STEINROE VARIABLE INVESTMENT TRUST
SUPPLEMENT DATED OCTOBER 16, 1995
TO
PROSPECTUS DATED MAY 1, 1995
- -------------------------------------------------------------------------------
Reference is made to "THE TRUST -- Application For Exemptive Order Permitting
Certain Fund Substitutions" on page 3 of the Prospectus. The substitutions of
fund shares described therein became effective as of the close of business on
October 13, 1995 in accordance with an exemptive order granted by the Securities
and Exchange Commission. As a result, MAF and MIF have ceased to exist as
separate Funds.
- -------------------------------------------------------------------------------
Client Service Hotline
800-367-3653 (press 3)
Distributed by:
Keyport Financial Services Corp.
125 High Street
Boston, Massachusetts 02110
<PAGE>
PROSPECTUSES
KEYPORT VARIABLE INVESTMENT TRUST
STEINROE VARIABLE INVESTMENT TRUST
MAY 1, 1995
<PAGE>
STEINROE VARIABLE INVESTMENT TRUST
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210
SteinRoe Variable Investment Trust (Trust) is an open-end, diversified
management investment company that currently includes seven separate Funds,
each with its own investment objective and policies. The seven Funds and
their investment objectives are:
Capital Appreciation Fund
(bullet) Capital growth by investing primarily in common stocks, convertible
securities, and other securities selected for prospective capital growth.
Managed Growth Stock Fund
(bullet) Long-term growth of capital through investment primarily in common
stocks.
Strategic Managed Assets Fund
(bullet) Maximum total investment return through aggressive investment in a
changing mix of securities. (This Fund is no longer being offered for new
sales.)
Managed Assets Fund
(bullet) High total investment return through investment in a changing mix of
securities.
Managed Income Fund
(bullet) High current income, with capital preservation and appreciation as
secondary objectives. (This Fund is no longer being offered for new sales.)
Mortgage Securities Income Fund
(bullet) Highest possible level of current income consistent with safety of
principal and maintenance of liquidity through investment primarily in
mortgage-backed securities.
Cash Income Fund
(bullet) High current income from short-term money market instruments while
emphasizing preservation of capital and maintaining excellent liquidity. (The
Cash Income Fund attempts to maintain its net asset value at $1.00 per share,
but there can be no assurance that it will be able to do so. An investment in
the Fund is neither insured nor guaranteed by the U.S. Government.)
There is no assurance that the objectives of the Funds will be realized.
Other Funds may be added or deleted from time to time.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This Prospectus contains information about the Funds that a prospective
investor should know before applying for certain variable annuity contracts
and variable life insurance policies offered by separate accounts of
insurance companies investing in the Trust. Please read it carefully and
retain it for future reference.
Additional facts about the Funds are included in a Statement of Additional
Information dated May 1, 1995, incorporated herein by reference, which has
been filed with the Securities and Exchange Commission. For a free copy write
to Keyport Financial Services Corp. at 125 High Street, Boston, Massachusetts
02110 or the broker-dealer offering the variable annuity contracts and
variable life insurance policies of Participating Insurance Companies (as
such term is defined in this Prospectus).
SHARES OF THE TRUST ARE AVAILABLE AND ARE BEING MARKETED EXCLUSIVELY AS A
POOLED FUNDING VEHICLE FOR VARIABLE ANNUITY CONTRACTS ("VA CONTRACTS") AND
VARIABLE LIFE INSURANCE POLICIES ("VLI POLICIES") OF KEYPORT LIFE INSURANCE
COMPANY AND OF KEYPORT AMERICA LIFE INSURANCE COMPANY, AND THE VA CONTRACTS
OF LIBERTY LIFE ASSURANCE COMPANY OF BOSTON AND, IN THE CASE OF THE CAPITAL
APPRECIATION FUND, ALSO OF TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY AND
FIRST TRANSAMERICA LIFE INSURANCE COMPANY. OTHER PARTICIPATING COMPANIES MAY
BE ADDED FROM TIME TO TIME.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE
APPROPRIATE VA CONTRACT OR VLI POLICIES OF PARTICIPATING INSURANCE COMPANIES.
BOTH PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
The date of this prospectus is May 1, 1995
1
<PAGE>
TABLE OF CONTENTS
Page
-------
The Trust 3
Financial Highlights 4
How the Funds Invest 11
Investment Techniques and Restrictions 14
Portfolio Turnover 15
How the Funds are Managed 15
Purchases and Redemptions 17
Investment Return 17
Net Asset Value 18
Taxes 18
Dividends and Distributions 19
Shareholder Communications 20
Organization and Description of Shares 20
Appendix A: Investment Techniques and Securities A-1
Appendix B: Description of Ratings B-1
2
<PAGE>
THE TRUST
The SteinRoe Variable Investment Trust (Trust) is an open-end, diversified
management investment company consisting of seven Funds with differing
investment objectives, policies and restrictions. Currently, the Trust
consists of Capital Appreciation Fund (CAF), Managed Growth Stock Fund
(MGSF), Strategic Managed Assets Fund (SMAF), Managed Assets Fund (MAF),
Managed Income Fund (MIF), Mortgage Securities Income Fund (MSIF), and Cash
Income Fund (CIF) (individually referred to as a Fund or by the initials
indicated or collectively as the Funds). The Trust issues shares of
beneficial interest in each Fund that represent interests in a separate
portfolio of securities and other assets. The Trust may add or delete Funds
from time to time. (SMAF and MIF are no longer being offered for new sales.
See "Application For Exemptive Order Permitting Certain Fund Substitutions"
below.)
The Trust is the funding vehicle for variable annuity contracts (VA
contracts) and variable life insurance policies (VLI policies) offered by the
separate accounts of life insurance companies (Participating Insurance
Companies). The shares of the Funds currently are sold only to Keyport Life
Insurance Company (Keyport), Keyport America Life Insurance Company (Keyport
America), Liberty Life Assurance Company of Boston (Liberty Life) and, in the
case of CAF, also to Transamerica Occidental Life Insurance Company and First
Transamerica Life Insurance Company.
The Participating Insurance Companies and their separate accounts are the
shareholders or investors (shareholders) of the Funds. Owners of VA contracts
and owners of VLI policies invest in sub-accounts of separate accounts of the
Participating Insurance Companies that, in turn, invest in the Funds.
The prospectuses issued by the Participating Insurance Company describe which
Funds are available to the separate accounts offering the VA contracts and
VLI policies. The Trust assumes no responsibility for those prospectuses.
However, the Board of Trustees of the Trust (Board) does monitor events to
identify any material conflicts that may arise between the interests of the
Participating Insurance Companies or between the interests of owners of VA
contracts and VLI policies. The Trust currently does not foresee any
disadvantages to the owners of VA contracts and VLI policies arising from the
fact that certain interests of the owners may differ. The Statement of
Additional Information contains additional information regarding such
differing interests and related risks.
Stein Roe & Farnham Incorporated (the Adviser) provides investment advisory
services to the Funds. The Adviser also provides administrative and transfer
agent services to the Funds. Keyport Financial Services Corp. (the
Underwriter) serves as the principal underwriter of the Trust with respect to
sales of shares to Keyport and to other Participating Insurance Companies
which are affiliates (Affiliated Participating Insurance Companies) of
Keyport or of Liberty Mutual Insurance Company (Liberty Mutual). As of the
date of this Prospectus, such affiliates are Keyport America and Liberty
Life. The Adviser, the Underwriter and Keyport are wholly owned indirect
subsidiaries of Liberty Financial Companies, Inc. (LFC). As of March 31,
1995, approximately 81.9% of the combined voting power of LFC's outstanding
voting stock was held, indirectly, by Liberty Mutual.
Application For Exemptive Order Permitting Certain Fund Substitutions
Keyport and certain of its affiliates have filed with the Securities and
Exchange Commission an application for an exemptive order permitting
substitution of (i) shares of MAF for shares of SMAF and (ii) shares of the
Colonial-Keyport Strategic Income Fund ("CKSIF") for the shares of MIF. CKSIF
is a series fund of the Keyport Variable Investment Trust ("KVIT"). KVIT also
is a funding vehicle for VA contracts and VLI policies of Affiliated
Participating Insurance Companies. Pending action on such application, shares
of SMAF and MIF are no longer being offered for new sales. However,
additional shares of such Funds continue to be issued prior to the effective
time of such substitutions in connection with reinvested distributions.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below present certain financial information for each Fund in the
Trust for the period beginning January 1, 1989 (for SMAF, April 25, 1989, and
for MIF, February 1, 1993) and ending December 31, 1994. The information has
been audited and reported on by the Trust's independent auditors, KPMG Peat
Marwick LLP. The report of KPMG Peat Marwick LLP for periods beginning on
January 1, 1990 appears in the Statement of Additional Information.
Capital Appreciation Fund
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1994 1993 1992 1991 1990 1989
------- -------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of period $ 16.53 $ 15.34 $ 15.32 $ 12.07 $ 14.79 $ 13.62
----- ------ ---- ---- ---- ------
Net investment income 0.06 0.03 -- 0.21 0.19 0.23
Net realized and unrealized gains (losses)
on investments 0.09 5.22 2.17 4.19 (1.53) 3.90
----- ------ ---- ---- ---- ------
Total from investment operations 0.15 5.25 2.17 4.40 (1.34) 4.13
----- ------ ---- ---- ---- ------
Less distributions:
Dividends from net investment income (0.07) (0.02) -- (0.15) (0.28) (0.22)
Distributions from net realized gains on
investments (1.87) (4.04) (2.15) (1.00) (1.10) (2.25)
Return of capital -- -- -- -- -- (0.49)
----- ------ ---- ---- ---- ------
Total distributions (1.94) (4.06) (2.15) (1.15) (1.38) (2.96)
----- ------ ---- ---- ---- ------
Net asset value, end of period $ 14.74 $ 16.53 $ 15.34 $ 15.32 $ 12.07 $ 14.79
===== ====== ==== ==== ==== ======
Total return:
Total investment return 1.19%(b) 35.68%(b) 14.48% 37.25% (8.91)% 30.84%
Ratios/supplemental data:
Net assets, end of period (000) $134,078 $96,544 $52,135 $41,179 $33,238 $32,176
Ratio of net expenses to average net assets 0.80%(a) 0.84%(a) 1.01% 1.03% 1.14% 1.08%
Ratio of net investment income to average
net assets 0.44%(b) 0.13%(b) (0.01)% 1.35% 1.43% 1.14%
Portfolio turnover ratio 144% 112% 85% 36% 121% 153%
</TABLE>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement from the Adviser and its affiliates, this ratio would have been
0.80% and 0.86% for the years ended December 31, 1994 and 1993, respectively.
(b) Computed giving effect to the expense limitation undertaking of the
Adviser and its affiliates.
4
<PAGE>
Managed Growth Stock Fund
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1994 1993 1992 1991 1990 1989
------ ------- ------ ------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of period $ 20.65 $ 20.10 $ 19.47 $ 13.44 $ 13.88 $ 10.75
---- ----- ---- ---- ------- --------
Net investment income 0.15 0.13 0.11 0.17 0.19 0.17
Net realized and unrealized gains (losses)
on investments (1.46) 0.86 1.18 6.25 (0.42) 3.19
---- ----- ---- ---- ------- --------
Total from investment operations (1.31) 0.99 1.29 6.42 (0.23) 3.36
---- ----- ---- ---- ------- --------
Less distributions:
Dividends from net investment income (0.17) (0.12) (0.10) (0.18) (0.21) (0.18)
Distributions from net realized gains on
investments (1.06) (0.32) (0.56) (0.21) -- --
Return of capital -- -- -- -- -- (0.05)
---- ----- ---- ---- ------- --------
Total distributions (1.23) (0.44) (0.66) (0.39) (0.21) (0.23)
---- ----- ---- ---- ------- --------
Net asset value, end of period $ 18.11 $ 20.65 $ 20.10 $ 19.47 $ 13.44 $ 13.88
==== ===== ==== ==== ======= ========
Total return:
Total investment return (6.35)% 4.97% 6.63% 48.03% (1.65)%(b) 31.30%(b)
Ratios/supplemental data:
Net assets, end of period (000) $98,733 $111,561 $64,402 $38,481 $17,383 $13,257
Ratio of net expenses to average net assets 0.77% 0.83% 0.97% 1.15% 1.50%(a) 1.60%(a)
Ratio of net investment income to average
net assets 0.75% 0.77% 0.63% 1.15% 1.51%(b) 1.35%(b)
Portfolio turnover ratio 72% 77% 20% 40% 39% 77%
</TABLE>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement from the Adviser and its affiliates, these ratios would have
been 1.54% and 1.63% for the years ended December 31, 1990 and 1989,
respectively. (b) Computed giving effect to the expense limitation
undertaking of the Adviser and its affiliates.
5
<PAGE>
Strategic Managed Assets Fund
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1994 1993 1992 1991 1990 1989***
--------- ------- ------ -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of period $ 6.16 $ 6.29 $ 6.45 $ 5.40 $ 5.98 $ 5.00
------- ----- ---- ------ ------- ----------
Net investment income 0.24 0.12 0.05 0.05 0.06 0.03
Net realized and unrealized gains (losses)
on investments (0.24) -- 0.72 1.96 (0.57) 1.04
------- ----- ---- ------ ------- ----------
Total from investment operations 0.00 0.12 0.77 2.01 (0.51) 1.07
------- ----- ---- ------ ------- ----------
Less distributions:
Dividends from net investment income (0.24) (0.12) (0.05) (0.05) (0.07) (0.02)
Distributions from net realized gains on
investments -- (0.13) (0.88) (0.91) -- (0.05)
Return of capital (0.09) -- -- -- -- (0.02)
------- ----- ---- ------ ------- ----------
Total distributions (0.33) (0.25) (0.93) (0.96) (0.07) (0.09)
------- ----- ---- ------ ------- ----------
Net asset value, end of period $ 5.83 $ 6.16 $ 6.29 $ 6.45 $ 5.40 $ 5.98
======= ===== ==== ====== ======= ==========
Total return:
Total investment return (0.03)%(b) 1.93%(b) 13.03% 38.50%(b) (8.52)%(b) 21.43%**(b)
Ratios/supplemental data:
Net assets, end of period (000) $59,147 $57,090 $38,131 $17,912 $10,498 $7,205
Ratio of net expenses to average net assets 0.85%(a) 0.92%(a) 1.24% 1.50%(a) 1.50%(a) 1.50%*(a)
Ratio of net investment income to average
net assets 3.77%(b) 1.80%(b) 1.15% 0.87%(b) 1.05%(b) 0.71%*(b)
Portfolio turnover ratio 204% 273% 297% 233% 61% 36%**
</TABLE>
* Annualized
** Not annualized
*** For the period from the start of business, April 25, 1989, to December 31,
1989.
(a) If the Fund had paid all of its expenses and there had been no
reimbursement from the Adviser and its affiliates, these ratios would have
been 0.88%, 0.93%, 1.60%, 2.12% and 1.71% for the years or period ended
December 31, 1994, 1993, 1991, 1990 and 1989, respectively.
(b) Computed giving effect to the expense limitation undertaking of the
Adviser and its affiliates.
6
<PAGE>
Managed Assets Fund
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1994 1993 1992 1991 1990 1989
------- ------- ------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of period $ 13.11 $ 12.54 $ 12.54 $ 10.26 $ 11.38 $ 10.25
----- ----- ----- ---- ---- ------
Net investment income 0.51 0.38 0.45 0.52 0.62 0.53
Net realized and unrealized gains (losses)
on investments (0.93) 0.78 0.49 2.31 (0.70) 1.75
----- ----- ----- ---- ---- ------
Total from investment operations (0.42) 1.16 0.94 2.83 (0.08) 2.28
----- ----- ----- ---- ---- ------
Less distributions:
Dividends from net investment income (0.51) (0.36) (0.46) (0.44) (0.74) (0.52)
Distributions from net realized gains on
investments -- (0.23) (0.48) (0.11) (0.30) (0.46)
Return of capital -- -- -- -- -- (0.17)
----- ----- ----- ---- ---- ------
Total distributions (0.51) (0.59) (0.94) (0.55) (1.04) (1.15)
----- ----- ----- ---- ---- ------
Net asset value, end of period $ 12.18 $ 13.11 $ 12.54 $ 12.54 $ 10.26 $ 11.38
===== ===== ===== ==== ==== ======
Total return:
Total investment return (3.19)% 9.29% 7.53% 27.93% (0.69)% 22.38%
Ratios/supplemental data:
Net assets, end of period (000) $196,278 $197,132 $113,572 $82,710 $58,368 $59,068
Ratio of net expenses to average net assets 0.68% 0.69% 0.66% 0.71% 0.75% 0.78%
Ratio of net investment income to average
net assets 4.01% 3.55% 3.98% 4.57% 5.30% 4.64%
Portfolio turnover ratio 71% 47% 70% 82% 111% 109%
</TABLE>
7
<PAGE>
Managed Income Fund
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1994 1993***
------ --------
<S> <C> <C>
Per share operating performance:
Net asset value, beginning of period $ 10.24 $ 10.00
---- ------
Net investment income 0.78 0.52
Net realized and unrealized gains on investments (1.22) 0.30
---- ------
Total from investment operations (0.44) 0.82
---- ------
Less distributions:
Dividends from net investment income (0.77) (0.54)
Distributions from net realized gains on investments -- (0.04)
---- ------
Total distributions (0.77) (0.58)
---- ------
Net asset value, end of period $ 9.03 $ 10.24
==== ======
Total return:
Total investment return (b) (4.40)% 8.31%**
Ratios/supplemental data:
Net assets, end of period (000) $42,448 $53,139
Ratio of net expenses to average net assets (a) 0.70% 0.71%*
Ratio of net investment income to average net assets
(b) 7.16% 6.32%*
Portfolio turnover ratio 80% 115%**
</TABLE>
* Annualized
** Not Annualized
*** For the period from the commencement of operations, February 1, 1993 to
December 31, 1993.
(a) If the Fund had paid all of its expenses and there had been no
reimbursement from the Adviser and its affiliates, this ratio would have been
0.78% and 0.85% (annualized) for the year or period ended December 31, 1994
and 1993, respectively.
(b) Computed giving effect to the expense limitation undertaking of the
Adviser and its affiliates.
8
<PAGE>
Mortgage Securities Income Fund
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1994 1993 1992 1991 1990 1989
--------- ------- ------ ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of period $ 10.17 $ 10.26 $ 10.42 $ 9.74 $ 9.69 $ 9.39
------- ----- ---- ---- ----- --------
Net investment income 0.73 0.65 0.63 0.67 0.80 0.76
Net realized and unrealized gains (losses)
on investments (0.89) (0.01) (0.01) 0.73 0.08 0.45
------- ----- ---- ---- ----- --------
Total from investment operations (0.16) 0.64 0.62 1.40 0.88 1.21
------- ----- ---- ---- ----- --------
Less distributions:
Dividends from net investment income (0.73) (0.65) (0.62) (0.66) (0.83) (0.76)
Distributions from net realized gains on
investments -- (0.08) (0.16) (0.06) -- --
Return of capital -- -- -- -- -- (0.15)
------- ----- ---- ---- ----- --------
Total distributions (0.73) (0.73) (0.78) (0.72) (0.83) (0.91)
------- ----- ---- ---- ----- --------
Net asset value, end of period $ 9.28 $ 10.17 $ 10.26 $ 10.42 $ 9.74 $ 9.69
======= ===== ==== ==== ===== ========
Total return:
Total investment return (1.57)%(b) 6.26%(b) 5.95% 14.48% 9.10%(b) 12.84%(b)
Ratios/supplemental data:
Net assets, end of period (000) $72,420 $91,195 $67,353 $48,559 $29,992 $21,067
Ratio of net expenses to average net assets 0.70%(a) 0.76%(a) 0.90% 0.99% 1.00%(a) 1.10%(a)
Ratio of net investment income to average
net assets 6.71%(b) 6.64%(b) 6.72% 7.26% 8.09%(b) 7.85%(b)
Portfolio turnover ratio 241% 187% 169% 133% 81% 101%
</TABLE>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement from the Adviser and its affiliates, this ratio would have
been 0.71%, 0.76%, 1.22% and 1.25% for the years ended December 31, 1994,
1993, 1990 and 1989, respectively.
(b) Computed giving effect to the expense limitation undertaking of the
Adviser and its affiliates.
9
<PAGE>
Cash Income Fund
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1994 1993 1992 1991 1990 1989
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---- ---- ---- ---- ---- ------
Net investment income 0.037 0.027 0.034 0.056 0.076 0.087
---- ---- ---- ---- ---- ------
Less distributions:
Dividends from net investment income (0.037) (0.027) (0.034) (0.056) (0.076) (0.087)
---- ---- ---- ---- ---- ------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
==== ==== ==== ==== ==== ======
Total return:
Total investment return 3.81% 2.70% 3.48% 5.79% 7.89% 9.07%
Ratios/supplemental data:
Net assets, end of period (000) $78,698 $83,049 $70,821 $77,676 $94,462 $94,313
Ratio of net expenses to average net assets 0.62% 0.65% 0.67% 0.67% 0.66% 0.66%
Ratio of net investment income to average
net assets 3.73% 2.68% 3.42% 5.67% 7.61% 8.68%
</TABLE>
10
<PAGE>
Further information about the performance of the Funds is contained in the
Trust's annual report to shareholders for the fiscal year ended December 31,
1994, which may be obtained without charge from the Underwriter.
HOW THE FUNDS INVEST
All investments, including mutual funds, have risks, and no one mutual fund
is suitable for all investors. No one Fund by itself constitutes a complete
investment program. The net asset value of the shares of the Funds, other
than Cash Income Fund, will vary with market conditions and there can be no
guarantee that any Fund will achieve its investment objective. Although Cash
Income Fund attempts to stabilize its net asset value at $1.00 per share,
there can be no assurance that it will be able to do so.
Each Fund and its investment objectives and policies are described below.
Certain additional investment policies and techniques common to some or all
of the Funds are described under "Investment Techniques and Restrictions"
below. The investment objectives are fundamental and may be changed only by a
vote of the Board and of the shareholders.
More information about the portfolio securities in which the Funds invest,
including certain risks and investment limitations, is provided in Appendix A
to this Prospectus and Appendix A in the Statement of Additional Information.
Appendix B in this Prospectus provides a description of bond ratings.
Capital Appreciation Fund
Capital Appreciation Fund seeks to provide shareholders with growth of
capital. It pursues this objective by investing primarily in common stocks,
securities convertible into common stocks and securities having common stock
characteristics, including rights and warrants, selected primarily for
prospective capital growth.
Investments in newer and smaller companies (those having a market
capitalization of less than $500,000,000), particularly those believed to be
in the earlier phases of growth, are emphasized. The Fund may also invest in
securities of larger, more established companies that the Adviser believes
possess some of the same characteristics as smaller companies. While income
is not an objective, securities appearing to offer attractive possibilities
for future growth of income may be included in the Fund's portfolio.
Investor Considerations. The type of securities in which Capital Appreciation
Fund invests may be expected to experience wide fluctuations in price in both
rising and declining markets. The Fund may be expected to experience a
greater degree of market and financial risk than other equity portfolios. The
Fund's portfolio may include securities that are not widely traded or new
issues of securities.
Managed Growth Stock Fund
Managed Growth Stock Fund seeks long-term growth of capital. It is expected
that under ordinary circumstances at least 65% of the total assets of the
Fund will be invested in the common stock of growth companies, including
foreign companies, whose earnings are expected to increase more rapidly than
most public companies. A growth company is one that the Adviser believes has
demonstrated an ability to increase its earnings at an above-average rate
with reasonable consistency and that has given indications of being able to
continue this pattern in the future. In general, these companies should: be
well managed; employ sound financial and accounting policies; demonstrate
effective research; have successful product development and marketing;
provide efficient service; possess pricing flexibility; and earn an above
average return on investment. Up to 25% of the Fund's investments in growth
companies may be in small capitalization companies with total common stock
outstanding of less than $500,000,000.
Up to 35% of the total assets of the Fund may be invested in debt securities
and securities convertible into common stock.
Investor Considerations. Investors should be aware of the possibility that
during periods of adverse economic and market conditions, the per share value
of the Fund may not move in relation to the favorable long-term earnings
trend of its portfolio companies.
Strategic Managed Assets Fund
This Fund currently is not being offered for new sales. See "THE
TRUST--Application For Exemptive Order Permitting Certain Fund
Substitutions."
Strategic Managed Assets Fund seeks to provide maximum total investment
return. To do this, the Fund aggressively adjusts its overall exposure to
risk by shifting its investment emphasis among investments providing
alternatives for capital growth, capital stability and income as market and
economic trends change. This flexible total investment return approach is a
fully-managed investment strategy that makes use of all types and grades of
equity, debt, convertible and money market securities. The Fund seeks to
achieve below-average volatility in a falling market and above-average
volatility in a rising market.
Strategic Managed Assets Fund may invest all or a part of the equity portion
of its portfolio in equity securities of newer and smaller companies, of
companies that are speculative with respect to financial strength and
stability of earnings and dividends, and of well-seasoned companies of any
size. The Fund
11
<PAGE>
may also invest all or a part of the debt portion of its portfolio in
securities rated below investment grade and in unrated securities. There is
no minimum rating requirement on the Fund's investments in debt securities,
and accordingly a part of the debt portion of its portfolio may be invested
in securities which are in default and as to which payment of interest and/or
repayment of principal is in arrears.
Investor Considerations. Strategic Managed Assets Fund will to varying
degrees (depending on its components at any point in time) reflect all of the
risks discussed with respect to the various types of investments made by the
other Funds. Securities rated below investment grade are considered
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal according to the terms of the obligation and,
therefore, carry greater investment risk, including the possibility of issuer
default and bankruptcy.
Although Strategic Managed Assets Fund seeks to reduce both financial and
market risks associated with any one investment medium, the performance of
the Fund will depend significantly on the additional factors of timing and
mix and the ability of the Adviser to judge and react to changing market
conditions. In addition, because the Fund is designed to attempt to provide a
maximum total investment return, it can be expected to make asset allocation
shifts more aggressively (see "PORTFOLIO TURNOVER") and may experience
greater volatility and risk than Managed Assets Fund.
Managed Assets Fund
Managed Assets Fund seeks to provide a high total investment return. To do
this, the Fund adjusts its overall exposure to risk by shifting its
investment emphasis among investments providing alternatives for capital
growth, capital stability and income as market and economic trends change.
This flexible, total investment return approach is a fully managed investment
strategy that makes use of equity, debt, convertible and money market
securities. The equity portion of the Fund's portfolio normally will
emphasize large capitalization (over $1 billion) stocks which appear to the
Adviser to be under-valued on a price-earnings ratio basis; the debt portion
of the portfolio is expected to be invested in investment grade debt
securities; and the money market portion of the portfolio is expected to be
invested in securities similar to those permitted by the policies of Cash
Income Fund.
Managed Assets Fund expects that over longer periods a larger portion of the
Fund's portfolio will consist of equity securities. The Fund may invest up to
25% of the equity portion of its portfolio in equity securities that are
speculative with respect to financial strength and stability of earnings and
dividends.
Investor Considerations. Although Managed Assets Fund seeks to reduce both
financial and market risks associated with any one investment medium,
performance of the Fund will depend significantly on the additional factors
of timing and mix and the ability of the Adviser to judge and react to
changing market conditions. (See "PORTFOLIO TURNOVER.") In making asset
allocation decisions, the Fund does not attempt to make short-term market
timing shifts.
Managed Income Fund
This Fund currently is not being offered for new sales. See "THE
TRUST--Application For Exemptive Order Permitting Certain Fund
Substitutions."
The Managed Income Fund seeks a high level of current income. Capital
preservation and appreciation are secondary objectives. The Fund invests in
debt and convertible dept securities rated investment grade; obligations of
the U.S. government or its agencies; obligations of U.S. banks that belong to
the Federal Reserve System, not to exceed 25% of the Fund's total assets;
preferred stocks and convertible preferred stocks rated investment grade;
highest-grade commercial debt repurchase agreements; and bank deposits, not
to exceed 10% of total assets. In addition, the Fund may invest up to 20% of
its assets in issues rated as low as CCC to increase the Fund's yield. The
Fund may invest in such lower quality debt securities if the Adviser believes
the financial condition of the issuers or the protection offered to their
particular obligations is stronger than is indicated by the lower rating or
otherwise.
Under normal market conditions, the Fund will invest at least 65% of the
value of its total assets (taken at market value) in convertible and
non-convertible bonds and debentures of corporate issuers. Such securities
may be convertible into equity securities of the issuer or accompanied by the
right to acquire such equity securities evidenced by warrants attached to the
security or acquired as part of a unit with the security. Equity securities
acquired by conversion or exercise of such a right may be retained by the
Fund for a sufficient time to permit orderly disposition thereof or for the
established long-term holding periods for Federal income tax purposes.
The Fund may invest up to 35% of its total assets in debt securities other
than convertible and non-convertible corporate bonds and debentures,
marketable preferred and common stocks, and foreign and municipal securities
that the Adviser considers likely to yield relatively high income in relation
to costs, and rights to acquire such securities. (Municipal securities are
securities issued by or on behalf of state and local govern-
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ments, the interest on which is generally exempt from Federal income tax.)
Any assets not otherwise invested may be invested in money market
instruments.
Some issuers of debt securities choose not to have their securities rated by
a rating service and the Fund may invest in unrated securities that the
Adviser believes are suitable for investment consistent with the Fund's
objectives.
Special Risk Factors and Investor Considerations. Investment in medium- or
lower-quality debt securities involves greater investment risk, including the
possibility of issuer default or bankruptcy. An economic downturn could
severely disrupt this market and adversely effect the value of outstanding
bonds and the ability of the issuers to repay principal and interest. In
addition, lower-quality bonds are less sensitive to interest rate changes
than higher-quality instruments and generally are more sensitive to adverse
economic changes or individual corporate developments. During a period of
adverse economic changes, including a period of rising interest rates,
issuers of such bonds may experience difficulty in servicing their principal
and interest payment obligations.
Achievement of the Fund's investment objective will be more dependent on the
Adviser's credit analysis than would be the case if the Fund were investing
in higher-quality debt securities. Since the ratings of rating services
(which evaluate the safety of principal and interest payments, not market
risks) are used only as preliminary indications of investment quality, the
Adviser employs its own credit research and analysis from which it has
developed a credit rating system based upon comparative credit analyses of
issuers within the same industry. These analyses may take into consideration
such quantitative factors as an issuer's present and potential liquidity,
profitability, internal capability to generate funds, debt/equity ratio and
debt servicing capabilities, and such qualitative factors as an assessment of
management, industry characteristics, accounting methodology and foreign
business exposure.
Medium- and lower-quality debt securities tend to be less marketable than
higher-quality debt securities because the market for them is less broad. The
market for unrated debt securities is even narrower. During periods of thin
trading in these markets, the spread between bid and asked prices is likely
to increase significantly, and the Fund may have greater difficulty selling
its portfolio securities. The market value of these securities and their
liquidity may be affected by adverse publicity and investor perceptions.
Mortgage Securities Income Fund
Mortgage Securities Income Fund seeks to provide the highest possible level
of current income, consistent with safety of principal and maintenance of
liquidity, by investing under ordinary circumstances at least 65% of its
total assets in various types of investments known as Mortgage Pass-Through
Certificates representing beneficial interests in mortgage pools.
The Mortgage Pass-Through Certificates in which the Fund invests include but
are not limited to: Government National Mortgage Association (GNMA)
Pass-Through Mortgage Backed Securities (GNMA Certificates), Federal National
Mortgage Association (FNMA) Guaranteed Mortgage Pass-Through Certificates
(FNMA Certificates), Federal Home Loan Mortgage Corporation (FHLMC) Mortgage
Pass-Through Certificates (FHLMC Certificates) and Conventional Mortgage
Pass-Through Certificates, including Real Estate Mortgage Investment Conduits
(REMICs). See "Appendix A: Investment Techniques and Securities" for a
description of these mortgage-backed securities and related risks.
Mortgage Securities Income Fund may invest in instruments rated investment
grade or, if unrated, believed by the Adviser to be of comparable
quality.Normally, the portion of Mortgage Securities Income Fund's portfolio
invested in Conventional Mortgage Pass-Through Certificates, if any, will be
invested primarily in instruments rated within the two highest grades (AAA or
AA) as determined by Standard & Poor's Corporation (S&P), or rated with a
comparable rating from another rating organization, or, if unrated, believed
by the Adviser to be of comparable quality.
While the Fund may invest in securities of any maturity, it is currently
expected, under normal circumstances, that the weighted average maturity of
the Fund's portfolio will exceed ten years.
Investor Considerations. The value of Mortgage Securities Income Fund's
securities generally fluctuates inversely with changes in interest rates.
Prepayment of high interest rate mortgage-backed securities when interest
rates are declining will affect the performance of the Fund and could result
in losses if a premium was paid for such securities.
Cash Income Fund
Cash Income Fund seeks high current income from investment in short-term
money market instruments while emphasizing preservation of capital and
maintaining excellent liquidity.
The Fund pursues this objective by investing all of its assets in U.S. dollar
denominated money market instruments maturing in thirteen months or less from
time of investment. Each security must be rated (or be issued by an issuer
that is rated with respect to its short-term debt) within the highest rating
category for short-term debt by at least two nationally recognized
statistical rating organizations ("NRSRO"), or, if unrated, determined by or
under the direction of the Board of Trustees to be of comparable quality.
These securities may include:
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(1) Securities issued or guaranteed by the U.S. Government or by its agencies
or instrumentalities ("U.S. Government Securities").
(2) Securities issued or guaranteed by the government of any foreign country
that have a long-term rating at time of purchase of A or better (or
equivalent rating) by at least one NRSRO.
(3) Certificates of deposit, bankers' acceptances and time deposits of any
bank (U.S. or foreign) having total assets in excess of $1 billion, or the
equivalent in other currencies (as of the date of the most recent available
financial statements) or of any branches, agencies or subsidiaries (U.S. or
foreign) of any such bank.
(4) Commercial paper of U.S. or foreign issuers, including variable rate
demand notes.
(5) Notes, bonds, and debentures having a long-term rating at time of
purchase of A or better (or equivalent rating) by at least one NRSRO.
(6) Repurchase agreements involving securities listed in (1) above.
(7) Other high-quality short-term obligations.
Under normal market conditions the Fund will invest at least 25% of its total
assets in securities of issuers in the financial services industry (which
includes, but is not limited to, banks, personal credit and business credit
institutions, and other financial service institutions).
The remaining maturity of each of the Fund's investments at the time of
investment is 13 months or less. The weighted average maturity of its
investment portfolio varies with money market conditions, but is always 90
days or less.
Although there can be no assurance that it will always be able to do so, the
Fund follows procedures designed to maintain its price per share at $1.00.
(See "Net Asset Value".)
Investor Considerations. The yield from short-term investments may be lower
than yields from longer-term securities. The value of Cash Income Fund's
securities fluctuates inversely with changes in interest rates. Both the risk
of an issuer's inability to pay interest and principal on a given security
(financial risk) and the price volatility (market risk) of investment in the
Fund may be expected to be less than for certain other Funds.
Because of the Fund's policy of investing at least 25% of its assets in
securities of issuers in the financial services industry, the Fund may be
more adversely affected by changes in market or economic conditions and other
circumstances affecting the financial services industry.
INVESTMENT TECHNIQUES AND RESTRICTIONS
Techniques
Each Fund may invest up to 25% of its total assets in securities of foreign
issuers as more fully described in Appendix A to this Prospectus.
When the Adviser believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar, it may cause a Fund
(other than the Cash Income Fund) to enter into forward contracts to sell an
amount of foreign currency approximating the value of some or all of the
Fund's portfolio securities denominated in such foreign currency. The Adviser
may also cause a Fund to enter into forward foreign currency contracts to
protect against loss between trade and settlement dates resulting from
changes in foreign currency exchange rates. Such contracts will also have the
effect of limiting any gains to the Fund that would have resulted from
advantageous changes in such rates.
It is the policy of each Fund that when the Adviser deems a temporary
defensive position advisable, each Fund may invest, without limitation (i.e.,
up to 100% of its assets), in high-quality fixed-income securities, or hold
assets in cash or cash equivalents, to the extent the Adviser believes such
alternative investments to be less risky than those securities in which the
Fund normally invests.
Each Fund may invest in securities purchased on a when-issued or
delayed-delivery basis. Although the payment terms of these securities are
established at the time the Fund enters into the commitment, the securities
may be delivered and paid for a month or more after the date of purchase,
when their value may have changed and the yields then available in the market
may be greater. The Funds will make such commitments only with the intention
of actually acquiring the securities, but may sell the securities before
settlement date if it is deemed advisable for investment reasons.
Each Fund may also invest in securities purchased on a standby commitment
basis, which is a delayed delivery agreement in which the Fund binds itself
to accept delivery of a security at the option of the other party to the
agreement. The Fund usually receives a commitment fee in consideration for
its standby commitment.
Except for Cash Income Fund, each Fund may make loans of its portfolio
securities to broker-dealers and banks subject to certain restrictions
described in Appendix A to this Prospectus and in the Statement of Additional
Information.
Each Fund other than Cash Income Fund may invest in options, futures
contracts and other derivatives as described in Appendix A to this Prospectus
and in the Statement of Additional Information.
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Restrictions on the Funds' Investments
No Fund will (1) with respect to 75% of the value of its total assets [except
as to the Cash Income Fund, 100% of the value of its total assets], invest
more than 5% of its total assets in the securities of any one issuer (except
that this restriction does not apply to (i) U.S. Government Securities or
(ii) [as to the Cash Income Fund only] certificates of deposit, bankers'
acceptances or repurchase agreements); (2) invest more than 25% of its total
assets (at market) in the securities of issuers in any particular industry
(except that this restriction does not apply to (i) U.S. Government
Securities, (ii) [as to the Cash Income Fund only] certificates of deposit,
bankers' acceptances or repurchase agreements or (iii) [as to the Cash Income
Fund only] securities of issuers in the financial services industry); (3)
acquire more than 10% of the outstanding voting securities of any one issuer;
or (4) borrow money, except as a temporary measure for extraordinary or
emergency purposes, and then the aggregate borrowings at any one time
(including any reverse repurchase agreements) may not exceed 33 1/3% of its
assets (at market). No Fund will purchase additional securities when its
borrowings, less proceeds receivable from sales of portfolio securities,
exceed 5% of total assets. The Funds may invest in repurchase agreements,
provided that no Fund will invest more than 15% [except as to Cash Income
Fund, for which the limitation is 10%] of its net assets in repurchase
agreements maturing in more than seven days and any other illiquid
securities. In each case, if a percentage limit is satisfied at the time of
investment or borrowing, a later increase or decrease resulting from a change
in the value of a security or decrease in a Fund's assets will not constitute
a violation of the limit.
All of the investment restrictions are set forth in the Statement of
Additional Information.
PORTFOLIO TURNOVER
Although no Fund purchases securities with a view to rapid turnover, there
are no limitations on the length of time that portfolio securities must be
held and a Fund's portfolio turnover rate may vary significantly from year to
year. A high rate of turnover of a Fund, if it should occur, would result in
increased transaction expenses for that Fund, which must be borne by the
Fund. The turnover rate of each Fund may exceed 100%. Capital Appreciation,
Strategic Managed Assets, Managed Assets and Mortgage Securities Income Funds
may have a higher rate of turnover than the other Funds and alternative
investment funds because of the flexibility of their investment policies
permitting shifts between different types of investments (in the case of
Strategic Managed Assets Fund and Managed Assets Fund), purchase of
securities on a delayed delivery basis (in the case of the Mortgage
Securities Income Fund) and the use of aggressive strategies and investments
(in the case of Capital Appreciation Fund and Strategic Managed Assets Fund).
The portfolio turnover rates of the Funds (other than CIF) are shown under
"Financial Highlights" above.
HOW THE FUNDS ARE MANAGED
The Trustees
The business of the Trust and the Funds is supervised by the Trust's Board of
Trustees. The Statement of Additional Information contains the names of and
biographical information on the Trustees.
Stein Roe & Farnham Incorporated
The investment portfolio of each Fund is managed, subject to the direction of
the Board of Trustees, by Stein Roe & Farnham Incorporated (the Adviser), One
South Wacker Drive, Chicago, Illinois 60606, pursuant to a separate Advisory
Agreement dated May 1, 1993 with each Fund other than CIF and MIF, an
Advisory Agreement dated December 9, 1988 with CIF, and an Advisory Agreement
dated November 18, 1992 with MIF. The Adviser was organized in 1986 to
succeed to the business of Stein Roe & Farnham, a partnership that had been
providing investment advisory and administrative services since 1932. The
Adviser is a wholly owned indirect subsidiary of LFC. As of December 31,
1994, the Adviser had assets under management of approximately $22.9 billion.
The Adviser places orders for the purchase and sale of securities for each
Fund. In doing so, the Adviser seeks to obtain the best combination of price
and execution, which involves a number of judgmental factors.
E. Bruce Dunn has been co-portfolio manager of the Capital Appreciation Fund
since 1991. Mr. Dunn has been associated with the Adviser since 1964. He is a
Vice-President of the Trust and a Senior Vice President of the Adviser. He
received his A.B. degree from Yale University in 1956 and his M.B.A. from
Harvard University in 1958. Mr. Dunn is a chartered investment counselor.
Richard B. Peterson has been co-portfolio manager of the Capital Appreciation
Fund since 1991. Mr. Peterson, who began his investment career at the Adviser
in 1964 after graduating from Carlton College and the Woodrow Wilson School
at Princeton University with a Masters in Public Affairs, rejoined the
Adviser in 1991 after 15 years of equity research and portfolio management
experience with State Farm Investment Management Corporation. Mr. Peterson is
a Senior Vice President of the Adviser.
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Each of Managed Growth Stock Fund and Strategic Managed Assets Fund is
managed by Harvey B. Hirschhorn and Erik P. Gustafson. Mr. Hirschhorn is a
chartered financial analyst who received his B.A. in mathematics from Rutgers
College in 1971 and his M.B.A. in finance from the University of Chicago in
1973. Associated with the Adviser since 1973, Mr. Hirschhorn is an Executive
Vice President of the Adviser and its Chief Economist and Investment
Strategist. Mr. Gustafson joined the Adviser in 1992 and became a Vice
President of the Adviser in 1994. From 1989 to 1992 he was associated with
Fowler, White, Burnett, Harley, Banick & Strickroot. He received a B.A. from
the University of Virginia in 1985 and M.B.A. and J.D. from Florida State
University in 1989.
Robert A. Christensen has been portfolio manager of the Managed Assets Fund
since its inception in 1989. Mr. Christensen is a Vice President of the Trust
and a Senior Vice President of the Adviser. He has been associated with the
Adviser since 1962. A chartered investment counselor, he received his B.A.
degree from Vanderbilt University in 1955 and M.B.A. from Harvard University
in 1962.
Ann H. Benjamin is the portfolio manager of the Managed Income Fund. She has
been associated with the Adviser since 1989 and became a Vice President of
the Adviser in 1992 and a Senior Vice President in 1994. Ms. Benjamin is a
Vice President of the Trust. A chartered financial analyst, she received her
B.B.A. from Chatham College in 1980 and her M.A. from Carnegie Mellon
University in 1985. Ms. Benjamin serves as High-Yield Credit Research
Manager for the Adviser, and is a member of the Adviser's Fixed-Income Credit
Review Committee.
Michael T. Kennedy has been portfolio manager of the Mortgage Securities
Income Fund since its inception in 1989. He is a Vice President of the Trust
and became a Vice President of the Adviser in 1992 and a Senior Vice
President in 1994, having been associated with the Adviser since 1987. A
chartered financial analyst, Mr. Kennedy received his B.S. degree from
Marquette University in 1984 and his M.M. from Northwestern University in
1988.
The Adviser also provides each of the Funds with administrative services
pursuant to an Administration Agreement with the Trust on behalf of each Fund
dated as of January 3, 1995. These services include financial statement
preparation, the provision of office space and equipment and facilities in
connection with the maintenance of the Trust's headquarters, preparation and
filing of required reports and tax returns, arrangements for meetings,
maintenance of the Trust's corporate books and records, communication with
shareholders, provision of internal legal services and oversight of
custodial, accounting and other services provided to the Funds by others. The
Adviser may, in its discretion, arrange for such services to be provided to
the Trust by LFC or by any of LFC's majority or greater owned subsidiaries.
Under separate agreements, the Adviser also acts as the agent of the Funds
for the transfer of shares, disbursement of dividends and maintenance of
shareholder account records, and provides certain pricing and other record
keeping services to the Funds.
The Adviser pays all compensation of the Trust's officers who are employees
of the Adviser.
Advisory and Administrative Fees
The Funds pay the Adviser annual fees for investment advisory and
administrative services based on the following schedules. All fees are
computed and accrued daily and paid monthly.
Cash Income Fund: Fees at the annual rates of .35% (for investment advisory
services) and .15% (for administrative services) of average daily net asset
value.
Managed Assets Fund: Fees at the annual rate of .45% (for investment advisory
services) and .15% (for administrative services) of average daily net asset
value.
Capital Appreciation and Managed Growth Stock Funds: Fees at the annual rate
of 0.50% (for investment advisory services) and 0.15% (for administrative
services) of average daily net assets.
Strategic Managed Assets Fund: Fees at the annual rates of 0.55% (for
investment advisory services) and 0.15% (for administrative services) of
average daily net asset value.
Managed Income and Mortgage Securities Income Funds: Fees at the annual rate
of 0.40% (for investment advisory services) and 0.15% (for administrative
services) of average daily net asset value.
LFC and Liberty Mutual
LFC is a diversified and integrated asset management organization providing
insurance and investment products to individuals and institutions through
multiple distributions channels. LFC's operating units include: Keyport, a
specialist in fixed and variable annuities; the Adviser; The Colonial Group,
Inc., sponsor of the Colonial family of mutual funds; and the Liberty
Financial Bank Group, a specialist in the design and implementation of bank
marketing programs for insurance and investment products.
Liberty Mutual is an international multi-line insurance writer and, with its
affiliates, is currently the fifth largest writer of property-casualty
insurance in the United States.
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Custodian
State Street Bank and Trust Company, Boston, Massachusetts, is the custodian
for the Funds. Foreign securities are maintained in the custody of foreign
banks and trust companies that are members of the Bank's Global Custody
Network or foreign depositories used by such members.
Expenses of the Funds
The Funds generally will pay all their expenses, other than those borne by
the Adviser. The Adviser has voluntarily agreed until April 30, 1996 to
reimburse all expenses, including management fees, incurred by the Funds as
follows:
Fund Expenses Exceeding
- -------------------- ------------------------------
SMAF 0.85% of average net assets
CAF, MGSF and MIF 0.80% of average net assets
MAF 0.75% of average net assets
MSIF 0.70% of average net assets
CIF 0.65% of average net assets
The Advisor would not, however, be required to reimburse expenses to an
extent which would result in a Fund's inability to qualify as a regulated
investment company under the Internal Revenue Code.
The expenses payable by the Funds include, among other things, the advisory
and administrative fees described above; fees for services of independent
public accountants; legal fees; transfer agent, custodian and portfolio
record keeping services; dividend disbursing agent and shareholder record
keeping and tax information services; expenses of periodic calculations of
the Funds' net asset values and of equipment for communication among the
Funds' custodian, the Adviser and others; taxes and the preparation of the
Funds' tax returns; brokerage fees and commissions; interest; costs of Board
and shareholder meetings; printing prospectuses and reports to shareholders;
fees for filing reports with regulatory bodies and the maintenance of the
Trust's existence; membership dues for industry trade associations; fees to
Federal and state authorities for the registration of the shares of the
Funds; fees and expenses of Trustees who are not directors, officers,
employees or stockholders of the Adviser or its affiliates; insurance and
fidelity bond premiums; and litigation and other extraordinary expenses of a
non-recurring nature.
It is the policy of the Trust that expenses directly charged or attributable
to any particular Fund will be paid from the assets of that Fund. General
expenses of the Trust will be allocated among and charged to the assets of
each of the Funds on a basis that the Trustees deem fair and equitable, which
may be based on the relative assets of each Fund or the nature of the
services performed and their relative applicability to each Fund.
PURCHASES AND REDEMPTIONS
The Participating Insurance Companies place orders to purchase and redeem
shares of each Fund based on, among other things, the net amount of purchase
payments to be invested and surrender and transfer requests to be effected on
that day pursuant to the VA contracts and VLI policies. Shares are purchased
and redeemed as a result of certain other transactions pursuant to the VA
contracts and VLI policies, including deductions for fees and charges by the
applicable separate account. The Trust continuously offers and redeems shares
at net asset value without the addition of any selling commission, sales load
or redemption charge. Shares are sold and redeemed at their net asset value
as next determined after receipt of purchase payments or redemption requests,
respectively, by the separate accounts. Similarly, shares are sold or
redeemed as a result of transactions under the VA contracts and VLI policies
at the net asset value computed for the day on which such transactions are
effected by the separate accounts. The right of redemption may be suspended
or payments postponed whenever permitted by applicable law and regulations.
Keyport Financial Services Corp. (KFSC) serves pursuant to an Underwriting
Agreement as principal underwriter for the Trust with respect to sales of
shares to Keyport and to other Affiliated Participating Insurance Companies.
KFSC is registered as a broker-dealer under the Securities Exchange Act of
1934 and is a member of the National Association of Securities Dealers, Inc.
KFSC's address is 125 High Street, Boston, Massachusetts 02110.
INVESTMENT RETURN
The total return from an investment in a Fund is measured by the
distributions received (assuming reinvestment of all distributions) plus or
minus the change in the net asset value per share for a given period. A total
return percentage is calculated by first dividing the value of a share at the
end of the period (including reinvestment of distributions) by the value of
the share at the beginning of the period and then subtracting 1.0. A Fund's
average annual total return is determined by computing the annual percentage
change in value of a $1.00 investment in such Fund for a specified period,
assuming reinvestment of all dividends and distributions.
Because Cash Income Fund seeks to maintain a $1.00 per share value, its
return is usually quoted as a current seven-day yield, calculated by totaling
the dividends on a share of the Fund for the previous seven days and
restating that yield as an annual rate, or as an effective yield, calculated
by adjusting the current yield to assume daily compounding.
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Total return information describes a Fund's performance for the period shown
and does not predict future performance. Comparison of a Fund's yield or
total return with those of alternative investments should consider
differences between the Fund and the alternative investments, the periods and
methods used in calculation of the return being compared, and the impact of
taxes on alternative investments. A Fund's investment return figures do not
reflect the cost of insurance and other insurance company separate account
charges which vary with the VA contracts and VLI policies offered through the
separate accounts of the Participating Insurance Companies, and which will
decrease the return realized by a contract or policyholder.
NET ASSET VALUE
The Adviser determines net asset value per share of each Fund as of the close
of regular trading on the New York Stock Exchange (currently 4:00 p.m.,
Boston time). Net asset value per share is calculated for each Fund by
dividing the current market value (amortized cost value in the case of the
Cash Income Fund) of total portfolio assets, less all liabilities (including
accrued expenses), by the total number of shares outstanding. Net asset value
is determined on each day when the Exchange is open, except on such days in
which no order to purchase or redeem shares is received. The Exchange is
scheduled to be open Monday through Friday throughout the year except for
certain Federal and other holidays.
Cash Income Fund
The valuation of the Cash Income Fund's securities is based on their
amortized cost, which does not take into account unrealized gains or losses,
in an attempt to maintain its net asset value at $1.00 per share. The extent
of any deviation between the Fund's net asset value based upon market
quotations or equivalents and $1.00 per share based on amortized cost will be
examined by the Board. If such deviation were to exceed 1/2 of 1%, the Board
would consider what action, if any, should be taken, including selling
portfolio securities, increasing, reducing, or suspending distributions or
redeeming shares in kind. Assets and securities of the Fund for which this
valuation method does not produce a fair value are valued at a fair value
determined in good faith by the Board.
Other Funds
U.S. Securities. Each security traded on a national stock exchange is valued
at its last sale price on that exchange on the day of valuation or, if there
are no sales that day, at the latest bid quotation. Each over-the-counter
security for which the last sale price on the day of valuation is available
from NASDAQ is valued at that price. All other over-the-counter securities
for which reliable quotations are available are valued at the latest bid
quotation, except that securities convertible into stock are valued at the
valuations provided by a pricing service approved by the Board.
The Board has determined to value long-term debt obligations primarily on the
basis of valuations furnished by a pricing service which may employ
electronic data processing techniques, including a so-called "matrix" system,
to determine valuations, as well as dealer-supplied quotations. Long-term
debt obligations for which reliable pricing services are, in the opinion of
the Adviser, not available will be valued at their respective values as
determined in good faith by, or under procedures established by, the Board.
Foreign Securities. The values of foreign portfolio securities are generally
based upon market quotations which, depending upon local convention or
regulation, may be the last sales price, the last bid or asked price, or the
mean between the last bid and asked prices as of, in each case, the close of
the appropriate exchange or other designated time. Trading in securities on
European and Far Eastern securities exchanges and over-the-counter markets
is normally completed at various times before the close of business on each
day on which the NYSE is open. Trading of these securities may not take place
on every NYSE business day. In addition, trading may take place in various
foreign markets on Saturdays or on other days when the NYSE is not open and
on which a Fund's net asset value is not calculated. Therefore, such
calculation does not take place contemporaneously with the determination of
the prices of many of the portfolio securities used in such calculation and
the value of a Fund's portfolio may be significantly affected on days when
shares of the Fund may not be purchased or redeemed.
Other assets and securities of a Fund are valued at a fair value as
determined in good faith by, or under procedures established by, the Board.
TAXES
Each Fund has elected to be treated and to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986 (Code). As a
result of such election, for any tax year in which a Fund meets the
investment limitations and the distribution, diversification and other
requirements referred to below, that Fund will not be subject to Federal
income tax, and the income of the Fund will be treated as the income of its
shareholders. Under current law, since the shareholders are life insurance
company "segregated asset accounts," they will not be subject to income tax
currently on this income to the extent such income is applied to increase the
values of VA contracts and VLI policies.
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Among the conditions for qualification and avoidance of taxation at the Trust
level, Subchapter M imposes investment limitations, distribution
requirements, and requirements relating to the diversification of
investments. The requirements of Subchapter M may affect the investments made
by each Fund. Any of the applicable diversification requirements could
require a sale of assets of a Fund that would affect the net asset value of
the Fund.
In addition, the Tax Reform Act of 1986 made certain changes to the tax
treatment of regulated investment companies, including the imposition of a
nondeductible 4% excise tax on certain undistributed amounts. To avoid this
tax, each Fund must declare and distribute to its shareholders by the end of
each calendar year, at least 98% of ordinary income earned during that
calendar year and at least 98% of capital gain net income, net of
carry-forward losses, if any, realized for the twelve-month period ending
October 31 of that year.
Pursuant to the requirements of Section 817(h) of the Code, the only
shareholders of the Trust and its Funds will be Participating Insurance
Companies and their separate accounts that fund VA contracts, VLI policies
and other variable insurance contracts. The prospectus that describes a
particular VA contract or VLI policy discusses the taxation of both separate
accounts and the owner of such contract or policy.
Each Fund intends to comply with the requirements of Section 817(h) and the
related regulations issued thereunder by the Treasury Department. These
provisions impose certain diversification requirements affecting the
securities in which the Funds may invest and other limitations. The
diversification requirements of Section 817(h) of the Code are in addition to
the diversification requirements under Subchapter M and the Investment
Company Act of 1940. The consequences of failure to meet the requirements of
Section 817(h) could result in taxation of the Participating Insurance
Companies offering the VA contracts and VLI policies and immediate taxation
of all owners of the contracts and policies to the extent of appreciation on
investment under the contracts. The Trust believes it is in compliance with
these regulations.
The Secretary of the Treasury may issue additional rulings or regulations
that will prescribe the circumstances in which an owner of a variable
insurance contract's control of the investments of a segregated asset account
may cause such owner, rather than the insurance company, to be treated as the
owner of the assets of a segregated asset account. It is expected that such
regulations would have prospective application. However, if a ruling or
regulation were not considered to set forth a new position, the ruling or
regulation could have retroactive effect.
The Trust therefore may find it necessary, and reserves the right to take
action to assure, that a VA contract or VLI policy continues to qualify as an
annuity or insurance contract under Federal tax laws. The Trust, for example,
may be required to alter the investment objectives of any Fund or substitute
the shares of one Fund for those of another. No such change of investment
objectives or substitution of securities will take place without notice to
the contract and policy owners with interests invested in the affected Fund
and without prior approval of the Securities and Exchange Commission, or the
approval of a majority of such owners, to the extent legally required.
To the extent a Fund invests in foreign securities, investment income
received by the Fund from sources within foreign countries may be subject to
foreign income taxes withheld at the source. The United States has entered
into tax treaties with many foreign countries which entitle a Fund to a
reduced rate of tax or exemption from tax on such income.
Gains and losses from foreign currency dispositions, foreign-currency
denominated debt securities and payables or receivables, and foreign currency
forward contracts are subject to special tax rules that generally cause them
to be recharacterized as ordinary income and losses, and may affect the
timing and amount of the Fund's recognition of income, gain or loss.
In order to avoid adverse tax consequences, a Fund may be required to limit
its equity investments in non-U.S. corporations that are treated as "passive
foreign investment companies" under the Code.
It is impossible to determine the effective rate of foreign tax in advance
since the amount of a Fund's assets, if any, to be invested within various
countries will fluctuate and the extent to which tax refunds will be
recovered is uncertain. The Funds intend to operate so as to qualify for
treaty-reduced tax rates where applicable.
The preceding is a brief summary of some relevant tax considerations. This
discussion is not intended as a complete explanation or a substitute for
careful tax planning and consultation with individual tax advisers.
DIVIDENDS AND DISTRIBUTIONS
Each Fund intends to declare and distribute, as dividends or capital gains
distributions, at least annually, substantially all of its net investment
income and net profits realized from the sale of portfolio securities, if
any, to its shareholders (Participating Insurance Companies' separate
accounts). The net investment income of each Fund consists of all dividends
or interest received by such Fund, less estimated expenses (including the
investment advisory and administrative fees). Income dividends will be
declared and distributed annually in the case of each Fund other than Cash
Income Fund. With respect to Cash Income Fund, the dividends are declared
daily and are reinvested monthly in shares of Cash Income Fund at the net
asset value per share of $1.00. All net short-term and long-term capital
gains of each Fund, net of carry-forward losses, if any, realized during the
fiscal year, are declared and distributed periodically, no less frequently
than annually. All dividends and distributions are reinvested in additional
shares of the Fund at net asset value, as of the record date for the
distributions.
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SHAREHOLDER COMMUNICATIONS
Owners of VA contracts and VLI policies, issued by a Participating Insurance
Company or for which shares of one or more Funds are the investment vehicles,
receive from the Participating Insurance Company unaudited semi-annual
financial statements and audited year-end financial statements of such Funds
certified by the Trust's independent auditors. Each report shows the
investments owned by each Fund and provides other information about the Trust
and its operations. Copies of such reports may be obtained from the
Participating Insurance Company or the Secretary of the Trust.
ORGANIZATION AND DESCRIPTION OF SHARES
The Trust is a diversified open-end management investment company as defined
in the Investment Company Act of 1940 (1940 Act) organized under an Agreement
and Declaration of Trust (Declaration of Trust) as a Massachusetts business
trust on June 9, 1987. The Declaration of Trust may be amended by a vote of
either the Trust's shareholders or the Board. The Trust is authorized to
issue an unlimited number of shares of beneficial interest without par value,
in one or more series as the Board may authorize. Each Fund is a separate
series of the Trust.
Each share of a Fund is entitled to participate pro rata in any dividends and
other distributions declared by the Board with respect to that Fund, and all
shares of a Fund have equal rights in the event of liquidation of that Fund.
Shareholders of a Fund are entitled to one vote for each share of that Fund
held on any matter presented to shareholders. Shares of the Funds will vote
separately as individual series when required by the 1940 Act or other
applicable law or when the Board determines that the matter affects only the
interests of one or more Funds, such as, for example, a proposal to approve
that Fund's Advisory Agreement, but shares of all the Funds vote together, to
the extent required by the 1940 Act, in the election or selection of Trustees
and independent accountants.
The shares do not have cumulative voting rights, which means that the holders
of more than 50% of the shares of the Funds voting for the election of
Trustees can elect all of the Trustees, and, in such event, the holders of
the remaining shares will not be able to elect any Trustees.
The Funds are not required by law to hold regular annual meetings of their
shareholders and do not intend to do so. However, special meetings may be
called for purposes such as electing or removing Trustees or changing
fundamental policies.
The Trust is required to hold a shareholders' meeting to elect Trustees to
fill vacancies in the event that less than a majority of Trustees were
elected by shareholders. Trustees may also be removed by the vote of
two-thirds of the outstanding shares at a meeting called at the request of
shareholders whose interests represent 10% or more of the outstanding shares.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims liability of the
shareholders, the Trustees, or officers of the Trust for acts or obligations
of the Trust, which are binding only on the assets and property of the Trust
(or the applicable Fund thereof) and requires that notice of such disclaimer
be given in each agreement, obligation, or contract entered into or executed
by the Trust or the Board. The Declaration of Trust provides for
indemnification out of the Trust's assets (or the applicable Fund) for all
losses and expenses of any shareholder held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is believed to be remote because it
is limited to circumstances in which the disclaimer is inoperative and the
Trust itself is unable to meet its obligations. The risk to any one Fund of
sustaining a loss on account of liabilities incurred by another Fund also is
believed to be remote.
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APPENDIX A
INVESTMENT TECHNIQUES
AND SECURITIES
U.S. GOVERNMENT SECURITIES
Each Fund may invest in certain U.S. Government Securities. Securities issued
or guaranteed by the U.S. Government include a variety of Treasury securities
that differ only in their interest rates, maturities and dates of issuance.
Treasury bills have maturities of one year or less. Treasury notes have
maturities of one to ten years and Treasury bonds generally have maturities
of greater than ten years at the date of issuance.
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include, but are not limited to, direct obligations of the
Treasury and securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage
Association, General Services Administration, Central Bank for Cooperatives,
Federal Home Loan Banks, Federal Loan Mortgage Corporation, Federal
Intermediate Credit Banks, Federal Land Banks, Maritime Administration, The
Tennessee Valley Authority, District of Columbia Armory Board, Resolution
Funding Corp. and Federal National Mortgage Association.
Some obligations of U.S. Government agencies and instrumentalities, such as
Government National Mortgage Association Pass-Through Certificates, are
supported by the full faith and credit of the U.S.; others, such as
securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury; still others, such as bonds issued by the
Federal National Mortgage Association, a private corporation, are supported
only by the credit of the instrumentality. Because the U.S. Government is not
obligated by law to provide support to an instrumentality it sponsors, a Fund
will invest in the securities issued by such an instrumentality only when the
Adviser determines that the credit risk with respect to the instrumentality
does not make its securities unsuitable investments for the Fund. U.S.
Government Securities do not include international agencies or
instrumentalities in which the U.S. Government, its agencies or
instrumentalities participate, such as the World Bank, the Asian Development
Bank or issues insured by the Federal Deposit Insurance Corporation or the
Federal Savings and Loan Insurance Corporation.
MONEY MARKET INSTRUMENTS
Each Fund may invest in the money market instruments described below, in
addition to money market instruments such as certificates of deposit of U.S.
banks and bankers' acceptances.
Obligations of Foreign Branches of United States Banks
The obligations of foreign branches of U.S. banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by
the terms of a specific obligation and by government regulation. Payment of
interest and principal upon these may also be affected by governmental action
in the country of domicile of the branch (generally referred to as sovereign
risk). In addition, evidences of ownership of such securities may be held
outside the U.S. and a Fund may be subject to the risks associated with the
holding of such property overseas. (See "FOREIGN INVESTMENTS--Foreign
Securities" below.)
Obligations of United States Branches of Foreign Banks
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by Federal and state regulation as well as
by governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
Obligations of Foreign Banks
Obligations of foreign banks and branches of foreign banks are similar to the
obligations of U.S. banks but involve risks that are different in some respects.
Such risks may include future political and economic developments, the possible
imposition of foreign withholding taxes on interest income payable on the
obligations, possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls, or the adoption of other foreign
government restrictions that might adversely affect the payment of principal and
interest on the obligations. Additionally, there may be less public information
available about foreign banks and their branches. Foreign banks and foreign
branches of foreign banks are not regulated by U.S. banking authorities, and
generally are not bound by accounting, auditing, and financial reporting
standards comparable to U.S. banks.
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Master Demand Notes
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by a Fund at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the issuer, as borrower. Master
demand notes may permit daily fluctuations in the interest rate and daily
changes in the amount borrowed. The Fund has the right to increase the amount
under the note at any time up to the full amount provided by the note
agreement or to decrease the amount, and the borrower may repay up to the
full amount of the note without penalty. Notes purchased by a Fund must
permit the Fund to demand payment of principal and accrued interest at any
time (on not more than seven days' notice) and to resell the note at any time
to a third party. The notes may have maturities of more than one year,
provided that (i) the Fund is entitled to payment of principal and accrued
interest upon not more than seven days' notice, and (ii) the rate of interest
on such notes is adjusted automatically at periodic intervals which normally
will not exceed 31 days but may extend up to one year. The notes will be
deemed to have a maturity equal to the longer of the period remaining to the
next interest rate adjustment or the demand notice period. Because these
types of notes are direct lending arrangements between the lender and
borrower, such instruments are not normally traded, and there is no secondary
market for these notes, although they are redeemable and thus repayable by
the borrower at face value plus accrued interest at any time. Accordingly,
the Fund's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. These notes are not typically rated by
credit rating agencies. A Fund may invest in such notes only if rated or at
the time of an investment the issuer meets the criteria established for
commercial paper.
Repurchase Agreements
Each Fund may enter into repurchase agreements with member banks of the
Federal Reserve System that have at least $1 billion in deposits, primary
dealers in U.S. Government Securities or other financial institutions
believed by the Adviser to be creditworthy. Under such agreements, the bank,
primary dealer or other financial institution agrees upon entering into the
contract to repurchase the security at a mutually agreed upon date and price,
thereby determining the yield during the term of the agreement. This results
in a fixed rate of return insulated from market fluctuations during such
period. The seller under a repurchase agreement will be required to maintain
the value of the securities subject to the agreement at not less than the
repurchase price, and such value will be determined on a daily basis by
marking the underlying securities to their market value. Although the
securities subject to the repurchase agreement might bear maturities
exceeding a year, each Fund intends to enter only into repurchase agreements
which provide for settlement within a year and usually within seven days.
Securities subject to repurchase agreements will be held by the Fund's
custodian or in the Federal Reserve book-entry system. A Fund does not bear
the risk of a decline in the value of the underlying security unless the
seller defaults under its repurchase obligation. In the event of a bankruptcy
or other default of a seller of a repurchase agreement, the Fund could
experience both delays in liquidating the underlying securities and losses
including (a) possible declines in the value of the underlying securities
during the period while the Fund seeks to enforce its rights thereto; (b)
possible subnormal levels of income and lack of access to income during this
period; and (c) expenses of enforcing its rights. The Board has established
procedures to evaluate the credit worthiness of each party with whom a Fund
enters into repurchase agreements by setting guidelines and standards of
review for the Adviser and monitoring the Adviser's actions with regard to
repurchase agreements.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements. Under a reverse
repurchase agreement, a Fund would sell securities and agree to repurchase
them at a mutually agreed upon date and price. Each Fund intends to enter
into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions.
At the time the Fund enters into a reverse repurchase agreement, it will
establish a segregated account with its custodian containing liquid assets
having a value not less than the repurchase price (including accrued
interest) and will subsequently monitor the account to maintain such value.
Reverse repurchase agreements involve the risk that the market value of the
securities which a Fund is obligated to repurchase may decline below the
repurchase price. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether
to enforce the Fund's obligation to repurchase the securities, and its use of
the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision. The Staff of the Securities and Exchange
Commission has taken the position that the 1940 Act treats reverse repurchase
agreements as borrowings by a fund.
STANDBY COMMITMENTS
Each Fund may invest in securities purchased on a standby commitment basis,
as described below.
A standby commitment is a delayed delivery agreement in which the Fund binds
itself to accept delivery of a security at
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the option of the other party to the agreement. The Fund usually receives a
commitment fee in consideration for its standby commitment. At the time a
Fund enters into a binding obligation to purchase securities on a standby
commitment basis, liquid assets of the Fund having a value of at least as
great as the purchase price of the securities to be purchased will be
segregated on the books of the Fund and held by the custodian throughout the
period of the obligation.
If the value of the securities that the Fund has committed to purchase
increases, the other party may exercise its right not to deliver the
securities, in which case the Fund only would retain its commitment fee and
forego any appreciation of those securities. If the value of the securities
that the Fund has committed to purchase decreases, the other party would
probably deliver the securities, in which case the Fund would absorb the loss
between the purchase price and the decreased market value, which loss may
significantly exceed the commitment fee.
LENDING PORTFOLIO SECURITIES
Each Fund, except Cash Income Fund, may lend portfolio securities in limited
amounts, as described below.
The Fund may lend securities to brokers, dealers and financial institutions
pursuant to agreements requiring that the loans be continuously secured by
liquid assets as collateral equal at all times in value to at least the
market value of the securities loaned. Such securities loans will not be made
with respect to a Fund if as a result the aggregate of all outstanding
securities loans exceeds 15% of the value of its total assets taken at their
current value. The Fund continues to receive interest or dividends on the
securities loaned and would also receive an additional return that may be in
the form of a fixed fee or a percentage of the collateral. The Fund would
have the right to call the loan and obtain the securities loaned at any time
on notice of not more than five business days. The Fund would not have the
right to vote the securities during the existence of the loan but would call
the loan to permit voting of the securities if, in the Adviser's judgment, a
material event requiring a shareholder vote would otherwise occur before the
loan was repaid. In the event of bankruptcy or other default of the borrower,
the Fund could experience both delays in liquidating the loan collateral or
recovering the loaned securities and losses including (a) possible decline in
the value of the collateral or in the value of the securities loaned during
the period while the Fund seeks to enforce its rights thereto, (b) possible
subnormal levels of income and lack of access to income during this period,
and (c) expenses of enforcing its rights. However, loans may be made only to
borrowers approved by the Board, when the income to be earned from the loan,
in the opinion of the Adviser, justifies the attendant risks.
OPTIONS, FUTURES AND OTHER DERIVATIVES
Consistent with its objective, except for Cash Income Fund, each Fund may
purchase and write both call options and put options on securities, indexes
and foreign currencies, enter into interest rate, index and foreign currency
futures contracts and options on such futures contracts, and purchase other
types of forward or investment contracts linked to individual securities,
interest rates, foreign currencies, indexes or other benchmarks ("derivative
products") in order to achieve its desired investment objective, to provide
additional revenue, or to hedge against changes in security prices, interest
rates or currency fluctuations. A Fund may write a call or put option only if
the option is covered. There can be no assurance that a liquid market will
exist when a Fund seeks to close out a derivative product position. In
addition, because of low margin deposits required, the use of futures
contracts involves a high degree of leverage, and may result in losses in
excess of the amount of the margin deposit. Successful use of derivative
products depends on the Adviser's ability to predict correctly changes in the
level and the direction of security prices, interest rates, currency exchange
rates and other market factors, but even a well conceived transaction may be
unsuccessful because of an imperfect correlation between the cash and the
derivative product markets. For additional information, with respect to these
matters, please refer to the Statement of Additional Information.
FOREIGN INVESTMENTS
Each Fund may invest up to 25% of its total assets in securities of foreign
issuers that are not publicly traded in the U.S., which for this purpose do
not include securities represented by American Depositary Receipts (ADRs)
or securities guaranteed by a U.S. person.
Foreign Securities
While investment in foreign securities is intended to reduce risk by
providing further diversification, such investments involve sovereign risk in
addition to the credit and market risks normally associated with domestic
securities. Foreign investments may be affected favorably or unfavorably by
changes in currency rates and exchange control regulations. There may be less
publicly available information about a foreign company than about a U.S.
company, and foreign companies may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those applicable
to U.S companies. Securities of some foreign companies are less liquid or
more volatile than securities of U.S. companies, and foreign
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brokerage commissions and custodian fees are generally higher than in the
U.S. Investments in foreign securities may also be subject to other risks
different from those affecting U.S. investments, including local political or
economic developments, expropriation or nationalization of assets, imposition
of withholding taxes on dividend or interest payments, currency blockage
(which would prevent cash from being brought back to the U.S.), and sometimes
less advantageous legal, operational, and financial protection applicable to
foreign sub-custodial arrangements. These risks are carefully considered by
the Adviser prior to the purchase of these securities.
Foreign Currency Transactions
When a Fund invests in foreign securities, such securities usually will be
denominated in, or salable for, foreign currencies, and the Fund temporarily
may hold funds in foreign currencies. Thus, the value of Fund shares will be
affected by changes in exchange rates.
As one way of managing exchange rate risk, each Fund may enter into forward
currency exchange contracts (agreements to purchase or sell currencies at a
specified price and date). The exchange rate for the transaction (the amount
of currency a Fund will deliver or receive when the contract is completed) is
fixed when the Fund enters into the contract. A Fund usually will enter into
these contracts to stabilize the U.S. dollar value of a security it has
agreed to buy or sell. Each Fund intends to use these contracts to hedge the
U.S. dollar value of a security it already owns or intends to purchase,
particularly if a Fund expects a decrease in the value of the currency in
which the foreign security is denominated. Although the Fund will attempt to
benefit from using forward contracts, the success of its hedging strategy
will depend on the Adviser's ability to predict accurately the future
exchange rates between foreign currencies and the U.S. dollar. The value of
each Fund's investments denominated in foreign currencies will depend on the
relative strength of those currencies and the U.S. dollar, and the Fund may
be affected favorably or unfavorably by changes in the exchange rates or
exchange control regulations between foreign currencies and the dollar.
Changes in foreign currency exchange rates also may affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities, and net investment income and gains, if any, to be distributed to
shareholders by a Fund.
MORTGAGE-BACKED SECURITIES
The types of mortgage loans that are generally available and that can be
placed in mortgage pools (i.e., fixed interest rate mortgage loans,
adjustable interest rate mortgage loans or ARMS, graduated payment mortgage
loans, etc.) can be expected to change periodically as a result of changing
factors. There can be no assurance that Mortgage Pass-Through Certificates
will be available at all times. The availability of these investments may
depend on economic and market conditions, and fiscal and other policies of
the Federal government that affect the residential housing market and the
ability of mortgage lenders to assemble mortgage pools for purchase.
Returns available on these investments are affected by money market
conditions generally as well as by monetary and fiscal policies of the
Federal government and the Board of Governors of the Federal Reserve System.
The potential returns on future investments could be adversely affected by an
increase in the availability of investment funds or changes in market
conditions or fiscal policies. If for economic or other reasons mortgagors
make prepayments on the underlying mortgage loans backing particular
Certificates, the yield may be less than if no prepayments are made, although
the proceeds from such pre-payments will be reinvested. Such impact on yield
would result if mortgagors repaid underlying mortgage loans because of their
ability to refinance such loans at lower interest rates.
The risks apply to all Mortgage Pass-Through Certificates, regardless of
whether they represent interests in pools of fixed or adjustable interest
rate mortgage loans. Adjustable interest rate mortgage loans involve the risk
that an increase in interest rates could increase home owner defaults
(although there are generally limits on the amount the interest rate on such
loans may increase). The yield on Certificates backed by adjustable interest
rate mortgage loans may decrease (or increase) while the yield on
Certificates backed by fixed interest rate mortgage loans should be more
constant (although the market value of Certificates representing interests in
a pool of adjustable interest rate mortgage loans should be more constant
than the market value of Certificates representing interests in pools of
fixed interest rate mortgage loans).
Conventional Certificates
It is expected that of the various types of Mortgage Pass-Through
Certificates available, Conventional Certificates normally will offer the
highest yields at a given point in time. Although Conventional Certificates
may provide the most attractive investment, they also involve particular
risks.
Conventional Certificates are not guaranteed by the U.S. Government or any
government agency. Conventional Certificates do not represent an interest in
or obligation of the issuing or servicing entity. In certain jurisdictions
such mortgage loans are not personal obligations of the mortgagor (the home
owner). Some of the underlying mortgage loans may become delinquent and
eventually may be foreclosed with the possibility of loss of interest and/or
principal. To protect against these risks, the underlying mortgage loans
generally will have some type of credit enhancement, either mortgage pool
insurance or a senior/subordinated structure whereby a class or classes of
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securities absorb losses prior to the senior class or classes. The percentage
of loss protected against is based on historical loss experience for mortgage
loans originated by the mortgage lenders. However, such loss experience
relates to an inflationary period for real estate values and is based
primarily on fixed interest rate mortgage loans without adjustable rate
features and, accordingly, there can be no assurance that adherence to such
loan-to-value ratios and such mortgage insurance will be sufficient to cover
credit which mortgage pools may experience in the future. Policies of
standard and special hazard insurance typically will be obtained with respect
to a variety of risks of physical damage to the mortgage properties. However,
there can be no assurance that the amounts of such policies or the risks
against which they insure will cover the full losses as a result of physical
damage to a mortgage property. Mortgage guaranty insurance policies may be
obtained for mortgage pools but they will not cover the entire pool. Losses
that are not covered by any of these insurance policies will ultimately be
borne by the investor.
Commercial Mortgage-Backed Securities
The Funds may invest in Mortgage Pass Through Certificates consisting of
Commercial Mortgage-Backed Securities if the Adviser believes such
investments offer attractive yields relative to other eligible investments.
Commercial Mortgage-Backed Securities are secured by loans on commercial real
estate (i.e., multi-family housing, office buildings, shopping centers,
shopping malls, etc.). Some of the underlying loans may become delinquent and
may be foreclosed with the possibility of loss of interest and/or principal.
To protect against these risks, the loans generally have loan-to-value ratios
at the time of origination of 75% or less. These securities also generally
have some type of credit enhancement, usually a senior/subordinated structure
whereby a class or classes of securities absorb losses prior to the senior
class or classes.
EQUIPMENT TRUST CERTIFICATES
Managed Income Fund and Managed Assets Fund may invest in Equipment Trust
Certificates. Equipment Trust Certificates are a mechanism for financing the
purchase of transportation equipment, such as railroad cars and locomotives,
trucks, airplanes and oil tankers, and are described in more detail in the
Statement of Additional Information.
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APPENDIX B
DESCRIPTION OF RATINGS
RATINGS IN GENERAL
A rating of a rating service represents the service's opinion as to the
credit quality of the security being rated. However, the ratings are general
and are not absolute standards of quality or guarantees as to the credit
worthiness of an issuer. Consequently, the Adviser believes that the quality
of debt securities in which a Fund invests should be continuously reviewed
and that individual analysts give different weightings to the various factors
involved in credit analysis. A rating is not a recommendation to purchase,
sell or hold a security because it does not take into account market value or
suitability for a particular investor. Ratings are based on current
information furnished by the issuer or obtained by the rating services from
other sources that they consider reliable. Ratings may be changed, suspended
or withdrawn as a result of changes in or unavailability of such information,
or for other reasons.
The following is a description of the characteristics of ratings used by
Moody's Investors Service, Inc. (Moody's) and Standard & Poor's Corporation
(S&P), each of which is a NRSRO.
BOND RATINGS
Ratings by Moody's
Aaa. Bonds rated Aaa are judged to be 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 an exceptionally stable
margin and principal is secure. Although 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 bonds.
Aa. Bonds 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 bonds 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 bonds.
A. Bonds 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 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 risk with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Ratings by S&P
AAA. Debt rated AAA has the highest rating. Capacity to pay interest and
repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
B-1
<PAGE>
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than for debt in higher rated categories.
BB, B, CCC, CC. Debt rated BB, B, CCC, or CC is regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C. This rating is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
NOTE: The ratings from AA to B may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within the major rating
categories.
COMMERCIAL PAPER RATINGS
Ratings By Moody's
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its commercial paper obligations are
supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment.
Ratings by S&P
A brief description of the applicable rating symbols and their meaning
follows:
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess overwhelming
safety characteristics will be denoted with a plus (+) sign designation.
B-2
<PAGE>
STEINROE VARIABLE INVESTMENT TRUST
Federal Reserve Plaza
600 Atlantic Avenue, Boston, Massachusetts 02210
Statement of Additional Information
Dated May 1, 1995
This Statement of Additional Information is not a prospectus, but
provides additional information which should be read in conjunction with the
Trust's Prospectus dated May 1, 1995 and any supplement thereto. The
Prospectus may be obtained at no charge from Keyport Financial Services Corp.,
125 High Street, Boston, Massachusetts 02110 or any other Participating
Insurance Company, or the broker-dealers offering certain variable annuity
contracts and variable life insurance policies issued by the Participating
Insurance Company.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
MIXED AND SHARED FUNDING........................................... S-2
INVESTMENT RESTRICTIONS............................................ S-3
PORTFOLIO TURNOVER....................... ......................... S-7
PURCHASES AND REDEMPTIONS.......................................... S-7
TRUSTEES AND OFFICERS.............................................. S-8
MANAGEMENT ARRANGEMENTS............................................ S-11
TRUST CHARGES AND EXPENSES......................................... S-12
CUSTODIAN.......................................................... S-14
INDEPENDENT AUDITORS............................................... S-14
PORTFOLIO TRANSACTIONS............................................. S-14
NET ASSET VALUE.................................................... S-18
INVESTMENT PERFORMANCE............................................. S-19
RECORD SHAREHOLDERS................................................ S-21
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS................... S-22
APPENDIX A - Investment Techniques and Securities.................. A-1
</TABLE>
S-1
<PAGE>
The SteinRoe Variable Investment Trust (the Trust) commenced operations
on January 1, 1989. The Trust is an open-end, diversified management
investment company currently consisting of seven Funds with differing
investment objectives, policies and restrictions. Currently, the Trust
consists of Capital Appreciation (CAF), Managed Growth Stock Fund (MGSF),
Strategic Managed Assets Fund (SMAF), Managed Assets Fund (MAF), Managed
Income Fund (MIF), Mortgage Securities Income Fund (MSIF) and Cash Income Fund
(CIF) (individually referred to as a Fund, or by the initials indicated, or
collectively as the Funds). The Trust issues shares of beneficial interest in
each Fund that represent interests in a separate portfolio of securities and
other assets. The Trust may add or delete Funds from time to time. As
described in the Prospectus, SMAF and MIF currently are not being offered for
new sales. The Trust is the funding vehicle for variable annuity contracts (VA
contracts) and variable life insurance policies (VLI policies) offered by the
separate accounts of life insurance companies (Participating Insurance
Companies).
MIXED AND SHARED FUNDING
As described above, the Trust serves as a funding medium for VA contracts
and VLI policies of Participating Insurance Companies, so-called mixed and
shared funding. As of the date of this Statement of Additional Information,
the Participating Insurance Companies are Keyport Life Insurance Company
(Keyport), Keyport America Life Insurance Company (a wholly owned subsidiary
of Keyport formerly known as "Crown America Life Insurance Company")(Keyport
America), Liberty Life Assurance Company of Boston (a 90%-owned subsidiary of
Liberty Mutual Insurance Company) (Liberty Life), and, with respect to CAF,
Transamerica Occidental Life Insurance Company (Transamerica Occidental) and
First Transamerica Life Insurance Company (First Transamerica). Keyport is an
indirect wholly owned subsidiary of Liberty Financial Companies, Inc. ("LFC").
As of March 31, 1995, approximately 81.9% of the combined voting power of
LFC's outstanding voting stock was held by Liberty Mutual Insurance Company
(Liberty Mutual). Neither Transamerica Occidental nor First Transamerica are
affiliated with Keyport or Liberty Mutual.
The interests of owners of VA contracts and VLI policies could diverge
based on differences in state regulatory requirements, changes in the tax laws
or other unanticipated developments. The Trust does not foresee any such
differences or disadvantages at this time. However, the Trustees will monitor
for such developments to identify any material irreconcilable conflicts and to
determine what action, if any, should be taken in response to such conflicts.
If such a conflict were to occur, one or more separate accounts might be
required to withdraw its investments in one or more Funds or shares of another
Fund may be substituted. This might force a Fund to sell securities at
disadvantageous prices.
S-2
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund operates under the investment restrictions listed below.
Restrictions numbered (i) through (viii) are fundamental policies which may
not be changed for a Fund without approval of a majority of the outstanding
voting shares of a Fund, defined as the lesser of the vote of (a) 67% of the
shares of a Fund at a meeting where more than 50% of the outstanding shares
are present in person or by proxy or (b) more than 50% of the outstanding
shares of a Fund. Other restrictions are not fundamental policies and may be
changed with respect to a Fund by the Trustees without shareholder approval.
The following investment restrictions apply to each Fund except as
otherwise indicated
A Fund may not:
(i) with respect to 75% of the value of the total assets of a Fund,
invest more than 5% of the value of its total assets, taken at
market value at the time of a particular purchase, in the
securities of any one issuer, except (a) securities issued or
guaranteed by the U.S. government or its agencies or
instrumentalities, and (b) [with respect to Cash Income Fund only]
certificates of deposit, bankers' acceptances and repurchase
agreements;
(ii) purchase securities of any one issuer if more than 10% of the
outstanding voting securities of such issuer would at the time be
held by the Fund;
(iii) act as an underwriter of securities, except insofar as it may be
deemed an underwriter for purposes of the Securities Act of 1933
on disposition of securities acquired subject to legal or
contractual restrictions on resale;
(iv) invest in a security if more than 25% of its total assets (taken
at market value at the time of a particular purchase) would be
invested in the securities of issuers in any particular industry,
except that this restriction does not apply to: (i) securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, (ii) [with respect to Cash Income Fund only]
certificates of deposit and bankers' acceptances and repurchase
agreements or (iii) [as to the Cash Income Fund only] securities
of issuers in the financial services industry;
(v) purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, and securities issued
by companies which invest in real estate or interests therein),
commodities or commodity contracts (except that it may enter into
(a) futures and options on futures and (b) forward contracts);
(vi) purchase securities on margin (except for use of short-term
credits as are necessary for the clearance of transactions), make
short sales of securities, or participate on a joint or
a joint and several basis in any trading account in securities
(except in connection with transactions in options, futures, and
options on futures);
S-3
<PAGE>
(vii) make loans, but this restriction shall not prevent a Fund from (a)
buying a part of an issue of bonds, debentures, or other
obligations which are publicly distributed, or from investing up
to an aggregate of 15% of its total assets (taken at market value
at the time of each purchase) in parts of issues of bonds,
debentures or other obligations of a type privately placed with
financial institutions, (b) investing in repurchase agreements, or
(c) lending portfolio securities, provided that it may not lend
securities if, as a result, the aggregate value of all securities
loaned would exceed 15% of its total assets (taken at market value
at the time of such loan); or
(viii) borrow, except that it may (a) borrow up to 33-1/3% of its total
assets from banks, taken at market value at the time of such
borrowing, as a temporary measure for extraordinary or emergency
purposes, but not to increase portfolio income (the total of
reverse repurchase agreements and such borrowings will not exceed
33-1/3% of its total assets, and the Fund will not purchase
additional securities when its borrowings, less proceeds
receivable from sales of portfolio securities, exceed 5% of its
total assets) and (b) enter into transactions in options, futures,
and options on futures.
Each Fund is also subject to the following restrictions and policies,
which are not fundamental and may be changed by the Trustees without
shareholder approval.
A Fund may not:
(a) invest in companies for the purpose of exercising control or
management;
(b) purchase more than 3% of the stock of another investment company;
or purchase stock of other investment companies equal to more than
5% of the Fund's total assets (valued at time of purchase) in the
case of any one other investment company and 10% of such assets
(valued at the time of purchase) in the case of all other
investment companies in the aggregate; any such purchases are to
be made in the open market where no profit to a sponsor or dealer
results from the purchase, other than the customary broker's
commission, except for securities acquired as part of a merger,
consolidation or acquisition of assets;
(c) mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by it,
except as may be necessary in connection with (i) permitted
borrowings and (ii) options, futures and options on futures;
S-4
<PAGE>
(d) issue senior securities, except to the extent permitted by the
Investment Company Act of 1940 (including permitted borrowings);
(e) purchase portfolio securities for the Fund from, or sell portfolio
securities to, any of the officers and directors or Trustees of
the Trust or of its investment adviser;
(f) invest more than 5% of its net assets (valued at time of purchase)
in warrants, nor more than 2% of its net assets in warrants that
are not listed on the New York or American Stock Exchanges;
(g) write an option on a security unless the option is issued by the
Options Clearing Corporation, an exchange or similar entity;
(h) buy or sell an option on a security, a futures contract or an
option on a futures contract unless the option, the futures
contract or the option on the futures contract is offered through
the facilities of a recognized securities association or listed on
a recognized exchange or similar entity;
(i) purchase a put or call option if the aggregate premiums paid for
all put and call options exceed 20% of its net assets (less the
amount by which any such positions are in-the-money), excluding
put and call options purchased as closing transactions; or
(j) invest more than 15% [except as to the Cash Income Fund, 10%] of
the Fund's net assets (taken at market value at the time of each
purchase) in illiquid securities including repurchase agreements
maturing in more than seven days.
Further, as to the Cash Income Fund with respect to 100% of its assets,
SEC rules prohibit the Fund from investing more than 5% of its assets, taken
at market value at the time of purchase, in the securities of any one issuer;
provided that (i) the Fund may invest more than 5% of its assets in securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities and (ii) the Fund may invest more than 5% of its assets for
a period of up to three business days after the purchase thereof (but not more
than 25% of its assets) in the securities of any one first-tier issuer (as
determined by Securities and Exchange Commission rules); provided, further,
that the Fund may not make more than one investment in accordance with this
exception at any one time.
S-5
<PAGE>
Under normal market conditions, the Cash Income Fund will invest at least
25% of its assets in securities of issuers in the financial services industry.
This policy may cause the Fund to be more adversely affected by changes in
market or economic conditions and other circumstances affecting the financial
services industry. The financial services industry includes issuers that,
according to the Directory of Companies Required to File Annual Reports with
the Securities and Exchange Commission (the Commission), are in the following
categories: state banks; national banks; savings and loan holding companies;
personal credit institutions; business credit institutions; mortgage-backed
securities; finance-services; security and commodity brokers, dealers and
services; life, accident and health insurance carriers; fire, marine, casualty
and surety insurance carriers; insurance agents, brokers and services.
Additional Voluntary Restrictions Pertaining to Capital Appreciation Fund
The Capital Appreciation Fund also is subject to the following additional
restrictions and policies under certain applicable insurance laws pertaining
to variable annuity contract separate accounts. These policies and
restrictions are not fundamental and may be changed by the Trustees without
shareholder approval:
The borrowing limits for the Fund are (1) 10% of net asset value when
borrowing for any general purpose and (2) 25% of net asset value when
borrowing as a temporary measure to facilitate redemptions. For this purpose,
net asset value is the market value of all investments or assets owned less
outstanding liabilities of the Fund at the time that any new or additional
borrowing is undertaken.
The Fund also will be subject to the following diversification guidelines
pertaining to investments in foreign securities:
1. The Fund will be invested in a minimum of five different foreign
countries at all times when it holds investments in foreign securities.
However, this minimum is reduced to four when foreign country investments
comprise less than 80% of the Fund's net asset value; to three when less
than 60% of such value; to two when less than 40%, and to one when less
than 20%.
2. Except as set forth in item 3 below, the Fund will have no more than 20%
of its net asset value invested in securities of issuers located in any
one foreign country.
3. The Fund may have an additional 15% of its value invested in securities
of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom or the Federal Republic of
Germany.
If a percentage limit with respect to any of the foregoing fundamental
and non-fundamental policies is satisfied at the time of investment or
borrowing, a later increase or decrease in a Fund's assets will not constitute
a violation of the limit.
S-6
<PAGE>
PORTFOLIO TURNOVER
The portfolio turnover of each Fund will vary from year to year. Although
no Fund will trade in securities for short-term profits, when circumstances
warrant securities may be sold without regard to the length of time held.
Portfolio turnover for each Fund is shown under "FINANCIAL HIGHLIGHTS" in the
Prospectus. See "PORTFOLIO TURNOVER" in the Prospectus for a discussion of
certain factors which may produce relatively high turnover in certain of the
Funds.
A 100% turnover rate would occur if all of the securities in the
portfolio were sold and either repurchased or replaced within one year. The
Funds pay brokerage commissions in connection with options and futures
transactions and effecting closing purchase or sale transactions, as well as
for the purchases and sales of other portfolio securities other than fixed
income securities. If a Fund writes a substantial number of call or put
options (on securities or indexes) or engages in the use of futures contracts
or options on futures contracts (all referred to as "Collateralized
Transactions"), and the market prices of the securities underlying the
Collateralized Transactions move inversely to the Collateralized Transaction,
there may be a very substantial turnover of the portfolios.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus under the
headings "PURCHASES AND REDEMPTIONS" and "NET ASSET VALUE."
Each Fund's net asset value is determined on days on which the New York
Stock Exchange is open for trading. The Exchange is regularly closed on
Saturdays and Sundays and on New Year's Day, the third Monday in February,
Good Friday, the last Monday in May, Independence Day, Labor Day, Thanksgiving
and Christmas. If one of these holidays falls on a Saturday or Sunday, the
Exchange will be closed on the preceding Friday or the following Monday,
respectively. Net asset value will not be determined on days when the Exchange
is closed unless, in the judgment of the Trustees, the net asset value of a
Fund should be determined on any such day, in which case the determination
will be made at 4:00 p.m., Boston time.
The Trust reserves the right to suspend or postpone redemptions of shares
of any Fund during any period when: (a) trading on the Exchange is restricted,
as determined by the Commission, or the Exchange is closed for other than
customary weekend and holiday closing; (b) the Commission has by order
permitted such suspension; or (c) an emergency, as determined by the
Commission, exists, making disposal of portfolio securities or the valuation
of net assets of such Fund not reasonably practicable.
S-7
<PAGE>
TRUSTEES AND OFFICERS
The following table sets forth certain information with respect to the
Trustees and officers of the Trust:
<TABLE>
<CAPTION>
Position(s) held Principal occupations
Name and Address with the Trust during past five years
- ---------------- ---------------- ----------------------
<S> <C> <C>
Richard R. Christensen(1) President and President, Liberty Investment
Federal Reserve Plaza Trustee Services, Inc.; since 1994,
600 Atlantic Avenue President, Liberty Asset
Boston, MA 02210 Management Company
John A. Bacon Jr. Trustee Private investor;
4N640 Honey Hill Road Director, Duplex Products,
Box 296 Inc.
Wayne, IL 60184
Salvatore Macera Trustee Private investor
20 Rowes Wharf
Boston, MA 02109
Dr. Thomas E. Stitzel Trustee Professor of Finance,
2208 Tawny Woods Place College of Business,
Boise, ID 83706 Boise State University;
business consultant and author
Gary A. Anetsberger Treasurer Vice President,
One South Wacker Drive Stein Roe & Farnham Incorporated
Chicago, IL 60606 Since 1991; Associate prior thereto
Sharon R. Robertson Controller Associate, Stein Roe & Farnham
One South Wacker Drive Incorporated
Chicago, IL 60606
</TABLE>
- --------------
(1)Trustee who is an "interested person", as defined in the Investment Company
Act of 1940, of the Trust, the Adviser or a Participating Insurance Company
which is an affiliate of the Trust or the Adviser.
S-8
<PAGE>
<TABLE>
<CAPTION>
Position(s) held Principal occupations
Name and Address with the Trust during past five years
- ---------------- ---------------- ----------------------
<S> <C> <C>
Robert A. Christensen Vice President Senior Vice President
One South Wacker Drive (1991 to present),
Chicago, IL 60606 First Vice President
(prior thereto), Stein Roe
& Farnham Incorporated
E. Bruce Dunn Vice President Senior Vice President,
One South Wacker Drive Stein Roe & Farnham
Chicago, IL 60606 Incorporated.
Richard B. Peterson Vice President Senior Vice President,
One South Wacker Drive Stein Roe & Farnham Incorporated
Chicago, IL 60606 (1991 to present); Vice President,
State Farm Investment Management
Company (prior thereto)
Ann H. Benjamin Vice President Senior Vice President (July 1994 to
One South Wacker Drive present), Vice President (1992 to
Chicago, IL 60606 July 1994), Associate (1989-1991),
Stein Roe & Farnham Incorporated
Harvey B. Hirschhorn Vice President Executive Vice President,
One South Wacker Drive Stein Roe & Farnham
Chicago, IL 60606 Incorporated
Michael T. Kennedy Vice President Senior Vice President (October
One South Wacker Drive 1994 to present), Vice President
Chicago, IL 60606 (1992 to October 1994), Associate
(prior thereto), Stein Roe &
Farnham Incorporated
Jane M. Naeseth Vice President Senior Vice President
One South Wacker Drive (1991 to present), Vice President
Chicago, IL 60606 (1989-1990), Stein Roe & Farnham
Incorporated
</TABLE>
S-9
<PAGE>
<TABLE>
<CAPTION>
Position(s) held Principal occupations
Name and Address with the Trust during past five years
- ---------------- ---------------- ----------------------
<S> <C> <C>
Erik P. Gustafson Vice President Vice President (1994 to present),
One South Wacker Drive Associate (1992 to 1994)
Chicago, IL 60606 Stein Roe & Farnham Incorporated;
prior thereto, Associate, Fowler, White,
Burnett, Harley, Banick & Strickroot
Timothy K. Armour Vice President President, Mutual Funds division,
One South Wacker Drive Stein Roe & Farnham Incoporated
Chicago, IL 60606 since June 1992; Senior Vice
President and Director of Marketing of
Citibank Illinois, prior thereto
Jilaine Hummel Bauer Vice President Senior Vice President (since April,
One South Wacker Drive 1992), Vice President, prior
Chicago, IL 60606 thereto, Stein Roe & Farnham Incorporated
John A. Benning Secretary Senior Vice President,
Federal Reserve Plaza General Counsel and
600 Atlantic Avenue Secretary, Liberty
Boston, MA 02210 Financial Companies, Inc.
Kevin M. Carome Assistant Secretary Since August 1993, Associate
Federal Reserve Plaza General Counsel and (since
600 Atlantic Avenue February 1995) Vice President,
Boston, MA 02210 Liberty Financial Companies, Inc.;
prior thereto, Associate, Ropes & Gray
</TABLE>
As indicated in the above table, certain Trustees and officers of the
Trust also hold positions with Stein Roe & Farnham Incorporated, LFC and/or
their affiliates. Certain of the Trustees and certain officers of the Trust
hold comparable positions with certain other investment companies managed by
Stein Roe & Farnham Incorporated or sponsored by other affiliates of LFC.
S-10
<PAGE>
Compensation of Trustees
The table set forth below presents certain information regarding the fees
paid to the Trustees for their services in such capacity and total fees paid
to them by all other investment companies affiliated with the Trust. Trustees
do not receive any pension or retirement benefits from the Trust. No officers
of the Trust or other individuals who are affiliated with the Trust receive
any compensation from the Trust for services provided to it.
<TABLE>
<CAPTION>
Compensation Table
- -------------------------------------------------------------------------------
Total Compensation
From the Trust and
Affiliated Investment
Name of Trustee Aggregate 1994 Compensation* Companies in 1994**
- --------------- --------------------------- ---------------------
<S> <C> <C>
Richard R. Christensen -- --
John A. Bacon Jr. $19,000 $29,500
Salvatore Macera 19,000 29,500
Dr. Thomas E. Stitzel 19,000 29,500
</TABLE>
- --------------
* Consists of Trustee fees in the amount of (i) a $10,000 annual retainer,
(ii) a $2,000 meeting fee for each meeting attended in person and (iii) a
$1,000 meeting fee for each telephone meeting.
** Includes Trustee fees paid by the Trust and by Keyport Variable Investment
Trust.
MANAGEMENT ARRANGEMENTS
As described in the Prospectus, the portfolio of each Fund is managed by
Stein Roe & Farnham Incorporated (Adviser). Each Fund has its own Advisory
Agreement with the Adviser. The Adviser is a wholly owned subsidiary of
SteinRoe Services, Inc., which in turn is a direct wholly owned subsidiary of
LFC. LFC, in turn, is an indirect majority owned subsidiary of Liberty Mutual.
The directors of the Adviser are Gary L. Countryman, Kenneth R. Leibler,
Hans P. Ziegler, Timothy K. Armour, and N. Bruce Callow. Mr. Countryman is
Chairman of Liberty Mutual and Chairman of LFC; Mr. Leibler is President and
Chief Executive Officer of LFC; Mr. Ziegler is Chairman and Chief Executive
Officer of the Adviser; Mr. Armour is President of the Adviser's Mutual Funds
Division; and Mr. Callow is President of the Adviser's Investment Counsel
division. The business address of Mr. Countryman is 175 Berkeley Street,
Boston, Massachusetts 02117; that of Mr. Leibler is Federal Reserve Place, 600
Atlantic Avenue, Boston, Massachusetts, 02210; that of Messrs. Ziegler, Armour
and Callow is One South Wacker Drive, Chicago, Illinois 60606.
S-11
<PAGE>
The Adviser, at its own expense, provides office space, facilities and
supplies, equipment and personnel for the performance of its functions under
each Fund's Advisory Agreement and pays all compensation of the Trustees,
officers and employees who are employees of the Adviser.
Each Fund's Advisory Agreement provides that neither the Adviser nor any
of its directors, officers, stockholders (or partners of stockholders),
agents, or employees shall have any liability to the Trust or any shareholder
of the Fund for any error or judgment, mistake of law or any loss arising out
of any investment, or for any other act or omission in the performance by the
Adviser of its duties under the Advisory Agreement, except for liability
resulting from willful misfeasance, bad faith or gross negligence on the
Adviser's part in the performance of its duties or from reckless disregard by
the Adviser of the Adviser's obligations and duties under the Advisory
Agreement.
Under an Administration Agreement with the Trust, the Adviser provides
each Fund with administrative services, excluding investment advisory
services. Specifically, the Adviser is responsible for preparing financial
statements, providing office space and equipment in connection with the
maintenance of the headquarters of the Trust, preparation and filing required
reports and tax returns, arrangements for meetings, maintenance of the Trust's
corporate books and records, communication with shareholders, providing
internal legal services and oversight of custodial, accounting and other
services provided to the Funds by others. The Administration Agreement
provides that the Adviser may, in its discretion, arrange for administrative
services to be provided to the Trust by LFC or any of LFC's majority or
greater owned subsidiaries.
Under separate agreements, the Adviser also acts as the agent of the
Funds for the transfer of shares, disbursement of dividends and maintenance of
shareholder account records, and provides certain pricing and other record
keeping services to the Funds. The Trust believes that the charges by the
Administrator to the Trust for these services are comparable to those of other
companies performing similar services.
TRUST CHARGES AND EXPENSES
Management Fees:
During fiscal 1994, 1993 and 1992, respectively, pursuant to the advisory
contracts described in the Prospectus, each Fund paid the Adviser management
fees as follows:
Capital Appreciation Fund: $583,720, $356,650 and $237,101
Managed Growth Stock Fund: $523,437, $416,674 and $268,382
Strategic Managed Assets Fund: $331,017, $319,460 and $150,733
Managed Assets Fund: $913,231, $624,957 and $327,920
Managed Income Fund: $191,502 (1994) and $161,084 (1993)
Mortgage Securities Income Fund: $324,958, $354,583 and $281,585
Cash Income Fund: $296,330, $244,509 and $263,284
S-12
<PAGE>
Administrative Expenses:
During fiscal 1994, pursuant to written agreements substantially similar
to the Administration Agreement described above, each Fund paid Liberty
Investment Services, Inc. ("LIS"), the Trust's former administrator, fees as
follows:
<TABLE>
<S> <C>
Capital Appreciation Fund: $175,116
Managed Growth Stock Fund: $157,031
Strategic Managed Assets Fund: $ 90,277
Managed Assets Fund: $304,411
Managed Income Fund: $ 71,813
Mortgage Securities Income Fund: $121,859
Cash Income Fund: $126,999
</TABLE>
In addition, during fiscal 1994 each Fund paid LIS $7,500 for transfer
agent services.
The Adviser replaced LIS as administrator to the Trust as of January 3,
1995.
Expense Limitation:
The Adviser has agreed to reimburse all expenses of the Funds as follows
through April 30, 1996:
<TABLE>
<CAPTION>
Fund Expenses Exceeding
- ---- ------------------
<S> <C>
SMAF 0.85% of average net assets
CAF, MGSF and MIF 0.80% of average net assets
MAF 0.75% of average net assets
MSIF 0.70% of average net assets
CIF 0.65% of average net assets
</TABLE>
Pursuant to these limitations (and a limitation of 0.70% of average net
assets applicable to MIF in effect through April 30, 1995), the total expenses
of the Funds listed below were reduced in 1994 by waiver or reimbursement in
the amounts specified below.
Capital Appreciation Fund: $ 2,532
Strategic Managed Assets Fund: $17,691
Managed Income Fund: $38,790
Mortgaged Securities Income Fund: $ 7,392
S-13
<PAGE>
CUSTODIAN
State Street Bank and Trust Company (the Bank), 225 Franklin Street,
Boston, Massachusetts 02110, is the custodian for the Trust. It is responsible
for holding all securities and cash of each Fund, receiving and paying for
securities purchased, delivering against payment securities sold, receiving
and collecting income from investments, making all payments covering expenses
of the Trust, and performing other administrative duties, all as directed by
authorized persons. The Bank does not exercise any supervisory function in
such matters as purchase and sale of portfolio securities, payment of
dividends or payment of expenses of the Funds. Portfolio securities purchased
in the U.S. are maintained in the custody of the Bank or other domestic banks
or depositories. Portfolio securities purchased outside of the U.S. are
maintained in the custody of foreign banks and trust companies who are members
of the Bank's Global Custody Network and foreign depositories (foreign
sub-custodians). Each of the domestic and foreign custodial institutions
holding portfolio securities has been approved by the Board in accordance with
regulations under the Investment Company Act of 1940.
The Trustees review, at least annually, whether it is in the best
interest of each Fund and its shareholders to maintain Fund assets in each
custodial institution. However, with respect to foreign sub-custodians, there
can be no assurance that a Fund, and the value of its shares, will not be
adversely affected by acts of foreign governments, financial or operational
difficulties of the foreign sub-custodians, difficulties and costs of
obtaining jurisdiction over, or enforcing judgments against, the foreign
sub-custodians or application of foreign law to a Fund's foreign subcustodial
arrangements. Accordingly, an investor should recognize that the noninvestment
risks involved in holding assets abroad are greater than those associated with
investing in the U.S.
The Funds may invest in obligations of the Bank and may purchase or sell
securities from or to the Bank.
INDEPENDENT AUDITORS
The Trust's independent auditors are KPMG Peat Marwick LLP, Boston,
Massachusetts. The auditors audit and report on the Funds' annual financial
statements, review certain regulatory reports and the Federal income tax
return for each Fund and perform other professional accounting, auditing, tax
and advisory services when engaged to do so by the Trust.
PORTFOLIO TRANSACTIONS
The Adviser places orders for the purchase and sale of portfolio
securities and options and futures contracts on behalf of each Fund. The
Adviser's overriding objective in effecting portfolio transactions is to seek
to obtain the best combination of price and execution. The best net price,
giving effect to brokerage commissions, if any, and other transaction costs,
normally is an important factor in this decision, but a number of other
judgmental factors may also enter into the decision. These include: the
Adviser's knowledge of negotiated commission rates currently
S-14
<PAGE>
available and other current transaction costs; the nature of the security
being traded; the size of the transaction; the desired timing of the trade;
the activity existing and expected in the market for the particular security;
confidentiality; the execution, clearance and settlement capabilities of the
broker-dealer selected and others that are considered; the Adviser's knowledge
of the financial stability of the broker-dealer selected and such other
brokers or dealers; and the Adviser's knowledge of actual or apparent
operational problems of any broker-dealer. Recognizing the value of these
execution, clearance and settlement factors, a Fund may pay a brokerage
commission in excess of that which another broker-dealer may have charged for
effecting the same transaction. Evaluations of the reasonableness of brokerage
commissions, based on the foregoing factors, are made on an ongoing basis by
the Adviser's staff while effecting portfolio transactions. The general level
of brokerage commissions paid is reviewed by the Adviser, which reports
annually to the Board.
With respect to transactions in securities involving brokerage
commissions, when more than one broker-dealer is believed to be capable of
providing the best combination of price and execution with respect to a
particular portfolio transaction for a Fund, the Adviser often selects a
broker-dealer that has furnished it with research products or services such as
research reports, subscriptions to financial publications and research
compilations, compilations of securities prices, earnings, dividends, and
similar data, and computer data bases, quotation equipment and services, and
research-oriented computer software and services, and services of economic or
other consultants. Selection of brokers or dealers is not made pursuant to an
agreement or understanding with any of the broker-dealers; however, the
Adviser uses an internal allocation procedure to identify those broker-dealers
who provide it with research products or services and the amount of research
products or services they provide, and endeavors to direct sufficient
commissions generated by its clients' accounts in the aggregate, including the
Funds, to such broker-dealers to ensure the continued receipt of research
products or services the Adviser feels are useful. In certain instances, the
Adviser receives from broker-dealers products or services which are used both
as investment research and for administrative, marketing or other non-research
purposes. In such instances, the Adviser makes a good faith effort to
determine the relative proportions of such products or services which may be
considered as investment research. The portion of the costs of such products
or services attributable to research usage may be defrayed by the Adviser
through brokerage commissions generated by client transactions (without prior
agreement or understanding, as noted above), while the portions of the costs
attributable to non-research usage of such products or services is paid by the
Adviser in cash. No person acting on behalf of the Trust or any Fund is
authorized, in recognition of the value of research products or services, to
pay a commission in excess of that which another broker-dealer might have
charged for effecting the same transaction. Research products or services
furnished by broker-dealers through whom a Fund effects transactions may be
used in servicing any or all of the clients of the Adviser and not all of such
research products or services are used in connection with the management of
the Trust.
S-15
<PAGE>
As stated above, the Adviser's overriding objective in effecting
portfolio transactions for the Funds is to seek to obtain the best combination
of price and execution. However, consistent with the provisions of the Rules
of Fair Practice of the National Association of Securities Dealers, Inc., the
Adviser may, in selecting broker-dealers to effect portfolio transactions for
the Funds, and where more than one broker-dealer is believed capable of
providing the best combination of price and execution with respect to a
particular transaction, select a broker-dealer in recognition of its sales of
VA contracts or VLI policies offered by Participating Insurance Companies. The
Adviser maintains an internal procedure to identify broker-dealers which have
sold VA contracts or VLI policies, and the amount of VA contracts or VLI
policies sold by them. Except as described in the next following sentence,
neither the Trust nor any Fund nor the Adviser has entered into any agreement
with, or made any commitment to, any unaffiliated broker-dealer which would
bind the Adviser, the Trust or any Fund to compensate any such broker-dealer,
directly or indirectly, for sales of VA contracts or VLI policies. The Adviser
has entered into an arrangement with Charles Schwab & Co., Inc. (Schwab)
pursuant to which the Adviser pays Schwab from the Adviser's fee for managing
CAF an amount in respect of CAF assets allocable to CAF shares held in
separate accounts of Transamerica Occidental and First Transamerica in respect
of VA Contracts issued by such entities and sold to clients of Schwab. The
Adviser does not cause the Trust or any Fund to pay brokerage commissions
higher than those obtainable from other broker-dealers in recognition of such
sales of VA contracts or VLI policies.
In light of the fact that the Adviser may also provide advisory services
to the Participating Insurance Companies, and to other advisory accounts that
may or may not be registered investment companies, securities of the same
issuer may be included, from time to time, in the portfolios of the Funds and
these other entities where it is consistent with their respective investment
objectives. If these entities desire to buy or sell the same portfolio
security at about the same time, combined purchases and sales may be made, and
in such event the security purchased or sold normally will be allocated at the
average price and as nearly as practicable on a pro-rata basis in proportion
to the amounts desired to be purchased or sold by each entity. While it is
possible that in certain instances this procedure could adversely affect the
price or number of shares involved in the Funds' transactions, it is believed
that the procedure generally contributes to better overall execution of the
Funds' portfolio transactions.
Because the Adviser's personnel may also provide investment advisory
services to the Participating Insurance Companies and other advisory clients,
it may be difficult to quantify the relative benefits received by the Trust
and these other entities from research provided by broker-dealers.
The Trust has arranged for the Bank, as its custodian, to act as a
soliciting dealer to accept any fees available to the Bank as a soliciting
dealer in connection with any tender offer for a Fund's portfolio securities.
The Bank will credit any such fees received against its custodial fees. In
addition, the Board periodically reviews the legal developments pertaining to
and the practicability of attempting to recapture underwriting discounts and
selling concessions when portfolio securities are purchased in underwritten
offerings. However, the Board has been advised by counsel that recapture by a
mutual fund currently is not permitted under the Rules of Fair Practice of the
National Association of Securities Dealers, Inc.
S-16
<PAGE>
The Trust's purchases and sales of securities not traded on securities
exchanges generally are placed by the Adviser with market makers for these
securities on a net basis, without any brokerage commissions being paid by the
Trust. Net trading does involve, however, transaction costs. Included in
prices paid to underwriters of portfolio securities is the spread between the
price paid by the underwriter to the issuer and the price paid by the
purchasers. Each Fund's purchases and sales of portfolio securities in the
over-the-counter market usually are transacted with a broker-dealer on a net
basis without any brokerage commission being paid by such Fund, but do reflect
the spread between the bid and asked prices. The Adviser may also transact
purchases of some portfolio securities directly with the issuers.
With respect to a Fund's purchases and sales of portfolio securities
transacted with a broker or dealer on a net basis, the Adviser may also
consider the part, if any, played by the broker or dealer in bringing the
security involved to the Adviser's attention, including investment research
related to the security and provided to the Fund.
The table below shows information on brokerage commissions paid by
Managed Assets Fund, Strategic Managed Assets Fund, Managed Growth Stock Fund
and Capital Appreciation Fund during the periods indicated. Cash Income Fund,
Mortgage Securities Income Fund and Managed Income Fund did not pay
commissions on any of their transactions.
<TABLE>
<CAPTION>
Strategic Managed
Capital Managed Managed Growth
Appreciation Assets Assets Stock
Fund Fund Fund Fund
------------ ------- --------- -------
<S> <C> <C> <C> <C>
Total amount
of brokerage
commissions
paid during
fiscal year
ended
12/31/94 $ 353,943 $ 219,454 $ 157,759 $ 166,006
- ------------------------------------------------------------------------------------
Amount of
commissions
paid to brokers
or dealers who
supplied research
services to the
Adviser $ 206,344 $ 163,313 $ 155,570 $ 162,756
Total dollar
amount involved
in such
transactions: $63,644,976 $83,127,306 $96,586,113 $102,363,824
- ------------------------------------------------------------------------------------
S-17
<PAGE>
Amount of
commissions
paid to brokers
or dealers that
were allocated
to such brokers
or dealers by the
Fund's portfolio
manager because
of research
services provided
to the Fund $ 101,987 $ 51,347 $ 1,689 $ --
Total dollar
amount involved
in such
transactions: $29,066,163 $26,305,401 $ 1,018,866 $ --
- ------------------------------------------------------------------------------------
Total brokerage
fees paid during
fiscal year ended
12/31/93: $ 160,071 $ 158,027 $ 97,420 $ 131,649
- ------------------------------------------------------------------------------------
Total brokerage
fees paid during
fiscal year ended
12/31/92: $ 75,790 $ 109,798 $ 134,831 $ 43,092
</TABLE>
NET ASSET VALUE
The net asset value of the shares of each of the Funds is determined by
dividing the total assets of each Fund, less all liabilities (including
accrued expenses), by the total number of shares outstanding.
S-18
<PAGE>
The valuation of the Cash Income Fund's securities is based upon their
amortized cost, which does not take into account unrealized gains or losses.
This method involves initially valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Cash Income Fund would receive if it sold
the security. During periods of declining interest rates, the quoted yield on
shares of the Cash Income Fund may tend to be higher than a like computation
made by a fund with identical investments utilizing a method of valuation
based upon market prices and estimates of market prices for all of its
portfolio securities. Thus, if the use of amortized cost by the Fund resulted
in a lower aggregate portfolio value on a particular day, a prospective
investor in the Cash Income Fund would be able to obtain a somewhat higher
yield if he purchased shares of the Cash Income Fund on that day than would
result from investment in a fund utilizing solely market values, and existing
investors in the Cash Income Fund would receive less investment income. The
converse would apply in a period of rising interest rates.
The proceeds received by each Fund for each purchase 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 Fund, and
constitute the underlying assets of that Fund. The underlying assets of each
Fund will be segregated on the books of account, and will be charged with the
liabilities in respect to such Fund and with a share of the general
liabilities of the Trust.
INVESTMENT PERFORMANCE
Cash Income Fund may quote a "Current Yield" or "Effective Yield" from
time to time. The Current Yield is an annualized yield based on the actual
total return for a seven-day period. The Effective Yield is an annualized
yield based on a daily compounding of the Current Yield. These yields are each
computed by first determining the "Net Change in Account Value" for a
hypothetical account having a share balance of one share at the beginning of a
seven-day period ("Beginning Account Value"), excluding capital changes. The
Net Change in Account Value will always equal the total dividends declared
with respect to the account, assuming a constant net asset value of $1.00.
The yields are then computed as follows:
Current Yield = Net Change in Account Value 365
--------------------------- -----
Beginning Account Value X 7
365/7
[1 + Net Change in Account Value]
---------------------------------
Effective Yield = Beginning Account Value - 1
For example, the yield of Cash Income Fund for the seven-day period ended
December 31, 1994 was:
$0.001107845 X 365
------------ -----
Current Yield = $1.00 7 = 5.777%
365/7
[1 + $0.001107845]
------------------
Effective Yield = $1.00 - 1 = 5.943%
S-19
<PAGE>
In addition to fluctuations reflecting changes in net income of Cash
Income Fund resulting from changes in income earned on its portfolio
securities and in its expenses, Cash Income Fund's yield also would be
affected if the Fund were to restrict or supplement its dividends in order to
maintain its net asset value at $1.00. Portfolio changes resulting from net
purchases or net redemptions of Cash Income Fund shares may affect yield.
Accordingly, Cash Income Fund's yield may vary from day to day and the yield
stated for a particular past period is not a representation as to its future
yield. Cash Income Fund's yield is not guaranteed and its principal is not
insured; however, the Fund will attempt to maintain its net asset value per
share at $1.00.
Each of the Funds may quote total return figures from time to time. Total
return on a per share basis is the amount of dividends received per share plus
or minus the change in the net asset value per share for a given period. Total
return percentage may be calculated by dividing the value of a share at the
end of a given period by the value of the share at the beginning of the period
and subtracting one.
Average Annual Total Return is computed as follows:
ERV = P(1+T)n
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
period (or fractional portion thereof).
For example, for a $1,000 investment in the Funds, the "Total Return,"
the "Total Return Percentage," and the "Average Annual Total Return" for the
life of those Funds (from January 1, 1989 to December 31, 1994, except that
the Strategic Managed Assets Fund did not commence investment operations until
May 1, 1989 and the Managed Income Fund did not commence investment operations
until February 1, 1993) were:
S-20
<PAGE>
<TABLE>
<CAPTION>
Total Return Average Annual
Fund Total Return Percentage Total Return
- ---- ------------ ------------ --------------
<S> <C> <C> <C>
Capital $ 2,570.80 157.080% 17.043%
Appreciation
Fund
Managed Growth
Stock Fund 2,003.51 100.351 12.279
Strategic Managed
Assets Fund 1,772.07 77.207 10.624
Managed Assets
Fund 1,769.05 76.905 9.974
Managed Income Fund 1,035.48 3.548 1.836
Mortgage Securities
Income Fund 1,561.75 56.175 7.713
Cash Income Fund 1,373.21 37.321 5.428
</TABLE>
The figures contained in this "Investment Performance" section assume
reinvestment of all dividends and distributions. They are not necessarily
indicative of future results. The performance of a Fund is a result of
conditions in the securities markets, portfolio management, and operating
expenses. Although information such as that shown above is useful in reviewing
a Fund's performance and in providing some basis for comparison with other
investment alternatives, it should not be used for comparison with other
investments using different reinvestment assumptions or time periods. The
Funds' total returns do not reflect the cost of insurance and other insurance
company separate account charges which vary with the VA contracts and VLI
policies offered through the separate accounts of the Participating Insurance
Companies.
In advertising and sales literature, a Fund may compare its performance
with that of other mutual funds, indexes or averages of other mutual funds,
indexes of related financial assets or data, and other competing investment
and deposit products available from or through other financial institutions.
The composition of these indexes or averages differs from that of the Funds.
Any comparison of a Fund to an alternative investment should consider
differences in features and expected performance.
RECORD SHAREHOLDERS
All the shares of the Funds are held of record by sub-accounts of
separate accounts of Participating Insurance Companies on behalf of the owners
of VLI policies and VA contracts, or by the general account of Keyport. At
March 31, 1994 the general account of Keyport owned of record less than 25% of
the outstanding shares of all the Funds.
S-21
<PAGE>
At all meetings of shareholders of the Funds each Participating Insurance
Company will vote the shares held of record by sub-accounts of its separate
accounts only in accordance with the instructions received from the VLI policy
and VA contract owners on behalf of whom such shares are held. All such shares
as to which no instructions are received (as well as, in the case of Keyport,
all shares held by its general account) will be voted in the same proportion
as shares as to which instructions are received (with Keyport's general
account shares being voted in the proportions determined by instructing owners
of Keyport VLI policies and VA contracts). Accordingly, each Participating
Insurance Company disclaims beneficial ownership of the shares of the Funds
held of record by the sub-accounts of its separate accounts (or, in the case
of Keyport, its general account). The Trust has not been informed that any
Participating Insurance Company knows of any owner of a VA contract or VLI
policy which on March 31, 1994 owned beneficially 5% or more of the
outstanding shares of any Fund.
INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
KPMG Peat Marwick LLP are the Trust's independent auditors. The financial
statements incorporated by reference in this SAI have been so incorporated,
and the schedule of financial highlights has been included in the Prospectus,
in reliance upon the report of KPMG Peat Marwick LLP given on the authority of
said firm as experts in accounting and auditing.
The financial statements of the Trust and Report of Independent Auditors
appearing on pages 9 to 50 of the December 31, 1994 Annual Report of the Trust
are incorporated in this SAI by reference.
S-22
<PAGE>
APPENDIX A
INVESTMENT TECHNIQUES AND SECURITIES
MONEY MARKET INSTRUMENTS
Each of the Funds may invest in money market instruments to the extent
and of the type and quality described in the Prospectus.
Certificates of Deposits
Certificates of deposit are receipts issued by a bank in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest
to the bearer of the receipt on the date specified on the Certificate. The
Certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated
certificates of banks (U.S. or foreign) having total assets of at least $1
billion, or the equivalent in other currencies, as of the date of their most
recently published financial statements and of branches of such banks (U.S. or
foreign).
The Funds will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank.
Bankers' Acceptances
Bankers' acceptances typically arise from short term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise.
The draft is then "accepted" by the bank that, in effect, unconditionally
guarantees to pay the face value of the instrument on its maturity date. The
acceptance may then be held by the accepting bank as an earning asset or it
may be sold in the secondary market at the going rate of discount for a
specific maturity. Although maturities for acceptances can be as long as 270
days, most acceptances have maturities of six months or
less.
Bankers' acceptances acquired by the Funds must be payable in U.S.
dollars and have been accepted by banks having total assets at the time of
purchase in excess of $1 billion, or the equivalent in other currencies, and
of branches of such banks (U.S. or foreign).
A-1
<PAGE>
MORTGAGE-BACKED SECURITIES
Mortgage Pass-Through Certificates in General
A Mortgage Pass-Through Certificate represents a participation interest
in mortgage loans or a beneficial undivided interest in a specified pool
containing mortgage loans.
The aggregate dollar balance of the mortgage loans (or participation
interests) in a specified pool is generally identical to the balance of the
Pass-Through Certificate held by the Certificate holder. As the balance in the
mortgage pool is paid down by scheduled payments of principal and interest and
by prepayments or other early or unscheduled recoveries of principal, the
balance of the Pass-Through Certificate is paid down correspondingly as all
such payments are "passed through" to the Certificate holder (in this case, to
the Funds). The average interest rate payable on the mortgage loans, the
"coupon rate," is somewhat higher than the "pass-through rate" payable under
the Pass-Through Certificate. The difference between the coupon rate and the
pass-through rate is generally paid to the servicer of the mortgage loans as
servicing compensation. Servicing includes collecting payments, remitting
payments to the Certificate holders, holding and disbursing escrow funds for
payment of taxes and insurance premiums, periodically inspecting the
properties, and servicing foreclosures in the event of unremedied defaults.
Under the terms of the Certificate, the due date for passing through
funds to the Certificate holders is some specified period after the payment
date on the mortgage loans. The regular pass-through installment is paid on
the due date by the entity servicing the mortgage pool, in most cases
regardless of whether or not it has been collected from the borrower.
A particular mortgage pool will consist of mortgage loans of one of the
following types: fixed interest mortgage loans with a maturity of not more
than 30 years; adjustable interest rate mortgage loans (that is, where the
interest rate is not fixed but varies in accordance with a formula or an
index) with a maturity of not more than 40 years; shared appreciation mortgage
loans with a maturity of not more than 30 years; growing equity mortgage loans
(where the monthly payment of principal increases in amount and the maturity
may be less than 30 years); graduated payment mortgage loans (where the amount
of the scheduled monthly payments at the beginning of the loan term are
insufficient to fully amortize the loan and the monthly payment amount
therefore increases after a specified period or periods); second mortgages
with fixed or adjustable rates with a maturity of not more than 30 years;
graduated payment adjustable rate mortgage loans; and other alternative
mortgage instruments which may combine some of the characteristics listed
above. For example, graduated payment, graduated equity, and shared
appreciation mortgage loans can have a fixed or variable interest rate. In
addition, new types of mortgage loans may be created in the future, and as
Mortgage Pass-Through Certificates representing interests in pools of new
types of mortgage loans are developed and offered to investors, the Fund will,
consistent with its investment policies and objective, consider investing in
such Certificates.
A-2
<PAGE>
Certain Mortgage Pass-Through Certificates purchased will represent
interests in mortgage pools containing graduated payment adjustable rate
mortgage loans or "GPARMs." These are adjustable interest rate mortgage loans
with a graduated payment feature. The scheduled monthly payment amount on this
type of loan at the beginning of the loan term is insufficient to fully
amortize the loan; that is, the scheduled payments are insufficient to pay off
the entire loan during the term. Because the monthly mortgage payments during
the early years of graduated payment mortgage loans may not even be sufficient
to pay the current interest due, GPARMs may involve negative amortization;
that is, the unpaid principal balance of the mortgage loan may increase
because any unpaid balance of the interest due will be added to the principal
amount of the mortgage loan. GPARMs also involve increases in the payment
amount, because at one or more times during the early years of the loan term,
the monthly mortgage payments (principal and interest) increase to a level
that will fully amortize the loan. The monthly payment amount may also be
increased (or decreased) to reflect changes in the interest rate. In addition,
the loan term may be lengthened or shortened from time to time, corresponding
to an increase or decrease in the interest rate.
GNMA Certificates
GNMA Certificates are mortgage-backed securities representing part
ownership of a pool of mortgage loans. These loans (issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations) are
either insured by the Federal Housing Administration (FHA) or the Farmers Home
Administration (FMHA), or guaranteed by the Veterans Administration (VA). A
"pool" or group of such mortgages is assembled and, after being approved by
GNMA, is offered to investors through securities dealers. Once approved by
GNMA, the timely payment of interest and principal on each mortgage is
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Government. GNMA is also empowered to borrow without limitation from the
Treasury, if necessary, to make any payments required under its guarantee.
GNMA Certificates differ from bonds issued without a sinking fund in that
principal is paid back monthly by the borrower over the term of the loan
rather than returned in a lump sum at maturity. GNMA Certificates are called
"modified pass-through" securities because both interest and principal
payments, including prepayments (net of fees paid to the issuer and GNMA), are
passed through to the holder of the Certificate regardless of whether or not
the mortgagor actually makes the payment.
The average life of GNMA Certificates is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greatest part of principal invested well before
the maturity of the mortgages in the pool. (Note: Due to the GNMA guarantee,
foreclosures impose little risk to principal investment.) As prepayment rates
of individual mortgage pools vary widely, it is not possible to accurately
predict the average life of a particular issue of GNMA Certificates.
A-3
<PAGE>
The coupon rate or interest on GNMA Certificates is lower than the
interest rate paid on the VA-guaranteed or FHA-insured mortgages underlying
the Certificates, but only by the amount of a relatively modest fee paid to
GNMA and the issuer.
The coupon rate by itself, however, does not indicate the yield which
will be earned on the Certificates for the following reasons:
1. Certificates may be issued at a premium or discount, rather than at
par;
2. After issuance, Certificates may trade in the secondary market at a
premium or discount;
3. Interest is earned monthly, rather than semi-annually as for
traditional bonds, and monthly compounding has the effect of raising
the effective yield earned on GNMA Certificates; and
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the
Certificate; that is, if mortgagors pay off their mortgages early,
the principal returned to Certificate holders may be reinvested at
more or less favorable rates.
Since the inception of the GNMA mortgage-backed securities program in
1970, the amount of GNMA Certificates outstanding has grown rapidly. The size
of the market and the active participation in the secondary market by
securities dealers and many types of investors make the GNMA Certificates
highly liquid instruments. Valuations of GNMA Certificates are readily
available from securities dealers and depend on, among other things, the level
of market rates, the Certificate's coupon rate and the prepayment experience
of the pool of mortgages backing each Certificate.
FNMA Guaranteed Mortgage Pass-Through Certificates
The Federal National Mortgage Association (FNMA) is a corporation
organized and existing under the laws of the U.S. and issues FNMA Certificates
under the authority contained in the Federal National Mortgage Association
Charter Act. FNMA Certificates are Mortgage Pass-Through Certificates issued
and guaranteed by FNMA. The obligations of FNMA under its guaranty are
obligations solely of FNMA and are not backed by, nor entitled to, the full
faith and credit of the U.S.
Each FNMA Certificate represents a fractional undivided interest in a
pool of conventional, FHA-insured or VA-guaranteed mortgage loans purchased or
formed by FNMA. The mortgage loans are either provided from FNMA's own
portfolio or are purchased from primary lenders that satisfy certain criteria
developed by FNMA, including depth of mortgage origination experience,
servicing experience and financial capacity.
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When the mortgage loans are not provided from FNMA's own portfolio, FNMA
may purchase an entire loan pool from a single lender and issue Certificates
backed by the pool alone. Alternatively, FNMA may package a pool made up of
loans purchased from a number of lenders. The mortgage loans are held by FNMA
in its capacity as trustee pursuant to the terms of a trust indenture for the
benefit of the Certificate holders.
Each FNMA mortgage pool will consist of mortgage loans evidenced by
promissory notes on one-family or two-to-four family residential properties.
Mortgage loans with varying interest rates may be included in a single pool.
Currently, substantially all FNMA mortgage pools consist of fixed interest
rate and growing equity mortgage loans, although FNMA mortgage pools may also
consist of adjustable interest rate mortgage loans or other types of mortgage
loans. Loans with varying loan-to-value ratios may be included in a single
pool, but each conventional mortgage loan with a loan-to-value ratio which
exceeds 80% must be insured against default and the mortgage insurance must
insure that portion of the loan balance which exceeds 75% of the property
value. The maximum loan term is 40 years. Each mortgage loan must conform to
FNMA's published requirements or guidelines with respect to maximum principal
amount, loan-to-value ratio, underwriting standards and hazard insurance
coverage.
Pursuant to the trust indenture, FNMA is responsible for servicing and
administering the mortgage loans in a pool but contracts with the lender (the
seller of the mortgage loans, or "seller/servicer"), or another eligible
servicing institution, to perform such functions under the supervision of
FNMA. The servicers are obligated to perform diligently all services and
duties customary to the servicing of mortgages as well as those specifically
prescribed by the FNMA Seller/Servicer Guide. FNMA has the right to remove
servicers for cause.
The pass-through rate on the FNMA Certificates is not greater than the
lowest annual interest rate borne by an underlying mortgage loan in the pool,
less a specified minimum annual percentage of the outstanding principal
balance. The fee to FNMA representing compensation for servicing and for
FNMA's guaranty (out of which FNMA will compensate seller/servicers) is, for
each underlying mortgage loan, the difference between the interest rate on the
mortgage loan and the pass-through rate.
The minimum size of a FNMA pool is $1 million of mortgage loans.
Registered holders purchase Certificates in amounts not less than $25,000.
Federal Home Loan Mortgage Corporation Participation Certificates
The Federal Home Loan Mortgage Corporation (FHLMC) is a corporate
instrumentality of the U.S. created pursuant to an act of Congress on July 24,
1970 primarily for the purpose of increasing availability of mortgage credit
for the financing of then urgently needed housing. It seeks to provide an
enhanced degree of liquidity for residential mortgage investors primarily by
assisting in the development of secondary markets for conventional mortgage
loans. FHLMC obtains its funds by selling mortgages and interests therein
(such as Participation Certificates), and by issuing debentures and otherwise
borrowing funds.
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FHLMC Mortgage Participation Certificates represent undivided interests
in specified groups of conventional mortgage loans and/or participation
interests therein underwritten and owned by FHLMC. FHLMC periodically forms
groups of whole mortgage loans and/or participations in connection with its
continuing sales program. Typically, at least 95% of the aggregate principal
balance of the mortgage loans in a group consists of single-family mortgage
loans and not more than 5% consists of multi-family loans. The Participation
Certificates are issued in fully registered form only, in original unpaid
principal balances of $25,000, $100,000, $200,000, $500,000, $1 million and $5
million. The Participation Certificates are not guaranteed by the U.S. or by
any Federal Home Loan Bank and do not constitute a debt or obligation of the
U.S. or any Federal Home Loan Bank.
FHLMC guarantees to each registered holder of a Participation Certificate
the timely payment of interest accruing at the application certificate rate on
the unpaid principal balance outstanding on the mortgage loans to the extent
of such holder's percentage of participation therein. FHLMC also guarantees to
each registered holder of a Participation Certificate collection of all
principal on the mortgage loans without any offset or deduction, to the extent
of such holder's pro rata share. Pursuant to these guaranties, FHLMC
indemnifies holders of Participation Certificates against any reduction in
principal by reason of charges for property repairs, maintenance and
foreclosure.
To permit a measure of marketability for holders of Participation
Certificates, FHLMC has provided since June 20, 1975, and expects to continue
to provide, bid quotations for outstanding Participation Certificates.
Informational bid quotations are available daily on Telerate Financial
Information Network or from FHLMC's regional offices.
Conventional Mortgage Pass-Through Certificates
A Private Mortgage Pass-Through Certificate is a security issued by a
mortgage banker, financial institution or other entity and represents an
undivided interest in a mortgage pool consisting of a number of mortgage loans
secured by single-family residential properties. Conventional Certificates do
not represent an interest in or obligation of the issuing or servicing entity.
The mortgage loans in a pool are held in trust by a qualified bank. These
private (or conventional) mortgages are not insured by the VA, FHA or any
other governmental agency. In some cases, private commercial insurance may
apply.
A typical mortgage pool consists of from 100 to 1000 individual mortgage
loans. The aggregate dollar balance of the mortgage loans in a pool will be
generally at least $5 million. These pools contain mortgage loans originated,
serviced and otherwise administered by an affiliate of the sponsor of the
pool.
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It is expected that each of the underlying mortgage loans will have a
loan-to-value ratio at origination (based on an independent appraisal of the
mortgage property obtained by the originator of the loan) of 90% or less.
Generally, the amount of the mortgage loans in excess of 80% of such appraised
value will be insured with a private mortgagor insurer. In some instances,
other mechanisms such as a bank letter of credit or Subordinated Certificates
are used in place of mortgage guaranty insurance but serve the same function.
The entities originating and servicing the underlying mortgage loans
generally advance to Certificate holders any principal and interest payments
not collected from the mortgagors. However, the obligations, if any, to make
those advances are limited only to those amounts that are reimbursable under
the mortgage guaranty insurance policy.
The property securing each of the mortgage loans in a mortgage pool will
be covered by standard hazard insurance policies insuring against losses due
to various causes, including fire, lightning and windstorm. The amount of each
policy is at least equal to the lesser of the outstanding principal balance of
the mortgage loan or the maximum insurable value of the improvements securing
the mortgage loan. Since certain other physical risks (including earthquakes,
mudflows and floods) are not otherwise insured against, the institution
originating and servicing the loans typically purchases a special hazard
insurance policy for each mortgage pool to cover such risks. The special
hazard insurance generally is in the amount of 1% of the aggregate principal
balances of the mortgage loans in each mortgage pool, or the sum of the
balance of the two largest mortgage loans in the mortgage pool, whichever is
greater, at the time of formation of the mortgage pool.
Any hazard losses not covered by either the standard hazard policies or
the special hazard insurance policy will not be insured against and,
accordingly, will be borne by the Fund and therefore by the Fund's
shareholders.
The pooling and servicing agreement for a Conventional Certificate
generally permits, but does not require, the entity originating and servicing
the mortgage loans to repurchase from the mortgage pool all remaining mortgage
loans. The right to repurchase typically is subject to the aggregate principal
balances of the mortgage loans at the time of repurchase being less than 20%
of the aggregate principal balances of the mortgage loans at the time of
issuance of the Certificate.
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Real Estate Mortgage Investment Conduits (REMICs)
A REMIC is an entity formed either as a partnership, corporation or trust
which holds a fixed pool of mortgages and issues multiple classes of interests
at varying maturities entitling holders to receive specified principal amounts
and interest payments at fixed rates.
Timely payment of principal and interest from a REMIC will be dependent
upon risks associated with the underlying mortgage loans held by the REMIC.
These risks include the potential for delinquency and default by mortgagors,
fluctuating interest rates, inflation and reduced market demand for qualified
market loans.
EQUIPMENT TRUST CERTIFICATES
The Managed Income Fund and Managed Assets Funds may invest in Equipment
Trust Certificates.
Equipment Trust Certificates are a mechanism for financing the purchase
of transportation equipment, such as railroad cars and locomotives, trucks,
airplanes and oil tankers.
Under an Equipment Trust Certificate, the equipment is used as the
security for the debt and title to the equipment is vested in a trustee. The
trustee leases the equipment to the user; i.e., the railroad, airline,
trucking or oil company. At the same time, Equipment Trust Certificates in an
aggregate amount equal to a certain percentage of the equipment's purchase
price are sold to lenders. The trustee pays the proceeds from the sale of
Certificates to the manufacturer. In addition, the company using the equipment
makes an initial payment of rent equal to the balance of the purchase price to
the trustee, which the trustee also pays to the manufacturer. The trustee
collects lease payments from the company and uses the payments to pay interest
and principal on the Certificates. At maturity, the Certificates are redeemed
and paid, the equipment is sold to the company and the lease is terminated.
Generally, these Certificates are regarded as obligations of the company
that is leasing the equipment and are shown as liabilities in its balance
sheet as a capitalized lease in accordance with generally accepted accounting
principals. However, the company does not own the equipment until all the
Certificates are redeemed and paid. In the event the company defaults under
its lease, the trustee terminates the lease. If another lessee is available,
the trustee leases the equipment to another user and makes payments on the
Certificates from new lease rentals.
OPTIONS, FUTURES AND OTHER DERIVATIVES
Except for the Cash Income Fund, each Fund may purchase and write both
call options and put options on securities, indexes and foreign currencies,
and enter into interest rate, index and foreign currency futures contracts and
options on such futures contracts ("futures options") in order to achieve its
investment objective, to provide additional revenue, or to hedge against
changes in security prices, interest rates or currency exchange rates. A Fund
also may use other types of options, futures contracts, futures options, and
other types of forward or investment contracts linked to individual
securities, interest rates, foreign currencies, indices or other benchmarks
("derivative products") currently traded or subsequently developed and traded,
provided the Trustees determines that their use is consistent with the Fund's
investment objective.
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Options
A Fund may purchase and write both put and call options on securities,
indexes or foreign currencies in standardized contracts traded on recognized
securities exchanges, boards of trade or similar entities, or quoted on
NASDAQ. A Fund also may purchase agreements, sometimes called cash puts, which
may accompany the purchase of a new issue of bonds from a dealer that the Fund
might buy as a temporary defensive measure.
An option on a security (or index or foreign currency) is a contract that
gives the purchase (holder) of the option, in return for a premium, the right
to buy from (call) or sell to (put) the seller (writer) of the option the
security underlying the option (or the cash value of the index or a specified
quantity of the foreign currency) at a specified exercise price at any time
during the term of the option (normally not exceeding nine months). The writer
of an option on an individual security or on a foreign currency has the
obligation upon exercise of the option to deliver the underlying security or
foreign currency upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security or foreign currency. Upon
exercise, the writer of an option on an index is obligated to pay the
difference between the cash value of the index and the exercise price
multiplied by the specified multiplier for the index option. (An index is
designed to reflect specified facets of a particular financial or securities
market, a specific group of financial instruments or securities, or certain
other economic indicators.)
A Fund will write call options and put options only if they are
"covered." For example, in the case of a call option on a security, the option
is "covered" if the Fund owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration upon conversion or exchange of other securities held in its
portfolio (or, if additional cash consideration is required, cash or cash
equivalents in such amount are held in a segregated account by its custodian).
If an option written by a Fund expires, the Fund realizes a capital gain
equal to the premium received at the time the option was written. If an option
purchased by a Fund expires, the Fund realizes a capital loss equal to the
premium paid.
Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security, currency or index, exercise price and
expiration). There can be no assurance, however, that a closing purchase or
sale transaction can be effected when a Fund desires.
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A Fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Fund will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Fund will realize a capital gain or, if it is
less, the Fund will realize a capital loss. The principal factors affecting
the market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security, currency or index
in relation to the exercise price of the option, the volatility of the
underlying security, currency or index, and the time remaining until
expiration.
A put or call option purchased by a Fund is an asset of the Fund, valued
initially at the premium paid for the option. The premium received for an
option written by a Fund is recorded as a deferred credit. The value of an
option purchased or written is marked-to-market daily and is valued at the
closing price on the exchange on which it is traded or, if not traded on an
exchange or no closing price is available, at the mean between the last bid
and asked prices.
Risks Associated with Options
There are several risks associated with transactions in options. For
example, there are significant differences between the securities and the
currency markets and the options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether, when and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may
be unsuccessful to some degree because of market behavior or unexpected
events.
There can be no assurance that a liquid market will exist when a Fund
seeks to close out an option position. If a Fund were unable to close out an
option that it had purchased, it would have to exercise the option in order to
realize any profit or the option would expire and become worthless. If a Fund
were unable to close out a covered call option that it had written on a
security or a foreign currency, it would not be able to sell the underlying
security or currency unless the option expired. As the writer of a covered
call option on a security, a Fund foregoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the call option above the sum of the premium and the exercise price
of the call. As the writer of a covered call option on a foreign currency, the
Fund foregoes, during the option's life, the opportunity to profit from
appreciation of the currency covering the call.
If trading were suspended in an option purchased or written by a Fund,
the Fund would not be able to close out the option. If restrictions on
exercise were imposed, the Fund might be unable to exercise an option it has
purchased. Except to the extent that a call option on an index written by the
Fund is covered by an option on the same index purchased by the Fund,
movements in the index may result in a loss to the Fund; however, such losses
may be mitigated by changes in the value of the Fund's portfolio securities
during the period the option was outstanding.
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Futures Contracts and Options on Futures Contracts
Each Fund may use interest rate, index and foreign currency futures
contracts. An interest rate, index or foreign currency futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a financial instrument, the cash value of an index(2) or
a specified quantity of a foreign currency at a specified price and time. A
public market exists in futures contracts covering a number of indexes
(including, but not limited to, the Standard & Poor's 500 Stock Index, the
Value Line Composite Index and the New York Stock Exchange Composite Index),
certain financial instruments (including, but not limited to: U.S. Treasury
bonds, U.S. Treasury notes and Eurodollar certificates of deposit) and foreign
currencies. Other index and financial instrument futures contracts are
available and it is expected that additional futures contracts will be
developed and traded.
The Funds may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities,
indexes and foreign currencies (discussed above). A futures option gives the
holder the right, in return for the premium paid, to assume a long position
(call) or a short position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option,
the opposite is true.
To the extent required by regulatory authorities having jurisdiction over
a Fund, such Fund will limit its use of futures contracts and futures options
to hedging transactions. For example, a Fund might use futures contracts to
hedge against or gain exposure to fluctuations in the general level of stock
prices or anticipated changes in interest rates or currency exchange rates
which might adversely affect either the value of the Fund's securities or the
price of the securities that the Fund intends to purchase. Although other
techniques could be used to reduce that Fund's exposure to stock price and
interest rate and currency fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost by using futures
contracts and futures options.
Each Fund will only enter into futures contracts and futures options that
are standardized and traded on an exchange, board of trade or similar entity
or quoted on an automated quotation system.
The success of any futures transaction depends on the Adviser correctly
predicting changes in the level and direction of stock prices, interest rates,
currency exchange rates and other factors. Should those predictions be
incorrect, a Fund's return might have been better had the transaction not been
attempted; however, in the absence of the ability to use futures contracts,
the Adviser might have taken portfolio actions in anticipation of the same
market movements with similar investment results but, presumably, at greater
transaction costs.
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(2)A futures contract on an index is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading
day of the contract and the index value at which the index contract was
originally written. Although the value of a securities index is a function
of the value of certain specified securities, no physical delivery of those
securities is made.
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When a purchase or sale of a futures contract is made by a Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of cash or U.S. Government securities or other securities
acceptable to the broker ("initial margin"). The margin required for a futures
contract is set by the exchange on which the contact is traded and may be
modified during the term of the contract. The initial margin is in the nature
of a performance bond or good faith deposit on the futures contract, which is
returned to the Fund upon termination of the contract, assuming all
contractual obligations have been satisfied. A Fund expects to earn interest
income on its initial margin deposits. A futures contract held by a Fund is
valued daily at the official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called "variation margin,"
equal to the daily change in value of the futures contract. This process is
known as "marking-to-market." Variation margin paid or received by a Fund does
not represent a borrowing or loan by the Fund but is instead settlement
between the Fund and the broker of the amount one would owe the other if the
futures contract had expired at the close of the previous day. In computing
daily net asset value, each Fund will mark-to-market its open futures
positions.
Each Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option
and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying property, usually these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying property and delivery month). If an offsetting purchase
price is less than the original sale price, the Fund engaging in the
transaction realizes a capital gain, or if it is more, the Fund realizes a
capital loss. Conversely, if an offsetting sale price is more than the
original purchase price, the Fund engaging in the transaction realizes a
capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.
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Risks Associated with Futures
There are several risks associated with the use of futures contracts and
futures options. A purchase or sale of a futures contract may result in losses
in excess of the amount invested in the futures contract. There can be no
guarantee that there will be a correlation between price movements in the
hedging vehicle and in the portfolio securities being hedged. In addition,
there are significant differences between the securities and the currency
markets and the futures markets that could result in an imperfect correlation
between the markets, causing a given transaction not to achieve its
objectives. The degree of imperfection of correlation depends on circumstances
such as: variations in speculative market demand for futures, futures options
and the related securities or currencies, including technical influences in
futures and futures options trading and differences between the Fund's
investments being hedged and the securities or currencies underlying the
standard contracts available for trading. For example, in the case of index
futures contracts, the composition of the index, including the issuers and the
weighting of each issue, may differ from the composition of the Fund's
portfolio, and, in the case of interest rate futures contracts, the interest
rate levels, maturities, and creditworthiness of the issues underlying the
futures contract may differ from the financial instruments held in the Fund's
portfolio. A decision as to whether, when and how use future contracts
involves the exercise of skill and judgment, and even a well-conceived
transaction may be unsuccessful to some degree because of market behavior or
unexpected security price, interest rate or currency exchange rate trends.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a
price beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because
the limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses. Stock index futures contracts are not normally subject to
such daily price change limitations.
There can be no assurance that a liquid market will exist at a time when
a Fund seeks to close out a futures or futures option position. The Fund would
be exposed to possible loss on the position during the interval of inability
to close, and would continue to be required to meet margin requirements until
the position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant long-term trading history. As
a result, there can be no assurance that an active secondary market will
develop or continue to exist.
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Limitations on Options and Futures
A Fund will not enter into a futures contract or purchase an option
thereon if, immediately thereafter, the initial margin deposits for futures
contracts held by that Fund plus premiums paid by it for open futures option
positions, less the amount by which any such positions are "in-the-money,"(3)
would exceed 5% of the Fund's total assets.
When purchasing a futures contract or writing a put option on a futures
contract, a Fund must maintain with its custodian (or broker, if legally
permitted) cash or cash equivalents (including any margin) equal to the market
value of such contract. When writing a call option on a futures contract, the
Fund similarly will maintain with its custodian cash or cash equivalents
(including any margin) equal to the amount by which such option is
in-the-money until the option expires or is closed out by the Fund.
A Fund may not maintain open short positions in futures contracts, call
options written on futures contracts or call options written on indexes if, in
the aggregate, the market value of all such open positions exceeds the current
value of the securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative volatility
of the relationship between the portfolio and the positions. For this purpose,
to the extent the Fund has written call options on specific securities in its
portfolio, the value of those securities will be deducted from the current
market value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission ("CFTC")
Regulation 4.5 and thereby avoid being deemed a "commodity pool operator,"
each Fund will use commodity futures or commodity options contracts solely for
bona fide hedging purposes within the meaning and intent of CFTC Regulation
1.3(z), or, with respect to positions in commodity futures and commodity
options contracts that do not come within the meaning and intent of CFTC
Regulation 1.3(z), the aggregate initial margin and premiums required to
establish such positions will not exceed 5% of the fair market value of the
assets of a Fund, after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into [in the case of an option
that is in-the-money at the time of purchase, the in-the-money amount (as
defined in Section 190.01(x) of the CFTC Regulations) may be excluded in
computing such 5%].
Taxation of Options and Futures
If a Fund exercises a call or put option it holds, the premium paid for
the option is added to the cost basis of the security purchased (call) or
deducted from the proceeds of the security sold (put). For cash settlement
options and futures options exercised by a Fund, the difference between the
cash received at exercise and the premium paid is a capital gain or loss.
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(3)A call option is "in-the-money" if the value of the futures contract the is
the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the excercise price exceeds the value of the futures
contract that is the subject of the option.
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If a call or put option written by a Fund is exercised, the premium is
included in the proceeds of the sale of the underlying security (call) or
reduces the cost basis of the security purchased (put). For cash settlement
options and futures options written by a Fund, the difference between the cash
paid at exercise and the premium received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital gain or
loss. If an option written by a Fund was in-the-money at the time it was
written and the security covering the option was held for more than the
long-term holding period prior to the writing of the option, any loss realized
as a result of a closing purchase transaction will be long-term. The holding
period of the securities covering an in-the-money option will not include the
period of time the option is outstanding.
If a Fund writes an equity call option(4) other than a "qualified covered
call option," as defined in the Internal Revenue Code, any loss on such option
transaction, to the extent it does not exceed the unrealized gains on the
securities covering the option, may be subject to deferral until the
securities covering the option have been sold.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the earlier of delivery notice date
or expiration date. If a Fund delivers securities under a futures contract,
the Fund also realizes a capital gain or loss on those securities.
For Federal income tax purposes, a Fund generally is required to
recognize as income for each taxable year its net unrealized gains and losses
as of the end of the year on futures, futures options and non-equity options
positions ("year-end mark-to-market"). Generally, any gain or loss recognized
with respect to such positions (either by year-end mark-to-market or by actual
closing of the positions) is considered to be 60% long-term and 40%
short-term, without regard to the holding periods of the contracts. However,
in the case of positions classified as part of a "mixed straddle," the
recognition of losses on certain positions (including options, futures and
futures options positions, the related securities and certain successor
positions thereto) may be deferred to a later taxable year. Sale of futures
contracts or writing of call options (or futures call options) or buying put
options (or futures put options) that are intended to hedge against a change
in the value of securities held by a Fund: (1) will affect the holding period
of the hedged securities; and (2) may cause unrealized gain or loss on such
securities to be recognized upon entry into the hedge.
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(4)An equity option is defined to mean any option to buy or sell stock, and
any other option the value of which is determined by reference to an index
of stocks of the type that is ineligible to be traded on a commodity
futures exchange (e.g., an option contract on a sub-index based on the
price of nine hotel-casino stocks). The definition of equity option
excludes options on broad-based stock indexes (such as the Standard &
Poor's 500 Stock Index).
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If a Fund were to enter into a short index future, short index futures
option or short index option position and the Fund's portfolio were deemed to
"mimic" the performance of the index underlying such contract, the option or
futures contract position and the Fund's stock positions would be deemed to be
positions in a mixed straddle, subject to the above-mentioned loss deferral
rules.
In order for a Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income (including but not limited
to gains from options and futures contracts). In addition, gains realized on
the sale or other disposition of securities held for less than three months
must be limited to less than 30% of the Fund's annual gross income. Any net
gain realized from futures (or futures options) contracts will be considered
gain from the sale of securities and therefore be qualifying income for
purposes of the 90% requirement. In order to avoid realizing excessive gains
on securities held less than three months, the Fund may be required to defer
the closing out of certain positions beyond the time when it would otherwise
be advantageous to do so.
"WHEN-ISSUED" SECURITIES AND COMMITMENT AGREEMENTS
Each Fund may purchase and sell securities on a when-issued and
delayed-delivery basis.
When-issued or delayed-delivery transactions arise when securities are
purchased or sold by the Funds with payment and delivery taking place in the
future in order to secure what is considered to be an advantageous price and
yield to the Funds at the time of entering into the transaction. However,
yields available in the market when delivery takes place may be higher than
the yields on securities to be delivered. When the Funds engage in when-issued
and delayed-delivery transactions, the Funds rely on the buyer or seller, as
the case may be, to consummate the sale. Failure to do so may result in the
Funds missing the opportunity to obtain a price or yield considered to be
advantageous. When-issued and delayed-delivery transactions may be expected to
occur a month or more before delivery is due. However, no payment or delivery
is made by the Funds until they receive payment or delivery from the other
party to the transaction. A separate account of liquid assets equal to the
value of such purchase commitments will be maintained with the Trust's
custodian until payment is made and will not be available to meet redemption
requests. When-issued and delayed-delivery agreements are subject to risks
from changes in value based upon changes in the level of interest rates and
other market factors, both before and after delivery. The Funds do not accrue
any income on such securities prior to their delivery. To the extent a Fund
engages in when-issued and delayed-delivery transactions, it will do so for
the purpose of acquiring portfolio securities consistent with its investment
objectives and policies and not for the purpose of investment leverage.
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Most Mortgage Pass-Through Certificates (especially Conventional and FNMA
Certificates), whether they represent interests in pools of fixed or
adjustable interest rate mortgage loans, may be purchased pursuant to the
terms of firm commitment or standby commitment agreements. Under the terms of
these agreements, a Fund will bind itself to accept delivery of a Mortgage
Pass-Through Certificate at some future settlement date (typically three to
six months from the date of the commitment agreement) at a stated price. The
standby commitment agreements create an additional risk for a Fund because the
other party to the standby agreement generally will not be obligated to
deliver the security, but the Fund will be obligated to accept it if
delivered. Depending on market conditions (particularly on the demand for, and
supply of, Mortgage Pass-Through Certificates), the Fund may receive a
commitment fee for assuming this obligation. If prevailing market interest
rates increase during the period between the date of the agreement and the
settlement date, the other party can be expected to deliver the security and,
in effect, pass any decline in value to the Fund. If the value of the security
increases after the agreement is made, however, the other party is unlikely to
deliver the security. In other words, a decrease in the value of the
securities to be purchased under the terms of standby commitment agreements
will likely result in the delivery of the security, and therefore such
decrease will be reflected in the Fund's net asset value. However, any
increase in the value of the securities to be purchased will likely result in
the non-delivery of the security and, therefore, such increase will not affect
the net asset value unless and until the Fund actually obtains the security.
WARRANTS
Each Fund except the Cash Income Fund may invest in warrants; however,
not more than 5% of a Fund's assets (at the time of purchase) will be invested
in warrants, other than warrants acquired in units or attached to other
securities. Warrants purchased must be listed on a national stock exchange or
the NASDAQ System. Warrants are speculative in that they have no voting
rights, pay no dividends, and have no right with respect to the assets of the
corporation issuing them. Warrants basically are options to purchase equity
securities at a specific price valid for a specific period of time. They do
not represent ownership of the securities, but only the right to buy them.
Warrants differ from call options in that warrants are issued by the issuer of
the security that may be purchased on their exercise, whereas call options may
be written or issued by anyone. The prices of warrants do not necessarily move
parallel to the prices of the underlying securities.
RESTRICTED SECURITIES
Restricted securities are acquired through private placement
transactions, directly from the issuer or from security holders, generally at
higher yields or on terms more favorable to investors than comparable publicly
traded securities. Privately placed securities are not readily marketable and
ordinarily can be sold only in privately negotiated transactions to a limited
number of purchasers or in public offerings made pursuant to an effective
registration statement under the Securities Act of 1933. Private or public
sales of such securities by a Fund may involve significant delays and expense.
Private sales require negotiations with one or more purchasers and generally
produce less favorable prices than the sale of comparable unrestricted
securities. Public sales generally involve the time and expense of preparing
and processing a registration statement under the Securities Act of 1933 and
may involve the payment of underwriting commissions; accordingly, the proceeds
may be less than the proceeds from the sale of securities of the same class
which are freely marketable.
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