dated October 22, 1999
I. INTRODUCTION1
A. Fiduciary Duty. This Code of Ethics is based upon the principle that
directors, officers and associates of Strong Capital Management, Inc. ("SCM"),
Strong Investments, Inc. ("the Distributor"), the Strong Family of Mutual Funds
("the Strong Funds") and Flint Prairie, L. L. C. ("Flint Prairie") have a
fiduciary duty to place the interests of clients ahead of their own. The Code
applies to all Access Persons and focuses principally on preclearance and
reporting of personal transactions in securities. Access Persons must avoid
activities, interests and relationships that might interfere with making
decisions in the best interests of the Advisory Clients of SCM.
As fiduciaries, Access Persons must at all times:
1. Place the interests of Advisory Clients first. Access Persons must
scrupulously avoid serving their own personal interests ahead of the
interests of the Advisory Clients of SCM. An Access Person may not induce
or cause an Advisory Client to take action, or not to take action, for
personal benefit rather than for the benefit of the Advisory Client. For
example, an Access Person would violate this Code by causing an Advisory
Client to purchase a Security he or she owned for the purpose of increasing
the price of that Security.
2. Avoid taking inappropriate advantage of their position. The receipt
of investment opportunities, perquisites or gifts from persons seeking
business with the Strong Funds, SCM, the Distributor, Flint Prairie or
their clients could call into question the exercise of an Access Person's
independent judgment. Access persons may not, for example, use their
knowledge of portfolio transactions to profit by the market effect of such
transactions.
3. Conduct all Personal Securities Transactions in full compliance
with this Code including both the preclearance and reporting requirements.
Doubtful situations should be resolved in favor of Advisory Clients.
Technical compliance with the Code's procedures will not automatically
insulate from scrutiny any trades that may indicate an abuse of fiduciary
duties.
B........Appendices to the Code. The appendices to this Code are
attached hereto, are a part of the Code and include the following:
1. Definitions--capitalized words as defined in the Code
(Appendix 1),
2. Contact Persons, including the Preclearance Officer designees
and the Code of Ethics Review Committee (Appendix 2),
3. Disclosure of Personal Holdings in Securities (Appendix 3),
4. Acknowledgment of Receipt of Code of Ethics and Limited Power
of Attorney (Appendix 4),
5. Preclearance Request for Access Persons (Appendix 5),
6. Annual Code of Ethics Questionnaire (Appendix 6),
7. List of Broad-Based Indices (Appendix 7),
8. Gift Policy (Appendix 8),
.........9........Insider Trading Policy (Appendix 9)
10. Electronic Trading Authorization Form (Appendix 10), and
.........11.......Social Security Number/Tax Identification Form (Appendix
11).
C........Application of the Code to Independent Fund Directors. This
Code applies to Independent Fund Directors and requires Independent Fund
Directors and their Immediate Families to report Securities Transactions to
the Compliance Department in accordance with the trade reporting
requirements (Section II.G.). However, provisions of the Code relating to
the disclosure of personal holdings (Section II.A.), preclearance of trades
(Section II.B.), prohibited transactions (II.D.1.), large positions in
registered investment companies (Section II.D.2.c.), private placements
(Section II.D.3.), restrictions on serving as a director of a
publicly-traded company (Section III.F.) and receipt of gifts (Section
III.B.) do not apply to Independent Fund Directors.
D........Application of the Code to Funds Subadvised by SCM. This Code
does not apply to the directors, officers and general partners of Funds for
which SCM serves as a subadviser.
II. PERSONAL SECURITIES TRANSACTIONS
A........Annual Disclosure of Personal Holdings by Access Persons.
Upon designation as an Access Person, and thereafter on an annual basis,
all Access Persons must report on the Disclosure of Personal Holdings In
Securities Form (Appendix 3) (or a substantially similar form) all
Securities, including securities held in certificate form, in which they
have a Beneficial Interest and all Securities in non-client accounts for
which they make investment decisions (previously reported holdings, as well
as those specifically excluded from the definition of Security, need not be
reported). This provision does not apply to Independent Fund Directors.
B........Preclearance Requirements for Access Persons.
1. General Requirement. Except for the transactions set forth in
Section II.B.2., all Securities Transactions in which an Access Person
or a member of his or her Immediate Family has a Beneficial Interest
must be precleared with the Preclearance Officer or his designee. This
provision does not apply to transactions of Independent Fund Directors
and their Immediate Families.
2. Transactions Exempt from Preclearance Requirements. The
following Securities Transactions are exempt from the preclearance
requirements set forth in Section II.B.1. of this Code:
a. Mutual Funds. Securities issued by any registered
open-end investment companies (including but not limited to the
Strong Funds);
b. No Knowledge. Securities Transactions where neither SCM,
the Access Person nor an Immediate Family member knows of the
transaction before it is completed (for example, Securities
Transactions effected for an Access Person by a trustee of a
blind trust or discretionary trades involving an investment
partnership or investment club in which the Access Person is
neither consulted nor advised of the trade before it is
executed);
c. Certain Corporate Actions. Any acquisition or disposition
of Securities through stock dividends, dividend reinvestments,
stock splits, reverse stock splits, mergers, consolidations,
spin-offs or other similar corporate reorganizations or
distributions generally applicable to all holders of the same
class of Securities. Odd-lot tender offers are also exempt from
the preclearance requirements; however, all other tender offers
must be precleared;
d. Rights. Any acquisition or disposition of Securities
through the exercise of rights, options, convertible bonds or
other instruments acquired in compliance with this Code;
e. Application to Commodities, Futures, Options on Futures
and Options on Broad-Based Indices. Commodities, futures
(including currency futures and futures on securities comprising
part of a broad-based, publicly traded market based index of
stocks), options on futures, options on currencies and options on
certain indices designated by the Compliance Department as
broad-based are not subject to preclearance or the seven day
black out, 60-day profit disgorgement and other prohibited
transaction provisions of Section II.D.1. of the Code but are
subject to transaction reporting requirements (Section II.G.).
The options on indices designated by the Compliance Department as
broad-based may be changed from time to time and are listed in
Appendix 7.
The options on indices that are not designated as broad-based are
subject to the preclearance, seven-day blackout, 60-day profit
disgorgement, prohibited transaction and reporting provisions of
the Code.
f. Miscellaneous. Any transaction in the following: (1)
bankers acceptances; (2) bank certificates of deposit ("CDs");
(3) commercial paper; (4) repurchase agreements (when backed by
exempt securities); (5) U.S. Government Securities; (6) the
acquisition of equity securities in dividend reinvestment plans
("DRIPs"), when the acquisition is directly through the issuer or
its non-broker agent; (7) Securities of the employer of a member
of the Access Person's Immediate Family if such securities are
beneficially owned through participation by the Immediate Family
member in a Profit Sharing plan, 401(k) plan, ESOP or other
similar plan; and (8) other Securities as may from time to time
be designated in writing by the Code of Ethics Review Committee
on the grounds that the risk of abuse is minimal or non-existent.
C. Preclearance Requests.
1. Trade Authorization Request Forms. Prior to entering an order for a
Securities Transaction that requires preclearance, the Access Person must
complete, in writing, a Preclearance Request For Access Persons Form
(Appendix 5) and submit the completed form to the Preclearance Officer (or
his or her designee). The Preclearance Request For Access Persons Form
requires Access Persons to provide certain information and to make certain
representations. Proposed Securities Transactions of the Preclearance
Officer that require preclearance must be submitted to his designee.
2. Review of Form. After receiving the completed Preclearance Request
For Access Persons Form, the Preclearance Officer (or his or her designee)
will (a) review the information set forth in the form, (b) independently
confirm whether the Securities are held by any Funds or other accounts
managed by SCM and whether there are any unexecuted orders to purchase or
sell the Securities by any Fund or accounts managed by SCM and (c) as soon
as reasonably practicable, determine whether to clear the proposed
Securities Transaction. The authorization, date, and time of the
authorization must be reflected on the Preclearance Request For Access
Persons Form. The Preclearance Officer (or his or her designee) will keep
one copy of the completed form for the Compliance Department, send one copy
to the Access Person seeking authorization and send the third copy to the
Trading Department, which will cause the transaction to be executed. If the
brokerage account is an Electronic Trading Account and the Access Person
has completed the Electronic Trading Authorization Form (Appendix 10), the
Access Person will execute the transaction on his or her own behalf and
will provide Compliance with a copy of the electronic confirmation by the
end of the next business day.
No order for a securities transaction for which preclearance authorization
is sought may be placed prior to the receipt of written authorization of
the transaction by the preclearance officer (or his or her designee).
Verbal approvals are not permitted.
3. Access Person Designees. If an Access Person is unable to
personally effect a personal Securities Transaction, such Access Person may
designate an individual at SCM to complete and submit for preclearance on
his or her behalf a Preclearance Request For Access Persons Form provided
the following requirements are satisfied:
a. The Access Person communicates the details of the trade and
affirms the accuracy of the representations and warranties contained
on the Form directly to such designated person; and
b. The designated person completes the Preclearance Request For
Access Persons Form on behalf of the Access Person in accordance with
the requirements of the Code and then executes the Access Person
Designee Certification contained in the Form. The Access Person does
not need to sign the Form so long as the foregoing certification is
provided.
D. Prohibited Transactions.
1. Prohibited Securities Transactions. The following Securities
Transactions for accounts in which an Access Person or a member of his or
her Immediate Family have a Beneficial Interest, to the extent they require
preclearance under Section II.B. above, are prohibited and will not be
authorized by the Preclearance Officer (or his or her designee) absent
exceptional circumstances:
a. Initial Public Offerings. Any purchase of Securities in an
initial public offering (other than a new offering of a registered
open-end investment company);
b. Pending Buy or Sell Orders. Any purchase or sale of Securities
on any day during which any Advisory Client has a pending "buy" or
"sell" order in the same Security (or Equivalent Security) until that
order is executed or withdrawn, unless the purchase or sale is a
Program Trade;
c. Seven Day Blackout. Purchases or sales of Securities by a
Portfolio Manager within seven calendar days of a purchase or sale of
the same Securities (or Equivalent Securities) by an Advisory Client
managed by that Portfolio Manager, unless the purchase or sale is a
Program Trade. For example, if a Fund trades in a Security on day one,
day eight is the first day the Portfolio Manager may trade that
Security for an account in which he or she has a beneficial interest;
d. Intention to Buy or Sell for Advisory Client. Purchases or
sales of Securities at a time when that Access Person intends, or
knows of another's intention, to purchase or sell that Security (or an
Equivalent Security) on behalf of an Advisory Client. This prohibition
applies whether the Securities Transaction is in the same (e.g., two
purchases) or the opposite (a purchase and sale) direction of the
transaction of the Advisory Client, unless the purchase or sale is a
Program Trade; and
e. 60-Day Blackout. (1) Sales of a Security within 60 days of the
purchase of the Security (or an Equivalent Security) in which the
Access Person has a Beneficial Interest and (2) purchases of a
Security within 60 days of the sale of the Security (or an Equivalent
Security) in which the Access Person had a Beneficial Interest, unless
in each case, the Access Person agrees to give up all profits on the
transaction to a charitable organization as specified by remedies
involving sanctions (Section IV.B.1.).
2. Always Prohibited Securities Transactions. The following Securities
Transactions are prohibited and will not be authorized under any
circumstances:
a. Inside Information. Any transaction in a Security while in
possession of material nonpublic information regarding the Security or
the issuer of the Security (see Insider Trading Policy, Appendix 9);
b. Market Manipulation. Transactions intended to raise, lower, or
maintain the price of any Security or to create a false appearance of
active trading;
c. Large Positions in Registered Investment Companies.
Transactions in a registered investment company, including Strong
Funds, which result in the Access Person owning five percent or more
of any class of securities in such investment company (this
prohibition does not apply to Independent Fund Directors); and
d. Others. Any other transactions deemed by the Preclearance
Officer (or his designee) to involve a conflict of interest, possible
diversion of corporate opportunity or an appearance of impropriety.
3. Private Placements. Acquisitions of Beneficial Interests in
Securities in a private placement by an Access Person is strongly
discouraged. The Preclearance Officer (or his or her designee) will
give permission only after considering, among other facts, whether the
investment opportunity should be reserved for Advisory Clients and
whether the opportunity is being offered to an Access Person by virtue
of his or her position as an Access Person. Access Persons who have
been authorized to acquire and have acquired securities in a private
placement are required to disclose that investment to the Compliance
Department when they play a part in any subsequent consideration of an
investment in the issuer by an Advisory Client. In such circumstances,
the decision to purchase securities of the issuer by an Advisory
Client must be independently authorized by a Portfolio Manager with no
personal interest in the issuer. This provision does not apply to
Independent Fund Directors.
4. No Explanation Required for Refusals. In some cases, the
Preclearance Officer (or his or her designee) may refuse to authorize
a Securities Transaction for a reason that is confidential. The
Preclearance Officer is not required to give an explanation for
refusing to authorize any Securities Transaction.
E. Execution of Personal Securities Transactions. Unless an exception is
provided in writing by the Compliance Department, all transactions in Securities
subject to the preclearance requirements for which an Access Person or a member
of his or her Immediate Family has a Beneficial Interest shall be executed by
the Trading Department. However, if the Access Person's brokerage account is an
Electronic Trading Account, the transaction may be placed by the Access Person.
IN ALL INSTANCES, THE TRADING DEPARTMENT MUST GIVE PRIORITY TO CLIENT TRADES
OVER ACCESS PERSON TRADES.
F. Length of Trade Authorization Approval. The authorization provided by
the Preclearance Officer (or his or her designee) is effective until the earlier
of (1) its revocation; (2) the close of business on the second trading day after
the authorization is granted for transactions placed by the Trading Department
(for example, if authorization is provided on a Monday, it is effective until
the close of business on Wednesday); (3) the close of business of the same
trading day that the authorization is granted for transactions placed through an
Electronic Trading Account; or (4) the Access Person learns that the information
in the Trade Authorization Request Form is not accurate. If the order for the
Securities Transaction is not placed within that period, a new advance
authorization must be obtained before the Securities Transaction is placed. For
Securities Transactions placed by the Trading Deparment that have not been
executed within two trading days after the day the authorization is granted (for
example, in the case of a limit order or a Not Held Order), no new authorization
is necessary unless the person placing the original order for the Securities
Transaction amends it in any way.
G. Trade Reporting Requirements.
1. Reporting Requirement. Every Access Person and members of his or
her Immediate Family (including Independent Fund Directors and their
Immediate Families) must arrange for the Compliance Department to receive
directly from any broker, dealer or bank that effects any Securities
Transaction, duplicate copies of each confirmation for each such
transaction and periodic statements for each brokerage account in which
such Access Person has a Beneficial Interest. Additionally, securities held
in certificate form that are not included in the periodic statements, must
also be reported. To assist in making these arrangements, the Compliance
Department will send a letter to each brokerage firm based on the
information provided by the Access Person in Appendix 3.
The foregoing does not apply to transactions and holdings in (1) open-end
investment companies including but not limited to the Strong Funds, (2)
bankers acceptances, (3) bank certificates of deposit ("CDs"), (4)
commercial paper, (5) repurchase agreements when backed by exempt
securities, (6) U. S. Government Securities, (7) the acquisition of equity
securities in dividend reinvestment plans ("DRIPs"), when the acquisition
is directly through the issuer or its non-broker agent; or (8) securities
of the employer of a member of the Access Person's Immediate Family if such
securities are beneficially owned through participation by the Immediate
Family member in a Profit Sharing plan, 401(k) plan, ESOP or other similar
plan.
2. Disclaimers. Any report of a Securities Transaction for the benefit
of a person other than the individual in whose account the transaction is
placed may contain a statement that the report should not be construed as
an admission by the person making the report that he or she has any direct
or indirect beneficial ownership in the Security to which the report
relates.
3. Quarterly Review. At least quarterly, for Securities Transactions
requiring preclearance under this Code, the Preclearance Officer (or his or
her designee) shall compare the confirmations and periodic statements
provided pursuant to the trade reporting requirements (Section II.G.1.) to
the approved Trade Authorization Request Forms. Such review shall include:
a. Whether the Securities Transaction complied with this Code;
b. Whether the Securities Transaction was authorized in advance
of its placement;
c. Whether the Securities Transaction was executed within two
full trading days of when it was authorized;
d. Whether any Fund or accounts managed by SCM owned the
Securities at the time of the Securities Transaction, and;
e. Whether any Fund or separate accounts managed by SCM purchased
or sold the Securities in the Securities Transaction within at least
10 days of the Securities Transaction.
4. Availability of Reports. All information supplied pursuant to
this Code will be available for inspection by the Boards of Directors
of SCM and SFDI; the Board of Directors of each Strong Fund; the Code
of Ethics Review Committee; the Compliance Department; the Access
Person's department manager (or designee); any party to which any
investigation is referred by any of the foregoing, the SEC, any
self-regulatory organization of which the Strong Funds, SCM, the
Distributor or Flint Prairie is a member, and any state securities
commission; as well as any attorney or agent of the foregoing, the
Strong Funds, SCM, the Distributor or Flint Prairie.
III. FIDUCIARY DUTIES
A. Confidentiality. Access Persons are prohibited from revealing
information relating to the investment intentions, activities or portfolios of
Advisory Clients except to persons whose responsibilities require knowledge of
the information.
B. Gifts. The following provisions on gifts apply only to associates of
SCM, the Distributor and Flint Prairie.
1. Accepting Gifts. On occasion, because of their position with SCM,
the Distributor, the Strong Funds or Flint Prairie, associates may be
offered, or may receive without notice, gifts from clients, brokers,
vendors or other persons not affiliated with such entities. Acceptance of
extraordinary or extravagant gifts is not permissible. Any such gifts must
be declined or returned in order to protect the reputation and integrity of
SCM, the Distributor, the Strong Funds and Flint Prairie. Gifts of a
nominal value (i.e., gifts whose reasonable value is no more than $100 a
year), customary business meals, entertainment (e.g., sporting events) and
promotional items (e.g., pens, mugs, T-shirts) may be accepted. Please see
the Gift Policy (Appendix 8) for additional information.
If an associate receives any gift that might be prohibited under this
Code, the associate must inform the Compliance Department.
2. Solicitation of Gifts. Associates of SCM, the Distributor or Flint
Prairie may not solicit gifts or gratuities.
3. Giving Gifts. Associates of SCM, the Distributor or Flint Prairie
may not give any gift with a value in excess of $100 per year to persons
associated with securities or financial organizations, including exchanges,
other member organizations, commodity firms, news media or clients of the
firm. Please see the Gift Policy (Appendix 9) for additional information.
C. Payments to Advisory Clients. Access Persons may not make any payments
to Advisory Clients in order to resolve any type of Advisory Client complaint.
All such matters must be handled by the Legal Department.
D. Corporate Opportunities. Access Persons may not take personal advantage
of any opportunity properly belonging to any Advisory Client, SCM, the
Distributor or Flint Prairie. This includes, but is not limited to, acquiring
Securities for one's own account that would otherwise be acquired for an
Advisory Client.
E. Undue Influence. Access Persons may not cause or attempt to cause any
Advisory Client to purchase, sell or hold any Security in a manner calculated to
create any personal benefit to the Access Person. If an Access Person or
Immediate Family Member stands to materially benefit from an investment decision
for an Advisory Client that the Access Person is recommending or participating
in, the Access Person must disclose to those persons with authority to make
investment decisions for the Advisory Client, any Beneficial Interest that the
Access Person (or Immediate Family) has in that Security or an Equivalent
Security, or in the issuer thereof, where the decision could create a material
benefit to the Access Person (or Immediate Family) or the appearance of
impropriety. If the Access Person in question is a person with authority to make
investment decisions for the Advisory Client, disclosure must also be made to
the Compliance Department. The person to whom the Access Person reports the
interest, in consultation with the Compliance Department, must determine whether
the Access Person will be restricted in making investment decisions.
F. Service as a Director. No Access Person, other than an Independent Fund
Director, may serve on the board of directors of a publicly-held company not
affiliated with SCM, the Distributor, the Strong Funds or Flint Prairie absent
prior written authorization by the Code of Ethics Review Committee. This
authorization will rarely, if ever, be granted and, if granted, will normally
require that the affected Access Person be isolated through "Chinese Wall" or
other procedures from those making investment decisions related to the issuer on
whose board the Access Person sits.
G. Involvement in Criminal Matters or Investment-Related Civil Proceedings.
Each Access Person must notify the Compliance Department, as soon as reasonably
practical, if arrested, arraigned, indicted or pleads no contest to any criminal
offense (other than minor traffic violations) or if named as a defendant in any
Investment-Related civil proceedings or any administrative or disciplinary
action.
IV. COMPLIANCE WITH THIS CODE OF ETHICS
A. Code of Ethics Review Committee.
1. Membership, Voting, and Quorum. The Code of Ethics Review Committee
shall consist of Senior Officers of SCM. The Committee shall vote by
majority vote with two members serving as a quorum. Vacancies may be
filled; and in the case of extended absences or periods of unavailability,
alternates may be selected by the majority vote of the remaining members of
the Committee. However, in the event that the General Counsel or Deputy
General Counsel is unavailable, at least one member of the Committee shall
also be a member of the Compliance Department.
2. Investigating Violations of the Code. The General Counsel, or his
or her designee, is responsible for investigating any suspected violation
of the Code and shall report the results of each investigation to the Code
of Ethics Review Committee. The Code of Ethics Review Committee is
responsible for reviewing the results of any investigation of any reported
or suspected violation of the Code. Any material violation of the Code by
an associate of SCM, the Distributor or Flint Prairie for which significant
remedial action was taken will be reported to the Boards of Directors of
the Strong Funds at the next regularly scheduled quarterly Board meeting.
3. Annual Reports. The Code of Ethics Review Committee will review the
Code at least once a year, in light of legal and business developments and
experience in implementing the Code and will prepare an annual report to
the Boards of Directors of SCM, the Distributor and each Strong Fund that:
a. Summarizes existing procedures concerning personal investing
and any changes in the procedures made during the past year;
b. Identifies any violation requiring significant remedial action
during the past year; and
c. Identifies any recommended changes in existing restrictions or
procedures based on its experience under the Code, evolving industry
practices or developments in applicable laws or regulations.
B. Remedies.
1. Sanctions. If the Code of Ethics Review Committee determines that
an Access Person has committed a violation of the Code, the Committee may
impose sanctions and take other actions as it deems appropriate, including
a letter of caution or warning, suspension of personal trading rights,
suspension of employment (with or without compensation), fine, civil
referral to the SEC, criminal referral and termination of employment for
cause. The Code of Ethics Review Committee may also require the Access
Person to reverse the trade(s) in question and forfeit any profit or absorb
any loss derived therefrom. The amount of profit shall be calculated by the
Code of Ethics Review Committee and shall be forwarded to a charitable
organization. No member of the Code of Ethics Review Committee may review
his or her own transaction.
2. Sole Authority. The Code of Ethics Review Committee has sole
authority, subject to the review set forth in Section IV.B.3. below, to
determine the remedy for any violation of the Code, including appropriate
disposition of any moneys forfeited pursuant to this provision. Failure to
promptly abide by a directive to reverse a trade or forfeit profits may
result in the imposition of additional sanctions.
3. Review. Whenever the Code of Ethics Review Committee determines
that an Access Person has committed a violation of this Code that merits
significant remedial action, it will report promptly to the Boards of
Directors of SCM and/or the Distributor (as appropriate), and no less
frequently than the quarterly meeting to the Boards of Directors of the
applicable Strong Funds, information relating to the investigation of the
violation, including any sanctions imposed. The Boards of Directors of SCM,
the Distributor and the Strong Funds may modify such sanctions as they deem
appropriate. Such Boards may have access to all information considered by
the Code of Ethics Review Committee in relation to the case. The Code of
Ethics Review Committee may determine whether to delay the imposition of
any sanctions pending review by the applicable Boards of Directors.
C. Exceptions to the Code. Although exceptions to the Code will rarely, if
ever, be granted, the General Counsel of SCM may grant exceptions to the
requirements of the Code on a case-by-case basis if he finds that the proposed
conduct involves negligible opportunity for abuse. All Material exceptions must
be in writing and must be reported as soon as practicable to the Code of Ethics
Review Committee and to the Boards of Directors of the SCM Funds at their next
regularly scheduled meeting after the exception is granted. Refer to Appendix 1
for the definition of "Material."
D. Compliance Certification. At least annually, all Access Persons will be
required to certify on the Annual Code of Ethics Questionnaire set forth in
Appendix 6, or on a document substantially in the form of Appendix 6, that they
have complied with the Code in all respects.
E. Record Retention. SCM will, at its principal place of business, maintain
the following records in an easily accessible place, for at least six years and
will make records available to the SEC or any representative thereof at any
time:
1. Code of Ethics. A copy of the Code of Ethics which is, or at any
time has been, in effect.
2. Violations. A record of any violation of such Code of Ethics and
any action taken as a result of such violation.
3. Required Reports. A copy of each report made by an Access Person
pursuant to the Code of Ethics shall include records of the procedures
followed in connection with the preclearance and reporting requirements of
this Code and information relied on by the Preclearance Officer in
authorizing the Securities Transaction and in making the post-Securities
Transaction determination.
4. Access Person List. A list of all persons who are, or have been,
required to make reports pursuant to the Code of Ethics.
F. Inquiries Regarding the Code. The Compliance Department will answer any
questions about this Code or any other compliance-related matters.
Appendix 1
DEFINITIONS
"Access Person" means (1) every director, officer, and general partner of
SCM, the Distributor, the Strong Funds and Flint Prairie; (2) every associate of
SCM, the Distributor and Flint Prairie who, in connection with his or her
regular functions, makes, participates in, or obtains information regarding the
purchase or sale of a security by an Advisory Client's account; (3) every
associate of SCM, the Distributor and Flint Prairie who is involved in making
purchase or sale recommendations for an Advisory Client's account; (4) every
associate of SCM, the Distributor and Flint Prairie who obtains information
concerning such recommendations prior to their dissemination; and (5) such
agents of SCM, the Distributor, the Funds or Flint Prairie as the Compliance
Department shall designate who may be deemed an Access Person if they were an
associate of the foregoing. Any uncertainty as to whether an individual is an
Access Person should be brought to the attention of the Compliance Department.
Such questions will be resolved in accordance with, and this definition shall be
subject to, the definition of "Access Person" found in Rule 17j-1(e)(1)
promulgated under the Investment Company Act of 1940.
"Advisory Client" means any client (including both investment companies and
managed accounts) for which SCM serves as an investment adviser or subadviser,
renders investment advice, makes investment decisions or places orders through
its Trading Department.
"Beneficial Interest" means the opportunity, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise, to
profit or share in any profit derived from a transaction in the subject
Securities. An Access Person is deemed to have a Beneficial Interest in
Securities owned by members of his or her Immediate Family. Common examples of
Beneficial Interest include joint accounts, spousal accounts, UTMA accounts,
partnerships, trusts and controlling interests in corporations. Any uncertainty
as to whether an Access Person has a Beneficial Interest in a Security should be
brought to the attention of the Compliance Department. Such questions will be
resolved by reference to the principles set forth in the definition of
"beneficial owner" found in Rules 16a-1(a)(2) and (5) promulgated under the
Securities Exchange Act of 1934.
"Code" means this Code of Ethics.
"Compliance Department" means the designated persons listed on Appendix 2,
as such Appendix shall be amended from time to time.
"The Distributor" means Strong Investments, Inc.
"Electronic Trading Account" means a brokerage account held by an Access
Person where Securities Transactions are placed either electronically via the
Internet or the telephone. All such Securities Transactions must be precleared
by the Compliance Department.
"Equivalent Security" means any Security issued by the same entity as the
issuer of a subject Security that is convertible into the equity Security of the
issuer. Examples include options but are not limited to rights, stock
appreciation rights, warrants and convertible bonds.
"Fund" means an investment company registered under the Investment Company
Act of 1940 (or a portfolio or series thereof) for which SCM serves as an
adviser or subadviser.
"Immediate Family" of an Access Person means any of the following persons
who reside in the same household as the Access Person:
child grandparent son-in-law
stepchild spouse daughter-in-law
grandchild sibling brother-in-law
parent mother-in-law sister-in-law
stepparent father-in-law
Immediate Family includes adoptive relationships and any other relationship
(whether or not recognized by law) which the General Counsel determines could
lead to the possible conflicts of interest, diversions of corporate opportunity,
or appearances of impropriety which this Code is intended to prevent.
"Independent Fund Director" means an independent director of an investment
company for which SCM serves as the advisor.
"Legal Department" means the SCM Legal/Compliance Department.
"Material" for purposes of this reporting requirement, shall mean the
following:
1. Number of Shares - Any transaction for more than 1,000 shares shall be
deemed material and subject to reporting. Whether a transaction of
1,000 shares or less is material shall be determined on a case-by-case
basis; in particular, the less liquid a security is, the lower the
threshold that should be used for the materiality determination.
2. Dollar Value of Transaction - Any transaction with a dollar value in
excess of $25,000 shall be deemed material and subject to reporting.
Whether a transaction of $25,000 or less is material shall be
determined on a case-by-case basis.
3. Number of Transactions in a Year - The General Counsel may grant no
more than two exceptions per associate per year that are not subject
to reporting. For example, if the General Counsel has granted two
exceptions to an associate, any exception granted thereafter shall be
deemed material and subject to reporting (irrespective of the number
of shares or other circumstances of the transaction).
4. Consultation with Independent Counsel - In any case where the General
Counsel believes there is an issue of whether a proposed exception is
material and subject to reporting, he shall consult with counsel to
the independent directors for the Strong Funds.
"Not Held Order" means an order placed with a broker and ultimately
executed at the discretion of the broker.
"Portfolio Manager" means a person who has or shares principal day-to-day
responsibility for managing the portfolio of an Advisory Client.
"Preclearance Officer" means the person designated as the Preclearance
Officer in Appendix 2 hereof.
"Program Trade" is where a Portfolio Manager directs a trader to do trades
in either an index-type account or portion of account or, at a minimum, 25-30%
of the Securities in a non-index account. Program Trades for non-index type
accounts generally arise in any of three situations: (1) cash or other assets
are being added to an account and the Portfolio Manager instructs the trader
that new securities are to be bought in a manner that maintains the account's
existing allocations; (2) cash is being withdrawn from an account and the
Portfolio Manager instructs the trader that securities are to be sold in a
manner that maintains the account's current securities allocations; and (3) a
new account is established and the Portfolio Manager instructs the trader to buy
specific securities in the same allocation percentages as are held by other
client accounts.
"SEC" means the Securities and Exchange Commission.
"Security" includes stock; notes, bonds, debentures and other evidences of
indebtedness (including loan participations and assignments); limited
partnership interests; investment contracts; all derivative instruments of the
foregoing, such as options and warrants; and other items mentioned in Section
2(a)(36) of the 1940 Act, not specifically exempted by Rule 17j-1. Items
excluded from the definition of "Security" by Rule 17j-1 are U. S. Government
Securities, bankers acceptances, bank certificates of deposit, commercial paper
and shares of open-end investment companies. In addition, security does not
include futures, commodities, currencies or options on the aforementioned, but
the purchase and sale of such instruments are nevertheless subject to the
reporting requirements of the Code.
"Securities Transaction" means a purchase or sale of Securities in which an
Access Person or a members of his or her Immediate Family has or acquires a
Beneficial Interest.
"SCM" means Strong Capital Management, Inc.
"Strong Funds" means the investment companies comprising the Strong Family
of Mutual Funds.
"U. S. Government Security" means any security issued or guaranteed as to
principal or interest by the United States or by a person controlled or
supervised by and acting as an instrumentality of the Government of the United
States pursuant to authority granted by the Congress of the United States or any
certificate of deposit for any of the foregoing.
Appendix 2
CONTACT PERSONS
Preclearance Officer
1. Stephen J. Shenkenberg, Deputy General Counsel and Chief Compliance Officer
of SCM
Designees of Preclearance Officer
1. Thomas A. Hooker
2. Linda E. Meints
3. John S. Weitzer
4. Kelly M. Zeroth
Compliance Department
1. Stephen J. Shenkenberg
2. Thomas A. Hooker
3. Kathleen A. Flanagan
4. Linda E. Meints
5. Kelly M. Zeroth
Code of Ethics Review Committee
1. Stephen J. Shenkenberg, Deputy General Counsel and Chief Compliance
Officer of SCM
2. Thomas A. Hooker, Director of Compliance
<TABLE>
<CAPTION>
Appendix 3
PERSONAL HOLDINGS IN SECURITIES
In accordance with Section II.A. of the Code of Ethics, please provide a list of all Securities (other
than those specifically excluded from the definition of Security), including physical certificates held, in which
each Access Person has a Beneficial Interest, including those in accounts of the Immediate Family of the Access
Person and all Securities in non-client accounts for which the Access Person makes investment decisions.
<S> <C>
(1) Name of Access Person: _____________________________________________________
(2) If different than (1), name of the person
in whose name the account is held: _____________________________________________________
(3) Relationship of (2) to (1): _____________________________________________________
(4) Broker at which Account is maintained: _____________________________________________________
(5) Account Number: _____________________________________________________
(6) Contact person at Broker and phone number _____________________________________________________
(7) For each account, attach the most recent account statement listing Securities in that account. If the
Access Person owns Beneficial Interests in Securities that are not listed in an attached account
statement, or holds the physical certificate, list them below:
Name of Security Quantity Value Custodian
1. ______________________________________________________________________________________________________________
2. ______________________________________________________________________________________________________________
3. ______________________________________________________________________________________________________________
4. ______________________________________________________________________________________________________________
5. ______________________________________________________________________________________________________________
6. ______________________________________________________________________________________________________________
(Attach separate sheet if necessary.)
I certify that this form and the attached statements (if any) constitute all of the Securities in which
I have a Beneficial Interest, including those for which I hold physical certificates, as well as those held in
accounts of my Immediate Family.
_____________________________________________________
Access Person Signature
Dated: __________________________________________ _____________________________________________________
Print Name
</TABLE>
Appendix 4
ACKNOWLEDGMENT OF RECEIPT OF CODE OF ETHICS
AND LIMITED POWER OF ATTORNEY
I acknowledge that I have received the Code of Ethics dated October 22, 1999,
and represent that:
1. In accordance with Section II.A. of the Code of Ethics, I will fully
disclose the Securities holdings in which I have, or a member of my Immediate
Family has, a Beneficial Interest.*
2. In accordance with Section II.B.1. of the Code of Ethics, I will obtain
prior authorization for all Securities Transactions in which I have, or a member
of my Immediate Family has, a Beneficial Interest except for transactions exempt
from preclearance under Section II.B. 2. of the Code of Ethics.*
3. In accordance with Section II.G.1. of the Code of Ethics, I will report
all Securities Transactions in which I have, or a member of my Immediate Family
has, a Beneficial Interest, except for transactions exempt from reporting under
Section II.G.1. of the Code of Ethics.
4. I will comply with the Code of Ethics in all other respects.
5. I agree to disgorge and forfeit any profits on prohibited transactions
in accordance with the requirements of the Code.*
I hereby appoint Strong Capital Management, Inc. as my attorney-in-fact for
the purpose of placing orders for and on my behalf to buy, sell, tender,
exchange, convert, and otherwise effectuate transactions in any and all stocks,
bonds, options, and other securities. I agree that Strong Capital Management,
Inc. shall not be liable for the consequences of any errors made by the
executing brokers in connection with such transactions.*
_________________________
Access Person Signature
_________________________
Print Name
Dated: _________________________________________
* Representations (1), (2) and (5) and the Limited Power of Attorney do not
apply to Independent Fund Directors.
<TABLE>
<CAPTION>
Appendix 5
Ctrl. No:_________________________ Associate ID
#_______________________________
STRONG CAPITAL MANAGEMENT, INC.
PRECLEARANCE REQUEST FOR ACCESS PERSONS
<S> <C>
1. Name of Access Person (and trading entity, if different): _________________________________________________________________
2. Name and symbol of Security: _________________________________________________________________
3. Maximum quantity to be purchased or sold: _________________________________________________________________
4. Name, account # & phone # of broker to effect transaction: _________________________________________________________________
5. Check if applicable: Purchase ____ Market Order ____
Sale ____ Limit Order ____ (Limit Order
Price: ___________)
Not Held Order ____
6. In connection with the foregoing transaction, I hereby make the following representations and warranties:
(a) I do not possess any material nonpublic information regarding the Security or the issuer of the Security.
(b) To my knowledge:
(1) The Securities or "equivalent" securities (i.e., securities issued by the same issuer) [ are / are
not ] (circle one) held by any investment companies or other accounts managed by SCM;
(2) There are no outstanding purchase or sell orders for this Security (or any equivalent security) by
any investment companies or other accounts managed by SCM; and
(3) None of the Securities (or equivalent securities) are actively being considered for purchase or
sale by any investment companies or other accounts managed by SCM.
(c)The Securities are not being acquired in an initial public offering.
(d)The Securities are not being acquired in a private placement or, if they are, I have reviewed Section
II.D.3. of the Code and have attached hereto a written explanation of such transaction.
(e)If I am a Portfolio Manager, none of the accounts I manage purchased or sold these Securities (or
equivalent securities) within the past seven calendar days and I do not expect any such client accounts
to purchase or sell these Securities (or equivalent securities) within seven calendar days of my
purchase or sale.
(f)If I am purchasing these Securities, I have not directly or indirectly (through any member of my
Immediate Family, any account in which I have a Beneficial Interest or otherwise) sold these Securities
(or equivalent securities) in the prior 60 days.
(g)If I am selling these Securities, I have not directly or indirectly (through any member of my Immediate
Family, any account in which I have a Beneficial Interest or otherwise) purchased these Securities (or
equivalent securities) in the prior 60 days.
(h)I have read the SCM Code of Ethics within the prior 12 months and believe that the proposed trade fully
complies with the requirements of the Code.
______________________________________________________________ _____________________________________________________________
Access Person Print Name
CERTIFICATION OF ACCESS PERSON DESIGNEE
The undersigned hereby certifies that the above Access Person (a) directly instructed me to complete this
form on his or her behalf, (b) to the best of my knowledge, was out of the office at the time of such instruction
and has not returned, and (c) confirmed to me that the representations and warranties contained in this form are
accurate.
______________________________________________________________ _____________________________________________________________
Access Person Designee Print Name
AUTHORIZATION
Authorized By:________________________________________________ Date:___________________
Time:_____________________________
PLACEMENT
Trader:_________________________ Date:________________ Time:__________________ Qty:_________________
EXECUTION
Trader:_________________________ Date:________________ Time:__________________ Qty:_________________
Price:_______________
(Original copy to Compliance Department, Yellow copy to Trading Department, Pink copy to Access Person)
_________ ________ __________________
revised 7/98
Confidential______ ________ __________________ Appendix 6
ANNUAL CODE OF ETHICS QUESTIONNAIRE1
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
Strong Investments, Inc.
and Flint Prairie, L. L. C.
September 14, 1999
Associate: ____________________________(please print name)
I. Introduction
Access Persons2 are required to answer the following questions for the year September 1, 1998, through
August 31, 1999. Answers of "No" to any of the questions in Sections II and III must be explained on the
"Attachment" on page 3. Upon completion, please sign and return the questionnaire by Monday, September 20th,
to Kelly Zeroth in the Compliance Department. All information provided is kept confidential to the maximum
extent possible. If you have any questions, please contact Kelly at extension 3549.
II. Annual certification of compliance with the Code of Ethics
A. Have you obtained preclearance for all Securities3 Transactions in which you have, or a member of your
Immediate Family has, a Beneficial Interest, except for transactions exempt from preclearance under the
Code of Ethics? (Circle "Yes" if there have been no Securities Transactions.)
Yes No ________(circle one)
B. Have you reported all Securities Transactions in which you have, or a member of your Immediate Family
has, a Beneficial Interest, except for transactions exempt from reporting under the Code of Ethics?
(Reporting requirements include arranging for the Compliance Department to receive, directly from your
broker, duplicate transaction confirmations and duplicate periodic statements for each brokerage account
in which you have, or a member of your Immediate Family has, a Beneficial Interest, as well as reporting
securities held in certificate form4. Circle "Yes" if there are no reportable transactions.)
Yes No (circle one)
C. Do you understand that you are prohibited from owning five percent or more of any class of security of a
registered investment company, and have you so complied?
Yes No ________(circle one)
D. Have you notified the Compliance Department if you have been arrested, arraigned, indicted, or have
plead no contest to any criminal offense, or been named as a defendant in any Investment-Related civil
proceedings, or administrative or disciplinary action? (Circle "Yes" if you have not been arrested,
arraigned, etc.)
Yes No (circle one)
E. Have you complied with the Code of Ethics in all other respects, including the gift policy?
Yes No (circle one)
List on the Attachment all reportable gifts5 given or received for the year September 1, 1998, through
August 31, 1999, noting the month, "counterparty," gift description, and estimated value.
III. Have you complied in all respects with the Insider Trading Policy dated January 1, 1999?
Yes No ________(circle one)
Answers of "No" to any of the questions in Sections II and III must be explained on the "Attachment" on page 3.
IV. Disclosure of directorships statement
A. Are you, or is any member of your Immediate Family, a director of any for-profit, privately held
companies6? (If "Yes," please list on the Attachment each company for which you are, or a member of
your Immediate Family is, a director.)
Yes No (circle one)
B. If the response to IV.A. is "Yes," do you have knowledge that any of the companies for which you are, or
a member of your Immediate Family is, a director will go public or be acquired within the next 12
months? (If the answer is "Yes," please be prepared to discuss this matter with a member of the
Compliance Department in the near future.)
Yes No (circle one)
I hereby represent that, to the best of my knowledge, the foregoing responses are true and complete. I
understand that any untrue or incomplete response may be subject to disciplinary action by the firm.
___________________________________________
Access Person Signature
_____________________________________________________ ___________________________________________
Print Name Date
ATTACHMENT TO
ANNUAL CODE OF ETHICS QUESTIONNAIRE
Please explain all "No" responses to questions in Sections II and III:
Please list each company for which you are, or a member or your Immediate Family is, a director (Section IV):
GIFTS for the year September 1, 1998, through August 31, 1999:
================================= ============================== =============================== ==============================
Month Gift Giver / Receiver Gift Description Estimated Value
================================= ============================== =============================== ==============================
1. ___________________________________________________________________________________________________
2. ___________________________________________________________________________________________________
3. ___________________________________________________________________________________________________
4. ___________________________________________________________________________________________________
5. ___________________________________________________________________________________________________
6. ___________________________________________________________________________________________________
7. ___________________________________________________________________________________________________
8. ___________________________________________________________________________________________________
9. ___________________________________________________________________________________________________
10. __________________________________________________________________________________________________
(Continue on an additional sheet if necessary.)
Appendix 7
LIST OF BROAD-BASED INDICES
Listed below are the broad-based indices as designated by the Compliance Department. See Section II.B.2.e. for
additional information.
----------------------------------------------------------- ----------------------------- ------------------------
DESCRIPTION OF OPTION SYMBOL EXCHANGE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Computer Technology XCI AMEX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Eurotop 100 ERT AMEX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Biotechnology Index BTK AMEX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Gold / Silver Index * AUX PHLX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Hong Kong Option Index HKO AMEX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Inter@ctive Wk. Internet Index INX CBOE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Japan Index JPN AMEX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Major Market Index * XMI AMEX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Morgan Stanley High Tech Index MSH AMEX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
NASDAQ-100 NDX CBOE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Oil Service Sector Index OSX PHLX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Pacific High Tech Index XPI PSE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Russell 2000 * RUT CBOE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Semiconductor Sector SOX PHLX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
S & P 100 * OEX CBOE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
S & P 400 Midcap Index * MID CBOE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
S & P 500 * SPX CBOE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Technology Index TXX CBOE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Value Line Index * VLE PHLX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Wilshire Small Cap Index WSX PSE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
* Includes LEAPs
----------------------------------------------------------- ----------------------------- ------------------------
</TABLE>
Appendix 8
GIFT POLICY
The gift policy of Strong Capital Management, Inc., Strong Investments,
Inc. and Flint Prairie, L. L. C. covers both giving gifts to and accepting gifts
from clients, brokers, persons with whom we do business or others (collectively,
"vendors"). It is based on the applicable requirements of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. ("NASD") and is
included as part of the firm's Codes of Ethics.
Under our policy, associates may not give gifts to or accept gifts from
vendors with a value in excess of $100 per person per year and must report to
the firm annually if they accept certain types of gifts. The NASD defines a
"gift" to include any kind of gratuity. Since giving or receiving any gifts in a
business setting may give rise to an appearance of impropriety or may raise a
potential conflict of interest, we are relying on your professional attitude and
good judgment to ensure that our policy is observed to the fullest extent
possible. The discussion below is designed to assist you in this regard.
Questions regarding the appropriateness of any gift should be directed to
the Legal/Compliance Department.
1. Gifts Given By Associates
Under applicable NASD rules, an associate may not give any gift with a
value in excess of $100 per year to any person associated with a securities or
financial organization, including exchanges, broker-dealers, commodity firms,
the news media, or clients of the firm. Please note, however, that the firm may
not take a tax deduction for any gift with a value exceeding $25.
This memorandum is not intended to authorize any associate to give a gift
to a vendor -- appropriate supervisory approval must be obtained before giving
any gifts.
2. Gifts Accepted By Associates
On occasion, because of their position within the firm, associates may be
offered, or may receive without notice, gifts from vendors. Associates may not
accept any gift or form of entertainment from vendors (e.g., tickets to the
theater or a sporting event where the vendor does not accompany the associate)
other than gifts of nominal value, which the NASD defines as under $100 in total
from any vendor in any year (managers may, if they deem it appropriate for their
department, adopt a lower dollar ceiling). Any gift accepted by an associate
must be reported to the firm, subject to certain exceptions (see heading 4
below). In addition, note that our gift policy does not apply to normal and
customary business entertainment or to personal gifts (see heading 3 below).
Associates may not accept a gift of cash or a cash equivalent (e.g., gift
certificates) in any amount, and under no circumstances may an associate solicit
a gift from a vendor.
Associates may wish to have gifts from vendors donated to charity,
particularly where it might be awkward or impolite for an associate to decline a
gift not permitted by our policy. In such case, the gift should be forwarded to
Legal, who will arrange for it to be donated to charity. Similarly, associates
may wish to suggest to vendors that, in lieu of an annual gift, the vendors make
a donation to charity. In either situation discussed in this paragraph, an
associate would not need to report the gift to the firm (see heading 4 below).
3. Exclusion for Business Entertainment/Personal Gifts
Our gift policy does not apply to normal and customary business meals and
entertainment with vendors. For example, if an associate has a business meal and
attends a sporting event or show with a vendor, that activity would not be
subject to our gift policy, provided the vendor is present. If, on the other
hand, a vendor gives an associate tickets to a sporting event and the associate
attends the event without the vendor also being present, the tickets would be
subject to the dollar limitation and reporting requirements of our gift policy.
Under no circumstances may associates accept business entertainment that is
extraordinary or extravagant in nature.
In addition, our gift policy does not apply to usual and customary gifts
given to or received from vendors based on a personal relationship (e.g., gifts
between an associate and a vendor where the vendor is a family member or
personal friend).
4. Reporting
The NASD requires gifts to be reported to the firm. Except as noted below,
associates must report annually all gifts given to or accepted from vendors
(Legal will distribute the appropriate reporting form to associates).
Associates are not required to report the following: (i) usual and
customary promotional items given to or received from vendors (e.g., hats, pens,
T-shirts, and similar items marked with a firm's logo), (ii) items donated to
charity through Legal, or (iii) food items consumed on the firm's premises
(e.g., candy, popcorn, etc.).
January 1, 1999
Appendix 9
INSIDER TRADING POLICY AND PROCEDURES
DESIGNED TO DETECT AND PREVENT INSIDER TRADING
A. Policy Statement.
1. Introduction. Strong Capital Management, Inc., Strong Investments, Inc.,
Heritage Reserve Development Corporation, Flint Prairie, L. L. C. and such other
companies which adopt these Policies and Procedures (all of the foregoing
entities are collectively referred to herein as "Strong") seek to foster a
reputation for integrity and professionalism. That reputation is a vital
business asset. The confidence and trust placed in Strong by clients is
something we should value and endeavor to protect. To further that goal, the
Policy Statement implements procedures to deter the misuse of material,
nonpublic information in securities transactions.
2. Prohibitions. Accordingly, associates are prohibited from trading,
either personally or on behalf of others (including advisory clients), on
material, nonpublic information or communicating material, nonpublic information
to others in violation of the law. This conduct is frequently referred to as
"insider trading." This policy applies to every associate and extends to
activities within and outside their duties at Strong. Any questions regarding
this policy should be referred to the Compliance Department.
3. General Sanctions. Trading securities while in possession of material,
nonpublic information or improperly communicating that information to others may
expose you to stringent penalties. Criminal sanctions may include a fine of up
to $1,000,000 and/or ten years imprisonment. The SEC can recover the profits
gained or losses avoided through the violative trading, a penalty of up to three
times the illicit windfall and an order permanently barring you from the
securities industry. Finally, you may be sued by investors seeking to recover
damages for insider trading violations.
4. Insider Trading Defined. The term "insider trading" is not defined in
the federal securities laws, but generally is used to refer to the use of
material, nonpublic information to trade in securities (whether or not one is an
"insider") or to communications of material, nonpublic information to others.
While the law concerning insider trading is not static, it is currently
understood that the law generally prohibits:
a. trading by an insider, while in possession of material, nonpublic
information;
b. trading by a non-insider, while in possession of material,
nonpublic information, where the information either was disclosed to the
non-insider in violation of an insider's duty to keep it confidential or
was misappropriated;
c. recommending the purchase or sale of securities on the basis of
material, nonpublic information;
d. communicating material, nonpublic information to others; or
e. providing substantial assistance to someone who is engaged in any
of the above activities.
The elements of insider trading and the penalties for such unlawful conduct
are described below. Any associate who, after reviewing these Policies and
Procedures has any question regarding insider trading should consult with the
Compliance Department. Often, a single question can forestall disciplinary
action or complex legal problems.
5. Tender Offers. Tender offers represent a particular concern in the law
of insider trading for two reasons. First, tender offer activity often produces
extraordinary gyrations in the price of the target company's securities. Trading
during this time period is more likely to attract regulatory attention (and
produces a disproportionate percentage of insider trading cases). Second, the
SEC has adopted a rule which expressly forbids trading and "tipping" while in
possession of material, nonpublic information regarding a tender offer received
from the tender offeror, the target company or anyone acting on behalf of
either. Associates should exercise particular caution any time they become aware
of nonpublic information relating to a tender offer.
6. Contact the Compliance Department. To protect yourself, our clients, and
Strong, you should contact the Compliance Department immediately if you believe
that you may have received material, nonpublic information.
B. Procedures Designed to Detect and Prevent Insider Trading. The following
procedures have been established to aid Strong and all associates in
avoiding insider trading, and to aid Strong in preventing, detecting, and
imposing sanctions against insider trading. Every associate must follow
these procedures or risk serious sanctions, including dismissal,
substantial personal liability and criminal penalties. Any questions about
these procedures should be directed to the Compliance Department.
1. Initial Questions. Before trading in the Securities of a company about
which an associate may have potential inside information, an associate, whether
trading for himself or herself or others, should ask himself or herself the
following questions:
a. Is the Information Material? Is this information that an investor
would consider important in making his or her investment decisions? Is this
information that would substantially affect the market price of the
securities if generally disclosed?
b. Is the Information Nonpublic? To whom has this information been
provided? Has the information been effectively communicated to the market
place by being published in Reuters, The Wall Street Journal or other
publications of general circulation?
2. Material and Nonpublic Information. If, after consideration of the
above, any associate believes that the information is material and nonpublic, or
if an associate has questions as to whether the information is material and
nonpublic, he or she should take the following steps:
a. Report the matter immediately to the Compliance Department.
b. Do not purchase or sell the Securities either on the associate's
own behalf or on the behalf of others.
c. Do not communicate the information to anyone, other than to the
Compliance Department.
d. After the Compliance Department has reviewed the issue, the
associate will be instructed to continue the prohibitions against trading
and communication, or he or she will be allowed to trade and communicate
the information.
3. Confidentiality. Information in an associate's possession that is
identified as material and nonpublic may not be communicated to anyone, include
persons within Strong, except as otherwise provided herein. In addition, care
should be taken so that such information is secure. For example, files
containing material, nonpublic information should be sealed, access to computer
files containing material, nonpublic information should be restricted and
conversations containing such information, if appropriate at all, should be
conducted in private (for example, not by cellular telephone to avoid potential
interception).
4. Assistance of the Compliance Department. If, after consideration of the
items set forth in Section B.2., doubt remains as to whether information is
material or nonpublic, or if there is any unresolved question as to the
applicability or interpretation of the foregoing procedures, or as to the
propriety of any action, it must be discussed with the Compliance Department
before trading or communicating the information to anyone.
5. Reporting Requirement. In accordance with Strong's Code of Ethics, every
associate must arrange for the Compliance Department to receive directly from
the broker, dealer, or bank in question, duplicate copies of each confirmation
for each Securities Transaction and periodic statement for each brokerage
account in which such associate has a beneficial interest.
C. Insider Trading Explanations.
1. Who is an Insider? The concept of "insider" is broad. It includes
officers, directors and associates of a company. In addition, a person can be a
"temporary insider" if he or she enters into a special confidential relationship
in the conduct of a company's affairs and as a result is given access to
information solely for the company's purposes. A temporary insider can include,
among others, a company's attorneys, accountants, consultants, bank lending
officers and the associates of such organizations. In addition, Strong may
become a temporary insider. According to the United States Supreme Court, the
company must expect the outsider to keep the disclosed nonpublic information
confidential, and the relationship must at least imply such a duty before the
outsider will be considered an insider.
2. What is Material Information? Trading on inside information is not a
basis for liability unless the information is material. "Material information"
generally is defined as information for which there is a substantial likelihood
that a reasonable investor would consider it important in making his or her
investment decisions, or information that is reasonably certain to have a
substantial effect on the price of a company's securities. It need not be
important that it would have changed the investor's decision to buy or sell. No
simple "bright line" test exists to determine when information is material;
assessments of materiality involve a highly fact-specific inquiry. For this
reason, you should direct any question about whether information is material to
the Compliance Department.
Material information often relates to a company's results and operations
including, for example, dividend changes, earnings results, changes in
previously released earnings estimates, significant merger or acquisition
proposals or agreements, major litigation, liquidation problems and
extraordinary management developments.
Material information also may relate to the market for a company's
securities. Information about a significant order to purchase or sell securities
may, in some contexts, be deemed material.
Material information does not have to relate to a company's business. For
example, in Carpenter v. U.S., 108 U.S. 316 (1987), the United States Supreme
Court considered as material certain information about the contents of a
forthcoming newspaper column that was expected to affect the market price of a
security. In that case, a Wall Street Journal reporter was found criminally
liable for disclosing to others the dates that reports on various companies
would appear in The Wall Street Journal and whether those reports would be
favorable or unfavorable.
3. What is Nonpublic Information? Information is nonpublic until it has
been effectively disseminated broadly to investors in the market place. One must
be able to point to some fact to show that the information is generally public.
For example, information found in a report filed with the SEC, or appearing in
Dow Jones, Reuters Economic Services, The Wall Street Journal, or other
publications of general circulation would be considered public.
4. What are the Penalties for Insider Trading? Penalties for trading on or
communicating material, nonpublic information are severe, both for individuals
involved in such unlawful conduct and their employers. A person can be subject
to some or all of the penalties below even if he or she does not personally
benefit from the violation. Penalties include: (a) civil injunctions; (b) treble
damages; (c) disgorgement of profits; (d) jail sentences; (e) fines for the
person who committed the violation of up to three times the profit gained or
loss avoided, whether or not the person actually benefited; and (f) fines for
the employer or other controlling person of up to the greater of $1,000,000 or
three times the amount of the profit gained or loss avoided.
In addition to the foregoing, any violation of this Policy with Respect to
Insider Trading can be expected to result in serious sanctions, including
dismissal of the person or persons involved.
January 1, 1999
Appendix 10
ELECTRONIC TRADING AUTHORIZATION FORM
Authorization has been granted to _______________________________________
("Access Person")
to open an Electronic Trading Account1 at ________________________________
("Brokerage Firm").
As a condition of approval, the Access Person agrees to the following
requirements, relating to all Securities Transactions:
1. All Securities Transactions as defined in the Code of Ethics, except those
specifically exempt, must be precleared by the Compliance Department;
2. All Securities Transactions will be placed and executed by the close of the
same trading day that the authorization is granted, otherwise the
authorization will expire. This includes Limit Orders. There will be no
open "until filled" orders;
3. The Access Person will provide the Compliance Department with documentation
from the Internet Site that shows when the order was placed and executed.
4. The Access Person will arrange for the Compliance Department to receive
directly from the Electronic Trading Firm, duplicate copies of each
confirmation for each Securities Transaction and periodic statements for
each brokerage account in which the Access Person has a Beneficial
Interest. The Access Person may not place trades on his or her own behalf
until these arrangements have been made.
5. The Access Person will comply with the Code of Ethics in all other
respects.
I hereby agree to the terms and conditions stated above. Any abuse of this
privilege may result in disciplinary action by the firm.
_______________________________________________ __________________
Access Person _________________ _________Date
AUTHORIZATION
_______________________________________________ __________________
Director of Compliance (or designee)_______ _________Date_____
Appendix 11
TO: ALL ACCESS PERSONS________ __________________
FROM: Director of Compliance
Subject: Social Security Number/Tax ID Information
Strong's Code of Ethics requires the Compliance Department to monitor the
personal investing activity of Access Persons, including investments in mutual
funds. To assist in this, we ask that you please provide your Social Security
Number, as well as the SSN of each member of your "Immediate Family". In
addition, please list all accounts in which you may have a "Beneficial
Interest".
(Please refer to your copy of the Code of Ethics for a definition of the
underlined words.)
Please complete this form return it to the Director of Compliance at your
earliest convenience. Thank you for your cooperation.
________________________________________________________________________
(Print Name) _________________ _________(SSN/TIN)
________________________________________________________________________
(Print Name) _________________ _________(SSN/TIN)
________________________________________________________________________
(Print Name) _________________ _________(SSN/TIN)
________________________________________________________________________
(Print Name) _________________ _________(SSN/TIN)
________________________________________________________________________
(Print Name) _________________ _________(SSN/TIN)
________________________________________________________________________
(Print Name) _________________ _________(SSN/TIN)
--------
1 Capitalized words are defined in Appendix 1.
1 All definitions used in this questionnaire have the same meaning as those
in the Code of Ethics.
2 Non-Access Persons and Independent Fund Directors of the Strong Funds
must complete a separate questionnaire.
3 Security, as defined, does not include open-end investment companies,
including the Strong Funds.
4 Please contact Kelly Zeroth if you are uncertain as to what confirmations
and statements you have arranged for the Compliance Department to receive.
5 Associates are not required to report the following: (i) usual and
customary promotional items given to or received from vendors, (ii) items
donated to charity (through Legal), or (iii) food items consumed on the
premises. Entertainment - i.e., a meal or activity with the vendor present -
does not have to be reported.
6 Per Section III.F. of the Code of Ethics, no Access Person, other than an
Independent Fund Director, may serve on the board of directors of a publicly
held company.
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS
I. APPLICABILITY
This Code of Ethics establishes rules of conduct for "Access Persons" (as
defined below) of Credit Suisse Asset Management, LLC, its subsidiaries and
Credit Suisse Asset Management Securities, Inc. (collectively referred to as
"CSAM") and each U.S. registered investment company that adopts this Code
("Covered Fund") (CSAM and the Covered Funds are collectively referred to as the
"Covered Companies"). For purposes of this Code, "Access Person" shall mean:
o any "Advisory Person" -- any employee or officer of CSAM and any natural
person in a control relationship to a Covered Company (except for a natural
person who, but for his or her holdings in a Covered Fund, would not be
considered an Advisory Person, unless he or she obtains information
concerning recommendations made to the Covered Fund with regard to the
purchase or sale of securities by the Covered Fund, in which case such
person shall be considered an Advisory Person only with respect to the
Covered Fund); or
o any director, trustee or officer of a Covered Fund, whether or not such
person is an Advisory Person, in which case such person shall be considered
an Access Person only with respect to the Covered Fund.
For purposes of this Code:
o the term "security" shall include any option to purchase or sell, any
security that is convertible or exchangeable for, and any other derivative
interest relating to the security;
o the terms "purchase" and "sale" of a security shall include, among other
things, the writing of an option to purchase or sell a security; and
o all other terms shall have the same meanings as under the Investment
Company Act of 1940 ("1940 Act"), unless indicated otherwise.
II. STATEMENT OF GENERAL PRINCIPLES
In conducting personal investment activities, all Access Persons are required to
act consistent with the following general fiduciary principles:
o the interests of CSAM clients, including Covered Funds, must always be
placed first, provided, however, that persons who are Access Persons only
with respect to certain Covered Funds shall place the interests of such
Covered Funds first;
o all personal securities transactions must be conducted in such a manner as
to avoid any actual or potential conflict of interest or any abuse of an
individual's position of trust and responsibility; and
o Access Persons must not take inappropriate advantage of their positions.
CSAM has a separate policy and procedures designed to detect and prevent insider
trading, which should be read together with this Code. Nothing contained in this
Code should be interpreted as relieving any Access Person from the obligation to
act in accordance with any applicable law, rule or regulation or any other
statement of policy or procedure adopted by any Covered Company.
III. PROHIBITIONS
The following prohibitions and related requirements apply to Advisory Persons
and/or Access Persons (as stated) and accounts in which they have "Beneficial
Ownership" (as defined in Exhibit 1).
A. Short Term Trading. CSAM discourages Advisory Persons from short-term trading
(i.e., purchases and sales within a 60 day period), as such activity could be
viewed as being in conflict with CSAM's general fiduciary principles. In no
event, however, may an Advisory Person make a purchase and sale (or sale and
purchase) of a security, including shares of Covered Funds and other U.S.
registered investment companies (other than money market funds), within five
"Business Days" (meaning days on which the New York Stock Exchange is open for
trading). CSAM reserves the right to extend this prohibition period for the
short-term trading activities of any or all Advisory Persons if CSAM determines
that such activities are being conducted in a manner that may be perceived to be
in conflict with CSAM's general fiduciary principles.
B. Side-by-Side Trading. No Access Person may purchase or sell (directly or
indirectly) any security for which there is a "buy" or "sell" order pending for
a CSAM client (except that this restriction does not apply to any Access Person
who is neither an Advisory Person nor an officer of a Covered Fund, unless he or
she knows, or in the ordinary course of fulfilling official duties with a
Covered Fund should know, that there is a "buy" or "sell" order pending with
respect to such security for a CSAM client), or that such Access Person knows
(or should know) at the time of such purchase or sale:
o is being considered for purchase or sale by or for any CSAM client; or
o is being purchased or sold by or for any CSAM client.
C. Blackout Periods. No Advisory Person may execute a securities transaction
within five Business Days before and one Business Day after a transaction in
that security for a CSAM client.
D. Public Offerings. No Advisory Person may directly or indirectly acquire
Beneficial Ownership in any security in a public offering in the primary
securities market.
E. Private Placements. No Advisory Person may directly or indirectly acquire or
dispose of any Beneficial Ownership in any privately placed security without the
express prior written approval of a supervisory person designated in Section IX
of this Code ("Designated Supervisory Person"). Approval will take into account,
among other factors, whether the investment opportunity should be reserved for a
CSAM client, whether the opportunity is being offered to the Advisory Person
because of his or her position with CSAM or as a reward for past transactions
and whether the investment creates or may in the future create a conflict of
interest.
F. Short Selling. Advisory Persons are only permitted to engage in short selling
for hedging purposes. No Advisory Person may engage in any transaction that has
the effect of creating any net "short exposure" in an individual security.
G. Futures Contracts. No Advisory Person may invest in futures contracts, except
through the purchase of options on futures contracts.
H. Options. No Advisory Person may write (i.e., sell) any options except for
hedging purposes and only if the option is fully covered.
I. Trading, Hedging and Speculation in Credit Suisse Group Securities.
Transactions by employees, officers and directors of CSAM in securities of
Credit Suisse Group ("CSG") are prohibited for each period beginning 15 calendar
days before announcement of CSG yearly or half-yearly results and ending two
Business Days after the announcement. Employees, officers and directors of CSAM
may only hedge vested positions in CSG stock through short sales or derivative
instruments. Uncovered short exposure, through short sales or otherwise, is not
permitted without the express prior written approval of a Designated Supervisory
Person.
J. Investment Clubs. No Advisory Person may participate in an "investment club"
or similar activity.
K. Disclosure of Interest. No Advisory Person may recommend to or effect for any
CSAM client any securities transaction without having disclosed his or her
personal interest (actual or potential), if any, in the issuer of the
securities, including without limitation:
o any ownership or contemplated ownership of any privately placed securities
of the issuer or any of its affiliates;
o any employment, management or official position with the issuer or any of
its affiliates;
o any present or proposed business relationship between the Advisory Person
and the issuer or any of its affiliates; and
o any additional factors that may be relevant to a conflict of interest
analysis.
Where the Advisory Person has a personal interest in an issuer, a decision to
purchase or sell securities of the issuer or any of its affiliates by or for a
CSAM client shall be subject to an independent review by a Designated
Supervisory Person.
L. Gifts. No Advisory Person may seek or accept any gift of more than a de
minimis value (approximately $250 per year) from any person or entity that does
business with or on behalf of a CSAM client, other than reasonable,
business-related meals and tickets to sporting events, theater and similar
activities. If any Advisory Person is unsure of the appropriateness of any gift,
a Designated Supervisory Person should be consulted.
M. Directorships and Other Outside Business Activities. No Advisory Person may
serve on the board of directors/trustees of any issuer without the express prior
written approval of a Designated Supervisory Person. Approval will be based upon
a determination that the board service would be consistent with the interests of
CSAM clients. Where board service is authorized, Advisory Persons serving as
directors will be isolated from those making investment decisions regarding the
securities of that issuer through "informational barrier" or other procedures
specified by a Designated Supervisory Person.
No Advisory Person may be employed (either for compensation or in a voluntary
capacity) outside his or her regular position with CSAM or its affiliated
companies without the written approval of a Designated Supervisory Person.
IV. EXEMPT TRANSACTIONS
A. Exemptions from Prohibitions.
1. Purchases and sales of securities issued or guaranteed by the U.S.
government or any agencies or instrumentalities of the U.S. government,
municipal securities, and other non-convertible fixed income securities, which
are in each case rated investment grade, are exempt from the prohibitions
described in paragraphs C and D of Section III if such transactions are made in
compliance with the preclearance requirements of Section V(B) below.
2. Any securities transaction, or series of related transactions, involving
500 shares or less of an issuer having a market capitalization (outstanding
shares multiplied by the current market price per share) greater than $2.5
billion is exempt from the prohibition described in paragraph C of Section III
if such transaction is made in compliance with the preclearance requirements of
Section V(B) below.
B. Exemptions from Prohibitions and Preclearance. The prohibitions described in
paragraphs B through E of Section III and the preclearance requirements of
Section V(B) shall not apply to:
o purchases and sales of securities that are direct obligations of the U.S.
government;
o purchases and sales of securities of U.S. registered open-end investment
companies;
o purchases and sales of bankers' acceptances, bank certificates of deposit,
and commercial paper;
o purchases that are part of an automatic dividend reinvestment plan;
o purchases and sales that are non-volitional on the part of either the
Access Person or the CSAM client;
o purchases and sales in any account maintained with a party that has no
affiliation with the Covered Companies and over which no Advisory Person
has, in the judgment of a Designated Supervisory Person after reviewing the
terms and circumstances, direct or indirect influence or control over the
investment or trading of the account; and
o purchases by the exercise of rights offered by an issuer pro rata to all
holders of a class of its securities, to the extent that such rights were
acquired from the issuer.
C. Further Exemptions. Express prior written approval may be granted by a
Designated Supervisory Person if a purchase or sale of securities or other
outside activity is consistent with the purposes of this Code and Section 17(j)
of the 1940 Act and rules thereunder (attached as Attachment A is a form to
request such approval). For example, a purchase or sale may be considered
consistent with those purposes if the purchase or sale is not harmful to a CSAM
client because such purchase or sale would be unlikely to affect a highly
institutional market, or because such purchase or sale is clearly not related
economically to the securities held, purchased or sold by the CSAM client.
V. TRADING, PRECLEARANCE, REPORTING AND OTHER COMPLIANCE PROCEDURES
A. Trading Through CSAM. No Advisory Person shall purchase or sell securities
for an account in which he or she has Beneficial Ownership other than through
the CSAM trading desk persons designated by a Designated Supervisory Person,
unless express prior written approval is granted by a Designated Supervisory
Person.
B. Preclearance. Except as provided in Section IV, before any Advisory Person
purchases or sells any security for any account in which he or she has
Beneficial Ownership, preclearance shall be obtained in writing from a
Designated Supervisory Person (attached as Attachment B is a form to request
such approval). If clearance is given for a purchase or sale and the transaction
is not effected on that Business Day, a new preclearance request must be made.
C. Reporting.
1. Initial Certification. Within 10 days after the commencement of his or her
employment with CSAM or his or her affiliation with any Covered Fund, each
Access Person shall submit to a Designated Supervisory Person an initial
certification in the form of Attachment C to certify that:
o he or she has read and understood this Code of Ethics and recognizes that
he or she is subject to its requirements; and
o he or she has disclosed or reported all personal securities holdings in
which he or she has any direct or indirect Beneficial Ownership and all
accounts in which any securities are held for his or her direct or indirect
benefit.
2. Annual Certification. In addition, each Access Person shall submit to a
Designated Supervisory Person an annual certification in the form of Attachment
D to certify that:
o he or she has read and understood this Code of Ethics and recognizes that
he or she is subject to its requirements;
o he or she has complied with all requirements of this Code of Ethics; and
o he or she has disclosed or reported (a) all personal securities
transactions for the previous year and (b) all personal securities holdings
in which he or she has any direct or indirect Beneficial Ownership and
accounts in which any securities are held for his or her direct or indirect
benefit as of a date no more than 30 days before the annual certification
is submitted.
Access Persons may comply with the initial and annual reporting requirements by
submitting account statements and/or Attachment E to a Designated Supervisory
Person within the prescribed periods. An Access Person who is not an Advisory
Person is not required to submit initial or annual certifications, unless such
Access Person is an officer of a Covered Fund.
Each Advisory Person shall annually disclose all directorships and outside
business activities (attached as Attachment F is a form for such disclosure).
3. Quarterly Reporting. All Advisory Persons and each Access Person who is an
officer of a Covered Fund shall also supply a Designated Supervisory Person, on
a timely basis, with duplicate copies of confirmations of all personal
securities transactions and copies of periodic statements for all securities
accounts, including confirmations and statements for transactions and accounts
described in Section IV(B) above (exempt from prohibitions and preclearance).
This information must be supplied at least once per calendar quarter, within 10
days after the end of the calendar quarter.
Each Access Person who is neither an Advisory Person nor an officer of a Covered
Fund is required to report a transaction only if he or she, at the time of that
transaction, knew (or in the ordinary course of fulfilling official duties with
a Covered Fund should have known) that during the 15-day period immediately
before or after the date of the transaction the security such person purchased
or sold was purchased or sold by the Covered Fund or was being considered for
purchase or sale by the Covered Fund.
VI. COMPLIANCE MONITORING AND SUPERVISORY REVIEW
A Designated Supervisory Person will periodically review reports from the CSAM
trading desk (or, if applicable, confirmations from brokers) to assure that all
transactions effected by Access Persons for accounts in which they have
Beneficial Ownership are in compliance with this Code and Rule 17j-1 under the
1940 Act.
Material violations of this Code and any sanctions imposed shall be reported not
less frequently than quarterly to the board of directors of each relevant
Covered Fund and to the senior management of CSAM. At least annually, each
Covered Company shall prepare a written report to the board of
directors/trustees of each Covered Fund, and to the senior management of CSAM,
that:
o describes issues that have arisen under the Code since the last report,
including, but not limited to, material violations of the Code or
procedures that implement the Code and any sanctions imposed in response to
those violations; and
o certifies that each Covered Company has adopted procedures reasonably
necessary to prevent Access Persons from violating the Code.
Material changes to this Code of Ethics must be approved by the Board of
Directors of each Covered Fund no later than six months after the change is
adopted. That approval must be based on a determination that the changes are
reasonably necessary to prevent Access Persons from engaging in any conduct
prohibited by the Code and Rule 17j-1 under the 1940 Act. Board approval must
include a separate vote of a majority of the independent directors.
VII. SANCTIONS
Upon discovering that an Access Person has not complied with the requirements of
this Code, the senior management of the relevant Covered Company may impose on
that person whatever sanctions are deemed appropriate, including censure; fine;
reversal of transactions and disgorgement of profits; suspension; or termination
of employment.
VIII. CONFIDENTIALITY
All information obtained from any Access Person under this Code shall be kept in
strict confidence, except that reports of transactions will be made available to
the Securities and Exchange Commission or any other regulatory or
self-regulatory organization to the extent required by law or regulation.
IX. FURTHER INFORMATION
The Designated Supervisory Persons are Hal Liebes and James W. Bernaiche or
their designees in CSAM's legal and compliance department. Any questions
regarding the Code of Ethics should be directed to a Designated Supervisory
Person.
Dated: March 1, 2000
EXHIBIT 1
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS
CODE OF ETHICS
DEFINITION OF BENEFICIAL OWNERSHIP
The term "Beneficial Ownership" as used in the attached Code of Ethics is to be
interpreted by reference to Rule 16a-1(a)(2) under the Securities Exchange Act
of 1934 ("Rule"). Under the Rule, a person is generally deemed to have
Beneficial Ownership of securities if the person (directly or indirectly),
through any contract, arrangement, understanding, relationship or otherwise, has
or shares a direct or indirect pecuniary interest in the securities.
The term "pecuniary interest" is generally defined in the Rule to mean the
opportunity (directly or indirectly) to profit or share in any profit derived
from a transaction in the securities. A person is deemed to have an "indirect
pecuniary interest" within the meaning of the Rule:
o in any securities held by members of the person's immediate family sharing
the same household; the term "immediate family" includes any child,
stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling,
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law
or sister-in-law, as well as adoptive relationships;
o a general partner's proportionate interest in the portfolio securities held
by a general or limited partnership;
o a person's right to dividends that is separated or separable from the
underlying securities;
o a person's interest in certain trusts; and
o a person's right to acquire equity securities through the exercise or
conversion of any derivative security, whether or not presently
exercisable.1
For purposes of the Rule, a person who is a shareholder of a corporation or
similar entity is not deemed to have a pecuniary interest in portfolio
securities held by the corporation or entity, so long as the shareholder is not
a controlling shareholder of the corporation or the entity and does not have or
share investment control over the corporation's or the entity's portfolio. The
term "control" means the power to exercise a controlling influence over
management or policies, unless the power is solely the result of an official
position with the company.
ATTACHMENT A
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS -- SPECIAL APPROVAL FORM
1. The following is a private placement of securities or other investment
requiring special approval in which I want to acquire or dispose of Beneficial
Ownership:
<TABLE>
<CAPTION>
NAME OF PRIVATE
SECURITY OR OTHER DATE TO BE AMOUNT TO BE RECORD PURCHASE HOW ACQUIRED
- ------------------ ----------- ------------- ------ -------- ------------
INVESTMENT ACQUIRED HELD OWNER PRICE (BROKER/ISSUER)
<S> <C> <C> <C> <C> <C>
- ------------------------- ----------------- ----------------- ------------------- ----------------- ----------------------
- ------------------------- ----------------- ----------------- ------------------- ----------------- ----------------------
- ------------------------- ----------------- ----------------- ------------------- ----------------- ----------------------
- ------------------------- ----------------- ----------------- ------------------- ----------------- ----------------------
- ------------------------- ----------------- ----------------- ------------------- ----------------- ----------------------
</TABLE>
Would this investment opportunity be appropriate for a CSAM client?
- --- Yes --- No
2. I want to engage in the following outside business activity:
- -----------------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
3. I want special approval to place personal securities trades
other than through the CSAM trading desk (please describe):
-----------------------------------------------------------------------
-----------------------------------------------------------------------
- -----------------------------------------------------------------------------
I certify, as applicable, that I (a) am not aware of any non-public information
about the issuer, (b) have made all disclosures required by the Code of Ethics
and (c) will comply with all reporting requirements of the Code.
- -------------------------------- -------------------------------
Signature Date
- --------------------------------
Print Name
- --- Approved
- --- Not Approved
- ------------------------------- ------------------------------
Designated Supervisory Person Date
ATTACHMENT B
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS -- PERSONAL TRADING PRECLEARANCE FORM
This form should be filled out completely to expedite approval.
1. Security: ------------------------------------------
Ticker: ------------------------------------------
---- Purchase ---- Sale
2. Number of shares/bonds/units/contracts: ---------------------------
3. Account Name/Shortname: --------------------------------------------
4. Brokerage Firm and Account Number: ------------------------------------
5. Why do you want to purchase or sell? Is this an opportunity appropriate for
CSAM clients?
-----------------------------------------------------------------------
6. Are you aware of a CSAM Advisory Person who is buying or
selling or who plans to buy or sell this security for his or
her personal accounts or CSAM clients?
--- Yes --- No
If yes, who?
-----------------------------------------------------------------------
7. If the amount is less than 500 shares, is the issuer market
capitalization greater than $2.5 billion?
---- Yes ----- No
I certify that I (a) am not aware of any non-public information about the
issuer, (b) have made all disclosures required by the Code of Ethics and this
trade otherwise complies with the Code, including the prohibition on investments
in initial public offerings, and (c) will comply with all reporting requirements
of the Code.
- ---------------------------------- ---------------------------
Signature of Advisory Person Date
- ----------------------------------
Print Name
- --- Approved
- --- Not Approved
- ---------------------------------- ---------------------------
Designated Supervisory Person Date - VALID THIS BUSINESS DAY ONLY.
ATTACHMENT C
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS
INITIAL CERTIFICATION
I certify that I:
O have read and understood the Code of Ethics for Credit Suisse Asset
Management, LLC, the Warburg Pincus Funds and the CSAM Closed-End Funds and
recognize that I am subject to its requirements; and
O have disclosed or reported all personal securities holdings in which I had
any direct or indirect Beneficial Ownership and accounts in which any
securities were held for my direct or indirect benefit as of the date I
commenced employment with CSAM or the date I became affiliated with a
Covered Fund.
- -------------------------------- -------------------------------
Signature of Access Person Date
- --------------------------------
Print Name
ATTACHMENT D
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS
ANNUAL CERTIFICATION
I certify that I:
O have read and understood the Code of Ethics for Credit Suisse Asset
Management, LLC, the Warburg Pincus Funds and the CSAM Closed-End Funds and
recognize that I am subject to its requirements;
O have complied with all requirements of the Code of Ethics and Policy and
Procedures Designed to Detect and Prevent Insider Trading in effect during
the year ended December 31, 1999; and
O have disclosed or reported all personal securities transactions for the
year ended December 31, 1999 and all personal securities holdings in which
I had any direct or indirect Beneficial Ownership and all accounts in which
any securities were held for my direct or indirect benefit as of December
31, 1999.
- -------------------------------- -------------------------------
Signature of Access Person Date
- --------------------------------
Print Name
ATTACHMENT E
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
Code of Ethics - Personal Securities Account Declaration
All Access Persons must complete each applicable item (1, 2, 3 or 4) and sign
below.
1. The following is a list of securities/commodities accounts in which I have
Beneficial Ownership:
<TABLE>
<CAPTION>
BROKER/DEALER ACCOUNT TITLE AND NUMBER
--------------------------------------------------------- ------------------------------------------------------
<S> <C>
--------------------------------------------------------- ------------------------------------------------------
--------------------------------------------------------- ------------------------------------------------------
--------------------------------------------------------- ------------------------------------------------------
--------------------------------------------------------- ------------------------------------------------------
2. The following is a list of securities/commodities accounts in which I
had Beneficial Ownership that have been opened or closed in the past
year:
BROKER/DEALER ACCOUNT TITLE AND NUMBER
--------------------------------------------------------- ------------------------------------------------------
--------------------------------------------------------- ------------------------------------------------------
--------------------------------------------------------- ------------------------------------------------------
--------------------------------------------------------- ------------------------------------------------------
</TABLE>
3. The following is a list of any other securities or other investment
holdings in which I have Beneficial Ownership (for securities held in
accounts other than those disclosed in response to items 1 and 2):
<TABLE>
<CAPTION>
NAME OF PRIVATE
SECURITY OR OTHER RECORD PURCHASE HOW ACQUIRED
- ------------------ ------ -------- ------------
INVESTMENT DATE ACQUIRED AMOUNT HELD OWNER PRICE (BROKER/ISSUER)
- ---------- ------------- ----------- ----- ----- ---------------
<S> <C> <C> <C> <C> <C>
- ------------------------- ----------------- ----------------- ------------------- ----------------- ----------------------
- ------------------------- ----------------- ----------------- ------------------- ----------------- ----------------------
- ------------------------- ----------------- ----------------- ------------------- ----------------- ----------------------
- ------------------------- ----------------- ----------------- ------------------- ----------------- ----------------------
- ------------------------- ----------------- ----------------- ------------------- ----------------- ----------------------
</TABLE>
4. I do not have Beneficial Ownership in any securities/commodities
accounts or otherwise have Beneficial Ownership of any securities or
other instruments subject to the Code of Ethics. (Please initial.)
-------------
Initials
I declare that the information given above is true and accurate:
- -------------------------------- -------------------------------
Signature of Access Person Date
- -------------------------------
Print Name
ATTACHMENT F
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS
OUTSIDE BUSINESS ACTIVITIES
Outside business activities include, but are not limited to, the following:
o self-employment;
o receiving compensation from another person or company;
o serving as an officer, director, partner, or consultant of another business
organization (including a family owned company); and
o becoming a general or limited partner in a partnership or owning any stock
in a business, unless the stock is publicly traded and no control
relationship exists.
Outside business activities include serving with a governmental (federal, state
or local) or charitable organization whether or not for compensation.
ALL ADVISORY PERSONS MUST COMPLETE AT LEAST ONE CHOICE (1 OR 2) AND SIGN BELOW.
<TABLE>
<CAPTION>
1. The following are my outside business activities:
APPROVED BY DESIGNATED SUPERVISORY PERSON
OUTSIDE BUSINESS ACTIVITY DESCRIPTION OF ACTIVITY (YES/NO)
------------------------------------ ----------------------------- ---------------------------------------------
<S> <C> <C>
------------------------------------ ----------------------------- ---------------------------------------------
------------------------------------ ----------------------------- ---------------------------------------------
------------------------------------ ----------------------------- ---------------------------------------------
------------------------------------ ----------------------------- ---------------------------------------------
------------------------------------ ----------------------------- ---------------------------------------------
</TABLE>
2. I am not involved in any outside business activities. (Please initial)
------------
Initials
I declare that the information given above is true and accurate:
- -------------------------------- -------------------------------
Signature of Advisory Person Date
- --------------------------------
Print Name
- --------
1 The term "derivative security" is defined as any option, warrant, convertible
security, stock appreciation right or similar right with an exercise or
conversion privilege at a price related to an equity security (or similar
securities) with a value derived from the value of an equity security.
PILGRIM BAXTER & ASSOCIATES, LTD.
CODE OF ETHICS
Adopted: March 22, 2000
EXECUTIVE SUMMARY
This is a summary of the restrictions and reporting/certification
requirements imposed on Access Persons by this Code. Capitalized terms are
defined in Section II of the Code. DO NOT RELY ON THIS SUMMARY AS A COMPLETE
STATEMENT OF THE RESTRICTIONS AND REPORTING/CERTIFICATION REQUIREMENTS. PLEASE
REFER TO THE APPROPRIATE SECTION OF THE CODE FOR MORE COMPLETE INFORMATION.
RESTRICTIONS ON ACCESS PERSONS (SECTION III OF THE CODE):
o Do not defraud, mislead or manipulate any Client in connection with the
Purchase or Sale of a Security.
o Pre-clear every Purchase or Sale of Beneficial Ownership in a Security with
the Review Officer.
o Do not acquire Beneficial Ownership of a Security as part of an Initial
Public Offering
o Do not profit from the Purchase and Sale or Sale and Purchase of Beneficial
Ownership in the same Security within a 60 calendar day period.
o Pre-clear every Purchase of Sale of Beneficial Ownership in a Limited
Offering with the Limited Offering Review Committee.
o Do not accept any position with any company, partnership or other entity
until approved by the Review Officer.
o Do not accept any Gift worth more than $100 from any person or entity doing
business with Pilgrim Baxter until approved by the Review Officer.
o Do not accept or consider any Gift when exercising fiduciary duties on
behalf of a Client.
REPORTING AND CERTIFICATION REQUIREMENTS FOR ACCESS PERSONS (SECTION V OF THE
CODE):
o Submit duplicate Security Trade Confirmations and Account Statements to the
Review Officer.
o Submit a signed and dated Initial Holdings Report to the Review Officer no
later than 10 days after becoming an Access Person.
o Submit a signed and dated Quarterly Transaction Report to the Review
Officer no later than 10 days after the end of each calendar quarter.
o Submit a signed and dated Annual Holdings Report to the Review Officer no
later than 30 days after the calendar year end.
o Submit a signed and dated Annual Certification to the Review Officer no
later than 30 days after the calendar year end.
o Immediately report any Beneficial Ownership of more than 1/2 of 1% of an
entity's outstanding share to the Review Officer.
PILGRIM BAXTER & ASSOCIATES, LTD.
CODE OF ETHICS
This Code of Ethics has been adopted by the Board of Directors of Pilgrim
Baxter & Associates, Ltd. ("Pilgrim Baxter") in accordance with Rule 17j-1(c)
under the Investment Company Act of 1940, as amended (the "Act"), and the
Recommendations of the Investment Company Institute Advisory Group on Personal
Investing. Rule 17j-1 under the Act prohibits persons who are actively engaged
in the management, portfolio selection or underwriting of registered investment
companies from participating in fraudulent or manipulative practices in
connection with the purchase or sale of securities held or to be acquired by
those investment companies.
I. STATEMENT OF GENERAL PRINCIPLES
As an investment adviser, Pilgrim Baxter owes its clients a fiduciary duty
to act solely in their best interests. As such, Pilgrim Baxter employees,
officers and directors are required to conduct themselves in a manner that
places the best interests of a client before their own. While Pilgrim Baxter has
complete confidence in the integrity and good faith of its employees, officers
and directors, Pilgrim Baxter believes it is important to set forth, in writing,
the general principles that should guide the daily conduct of all Pilgrim Baxter
employees, officers and directors. Pilgrim Baxter believes these general
principles to be the following:
o The best interests of Pilgrim Baxter's clients are paramount. Therefore,
all Pilgrim Baxter personnel must conduct themselves and their operations
to give maximum effect to this tenet by always placing client interests
before their own.
o The personal securities transactions of Pilgrim Baxter personnel must be
accomplished so as to avoid even the appearance of a conflict with client
interests.
o Pilgrim Baxter personnel must always avoid actions or activities that
allow, or appear to allow, them to profit or benefit from their position
with respect to clients, or that would otherwise bring into question their
independence or judgment.
II. DEFINITIONS
ACCESS PERSON(S) means every director, officer and employee of Pilgrim
Baxter and any independent contractor or temporary employee who, because of
their job responsibilities, has been deemed by the Review Officer to have
access to information concerning the Purchase or Sale of a Security by
Pilgrim Baxter on behalf of a Client.
BENEFICIAL OWNERSHIP means any direct or indirect pecuniary interest in or
any direct or indirect influence or control over a Security or Limited
Offering. An example of influence or control is any voting or investment
discretion. In general, an Access Person will be considered the beneficial
owner of any Security or Limited Offering held in the name of (i) a spouse
or domestic partner, (ii) a minor child, (iii) a relative who resides in
the Access Person's house, or (iv) any other person if the Access Person
has direct or indirect influence or control over the Security or Limited
Offering. Overall, Beneficial Ownership will be determined in accordance
with Section 16 of the Securities Exchange Act of 1934.
CLIENT means any investment company, or any of its portfolios, registered
under the Act and any separately managed account for which Pilgrim Baxter
acts as investment adviser or sub-adviser.
INITIAL PUBLIC OFFERING means an offering of securities registered under
the Securities Act of 1933, the issuer of which, immediately before the
registration, was not subject to the reporting requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934.
LIMITED OFFERING(S) means an offering that is exempt from registration
under the Securities Act of 1933 pursuant to Section 4(2) or Section 4(6)
or pursuant to Rules 504, 505, or 506 under the Securities Act of 1933. The
term includes so-called private placements such as any investment limited
partnership that is exempt from registration.
LIMITED OFFERING REVIEW COMMITTEE means the committee members identified in
the Pre-Clearance Procedures and Conditions for Limited Offerings which are
attached to this Code as Exhibit A.
PERSONAL ACCOUNT means any Security or Limited Offering account in which an
Access Person has Beneficial Ownership. For example, a Personal Account
would include any brokerage account maintained by an Access Person or the
spouse of an Access Person at Merrill Lynch, Ameritrade or at any other
discount or full service broker.
PURCHASE OR SALE includes, among other things, every direct or indirect
acquisition or sale and the writing of an option to purchase or sell.
REVIEW OFFICER means the Chief Compliance Officer, or his/her designee.
` RELATED SECURITY means any Security whose value directly fluctuates as a
result of a change in the value of a Security or Limited Offering.
SECURITY has the same meaning as that set forth in Section 2(a)(36) of the
Act. It includes such things as stocks, SPDRs and municipal bonds. It does
not include securities issued by the U.S. Government or its agencies,
bankers' acceptances, bank certificates of deposit, commercial paper, high
quality short-term debt instruments, including repurchase agreements and
shares of registered open-end mutual funds.
SECURITY UNIVERSE means every Security then currently included in the
official lists of securities held by a Client or appropriate for Client
investment consideration that are compiled by Pilgrim Baxter's investment
team.
III. RESTRICTIONS ON ACCESS PERSONS
Client Relations:
o DO NOT DEFRAUD, MISLEAD OR MANIPULATE ANY CLIENT IN CONNECTION WITH
THE PURCHASE OR SALE OF A SECURITY.
Access Persons are prohibited from directly or indirectly using any
act, device, scheme, artifice, practice or course of conduct to
defraud, mislead or manipulate any Client in connection with the
Purchase or Sale of a Security. Access Persons are also prohibited
from making any untrue statement of material fact to any Client and
from omitting to state a material fact necessary in order to make the
statement made to any Client, under the circumstances, not misleading.
Personal Transactions in a Security
o PRE-CLEAR EVERY PURCHASE OR SALE OF BENEFICIAL OWNERSHIP IN A SECURITY
WITH THE REVIEW OFFICER.
Access Persons must pre-clear every Purchase or Sale of Beneficial
Ownership in a Security with the Review Officer. There are 4
exceptions to this restriction. See Section IV of the Code for more
information, including the 4 exceptions to this restriction.
o DO NOT ACQUIRE BENEFICIAL OWNERSHIP OF A SECURITY AS PART OF AN
INITIAL PUBLIC OFFERING.
Access Persons are prohibited from directly or indirectly acquiring
Beneficial Ownership in a Security as part of an Initial Public
Offering by an issuer.
o DO NOT PROFIT FROM THE PURCHASE AND SALE OR SALE AND PURCHASE OF
BENEFICIAL OWNERSHIP IN THE SAME SECURITY WITHIN A 60 CALENDAR DAY
PERIOD.
Access Persons are prohibited from profiting from the Purchase and
Sale or Sale and Purchase of Beneficial Ownership in the same Security
within a 60 calendar day period.
This restriction does not apply to the exercise or expiration of an
option over which the Access Person has no discretion.
As requested by an Access Person, the Review Officer may, in his
discretion, grant other exceptions to this restriction on a
case-by-case basis.
Personal Transactions in a Limited Offering
o PRE-CLEAR EVERY PURCHASE OF SALE OF BENEFICIAL OWNERSHIP IN A LIMITED
OFFERING WITH THE LIMITED OFFERING REVIEW COMMITTEE.
Access Persons must pre-clear every Purchase or Sale of Beneficial
Ownership in a Limited Offering with the Limited Offering Review
Committee. See Section IV of the Code for more information.
Positions with a Company, Partnership or other Entity
o DO NOT ACCEPT ANY POSITION WITH ANY COMPANY, PARTNERSHIP OR OTHER
ENTITY UNTIL APPROVED BY THE REVIEW OFFICER.
Access Persons shall not accept a position as a director, trustee,
general partner or officer of a public or private company or
partnership until the Review Officer approves accepting the position.
In general, the Review Officer will approve the acceptance of these
positions if they are consistent with Client interests.
Gifts
o DO NOT ACCEPT ANY GIFT WORTH MORE THAN $100 FROM ANY PERSON OR ENTITY
DOING BUSINESS WITH PILGRIM BAXTER UNTIL APPROVED BY THE REVIEW
OFFICER.
Access Persons are prohibited from accepting any gift, favor, gratuity
or other item ("Gift") with a fair market value greater than $100 from
any person or entity doing business with Pilgrim Baxter until the
Review Officer approves the Gift.
A Gift does not include occasional participation in lunches, dinners,
cocktail parties, sporting activities or similar gatherings conducted
for business purposes.
o DO NOT ACCEPT OR CONSIDER ANY GIFT WHEN EXERCISING FIDUCIARY DUTIES ON
BEHALF OF A CLIENT.
Access Persons are prohibited from accepting any Gift, allowing any
member of their family to accept any Gift, and considering any Gift
already received by them or their family when exercising their
fiduciary duties on behalf of a Client.
IV. PROCEDURES FOR PRE-CLEARING PERSONAL TRANSACTIONS
Purchase or Sale of Beneficial Ownership in a Security
o As stated in Section II of this Code, Access Persons must pre-clear
every Purchase or Sale of Beneficial Ownership in a Security with the
Review Officer.
o This means that Access Persons must obtain prior written approval from
the Review Officer before effecting any Purchase or Sale of a
Security.
o Exceptions: This pre-clearance/approval process does not apply to the
following:
(a) Purchase or Sale that is non-volitional on the part of the Access
Person, including a purchase or sale upon the exercise of puts or
calls written by the Access Person and sales from a margin
account, pursuant to a bona fide margin call;
(b) Purchase that is part of an automatic dividend reinvestment plan;
(c) Purchase effected upon the exercise of rights issued by an issuer
pro rata to all holders of the Security, to the extent such
rights were acquired from the issuer and sales of such rights so
acquired; and
(d) An acquisition of a Security through a gift or bequest
o Pre-Clearance requests for the Purchase or Sale of a Security must be
submitted on a Pre-Authorization Personal Securities Transaction form
located at s:\common\code\PBA Reports\Codeauth1.
o The Review Officer will notify Access Persons whether their
pre-clearance request is approved or denied.
o Pre-Clearance approval by the Review Officer is valid for only two (2)
business days. Any Purchase or Sale of a Security not completed within
this period must be pre-cleared again before effected.
o If the Security is not currently in the Security Universe, the Review
Officer will consult with the Chief Investment Officer to determine if
the Security should be included in the Security Universe, or in his
absence that individual designated to make such determination.
o The Review Officer may approve the Purchase or Sale of a Security
which appears upon reasonable inquiry and investigation to present no
reasonable likelihood of harm to any Client and with respect to a
Client that is a registered investment company, is in accordance with
Rule 17j-1 under the Act.
Note: These transactions would normally include (a) the Purchase or
Sale of a Security not in the Security Universe and (b) the Purchase
or Sale of up to 1,000 shares of a Security in the Security Universe
if (i) the issuer has a market capitalization of over $1 billion and
(ii) that Security is not then currently on the trading blotter.
o The Review Officer reports every Purchase and Sale of a Security in
the Security Universe by an Access Person to the Board of Directors of
the PBHG Family of Funds.
Purchase or Sale of Beneficial Ownership in a Limited Offering
o As stated in Section III of this Code, Access Persons must pre-clear
every Purchase or Sale of Beneficial Ownership in a Limited Offering
with the Limited Offering Review Committee.
o This means that Access Persons must obtain prior written approval from
the Limited Offering Review Committee before effecting any Purchase or
Sale of Beneficial Ownership in a Limited Offering.
o This pre-clearance/approval process is governed by the Pre-Clearance
Procedures and Conditions for Limited Offerings, which are attached to
this Code as Exhibit A.
Note: These Pre-Clearance Procedures and Conditions also impose
additional restrictions on an Access Person after a Limited Offering
has been acquired.
o Access Persons must submit a Certificate of Representation with their
pre-clearance request. This Certificate is located at
s:\common\code\PBA Reports\Limited Offering Pre-auth.
V. REPORTING AND CERTIFICATION REQUIREMENTS FOR ACCESS PERSONS
o SUBMIT DUPLICATE SECURITY TRADE CONFIRMATIONS AND ACCOUNT STATEMENTS
TO THE REVIEW OFFICER.
Access Persons must direct each broker, dealer and bank that places a
Purchase or Sale of a Security on behalf of the Access Person to send
a duplicate copy of the trade confirmation to the Review Officer.
Access Persons also must direct each broker, dealer and bank at which
a Security is held in an account for the direct or indirect benefit of
the Access Person to send a duplicate account statement to the Review
Officer.
A sample letter instructing the broker, dealer or bank to send
duplicate trade confirmations and account statements may be obtained
from the Review Officer.
Access Persons may comply with the duplicate trade
confirmation/account statement requirement by directly providing the
Review Officer with a copy of every such trade confirmation and
account statement.
o SUBMIT A SIGNED AND DATED INITIAL HOLDINGS REPORT TO THE REVIEW
OFFICER NO LATER THAN 10 DAYS AFTER BECOMING AN ACCESS PERSON.
Access Persons must submit a signed and dated Initial Holdings Report
to the Review Officer no later than 10 days after becoming an Access
Person under this Code.
The Initial Holdings Report is located at The Initial Holding Report
must contain the following information, as of the date the individual
became an Access Person:
(a) the title, number of shares and principal amount of every
Security and Limited Offering in which the Access Person has
Beneficial Ownership;
(b) the account name and number of every Personal Account and the
name of the broker, dealer or bank where the Personal Account is
maintained and
(c) the date the Report is submitted to the Review Officer.
Notes: In providing this information, Access Persons may cross
reference any trade confirmations and account statements submitted to
the Review Officer.
If there is no Security, Limited Offering or Personal Account
information to report, check the boxes to that effect on the Initial
Holdings Report.
The Initial Holdings Report may contain a statement that the report
will not be construed as an admission by the Access Person that he has
any Beneficial Ownership in any Security or Limited Offering listed in
the report.
o SUBMIT A SIGNED AND DATED QUARTERLY TRANSACTION REPORT TO THE REVIEW
OFFICER NO LATER THAN 10 DAYS AFTER THE END OF EACH CALENDAR QUARTER.
Access Persons must submit a signed and dated Quarterly Transaction
Report to the Review Officer no later than 10 days after the end of
each calendar quarter.
The Quarterly Transaction Report is located at The Quarterly
Transaction Report must contain the following information:
(a) for every Purchase or Sale of Beneficial Ownership in a Security or
Limited Offering placed during the quarter:
(i) the date of the Purchase or Sale, the title, interest rate and
maturity date (if applicable), number of shares and principal
amount of the Security or Limited Offering;
(ii) the nature of the Purchase or Sale (i.e., purchase, sale or other
type of acquisition or disposition);
(iii)the price at which the Purchase or Sale of a Security or Limited
Offering was placed;
(iv) the name of the broker, dealer or bank with or through which the
Purchase or Sale was placed, including the account name and
number of the Personal Account and
(v) the date the Report is submitted to the Review Officer.
(b) For every Personal Account opened during the quarter:
(i) the name of the broker, dealer or bank with whom the Personal
Account was opened;
(ii) the account name and number of the Personal Account;
(iii) the date the Personal Account was opened and
(iv) the date the Report is submitted to the Review Officer.
Notes: In providing this information, Access Persons may cross
reference any trade confirmations and account statements submitted to
the Review Officer.
If there is no Security, Limited Offering or Personal Account
information to report, check the boxes to that effect on the Quarterly
Transaction Report.
The Quarterly Transaction Report may contain a statement that the
report will not be construed as an admission by the Access Person that
he has any Beneficial Ownership in any Security or Limited Offering
listed in the report.
o SUBMIT A SIGNED AND DATED ANNUAL HOLDINGS REPORT TO THE REVIEW OFFICER
NO LATER THAN 30 DAYS AFTER THE CALENDAR YEAR END.
Access Persons must submit a signed and dated Annual Holdings Report
to the Review Officer no later than 30 days after the calendar year
end.
The Annual Holdings Report is located at The Annual Holdings Report
must contain the following information, as of a date no more than 30
days before the report is submitted:
(a) the title, number of shares and principal amount of every
Security and Limited Offering in which the Access Person has
Beneficial Ownership;
(b) the account name and number of every Personal Account and the
name of any broker, dealer or bank where every Personal Account
is maintained and
(c) the date the Report is submitted to the Review Officer.
Notes: In providing this information, Access Persons may cross
reference any trade confirmations and account statements submitted to
the Review Officer.
If there is no Security, Limited Offering or Personal Account
information to report, check the boxes to that effect of the Annual
Holdings Report.
o SUBMIT A SIGNED AND DATED ANNUAL CERTIFICATION TO THE REVIEW OFFICER
NO LATER THAN 30 DAYS AFTER THE CALENDAR YEAR-END.
Access Persons must submit a signed and dated Annual Certification to
the Review Officer no later than 30 days after the calendar year end.
The Annual Certification is included as part of the Annual Holdings
Report which is located at s:\common\code\PBA Reports\Codeannl.
In the Annual Certification, Access Persons must certify that they: (a)
have read and understand this Code; (b) are subject to this Code; (c) will
comply with this Code during the upcoming year; and (d) have complied with all
the Code reporting requirements to which they were subject during the past year.
o IMMEDIATELY REPORT ANY BENEFICIAL OWNERSHIP OF MORE THAN 1/2 OF 1% OF
AN ENTITY'S OUTSTANDING SHARES to THE REVIEW OFFICER.
Access Persons whose Beneficial Ownership in an entity becomes more
than 1/2 of 1% of that entity's outstanding shares (whether
publicly-traded or not) immediately report the following to the Review
Officer: (a) the name of the entity; (b) the total number of shares in
which the Access Person has direct Beneficial Ownership and (c) the
total number of shares in which the Access Person has indirect
Beneficial Ownership.
VI. REVIEW AND ENFORCEMENT PROCEDURES
o The Review Officer maintains a list of all Access Persons subject to
the reporting requirements of Section V and notifies all Access
Persons of their specific reporting requirements.
o The Review Officer reviews every trade confirmation, account statement
and report submitted by Access Persons pursuant to Section V.
o If the Review Officer determines that an Access Person may have
violated this Code, he may request the Access Person to submit
additional information. The Review Officer's determination and all
additional information provided by the Access Person are then
submitted to a senior officer of Pilgrim Baxter for further review.
o A senior officer of Pilgrim Baxter reviews every trade confirmation,
account statement and report submitted by the Review Officer pursuant
to Section V and determines whether the Review Officer may have
violated this Code.
o Access Persons who violate this Code may be subject to sanctions,
including one or more of the following:
(a) a letter of censure
(b) suspension or termination of employment
(c) a fine
(d) restrictions on future personal transactions in a Security or
Limited Offering
(e) reversal of the Purchase or Sale
(f) referral to regulatory or law enforcement agencies
(g) disgorgement of profits
o The following factors may be considered in determining the
appropriateness of any sanction:
(a) harm to any Client
(b) frequency of occurrence
(c) degree of conflict with Client interests
(d) evidence of willful or reckless disregard of the Code
requirements (e) honest and timely cooperation from the Access
Person
VII. RECORDS MAINTAINED BY PILGRIM BAXTER
In accordance with Rule 17j-1(f), Pilgrim Baxter maintains the
following records in an easily accessible place and makes them
available for examination by the Securities and Exchange Commission:
o A copy of every Pilgrim Baxter Code of Ethics in effect during
the past six years.
o A record of every Pilgrim Baxter Code of Ethics violation that
occurred during the last six years and a record of any action
taken as a result of that violation.
o A copy of every trade confirmation, account statement and report
submitted by Access Persons under Section V during the past six
years.
o A record of every person who is, or within the last six years has
been, an Access Person under this Code.
o A record of every person who is, or within the last six years has
been a Review Officer and his/her designee.
o Effective February 1, 2000, a record of every person who is, or
within the last six years has been, a member of the Limited
Offering Review Committee.
o A copy of every written report Pilgrim Baxter has furnished as
investment adviser or sub-adviser in accordance with Rule
17j-1(c)(2)(ii) to the board of directors of an investment
company registered under the Investment Company Act of 1940
during the last six years.
o Effective February 1, 2000, a record of any decision by the
Limited Offering Review Committee, and the reasons supporting the
decision, to approve the acquisition or sale of a Limited
Offering by an Access Person. This record will be kept for five
years after the end of the fiscal year in which the approval is
granted.
VIII. MISCELLANEOUS
o Pilgrim Baxter will use its best efforts to ensure that all
information provided by an Access Person pursuant to this Code
will be treated as personal and confidential. However, every
Access Person should know that all such information will be
available for inspection by appropriate regulatory agencies and
other parties within and outside of Pilgrim Baxter as are
necessary to evaluate compliance with or sanctions under this
Code.
o Upon request, the Review Officer will prepare a report to Pilgrim
Baxter's Board of Directors discussing the operation of this Code
and whether any changes or modifications to the Code are
necessary.
o Upon request, the Review Officer will certify that Pilgrim Baxter
has adopted procedures reasonably necessary to prevent its Access
Persons form violating this Code.
EXHIBIT A
PRE-CLEARANCE
PROCEDURES AND CONDITIONS
FOR LIMITED OFFERINGS
These Procedures and Conditions govern the Purchase or Sale of Beneficial
Ownership in a Limited Offering by an Access Person, as set forth in Section III
of the Code of Ethics. Capitalized terms not defined in these Procedures and
Conditions have the same definition as they do in the Code of Ethics.
1. PRE-CLEARANCE REQUIRED. As required by the Code of Ethics, every Access
Person must obtain prior written approval from the Limited Offering Review
Committee before directly or indirectly acquiring or selling any Beneficial
Ownership in a Limited Offering.
2. LIMITED OFFERING REVIEW COMMITTEE.
a. The Limited Offering Pre-Clearance Review Committee (the "Review
Committee") consists of the following persons: the Chairman, the CIO,
the Chairperson of the Management Committee and at least one of the
following persons: the Chief Compliance Officer or the General
Counsel.
b. If a member of the Review Committee is the Access Person seeking
pre-clearance approval, that member will recuse him/herself from the
Review Committee and will only be considered an Access Person for
purposes of the pre-clearance approval process.
3. PRE-CLEARANCE APPROVAL PROCESS.
a. The Review Committee reviews each pre-clearance approval request on a
case-by-case basis.
b. Before pre-clearance approval may be granted, among other things,
(i) the Access Person and the Review Committee must determine that
the Limited Offering is not appropriate for any Client;
(ii) the Access Person must demonstrate he/she would be a passive
investor and would own less than 5% of the entity after acquiring
the Limited Offering; and
(iii)the Review Committee must determine that no Client owns a
Related Security.
4. CONFLICT OF INTEREST POTENTIAL.
A. IN GENERAL. Pilgrim Baxter recognizes that the acquisition of Beneficial
Ownership in a Limited Offering by an Access Person may create a conflict
of interest. Therefore, in determining whether to approve an Access
Person's request, the Review Committee considers, among other things, the
likelihood that a conflict of interest may arise, whether Client interests
may be protected and whether that conflict may cause Pilgrim Baxter to
violate its fiduciary duties to a Client.
B. BROKERAGE ALLOCATION. Pilgrim Baxter recognizes that the source of the
opportunity to acquire a Limited Offering may present a potential conflict
of interest. Pilgrim Baxter believes that inappropriate quid pro quo
arrangements are unlikely to arise because its brokerage allocation is the
exclusive province of Pilgrim Baxter's trading department. Nonetheless,
before granting pre-clearance approval to an Access Person, the Review
Committee must determine that there is no reasonable expectation that a
material conflict of interest will develop if the opportunity for the
Access Person to acquire a Limited Offering came from a broker with whom
Pilgrim Baxter does business. The CEO or his designee will periodically
monitor Pilgrim Baxter's brokerage allocation to assure that (i) no
material conflict actually exists and (ii) that no appearance of
impropriety exists in connection with Pilgrim Baxter's brokerage allocation
and past sources of Limited Offering investment opportunities. In addition,
Pilgrim Baxter's traders are prohibited from directly or indirectly
acquiring beneficial ownership in a Limited Offering sourced from or
through a broker with whom Pilgrim Baxter does business or with whom
Pilgrim Baxter has a reasonable likelihood of doing business in the future.
5. LIMITED OFFERING MEMORANDUM. The Access Person must supply the Review
Committee with a copy of the Offering Memorandum for the Limited Offering
at the time the Access Person submits his/her pre-clearance approval
request.
6. CERTIFICATE OF REPRESENTATION BY ACCESS PERSON. The Access Person must
execute a certificate of representation which certifies: (a) his/her
obligations under the Code of Ethics; (b) the restrictions imposed upon
him/her in connection with an acquisition of Beneficial Ownership in a
Limited Offering and (c) the accuracy of any statements or representations
made by him/her in connection with the pre-clearance approval process.
7. RESTRICTIONS AFTER ACQUIRING A LIMITED OFFERING.
a. The Access Person may not be a selling shareholder in the Initial Public
Offering or any subsequent unwritten offering by the entity.
b. Access Person must hold the Limited Offering for the longer of (i) the
holding period which would be applicable pursuant to Rule 144 or (ii) 12
months. However, if no Client participates in the Initial Public Offering
of the entity and the entity is not in the Security Universe, the Access
Person may petition the Review Committee for relief from this mandatory
holding period.
8. RESTRICTED ENTITIES. The Review Committee will establish a list of entities
in which Access Persons have acquired a Limited Offering. This list will
periodically be compared to Pilgrim Baxter's trading records.
