File No. 33-14954
File No. 811-5199
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 11 /X/
and/or
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 13 /X/
(check appropriate box or boxes)
STEINROE VARIABLE INVESTMENT TRUST
(Exact Name of Registrant as Specified in Charter)
Federal Reserve Plaza, 600 Atlantic Avenue, Boston, Massachusetts 02210
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (617) 722-6000
It is proposed that this filing become effective (check appropriate box)
______ immediately upon filing pursuant to paragraph (b) of Rule 485
___X__ on May 1, 1996 pursuant to paragraph (b) of Rule 485
______ 60 days after filing pursuant to paragraph (a)(i) of Rule 485
______ on [ ] pursuant to paragraph (a)(i) of Rule 485
______ 75 days after filing pursuant to paragraph (a)(ii) of Rule 485
______ on [ ] pursuant to paragraph (a)(ii) of Rule 485
JOHN A. BENNING, ESQ.
Senior Vice President and General Counsel
Liberty Financial Companies, Inc.
Federal Reserve Plaza
600 Atlantic Avenue
Boston, MA 02210
(Name and Address of Agent for Service)
<PAGE>
The Registrant has registered an indefinite number of shares of beneficial
interest of all existing and subsequently created Series of the Trust under the
Securities Act of 1933 pursuant to Rule 24f-2. A Rule 24f-2 Notice with respect
to the year ended December 31, 1995 was filed on February 28, 1996.
<PAGE>
STEINROE VARIABLE INVESTMENT TRUST
CROSS REFERENCE SHEET
(as required by Rule 481(a))
PART A
FORM N-1A LOCATION
1. Cover Page Cover Page
2. Synopsis The Trust
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page; The Trust; How
the Funds Invest; Investment
Techniques and Restrictions;
Portfolio Turnover; How the
Funds are Managed;
Organization and Description
of Shares; Appendix A:
Investment Techniques and
Securities
5. Management of the Fund How the Funds are Managed
5A. Management's Discussion of Fund Performance Information required by
Item 5A is included in the
Registrant's Annual Report for
the year ended December 31,
1995. As required by said Item
5A, the Registrant undertakes
under "Financial Highlights" in
the Prospectuses to provide free
of charge a copy of said Annual
Report to persons requesting the
same.
6. Capital Stock and Other Securities The Trust; Purchases and
Redemptions; Net Asset Value;
Taxes; Dividends and
Distributions; Shareholder
Communications; Organization
and Description of Shares;
Appendix A: Investment
Techniques and Securities
7. Purchase of Securities Being Offered How the Funds are Managed;
Purchases and Redemptions;
Net Asset Value
8. Redemption or Repurchase Purchases and Redemptions
9. Pending Legal Proceedings Not Applicable
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 five separate Funds,
each with its own investment objective and policies. The five 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.
Managed Assets Fund
(bullet) High total investment return through investment in a changing mix of
securities.
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, 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).
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 INDEPENDENCE LIFE & ANNUITY 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 INSURANCE
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, 1996
<PAGE>
TABLE OF CONTENTS
Page
-------
The Trust 3
Financial Highlights 4
How the Funds Invest 9
Investment Techniques and Restrictions 11
Portfolio Turnover 12
How the Funds are Managed 12
Purchases and Redemptions 14
Investment Return 14
Net Asset Value 14
Taxes 15
Dividends and Distributions 16
Shareholder Communications 16
Organization and Description of Shares 16
Additional Information 17
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 currently consisting of five Funds with differing
investment objectives, policies and restrictions. Currently, the Trust consists
of Capital Appreciation Fund (CAF), Managed Growth Stock Fund (MGSF), Managed
Assets Fund (MAF), 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.
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), Independence Life & Annuity Company,
(Independence), 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
agency 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 Independence 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 81.5% of the combined voting power of LFC's outstanding
voting stock was held, indirectly, by Liberty Mutual.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below present certain financial information for each Fund in the
Trust 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 the
Statement of Additional Information. The Funds' 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.
Capital Appreciation Fund
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
------- ------- ------- ------- ------- ------- ---------
Per share operating performance:
Net asset value, beginning of
<S> <C> <C> <C> <C> <C> <C> <C>
year $14.74 $16.53 $15.34 $15.32 $12.07 $14.79 $13.62
------ ------ ------ ------ ------ ------ -------
Net investment income 0.04 0.06 0.03 -- 0.21 0.19 0.23
Net realized and unrealized gains
(losses) on investments 1.69 0.09 5.22 2.17 4.19 (1.53) 3.90
------ ------ ------ ------ ------ ------ -------
Total from investment operations 1.73 0.15 5.25 2.17 4.40 (1.34) 4.13
------ ------ ------ ------ ------ ------ -------
Less distributions:
Distributions from and in excess
of
net investment income (0.04) (0.07) (0.02) -- (0.15) (0.28) (0.22)
Distributions from and in excess
of net realized gains on
investments (0.10) (1.87) (4.04) (2.15) (1.00) (1.10) (2.25)
Return of capital -- -- -- -- -- -- (0.49)
------ ------ ------ ------ ------ ------ -------
Total distributions (0.14) (1.94) (4.06) (2.15) (1.15) (1.38) (2.96)
------ ------ ------ ------ ------ ------ -------
Net asset value, end of year $16.33 $14.74 $16.53 $15.34 $15.32 $12.07 $14.79
====== ====== ====== ====== ====== ====== =======
Total return:
Total investment return 11.75% 1.19%(b) 35.68%(b) 14.48% 37.25% (8.91)% 30.84%
Ratios/supplemental data:
Net assets, end of year (000s) $143,248 $134,078 $96,544 $52,135 $41,179 $33,238 $32,176
Ratio of expenses to average
net assets 0.76% 0.80%(a) 0.84%(a) 1.01% 1.03% 1.14% 1.08%
Ratio of net investment income to
average net assets 0.26% 0.44%(b) 0.13%(b) (0.01)% 1.35% 1.43% 1.14%
Portfolio turnover ratio 132% 144% 112% 85% 36% 121% 153%
</TABLE>
(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.
4
<PAGE>
Managed Growth Stock Fund
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
------- ------- ------- ------- ------- ------- ---------
Per share operating performance:
Net asset value, beginning of
<S> <C> <C> <C> <C> <C> <C> <C>
year $18.11 $20.65 $20.10 $19.47 $13.44 $13.88 $10.75
------ ------ ------ ------ ------ ------ -------
Net investment income 0.15 0.15 0.13 0.11 0.17 0.19 0.17
Net realized and unrealized gains
(losses) on investments 6.68 (1.46) 0.86 1.18 6.25 (0.42) 3.19
------ ------ ------ ------ ------ ------ -------
Total from investment operations 6.83 (1.31) 0.99 1.29 6.42 (0.23) 3.36
------ ------ ------ ------ ------ ------ -------
Less distributions:
Distributions from and in excess
of
net investment income (0.15) (0.17) (0.12) (0.10) (0.18) (0.21) (0.18)
Distributions from and in
excess of net realized gains on
investments (1.20) (1.06) (0.32) (0.56) (0.21) -- --
Return of capital -- -- -- -- -- -- (005)
------ ------ ------ ------ ------ ------ -------
Total distributions (1.35) (1.23) (0.44) (0.66) (0.39) (0.21) (0.23)
------ ------ ------ ------ ------ ------ -------
Net asset value, end of year $23.59 $18.11 $20.65 $20.10 $19.47 $13.44 $13.88
====== ====== ====== ====== ====== ====== =======
Total return:
Total investment return 37.73% (6.35)% 4.97% 6.63% 48.03% (1.65)%(b) 31.30%(b)
Ratios/supplemental data:
Net assets, end of year (000s) $136,834 $98,733 $111,561 $64,402 $38,481 $17,383 $13,257
Ratio of expenses to average
net assets 0.74% 0.77% 0.83% 0.97% 1.15% 1.50%(a) 1.60%(a)
Ratio of net investment income
to average net assets 0.72% 0.75% 0.77% 0.63% 1.15% 1.51%(b) 1.35%(b)
Portfolio turnover ratio 41% 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>
Managed Assets Fund
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
------- ------- ------- ------- ------- ------- ---------
Per share operating performance:
Net asset value, beginning of
<S> <C> <C> <C> <C> <C> <C> <C>
year $12.18 $13.11 $12.54 $12.54 $10.26 $11.38 $10.25
------ ------ ------ ------ ------ ------ -------
Net investment income 0.48 0.51 0.38 0.45 0.52 0.62 0.53
Net realized and unrealized gains
(losses) on investments 2.61 (0.93) 0.78 0.49 2.31 (0.70) 1.75
------ ------ ------ ------ ------ ------ -------
Total from investment operations 3.09 (0.42) 1.16 0.94 2.83 (0.08) 2.28
------ ------ ------ ------ ------ ------ -------
Less distributions:
Distributions from and in excess
of
net investment income (0.48) (0.51) (0.36) (0.46) (0.44) (0.74) (0.52)
Distributions from and in
excess of net realized gains on
investments (0.71) -- (0.23) (0.48) (0.11) (0.30) (0.46)
Return of capital -- -- -- -- -- -- (0.17)
------ ------ ------ ------ ------ ------ -------
Total distributions (1.19) (0.51) (0.59) (0.94) (0.55) (1.04) (1.15)
------ ------ ------ ------ ------ ------ -------
Net asset value, end of year $14.08 $12.18 $13.11 $12.54 $12.54 $10.26 $11.38
====== ====== ====== ====== ====== ====== =======
Total return:
Total investment return 25.43% (3.19)% 9.29% 7.53% 27.93% (0.69)% 22.38%
Ratios/supplemental data:
Net assets, end of year (000s) $277,014 $196,278 $197,132 $113,572 $82,710 $58,368 $59,068
Ratio of expenses to average
net assets 0.66% 0.68% 0.69% 0.66% 0.71% 0.75% 0.78%
Ratio of net investment income to
average net assets 3.12% 4.01% 3.55% 3.98% 4.57% 5.30% 4.64%
Portfolio turnover ratio 66% 71% 47% 70% 82% 111% 109%
</TABLE>
6
<PAGE>
Mortgage Securities Income Fund
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
------- ------- ------- ------- ------- ------- ---------
Per share operating performance:
Net asset value, beginning of
<S> <C> <C> <C> <C> <C> <C> <C>
year $9.28 $10.17 $10.26 $10.42 $9.74 $9.69 $9.39
----- ----- ----- ----- ----- ----- -------
Net investment income 0.57 0.73 0.65 0.63 0.67 0.80 0.76
Net realized and unrealized gains
(losses) on investments 0.89 (0.89) (0.01) (0.01) 0.73 0.08 0.45
----- ----- ----- ----- ----- ----- -------
Total from investment operations 1.46 (0.16) 0.64 0.62 1.40 0.88 1.21
----- ----- ----- ----- ----- ----- -------
Less distributions:
Distributions from and in excess
of
net investment income (0.58) (0.73) (0.65) (0.62) (0.66) (0.83) (0.76)
Distributions from and in
excess of net realized gains on
investments -- -- (0.08) (0.16) (0.06) -- --
Return of capital -- -- -- -- -- -- (0.15)
----- ----- ----- ----- ----- ----- -------
Total distributions (0.58) (0.73) (0.73) (0.78) (0.72) (0.83) (0.91)
----- ----- ----- ----- ----- ----- -------
Net asset value, end of year $10.16 $9.28 $10.17 $10.26 $10.42 $9.74 $9.69
===== ===== ===== ===== ===== ===== =======
Total return:
Total investment return 15.74% (1.57)%(b) 6.26%(b) 5.95% 14.48% 9.10%(b) 12.84%(b)
Ratios/supplemental data:
Net assets, end of year (000s) $101,778 $72,420 $91,195 $67,353 $48,559 $29,992 $21,067
Ratio of expenses to average
net assets 0.69% 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 6.76% 6.71%(b) 6.64%(b) 6.72% 7.26% 8.09%(b) 7.85%(b)
Portfolio turnover ratio (c) 112% 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.
(c) The portfolio turnover ratio includes dollar roll transactions.
7
<PAGE>
Cash Income Fund
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
------ ------ ------ ------ ------ ------ --------
Per share operating performance:
Net asset value, beginning of
<S> <C> <C> <C> <C> <C> <C> <C>
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 (0.030) (0.037) (0.027) (0.034) (0.056) (0.076) (0.087)
---- ---- ---- ---- ---- ---- ------
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% 0.67% 0.66% 0.66%
Ratio of net investment income
to average net assets 5.48% 3.73% 2.68% 3.42% 5.67% 7.61% 8.68%
</TABLE>
8
<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,
1995, 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. The Fund invests in both domestic and foreign
companies.
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 pos- sibilities
for future growth of income may be included in the Fund's portfolio.
Investor Considerations. The type of securities in which the 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. The foreign companies in which the Fund invests may include
companies whose operations are limited to a single country or group of
countries. The value of such investments may be significantly impacted by
factors (both positive and negative) affecting the local economy of such
country or countries.
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--i.e., companies that create wealth over a long period of
time. 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. The foreign companies in which the Fund
invests typically are companies with global operations. Thus, in contrast to
CAF, the Fund generally is less likely to be impacted by country-specific
risks with respect to foreign investments.
Managed Assets Fund
Managed Assets Fund seeks to provide a high total investment return. The Fund's
assets are allocated among equities, debt securities and cash. The portfolio
manager determines those allocations using the Adviser's investment strategists'
views regarding economic, market, and other factors relative to investment
opportunities. The equity portion of the Fund's portfolio is invested primarily
in well-established companies having market capitalizations in excess of $1
billion. Under normal market conditions, debt securities will make up at least
25% of the Fund's total assets. Investments in debt securities are lim-
9
<PAGE>
ited to those that are within the four highest grades (generally referred to as
"investment grade") assigned by a nationally recognized statistical rating
organization, or, if unrated, determined by the Adviser to be of comparable
quality. The cash portion of the portfolio is 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.
Investor Considerations. Although the 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.
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 Backed Securities
representing beneficial interests in mortgage pools.
The Mortgage Backed Securities in which the Fund invests include but are not
limited to: Mortgage Pass-Through Certificates, including Government National
Mortgage Association (GNMA) Mortgage Pass-Through Certificates (GNMA
Certificates), Federal National Mortgage Association (FNMA) Mortgage
Pass-Through Certificates (FNMA Certificates), Federal Home Loan Mortgage
Corporation (FHLMC) Mortgage Pass- Through Certificates (FHLMC Certificates),
and Non- Governmental Mortgage Pass-Through Certificates, Commerical Mortgage
Backed Securities, Collateralized Mortgage Obligations (CMOs) and 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 Mortgage Backed Securities which are not guaranteed by the full faith and
credit of the U.S. Government or an agency or instrumentality thereof, 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 nationally recognized statistical rating
organization, or, if unrated, determined 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 the 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:
(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).
10
<PAGE>
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 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. CAF, MGSF
and MAF typically hold foreign companies in their portfolios. MSIF and CIF
are less likely to invest in foreign securities to any material extent.
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 (with particular reference to debt
securities) 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.
No Fund will (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)
[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
11
<PAGE>
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%. CAF, MAF and MSIF 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 MAF), purchase of securities on a
delayed delivery basis (in the case of MSIF) and the use of aggressive
strategies and investments (in the case of CAF). 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 Informa- tion contains the names of and
biographical information for 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 an Advisory
Agreement dated December 9, 1988 with CIF. 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 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
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.
Managed Growth Stock Fund is managed by Erik P. Gustafson. Mr. Gustafson
joined the Adviser in 1992 and became a Vice President of the Adviser in 1994
and a Senior Vice President in 1996. 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.
Harvey B. Hirschhorn is the portfolio manager for the Managed Assets Fund.
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.
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
12
<PAGE>
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.
Mortgage Securities Income Fund: 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 company providing insurance
and investment products to individuals and institutions through multiple
distribution channels. LFC's operating units include: Keyport, a specialist in
fixed, variable and indexed annuities; The Colonial Group, Inc., sponsor of the
Colonial family of mutual funds; the Adviser; Newport Pacific Management, Inc.,
a specialist in the 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 Funds. Foreign securities are maintained in the custody of
foreign banks and trust companies that are members of the State Street'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, 1997 to reimburse
all expenses, including management fees, incurred by the Funds as follows:
Fund Expenses Exceeding
- -------------- ------------------------------
CAF and MGSF 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 Adviser 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 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 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.
13
<PAGE>
PURCHASES AND REDEMPTION
The Participating Insurance Companies place daily 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
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.
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.
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., New York
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 securities 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
14
<PAGE>
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.
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, 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 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 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 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.
15
<PAGE>
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.
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
an amendment to 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 20
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.
16
<PAGE>
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.
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.
17
<PAGE>
APPENDIX
INVESTMENT TECHNIQUES
AND SECURITIES
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 Ameri- can 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 risks 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 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.
A-1
<PAGE>
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 Bands
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.
Master Demands 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
A-2
<PAGE>
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 creditworthiness 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 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
A-3
<PAGE>
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.
MORTGAGE BACKED SECURITIES
General
The types of mortgage loans that are generally available and that can be placed
in mortgage pools underlying Mortgage Backed Securities (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 Backed Securities
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 Mortgage Backed Securities 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 Mortgage
Backed Securities, 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.
These risks apply to all Mortgage Backed Securities, regardless of whether
they represent interests in pools of fixed or adjustable interest rate
mortgage loans. Adjustable interest rate mortgage loans also involve a
somewhat greater 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 Mortgage Backed
Securities backed by adjustable interest rate mortgage loans may decrease (or
increase) while the yield on Mortgage Backed Securities backed by fixed
interest rate mortgage loans should be more constant (although the market
value of Mortgage Backed Securities representing interests in a pool of
adjustable interest rate mortgage loans should be more constant than the
market value of Mortgage Backed Securities representing interests in pools of
fixed interest rate mortgage loans).
Mortgage Pass-Through Certificates
Mortgage Pass-Through Certificates are securities representing interests in
pools of mortgages. Principal and interest payments made on the mortgages in the
pools are passed through to the holder of such securities. Payment of principal
and interest on some Mortgage Pass-Through Certificates (but not the market
value of the securities themselves) may be guaranteed by the full faith and
credit of the U.S. Government (in the case of GNMA Certificates), or guaranteed
by agencies or instrumentalities of the U.S. Government (in the case of FNMA
Certificates and FHLMC Certificates). Non-Governmental Mortgage Pass- Through
Certificates are created by non-governmental issuers (such as commercial banks,
savings and loan institutions, private mortgage insurance companies, mortgage
bankers and other secondary market issuers).
A-4
<PAGE>
It is expected that of the various types of Mortgage Pass- Through
Certificates available, Non-Governmental Mortgage Pass-Through Certificates
(Non-Governmental Certificates) normally will offer the highest yields at a
given point in time. Although Non-Governmental Certificates may provide the
most attractive investment, they also involve particular risks. Non-
Governmental Certificates are not guaranteed by the U.S. Government or any
government agency. Non-Governmental 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
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.
The Funds also may invest in certificates representing undivided interests in
the interest or principal of Mortgage Backed Securities (interest
only/principal only securities). These securities tend to be more volatile
than other types of debt securities. The interest only class involves the
risk of loss of the entire value of the investment if the underlying
mortgages are prepaid. In the case of principal only class securities, a Fund
recognizes (accrues) as income for accounting purposes a portion of the
difference between purchase price and face value. Because the Fund includes
this accrued income in calculating its dividend even though it has not
received payment, the Fund may have to sell other investments to obtain cash
needed to make income distributions.
Commercial Mortgage Backed Securities
The Funds may invest in Mortgage Backed Securities 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.
Collateralized Mortgage Obligations (CMOs)
and Real Estate Mortgage Investment Conduits (REMICs)
CMOs and REMICs are debt securities issued by special purpose trusts
collateralized by underlying mortgage loans, pools of Mortgage Pass-Through
Certificates guaranteed by GNMA, FNMA or FHLMC, or pools of mortgages
sponsored by non- governmental agencies. CMOs and REMICs may be issued by
agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in mortgage loans, including depository
institutions, mortgage banks, investment banks and special-purpose
subsidiaries of the foregoing.
CMOs and REMICs are not, however, Mortgage Pass-Through Certificates, such as
those described above under "Mortgage Pass-Through Certificates." Rather,
they are pay-through securities, i.e., securities backed by the cash flow
from the underlying mortgages. Investors in CMOs and REMICs are not owners of
the underlying mortgages, which serve as collateral for such debt securities,
but are simply owners of a fixed-income security backed by such pledged
assets. CMOs and REMICs typically are structured into multiple classes, with
each class bearing a different stated maturity and having different payment
streams. One class (the Residual) is in the nature of equity. The Funds will
not invest in the Residual class. Although the structures of CMOs and REMICs
vary greatly, monthly payments of principal, including prepayments, typically
are first returned to the investors holding the shortest maturity class;
investors holding longer maturity classes typically receive principal
payments only after the shorter class or classes have been retired. A Fund
may experience costs and delays in liquidating the collateral if the issuer
defaults or enter bankruptcy and may incur a loss.
Dollar Roll Transactions
The Funds may enter into dollar roll transactions pertaining to Mortgage
Backed Securities. A dollar roll transaction involves a sale by a Fund of
Mortgage Backed Securities that it holds with an agreement by the Fund to
repurchase substantially similar
A-5
<PAGE>
securities at an agreed upon price and date. During the period between the sale
and repurchase, the Fund will not be entitled to accrue interest and receive
principal payments on the securities sold. Dollar roll transactions involve the
risk that the market value of the securities sold by the Fund may decline below
the repurchase price of those securities. In the event the buyer of securities
under a dollar roll transaction files for bankruptcy or becomes insolvent, the
Fund's use of proceeds of the transaction may be restricted pending a
determination by or with respect to the other party.
EQUIPMENT TRUST CERTIFICATES
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.
A-6
<PAGE>
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.
BBB. Debt rated BBB is regarded as having an adequate capac-
B-1
<PAGE>
ity 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.
COMMERCAIL 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
CROSS REFERENCE SHEET
(as required by Rule 481(a))
PART A
FORM N-1A LOCATION
1. Cover Page Cover Page
2. Synopsis The Trust
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page; The Trust; How
the Funds Invest; Investment
Techniques and Restrictions;
Portfolio Turnover; How the
Funds are Managed;
Organization and Description
of Shares; Appendix A:
Investment Techniques and
Securities
5. Management of the Fund How the Funds are Managed
5A. Management's Discussion of Fund Performance Information required by
Item 5A is included in the
Registrant's Annual Report for
the year ended December 31,
1995. As required by said Item
5A, the Registrant undertakes
under "Financial Highlights" in
the Prospectuses to provide free
of charge a copy of said Annual
Report to persons requesting the
same.
6. Capital Stock and Other Securities The Trust; Purchases and
Redemptions; Net Asset Value;
Taxes; Dividends and
Distributions; Shareholder
Communications; Organization
and Description of Shares;
Appendix A: Investment
Techniques and Securities
7. Purchase of Securities Being Offered How the Funds are Managed;
Purchases and Redemptions;
Net Asset Value
8. Redemption or Repurchase Purchases and Redemptions
9. Pending Legal Proceedings Not Applicable
STEINROE VARIABLE INVESTMENT TRUST
CAPITAL APPRECIATION FUND
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210
Capital Appreciation 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 capital growth by investing
primarily in common stocks, convertible securities, and other securities
selected for prospective capital growth. There is no assurance that the
objective of the Fund will be achieved.
- --------------------------------------------------------------------------------
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 cover page continues on the following page.)
The date of this prospectus is May 1, 1996
<PAGE>
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 call or write to the Annuity Service Center, Charles Schwab & Co.,
Inc. (1-800-838-6650; Post Office Box 7785, San Francisco, California
94120-9420), or the broker-dealer offering the Participating Insurance Company's
variable annuity contracts.
- --------------------------------------------------------------------------------
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, OF
INDEPENDENCE LIFE & ANNUITY COMPANY, OF LIBERTY LIFE ASSURANCE COMPANY OF
BOSTON, OF TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY, OF FIRST TRANSAMERICA
LIFE INSURANCE COMPANY, OR OF OTHER PARTICIPATING COMPANIES.
- --------------------------------------------------------------------------------
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. THIS PROSPECTUS
IS INTENDED TO BE USED SOLELY IN CONNECTION WITH VA CONTRACTS ISSUED BY
TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY OR FIRST TRANSAMERICA LIFE
INSURANCE COMPANY.
TABLE OF CONTENTS
Page
The Trust............................................................... 4
Financial Highlights.................................................... 5
How the Fund Invests.................................................... 6
Investment Techniques and Restrictions.................................. 7
Portfolio Turnover...................................................... 8
How the Fund is Managed................................................. 9
Purchases and Redemptions............................................... 11
Investment Return....................................................... 11
Net Asset Value......................................................... 12
Taxes................................................................... 13
Dividends and Distributions.............................................. 15
Shareholder Communications.............................................. 15
Organization and Description of Shares.................................. 15
Additional Information.................................................. 16
Appendix A: Investment Techniques and Securities........................ A-1
<PAGE>
THE TRUST
Capital Appreciation 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). The shares of the Trust's series funds currently are sold only to
Keyport Life Insurance Company (Keyport), Independence Life & Annuity Company
(Independence), Liberty Life Assurance Company of Boston (Liberty Life) and, in
the case of the Fund, also to Transamerica Occidental Life Insurance Company
(Transamerica Occidental) and First Transamerica Life Insurance Company (First
Transamerica). Keyport, Independence and Liberty Life (Keyport entities) are
affiliate entities, as are Transamerica Occidental and Transamerica Life
(Transamerica entities). There is no affiliation between the Keyport entities
and the Transamerica entities.
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.
This prospectus is intended to be used solely in connection with VA
Contracts issued by Transamerica Occidental or First Transamerica.
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 management,
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 March 31, 1996, approximately 81.5% 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
from the Charles Schwab & Co., Inc. Annuity Service Center (at the address and
phone number noted below) and is incorporated by reference into this Statement
of Additional Information. The Funds' 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.
Capital Appreciation Fund
Financial Highlights
(for a share outstanding throughout the period)
- --------------------------------------------------------------------------------
Years Ended December 31,
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ----
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Per share
operating
performance:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net asset value, $14.74 $16.53 $15.34 $15.32 $12.07 $14.79 $13.62
beginning of year ------ ------ ------ ------ ------ ------ ------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net investment 0.06 0.03 0.21 0.19 0.23 0.04 -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net realized and 1.69 0.09 5.22 2.17 4.19 (1.53) 3.90
unrealized ---- ---- ---- ---- ------ ---- ----
gains/(losses)
on investments
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total from 1.73 0.15 5.25 2.17 4.40 (1.34) 4.13
investment ---- ---- ---- ---- ----- ------ ----
operations
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Less
distributions:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Distributions (0.04) (0.07) (0.02) - (0.15) (0.28) (0.22)
from and in
excess of net
investment income
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Distributions (0.10) (1.87) (4.04) (2.15) (1.00) (1.10) (2.25)
from and in
excess of net
realized gains
on investments
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Return of capital - - - - - - (0.49)
----- ----- ----- ----- ----- ----- -----
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total (0.14) (1.94) (4.06) (2.15) (1.15) (1.38) (2.96)
distributions ------ ------ ------ ------ ------ ------ ------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net asset value, $16.33 $14.74 $16.53 $15.34 $15.32 $12.07 $14.79
end of year ====== ====== ====== ====== ====== ====== ======
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Total return:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total investment 11.75% 35.68%(b) 14.48% 37.25% (8.91%) 30.84% 1.19%(b)
return
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Ratios/supplemental
data:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net assets, end $143,248 $134,078 $96,544 $52,135 $41,179 $33,238 $32,176
of year (000s)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Ratio of 0.76% 0.80%(a) 0.84%(a) 1.01% 1.03% 1.14% 1.08%
expenses to
average net
assets
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Ratio of net 0.26% 0.44%(b) 0.13%(b) (0.01)% 1.35% 1.43% 1.14%
investment
income to
average net
assets
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio 132% 144% 112% 85% 36% 121% 153%
turnover ratio
- --------------------------------------------------------------------------------
(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 by calling or writing the Annuity Service
Center, Charles Schwab & Co., Inc. (1-800-838-6650; Post Office Box 7785, San
Francisco, California 94120-9420).
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. The net asset value of the shares of the Fund will vary with
market conditions and there can be no guarantee that any Fund will achieve its
investment objective.
The Fund and its investment objectives and policies and are described
below. The Fund's investment objective is 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 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.
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. The Fund invests in both domestic and foreign
companies.
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 the 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. The foreign companies in
which the Fund invests may include companies whose operations are limited to a
single country or group of countries. The value of such investments may be
significantly impacted by factors (both positive and negative) affecting the
local economy of such country or countries.
INVESTMENT TECHNIQUES AND RESTRICTIONS
Techniques
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. The
Fund typically holds foreign companies in its portfolio.
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.
It is the policy of the Fund that when the Adviser deems a temporary
defensive position advisable, the 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 that the Adviser believes such
alternative investments to be less risky than those securities in which the Fund
normally invests.
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 make loans of its portfolio securities to broker-dealers and
banks subject to certain restrictions described in the Trust's Statement of
Additional Information.
The Fund may invest in options, futures contracts and other derivatives
as described in Appendix A to this Prospectus and in the Trust's Statement of
Additional Information.
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 U.S. Government
Securities); (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 U.S. Government Securities); (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 15% 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%. The Fund may
have a higher rate of turnover than alternative investment funds because of the
flexibility of its investment policies permitting the use of aggressive
strategies and investments. The Fund's portfolio turnover rates are shown under
"FINANCIAL HIGHLIGHTS" above.
<PAGE>
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 May 1, 1993. 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.
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 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 1965 after graduating from Carlton College and the Woodrow Wilson
School at Princeton University with a Masters in Public Administration, rejoined
the Adviser in 1991 after 15 years of equity research and portfolio management
experience with State Farm Investment Corporation. Mr. Peterson is a Senior
Vice President of the Adviser.
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 0.50% 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 0.80% 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; 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; 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. (Redemption proceeds by the
Keyport entities may be reinvested in shares of the Other Funds or in shares in
the series fund of another open-end investment company sponsored by Keyport).
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.
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.
U.S. Securities
Each security traded on a national securities 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 latest valuation from a
principal market maker.
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 the 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 the 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 the Fund are valued at a fair value as
determined in good faith by, or under procedures established 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
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, 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 the Fund consists of all dividends or interest received by
the Fund, less estimated expenses (including the investment advisory and
administrative fees). Income dividends will be declared and distributed
annually. 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 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 Annuity Service
Center, Charles Schwab & Co., Inc. (1-800-838-6650; Post Office Box 7785, San
Francisco, California 94120-9420).
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.
<PAGE>
- --------------------------------------------------------------------------- ----
- --------------------------------------------------------------------------------
APPENDIX A
INVESTMENT TECHNIQUES
AND SECURITIES
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.
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
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 its 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
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.
OPTIONS, FUTURES AND OTHER DERIVATIVES
Consistent with its objective, the 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, 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.
PART B
FORM N-1A LOCATION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Commencement of Operations;
Mixed and Shared Funding
13. Investment Objectives and Policies Investment Restrictions;
Appendix A: Investment
Techniques and Securities
14. Management of the Fund Trustees and Officers;
Management Arrangements
15. Control Persons and Principal Holders Record Shareholders
of Securities
16. Investment Advisory and Other Services Management Arrangements;
Custodian; Independent
Auditors and Financial
Statements
17. Brokerage Allocation and other Practices Portfolio Transactions
18. Capital Stock and Other Securities Investment Restrictions;
Purchases and Redemptions;
Net Asset Value; Appendix A:
Investment Techniques and
Securities
<PAGE>
19. Purchase, Redemption and Pricing of Investment Restrictions;
Securities Being Offered Purchases and Redemptions;
Net Asset Value; Investment
Performance
20. Tax Status Taxes (Part A)
21. Underwriters Purchases and Redemptions
(Part A)
22. Calculation of Performance Data Investment Performance
23. Financial Statements The financial statements
required by Item 23 are
incorporated by reference
from the Registrant's Annual
Report for the year ended
December 31, 1995 and are
included in Part B.
STEINROE VARIABLE INVESTMENT TRUST
Federal Reserve Plaza
600 Atlantic Avenue, Boston, Massachusetts 02210
Statement of Additional Information
Dated May 1, 1996
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, 1996 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 OF CONTENTS
Page
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-13
PORTFOLIO TRANSACTIONS...................................... S-14
NET ASSET VALUE............................................. S-18
INVESTMENT PERFORMANCE...................................... S-19
RECORD SHAREHOLDERS......................................... S-21
INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS............... S-22
APPENDIX A - Investment Techniques and Securities........... A-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 five Funds with differing investment objectives,
policies and restrictions. Currently, the Trust consists of Capital Appreciation
Fund (CAF), Managed Growth Stock Fund (MGSF), Managed Assets Fund (MAF),
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. 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),
Independence Life & Annuity Company (a wholly owned subsidiary of Keyport)
(Independence), Liberty Life Assurance Company of Boston (an affiliate 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 81.5% 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. One or more of the Funds may from time to time
become funding vehicles for VA contracts or VLI policies of other Participation
Insurance Companies, including other entities not 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.
<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);
(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;
(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.
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.
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., Eastern 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.
TRUSTEES AND OFFICERS
The following table sets forth certain information with respect to the
Trustees and officers of the Trust:
Position(s) held Principal occupations
Name and Address with the Trust during past five years
Richard R. Christensen 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 Senior Vice President, Stein
One South Wacker Drive Roe & Farnham Incorporated
Chicago, IL 60606 since April 1996; Vice
President prior thereto
<PAGE>
Position(s) held Principal occupations
Name and Address with the Trust during past five years
Sharon R. Robertson Controller Associate, Stein Roe & Farnham
One South Wacker Drive Incorporated
Chicago, IL 60606
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
Chicago, IL 60606 Incorporated (1991 to
present); Vice President,
State Farm Investment
Management Company (prior
thereto)
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
Chicago, IL 60606 President (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
Chicago, IL 60606 President (1989-1990), Stein
Roe & Farnham Incorporated
Erik P. Gustafson Vice President Senior Vice President(April
One South Wacker Drive 1996 to present), Vice
Chicago, IL 60606 President (1994 to April
1996), Associate (1992 to
1994) Stein Roe & Farnham
Incorporated; prior thereto,
Associate, Fowler, White,
Burnett, Harley, Banick &
Strickroot, Tampa, Florida
<PAGE>
Position(s) held Principal occupations
Name and Address with the Trust during past five years
Timothy K. Armour Vice President President, Mutual Funds
One South Wacker Drive division, Stein Roe & Farnham
Chicago, IL 60606 Incorporated since June 1992;
Senior Vice President and
Director of Marketing of
Citibank Illinois, prior
thereto
Jilaine Hummel Bauer Vice President Senior Vice President
One South Wacker Drive (since April, 1992), Vice
Chicago, IL 60606 President, prior 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 FinancialCompanies,
Inc.; prior thereto,
Associate, Ropes & Gray,
Boston, Massachusetts
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.
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.
<PAGE>
Compensation Table
- ------------------------------------------------------------------------------
Total Compensation
From the Trust and
Affiliated Investment
Name of Trustee Aggregate 1995 Compensation* Companies in 1995**
Richard R. Christensen -- --
John A. Bacon Jr. $18,000 $27,000
Salvatore Macera 18,000 27,000
Dr. Thomas E. Stitzel 18,000 27,000
* 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 Kenneth R. Leibler, C. Allen Merritt,
Jr., Hans P. Ziegler, Timothy K. Armour, and N. Bruce Callow. Mr. Leibler is
President and Chief Executive Officer of LFC; Mr. Merritt is Senior Vice
President, Treasurer and Chief Financial 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 Messrs.
Leibler and Merritt 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.
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 1995, 1994 and 1993 respectively, pursuant to the advisory
contracts described in the Prospectus, each Fund paid the Adviser management
fees as follows:
Capital Appreciation Fund: $690,902, $583,720 and $356,650
Managed Growth Stock Fund: $586,298, $523,437 and $416,674
Managed Assets Fund:$ 1,009,369, $913,231 and $624,957
Mortgage Securities Income Fund: $316,804, $324,958 and $354,583
Cash Income Fund: $241,257, $296,330 and $244,509
Administrative Expenses:
During fiscal 1995, pursuant to the Administration Agreement described
above, each Fund paid the Adviser administrative fees as follows:
Capital Appreciation Fund: $207,244
Managed Growth Stock Fund: $175,868
Managed Assets Fund: $336,418
Mortgage Securities Income Fund: $118,789
Cash Income Fund: $103,394
In addition, during fiscal 1994 each Fund paid the Adviser $7,500 for
transfer agent services.
Expense Limitation:
The Adviser has agreed to reimburse all expenses of the Funds as follows
through April 30, 1996:
Fund Expenses Exceeding
CAF and MGSF 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
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).
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.
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 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.
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.
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 Capital
Appreciation Fund, Managed Growth Stock Fund and Managed Assets Fund during the
periods indicated. Cash Income Fund and Mortgage Securities Income Fund did not
pay commissions on any of their transactions.
<PAGE>
Managed
Capital Managed Growth
Appreciation Assets Stock
Fund Fund Fund
Total amount
of brokerage
commissions
paid during
fiscal year
ended
12/31/95 $485,545 $273,626 $109,831
Amount of
commissions
paid to brokers
or dealers who
supplied research
services to the
Adviser $427,443 $251,720 $105,811
Total dollar
amount involved
in such
transactions: $137,912,736 $130,438,221 $71,179,668
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 $136,159 $64,064 $17,637
Total dollar
amount involved
in such
transactions: $59,401,841 $31,650,719 $9,970,606
Total brokerage
fees paid during
fiscal year ended
12/31/94: $353,943 $219,454 $166,006
Total brokerage
fees paid during
fiscal year ended
12/31/93: $160,071 $158,027 $131,649
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.
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, 1995 was:
$0.001021386 X 365
Current Yield = $1.00 7 = 5.33%
365/7
[1 + $0.001021386]
------------------
Effective Yield = $1.00 - 1 = 5.47%
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, 1995 were:
Total Return Average Annual
Fund Total Return Percentage Total
Return
Capital $2,874 187.29% 16.28%
Appreciation
Fund
Managed Growth $2,760 175.91% 15.61%
Stock Fund
Managed Assets $2,219 121.88% 12.06%
Fund
Mortgage Securities $1,808 80.75% 8.83%
Income Fund
Cash Income Fund $1,450 45.01% 5.45%
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,
1995 the general account of Keyport owned of record less than 25% of the
outstanding shares of all the Funds.
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, 1995 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 the financial highlights has been included in the Prospectus, in
reliance upon the 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 12 to 40 of the December 31, 1995 Annual Report of the Trust
are incorporated in this SAI by reference.
<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).
MORTGAGE-BACKED SECURITIES
Mortgage Pass-Through Certificates
A Mortgage Pass-Through Certificate is a Mortgage Backed Security
representing 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
Mortgage 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 Mortgage 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 Mortgage 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.
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 represent 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.
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 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.
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.
<PAGE>
FHLMC 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 Mortgage
Pass-Through Certificates), and by issuing debentures and otherwise borrowing
funds.
FHLMC 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 FHLMC 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 FHLMC 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 FHLMC 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 FHLMC 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 FHLMC
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 FHLMC Certificates,
FHLMC has provided since June 20, 1975, and expects to continue to provide, bid
quotations for outstanding FHLMC Certificates. Informational bid quotations are
available daily on Telerate Financial Information Network or from FHLMC's
regional offices.
Non-Governmental Mortgage Pass-Through Certificates
A Non-Governmental 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. Non-Governmental 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 or other
credit support 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.
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 senior/subordinated class
structures, are used in place of mortgage guaranty insurance but serve a similar
credit support 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 Non-Governmental 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.
<PAGE>
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
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.
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.
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.
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.
<PAGE>
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 index2 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.
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.
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.
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.
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 option4 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.
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.
Most Mortgage Pass-Through Certificates (especially FNMA and
Non-Governmental 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.
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.
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.
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 exercise price exceeds the value of the futures contract
that is the subject of the option.
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).
PART B
FORM N-1A LOCATION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Commencement of Operations;
Mixed and Shared Funding
13. Investment Objectives and Policies Investment Restrictions;
Appendix A: Investment
Techniques and Securities
14. Management of the Fund Trustees and Officers;
Management Arrangements
15. Control Persons and Principal Holders Record Shareholders
of Securities
16. Investment Advisory and Other Services Management Arrangements;
Custodian; Independent
Auditors and Financial
Statements
17. Brokerage Allocation and other Practices Portfolio Transactions
18. Capital Stock and Other Securities Investment Restrictions;
Purchases and Redemptions;
Net Asset Value; Appendix A:
Investment Techniques and
Securities
<PAGE>
19. Purchase, Redemption and Pricing of Investment Restrictions;
Securities Being Offered Purchases and Redemptions;
Net Asset Value; Investment
Performance
20. Tax Status Taxes (Part A)
21. Underwriters Purchases and Redemptions
(Part A)
22. Calculation of Performance Data Investment Performance
23. Financial Statements The financial statements
required by Item 23 are
incorporated by reference
from the Registrant's Annual
Report for the year ended
December 31, 1995 and are
included in Part B.
STEINROE VARIABLE INVESTMENT TRUST
CAPITAL APPRECIATION FUND
Federal Reserve Plaza
600 Atlantic Avenue, Boston, Massachusetts 02210
Statement of Additional Information
Dated May 1, 1996
This Statement of Additional Information is not a prospectus, but provides
additional information which should be read in conjunction with the Capital
Appreciation Fund's Prospectus dated May 1, 1996 and any supplement thereto. The
Prospectus may be obtained at no charge by calling or writing the Annuity
Service Center, Charles Schwab & Co., Inc. (1-800-838-6650; Post Office box
7785, San Francisco, California 94120-9420), or the broker-dealer offering the
Participating Insurance Company's variable annuity contracts.
This Prospectus is intended to be used solely in connection with variable
annuity contracts issued by Transamerica Occidental Life Insurance Company or
First Transamerica Life Insurance Company.
TABLE OF CONTENTS
Page
COMMENCEMENT OF OPERATIONS.................................. S-2
MIXED AND SHARED FUNDING.................................... S-2
INVESTMENT RESTRICTIONS..................................... S-2
PORTFOLIO TURNOVER.......................................... S-6
PURCHASES AND REDEMPTIONS................................... S-6
TRUSTEES AND OFFICERS....................................... S-6
MANAGEMENT ARRANGEMENTS..................................... S-10
TRUST CHARGES AND EXPENSES.................................. S-11
CUSTODIAN................................................... S-11
PORTFOLIO TRANSACTIONS...................................... S-12
NET ASSET VALUE............................................. S-15
INVESTMENT PERFORMANCE...................................... S-15
RECORD SHAREHOLDERS......................................... S-16
INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS............... S-16
APPENDIX A - Investment Techniques and Securities........... A-1
<PAGE>
COMMENCEMENT OF OPERATIONS
Capital Appreciation 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. Other funds may be added or deleted from time to
time. 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 series funds of the Trust other than the Fund are referred to hereinafter as
"Other Funds."
MIXED AND SHARED FUNDING
The Trust serves as a funding medium for VA contracts and VLI policies of
Participating Insurance Companies, (as such term is defined in the Prospectus),
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), Independence Life & Annuity Company (a wholly owned
subsidiary of Keyport) (Independence), Liberty Life Assurance Company of Boston
(an affiliate of Liberty Mutual Insurance Company) (Liberty Life), and, with
respect to the Fund, 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 81.5% of
the combined voting power of LFC's outstanding voting stock was owned,
indirectly, by Liberty Mutual Insurance Company (Liberty Mutual). Neither
Transamerica Occidental nor First Transamerica are affiliated with Keyport or
Liberty Mutual. The Fund may from time to time become a funding vehicle for VA
contracts and VLI policies of other Participating Insurance Companies, including
other entities not 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 the Fund or shares of another fund may be
substituted. This might force the Fund to sell securities at disadvantageous
prices.
INVESTMENT RESTRICTIONS
The Fund operates under the investment restrictions listed below.
Restrictions numbered (i) through (viii) are fundamental policies which may not
be changed without approval of a majority of the outstanding voting shares of
the Fund, defined as the lesser of the vote of (a) 67% of the shares of the 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 the Fund. Other
restrictions are not fundamental policies and may be changed by the Trustees
without shareholder approval.
The Fund may not:
(i) with respect to 75% of the value of the total assets of the 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 securities issued or
guaranteed by the U.S. government or its agencies or
instrumentalities;
(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 securities issued
or guaranteed by the U.S. Government or its agencies or
instrumentalities;
(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;
(vii) make loans, but this restriction shall not prevent the 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.
The Fund is also subject to the following restrictions and policies, which
are not fundamental and may be changed by the Trustees without shareholder
approval.
The 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;
(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% 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.
Additional Voluntary Restrictions
The 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 the Fund's assets will not constitute a violation
of the limit.
PORTFOLIO TURNOVER
The portfolio turnover of the Fund will vary from year to year. Although
the Fund will not 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 the 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 the Fund.
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 Fund pays
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
the 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."
The 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 the Fund should
be determined on any such day, in which case the determination will be made at
4:00 p.m., Eastern time.
The Trust reserves the right to suspend or postpone redemptions of shares
of the 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 the
Fund not reasonably practicable.
TRUSTEES AND OFFICERS
The following table sets forth certain information with respect to the
Trustees and officers of the Trust:
Position(s) held Principal occupations
Name and Address with the Trust during past five years
Richard R. Christensen1 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 Senior Vice President,
One South Wacker Drive Stein Roe & Farnham
Chicago, IL 60606 Incorporated since April 1996;
Vice President prior thereto
Sharon R. Robertson Controller Associate, Stein Roe &
One South Wacker Drive Farnham Incorporated
Chicago, IL 60606
Richard B. Peterson Vice President Senior Vice President,
One South Wacker Drive Stein Roe & Farnham
Chicago, IL 60606 Incorporated(1991 to present);
Vice President, State Farm
Investment Management
Corporation (prior thereto)
E. Bruce Dunn Vice President Senior Vice President,
One South Wacker Drive Stein Roe & Farnham
Chicago, IL 60606 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
South Wacker Drive 1994 to present), Vice
Chicago, IL 60606 President (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
Chicago, IL 60606 President (1989-1990),
Stein Roe & Farnham
Incorporated.
Eric P. Gustafson Vice President Senior Vice President
One South Wacker (April 1996 to present),
Chicago, IL 60606 Vice President(1994 to
present), Associate
(1992-1994), Stein Roe &
Farnham Incorporated; prior
thereto, Associate, Fowler,
White, Burnett, Harley, Banick
& Strickroot, Tampa, Florida
Timothy K. Armour Vice President President, Mutual Funds
One South Wacker Drive division, Stein Roe & Farnham
Chicago, IL 60606 Incorporated since June 1992;
Senior Vice and Director of
Marketing of Citibank
Illinois, prior thereto
Jilaine Hummel Bauer Vice President Senior Vice President
One South Wacker Drive (since April, 1992), Vice
Chicago, IL 60606 President, prior 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,
Boston, Massachusetts
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.
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.
Compensation Table
- ------------------------------------------------------------------------------
Total Compensation
From the Trust and
Affiliated Investment
Name of Trustee Aggregate 1995 Compensation* Companies in 1995*
Richard R. Christensen -- --
John A. Bacon Jr. $18,000 $27,000
Salvatore Macera 18,000 27,000
Dr. Thomas E. Stitzel 18,000 27,000
* 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
<PAGE>
MANAGEMENT ARRANGEMENTS
As described in the Prospectus, the portfolio of the Fund is managed by
Stein Roe & Farnham Incorporated (the Adviser). The Fund has its own Advisory
Agreement with the Adviser. The Adviser is a direct wholly owned subsidiary of
SteinRoe Services, Inc., which in turn is a direct wholly owned subsidiary of
LFC. LFC, in turn, is a an indirect majority owned subsidiary of Liberty Mutual.
The directors of the Adviser are Kenneth R. Leibler, C. Allen Merritt,
Jr., Hans P. Ziegler, Timothy K. Armour, and N. Bruce Callow. Mr. Leibler is
President and Chief Executive Officer of LFC; Mr. Merritt is Senior Vice
President, Treasurer and Chief Financial 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; Mr. Callow is President of the
Adviser's Investment Counsel division. The business address of Messrs.
Leibler and Merritt is Federal Reserve Plaza, 600 Atlantic Avenue, Boston,
Massachusetts, 02210; that of Messrs. Ziegler, Armour and Callow is One South
Wacker Drive, Chicago, Illinois 60606.
The Adviser, at its own expense, provides office space, facilities and
supplies, equipment and personnel for the performance of its functions under the
Fund's Advisory Agreement and pays all compensation of the Trustees, officers
and employees who are employees of the Adviser.
The 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 the
Fund and each Other 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 Fund
and the Other 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 Fund. The Trust believes that the charges
by the Administrator to the Fund for these services are comparable to those of
other companies performing similar services.
TRUST CHARGES AND EXPENSES
Management Fees:
During fiscal 1995, 1994 and 1993, respectively, pursuant to the advisory
contract described in the Prospectus, the Fund paid the Adviser management fees
in the amount of $690,902, $583,720 and $356,650, respectively.
Administrative Expenses:
During fiscal 1995, pursuant to the Administration Agreement described
above, the Fund paid the Adviser administration fees in the amount of $207,244.
In addition, during fiscal 1995 the Fund paid the Adviser $75,000 for transfer
agent services.
Expense Limitation:
The Adviser and Administrator have agreed to reimburse all expenses of the
Fund in excess of 0.80% of average net assets through April 30, 1997.
CUSTODIAN
State Street Bank and Trust Company (the Bank), 225 Franklin Street,
Boston, Massachusetts 02110, is the custodian for the Fund. It is responsible
for holding all securities and cash of the 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
Fund 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 Fund. 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).
With respect to foreign sub-custodians, there can be no assurance that the
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 the 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 Fund may invest in obligations of the Bank and may purchase or sell
securities from or to the Bank.
PORTFOLIO TRANSACTIONS
The Adviser places orders for the purchase and sale of portfolio
securities and options and futures contracts on behalf of the 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 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 dealer; 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, the
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 the 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
Fund, 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 the 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 the 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 Fund.
As stated above, the Adviser's overriding objective in effecting portfolio
transactions for the Fund 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 Fund, 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 the
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
the 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 the Fund an amount in respect of the
Fund's assets allocable to the Fund 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 the 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 Fund 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 Fund's transactions, it is believed that the
procedure generally contributes to better overall execution of the Fund's
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 Fund 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.
The Fund'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
Fund. 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. The
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 the 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 the 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 the
Fund during the three year period ended December 31, 1995.
Total amount of brokerage commissions
paid during fiscal year ended 12/31/95............................ $485,545
Amount of commissions paid to brokers or dealers
who supplied research services to the Adviser..................... $427,443
Total dollar amount involved in such transaction.................. $137,912,736
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......... $136,159
Total dollar amount involved in such transaction.................. $59,401,841
Total brokerage fees paid during fiscal year ended 12/31/94....... $359,943
Total brokerage fees paid during fiscal year ended 12/31/93....... $160,071
<PAGE>
NET ASSET VALUE
The net asset value of the shares of the Fund is determined by dividing
the total assets of the Fund, less all liabilities (including accrued expenses),
by the total number of shares outstanding.
The proceeds received by the 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 the Fund, and constitute
the underlying assets of the Fund. The underlying assets of the Fund will be
segregated on the books of account, and will be charged with the liabilities in
respect to the Fund and with a share of the general liabilities of the Trust.
INVESTMENT PERFORMANCE
The Fund 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 Fund, the "Total Return," the
"Total Return Percentage," and the "Average Annual Total Return" for the life of
the Fund (from January 1, 1989 to December 31, 1995) were:
Total Return Average Annual
Total Return Percentage Total Return
Capital
Appreciation
Fund $2,874 187.29% 16.28%
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 the 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
the 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 Fund's
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, the 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 Fund. Any
comparison of the Fund to an alternative investment should consider differences
in features and expected performance.
RECORD SHAREHOLDERS
All the shares of the Fund 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,
1995 the general account of Keyport owned of record less than 25% of the
outstanding shares of the Fund.
At all meetings of shareholders of the Fund 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 Fund 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, 1995 owned beneficially 5% or more of the outstanding
shares of the 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 with respect to the Fund and Report
of Independent Auditors appearing in the December 31, 1995 Annual Report of the
Trust are incorporated in this SAI by reference.
<PAGE>
APPENDIX A
INVESTMENT TECHNIQUES AND SECURITIES
OPTIONS, FUTURES AND OTHER DERIVATIVES
The 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. The 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.
Options on Securities and Indexes
The 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.
The 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 economic indicators.)
The 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 the Fund expires, it realizes a capital gain equal
to the premium received at the time the option was written. If an option
purchased by the Fund expires, it 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 the Fund desires.
The 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 the Fund is an asset of the Fund, valued
initially at the premium paid for the option. The premium received for an option
written by the 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 the Fund
seeks to close out an option position. If the 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 the 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, the 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 the 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.
Futures Contracts and Options on Futures Contracts
The 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 index2 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
the Fund, it will limit its use of futures contracts and futures options to
hedging transactions. For example, the 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 the 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.
The 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 future 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, the 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.
When a purchase or sale of a futures contract is made by the Fund, it 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. The Fund expects to earn interest income on its
initial margin deposits. A futures contract held by the 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 the 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, the Fund will mark-to-market its open futures positions.
The 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.
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
to use futures 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 stock 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
the 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.
Limitations on Options and Futures
The 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 the 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, the 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.
The 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 Regulation
("CFTC") 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%].
<PAGE>
Taxation of Options and Futures
If the 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 the Fund, the difference between the
cash received at exercise and the premium paid is a capital gain or loss.
If a call or put option written by the 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 the 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 the 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 the Fund writes an equity call option4 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 the Fund delivers securities under a futures contract, the
Fund also realizes a capital gain or loss on those securities.
For Federal income tax purposes, the 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 the 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.
If the 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 the 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
The 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 Fund 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 Fund 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 Fund engages in when-issued and
delayed-delivery transactions, the Fund relies on the buyer or seller, as the
case may be, to consummate the sale. Failure to do so may result in the Fund
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 Fund until it receives 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 Fund does not accrue any income on such
securities prior to their delivery. To the extent the 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.
WARRANTS
The Fund may invest in warrants; however, not more than 5% of the 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
the 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.
1 ____________________
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.
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.
3 A call option is "in-the-money" if the value of the futures contract that
is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures contract
that is the subject of the option.
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 option on
broad-based stock indexes (such as the Standard & Poor's 500 Stock Index).
INDEPENDENT AUDITORS' REPORT
Stein Roe Variable Investment Trust Cash Income Fund
The Board of Trustees and Shareholders
of SteinRoe Variable Investment Trust
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of Capital Appreciation Fund, Managed
Growth Stock Fund, Managed Assets Fund, Mortgage Securities Income Fund, and
Cash Income Fund, all constituent funds of SteinRoe Variable Investment Trust,
as of December 31, 1995, and the related statements of operations for the year
then ended, the statements of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the years
presented. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1995 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
funds constituting the SteinRoe Variable Investment Trust as of December 31,
1995, the results of their operations for the year then ended, the changes in
their net assets for each of the two years in the period then ended, and the
financial highlights for each of the years in the presented, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 12, 1996
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
SteinRoe Variable Investment Trust Capital Appreciation Fund / December 31,
1995
<CAPTION>
Market
Shares Value
--------- -----------
<S> <C> <C>
COMMON STOCKS--(93.5%)
Aerospace - (1.9%)
Hexel Corporation 125,000 $ 1,406,250
Power Control Technologies, Inc. 155,000 1,259,375
-----------
2,665,625
-----------
Banks/Savings and Loans--(2.2%)
Rancho Santa Fe National Bank (a) 110,000 385,000
Southern National Corporation 105,000 2,756,250
-----------
3,141,250
-----------
Broadcasting--(3.0%)
Central European Media Enterprises 141,900 2,908,950
Grupo Radio Centro ADS 186,000 1,371,750
-----------
4,280,700
-----------
Business Services--(17.0%)
Danka Business Systems Plc ADR 106,000 3,922,000
Fiserv Inc. (a) 95,000 2,850,000
G & K Services Cl. A 256,000 6,528,000
Interim Services, Inc. (a) 170,000 5,907,500
Unitog Company 213,000 5,138,625
-----------
24,346,125
-----------
Chemicals--(0.7%)
CFC International, Inc. (a) 115,000 991,875
-----------
Computers/Business Equipment--(1.2%)
Daktronics, Inc. (a) 85,300 383,850
Zytec Corp. (a) 110,000 1,265,000
-----------
1,648,850
-----------
Computer Services--(3.2%)
Keane, Inc. (a) 209,800 4,641,825
-----------
Consumer Products--(2.3%)
Kimberly-Clark de Mexico 105,000 1,587,667
Thomas Nelson, Inc. 135,000 1,755,000
-----------
3,342,667
-----------
Electronics--(5.4%)
AVX Corp. 87,400 2,316,100
C.P. Clare Corporation 110,000 2,255,000
Harris Corp 40,000 2,185,000
Littelfuse, Inc. (a) 25,000 918,750
-----------
7,674,850
-----------
Energy Services--(2.5%)
Weatherford Enterra Inc. (a) 125,000 3,609,375
-----------
<PAGE>
<CAPTION>
Market
Shares Value
--------- ----------
<S> <C> <C>
Financial--(2.7%)
BHI Corp. 163,516 $ 2,575,377
Grupo Financiero Inbursa (a) 460,000 1,343,336
-----------
3,918,713
-----------
Health Care--(7.1%)
AmeriSource Distribution
Corporation (a) 199,700 6,590,100
Henry Schein (a) 115,200 3,398,400
PACE Health Management Systems,
Inc. (a) 75,000 196,875
-----------
10,185,375
-----------
Insurance--(13.6%)
Meadowbrook Insurance Group, Inc. (a) 74,200 2,485,700
National Mutual of Asia 4,493,000 4,067,694
Protective Life Corporation (a) 85,000 2,656,250
Triad Guaranty, Inc. (a) 213,800 5,665,700
20th Century Industries, Inc. 234,000 4,650,750
-----------
19,526,094
-----------
Media/Broadcasting--(1.4%)
Valuevision International, Inc. (a) 350,000 1,946,875
-----------
Medical Equipment--(2.5%)
Stryker Corporation 69,400 3,643,500
-----------
Miscellaneous--(0.8%)
Barefoot Inc. 110,000 1,155,000
-----------
Miscellaneous Transportation--(1.2%)
Ek Chor China Motorcycle Co. Ltd. 150,000 1,743,750
-----------
Packaging--(1.6%)
Crown Cork & Seal, Inc. (a) 55,000 2,296,250
-----------
Oil/Gas--(6.5%)
Alexander Energy Corp. (a) 355,000 1,619,687
Barrett Resources Corp. (a) 120,000 3,525,000
St. Mary Land & Exploration Co. 49,000 686,000
Renaissance Energy Ltd. 116,400 2,901,892
Vintage Petroleum, Inc. 25,000 562,500
-----------
9,295,079
-----------
Retail Trade--(3.1%)
Proffitts, Inc. (a) 59,000 1,548,750
Quality Food Centers, Inc. 130,000 2,860,000
-----------
4,408,750
-----------
<PAGE>
<CAPTION>
SCHEDULE OF INVESTMENTS (Continued)
SteinRoe Variable Investment Trust Capital Appreciation Fund / December 31, 1995
Market
Shares Value
--------- -----------
<S> <C> <C>
COMMON STOCKS (Continued)
Specialty Chemicals--(8.1%)
Cambrex Corp. 98,300 $ 4,067,163
OM Group, Inc. 173,500 5,747,187
PENWEST Ltd. 73,700 1,824,075
------------
11,638,425
------------
Telecommunications--(4.0%)
ABC Communication Holdings Ltd. 3,199,000 579,237
Plantronics, Inc. (a) 125,000 4,515,625
Shanghai Post &
Telecommunications (a) 1,659,000 660,282
------------
5,755,144
------------
Water Filtration--(1.5%)
Culligan 87,400 2,119,450
------------
Total Common Stocks (Cost $119,676,471) 133,975,547
------------
Market
SHORT-TERM INVESTMENTS--(8.6%) Par Value
----------- ------------
Goldman Sachs Group, 6.050%, due
01/02/96 $ 4,000,000 $ 3,997,983
ITT Hartford, 5.800%, due 1/03/96 6,000,000 5,996,133
Lehman Brothers Holdings, 6.100%,
due 1/02/96 2,265,000 2,263,849
------------
Total Short-Term Investments
(Cost $12,257,965) 12,257,965
------------
Total Investments--(102.1%)
(Cost $131,934,436)(b) 146,233,512
Other Assets, Less Liabilities--(-2.1%) (2,985,383)
------------
Net Assets (100%) $143,248,129
=============
<FN>
(a)Non-income producing security.
(b)The cost of investments for federal income tax purposes is $131,958,186.
Gross unrealized appreciation and depreciation on investments at
December 31, 1995 is as follows:
Gross unrealized appreciation: $22,380,839
Gross unrealized depreciation: (8,105,513)
------------
Net unrealized appreciation: $14,275,326
===========
See Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
SteinRoe Variable Investment Trust Capital Appreciation Fund / December 31, 1995
<S> <C>
Assets:
Investments, at market value (identified cost $131,934,436) $146,233,512
Receivable for investments sold 1,142,078
Receivable for fund shares sold 86,950
Dividends and interest receivable 21,718
Other assets 14,955
------------
Total assets 147,499,213
------------
Liabilities:
Payable for investments purchased 3,736,360
Payable for fund shares repurchased 356,742
Management fee payable 55,422
Administrative fee payable 16,644
Accrued expenses payable 36,486
Payable to custodian bank 49,430
------------
Total liabilities 4,251,084
------------
Net assets $143,248,129
============
Net assets represented by:
Paid-in capital $129,235,823
Accumulated overdistributed net investment income (77,716)
Accumulated distributions in excess of net realized gains on
investments (209,696)
Net unrealized appreciation on investments and foreign currencies 14,299,718
------------
Total net assets applicable to outstanding shares of
beneficial interest $143,248,129
=============
Shares of beneficial interest outstanding 8,773,334
=============
Net asset value per share $16.33
=======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
<S> <C>
Investment income:
Dividends (net of foreign taxes withheld) $ 734,892
Interest income 681,999
-------------
Total investment income 1,416,891
-------------
Expenses:
Management fee 686,978
Administrative fee 206,085
Custodian fee 60,122
Accounting fee 27,202
Printing expense 24,171
Audit and legal fees 18,797
Trustees' expense 9,696
Transfer agent fee 7,460
Miscellaneous expense 9,183
-------------
Total expenses 1,049,694
-------------
Net investment income 367,197
Realized and unrealized gains (losses) on investments:
Net realized gains on investments 1,051,804
Net realized losses on foreign currency transactions (20,399)
Change in unrealized appreciation or depreciation on investments 13,894,884
-------------
Net increase in net assets resulting from operations $ 15,293,486
===========
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
SteinRoe Variable Investment Trust Capital Appreciation Fund
Years Ended December 31,
-------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Operations:
Net investment income $ 367,197 $ 517,097
Net realized gains on investments 1,051,804 13,548,855
Net realized losses on foreign currency transactions (20,399) (231)
Change in unrealized appreciation or
depreciation on investments 13,894,884 (12,211,045)
------------ ------------
Net increase in net assets resulting from operations 15,293,486 1,854,676
------------ ------------
Distributions declared from:
Net investment income (346,798) (516,866)
Distributions in excess of net investment income (28,200) (47,983)
Net realized gains on investments (849,985) (14,465,741)
Distributions in excess of net realized gains
on investments -- (411,514)
------------ ------------
Total distributions (1,224,983) (15,442,104)
------------ ------------
Fund share transactions:
Proceeds from fund shares sold 43,757,834 68,416,999
Cost of fund shares repurchased (49,881,536) (32,737,534)
Distributions reinvested 1,224,983 15,442,104
------------ ------------
Net increase (decrease) in net assets resulting
from fund share transactions (4,898,719) 51,121,569
------------ ------------
Total increase in net assets 9,169,784 37,534,141
Net assets:
Beginning of year 134,078,345 96,544,204
------------ ------------
End of year $143,248,129 $134,078,345
============ ============
Accumulated overdistributed net investment income
included in ending net assets $ (77,716) $ (49,516)
============ ============
Analysis of changes in shares of beneficial interest:
Shares sold 2,916,477 4,230,792
Shares repurchased (3,317,111) (2,037,606)
Distributions reinvested 75,757 1,065,237
------------ ------------
Net increase (decrease) (324,877) 3,258,423
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SteinRoe Variable Investment Trust Capital Appreciation Fund
Years Ended December 31,
-------------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of year $ 14.74 $ 16.53 $ 15.34 $ 15.32 $ 12.07
--------- --------- -------- -------- --------
Net investment income 0.04 0.06 0.03 -- 0.21
Net realized and unrealized gains
on investments and foreign currency transactions 1.69 0.09 5.22 2.17 4.19
--------- --------- -------- -------- --------
Total from investment operations 1.73 0.15 5.25 2.17 4.40
--------- --------- -------- -------- --------
Less distributions:
Distributions from and in excess of net investment income (0.04) (0.07) (0.02) -- (0.15)
Distributions from and in excess of net realized gains
on investments (0.10) (1.87) (4.04) (2.15) (1.00)
--------- --------- -------- -------- --------
Total distributions (0.14) (1.94) (4.06) (2.15) (1.15)
--------- --------- -------- -------- --------
Net asset value, end of year $ 16.33 $ 14.74 $ 16.53 $ 15.34 $ 15.32
======== ======== ======= ======= =======
Total return:
Total investment return 11.75% 1.19%(b) 35.68%(b) 14.48% 37.25%
Ratios/supplemental data:
Net assets, end of period (000s) $143,248 $134,078 $96,544 $52,135 $41,179
Ratio of expenses to average net assets 0.76% 0.80%(a) 0.84%(a) 1.01% 1.03%
Ratio of net investment income to average net assets 0.26% 0.44%(b) 0.13%(b) (0.01)% 1.35%
Portfolio turnover ratio 132% 144% 112% 85% 36%
<FN>
(a) These ratios were not materially affected by the reimbursement
of certain expenses by the Investment Adviser and Administrator.
(b) Computed giving effect to the Investment Adviser's and the
Administrator's expense limitation undertaking.
See Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
SteinRoe Variable Investment Trust Managed Growth Stock Fund / December 31,
1995
Market
Shares Value
--------- -----------
<S> <C> <C>
COMMON STOCKS--(96.2%)
Banks; Savings & Loans--(7.0%)
Citicorp 50,000 $ 3,362,500
Fleet Financial Group Inc. 50,000 2,037,500
MBNA Corp. 70,000 2,581,250
Royal Bank of Scotland Plc 182,000 1,656,087
-----------
9,637,337
-----------
Business Services--(2.4%)
First Data Corporation 50,000 3,343,750
-----------
Computers and Computer Software--(3.4%)
Hewlett-Packard 25,000 2,093,750
Microsoft Corp. (a) 30,000 2,632,500
-----------
4,726,250
-----------
Construction--(1.9%)
Fluor Inc. 40,000 2,640,000
-----------
Consumer-Related--(7.8%)
CUC International, Inc. (a) 75,000 2,559,375
The Gillette Company 75,000 3,909,375
The Proctor & Gamble Co. 50,000 4,150,000
-----------
10,618,750
-----------
Distribution--Wholesale--(1.8%)
Sysco Corporation 75,000 2,437,500
-----------
Drugs--(3.7%)
Eli Lilly & Co. 50,000 2,812,500
Sandoz ADRs 50,000 2,293,750
-----------
5,106,250
-----------
Electrical Equipment--(3.2%)
General Electric Company 60,000 4,320,000
-----------
Electronics--(1.4%)
Tellabs 50,000 1,850,000
-----------
Energy--(3.4%)
Renaissance Energy Ltd. (a) 75,000 1,869,776
Schlumberger Ltd. 40,000 2,770,000
-----------
4,639,776
-----------
<PAGE>
<CAPTION>
Market
Shares Value
--------- -----------
<S> <C> <C>
Financial Services--(3.2%)
Federal National Mortgage
Association 35,000 $ 4,344,375
-----------
Food/Beverage/Tobacco--(5.1%)
The Coca Cola Company 50,000 3,712,500
Nabisco Holdings Corp. 100,000 3,262,500
-----------
6,975,000
-----------
Health Care--(10.2%)
Abbott Laboratories 65,000 2,713,750
Johnson & Johnson 40,000 3,425,000
Roche Holdings Ltd. ADSs (c) 40,000 3,172,116
United Healthcare 70,000 4,585,000
-----------
13,895,866
-----------
Hotel--(3.0%)
HFS, Inc. 50,000 4,087,500
------------
Insurance--(5.5%)
American International Group, Inc. 37,500 3,468,750
The Travelers, Inc. 65,000 4,086,875
-----------
7,555,625
-----------
Leisure & Entertainment--(2.6%)
Disney (Walt) Co. 60,000 3,540,000
-----------
Media--(1.7%)
Viacom International Incorporated
Class B (a) 50,000 2,368,750
-----------
Medical Supplies--(2.9%)
Medtronic, Inc. 70,000 3,911,250
-----------
Retail--(4.5%)
The Home Depot, Inc. 75,000 3,590,625
Kohl's Corp. (a) 50,000 2,625,000
-----------
6,215,625
-----------
Restaurants--(2.6%)
McDonalds Corporation
80,000 3,610,000
-----------
Rubber, Plastic & Related--(2.6%)
Illinois Tool Works Inc. 60,000 3,540,000
-----------
<PAGE>
<CAPTION>
SCHEDULE OF INVESTMENTS Market
(Continued) Shares Value
---------- -----------
<S> <C> <C>
Technology Services--(7.0%)
Cisco Systems, Inc. 50,000 $ 3,731,250
General Motors Corp. Series E-1 60,000 3,120,000
Sun Microsystems 60,000 2,737,500
------------
9,588,750
------------
Telecommunications--(9.3%)
AT&T Corporation 45,000 2,913,750
Airtouch Communications (a) 85,000 2,401,250
LM Ericsson Telecommunications
ADRs Class B 150,000 2,925,000
Motorola, Inc. 50,000 2,850,000
Telefonica De Argentina ADRs 60,000 1,635,000
------------
12,725,000
------------
Total Common Stocks (Cost $92,619,727) 131,677,354
------------
Par
----------
SHORT-TERM INVESTMENTS--(3.8%)
Lehman Brothers Holdings, Inc.,
6.800% 1/02/96
(Cost $5,162,374) $5,165,000 5,162,374
------------
Total Investments--(100.0%)
(Cost $97,782,101) (b) 136,839,728
Other Assets, Less Liabilities (0.0%) (5,918)
------------
Net Assets (100%) $136,833,810
=============
<FN>
(a) Non-income producing security.
(b) The cost of investments for federal income tax purposes is
$97,783,341. Gross unrealized appreciation and depreciation at
December 31, 1995 is as follows:
Gross unrealized appreciation: $39,457,809
Gross unrealized depreciation: (401,422)
------------
Net unrealized appreciation: $39,056,387
============
(c) Private placement security. These securities generally are issued to
institutional investors, such as the Fund who agree that they
are purchasing the securities for investment and not with a view
to public distribution. Any resale by the Fund must be in an
exempt transaction, normally to other institutional investors.
See Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
SteinRoe Variable Investment Trust Managed Growth Stock Fund / December 31, 1995
<S> <C>
Assets:
Investments, at market value (identified cost $97,782,101) $136,839,728
Cash 54,057
Receivable for fund shares sold 121,310
Dividends and interest receivable 191,617
Other assets 11,534
-------------
Total assets 137,218,246
-------------
Liabilities:
Payable for fund shares repurchased 283,459
Management fee payable 53,822
Administrative fee payable 16,164
Accrued expenses payable 24,905
Other liabilities 6,086
-------------
Total liabilities 384,436
-------------
Net assets $136,833,810
============
Net assets represented by:
Paid-in capital $ 97,920,456
Accumulated overdistributed net investment income (40,231)
Accumulated distributions in excess of net realized
gains on investments (104,384)
Net unrealized appreciation on investments and foreign currencies 39,057,969
-------------
Total net assets applicable to outstanding shares of
beneficial interest $136,833,810
============
Shares of beneficial interest outstanding 5,801,702
============
Net asset value per share $23.59
======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
<S> <C>
Investment income:
Dividends (net of foreign taxes withheld) $ 1,253,041
Interest income 459,993
-------------
Total investment income 1,713,034
-------------
Expenses:
Management fee 582,541
Administrative fee 174,762
Accounting fee 26,683
Audit fee 18,823
Custodian fee 18,654
Printing expense 12,075
Trustees' expense 8,371
Transfer agent fee 7,459
Miscellaneous expense 15,224
-------------
Total expenses 864,592
-------------
Net investment income 848,442
Realized and unrealized gains (losses) on investments:
Net realized gains on investments 6,765,437
Change in unrealized appreciation or depreciation on investments 29,815,844
-------------
Net increase in net assets resulting from operations $ 37,429,723
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
SteinRoe Variable Investment Trust Managed Growth Stock Fund
Years Ended December 31,
-------------------------------
1995 1994
------------ -------------
<S> <C> <C>
Operations:
Net investment income $ 848,442 $ 784,118
Net realized gains on investments 6,765,437 5,159,272
Change in unrealized appreciation or
depreciation on investments 29,815,844 (13,153,444)
------------ ------------
Net increase (decrease) in net assets resulting
from operations 37,429,723 (7,210,054)
------------ ------------
Distributions declared from:
Net investment income (799,977) (784,118)
Distributions in excess of net investment income -- (84,035)
Net realized gains on investments (6,557,064) (5,159,272)
Distributions in excess of net realized gains
on investments (42,937) (253,915)
------------ ------------
Total distributions (7,399,978) (6,281,340)
------------ ------------
Fund share transactions:
Proceeds from fund shares sold 23,896,709 18,043,118
Cost of fund shares repurchased (23,225,761) (23,661,234)
Distributions reinvested 7,399,978 6,281,340
------------ ------------
Net increase in net assets resulting from fund
share transactions 8,070,926 663,224
------------ ------------
Total increase (decrease) in net assets 38,100,671 (12,828,170)
Net assets:
Beginning of year 98,733,139 111,561,309
------------ ------------
End of year $136,833,810 $ 98,733,139
============ ============
Accumulated overdistributed net investment income
included in ending net assets $ (40,231) $ (88,697)
============ ============
Analysis of changes in shares of beneficial interest:
Shares sold 1,121,091 913,688
Shares repurchased (1,086,399) (1,211,396)
Distributions reinvested 314,893 346,270
------------ ------------
Net increase 349,585 48,562
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SteinRoe Variable Investment Trust Managed Growth Stock Fund
Years Ended December 31,
-------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of year $ 18.11 $ 20.65 $ 20.10 $ 19.47 $ 13.44
--------- -------- --------- -------- --------
Net investment income 0.15 0.15 0.13 0.11 0.17
Net realized and unrealized gains (losses)
on investments 6.68 (1.46) 0.86 1.18 6.25
--------- -------- --------- -------- --------
Total from investment operations 6.83 (1.31) 0.99 1.29 6.42
--------- -------- --------- -------- --------
Less distributions:
Distributions from and in excess of net investment income (0.15) (0.17) (0.12) (0.10) (0.18)
Distributions from and in excess of net realized gains
on investments (1.20) (1.06) (0.32) (0.56) (0.21)
--------- -------- --------- -------- --------
Total distributions (1.35) (1.23) (0.44) (0.66) (0.39)
--------- -------- --------- -------- --------
Net asset value, end of year $ 23.59 $ 18.11 $ 20.65 $ 20.10 $19.47
======== ======= ======== ======= =======
Total return:
Total investment return 37.73% (6.35)% 4.97% 6.63% 48.03%
Ratios/supplemental data:
Net assets, end of period (000s) 136,834 $98,733 $111,561 $64,402 $38,481
Ratio of expenses to average net assets 0.74% 0.77% 0.83% 0.97% 1.15%
Ratio of net investment income to average net assets 0.72% 0.75% 0.77% 0.63% 1.15%
Portfolio turnover ratio 41% 72% 77% 20% 40%
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
SteinRoe Variable Investment Trust Managed Assets Fund / December 31, 1995
Market
Shares Value
--------- -----------
<S> <C> <C>
COMMON STOCKS--(54.2%)
Banks--(5.5%)
Bank America Corporation 58,000 $ 3,755,500
Bank of Boston Corp. 40,000 1,850,000
Citicorp 66,500 4,472,125
Mercantile Bancorp Inc. 36,000 1,656,000
NationsBank Corp. 51,500 3,585,688
-----------
15,319,313
-----------
Building and Construction--(1.0%)
Masco Corporation 90,000 2,823,750
-----------
Chemicals--(2.2%)
Praxair, Inc. 143,000 4,808,375
Rexene Corporation 120,000 1,290,000
-----------
6,098,375
-----------
Computers--(1.1%)
International Business Machine 33,000 3,027,750
-----------
Consumer Products--(1.4%)
First Brands Corp. 80,000 3,810,000
-----------
Data Products & Reproduction--(1.0%)
Xerox 20,000 2,740,000
-----------
Drugs/Health Care--(7.1%)
American Home Products Corp. 35,000 3,395,000
Bristol-Meyers Squibb Company 44,000 3,778,500
Elan Corporation Plc ADRs (a) 77,000 3,744,125
Integrated Healthcare Services 90,000 2,250,000
Eli Lilly & Company 56,000 3,150,000
Sandoz ADRs 75,000 3,440,625
-----------
19,758,250
-----------
Electrical Equipment--(3.3%)
Emerson Electric Co. 45,500 3,719,625
General Electric Company 73,500 5,292,000
-----------
9,011,625
-----------
Electronics--(3.2%)
Harris Corp. 66,000 3,605,250
Intel Corporation 59,000 3,348,250
Phillips Electronics N.V. 50,000 1,793,750
-----------
8,747,250
-----------
Environmental Services--(1.5%)
WMX Technologies 138,000 4,122,750
-----------
Fabricated Metal Products--(1.4%)
Crown Cork & Seal Co., Inc. (a) 92,000 3,841,000
-----------
<PAGE>
<CAPTION>
Market
Shares Value
--------- -----------
<S> <C> <C>
Financial Services--(3.0%)
Federal National Mortgage Association 41,000 $ 5,089,125
Green Tree Financial Corp. 126,000 3,323,250
-----------
8,412,375
-----------
Food/Beverage/Tobacco--(2.0%)
PepsiCo, Inc. 37,000 2,067,375
Sara Lee Corporation 113,000 3,601,875
-----------
5,669,250
-----------
Holding--(1.6%)
Security Capital Industrial Trust 256,000 4,480,000
-----------
Housewares--(1.0%)
Newell 105,000 2,716,875
-----------
Insurance--(1.2%)
TIG Holdings 119,000 3,391,500
-----------
Machinery--(1.1%)
Applied Materials, Inc. (a) 41,000 1,614,375
Helix Technology Corp. 35,000 1,382,500
-----------
2,996,875
-----------
Oil/Gas--(2.7%)
Amoco Corp. 50,000 3,593,750
Enron Corp. 103,600 3,949,750
-----------
7,543,500
-----------
Paper & Forest Products--(1.9%)
Kimberly Clark Corporation 28,000 2,317,000
Sonoco Products 110,000 2,887,500
-----------
5,204,500
-----------
Publishing & Broadcasting--(1.3%)
Hubbell Inc., Class B 55,000 3,616,250
-----------
Real Estate--(2.5%)
Avalon Properties, Inc. 158,000 3,397,000
Southwestern Properties Trust 267,000 3,604,500
-----------
7,001,500
-----------
Retail--(0.8%)
TOYS "R" US, Inc. (a) 108,000 2,349,000
-----------
Telecommunications--(2.2%)
Frontier Corp. 124,000 3,720,000
Telefonos De Mexico S.A. de C.V.,
Class A ADRs 75,000 2,390,625
-----------
6,110,625
-----------
<PAGE>
<CAPTION>
Market
Shares Value
-------- ------------
<S> <C> <C>
COMMON STOCKS (Continued)
Transportation--(1.8%)
CSX Corp. 74,000 $ 3,376,250
Canadian National Railway (a) 100,000 1,500,000
-----------
4,876,250
-----------
Utilities--(2.4%)
Empressa Nacional De Electricidad
ADRs 54,000 3,091,500
Enron Global Power & Pipe 140,000 3,482,500
-----------
6,574,000
-----------
Total Common Stocks (Cost $118,373,995) 150,242,563
-----------
PREFERRED STOCKS (0.9%)
Gas Exploration--(0.9%)
Occidental Petroleum Corporation (c)
(Cost $2,360,750) 45,000 2,452,500
-----------
<CAPTION>
Par
----------
<S> <C> <C>
LONG-TERM OBLIGATIONS--(31.5%)
Air Transportation--(1.2%)
Federal Express Corporation 1994
Pass-Through Certificates Series
A310-A1 7.530% 9/23/06 $2,360,190 2,497,789
United Airline Corporation Series
1991-A-1 9.200% 3/22/08 711,197 795,140
-----------
3,292,929
-----------
Asset-Backed Securities--(2.4%)
ALPS Pass-Through Trust Series 1994-1
Class C2 9.350% 9/15/04 1,989,855 2,112,350
American Mortgage Trust Series 1993-3
Class 3B 8.190% 9/27/22 (c) 2,205,796 2,211,840
Greentree Home Improvement Loan
Trust Series 1994-A Class A
7.050% 3/15/14 1,346,069 1,366,892
Greentree Financial Securitized Net
Interest Margin Series 1994-A
6.900% 2/15/04 937,975 945,300
-----------
6,636,382
-----------
Banks--(5.0%)
Den Danske Bank 6.550% 9/15/03 2,250,000 2,261,363
Bangkok Bank Public Ltd.
7.250% 9/15/05 (c) 3,000,000 3,110,490
Kansallis Osake Panki 10.000% 5/1/02 3,500,000 4,179,700
Santander Financial Issuances
7.750% 5/15/05 4,000,000 4,377,760
-----------
13,929,313
-----------
<PAGE>
<CAPTION>
Market
Par Value
-------- ------------
<S> <C> <C>
Drugs/Healthcare--(2.4%)
Nationwide Health Property Inc.
Conv. Deb., 6.250% 1/01/99 $3,400,000 $3,395,750
Sandoz Corporation 6.625% 7/28/05 3,000,000 3,102,300
----------
6,498,050
----------
Foreign Government Regional Bond--(1.0%)
Corporacion Andina de Fomento
6.625% 10/14/98 (c) 2,900,000 2,890,894
----------
Financial (2.8%)
American Residential Mtg. Corp.
Medium-Term Note 6.110% 2/03/99 2,000,000 2,023,140
Associates Corporation of North
America 7.500% 4/15/02 4,000,000 4,309,240
General Motors Acceptance Corp.
9.625% 12/15/01 1,300,000 1,527,510
----------
7,859,893
----------
Hotels--(0.6%)
Renaissance Hotel Group
8.875% 10/01/05 1,600,000 1,685,152
----------
Major Chemicals--(1.4%)
Hanson Overseas 7.375% 1/15/03 3,500,000 3,751,475
----------
Media--(0.6%)
TimeWarner, Inc. Conv. Deb.
8.750% 1/10/15 1,699,750 1,750,743
----------
Mortgage-Backed Securities--(1.0%)
Lennar Central Partners Limited
Partnership Series 1994-1 Class C
8.120% 9/15/02 (c) 2,500,000 2,547,375
MDC Mortgage Funding Corporation
Series Q Class 5, 8.850% 3/20/18 311,983 324,731
----------
2,872,106
----------
Oil/Gas--(2.4%)
Consolidated Natural Gas
Conv. Deb. 7.250% 12/15/15 2,500,000 2,581,250
SFP Pipeline Holdings, Inc.
Conv. Deb. 10.410% 8/15/10 1,400,000 1,767,500
Exxon Capital Corp. (Effective Yield
6.590%) 11/15/04 4,000,000 2,381,400
----------
6,730,150
----------
Telecommunications--(1.6%)
Telecommunications Inc.
8.250% 1/15/03 4,000,000 4,321,360
----------
<PAGE>
<CAPTION>
SCHEDULE OF INVESTMENTS Market
(Continued) Par Value
---------- -----------
<S> <C> <C>
LONG-TERM OBLIGATIONS (Continued)
Utilities--(0.9%)
Niagara Mohawk Power Corp.
8.000% 6/01/04 $2,500,000 $ 2,435,475
------------
U.S. Government and Agency Obligations--(8.2%)
Federal Home Loan Bank
7.360% 7/01/04 7,500,000 8,230,650
Federal Home Loan Mortgage
Corporation
8.065% 1/27/05 4,000,000 4,610,480
12.000% 7/01/20 Gold 2,015,513 2,265,557
Federal National Mortgage Association
8.000% 4/13/05 1,500,000 1,566,720
Government National Mortgage
Association 6.500% 7/20/25 ARM 1,512,670 1,540,942
U.S. Treasury Note 6.250% 2/15/03 4,250,000 4,435,853
------------
22,650,201
------------
Total Long-Term Obligations
(Cost $84,793,100) 87,304,123
------------
SHORT-TERM INVESTMENTS--(12.8%)
Lehman Brothers Holding Inc.
6.100% 1/02/96 11,445,000 11,439,182
Goldman Sachs Group
6.050% 1/03/96 12,445,000 12,436,634
Raytheon Co. 5.950% 1/04/96 11,490,000 11,480,505
------------
Total Short-Term Investments
(Cost $35,356,321) 35,356,321
------------
Total Investments--(99.4%)
(Cost $240,884,166) (b) 275,355,507
Other Assets Less Liabilities (0.6%) 1,658,126
------------
Net Assets (100%) $277,013,633
=============
<FN>
(a)Non-income producing security.
(b) The cost of investments for federal income tax purposes is
identical.
Gross unrealized appreciation and depreciation at December 31,
1995 is as follows:
Gross unrealized appreciation: 36,860,988
Gross unrealized depreciation: (2,389,647)
------------
Net unrealized appreciation: 34,471,341
============
(c) Private placement security. These securities generally are issued to
institutional investors, such as the Fund who agree that they are purchasing
the securities for investment and not with a view to public distribution. Any
resale by the Fund must be in an exempt transaction, normally to other
institutional investors.
See Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
SteinRoe Variable Investment Trust Managed Assets Fund / December 31, 1995
<S> <C>
Assets:
Investments, at market value (identified cost $240,884,166) $275,355,507
Cash 58,284
Receivable for fund shares sold 236,603
Dividends and interest receivable 1,810,940
Other assets 29,911
------------
Total assets 277,491,245
------------
Liabilities:
Payable for fund shares repurchased 320,646
Management fee payable 97,798
Administrative fee payable 32,637
Accrued expenses payable 26,531
------------
Total liabilities 477,612
------------
Net assets $277,013,633
============
Net assets represented by:
Paid-in capital $242,794,477
Accumulated overdistributed net investment income (153,841)
Accumulated distributions in excess of net realized
gains on investments (98,344)
Net unrealized appreciation on investments 34,471,341
------------
Total net assets applicable to outstanding shares of
beneficial interest $277,013,633
============
Shares of beneficial interest outstanding 19,674,850
============
Net asset value per share $14.08
=======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
<S> <C>
Investment income:
Interest income $ 6,328,644
Dividends (net of foreign taxes) 3,728,769
-----------
Total investment income 10,057,413
-----------
Expenses:
Management fee 1,002,185
Administrative fee 334,062
Custodian fee 30,682
Accounting fee 29,356
Audit and legal fees 25,450
Printing expense 17,135
Trustees' expense 13,450
Transfer agent fee 7,460
Miscellaneous expense 30,967
-----------
Total expenses 1,490,747
-----------
Net investment income 8,566,666
Realized and unrealized gains on investments:
Net realized gains on investments 12,779,937
Change in unrealized appreciation or depreciation on investments 28,886,194
-----------
Net increase in net assets resulting from operations $50,232,797
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
SteinRoe Variable Investment Trust Managed Assets Fund
Years Ended December 31,
-------------------------------
1995 1994
------------ -------------
<S> <C> <C>
Operations:
Net investment income $ 8,566,666 $ 8,128,114
Net realized gains on investments 12,779,937 48,913
Change in unrealized appreciation or
depreciation on investments 28,886,194 (14,923,481)
------------ ------------
Net increase (decrease) in net assets resulting
from operations 50,232,797 (6,746,454)
------------ ------------
Distributions declared from:
Net investment income (8,589,529) (7,905,230)
Distributions in excess of net investment income (192,094) --
Net realized gains on investments (12,796,378) --
Distributions in excess of net realized gains
in investments (135,229) --
------------ ------------
Total distributions (21,713,230) (7,905,230)
------------ ------------
Fund share transactions:
Proceeds from fund shares sold 21,591,908 44,215,554
Cost of fund shares repurchased (40,012,684) (38,323,460)
Distributions reinvested 21,713,230 7,905,230
Strategic Managed Assets Fund Substitution 48,923,531 --
------------ ------------
Net increase in net assets resulting from fund
share transactions 52,215,985 13,797,324
------------ ------------
Total increase (decrease) in net assets 80,735,552 (854,360)
Net assets:
Beginning of year 196,278,081 197,132,441
------------ ------------
End of year $277,013,633 $196,278,081
============ ============
Accumulated undistributed (overdistributed) net
investment income included in
ending net assets $ (192,094) $ 22,863
============ ============
Analysis of changes in shares of beneficial interest:
Shares sold 1,590,395 3,411,405
Shares repurchased (2,911,681) (2,987,381)
Distributions reinvested 1,549,182 651,172
Strategic Managed Assets Fund Substitution 3,333,520 --
------------ ------------
Net increase 3,561,416 1,075,196
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SteinRoe Variable Investment Trust Managed Assets Fund
Years Ended December 31,
-------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of year $ 12.18 $ 13.11 $ 12.54 $ 12.54 $ 10.26
--------- --------- --------- --------- --------
Net investment income 0.48 0.51 0.38 0.45 0.52
Net realized and unrealized gains (losses)
on investments 2.61 (0.93) 0.78 0.49 2.31
--------- --------- --------- --------- --------
Total from investment operations 3.09 (0.42) 1.16 0.94 2.83
--------- --------- --------- --------- --------
Less distributions:
Distributions from and in excess of net investment income (0.48) (0.51) (0.36) (0.46) (0.44)
Distributions from and in excess of net realized gains
on investments (0.71) -- (0.23) (0.48) (0.11)
--------- --------- --------- --------- --------
Total distributions (1.19) (0.51) (0.59) (0.94) (0.55)
--------- --------- --------- --------- --------
Net asset value, end of year $ 14.08 $ 12.18 $ 13.11 $ 12.54 $ 12.54
======== ======== ======== ======== =======
Total return:
Total investment return 25.43% (3.19)% 9.29% 7.53% 27.93%
Ratios/supplemental data:
Net assets, end of year (000s) $277,014 $196,278 $197,132 $113,572 $82,710
Ratio of expenses to average net assets 0.66% 0.68% 0.69% 0.66% 0.71%
Ratio of net investment income to average net assets 3.12% 4.01% 3.55% 3.98% 4.57%
Portfolio turnover ratio 66% 71% 47% 70% 82%
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
SteinRoe Variable Investment Trust Mortgage Securities Income Fund / December
31, 1995
Par Market
Value Value
--------- -----------
<S> <C> <C>
ASSET-BACKED SECURITIES--(3.0%)
ALPS Pass-Through Trust Series 1994-1
Class C2 9.350% 9/15/04 $ 994,927 $1,056,175
First Boston Home Equity Loan Pass-
Through Certificates Series 1993-H1,
Class A-IO (effective yield 12.820%) 9/28/13 9,202,754 310,777
Greentree Home Improvement Loan
Trust Series 1994-A Class A
7.050% 3/15/14 1,009,552 1,025,169
Green Tree Securitized Net Interest
Margin Series 1994-A
6.900% 2/15/04 703,481 708,975
----------
Total Asset-Backed Securities
(Cost $3,027,487) 3,101,096
----------
MORTGAGE-BACKED SECURITIES--(10.3%)
American Mortgage Trust Series
1993-3 Class 3B 8.190% 9/27/22 833,301 835,584
Bank of America, N.A. Series
1979-3 9.500% 11/01/08 91,515 93,689
Citicorp Mortgage Securities, Inc.
Series 1987-10 10.000% 7/01/17 204,798 218,505
Comfed Savings Bank Adjustable Rate
Mortgage Series 1987-1A
9.245% 1/01/08 193,853 164,775
Countrywide Mortgage Backed
Securities Inc. Series 1994-F
Class A4 6.000% 4/25/09 2,000,000 1,965,180
Excel Credit Corporation Commercial
Mortgage Pass-Through Certificate
Series 1994-1 Class A 6.432%
3/01/04 Floating Rate 675,519 681,234
Glendale Federal Savings & Loan
Series 1978-A 9.125% 1/25/08 38,245 39,524
Home Savings of America Series
1979-4 10.000% 7/01/09 68,111 70,729
Imperial Savings & Loan Adjustable
Rate Mortgage Series 1987-4A
9.800% 7/25/17 44,215 47,656
Kidder Peabody Acceptance Corp.
Series 1993-C1 6.800%
7/25/17 62,805 63,522
MDC Mortgage Funding Corporation
Series Q Class 5 8.850% 3/20/18 467,975 487,096
Merrill Lynch
8.000% 12/20/18 Series 20-D 2,133,245 2,191,717
8.227% 4/25/23 Series 1994-M1
Class C 421,000 443,835
7.090% 12/26/25 Series 1995-C3
Class A3 2,000,000 2,050,000
4.870% 11/15/26 Series 1987-A 112,880 111,363
<PAGE>
<CAPTION>
Par Market
Value Value
--------- -----------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES (Continued)
PS CMO Trust Series 1994-C1-A2
7.920% 8/15/02 $ 750,000 $ 791,850
Republic Federal Savings & Loan
Association Series 1987-1
7.500% 2/28/17 14,958 15,290
Residential Funding Corp. Series
1987-S-9 10.500% 9/01/17 55,911 58,797
Sears Mortgage Securities Corp.
Series 1987-A 6.500%
3/25/17 37,555 37,885
Security Pacific National Bank
Series 1987-B 8.500%
9/01/16 67,986 69,763
-----------
Total Mortgage-Backed Securities
(Cost $10,094,127) 10,437,994
-----------
CORPORATE BONDS--(2.4%)
Utilities--(0.4%)
Commonwealth Edison Company
7.375% 9/15/02 350,000 369,380
-----------
Telecommunications--(2.0%)
Telecom New Zealand
6.500% 10/11/01 2,000,000 2,055,660
-----------
Total Corporate Bonds
(Cost $2,390,008) 2,425,040
-----------
FEDERAL HOME LOAN MORTGAGE
CORPORATE CERTIFICATES--(18.4%)
8.500% 5/01/06 214,956 224,160
6.500% various due dates to 6/01/09 2,159,326 2,171,545
8.000% 6/01/09 191,401 198,638
10.750% 11/01/09 333,165 366,692
12.250% 4/01/12 62,796 70,293
11.250% various due dates to 1/01/16 177,586 195,871
11.500%various due dates to 2/01/16 87,233 96,638
9.250% 5/01/16 105,910 111,173
10.500% various due dates to 2/01/19 494,431 540,784
12.000% various due dates to 7/01/20 1,571,138 1,765,079
9.000% various due dates to 1/01/22 130,079 136,664
7.500% various due dates to 5/01/24 10,007,775 10,284,866
7.000% 10/15/25 (b) 2,500,000 2,522,650
-----------
Total Federal Home Loan Mortgage
Corporate Certificates
(Cost $18,119,915) 18,685,053
-----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION CERTIFICATES--(35.1%)
10.500% 2/01/01 231,008 244,363
10.000% various due dates to 9/01/01 200,332 211,037
7.000% 11/01/08 (b) 4,650,000 4,734,258
9.000% various due dates to 5/01/20 486,503 514,095
<PAGE>
<CAPTION>
Par Market
Value Value
--------- -----------
<S> <C> <C>
FEDERAL NATIONAL MORTGAGE
ASSOCIATION CERTIFICATES (Continued)
12.250% 9/01/12
FHA/VA Guaranteed $ 87,707 $ 99,520
10.250% 2/01/16 250,614 275,911
7.500% 3/01/16
FHA/VA Guaranteed 374,315 404,261
9.500% various due dates to 5/01/20 60,004 64,261
6.500% various due dates to 12/01/16 1,708,587 1,698,555
8.500% various due dates to 12/01/24 3,792,654 3,960,003
6.000% various due dates to 2/01/25 14,884,293 14,680,556
7.000% 8/01/25 1,235,907 1,245,943
8.000% various due dates to 8/01/25 2,128,613 2,203,871
6.500% 8/15/25 (b) 3,600,000 3,558,384
7.500% various due dates to 12/01/25 1,794,831 1,841,637
-----------
Total Federal National Mortgage
Association Certificates
(Cost $34,925,419) 35,736,655
-----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION CERTIFICATES--(16.8%)
10.500% 4/15/01 40,155 43,054
13.000% 5/15/11 76,586 88,696
11.500% various due dates to 5/15/13 570,491 644,479
11.750% 7/15/13 31,025 34,505
11.000% various due dates to 12/15/15 90,717 101,802
8.500% 2/15/17 319,420 337,790
9.000% various due dates to 1/15/20 2,518,551 2,692,822
10.000% various due dates to 11/15/19 927,957 1,020,352
9.500% various due dates to 8/15/22 2,989,629 3,230,899
8.000% various due dates to 9/15/22 4,024,144 4,202,314
7.000% 4/15/23 578,147 586,461
7.500% 10/01/23 28,372 29,188
6.500% various due dates to 7/15/24 988,619 981,140
6.500% 7/20/25 ARM 3,025,340 3,081,883
-----------
Total Government National Mortgage
Association Certificates
(Cost $16,896,400) 17,075,385
-----------
REAL ESTATE MORTGAGE INVESTMENT
CONDUITS--(5.7%)
Federal Home Loan Mortgage
Corporation Series 11-C
9.500% 4/15/19 134,189 138,977
Federal National Mortgage
Association REMIC Trust Series
1992-37PE 7.000% 1/25/18 1,750,000 1,766,730
<PAGE>
<CAPTION>
Par Market
Value Value
--------- -----------
<S> <C> <C>
Federal National Mortgage
Association Trust Series
1988-4Z 9.250% 3/25/18 $1,672,092 $ 1,779,440
Federal National Mortgage
Association Trust Series
1991-91SA (effective yield 14.400%)
7/25/98 14,091 107,003
Prudential Home Mortgage
Trust Series 1992-A-B2-2
7.900% 11/25/22 2,000,000 2,012,080
------------
Total Real Estate Mortgage
Investment Conduits
(Cost $5,673,580) 5,804,230
------------
U.S. GOVERNMENT SECURITIES AND
AGENCY OBLIGATIONS--(4.6%)
Federal National Mortgage
Association 8.000% 4/13/05 2,000,000 2,088,960
Student Loan Marketing Association
Medium Term Note
9.400% 6/01/11 410,000 539,056
U.S. Treasury Bonds
8.750% 5/15/17 750,000 993,060
7.125% 2/15/23 300,000 343,455
6.250% 8/15/23 750,000 772,463
------------
Total U.S. Government Securities and
Agency Obligations
(Cost $4,527,278) 4,736,994
------------
SHORT-TERM INVESTMENTS--(13.7%)
Finova Capital Corp. 5.950% 1/16/96 5,000,000 4,985,951
General Motors Acceptance Corp.
6.100% 1/02/96 3,955,000 3,952,990
Lehman Brothers Holdings Inc.
6.050% 1/18/96 2,000,000 1,993,614
Dai Ichi Kangyo 6.180% 1/16/96 3,000,000 3,000,200
------------
Total Short-Term Investments
(Cost $13,932,755) 13,932,755
------------
Total Investments--(110.0%)
(Cost $109,586,969) (a) 111,935,202
Other Assets, Less Liabilities--(-10.0%) (10,156,936)
------------
Net Assets (100%) $101,778,266
============
<FN>
(a) The cost of investments for federal income tax purposes
is $109,590,501 Gross unrealized appreciation and
depreciation at December 31, 1995 is as follows:
Gross unrealized appreciation: $2,492,560
Gross unrealized depreciation: (147,859)
-----------
Net unrealized appreciation: $2,344,701
===========
(b) Security purchased on a delay delivery basis; see notes to
the financial statements.
See Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
SteinRoe Variable Investment Trust Mortgage Securities Income Fund /
December 31, 1995
<S> <C>
Assets:
Investments, at market value (identified cost $109,586,969) $111,935,202
Cash 51,017
Receivable for fund shares sold 11,533
Dividends and interest receivable 728,668
Other assets 17,544
------------
Total assets 112,743,964
------------
Liabilities:
Payable for investments purchased 10,710,600
Payable for fund shares repurchased 167,735
Management fee payable 45,606
Administrative fee payable 12,051
Accrued expenses payable 29,706
------------
Total liabilities 10,965,698
------------
Net assets $101,778,266
============
Net assets represented by:
Paid-in capital $102,491,007
Accumulated overdistributed net investment income (129,284)
Accumulated net realized losses on investments (2,931,689)
Net unrealized appreciation on investments 2,348,232
------------
Total net assets applicable to outstanding shares of
beneficial interest $101,778,266
============
Shares of beneficial interest outstanding 10,019,095
============
Net asset value per share $10.16
======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
<S> <C>
Interest income $ 5,899,589
------------
Expenses:
Management fee 314,570
Administrative fee 117,959
Custodian fee 33,418
Accounting fee 25,725
Audit and legal fees 23,403
Transfer agent fee 7,449
Printing expense 6,588
Trustees' expense 6,327
Miscellaneous expense 9,549
------------
Total expenses 544,988
------------
Net investment income 5,354,601
Realized and unrealized gains on investments:
Net realized gains on investments 653,056
Change in unrealized appreciation or depreciation on investments 5,388,182
------------
Net increase in net assets resulting from operations $11,395,839
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
SteinRoe Variable Investment Trust Mortgage Securities Income Fund
Years Ended December 31,
---------------------------
1995 1994
------------ -------------
<S> <C> <C>
Operations:
Net investment income $ 5,354,601 $ 5,452,061
Net realized gains (losses) on investments 653,056 (3,503,695)
Change in unrealized appreciation or depreciation
on investments 5,388,182 (3,358,291)
------------ ------------
Net increase (decrease) in net assets resulting
from operations 11,395,839 (1,409,925)
------------ ------------
Distributions declared from:
Net investment income (5,354,601) (5,285,435)
Distributions in excess of net investment income (145,396) --
------------ ------------
Total distributions (5,499,997) (5,285,435)
------------ ------------
Fund share transactions:
Proceeds from fund shares sold 6,851,307 4,366,162
Cost of fund shares repurchased (14,865,209) (21,732,135)
Distributions reinvested 5,499,997 5,285,435
Colonial-Keyport Government Fund Substitution 25,976,819 --
------------ ------------
Net increase (decrease) in net assets resulting from
fund share transactions 23,462,914 (12,080,538)
------------ ------------
Total increase (decrease) in net assets 29,358,756 (18,775,898)
Net assets:
Beginning of period 72,419,510 91,195,408
------------ ------------
End of period $101,778,266 $72,419,510
============ =============
Accumulated overdistributed net investment income
included in ending net assets $ (129,284) $ (16,449)
============ =============
Analysis of changes in shares of beneficial interest:
Shares sold 680,330 435,739
Shares redeemed (1,486,896) (2,167,973)
Distributions reinvested 542,406 569,551
Colonial-Keyport Government Fund Substitution 2,477,593 --
------------ ------------
Net increase (decrease) 2,213,433 (1,162,683)
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SteinRoe Variable Investment Trust Mortgage Securities Income Fund
Years Ended December 31,
-------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of year $ 9.28 $ 10.17 $ 10.26 $ 10.42 $ 9.74
--------- --------- --------- --------- --------
Net investment income 0.57 0.73 0.65 0.63 0.67
Net realized and unrealized gains (losses)
on investments 0.89 (0.89) (0.01) (0.01) 0.73
--------- --------- --------- --------- --------
Total from investment operations 1.46 (0.16) 0.64 0.62 1.40
--------- --------- --------- --------- --------
Less distributions:
Distributions from and in excess of net investment income (0.58) (0.73) (0.65) (0.62) (0.66)
Distributions from and in excess of net realized gains
on investments -- -- (0.08) (0.16) (0.06)
--------- --------- --------- --------- --------
Total distributions (0.58) (0.73) (0.73) (0.78) (0.72)
--------- --------- --------- --------- --------
Net asset value, end of year $ 10.16 $ 9.28 $ 10.17 $ 10.26 $ 10.42
========= ========= ========= ========= ========
Total return:
Total investment return 15.74% (1.57)%(b) 6.26%(b) 5.95% 14.48%
Ratios/supplemental data:
Net assets, end of year (000s) 101,778 $72,420 $91,195 $67,353 $48,559
Ratio of net expenses to average net assets 0.69% 0.70%(a) 0.76%(a) 0.90% 0.99%
Ratio of net investment income to average
net assets 6.76% 6.71%(b) 6.64%(b) 6.72% 7.26%
Portfolio turnover ratio (c) 112% 241% 187% 169% 133%
<FN>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement from the Investment Adviser and the Administrator, as described
in Note 5, this ratio would have been 0.71%, and 0.76% for the years ended
December 31, 1994, and 1993, respectively.
(b) Computed giving effect to the Investment Adviser's and the
Administrator's expense limitation undertaking.
(c) The Portfolio turnover ratio includes dollar roll transactions.
See Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
SteinRoe Variable Investment Trust Cash Income Fund / December 31, 1995
Par Market
(000) Value
--------- -----------
<S> <C> <C>
COMMERCIAL PAPER--(91.2%)
Business Credit Institution--(25.0%)
American Honda Finance Corp.
(gtd. by Honda Motor Co. Inc.)
5.865% 1/12/96 $3,000 $ 2,994,656
Beta Finance 5.808% 1/23/96 3,000 2,989,495
Finova Capital Corp. 6.009%
1/04/96 3,000 2,998,512
General Motors Acceptance Corp.
6.104% 1/02/96 1,310 1,309,778
Sears Roebuck Acceptance Corp.
5.809% 2/07/96 3,000 2,982,425
Whirlpool Financial Corp.
5.802% 1/31/96 3,000 2,985,700
-----------
16,260,566
-----------
Banking--(13.7%)
Banca CRT Financial Corp.
(gtd. by Cassa di Risparmio di Torino)
5.814% 4/08/96 3,000 2,953,858
Orix America Inc. 6.029% 3/27/96 3,000 2,957,717
Svenska Handlesbanken Inc.
(gtd. by Svenska Handlesbanken),
5.806% 2/09/96 3,000 2,981,345
-----------
8,892,920
-----------
Brokerage Services--(4.6%)
Lehman Brothers Holdings Inc.
6.125% 1/11/96 3,000 2,994,917
-----------
Computers--(4.6%)
CSC Enterprises 5.753% 2/16/96 3,000 2,978,150
-----------
Drugs--(9.5%)
A.H. Robbins Company
5.808% 2/02/96 3,000 2,984,667
American Home Food Products, Inc.
(gtd. by American Home Products
Corp.) 5.827% 1/09/96 3,200 3,195,876
-----------
6,180,543
-----------
Electronics--(4.9%)
General Signal Corp. 5.910% 1/08/96 3,225 3,221,319
-----------
Major Chemical--(5.2%)
DIC Americas Inc. 6.059% 1/26/96 3,390 3,375,875
-----------
<PAGE>
<CAPTION>
Par Market
(000) Value
--------- -----------
<S> <C> <C>
Lending Institutions--(14.3%)
Countrywide Funding Corp.
5.861% 1/24/96 $3,300 $ 3,287,729
Oak Funding Corp. 5.877% 1/18/96 3,000 2,991,713
Fleet Mortgage Group, Inc.
5.881% 1/05/96 3,000 2,998,050
----------
9,277,492
----------
Other Financial--(4.8%)
Hanson Finance Plc 5.834% 1/17/96 3,140 3,131,906
----------
Photography--(4.6%)
Seiko Corp. of America
6.145% 2/28/96 3,000 2,970,758
----------
Total Commercial Paper
(Cost $59,284,446) 59,284,446
-----------
YANKEE CERTIFICATES OF DEPOSIT--(9.2%)
Financial Services
Sanwa Bank Ltd. 5.900% 2/7/96 3,000 2,999,538
Sumitomo Bank Ltd 6.180% 1/02/96 3,000 3,000,006
-----------
Total Yankee Certificates of Deposit
(Cost $5,999,544) 5,999,544
-----------
Total Investments - (100.4%)
(Cost $65,283,990) (a) 65,283,990
Other Assets, Less Liabilities--(-0.4%) (291,939)
-----------
Net Assets (100%) $64,992,051
============
<FN>
(a) The cost of investments for federal income tax purposes is
identical. There is no unrealized appreciation or depreciation at
December 31, 1995.
See Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
SteinRoe Variable Investment Trust Cash Income Fund / December 31, 1995
<S> <C>
Assets:
Investments, at market value (identified cost $65,283,990) $65,283,990
Cash 51,520
Receivable for fund shares sold 1,780
Dividends and interest receivable 28,257
Other assets 9,432
-----------
Total assets 65,374,979
-----------
Liabilities:
Payable for fund shares repurchased 327,447
Management fee payable 19,614
Administrative fee payable 8,402
Accrued expenses payable 27,465
-----------
Total liabilities 382,928
-----------
Net assets $64,992,051
============
Net assets represented by:
Paid-in capital $64,992,051
-----------
Total net assets applicable to outstanding shares of beneficial interest
$64,992,051
===========
Shares of beneficial interest outstanding 64,992,051
===========
Net asset value per share $1.00
=====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
<S> <C>
Interest income $4,212,168
----------
Expenses:
Management fee 241,148
Administrative fee 103,349
Accounting fee 25,473
Custodian fee 18,962
Audit and legal fees 18,066
Transfer agent fee 7,501
Trustees' expense 6,150
Printing expense 5,110
Miscellaneous expense 11,096
----------
Total expenses 436,855
----------
Net investment income $3,775,313
----------
Net increase in net assets resulting from operations $3,775,313
==========
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
SteinRoe Variable Investment Trust Cash Income Fund
Years Ended December 31,
----------------------------
1995 1994
------------ -------------
<S> <C> <C>
Operations:
Net investment income $ 3,775,313 $ 3,158,001
------------ ------------
Net increase (decrease) in net assets resulting
from operations 3,775,313 3,158,001
------------ ------------
Distributions declared from:
Net investment income (3,775,313) (3,158,001)
------------ ------------
Fund share transactions:
Proceeds from fund shares sold 56,499,769 58,444,349
Cost of fund shares repurchased (73,981,455) (65,952,846)
Distributions reinvested 3,775,313 3,158,001
------------ ------------
Net decrease in net assets resulting from fund
share transactions (13,706,373) (4,350,496)
------------ ------------
Total decrease in net assets (13,706,373) (4,350,496)
Net assets:
Beginning of period 78,698,424 83,048,920
------------ ------------
End of period $ 64,992,051 $ 78,698,424
=========== ===========
Analysis of changes in shares of beneficial interest:
Shares sold 56,499,769 58,444,349
Shares redeemed (73,981,455) (65,952,846)
Distributions reinvested 3,775,313 3,158,001
------------ ------------
Net increase (decrease) (13,706,373) (4,350,496)
=========== ===========
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SteinRoe Variable Investment Trust Cash Income Fund
Years Ended December 31,
------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Net investment income 0.030 0.037 0.027 0.034 0.056
-------- -------- -------- -------- --------
Less distributions:
Distributions from net investment income (0.030) (0.037) (0.027) (0.034) (0.056)
-------- -------- -------- -------- --------
Net asset value, end of year $ 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%
Ratios/supplemental data:
Net assets, end of year (000) $64,992 $78,698 $83,049 $70,821 $77,676
Ratio of expenses to average net assets 0.63% 0.62% 0.65% 0.67% 0.67%
Ratio of net investment income to average
net assets 5.48% 3.73% 2.68% 3.42% 5.67%
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization and Accounting Policies
SteinRoe Variable Investment Trust (the "Trust"), an open-end management
investment company, was organized as a Massachusetts business trust on June 9,
1987. At December 31, 1995, the Trust consisted of five diversified Funds
with differing investment objectives, policies, and restrictions (individually
referred to as a "Fund", or collectively referred to as the "Funds"):
Capital Appreciation Fund--achieve capital growth by investing in equity
securities
Managed Growth Stock Fund--achieve long-term growth of capital by investing
65% of total assets in growth companies
Managed Assets Fund--achieve high total investment return by investing in
equity and debt securities
Mortgage Securities Income Fund--achieve highest possible level of current
income by investing at least 65% of total assets in Mortgage Pass-Through
Certificates
Cash Income Fund--high current income while emphasizing capital
preservation from investment in short-term money market instruments
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 various affiliated and
non-afilliated insurance companies and, in the case of Capital Appreciation
Fund, also of Transamerica Occidental Life Insurance Company and First
Transamerica Life Insurance Company. SteinRoe and Farnham, Inc. (the
"Adviser") provides investment advisory services to the Funds as well as
management, and administrative services. SteinRoe Services, Inc. provides
transfer agent services. Keyport Financial Services Corp., subsidiary of
Keyport, serves as the underwriter of the Trust. Keyport, the Adviser and the
Transfer Agent are direct subsidiaries of Liberty Financial Companies, Inc.
Liberty Life is a subsidiary of Liberty Mutual Insurance Company and Liberty
Mutual Fire Insurance Company. At December 31, 1995, various affiliated
insurance companies of Liberty Financial Company owned 100 percent of the
outstanding shares of all Funds, except for Capital Appreciation Fund, of
which Liberty Financial Company affiliates owned 98.1 percent and Transamerica
Life Companies owned 1.9 percent.
The following is a summary of significant accounting policies followed by the
Funds in the preparation of their financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those
estimates.
<PAGE>
Valuation of Investments--Portfolio securities listed on domestic exchanges
and over-the-counter securities quoted on the NASDAQ system are valued on the
basis of the last sale on the date as of which the valuation is made, or,
lacking any sales, at the current bid prices. Over-the-counter securities not
quoted on the NASDAQ system are valued at the latest bid quotation. Foreign
security valuations are generally based upon market quotations which,
depending upon local convention or regulation, may be last sale price, last
bid or asked price, or the mean between last bid and asked prices as of, in
each case, the close of the appropriate exchange or other designated time.
Long-term debt securities are valued on the basis of dealer-supplied
quotations or valuations furnished by a pricing service. Securities for which
reliable quotations are not readily available are valued at fair value, as
determined in good faith and pursuant to procedures established by the
Trustees. Short-term securities with remaining maturities of 60 days or less
are valued at amortized cost unless the Trustees determine this does not
represent fair value. The Cash Income Fund values investments utilizing the
amortized cost valuation technique permitted in accordance with Rule 2a-7
under the Investment Company Act of 1940, which requires the Fund to comply
with certain conditions. This technique involves valuing a portfolio security
initially at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium.
Federal Income Taxes--The Funds now qualify and intend to continue qualifying
as "regulated investment companies" and as such (and by complying with the
applicable provisions of the Internal Revenue Code) will not be subject to
federal income tax on taxable income (including realized capital gains)
distributed to shareholders. By making the distributions required under the
Internal Revenue Code, the Funds intend to avoid excise tax liability.
Foreign Currency Transactions--Certain of the Funds have entered into foreign
exchange contracts for the settlement of purchases and sales of securities
denominated in a foreign currency to reduce the risk to the Funds from adverse
changes in the relationship between the U.S. dollar and the foreign currency.
The face or contract amount in U.S. dollars reflects the total exposure the
Fund has in that particular currency contract. In the event that the
counterparty in the foreign exchange contract fails to meet the terms of the
contract, the Fund could be exposed to the effects of changes in the
relationship between the U.S. dollar and the foreign currency.
Investment Transactions--The Funds may purchase or sell securities on a
when-issued, delayed delivery or forward commitment basis. Payment and deliver
may take place a month or more after the date of the transaction. The price of
the underlying securities and the date when the securities will be delivered
and paid for are fixed at the time the transaction is negotiated. The Mortgage
Securities Income Fund may also enter into dollar roll transactions. In a
dollar roll transaction, the Fund sells securities for delivery in the current
month and simultaneously contracts to repurchase, typically in 30 to 60 days,
substantially similar securities at an agreed upon price and date.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
These transactions may increase the risk if the other party to the transaction
fails to deliver and causes the Fund to subsequently invest at less
advantageous yields. The Funds identify securities as segregated in their
custodial records with a value at least equal to the amount of the purchase
commitment.
Reclassification--Certain of the Funds have changed the classification of
distributions to shareholders to better disclose the differences between
financial statement amounts and distributions to shareholders in accordance
with Federal income tax regulations. Accordingly, amounts as of December 31,
1995 have been reclassified as follows:
<TABLE>
<CAPTION>
Mortgage
Capital Managed Securities
Appreciation Assets Income
Fund Fund Fund
------------ -------------- --------------
<S> <C> <C> <C>
Paid-in Capital $ -- $(75,138) $ --
Accumulated net
investment income (20,399) 38,253 32,561
Accumulated net
realized gains
(losses) on
investments 20,399 36,885 (32,561)
</TABLE>
There were no reclassifications of distributions for Managed Growth Stock Fund
or Cash Income Fund. In all cases, net investment income, net realized gains
(losses) on investments, and net assets were not affected by this change.
Other--Security transactions are accounted for on trade date. Interest income
is recorded on the accrual basis. Discounts on debt securities are amortized
in accordance with Internal Revenue Code requirements. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Net
realized and unrealized gains (losses) on foreign currency transactions
include the fluctuation in exchange rates on gains and losses between trade
and settlement dates on security transactions, gains and losses arising from
the disposition of foreign currency, and currency gains and losses between the
accrual and payment dates on dividend and interest income and foreign
withholding taxes. The Funds do not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on investment from
the fluctuations arising from changes in market prices of securities held.
Such fluctuations are included with the net realized and unrealized gain or
loss from investments. Unrealized appreciation and depreciation and realized
gains and losses differ between financial statements and tax earnings due to
deferred losses from wash sales.
Note 2. Fund Share Transactions
Each Fund's capitalization consists of an unlimited number of shares of
beneficial interest without par value that represent a separate series of the
Trust. Each share of a Fund represents an equal proportionate beneficial
interest in that Fund and, when issued and outstanding, is fully paid and
non-assessable. Shareholders would be entitled to share proportionally in the
net assets of a Fund available for distribution to shareholders upon
liquidation of a Fund.
<PAGE>
Note 3. Security Transactions
Realized gains and losses are computed on the identified cost basis for both
financial reporting and federal income tax purposes. At December 31, 1995,
the Mortgage Securities Income Fund had a capital loss carryover of
$2,928,158, which will expire in 2002, if not utilized. The cost of
investments purchased and proceeds from investment sold excluding short-term
investments for the year ended December 31, 1995 for the Funds excluding Cash
Income Fund were as follows:
<TABLE>
<CAPTION>
Mortgage
Capital Managed Managed Securities
Appreciation Growth Assets Income
Fund Stock Fund Fund Fund
------------ ----------- -------------- --------------
<S> <C> <C> <C> <C>
Cost of investments
purchased $166,531,621 $47,836,216 $131,929,723 $93,171,641
Proceeds from
investments sold 171,663,693 44,488,696 143,375,891 94,963,162
Note 4. Distributions to shareholders
The Funds with the exception of the Cash Income Fund, intend to distribute as
dividends or capital gain distributions, at least annually, substantially all
of their net investment income and net gains realized from the sale of
portfolio securities. All dividends and distributions are reinvested in
additional shares of the Funds. The Cash Income Fund declares dividends daily
and reinvests all dividends declared monthly in additional shares at net asset
value. Income and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles primarily relating to gains and losses on foreign
currency and wash sale transactions.
Note 5. Management and Administrative Fees
The Funds have advisory and administrative agreements with the Adviser. The
following investment advisory fee rates were in effect as of December 31,
1995:
<CAPTION>
Annual rate(s) as a
percent of
Fund(s) average daily net assets
------- ----------------------
<S> <C>
Capital Appreciation Fund .50 of 1%
Managed Growth Stock Fund .50 of 1%
Managed Assets Fund .45 of 1%
Mortgage Securities Income Fund .40 of 1%
Cash Income Fund .35 of 1%
</TABLE>
As of December 31, 1995, for all the Funds, the administrative fee was .15 of
1 percent of average annual net assets. Both the investment advisory fees and
the administrative fees are computed daily and paid monthly.
The Adviser also provides the Funds with certain Fund accounting services. The
fee is $25,000 annually plus .0025 of 1 percent of assets in excess of $50
million. For the year ended December 31, 1995, Capital Appreciation Fund,
Managed Growth Stock Fund, Managed Assets Fund, Mortgage Securities Income
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fund, and Cash Income Fund incurred charges of $27,202, $26,683, $29,356,
$25,725 and $25,473, respectively.
The Funds pay SteinRoe Services, Inc. for transfer agent services rendered at
an annual rate of $7,500 computed on the basis of $625 per month.
The Adviser has agreed to reimburse all expenses, including management fees,
incurred by the Funds as follows:
<TABLE>
<CAPTION>
Fund(s) Expenses exceeding
- ------- -------------------------
<S> <C>
Capital Appreciation Fund .80 of 1% of average daily net assets
Managed Growth Stock Fund .80 of 1% of average daily net assets
Managed Assets Fund .75 of 1% of average daily net assets
Mortgage Securities Income Fund .70 of 1% of average daily net assets
Cash Income Fund .65 of 1% of average daily net assets
The expense limitations expire April 30, 1996.
</TABLE>
Note 6. Investment in Repurchase Agreements
Each Fund may enter into repurchase agreements with banks, broker-dealer firms
and other recognized financial institutions whereby such institutions sell an
instrument in which a Fund may invest to that Fund, and the seller agrees, at
the time of the sale, to repurchase that instrument at a specified time and
price. The Funds require the seller of the instrument to maintain on deposit
with the Funds' custodian bank or in the Federal Reserve Book-Entry System
securities in an amount at all times equal to or in excess of the value of the
repurchase agreement plus accrued interest. In the event the seller of the
instrument defaults on the repurchase obligation, a Fund could receive less
than the repurchase price on the sale of the securities to another party or
could be subject to delays in selling the securities.
Note 7. Substitutions
In October, 1995, Keyport and Liberty Life, the Funds' only shareholders at
that time, received an order from the Securities and Exchange Commission
approving the substitution of (i) shares of Managed Assets Fund ("MAF") for
shares of Strategic Managed Assets Fund ("SMAF"), (ii) shares of the
Colonial-Keyport Strategic Income Fund ("CKSIF") for the shares of Managed
Income Fund ("MIF") and (iii) shares of Mortgage Securities Income Fund
("MSIF") for shares of Colonial-Keyport Government Fund ("CKGF"). CKSIF and
CKGF are series of the Keyport Variable Investment Trust ("KVIT"). KVIT also
is a funding vehicle for VA contracts and VLI policies of affiliated
participating insurance companies. The substitution occurred on October 13,
1995 at the net asset value of shares totaling $48,923,531 of MAF which were
substituted for shares of SMAF, $37,216,837 CKSIF which were substituted for
shares of MIF, and $25,976,819 of MSIF which were substituted for shares of
CKGF.
<PAGE>
Investment Adviser
Administrator
Stein Roe & Farnham Incorporated
One South Wacker Drive
Chicago, Illinois 60606
Transfer Agent
SteinRoe Services, Inc.
One South Wacker Drive
Chicago, Illinois 60606
Distributor
Keyport Financial Services Corp.
125 High Street
Boston, Massachusetts 02110
Client Services
Keyport Life Insurance Company
125 High Street
Boston, Massachusetts 02110
800-367-3653 (Press 3)
Custodian
State Street Bank & Trust Company
P.O. Box 366
Boston, Massachusetts 02101
Independent Auditors
KPMG Peat Marwick LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
Legal Counsel
Bingham, Dana & Gould
150 Federal Street
Boston, Massachusetts 02110
The Trustees
John A. Bacon Jr.
Richard R. Christensen
Salvatore Macera
Dr. Thomas E. Stitzel
This report is authorized for use as sales literature only when accompanied by
a current prospectus of the Trust and a current prospectus for a variable
insurance product offered by Keyport Life Insurance Company, Keyport America
Life Insurance Company, or Liberty Life Assurance Company of Boston.
12/95 NIM 30m
PART C
Information required to be set forth in Part C is set forth under
the appropriate item, so numbered, in Part C of the Registration Statement.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Index to Financial Statements and Supporting Schedules:
The following financial statements for each of the Funds in the
Trust are included below in this Part C:
Independent Auditors' Report
Schedules of Investments as of December 31, 1995
Statements of Assets and Liabilities as of December 31, 1995
Statements of Operations for the year ended December 31, 1995
Statements of Changes in Net Assets for each of the years in the two-year
period ended December 31, 1995
Financial Highlights for each of the years in the five-year period ended
December 31, 1995
Said financial statements are included in this filing as part of Part B.
<PAGE>
(b) Exhibits:
1. (a) Agreement and Declaration of Trust(1)
(b) Amendment to Agreement and Declaration of Trust(2)
(c) Second Amendment to Agreement and Declaration of Trust(2)
2. (a) By-Laws(1)
(b) Amended By-Laws(2)
3. None
4. (a) Specimen Share Certificates for each Fund (2)
(b) [Deleted]
5. (a) Fund Advisory Agreement, dated May 1, 1993, between the Trust on
behalf of the Capital Appreciation Fund and Stein Roe & Farnham
Incorporated(3)
(b) Fund Advisory Agreement, dated May 1, 1993, between the Trust on
behalf of the Managed Growth Stock Fund and Stein Roe & Farnham
Incorporated(3)
(c) [Deleted]
(d) Fund Advisory Agreement, dated May 1, 1993, between the Trust on
behalf of the Managed Assets Fund and Stein Roe & Farnham
Incorporated(3)
(e) Fund Advisory Agreement, dated May 1, 1993, between the Trust on
behalf of the Mortgage Securities Income Fund and Stein Roe &
Farnham Incorporated(3)
(f) Fund Advisory Agreement, dated December 9, 1988, between the Trust
on behalf of the Cash Income Fund and Stein Roe & Farnham
Incorporated(4)
(g) [Deleted]
<PAGE>
6. (a) Underwriting Agreement dated December 9, 1988 between Keystone
Provident Financial Services Corp. (now Keyport Financial Services
Corp.) and the Trust(4)
(b) Amendment to Underwriting Agreement dated as of April 1, 1994
between Keyport Financial Services Corp. and the Trust (3)
7. None
8. (a) Custodian Contract dated December 31, 1988 between State Street
Bank and Trust Company and SteinRoe Variable Investment Trust(4)
(b) First Amendment to Custodian Contract dated February 23, 1989(5)
(c) Second Amendment to Custodian Contract dated January 23, 1993 (3)
9. (a) Administration Agreement dated as of January 3, 1995 between
the Trust, on behalf of each of its Funds, and Stein Roe & Farnham
Incorporated (6)
(b) Transfer Agency Agreement dated as of January 3, 1995 between the
Trust, on behalf of each of its Funds, and Stein Roe & Farnham
Incorporated (6)
(c) Participation Agreement dated December 9, 1988 among the Trust,
Keyport Life Insurance Company (formerly Keystone Provident Life
Insurance Company) and Keyport Financial Services Corp.(4)
(d) Participation Agreement dated May 15, 1992 among the Trust, Keyport
Financial Services Corp. and Liberty Life Assurance Company of
Boston.(3)
(e) Participation Agreement dated as of October 1, 1993 among the
Trust, Keyport Financial Services Corp. and Independence Life
Annuity Company (formerly "Crown America Life Insurance
Company").(3)
(f) Participation Agreement dated as of April 15, 1994 among the Trust,
on behalf of the Capital Appreciation Fund, Transamerica Occidental
Life Insurance Company, Stein Roe & Farnham Incorporated and
Charles Schwab & Co., Inc. (3)
(g) Participation Agreement dated as of December 1, 1994 among
the Trust, on behalf of the Capital Appreciation Fund, First
Transamerica Life Insurance Company, Stein Roe & Farnham
Incorporated and Charles Schwab & Co., Inc. (6)
(h) Accounting and Bookkeeping Agreement dated as of January 3,
1995 between the Trust, on behalf of each of its Funds, and Stein
Roe Farnham Incorporated. (6)
10. Opinion and consent of counsel as to the legality of the securities being
registered.(7)
11. Consent of Independent Auditors
12. Not applicable.
13. Not applicable.
14. Not applicable
15. Not applicable
16. Not applicable
17. Financial Data Schedule
18. Not applicable.
19. (a) Power of Attorney executed by each Trustee of the Trust
pertaining to this Registration Statement (8)
(b) Power of Attorney executed by Gary A. Anetsberger and Sharon
R. Robertson pertaining to this Registration Statement.(6)
- -----------------
(1) Incorporated by reference to the initial Registration Statement on Form
N-1A (File No. 33-14954) filed on June 10, 1987.
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to this
Registration Statement filed on October 7, 1988.
(3) Incorporated by reference to Post-Effective Amendment No. 9 to this
Registration Statement filed on April 27, 1994
(4) Incorporated by reference to Post-Effective Amendment No. 1 to this
Registration Statement filed on February 21, 1989.
(5) Incorporated by reference to Post-Effective Amendment No. 2 to this
Registration Statement filed on June 28, 1989.
(6) Incorporated by reference to Post-Effective Amendment No. 10 to this
Registration Statement filed on April 27, 1995.
(7) Incorporated by reference to Pre-Effective Amendment No. 2 to this
Registration Statement filed on November 21, 1988.
(8) Located on Signature Pages of Post-Effective Amendment No. 9 to this
Registration Statement filed April 27, 1994 (incorporated therefrom by
reference).
Item 25. Persons Controlled by or Under Common Control with Registrant.
Shares of the Trust registered pursuant to this Registration Statement
will be offered and sold to Keyport Life Insurance Company ("Keyport"), a stock
life insurance company organized under the laws of Rhode Island, and to certain
of its separate investment accounts and the respective separate investment
accounts of Liberty Life Assurance Company of Boston ("Liberty Life"), a stock
life insurance company organized as a Massachusetts corporation, and
Independence Life & Annuity Company, a stock life insurance company organized
under the laws of Rhode Island (formerly known as "Crown America Life Insurance
Company" and thereafter formerly known as "Keyport America Life Insurance
Company") ("Independence"). As described below, Keyport, Liberty Life and
Independence are under common control. The purchasers of insurance contracts and
policies issued in connection with such accounts will have the right to instruct
Keyport, Liberty Life and Independence with respect to the voting of the
Registrant's shares held by their respective separate accounts. Subject to such
voting instruction rights, Keyport, Liberty Life, Independence and their
respective separate accounts directly control the Registrant. In addition,
shares of Capital Appreciation Fund currently are sold to certain separate
accounts of two insurance companies not affiliated with Keyport, and shares of
any of the Funds may in the future be sold to separate accounts of other
unaffiliated insurance companies.
Keyport Financial Services Corp. ("KFSC"), the Trust's principal
underwriter, Stein Roe & Farnham Incorporated, the Trust's investment manager
(the "Adviser"), Keyport and Independence are each wholly owned indirect
subsidiaries of Liberty Financial Companies, Inc. ("LFC"), Boston,
Massachusetts. As of March 31, 1996, Liberty Mutual Insurance Company ("LMIC"),
Boston, Massachusetts, owned, indirectly, approximately 81.5% of the combined
voting power of the outstanding voting stock LFC (with the balance being
publicly-held). Liberty Life is a 90%-owned subsidiary of LMIC.
Item 26. Number of Holders of Securities
As of March 31, 1996 the number of record holders of shares of beneficial
interest of each series ("Fund") of the Trust was as follows:
<PAGE>
Title of Class Number of Record
Shares of Beneficial Interest of Holders
Capital Appreciation Fund 16
Managed Growth Stock Fund 13
Managed Assets Fund 13
Mortgage Securities Income Fund 11
Cash Income Fund 18
Item 27. Indemnification
Reference is made to Item 27 of Pre-Effective Amendment No. 2 to this
registration Statement filed November 21, 1988, and incorporated herein by
reference.
Item 28. Business and Other Connections of Investment Adviser.
The Adviser is a direct wholly owned subsidiary of SteinRoe Services Inc.
("SSI"), which in turn, is a direct wholly owned subsidiary of LFC. LFC, as
stated in Item 25 above, is an indirect majority owned subsidiary of LMIC. The
Adviser acts as investment adviser to individuals, trustees, pension and
profit-sharing plans, charitable organizations, and other investors. In addition
to the Registrant, it also acts as investment adviser to other no-load companies
having different investment policies.
During the past two years, neither the Adviser nor any of its directors
or officers, except for directors Gary L. Countryman, Kenneth R. Leibler, C.
Allen Merritt Jr. and N. Bruce Callow, have been engaged in any business,
profession, vocation, or employment of a substantial nature, either on their
own account or in the capacity of director, officer, partner or trustee, other
than as an officer or associate of the Adviser. Mr. Countryman (a director of
the Adviser prior to January 1996) is President of LMIC and Liberty Mutual Fire
Insurance Company and Chairman of LFC. Mr. Leibler became President and Chief
Executive Officer of LFC as of January 1, 1995; prior thereto he was President
and Chief Operating Officer of LFC. Mr. Merritt (a director of the Adviser
commencing January 1996) is Senior Vice President, Treasurer and Chief
Financial Officer of LFC. Mr. Callow was Senior Vice President of Trust
Financial Services of the Northern Trust Company prior to June 1994.
Certain directors and officers of the Adviser also serve and have during
the past two years served in various capacities as officers, directors or
trustees of SSI, or the Registrant or investment companies managed by the
Adviser, as shown below. (The listed entities, except for the Registrant and
Liberty Financial Trust, are all located at One South Wacker Drive, Chicago,
Illinois 60606; the address of the Registrant and Liberty Financial Trust is
Federal Reserve Plaza, 600 Atlantic Avenue, Boston, Massachusetts 02210.)
<PAGE>
Officer of the Adviser Current Position Position Formerly
Held Within Past
Two Years
SteinRoe Services Inc.
Timothy K. Armour Vice President
Gary A. Anetsberger Vice President
Jilaine Hummel Bauer Secretary; Vice President
Kenneth J. Kozanda Vice-President; Treasurer
Alfred F. Kugel Vice-President
Sabino Marinella Director
Hans P. Ziegler Director;
Vice Chairman; President
SteinRoe Investment Trust
Timothy K. Armour President; Trustee
Gary A. Anetsberger Senior
Vice President;
Controller
Jilaine Hummel Bauer Executive Vice President; Vice President
Secretary
N. Bruce Callow Executive Vice President
Daniel K. Cantor Vice President
E. Bruce Dunn Vice President
Eric P. Gustafson Vice President
Stephen P. Lautz Vice President
Lynn C. Maddox Vice President
Richard B. Peterson Vice President
Gloria J. Santella Vice President
Thomas P. Sorbo Vice President
Hans P. Ziegler Executive
Vice President
SteinRoe Income Trust
Timothy K. Armour President; Trustee
Gary A. Anetsberger Senior Vice-President
Controller
Jilaine Hummel Bauer Executive Vice President; Vice President
Secretary
Ann H. Benjamin Vice President
N. Bruce Callow Executive Vice President
Michael T. Kennedy Vice President
Lynn C. Maddox Vice President
Jane M. Naeseth Vice President
Thomas P. Sorbo Vice President
Hans P. Ziegler Executive Vice President
SteinRoe Municipal Trust
Timothy K. Armour President; Trustee
Gary A. Anetsberger Senior
Vice President;
Controller
Jilaine Hummel Bauer Executive Vice President; Vice President
Secretary
N. Bruce Callow Executive Vice President
Joanne T. Costopoulos Vice President
Stephen P. Lautz Vice President
Lynn C. Maddox Vice President
M. Jane McCart Vice President
Thomas S. Sorbo Vice President
Hans P. Ziegler Executive; Vice President
SR&F Base Trust
Gary A. Anetsberger Senior Vice President;
Controller
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive Vice President; Vice President
Secretary
Ann H. Benjamin Vice President
N. Bruce Callow Executive Vice President
Michael T. Kennedy Vice President
Stephen P. Lautz Vice President
Lynn C. Maddox Vice President
Jane M. Naeseth Vice President
Thomas P. Sorbo Vice President
Hans P. Ziegler Executive Vice President
Item 29. Principal Underwriters
(a) The Registrant's principal underwriter, Keyport Financial Services
Corp. ("KFSC"), is a wholly owned subsidiary of Keyport Life Insurance Company,
which in turn is a direct wholly owned indirect subsidiary of SSI, which in turn
is a direct wholly owned subsidiary of LFC. KFSC acts on a "best efforts" basis
and receives no fee or commission for its underwriting and distribution
services. KFSC does not act as underwriter with respect to shares issued to
Participating Insurance Companies which are not affiliates of Keyport or LMIC.
(b) Set forth below is information concerning the directors and officers
of KFSC:
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
John S. Rosensteel Chairman None
Lee R. Roberts Director None
William L. Dixon Vice President - Compliance None
Jimme D. Massingill Vice President - Marketing None
Operations
Francis E
Reinhart Vice President - Administration None
and Director
John E. Arant, III Vice President - Chief Sales Officer None
James J. Klopper Clerk None
The business address of each of the directors and officers of KFSC is 125 High
Street, Boston, Massachusetts 02110.
(c) Not applicable.
Item 30. Location of Accounts and Records
Persons maintaining physical possession of accounts, books and other
documents required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and the Rules promulgated thereunder include Registrant's Secretary,
John A. Benning; Registrant's investment adviser, administrator and transfer and
dividend disbursing agent, Stein Roe & Farnham Incorporated; Registrant's
principal underwriter, Keyport Financial Services Corp.; and Registrant's
custodian, State Street Bank and Trust Company. The address of the Secretary is
600 Atlantic Avenue, Boston, MA 02210-2214; the address of Stein Roe & Farnham
Incorporated is One South Wacker Drive, Chicago, IL 60606; the address of
Keyport Financial Services, Inc., is 125 High Street, Boston, MA 02110; and the
address of State Street Bank and Trust Company is 225 Franklin Street, Boston,
MA 02110.
Item 31. Management Services
Reference is made to Item 1 of Post-Effective Amendment No. 1 to this
Registration Statement filed on February 21, 1989 and incorporated herein by
reference.
Item 32. Undertakings
(a) Not applicable.
(b) Reference is made to Item 32 of Pre-Effective Amendment No. 2 to
this Registration Statement filed on November 21, 1988 and
incorporated herein by reference.
(c) The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 10 to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Boston
and the Commonwealth of Massachusetts, on the 26th day of April, 1996. The
Registrant hereby certifies, in accordance with Rule 485(b)(4) under the
Securities Act of 1933, that this amendment meets the requirements for
effectiveness under Rule 485(b) thereunder.
STEINROE VARIABLE INVESTMENT TRUST
By: /s/ Richard R. Christensen*
Richard R. Christensen, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-1A has been signed below by the following
persons in the capacities and on the dates indicated.
(Signature) (Title and Capacity) (Date)
/s/ Richard R. Christensen* President; Principal April 26, 1996
Richard R. Christensen Executive Officer;
Trustee
/s/ Gary A. Anetsberger* Treasurer; Principal April 26, 1996
- -----------------------
Gary A. Anetsberger Financial Officer
/s/ Sharon R. Robertson* Controller; Principal April 26, 1996
Sharon R. Robertson Accounting Officer
/s/ John A. Bacon Jr.* Trustee April 26, 1996
- ---------------------
John A. Bacon Jr.
/s/ Salvatore Macera * Trustee April 26, 1996
- ---------------------
Salvatore Macera
/s/ Thomas E. Stitzel* Trustee April 26, 1996
- ---------------------
Thomas E. Stitzel
*By/S/ KEVIN M. CAROME
Kevin M. Carome
Attorney-in-fact
<PAGE>
EXHIBIT LIST
- ------------======================================================
Exhibit Description
- ------------======================================================
- ------------======================================================
11 Consent of Independent Auditors
- ------------======================================================
- ------------======================================================
17 Financial Data Schedule
- ------------======================================================
CONSENT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
the SteinRoe Variable Investment Trust
We consent to the use of our report which is incorporated by reference into the
Statements of Additional Information and the reference to our firm under the
heading "Financial Highlights" in the Prospectuses and to the reference to our
firm as experts under the heading "Independent Auditors and Financial
Statements" in the Statements of Additional Information.
KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Chicago, Illinois
April 23, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> CAPITAL APPRECIATION FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 131934
<INVESTMENTS-AT-VALUE> 146233
<RECEIVABLES> 1251
<ASSETS-OTHER> 15
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 147499
<PAYABLE-FOR-SECURITIES> 3736
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 515
<TOTAL-LIABILITIES> 4251
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 129236
<SHARES-COMMON-STOCK> 8773
<SHARES-COMMON-PRIOR> 9098
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 78
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 210
<ACCUM-APPREC-OR-DEPREC> 14300
<NET-ASSETS> 143248
<DIVIDEND-INCOME> 735
<INTEREST-INCOME> 682
<OTHER-INCOME> 0
<EXPENSES-NET> 1050
<NET-INVESTMENT-INCOME> 367
<REALIZED-GAINS-CURRENT> 1031
<APPREC-INCREASE-CURRENT> 13895
<NET-CHANGE-FROM-OPS> 15293
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 375
<DISTRIBUTIONS-OF-GAINS> 850
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2916
<NUMBER-OF-SHARES-REDEEMED> 3317
<SHARES-REINVESTED> 76
<NET-CHANGE-IN-ASSETS> 9170
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 50
<OVERDIST-NET-GAINS-PRIOR> 412
<GROSS-ADVISORY-FEES> 687
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1050
<AVERAGE-NET-ASSETS> 138180
<PER-SHARE-NAV-BEGIN> 14.74
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 1.69
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> .10
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.33
<EXPENSE-RATIO> .76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> CASH INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 65284
<INVESTMENTS-AT-VALUE> 65284
<RECEIVABLES> 30
<ASSETS-OTHER> 61
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 65375
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 383
<TOTAL-LIABILITIES> 383
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 64992
<SHARES-COMMON-STOCK> 64992
<SHARES-COMMON-PRIOR> 78698
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 64992
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4212
<OTHER-INCOME> 0
<EXPENSES-NET> 437
<NET-INVESTMENT-INCOME> 3775
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 3775
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3775
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 56500
<NUMBER-OF-SHARES-REDEEMED> 73981
<SHARES-REINVESTED> 3775
<NET-CHANGE-IN-ASSETS> (13706)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 241
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 437
<AVERAGE-NET-ASSETS> 68938
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .030
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .030
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> MANAGED ASSETS FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 240884
<INVESTMENTS-AT-VALUE> 275356
<RECEIVABLES> 2047
<ASSETS-OTHER> 88
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 277491
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 477
<TOTAL-LIABILITIES> 477
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 242794
<SHARES-COMMON-STOCK> 19675
<SHARES-COMMON-PRIOR> 16113
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 192
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 135
<ACCUM-APPREC-OR-DEPREC> 34471
<NET-ASSETS> 277014
<DIVIDEND-INCOME> 3729
<INTEREST-INCOME> 6329
<OTHER-INCOME> 0
<EXPENSES-NET> 1491
<NET-INVESTMENT-INCOME> 8567
<REALIZED-GAINS-CURRENT> 12780
<APPREC-INCREASE-CURRENT> 28886
<NET-CHANGE-FROM-OPS> 50233
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 8782
<DISTRIBUTIONS-OF-GAINS> 12932
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4924
<NUMBER-OF-SHARES-REDEEMED> 2912
<SHARES-REINVESTED> 1549
<NET-CHANGE-IN-ASSETS> 80736
<ACCUMULATED-NII-PRIOR> 23
<ACCUMULATED-GAINS-PRIOR> 16
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1002
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1491
<AVERAGE-NET-ASSETS> 274834
<PER-SHARE-NAV-BEGIN> 12.18
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> 2.61
<PER-SHARE-DIVIDEND> .48
<PER-SHARE-DISTRIBUTIONS> .71
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.08
<EXPENSE-RATIO> .66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MANAGED GROWTH STOCK FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 97782
<INVESTMENTS-AT-VALUE> 136840
<RECEIVABLES> 313
<ASSETS-OTHER> 65
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 137218
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 384
<TOTAL-LIABILITIES> 384
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 97920
<SHARES-COMMON-STOCK> 5802
<SHARES-COMMON-PRIOR> 5452
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 40
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 104
<ACCUM-APPREC-OR-DEPREC> 39058
<NET-ASSETS> 136834
<DIVIDEND-INCOME> 1253
<INTEREST-INCOME> 460
<OTHER-INCOME> 0
<EXPENSES-NET> 865
<NET-INVESTMENT-INCOME> 848
<REALIZED-GAINS-CURRENT> 6765
<APPREC-INCREASE-CURRENT> 29816
<NET-CHANGE-FROM-OPS> 37430
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 800
<DISTRIBUTIONS-OF-GAINS> 6600
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1121
<NUMBER-OF-SHARES-REDEEMED> 1086
<SHARES-REINVESTED> 315
<NET-CHANGE-IN-ASSETS> 38101
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 89
<OVERDIST-NET-GAINS-PRIOR> 270
<GROSS-ADVISORY-FEES> 583
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 865
<AVERAGE-NET-ASSETS> 117259
<PER-SHARE-NAV-BEGIN> 18.11
<PER-SHARE-NII> .15
<PER-SHARE-GAIN-APPREC> 6.68
<PER-SHARE-DIVIDEND> .15
<PER-SHARE-DISTRIBUTIONS> 1.20
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.59
<EXPENSE-RATIO> .74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> MORTGAGE SECURITIES INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 109587
<INVESTMENTS-AT-VALUE> 111935
<RECEIVABLES> 740
<ASSETS-OTHER> 69
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 112744
<PAYABLE-FOR-SECURITIES> 10711
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 255
<TOTAL-LIABILITIES> 10966
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 102491
<SHARES-COMMON-STOCK> 10019
<SHARES-COMMON-PRIOR> 7806
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 129
<ACCUMULATED-NET-GAINS> (2932)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2348
<NET-ASSETS> 101778
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5900
<OTHER-INCOME> 0
<EXPENSES-NET> 545
<NET-INVESTMENT-INCOME> 5355
<REALIZED-GAINS-CURRENT> 653
<APPREC-INCREASE-CURRENT> 5388
<NET-CHANGE-FROM-OPS> 11396
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5500
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3158
<NUMBER-OF-SHARES-REDEEMED> 1487
<SHARES-REINVESTED> 542
<NET-CHANGE-IN-ASSETS> 29358
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3552)
<OVERDISTRIB-NII-PRIOR> 16449
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 315
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 545
<AVERAGE-NET-ASSETS> 79202
<PER-SHARE-NAV-BEGIN> 9.28
<PER-SHARE-NII> .57
<PER-SHARE-GAIN-APPREC> .89
<PER-SHARE-DIVIDEND> .58
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.16
<EXPENSE-RATIO> .69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
