STEINROE VARIABLE INVESTMENT TRUST
CASH INCOME FUND
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210
Cash Income Fund (Fund) is a series fund in the SteinRoe Variable
Investment Trust (Trust), an open-end, diversified management investment company
that currently includes seven separate funds, each with its own investment
objective and policies.
The investment objective of the Fund is 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.)
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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.
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(This cover page continues on the following page.)
The date of this prospectus is August 1, 1996
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This Prospectus contains information about the Fund 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 shares of the Fund. Please read it carefully and retain
it for future reference.
Additional facts about the Trust (including the Fund) are included in a
Statement of Additional Information dated May 1, 1996, 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).
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SHARES OF THE FUND 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
INDEPENDENCE LIFE & ANNUITY COMPANY, AND THE VA CONTRACTS OF LIBERTY LIFE
ASSURANCE COMPANY OF BOSTON. OTHER PARTICIPATING INSURANCE COMPANIES MAY BE
ADDED FROM TIME TO TIME.
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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.
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TABLE OF CONTENTS
Page
The Trust............................................................... 4
Financial Highlights.................................................... 4
How the Fund Invests.................................................... 5
Investment Techniques and Restrictions.................................. 7
Portfolio Turnover...................................................... 8
How the Fund is Managed................................................. 8
Purchases and Redemptions............................................... 10
Investment Return....................................................... 11
Net Asset Value......................................................... 11
Taxes................................................................... 12
Dividends and Distributions............................................. 13
Shareholder Communications.............................................. 14
Organization and Description of Shares.................................. 14
Additional
Information............................................................. 15
Appendix A: Investment Techniques and Securities........................ A-1
Appendix B: Description of Ratings..................................... B-1
<PAGE>
THE TRUST
Cash Income Fund (Fund) is a series fund of the SteinRoe Variable
Investment Trust (Trust), an open-end, diversified management investment company
currently consisting of five funds with differing investment objectives,
policies and restrictions. (The Trust's series funds other than the Fund are
referred to herein as the "Other Funds"). The Trust issues shares of beneficial
interest in each of its series funds that represent interests in a separate
portfolio of securities and other assets. The Trust may add or delete series
funds from time to time.
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). Shares of the Fund currently are sold only to Keyport Life Insurance
Company (Keyport), Independence Life & Annuity Company (Independence) and
Liberty Life Assurance Company of Boston (Liberty Life). Keyport, Independence
and Liberty Life (Keyport entities) are affiliated entities. Other Participating
Insurance Companies may be added from time to time.
The Participating Insurance Companies and their separate accounts are the
shareholders or investors (shareholders) of the Fund. 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 Fund.
The prospectuses issued by the Participating Insurance Company describe
which underlying 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 Trust's 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 Fund. The Adviser also provides administrative and
transfer agent services to the Fund. Keyport Financial Services Corp. (the
Underwriter) serves as the principal underwriter for sales of the Fund's shares
to the Keyport entities. The Adviser, the Underwriter and the Keyport entities
are wholly owned indirect subsidiaries of Liberty Financial Companies, Inc.
("LFC"). As of June 30, 1996, approximately 82% of the combined voting power of
LFC's outstanding voting stock was owned, indirectly, by Liberty Mutual
Insurance Company (Liberty Mutual).
FINANCIAL HIGHLIGHTS
The table below presents certain financial information for the Fund for
the period beginning January 1, 1989 and ending December 31, 1995. 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, 1991 appears in the Trust's annual report to
shareholders for the fiscal year ended December 31, 1995 (which may be obtained
without charge from the Underwriter) and is incorporated by reference into this
Prospectus. The Fund's total returns presented below 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
Participating Insurance Companies.
Cash Income Fund
Financial Highlights
(for a share outstanding throughout the period)
Years Ended December 31,
-------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
Per share operating
performances
Net asset value,
beginning of year.....$1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income... 0.030 0.037 0.027 0.034 0.056 0.076 0.087
Less distributions:
Distributions from net
investment income.....(0.037) (0.056) (0.076) (0.087) (0.030) (0.027) (0.034)
Net asset value,
end of year........... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Total return:
Total investment
return................ 5.62% 3.81% 2.70% 3.48% 5.79% 7.89% 9.07%
Ratios/supplemental data:
Net assets, end of
year (000s).......... $64,992 $78,698 $83,049 $70,821 $77,676 $94,462 $94,313
Ratio of expenses to
average net assets 0.63% 0.62% 0.65 0.67% 0.66% 0.66% 0.67%
Ratio of net investment
income to average
net assets........... 5.48% 3.73% 2.68% 5.67% 7.61% 8.68% 3.42%
(a) These ratios were not materially affected by the reimbursement of certain
expenses by the Adviser and its affiliates.
(b) Computed giving effect to the expense limitation undertaking of the
Adviser and its affiliates.
Further information about the performance of the Fund is contained in the
Trust's annual report to shareholders for the year ended December 31, 1995,
which may be obtained without charge from the Underwriter.
HOW THE FUND INVESTS
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. There can be no guarantee that the Fund will achieve its
investment objective. Although the 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.
The Fund and its investment objectives and policies are described below.
The Fund's investment objective is fundamental and may be changed only by a vote
of the Board of Trustees and of the shareholders.
More information about the portfolio securities in which the Fund
invests, including certain risks and investment limitations, is provided in
Appendix A to this Prospectus and Appendix A in the Trust's Statement of
Additional Information.
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:
(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 the 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 non-money market 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
The 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 Fund 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.
The 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.
The 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
the 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 the 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.
Restrictions on the Fund's Investments
The Fund will not (1) with respect to 75% 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) 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) certificates of deposit,
bankers' acceptances or repurchase agreements or (iii) 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). The Fund will not purchase additional
securities when its borrowings, less proceeds receivable from sales of portfolio
securities, exceed 5% of total assets. The Fund may invest in repurchase
agreements, provided that the Fund will not invest more than 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 the Fund's assets will not
constitute a violation of the limit.
All of the investment restrictions applicable to the Fund are set forth
in the Trust's Statement of Additional Information.
PORTFOLIO TURNOVER
Although the Fund does not purchase securities with a view to rapid
turnover, there are no limitations on the length of time that portfolio
securities must be held and the Fund's portfolio turnover rate may vary
significantly from year to year. A high rate of turnover of the Fund, if it
should occur, would result in increased transaction expenses, which must be
borne by the Fund. The turnover rate of the Fund may exceed 100%.
HOW THE FUND IS MANAGED
The Trustees
The business of the Trust's series funds is supervised by the Trust's
Board of Trustees. The Trust's Statement of Additional Information contains the
names of and biographical information on the Trustees.
Stein Roe & Farnham Incorporated
The investment portfolio of the 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 an Advisory Agreement
dated December 9, 1988. 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, 1995, the Adviser
had assets under management of approximately $23.0 billion.
The Adviser places orders for the purchase and sale of securities for the
Fund. In doing so, the Adviser seeks to obtain the best combination of price and
execution, which involves a number of judgmental factors.
The Adviser also provides the Fund with administrative services pursuant
to an Administration Agreement with the Trust on behalf of the Fund and the
Other Funds 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 Fund and the Other
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 Fund
and the Other Funds for the transfer of shares, disbursement of dividends and
maintenance of shareholder account records, and provides pricing and certain
other record keeping services to the Fund and the Other Funds.
The Adviser pays all compensation of the Trust's officers who are
employees of the Adviser.
Advisory and Administrative Fees
The Fund pays the Adviser annual fees for investment advisory and
administrative services at the annual rates of 0.35% and 0.15%, respectively, of
average daily net assets. All fees are computed and accrued daily and paid
monthly.
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 primary operating units include:
Keyport, a specialist in fixed and variable annuities; The Colonial Group, Inc.,
sponsor of the Colonial family of mutual funds; the Adviser; Newport Pacific
Management, Inc., a specialist in Asian equity markets; Liberty Asset Management
Company, a sponsor of closed-end funds employing a multi-managed investment
approach; and Independent Financial Marketing Group, Inc. and the Liberty
Financial Bank Group, specialists 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.
Custodian
State Street Bank and Trust Company (State Street), Boston,
Massachusetts, is the custodian for the Fund. Foreign securities are maintained
in the custody of foreign banks and trust companies that are members of State
Street's Global Custody Network or foreign depositories used by such members.
Expenses of the Fund
The Fund generally will pay all its expenses, other than those borne by
the Adviser. The Adviser has voluntarily agreed until April 30, 1997 to
reimburse all expenses, including management and administrative fees, incurred
by the Fund in excess of 0.65% of average net assets.
The Advisor would not, however, be required to reimburse expenses to an
extent which would result in the Fund's inability to qualify as a regulated
investment company under the Internal Revenue Code.
The expenses payable by the Fund 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 recordkeeping services; dividend disbursing agent and shareholder
recordkeeping and tax information services; expenses of periodic calculations of
net asset values and of equipment for communication among the custodian, the
Adviser and others; taxes and the preparation of tax returns; 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;
registration fees to federal authorities; 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 other extraordinary
expenses of a non-recurring nature.
It is the policy of the Trust that expenses directly charged or
attributable to any of its particular series funds 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 Trust's series funds (including the Fund and the
Other Funds) on a basis that the Trustees deem fair and equitable, which may be
(but need not be) based on the relative assets of each such fund or the nature
of the services performed and their relative applicability to each such fund.
PURCHASES AND REDEMPTIONS
The Participating Insurance Companies place daily orders to purchase and
redeem shares of the 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 insurance company 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 such other 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.
INVESTMENT RETURN
The total return from an investment in the 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. The Fund's
average annual total return is determined by computing the annual percentage
change in value of a $1.00 investment in the Fund for a specified period,
assuming reinvestment of all dividends and distributions.
Because the Fund seeks to maintain a $1.00 per share net asset 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.
Total return information describes the Fund's performance for the period
shown and does not predict future performance. Comparison of the 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. The 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 the Fund as of the
close of regular trading on the New York Stock Exchange (NYSE) (currently 4:00
p.m., Eastern time). Net asset value per share is calculated for the Fund by
dividing the current market value 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 NYSE is open,
except on such days in which no order to purchase or redeem shares is received.
The NYSE is scheduled to be open Monday through Friday throughout the year
except for certain Federal and other holidays.
The valuation of the 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.
TAXES
The 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 the Fund meets
the investment limitations and the distribution, diversification and other
requirements referred to below, the 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.
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 the Fund.
Any of the applicable diversification requirements could require a sale of
assets of the 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,
the 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, plus
any remaining undistributed income from the prior year.
Pursuant to the requirements of Section 817(h) of the Code, the only
shareholders of the Trust and its series 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 separate accounts and the
owner of such contract or policy.
The Fund intends to comply with the requirements of Section 817(h) and
the related regulations thereunder issued by the Treasury Department. These
provisions impose certain diversification requirements affecting the securities
in which the Fund 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 that the Fund is in compliance with these
requirements.
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 a
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 the Fund or substitute the
shares of the 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 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 the 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 the Fund to a reduced
rate of tax or exemption from tax on such income.
The Fund's foreign currency 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 for the Fund, the 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 the 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 Fund intends 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
The Fund intends to declare and distribute, as dividends or capital gains
distributions, 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 the Fund consists of all dividends or interest received by the Fund,
less estimated expenses (including the investment advisory and administrative
fees). Dividends in respect of net investment income are declared daily and are
reinvested monthly in shares of the Fund at the net asset value per share of
$1.00. All net short-term and long-term capital gains of the Fund, net of
carry-forward losses, if any, realized during the fiscal year, are declared and
distributed periodically, no less frequently than annually. All capital gains
dividends and distributions are reinvested in additional shares of the Fund at
net asset value, as of the record date for the distributions.
SHAREHOLDER COMMUNICATIONS
Owners of VA contracts and VLI policies, issued by a Participating
Insurance Company or for which shares of the Fund are available as an investment
vehicle, receive from the applicable Participating Insurance Company unaudited
semi-annual financial statements and audited year-end financial statements of
the Fund certified by the Trust's independent auditors. Each report shows the
investments owned by the Fund and provides other information about the Trust and
its operations. Copies of such reports may be obtained from the Participating
Insurance Companies 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 (which include shareholders of the Other
Funds) 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 of the Trust's funds is a separate series of the
Trust.
Each share of the Fund is entitled to participate pro rata in any
dividends and other distributions declared by the Board with respect to the
Fund, and all shares of the Fund have equal rights in the event of liquidation
of the Fund.
Shareholders of each of the Fund and each Other Fund are entitled to one
vote for each share of that series fund held on any matter presented to
shareholders. Shares of the Fund and the Other 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 an amendment to that fund's
Advisory Agreement, but shares of the Fund and all of the Other Funds vote
together, to the extent required by the 1940 Act, in the election or selection
of Trustees and independent accountants.
The shares of the Trust do not have cumulative voting rights, which means
that the holders of more than 50% of the shares of the Fund and the Other Funds,
taken together, 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 Fund is not required by law to hold regular annual meetings of
shareholders and does 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 of the Trust.
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 series 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 series fund of sustaining a
loss on account of liabilities incurred by another series fund also is believed
to be remote.
ADDITIONAL INFORMATION
This Prospectus including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Trust with the Securities
and Exchange Commission under the Securities Act of 1933. Copies of the
Registration Statement may be obtained from the Commission or may be examined at
the office of the Commission in Washington, D.C.
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APPENDIX A
INVESTMENT TECHNIQUES
AND SECURITIES
MONEY MARKET INSTRUMENTS
The 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 the Fund may be subject to the risks associated
with the holding of such property overseas. (See "FOREIGN INVESTMENTS--Foreign
Securities" below.)
Obligations of Foreign 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 withholdings 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 the 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 the 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. The 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
The 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 Advisor 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 that underlying
securities to their market value. Although the securities subject to the
repurchase agreement might bear maturities exceeding a year, the 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. The
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 creditworthiness of each party with whom the 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.
U.S. GOVERNMENT SECURITIES
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, the 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.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements. Under a reverse
repurchase agreement, the Fund would sell securities and agree to repurchase
them at a mutually agreed upon date and price. The 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 the
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
The 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 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 the Fund enters into a binding
obligations 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.
FOREIGN INVESTMENTS
The 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. These include sovereign risks and risks pertaining to the local
economy in the country or countries in which the foreign company conducts
business. 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 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 the 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, the 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 the Fund will deliver or receive when the contract is
completed) is fixed when the Fund enters into the contract. The Fund usually
will enter into these contracts to stabilize the U.S. dollar value of a security
it has agreed to buy or sell. The 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 the 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 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 the Fund.
LENDING PORTFOLIO SECURITIES
The 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.
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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 the 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 the Aaa bonds.
A. Bonds rated A posses 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 standings.
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.
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, in 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.
