File No. 33-14954
File No. 811-5199
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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. 12 /X/
and/or
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 14 /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, 1997 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, 1996 was filed on February 26, 1997.
2
<PAGE>
STEINROE VARIABLE INVESTMENT TRUST
CROSS REFERENCE SHEET
(as required by Rule 481(a))
<TABLE>
<CAPTION>
PART A
FORM N-1A LOCATION
<S> <C>
1. Cover Page Cover Page
2. Synopsis The Trust
3. Condensed Financial Information Financial Highlights; Investment Return
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, 1996. 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
3
<PAGE>
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
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
4
<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,
1996 and are included in Part B.
</TABLE>
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.
5
<PAGE>
STEINROE VARIABLE INVESTMENT TRUST
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210
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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
o Capital growth by investing primarily in common stocks, convertible
securities, and other securities selected for prospective capital growth.
Managed Growth Stock Fund
o Long-term growth of capital through investment primarily in common stocks.
Managed Assets Fund
o High total investment return through investment in a changing mix of
securities.
Mortgage Securities Income Fund
o 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
o 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.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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This 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, 1997, incorporated herein by reference, which has been
filed with the Securities and Exchange Commission. For a free copy write to
Keyport Financial Services Corp. at 125 High Street, Boston, Massachusetts 02110
or the broker-dealer offering the variable annuity contracts and variable life
insurance policies of Participating Insurance Companies (as such term is defined
in this Prospectus).
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SHARES OF THE 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 PARTICIPATING INSURANCE COMPANIES.
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THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE APPROPRIATE
VA CONTRACT OR VLI POLICIES OF THE APPLICABLE PARTICIPATING INSURANCE COMPANY.
BOTH PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
The date of this prospectus is May 1, 1997
<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).
Certain Participating Insurance Companies are affiliated with the adviser to the
Funds (Affiliated Participating Insurance Companies). As of the date of this
Prospectus, such Affiliated Participating Insurance Companies are Keyport Life
Insurance Company (Keyport), Independence Life & Annuity Company (Independence)
and Liberty Life Assurance Company of Boston (Liberty Life). Shares of the Funds
from time to time may be sold to other unaffiliated Participating Insurance
Companies.
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 services to the
Funds, and an affiliate of the Adviser provides 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 Affiliated
Participating Insurance Companies. The Adviser, the Underwriter, Keyport and
Independence are subsidiaries of Liberty Financial Companies, Inc. (LFC). As of
March 31, 1997, approximately 80.6% of the combined voting power of LFC's
outstanding voting stock was held, indirectly, by Liberty Mutual. Liberty Life
is a subsidiary of 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, 1996. 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, 1992 appears in the Trust's annual report to
shareholders for the fiscal year ended December 31, 1996 (which may be obtained
without charge from the Underwriter or from the Participating Insurance Company
issuing the applicable VA contract or VLI policy), 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 Participating Insurance Companies.
Capital Appreciation Fund
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
------- ------- -------- --------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of year $ 16.33 $ 14.74 $ 16.53 $ 15.34 $ 15.32 $12.07 $ 14.79 $13.62
------- ------- -------- --------- -------- ------ -------- ------
Net investment income 0.04 0.04 0.06 0.03 -- 0.21 0.19 0.23
Net realized and unrealized gains
(losses) on investments and foreign
currency transactions 4.36 1.69 0.09 5.22 2.17 4.19 (1.53) 3.90
------- ------- -------- --------- -------- ------ -------- ------
Total from investment operations 4.40 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 $ 20.73 $ 16.33 $ 14.74 $ 16.53 $ 15.34 $15.32 $ 12.07 $14.79
======= ======= ======== ========= ======== ====== ======== ======
Total return:
Total investment return 26.94% 11.75% 1.19% 35.68%(b) 14.48% 37.25% (8.91)% 30.84% (b)
Ratios/supplemental data:
Net assets, end of year (000s) $196,219 $143,248 $134,078 $ 96,544 $52,135 $41,179 $33,238 $32,176
Ratio of expenses to average
net assets 0.75% 0.76% 0.80% 0.84%(a) 1.01% 1.03% 1.14% 1.08%(a)
Ratio of net investment income to
average net assets 0.20% 0.26% 0.44% 0.13%(b) (0.01)% 1.35% 1.43% 1.14%(b)
Portfolio turnover ratio 100% 132% 144% 112% 85% 36% 121% 153%
Average commissions (per share) $0.0251 -- -- -- -- -- -- --
</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,
------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
---------- ----------- ----------- ----------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of year $ 23.59 $ 18.11 $ 20.65 $ 20.10 $19.47 $13.44 $ 13.88 $ 10.75
------- ------- -------- ------- ------ ------ ------ -------
Net investment income 0.13 0.15 0.15 0.13 0.11 0.17 0.19 0.17
Net realized and unrealized gains
(losses) on investments 4.89 6.68 (1.46) 0.86 1.18 6.25 (0.42) 3.19
------- ------- -------- ------- ------ ------ ------ -------
Total from investment operations 5.02 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 -- -- -- -- -- -- -- (0.05)
------- ------- -------- ------- ------ ------ ------ -------
Total distributions -- (1.35) (1.23) (0.44) (0.66) (0.39) (0.21) (0.23)
------- ------- -------- ------- ------ ------ ------ -------
Net asset value, end of year $ 28.61 $ 23.59 $ 18.11 $ 20.65 $20.10 $19.47 $ 13.44 $ 13.88
======= ======= ======== ======= ====== ====== ====== =======
Total return:
Total investment return 21.28% 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) $161,879 $136,834 $98,733 $111,561 $64,402 $38,481 $17,383 $13,257
Ratio of expenses to average
net assets 0.73% 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 0.49% 0.72% 0.75% 0.77% 0.63% 1.15% 1.51%(b) 1.35%(b)
Portfolio turnover ratio 35% 41% 72% 77% 20% 40% 39% 77%
Average commissions (per share) $0.0534 -- -- -- -- -- -- --
</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,
------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
----------- ----------- ----------- ---------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of year $ 14.08 $ 12.18 $ 13.11 $ 12.54 $ 12.54 $10.26 $ 11.38 $10.25
------- ------- -------- ------- ------- ------ -------- ------
Net investment income 0.57 0.48 0.51 0.38 0.45 0.52 0.62 0.53
Net realized and unrealized gains
(losses) on investments 1.63 2.61 (0.93) 0.78 0.49 2.31 (0.70) 1.75
------- ------- --------- ------- ------- ------ -------- ------
Total from investment operations 2.20 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 $ 16.28 $ 14.08 $ 12.18 $ 13.11 $ 12.54 $12.54 $ 10.26 $11.38
======= ======= ========= ======= ======= ====== ======== ======
Total return:
Total investment return 15.63% 25.43% (3.19)% 9.29% 7.53% 27.93% (0.69)% 22.38%
Ratios/supplemental data:
Net assets, end of year (000s) $299,184 $277,014 $196,278 $197,132 $113,572 $82,710 $58,368 $59,068
Ratio of expenses to average
net assets 0.67% 0.66% 0.68% 0.69% 0.66% 0.71% 0.75% 0.78%
Ratio of net investment income to
average net assets 3.68% 3.12% 4.01% 3.55% 3.98% 4.57% 5.30% 4.64%
Portfolio turnover ratio(a) 76% 66% 71% 47% 70% 82% 111% 109%
Average commissions (per share) $0.0547 -- -- -- -- -- -- --
</TABLE>
- ----------
(a) The portfolio turnover ratio includes dollar roll transactions.
6
<PAGE>
Mortgage Securities Income Fund
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
----------- ---------- ----------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of year $ 10.16 $ 9.28 $ 10.17 $ 10.26 $10.42 $ 9.74 $ 9.69 $ 9.39
-------- ------- ------ -------- ------ ------ -------- --------
Net investment income 0.78 0.57 0.73 0.65 0.63 0.67 0.80 0.76
Net realized and unrealized gains
(losses) on investments (0.30) 0.89 (0.89) (0.01) (0.01) 0.73 0.08 0.45
-------- ------- ------ -------- ------ ------ -------- --------
Total from investment operations 0.48 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 (0.80) (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 (0.80) (0.58) (0.73) (0.73) (0.78) (0.72) (0.83) (0.91)
-------- ------- ------ -------- ------ ------ -------- --------
Net asset value, end of year $ 9.84 $ 10.16 $ 9.28 $ 10.17 $10.26 $10.42 $ 9.74 $ 9.69
======== ======= ====== ======== ====== ====== ======== ========
Total return:
Total investment return 4.70% 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) $ 76,009 $101,778 $72,420 $ 91,195 $67,353 $48,559 $ 29,992 $ 21,067
Ratio of expenses to average
net assets 0.70%(a) 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 6.71%(b) 6.76% 6.71%(b) 6.64%(b) 6.72% 7.26% 8.09%(b) 7.85%(b)
Portfolio turnover ratio (c) 72% 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 0.72%, 0.71%, 0.76%, 1.22% and 1.25% for the years ended December 31,
1996, 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,
---------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
----------- ----------- ---------------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <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 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- -------
Net investment income 0.049 0.055 0.037 0.027 0.034 0.056 0.076 0.087
------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
Distributions from net investment
income (0.049) (0.055) (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 $ 1.00
======= ======= ======= ======= ======= ======= ======= =======
Total return:
Total investment return 5.01% 5.62% 3.81% 2.70% 3.48% 5.79% 7.89% 9.07%
Ratios/supplemental data:
Net assets, end of year (000s) $65,461 $64,992 $78,698 $83,049 $70,821 $77,676 $94,462 $94,313
Ratio of expenses to average
net assets 0.65% 0.63% 0.62% 0.65% 0.67% 0.67% 0.66% 0.66%
Ratio of net investment income
to average net assets 4.90% 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,
1996, which may be obtained without charge from the Underwriter or from the
Participating Insurance Company issuing the applicable VA contract or VLI
policy.
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, 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.
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 views of the Adviser's investment
strategists 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-
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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: (i) 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, (ii) Commerical Mortgage
Backed Securities, (iii) Collateralized Mortgage Obligations (CMOs) and (iv)
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).
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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.
Restrictions on the Funds' Investments
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
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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 Information 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 has provided investment
advisory and administrative services since 1932. The Adviser is a wholly owned
indirect subsidiary of LFC. As of December 31, 1996, the Adviser had assets
under management of approximately $26.7 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. Mr. Dunn has announced his intention to
retire as portfolio manager of the Fund on June 30, 1997.
Richard B. Peterson has been co-portfolio manager of the Capital Appreciation
Fund since 1991. 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.
Harvey B. Hirschhorn is the portfolio manager for the Managed Assets Fund.
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 became a Vice President of the Adviser in
1992 and a Senior Vice President in 1994, having been associated with the
Adviser since 1987.
The Adviser also provides each of the Funds with administrative services
pursuant to an Administration Agreement with the Trust on behalf of each Fund
dated as of January 3, 1995. These services include financial statement
preparation, the provision of office space and equipment and facilities in
connection with the maintenance of the Trust's headquarters, preparation and
filing of required reports and tax returns, arrangements for meetings,
maintenance of the Trust's corporate books and records, communication with
shareholders, provision of internal legal services and oversight of custodial,
accounting and other services provided to the Funds by others. The Adviser may,
in its discretion, arrange for such services to be provided to the Trust by LFC
or by any of LFC's majority or greater owned subsidiaries.
Under separate agreements, the Adviser also acts as the agent of the Funds for
the transfer of shares, disbursement of dividends and maintenance of shareholder
account records, and provides certain pricing and other record keeping services
to the Funds.
The Adviser pays all compensation of the Trust's officers who are employees of
the Adviser.
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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.
In addition, each Fund pays the Adviser an additional fee for accounting and
bookkeeping services in the annual amount of $25,000 plus .0025 percent of
average daily net assets in excess of $50,000,000.
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, the Adviser, The
Colonial Group, Inc., sponsor of the Colonial family of mutual funds, 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., a specialist in the design and implementation of bank marketing programs
for insurance and investment products.
Liberty Mutual is an international multi-line insurance writer and, with its
affiliates, is currently the fifth largest writer of property-casualty insurance
in the United States.
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, 1998 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.
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.
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PURCHASES AND REDEMPTIONS
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), a subsidiary of Keyport, 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
$1,000 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 (NYSE) (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 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.
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
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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.
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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 advisors.
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 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.
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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.
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APPENDIX A
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 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 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.
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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" above.)
Obligations of United States Branches of Foreign Banks
Obligations of U.S. branches of foreign banks may be general obligations of the
parent bank in addition to the issuing branch, or may be limited by the terms of
a specific obligation and by Federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
Obligations of Foreign Banks
Obligations of foreign banks and branches of foreign banks are similar to the
obligations of U.S. banks but involve risks that are different in some respects.
Such risks may include future political and economic developments, the possible
imposition of foreign withholding taxes on interest income payable on the
obligations, possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls, or the adoption of other foreign
government restrictions that might adversely affect the payment of principal and
interest on the obligations. Additionally, there may be less public information
available about foreign banks and their branches. Foreign banks and foreign
branches of foreign banks are not regulated by U.S. banking authorities, and
generally are not bound by accounting, auditing, and financial reporting
standards comparable to U.S. banks.
Master Demand Notes
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by a Fund at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the issuer, as borrower. Master
demand notes may permit daily fluctuations in the interest rate and daily
changes in the amount borrowed. The Fund has the right to increase the
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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
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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 prepayments 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).
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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
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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.
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APPENDIX B
DESCRIPTION OF RATINGS
RATINGS IN GENERAL
A rating of a rating service represents the service's opinion as to the credit
quality of the security being rated. However, the ratings are general and are
not absolute standards of quality or guarantees as to the credit worthiness of
an issuer. Consequently, the Adviser believes that the quality of debt
securities in which a Fund invests should be continuously reviewed and that
individual analysts give different weightings to the various factors involved in
credit analysis. A rating is not a recommendation to purchase, sell or hold a
security because it does not take into account market value or suitability for a
particular investor. Ratings are based on current information furnished by the
issuer or obtained by the rating services from other sources that they consider
reliable. Ratings may be changed, suspended or withdrawn as a result of changes
in or unavailability of such information, or for other reasons.
The following is a description of the characteristics of ratings used by Moody's
Investors Service, Inc. (Moody's) and Standard & Poor's Corporation (S&P), each
of which is a NRSRO.
BOND RATINGS
Ratings by Moody's
Aaa. Bonds rated Aaa are judged to be the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edge." Interest
payments are protected by a large or an exceptionally stable margin and
principal is secure. Although the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such bonds.
Aa. Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa bonds or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa bonds.
A. Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered as medium grade obligations; i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of risk with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Ratings by S&P
AAA. Debt rated AAA has the highest rating. Capacity to pay interest and repay
principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capac-
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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.
COMMERCIAL PAPER RATINGS
Ratings By Moody's
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its commercial paper obligations are
supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment.
Ratings by S&P
A brief description of the applicable rating symbols and their meaning follows:
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
B-2
<PAGE>
STEINROE VARIABLE INVESTMENT TRUST
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 five 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 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, 1997, incorporated herein by
reference, which has been filed with the Securities and Exchange Commission. For
a free copy call or write to 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 PARTICIPATING INSURANCE COMPANIES.
- ------------------------------------------------------------------------------
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE APPROPRIATE
VA CONTRACT OR VLI POLICIES OF THE APPLICABLE PARTICIPATING INSURANCE COMPANY.
BOTH PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
The date of this prospectus is May 1, 1997
<PAGE>
TABLE OF CONTENTS
Page
The Trust..................................................3
Financial Highlights.......................................3
How the Fund Invests.......................................4
Investment Techniques and Restrictions.....................5
Portfolio Turnover........................................ 6
How the Fund is Managed....................................7
Purchases and Redemptions..................................9
Investment Return..........................................9
Net Asset Value............................................9
Taxes.....................................................10
Dividends and Distributions...............................12
Shareholder Communications................................12
Organization and Description of Shares....................12
Additional Information....................................13
Appendix A: Investment Techniques and Securities..........14
2
<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). Certain Participating Insurance Companies are affiliated with the
Adviser to the Fund (Affiliated Participating Insurance Companies). As of the
date of this Prospectus, such Affiliated Participating Insurance Companies are
Keyport Life Insurance Company (Keyport), Independence Life & Annuity Company
(Independence) and Liberty Life Assurance Company of Boston (Liberty Life).
Shares of the Fund from time to time may be sold to other unaffiliated
Participating Insurance Companies.
The Participating Insurance Companies and their separate accounts are
the shareholders or investors (shareholders) of the Fund. Owners of VA contracts
and owners of VLI policies invest in sub-accounts of separate accounts of the
Participating Insurance Companies that, in turn, invest in the Fund.
The prospectuses issued by the Participating Insurance Company describe
which underlying funds are available to the separate accounts offering the VA
contracts and VLI policies. The Trust assumes no responsibility for those
prospectuses. However, the Board of Trustees of the Trust (Board) does monitor
events to identify any material conflicts that may arise between the interests
of the Participating Insurance Companies or between the interests of owners of
VA contracts and VLI policies. The Trust currently does not foresee any
disadvantages to the owners of VA contracts and VLI policies arising from the
fact that certain interests of the owners may differ. The Statement of
Additional Information contains additional information regarding such differing
interests and related risks.
Stein Roe & Farnham Incorporated (the Adviser) provides investment
advisory services to the Fund. The Adviser also provides administrative and
transfer agent services to the Fund. Keyport Financial Services Corp. (the
Underwriter) serves as the principal underwriter for sales of the Fund's shares
to the Affiliated Participating Insurance Companies. The Adviser, the
Underwriter, Keyport and Independence are subsidiaries of Liberty Financial
Companies, Inc. (LFC). As of March 31, 1997, approximately 80.5% of the combined
voting power of LFC's outstanding voting stock was held, indirectly, by Liberty
Mutual Insurance Company (Liberty Mutual). Liberty Life is a subsidiary of
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, 1996. 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, 1992 appears in the Trust's annual report to
shareholders for the fiscal year ended December 31, 1996 (which may be obtained
without charge from the broker-dealer offering the Participating Insurance
Company's variable annuity contracts) and is incorporated by reference into the
Statement of Additional
3
<PAGE>
Information. The Fund's total returns presented below do not reflect the cost of
insurance and other insurance company separate account charges which vary with
the VA contracts and VLI policies offered through Participating Insurance
Companies.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of year.. $16.33 $14.74 $16.53 $15.34 $15.32 $12.07 $14.79 $13.62
------ ------ ------ ------ ------ ------ ------ ------
Net investment income............... 0.04 0.04 0.06 0.03 -- 0.21 0.19 0.23
Net realized and unrealized gains/
(losses) on investments and
foreign currency transactions.... 4.36 1.69 0.09 5.22 2.17 4.19 (1.53) 3.90
-------- -------- -------- -------- -------- -------- --------- -------
Total from investment operations.... 4.40 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........ $20.73 $16.33 $14.74 $16.53 $15.34 $15.32 $12.07 $14.79
====== ====== ====== ====== ====== ====== ====== ======
Total return:
Total investment return............. 26.94% 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)...... $196,219 $143,248 $134,078 $96,544 $52,135 $41,179 $33,238 $32,176
Ratio of expenses to average net
assets........................... 0.75% 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............... 0.20% 0.26% 0.44%(b) 0.13%(b) (0.01)% 1.35% 1.43% 1.14%
Portfolio turnover ratio............ 100% 132% 144% 112% 85% 36% 121% 153%
Average commissions (per share)..... $0.0251 -- -- -- -- -- -- --
</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.
Further information about the performance of the Fund is contained in
the Trust's annual report to shareholders for the year ended December 31, 1996,
which may be obtained without charge by calling or writing the broker-dealer
offering the Participating Insurance Company's variable annuity contracts.
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 the Fund will achieve its
investment objective.
The Fund and its investment objective and policies and are described
below. Certain additional investment policies and techniques are described under
"INVESTMENT TECHNIQUES AND RESTRICTIONS" 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 Statement of Additional
Information.
4
<PAGE>
The 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, 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 ac-
5
<PAGE>
tually 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 Appendix A to this
Prospectus and in the 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 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 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.
6
<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 and its predecessor have been
providing investment advisory and administrative services since 1932. The
Adviser is a wholly owned indirect subsidiary of LFC. As of December 31, 1996,
the Adviser had assets under management of approximately $26.7 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. Mr. Dunn
has announced his intention to retire as portfolio manager on June 30, 1997.
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, 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 certain pricing and
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.
7
<PAGE>
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 operating units include: Keyport
Life Insurance Company, a specialist in fixed and variable annuities; the
Adviser; The Colonial Group, Inc., sponsor of the Colonial family of mutual
funds; 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., a specialist in the design and implementation of bank marketing programs
for insurance and investment products.
Liberty Mutual is an international multi-line insurance writer and,
with its affiliates, is currently the fifth largest writer of property-casualty
insurance in the United States.
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, 1998 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 value and of equipment for communication among the custodian, the
Adviser and others; taxes; 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 Fund shares; 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.
8
<PAGE>
It is the policy of the Trust that expenses directly charged or
attributable to one of its 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 based
on the relative assets of each such fund or the nature of the services performed
and their relative applicability to each such fund.
PURCHASES AND REDEMPTIONS
The Participating Insurance Companies place daily orders to purchase
and redeem shares of the Fund based on, among other things, the net amount of
purchase payments to be invested and surrender and transfer requests to be
effected on that day pursuant to the VA contracts and VLI policies. Shares are
purchased and redeemed as a result of certain other transactions pursuant to the
VA contracts and VLI policies, including deductions for fees and charges by the
applicable insurance company separate account. The Trust continuously offers and
redeems shares at net asset value without the addition of any selling
commission, sales load or redemption charge. Shares are sold and redeemed at
their net asset value as next determined after receipt of purchase payments or
redemption requests, respectively, by the separate accounts. Similarly, shares
are sold or redeemed as a result of such other transactions under the VA
contracts and VLI policies at the net asset value computed for the day on which
such transactions are effected by the separate accounts. The right of redemption
may be suspended or payments postponed whenever permitted by applicable law and
regulations.
INVESTMENT RETURN
The total return from an investment in the Fund is measured by the
distributions received (assuming reinvestment of all distributions) plus or
minus the change in the net asset value per share for a given period. A total
return percentage is calculated by first dividing the value of a share at the
end of the period (including reinvestment of distributions) by the value of the
share at the beginning of the period and then subtracting 1.0. The Fund's
average annual total return is determined by computing the annual percentage
change in value of a $1,000 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
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
9
<PAGE>
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 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 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
10
<PAGE>
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.
Currency gains and losses from foreign currency dispositions,
foreign-currency denominated debt securities and payables or receivables, and
foreign currency forward contracts are
11
<PAGE>
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, 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 advisors.
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 broker-dealer
offering the Participating Insurance Company's variable annuity contracts.
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.
12
<PAGE>
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 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.
13
<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 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 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
14
<PAGE>
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 the 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
15
<PAGE>
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. The 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 the 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.
16
<PAGE>
STEINROE VARIABLE INVESTMENT TRUST
CASH INCOME FUND
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210
Cash Income Fund (Fund) is a series fund in the SteinRoe Variable
Investment Trust (Trust), an open-end, diversified management investment company
that currently includes five separate funds, each with its own investment
objective and policies.
The investment objective of the Fund is high current income from
short-term money market instruments while emphasizing preservation of capital
and maintaining excellent liquidity. (The Cash Income Fund attempts to maintain
its net asset value at $1.00 per share, but there can be no assurance that it
will be able to do so. An investment in the Fund is neither insured nor
guaranteed by the U.S. Government.)
- ------------------------------------------------------------------------------
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, 1997
<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, 1997, 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 FUND ARE AVAILABLE AND ARE BEING MARKETED EXCLUSIVELY AS A POOLED
FUNDING VEHICLE FOR VARIABLE ANNUITY CONTRACTS ("VA CONTRACTS") AND VARIABLE
LIFE INSURANCE POLICIES ("VLI POLICIES") OF KEYPORT LIFE INSURANCE COMPANY AND
INDEPENDENCE LIFE & ANNUITY COMPANY, AND THE VA CONTRACTS OF LIBERTY LIFE
ASSURANCE COMPANY OF BOSTON. OTHER PARTICIPATING INSURANCE COMPANIES MAY BE
ADDED FROM TIME TO TIME.
- ------------------------------------------------------------------------------
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.
2
<PAGE>
TABLE OF CONTENTS
Page
The Trust.................................................... 4
Financial Highlights......................................... 4
How the Fund Invests......................................... 5
Investment Techniques and Restrictions....................... 7
How the Fund is Managed...................................... 8
Purchases and Redemptions.................................... 10
Investment Return............................................ 10
Net Asset Value.............................................. 11
Taxes........................................................ 11
Dividends and Distributions.................................. 13
Shareholder Communications................................... 13
Organization and Description of Shares....................... 13
Additional Information....................................... 15
Appendix A: Investment Techniques and Securities............. A-1
Appendix B: Description of Ratings.......................... B-1
3
<PAGE>
THE TRUST
Cash Income Fund (Fund) is a series fund of the SteinRoe Variable
Investment Trust (Trust), an open-end, diversified management investment company
currently consisting of five funds with differing investment objectives,
policies and restrictions. (The Trust's series funds other than the Fund are
referred to herein as the "Other Funds"). The Trust issues shares of beneficial
interest in each of its series funds that represent interests in a separate
portfolio of securities and other assets. The Trust may add or delete series
funds from time to time.
The Trust is the funding vehicle for variable annuity contracts (VA
contracts) and variable life insurance policies (VLI policies) offered by the
separate accounts of life insurance companies (Participating Insurance
Companies). Shares of the Fund currently are sold only to Keyport Life Insurance
Company (Keyport), Independence Life & Annuity Company (Independence) and
Liberty Life Assurance Company of Boston (Liberty Life). Keyport, Independence
and Liberty Life (Keyport entities) are affiliated entities. Other Participating
Insurance Companies may be added from time to time.
The Participating Insurance Companies and their separate accounts are
the shareholders or investors (shareholders) of the Fund. Owners of VA contracts
and owners of VLI policies invest in sub-accounts of separate accounts of the
Participating Insurance Companies that, in turn, invest in the Fund.
The prospectuses issued by the Participating Insurance Company describe
which underlying funds are available to the separate accounts offering the VA
contracts and VLI policies. The Trust assumes no responsibility for those
prospectuses. However, the Board of Trustees of the Trust (Board) does monitor
events to identify any material conflicts that may arise between the interests
of the Participating Insurance Companies or between the interests of owners of
VA contracts and VLI policies. The Trust currently does not foresee any
disadvantages to the owners of VA contracts and VLI policies arising from the
fact that certain interests of the owners may differ. The Trust's Statement of
Additional Information contains additional information regarding such differing
interests and related risks.
Stein Roe & Farnham Incorporated (the Adviser) provides investment
advisory services to the Fund. The Adviser also provides administrative and
transfer agent services to the Fund. Keyport Financial Services Corp. (the
Underwriter) serves as the principal underwriter for sales of the Fund's shares
to the Keyport entities. The Adviser, the Underwriter and the Keyport entities
are wholly owned indirect subsidiaries of Liberty Financial Companies, Inc.
("LFC"). As of March 31, 1997, approximately 80.6% 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, 1996. The
information has been audited and reported on by the Trust's independent
auditors, KPMG Peat Marwick LLP. The report of KPMG Peat Marwick
4
<PAGE>
LLP for periods beginning on January 1, 1992 appears in the Trust's annual
report to shareholders for the fiscal year ended December 31, 1996 (which may be
obtained without charge from the Underwriter) and is incorporated by reference
into this Prospectus. The Fund's total returns presented below do not reflect
the cost of insurance and other insurance company separate account charges which
vary with the VA contracts and VLI policies offered through the separate
accounts of Participating Insurance Companies.
Cash Income Fund
Financial Highlights
(for a share outstanding throughout the period)
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share operating
performances:
Net asset value, beginning
of year................... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------- ------- ------- ------- ------- ------- ------- -------
Net investment
income.................... 0.049 0.055 0.037 0.027 0.034 0.056 0.076 0.087
------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
Distributions from net
investment income (0.049) (0.055) (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 $1.00
====== ====== ====== ====== ====== ====== ====== ======
Total return:
Total investment
return................. 5.01% 5.62% 3.81% 2.70% 3.48% 5.79% 7.89% 9.07%
Ratios/supplemental data:
Net assets, end of year
(000s)................. $65,461 $64,992 $78,698 $83,049 $70,821 $77,676 $94,462 $94,313
Ratio of expenses to
average net assets..... 0.65% 0.63% 0.62% 0.65% 0.67% 0.67% 0.66% 0.66%
Ratio of net investment
income to average net
assets................. 4.90% 5.48% 3.73% 2.68% 3.42% 5.67% 7.61% 8.68%
</TABLE>
Further information about the performance of the Fund is contained in
the Trust's annual report to shareholders for the year ended December 31, 1996,
which may be obtained without charge from the Underwriter.
HOW THE FUND INVESTS
All investments, including mutual funds, have risks, and no one mutual
fund is suitable for all investors. No one fund by itself constitutes a complete
investment program. There can be no guarantee that the Fund will achieve its
investment objective. Although the Fund attempts to stabilize its net asset
value at $1.00 per share, there can be no assurance that it will be able to do
so.
The Fund and its investment objectives and policies are described
below. The Fund's investment objective is fundamental and may be changed only by
a vote of the Board of Trustees and of the shareholders.
5
<PAGE>
More information about the portfolio securities in which the Fund
invests, including certain risks and investment limitations, is provided in
Appendix A to this Prospectus and Appendix A in the Trust's Statement of
Additional Information.
Cash Income Fund seeks high current income from investment in
short-term money market instruments while emphasizing preservation of capital
and maintaining excellent liquidity.
The Fund pursues this objective by investing all of its assets in U.S.
dollar denominated money market instruments maturing in thirteen months or less
from time of investment. Each security must be rated (or be issued by an issuer
that is rated with respect to its short-term debt) within the highest rating
category for short-term debt by at least two nationally recognized statistical
rating organizations ("NRSRO"), or, if unrated, determined by or under the
direction of the Board of Trustees to be of comparable quality. These securities
may include:
(1) Securities issued or guaranteed by the U.S. Government or by
its agencies or instrumentalities ("U.S. Government
Securities").
(2) Securities issued or guaranteed by the government of any
foreign country that have a long-term rating at time of
purchase of A or better (or equivalent rating) by at least one
NRSRO.
(3) Certificates of deposit, bankers' acceptances and time
deposits of any bank (U.S. or foreign) having total assets in
excess of $1 billion, or the equivalent in other currencies
(as of the date of the most recent available financial
statements) or of any branches, agencies or subsidiaries (U.S.
or foreign) of any such bank.
(4) Commercial paper of U.S. or foreign issuers, including
variable rate demand notes.
(5) Notes, bonds, and debentures having a long-term rating at time
of purchase of A or better (or equivalent rating) by at least
one NRSRO.
(6) Repurchase agreements involving securities listed in (1)
above.
(7) Other high-quality short-term obligations.
Under normal market conditions the Fund will invest at least 25% of its
total assets in securities of issuers in the financial services industry (which
includes, but is not limited to, banks, personal credit and business credit
institutions, and other financial service institutions).
The remaining maturity of each of the Fund's investments at the time of
investment is 13 months or less. The weighted average maturity of its investment
portfolio varies with money market conditions, but is always 90 days or less.
6
<PAGE>
Although there can be no assurance that it will always be able to do
so, the Fund follows procedures designed to maintain its price per share at
$1.00. (See "NET ASSET VALUE.")
Investor Considerations
The yield from short-term investments may be lower than yields from
longer-term securities. The value of the Fund's securities fluctuates inversely
with changes in interest rates. Both the risk of an issuer's inability to pay
interest and principal on a given security (financial risk) and the price
volatility (market risk) of investment in the Fund may be expected to be less
than for non-money market funds.
Because of the Fund's policy of investing at least 25% of its assets in
securities of issuers in the financial services industry, the Fund may be more
adversely affected by changes in market or economic conditions and other
circumstances affecting the financial services industry.
INVESTMENT TECHNIQUES AND RESTRICTIONS
Techniques
The Fund may invest in securities purchased on a when-issued or
delayed-delivery basis. Although the payment terms of these securities are
established at the time the Fund enters into the commitment, the securities may
be delivered and paid for a month or more after the date of purchase, when their
value may have changed and the yields then available in the market may be
greater. The Fund will make such commitments only with the intention of actually
acquiring the securities, but may sell the securities before settlement date if
it is deemed advisable for investment reasons.
The Fund may also invest in securities purchased on a standby
commitment basis, which is a delayed delivery agreement in which the Fund binds
itself to accept delivery of a security at the option of the other party to the
agreement. The Fund usually receives a commitment fee in consideration for its
standby commitment.
The Fund may invest up to 25% of its total assets in securities of
foreign issuers as more fully described in Appendix A to this Prospectus.
When the Adviser believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, it may cause
the Fund to enter into forward contracts to sell an amount of foreign currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. The Adviser may also cause the Fund to
enter into forward foreign currency contracts to protect against loss between
trade and settlement dates resulting from changes in foreign currency exchange
rates. Such contracts will also have the effect of limiting any gains to the
Fund that would have resulted from advantageous changes in such rates.
7
<PAGE>
Restrictions on the Fund's Investments
The Fund will not (1) with respect to 75% of the value of its total
assets invest more than 5% of its total assets in the securities of any one
issuer (except that this restriction does not apply to (i) U.S. Government
Securities or (ii) certificates of deposit, bankers' acceptances or repurchase
agreements); (2) invest more than 25% of its total assets (at market) in the
securities of issuers in any particular industry (except that this restriction
does not apply to (i) U.S. Government Securities (ii) certificates of deposit,
bankers' acceptances or repurchase agreements or (iii) securities of issuers in
the financial services industry); (3) acquire more than 10% of the outstanding
voting securities of any one issuer; or (4) borrow money, except as a temporary
measure for extraordinary or emergency purposes, and then the aggregate
borrowings at any one time (including any reverse repurchase agreements) may not
exceed 33 1/3% of its assets (at market). The Fund will not purchase additional
securities when its borrowings, less proceeds receivable from sales of portfolio
securities, exceed 5% of total assets. The Fund may invest in repurchase
agreements, provided that the Fund will not invest more than 10% of its net
assets in repurchase agreements maturing in more than seven days and any other
illiquid securities. In each case, if a percentage limit is satisfied at the
time of investment or borrowing, a later increase or decrease resulting from a
change in the value of a security or decrease in the Fund's assets will not
constitute a violation of the limit.
All of the investment restrictions applicable to the Fund are set forth
in the Trust's Statement of Additional Information.
HOW THE FUND IS MANAGED
The Trustees
The business of the Trust's series funds is supervised by the Trust's
Board of Trustees. The Trust's Statement of Additional Information contains the
names of and biographical information on the Trustees.
Stein Roe & Farnham Incorporated
The investment portfolio of the Fund is managed, subject to the
direction of the Board of Trustees, by Stein Roe & Farnham Incorporated (the
Adviser), One South Wacker Drive, Chicago, Illinois 60606, pursuant to an
Advisory Agreement dated December 9, 1988. The Adviser has been providing
investment advisory and administrative services since 1932. The Adviser is a
wholly owned indirect subsidiary of LFC. As of December 31, 1996, the Adviser
had assets under management of approximately $26.7 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.
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
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records, and provides pricing and certain other record keeping services to the
Fund and the Other Funds.
The Adviser pays all compensation of the Trust's officers who are
employees of the Adviser.
Advisory and Administrative Fees
The Fund pays the Adviser annual fees for investment advisory and
administrative services at the annual rates of 0.35% and 0.15%, respectively, of
average daily net assets. All fees are computed and accrued daily and paid
monthly.
LFC and Liberty Mutual
LFC is a diversified and integrated asset management organization
providing insurance and investment products to individuals and institutions
through multiple distributions channels. LFC's primary operating units include:
Keyport; the Adviser; The Colonial Group, Inc., sponsor of the Colonial family
of mutual funds; 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., a specialist in the design and implementation of bank
marketing programs for insurance and investment products.
Liberty Mutual is an international multi-line insurance writer and,
with its affiliates, is currently the fifth largest writer of property-casualty
insurance in the United States.
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, 1998 to
reimburse all expenses, including management and administrative fees, incurred
by the Fund in excess of 0.65% of average net assets.
The Advisor would not, however, be required to reimburse expenses to an
extent which would result in the Fund's inability to qualify as a regulated
investment company under the Internal Revenue Code.
The expenses payable by the Fund include, among other things, the
advisory and administrative fees described above; fees for services of
independent public accountants; legal fees; transfer agent, custodian and
portfolio recordkeeping services; dividend disbursing agent and shareholder
recordkeeping and tax information services; expenses of periodic calculations of
net asset
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values and of equipment for communication among the custodian, the Adviser and
others; taxes and the preparation of tax returns; interest; costs of Board and
shareholder meetings; printing prospectuses and reports to shareholders; fees
for filing reports with regulatory bodies and the maintenance of the Trust's
existence; membership dues for industry trade associations; registration fees to
federal authorities; fees and expenses of Trustees who are not directors,
officers, employees or stockholders of the Adviser or its affiliates; insurance
and fidelity bond premiums; and other extraordinary expenses of a non-recurring
nature.
It is the policy of the Trust that expenses directly charged or
attributable to any of its particular series funds will be paid from the assets
of that fund. General expenses of the Trust will be allocated among and charged
to the assets of each of the Trust's series funds (including the Fund and the
Other Funds) on a basis that the Trustees deem fair and equitable, which may be
based on the relative assets of each such fund or the nature of the services
performed and their relative applicability to each such fund.
PURCHASES AND REDEMPTIONS
The Participating Insurance Companies place daily orders to purchase
and redeem shares of the Fund based on, among other things, the net amount of
purchase payments to be invested and surrender and transfer requests to be
effected on that day pursuant to the VA contracts and VLI policies. Shares are
purchased and redeemed as a result of certain other transactions pursuant to the
VA contracts and VLI policies, including deductions for fees and charges by the
applicable insurance company separate account. The Trust continuously offers and
redeems shares at net asset value without the addition of any selling
commission, sales load or redemption charge. Shares are sold and redeemed at
their net asset value as next determined after receipt of purchase payments or
redemption requests, respectively, by the separate accounts. Similarly, shares
are sold or redeemed as a result of such other transactions under the VA
contracts and VLI policies at the net asset value computed for the day on which
such transactions are effected by the separate accounts. The right of redemption
may be suspended or payments postponed whenever permitted by applicable law and
regulations.
INVESTMENT RETURN
The total return from an investment in the Fund is measured by the
distributions received (assuming reinvestment of all distributions) plus or
minus the change in the net asset value per share for a given period. A total
return percentage is calculated by first dividing the value of a share at the
end of the period (including reinvestment of distributions) by the value of the
share at the beginning of the period and then subtracting 1.0. The Fund's
average annual total return is determined by computing the annual percentage
change in value of a $1,000 investment in the Fund for a specified period,
assuming reinvestment of all dividends and distributions.
Because the Fund seeks to maintain a $1.00 per share net asset value,
its return is usually quoted as a current seven-day yield, calculated by
totaling the dividends on a share of the Fund for the previous seven days and
restating that yield as an annual rate, or as an effective yield, calculated by
adjusting the current yield to assume daily compounding.
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Total return information describes the Fund's performance for the
period shown and does not predict future performance. Comparison of the Fund's
yield or total return with those of alternative investments should consider
differences between the Fund and the alternative investments, the periods and
methods used in calculation of the return being compared, and the impact of
taxes on alternative investments. The Fund's investment return figures do not
reflect the cost of insurance and other insurance company separate account
charges which vary with the VA contracts and VLI policies offered through the
separate accounts of the Participating Insurance Companies, and which will
decrease the return realized by a contract or policyholder.
NET ASSET VALUE
The Adviser determines net asset value per share of the Fund as of the
close of regular trading on the New York Stock Exchange (NYSE) (currently 4:00
p.m., Eastern time). Net asset value per share is calculated for the Fund by
dividing the current market value of total portfolio assets, less all
liabilities (including accrued expenses), by the total number of shares
outstanding. Net asset value is determined on each day when the NYSE is open,
except on such days in which no order to purchase or redeem shares is received.
The NYSE is scheduled to be open Monday through Friday throughout the year
except for certain Federal and other holidays.
The valuation of the Fund's securities is based on their amortized
cost, which does not take into account unrealized gains or losses, in an attempt
to maintain its net asset value at $1.00 per share. The extent of any deviation
between the Fund's net asset value based upon market quotations or equivalents
and $1.00 per share based on amortized cost will be examined by the Board. If
such deviation were to exceed 1/2 of 1%, the Board would consider what action,
if any, should be taken, including selling portfolio securities, increasing,
reducing, or suspending distributions or redeeming shares in kind. Assets and
securities of the Fund for which this valuation method does not produce a fair
value are valued at a fair value determined in good faith by the Board.
TAXES
The Fund has elected to be treated and to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986
(Code). As a result of such election, for any tax year in which the Fund meets
the investment limitations and the distribution, diversification and other
requirements referred to below, the Fund will not be subject to Federal income
tax, and the income of the Fund will be treated as the income of its
shareholders. Under current law, since the shareholders are life insurance
company "segregated asset accounts," they will not be subject to income tax
currently on this income to the extent such income is applied to increase the
values of VA contracts and VLI policies.
Among the conditions for qualification and avoidance of taxation at the
Trust level, Subchapter M imposes investment limitations, distribution
requirements, and requirements relating to the diversification of investments.
The requirements of Subchapter M may affect the investments made by the Fund.
Any of the applicable diversification requirements could require a sale of
assets of the Fund that would affect the net asset value of the Fund.
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In addition, the Tax Reform Act of 1986 made certain changes to the tax
treatment of regulated investment companies, including the imposition of a
nondeductible 4% excise tax on certain undistributed amounts. To avoid this tax,
the Fund must declare and distribute to its shareholders by the end of each
calendar year, at least 98% of ordinary income earned during that calendar year,
and at least 98% of capital gain net income, net of carry-forward losses, if
any, realized for the twelve-month period ending October 31 of that year, plus
any remaining undistributed income from the prior year.
Pursuant to the requirements of Section 817(h) of the Code, the only
shareholders of the Trust and its series funds will be Participating Insurance
Companies and their separate accounts that fund VA contracts, VLI policies and
other variable insurance contracts. The prospectus that describes a particular
VA contract or VLI policy discusses the taxation of separate accounts and the
owner of such contract or policy.
The Fund intends to comply with the requirements of Section 817(h) and
the related regulations thereunder issued by the Treasury Department. These
provisions impose certain diversification requirements affecting the securities
in which the Fund may invest and other limitations. The diversification
requirements of Section 817(h) of the Code are in addition to the
diversification requirements under Subchapter M and the Investment Company Act
of 1940. The consequences of failure to meet the requirements of Section 817(h)
could result in taxation of the Participating Insurance Companies offering the
VA contracts and VLI policies and immediate taxation of all owners of the
contracts and policies to the extent of appreciation on investment under the
contracts. The Trust believes that the Fund is in compliance with these
requirements.
The Secretary of the Treasury may issue additional rulings or
regulations that will prescribe the circumstances in which an owner of a
variable insurance contract's control of the investments of a segregated asset
account may cause such owner, rather than the insurance company, to be treated
as the owner of the assets of a segregated asset account. It is expected that
such regulations would have prospective application. However, if a ruling or
regulation were not considered to set forth a new position, the ruling or
regulation could have a retroactive effect.
The Trust therefore may find it necessary, and reserves the right to
take action to assure, that a VA contract or VLI policy continues to qualify as
an annuity or insurance contract under Federal tax laws. The Trust, for example,
may be required to alter the investment objectives of the Fund or substitute the
shares of the Fund for those of another. No such change of investment objectives
or substitution of securities will take place without notice to the contract and
policy owners with interests invested in the Fund and without prior approval of
the Securities and Exchange Commission, or the approval of a majority of such
owners, to the extent legally required.
To the extent the Fund invests in foreign securities, investment income
received by the Fund from sources within foreign countries may be subject to
foreign income taxes withheld at the source. The United States has entered into
tax treaties with many foreign countries which entitle the Fund to a reduced
rate of tax or exemption from tax on such income.
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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.
It is impossible to determine the effective rate of foreign tax in
advance since the amount of the Fund's assets, if any, to be invested within
various countries will fluctuate and the extent to which tax refunds will be
recovered is uncertain. The Fund intends to operate so as to qualify for
treaty-reduced tax rates where applicable.
The preceding is a brief summary of some relevant tax considerations.
This discussion is not intended as a complete explanation or a substitute for
careful tax planning and consultation with individual tax advisers.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare and distribute, as dividends or capital
gains distributions, substantially all of its net investment income and net
profits realized from the sale of portfolio securities, if any, to its
shareholders (Participating Insurance Companies' separate accounts). The net
investment income of the Fund consists of all dividends or interest received by
the Fund, less estimated expenses (including the investment advisory and
administrative fees). Dividends in respect of net investment income are declared
daily and are reinvested monthly in shares of the Fund at the net asset value
per share of $1.00. All net short-term and long-term capital gains of the Fund,
net of carry-forward losses, if any, realized during the fiscal year, are
declared and distributed periodically, no less frequently than annually. All
capital gains dividends and distributions are reinvested in additional shares of
the Fund at net asset value, as of the record date for the distributions.
SHAREHOLDER COMMUNICATIONS
Owners of VA contracts and VLI policies, issued by a Participating
Insurance Company or for which shares of the Fund are available as an investment
vehicle, receive from the applicable Participating Insurance Company unaudited
semi-annual financial statements and audited year-end financial statements of
the Fund certified by the Trust's independent auditors. Each report shows the
investments owned by the Fund and provides other information about the Trust and
its operations. Copies of such reports may be obtained from the Participating
Insurance Companies or the Secretary of the Trust.
ORGANIZATION AND DESCRIPTION OF SHARES
The Trust is a diversified open-end management investment company as
defined in the Investment Company Act of 1940 (1940 Act) organized under an
Agreement and Declaration of Trust (Declaration of Trust) as a Massachusetts
business trust on June 9, 1987. The Declaration of Trust may be amended by a
vote of either the Trust's shareholders (which include shareholders of the Other
Funds) or the Board. The Trust is authorized to issue an unlimited number of
shares of
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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.
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ADDITIONAL INFORMATION
This Prospectus including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Trust with the Securities
and Exchange Commission under the Securities Act of 1933. Copies of the
Registration Statement may be obtained from the Commission or may be examined at
the office of the Commission in Washington, D.C.
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APPENDIX A
INVESTMENT TECHNIQUES
AND SECURITIES
MONEY MARKET INSTRUMENTS
The Fund may invest in the money market instruments described below, in
addition to money market instruments such as certificates of deposit of U.S.
banks and bankers' acceptances.
Obligations of Foreign Branches of United States Banks
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by government regulation.
Payment of interest and principal upon these may also be affected by
governmental action in the country of domicile of the branch (generally referred
to as sovereign risk). In addition, evidences of ownership of such securities
may be held outside the U.S. and the Fund may be subject to the risks associated
with the holding of such property overseas. (See "FOREIGN INVESTMENTS--Foreign
Securities" below.)
Obligations of U.S. Branches of Foreign Banks
Obligations of U.S. branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal and state
regulation as well as by governmental action in the country in which the foreign
bank has its head office. In addition, there may be less publicly available
information about a U.S. branch of a foreign bank than about a domestic bank.
Obligations of Foreign Banks
Obligations of foreign banks and branches of foreign banks are similar
to the obligations of U.S. banks but involve risks that are different in some
respects. Such risks may include future political and economic developments, the
possible imposition of foreign withholdings taxes on interest income payable on
the obligations, possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls, or the adoption of other foreign
government restrictions that might adversely affect the payment of principal and
interest on the obligations. Additionally, there may be less public information
available about foreign banks and their branches. Foreign banks and foreign
branches of foreign banks are not regulated by U.S. banking authorities, and
generally are not bound by accounting, auditing, and financial reporting
standards comparable to U.S. banks.
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Master Demand Notes
Master demand notes are unsecured obligations that permit the
investment of fluctuating amounts by the Fund at varying rates of interest
pursuant to direct arrangements between the Fund, as lender, and the issuer, as
borrower. Master demand notes may permit daily fluctuations in the interest rate
and daily changes in the amount borrowed. The Fund has the right to increase the
amount under the note at any time up to the full amount provided by the note
agreement or to decrease the amount, and the borrower may repay up to the full
amount of the note without penalty. Notes purchased by the Fund must permit the
Fund to demand payment of principal and accrued interest at any time (on not
more than seven days' notice) and to resell the note at any time to a third
party. The notes may have maturities of more than one year, provided that (i)
the Fund is entitled to payment of principal and accrued interest upon not more
than seven days' notice, and (ii) the rate of interest on such notes is adjusted
automatically at periodic intervals which normally will not exceed 31 days but
may extend up to one year. The notes will be deemed to have a maturity equal to
the longer of the period remaining to the next interest rate adjustment or the
demand notice period. Because these types of notes are direct lending
arrangements between the lender and borrower, such instruments are not normally
traded, and there is no secondary market for these notes, although they are
redeemable and thus repayable by the borrower at face value plus accrued
interest at any time. Accordingly, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. These notes
are not typically rated by credit rating agencies. The Fund may invest in such
notes only if rated or at the time of an investment the issuer meets the
criteria established for commercial paper.
Repurchase Agreements
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System that have at least $1 billion in deposits, primary
dealers in U.S. Government Securities or other financial institutions believed
by the 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 that underlying
securities to their market value. Although the securities subject to the
repurchase agreement might bear maturities exceeding a year, the Fund intends to
enter only into repurchase agreements which provide for settlement within a year
and usually within seven days. Securities subject to repurchase agreements will
be held by the Fund's custodian or in the Federal Reserve book-entry system. The
Fund does not bear the risk of a decline in the value of the underlying security
unless the seller defaults under its repurchase obligation. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and losses
including (a) possible declines in the value of the underlying securities during
the period while the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during this period; and
(c) expenses of enforcing its rights. The Board has established procedures to
evaluate the
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creditworthiness of each party with whom the Fund enters into repurchase
agreements by setting guidelines and standards of review for the Adviser and
monitoring the Adviser's actions with regard to repurchase agreements.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities include, but are not limited to, direct obligations of the
Treasury and securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
General Services Administration, Central Bank for Cooperatives, Federal Home
Loan Banks, Federal Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Maritime Administration, the Tennessee Valley
Authority, District of Columbia Armory Board, Resolution Funding Corp. and
Federal National Mortgage Association.
Some obligations of U.S. Government agencies and instrumentalities,
such as Government National Mortgage Association Pass-Through Certificates, are
supported by the full faith and credit of the U.S.; others, such as securities
of Federal Home Loan Banks, are supported by the right of the issuer to borrow
from the Treasury; still others, such as bonds issued by the Federal National
Mortgage Association, a private corporation, are supported only by the credit of
the instrumentality. Because the U.S. Government is not obligated by law to
provide support to an instrumentality it sponsors, the Fund will invest in the
securities issued by such an instrumentality only when the Adviser determines
that the credit risk with respect to the instrumentality does not make its
securities unsuitable investments for the Fund. U.S. Government Securities do
not include international agencies or instrumentalities in which the U.S.
Government, its agencies or instrumentalities participate, such as the World
Bank, the Asian Development Bank or issues insured by the Federal Deposit
Insurance Corporation or the Federal Savings and Loan Insurance Corporation.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements. Under a reverse
repurchase agreement, the Fund would sell securities and agree to repurchase
them at a mutually agreed upon date and price. The Fund intends to enter into
reverse repurchase agreements to avoid otherwise having to sell securities
during unfavorable market conditions in order to meet redemptions. At the time
the Fund enters into a reverse repurchase agreement, it will establish a
segregated account with its custodian containing liquid assets having a value
not less than the repurchase price (including accrued interest) and will
subsequently monitor the account to maintain such value. Reverse repurchase
agreements involve the risk that the market value of the securities which the
Fund is obligated to repurchase may decline below the repurchase price. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and its use of the proceeds of the
reverse repurchase agreement may effectively be restricted pending such
decision. The Staff of the Securities and
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Exchange Commission has taken the position that the 1940 Act treats reverse
repurchase agreements as borrowings by a fund.
STANDBY COMMITMENTS
The Fund may invest in securities purchased on a standby commitment
basis, as described below:
A standby commitment is a delayed delivery agreement in which the Fund
binds itself to accept delivery of a security at the option of the other party
to the agreement. The Fund usually receives a commitment fee in consideration
for its standby commitment. At the time the Fund enters into a binding
obligations to purchase securities on a standby commitment basis, liquid assets
of the Fund having a value of at least as great as the purchase price of the
securities to be purchased will be segregated on the books of the Fund and held
by the custodian throughout the period of the obligation.
If the value of the securities that the Fund has committed to purchase
increases, the other party may exercise its right not to deliver the securities,
in which case the Fund only would retain its commitment fee and forego any
appreciation of those securities. If the value of the securities that the Fund
has committed to purchase decreases, the other party would probably deliver the
securities, in which case the Fund would absorb the loss between the purchase
price and the decreased market value, which loss may significantly exceed the
commitment fee.
FOREIGN INVESTMENTS
The Fund may invest up to 25% of its total assets in securities of
foreign issuers.
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 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,
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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.
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APPENDIX B
DESCRIPTION OF RATINGS
RATINGS IN GENERAL
A rating of a rating service represents the service's opinion as to the
credit quality of the security being rated. However, the ratings are general and
are not absolute standards of quality or guarantees as to the credit worthiness
of an issuer. Consequently, the Adviser believes that the quality of debt
securities in which the Fund invests should be continuously reviewed and that
individual analysts give different weightings to the various factors involved in
credit analysis. A rating is not a recommendation to purchase, sell or hold a
security because it does not take into account market value or suitability for a
particular investor. Ratings are based on current information furnished by the
issuer or obtained by the rating services from other sources that they consider
reliable. Ratings may be changed, suspended or withdrawn as a result of changes
in or unavailability of such information, or for other reasons.
The following is a description of the characteristics of ratings used
by Moody's Investors Service, Inc. (Moody's) and Standard & Poor's Corporation
(S&P), each of which is a NRSRO.
BOND RATINGS
Ratings by Moody's
Aaa. Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or an exceptionally stable margin and
principal is secure. Although the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such bonds.
Aa. Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa bonds or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than the Aaa bonds.
A. Bonds rated A posses many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
B-1
<PAGE>
great length of time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of risk with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standings.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Ratings by S&P
AAA. Debt rated AAA has the highest rating. Capacity to pay interest
and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
B-2
<PAGE>
BB, B, CCC, CC. Debt rated BB, B, CCC or CC is regarded, in balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C. This rating is reserved for income bonds on which no interest is
being paid.
D. Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.
NOTE: The ratings from AA to B may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within the major rating
categories.
COMMERCIAL PAPER RATINGS
Ratings by Moody's
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or entities, Moody's,
in assigning ratings to such issuers, evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment.
Ratings by S&P
A brief description of the applicable rating symbols and their meaning
follows:
A. Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with the designations 1, 2, and 3 to indicate the relative degree of
safety.
A-1. this designation indicates that the degree of safety regarding
timely payment is very strong. Those issues determined to possess overwhelming
safety characteristics will be denoted with a plus (+) sign designation.
B-3
<PAGE>
STEINROE VARIABLE INVESTMENT TRUST
Federal Reserve Plaza
600 Atlantic Avenue, Boston, Massachusetts 02210
STATEMENT OF ADDITIONAL INFORMATION
Dated May 1, 1997
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, 1997 and any supplement thereto. The Prospectus
may be obtained at no charge by calling Keyport Financial Services Corp. at
(800) 437-4466, or by contacting the applicable Participating Insurance Company,
or the broker-dealers offering certain variable annuity contracts or 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-17
INVESTMENT PERFORMANCE....................................... S-18
RECORD SHAREHOLDERS.......................................... S-20
INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS................ S-21
APPENDIX A - Investment Techniques and Securities............ A-1
S-1
<PAGE>
The SteinRoe Variable Investment Trust (the Trust) commenced operations
on January 1, 1989. The Trust is an open-end, diversified management investment
company currently consisting of 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, First Transamerica Life
Insurance Company, Great-West Life & Annuity Insurance Company and Providian
Life and Health Insurance Company. Keyport is an indirect wholly owned
subsidiary of Liberty Financial Companies, Inc. ("LFC"). As of March 31, 1997,
approximately 80.6% of the combined voting power of LFC's outstanding voting
stock was held by Liberty Mutual Insurance Company (Liberty Mutual). The other
existing Participating Insurance Companies are not 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.
S-2
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund operates under the investment restrictions listed below.
Restrictions numbered (i) through (viii) are fundamental policies which may not
be changed for a Fund without approval of a majority of the outstanding voting
shares of a Fund, defined as the lesser of the vote of (a) 67% of the shares of
a Fund at a meeting where more than 50% of the outstanding shares are present in
person or by proxy or (b) more than 50% of the outstanding shares of a Fund.
Other restrictions are not fundamental policies and may be changed with respect
to a Fund by the Trustees without shareholder approval.
The following investment restrictions apply to each Fund except as
otherwise indicated.
A Fund may not:
(i) with respect to 75% of the value of the total assets of a
Fund, invest more than 5% of the value of its total
assets, taken at market value at the time of a particular
purchase, in the securities of any one issuer, except (a)
securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities, and (b) [with respect
to Cash Income Fund only] certificates of deposit,
bankers' acceptances and repurchase agreements;
(ii) purchase securities of any one issuer if more than 10% of
the outstanding voting securities of such issuer would at
the time be held by the Fund;
(iii) act as an underwriter of securities, except insofar as it
may be deemed an underwriter for purposes of the
Securities Act of 1933 on disposition of securities
acquired subject to legal or contractual restrictions on
resale;
(iv) invest in a security if more than 25% of its total assets
(taken at market value at the time of a particular
purchase) would be invested in the securities of issuers
in any particular industry, except that this restriction
does not apply to: (i) securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities,
(ii) [with respect to Cash Income Fund only] certificates
of deposit and bankers' acceptances and repurchase
agreements or (iii) [as to the Cash Income Fund only]
securities of issuers in the financial services industry;
(v) purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein,
and securities issued by companies which invest in real
estate or interests therein), commodities or commodity
contracts (except that it may enter into (a) futures and
options on futures and (b) forward contracts);
S-3
<PAGE>
(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
S-4
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
S-5
<PAGE>
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 Germany.
If a percentage limit with respect to any of the foregoing fundamental
and non-fundamental policies is satisfied at the time of investment or
borrowing, a later increase or decrease in a Fund's assets will not constitute a
violation of the limit.
S-6
<PAGE>
PORTFOLIO TURNOVER
The portfolio turnover of each Fund will vary from year to year.
Although no Fund will trade in securities for short-term profits, when
circumstances warrant securities may be sold without regard to the length of
time held. Portfolio turnover for each Fund (other than Cash Income 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 ("NYSE") is open for trading. The NYSE 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 NYSE will
be closed on the preceding Friday or the following Monday, respectively. Net
asset value will not be determined on days when the NYSE 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 NYSE is
restricted, as determined by the Commission, or the NYSE is closed for other
than customary weekend and holiday closing; (b) the Commission has by order
permitted such suspension; or (c) an emergency, as determined by the Commission,
exists, making disposal of portfolio securities or the valuation of net assets
of such Fund not reasonably practicable.
S-7
<PAGE>
TRUSTEES AND OFFICERS
The following table sets forth certain information with respect to the
Trustees and officers of the Trust:
<TABLE>
<CAPTION>
Position(s) held Principal occupations
Name and Address Age with the Trust during past five years
- ---------------- --- ---------------- ----------------------
<S> <C> <C> <C>
Richard R. Christensen(1) 64 President and President, Liberty Investment
Federal Reserve Plaza Trustee Services, Inc.; since
600 Atlantic Avenue 1994, President, Liberty
Boston, MA 02210 Asset Management
Company
John A. Bacon Jr. 64 Trustee Private investor
4N640 Honey Hill Road
Box 296
Wayne, IL 60184
Salvatore Macera 66 Trustee Private investor
20 Rowes Wharf
Boston, MA 02109
Dr. Thomas E. Stitzel 57 Trustee Professor of Finance,
2208 Tawny Woods Place College of Business,
Boise, ID 83706 Boise State University;
business consultant and author
Gary A. Anetsberger 41 Treasurer Senior Vice President,
One South Wacker Drive Stein Roe & Farnham
Chicago, IL 60606 Incorporated since April
1996; Vice President prior thereto
- ----------
(1) Trustee who is an "interested person," as defined in the Investment Company
Act of 1940, of the Trust, the Adviser or a Participating Insurance Company
which is an affiliate of the Trust or the Adviser.
S-8
<PAGE>
Position(s) held Principal occupations
Name and Address Age with the Trust during past five years
- ---------------- --- ---------------- ----------------------
Sharon R. Robertson 35 Controller Associate, Stein Roe &
One South Wacker Drive Incorporated
Chicago, IL 60606
E. Bruce Dunn 63 Vice President Senior Vice President,
One South Wacker Drive Stein Roe & Farnham
Chicago, IL 60606 Incorporated.
Richard B. Peterson 56 Vice President Senior Vice President,
One South Wacker Drive Stein Roe & Farnham
Chicago, IL 60606 Incorporated
Harvey B. Hirschhorn 47 Vice President Executive Vice President,
One South Wacker Drive Stein Roe & Farnham
Chicago, IL 60606 Incorporated
Michael T. Kennedy 35 Vice President Senior Vice President
One South Wacker Drive (October 1994 to
Chicago, IL 60606 present), Vice President
(prior thereto), Stein Roe &
Farnham Incorporated
Jane M. Naeseth 47 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 33 Vice President Senior Vice President
One South Wacker Drive (April 1996 to present),
Chicago, IL 60606 Vice President (1994 to
April 1996), Associate (prior
thereto), Stein Roe
& Farnham Incorporated
S-9
<PAGE>
Position(s) held Principal occupations
Name and Address Age with the Trust during past five years
- ---------------- --- ---------------- ----------------------
Timothy K. Armour 48 Vice President President, Mutual Funds
One South Wacker Drive division, Stein Roe &
Chicago, IL 60606 Farnham Incorporated
since June 1992; Senior
Vice President and
Director of Marketing of
Citibank Illinois, prior
thereto
Jilaine Hummel Bauer 41 Vice President Senior Vice President,
One South Wacker Drive Stein Roe & Farnham
Chicago, IL 60606 Incorporated
John A. Benning 62 Secretary Senior Vice President,
Federal Reserve Plaza General Counsel and
600 Atlantic Avenue Secretary, Liberty
Boston, MA 02210 Financial Companies, Inc.
Kevin M. Carome 41 Assistant Secretary Since August 1993, Federal
Reserve Plaza Associate General
600 Atlantic Avenue Counsel and (since
Boston, MA 02210 February 1995) Vice
President, Liberty
Financial Companies, Inc.;
prior thereto, Associate,
Ropes & Gray, Boston,
Massachusetts
</TABLE>
As indicated in the above table, certain Trustees and officers of the
Trust also hold positions with Stein Roe & Farnham Incorporated, LFC and/or
their affiliates. Certain of the Trustees and certain officers of the Trust hold
comparable positions with certain other investment companies managed by Stein
Roe & Farnham Incorporated or sponsored by other affiliates of LFC.
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
S-10
<PAGE>
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 1996 Compensation* Companies in 1996**
- --------------- --------------------------- -----------------
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. Beginning in 1997, the fee
for meetings attended in person has been increased to $3,000 per 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 direct subsidiary of
SteinRoe Services, Inc., which in turn is a wholly owned direct subsidiary of
LFC. LFC, in turn, is a majority owned indirect subsidiary of Liberty Mutual.
The directors of the Adviser are Kenneth R. Leibler, C. Allen Merritt,
Jr., Hans P. Ziegler, Timothy K. Armour, and Harold W. Cogger. Mr. Leibler is
President and Chief Executive Officer of LFC; Mr. Merritt is Executive Vice
President and Treasurer 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. Cogger is Executive Vice President of LFC. The business
address of Messrs. Leibler, Merritt and Cogger is Federal Reserve Place, 600
Atlantic Avenue, Boston, Massachusetts 02210; that of Messrs. Ziegler and Armour
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
S-11
<PAGE>
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 each year in the three year period ended December 31, 1996,
pursuant to the advisory contracts described in the Prospectus, each Fund paid
the Adviser management fees as follows:
1994 1995 1996
---------- ------------- -------
Capital Appreciation Fund: $583,720 $ 690,902 $ 850,612
Managed Growth Stock Fund: $523,437 $ 586,298 $ 743,602
Managed Assets Fund: $913,231 $1,009,369 $1,293,967
Mortgage Securities Income Fund: $324,958 $ 316,804 $ 334,914
Cash Income Fund: $296,330 $ 241,257 $ 229,758
Administrative Expenses:
During each year in the three year period ended December 31, 1996,
pursuant to the Administration Agreement described above, each Fund paid the
Adviser or an affiliate thereof administrative fees as follows:
S-12
<PAGE>
1994 1995 1996
------- ------- -------
Capital Appreciation Fund: $175,116 $207,244 $255,184
Managed Growth Stock Fund: $157,031 $175,868 $223,081
Managed Assets Fund: $304,411 $336,418 $431,322
Mortgage Securities Income Fund: $121,354 $118,789 $125,593
Cash Income Fund: $126,999 $103,394 $ 98,468
In addition, during each such year each Fund paid the Adviser or an
affiliate thereof $7,500 for transfer agent services.
Expense Limitation:
The Adviser has agreed to reimburse all expenses of the Funds as
follows through April 30, 1998:
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
Pursuant to such limitations the total expenses of the Mortgage
Securities Income Fund were reduced during 1996 by $14,831:
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
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<PAGE>
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
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<PAGE>
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 portion 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. The Adviser also may receive research in connection with
selling concessions and designations in fixed price offerings in which the Funds
participate. 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
Conduct 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 arrangements with
sponsors of programs for the sale of VA contracts issued by Participating
Insurance Companies which are not affiliates of the Adviser pursuant to which
the Adviser pays the sponsor from the Adviser's fee for managing CAF an amount
in respect of CAF assets allocable to CAF shares held in separate accounts of
such unaffiliated Participating Insurance Companies in respect of VA contracts
issued by such entities and sold through such arrangements. 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
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<PAGE>
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 Conduct 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.
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<TABLE>
<CAPTION>
- ------------------------------------- ------------------------- -------------------------- --------------------------
Capital Appreciation Managed Assets Managed Growth
Fund Fund Stock Fund
- ------------------------------------- ------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
Total amount of brokerage
commissions
paid during fiscal year
ended 12/31/96 $316,995 $304,087 $81,270
- ------------------------------------- ------------------------- -------------------------- --------------------------
Amount of commissions paid to
brokers or dealers who supplied
research services to the Adviser
$294,393 $296,862 $77,970
- ------------------------------------- ------------------------- -------------------------- --------------------------
Total dollar amount involved in
such transactions: $129,739,455 $166,476,759 $60,289,503
- ------------------------------------- ------------------------- -------------------------- --------------------------
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 $79,837 $73,178 $13,200
- ------------------------------------- ------------------------- -------------------------- --------------------------
Total dollar amount involved in
such transactions: $34,560,978 $36,852,708 $10,481,354
- ------------------------------------- ------------------------- -------------------------- --------------------------
Total brokerage fees paid
during fiscal year ended
12/31/95: $485,545 $273,626 $109,831
- ------------------------------------- ------------------------- -------------------------- --------------------------
Total brokerage fees paid
during fiscal year ended
12/31/94: $353,943 $219,454 $166,006
- ------------------------------------- ------------------------- -------------------------- --------------------------
</TABLE>
NET ASSET VALUE
The net asset value of the shares of each of the Funds is determined by
dividing the total assets of each Fund, less all liabilities (including accrued
expenses), by the total number of shares outstanding.
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
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<PAGE>
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, 1996 was:
$0.000983030 X 365
------------ ---
Current Yield = $1.00 7 = 5.13%
365/7
[1 + $0.000983030]
------------------
Effective Yield = $1.00 - 1 = 5.26%
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<PAGE>
In addition to fluctuations reflecting changes in net income of Cash
Income Fund resulting from changes in income earned on its portfolio securities
and in its expenses, Cash Income Fund's yield also would be affected if the Fund
were to restrict or supplement its dividends in order to maintain its net asset
value at $1.00. Portfolio changes resulting from net purchases or net
redemptions of Cash Income Fund shares may affect yield. Accordingly, Cash
Income Fund's yield may vary from day to day and the yield stated for a
particular past period is not a representation as to its future yield. Cash
Income Fund's yield is not guaranteed and its principal is not insured; however,
the Fund will attempt to maintain its net asset value per share at $1.00.
Each of the Funds may quote total return figures from time to time.
Total return on a per share basis is the amount of dividends received per share
plus or minus the change in the net asset value per share for a given period.
Total return percentage may be calculated by dividing the value of a share at
the end of a given period by the value of the share at the beginning of the
period and subtracting one.
Average Annual Total Return is computed as follows:
ERV = P(1+T)(n)
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
period (or fractional portion thereof).
For example, for a $1,000 investment in the Funds, the "Total Return,"
the "Total Return Percentage," and the "Average Annual Total Return" for the
life of those Funds (from January 1, 1989 to December 31, 1996 were:
Total Return Average Annual
Fund Total Return Percentage Total Return
- ------------ ------------ ------------ --------------
Capital $3,647 264.75% 17.56%
Appreciation
Fund
Managed Growth $3,347 234.67% 16.30%
Stock Fund
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<PAGE>
Managed Assets $2,566 156.65% 12.50%
Fund
Mortgage Securities $1,892 89.26% 8.30%
Income Fund
Cash Income Fund $1,516 52.28% 5.40%
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, 1997 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
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<PAGE>
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, 1997 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 Statement of Additional
Information 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 10 to 38 of the December 31, 1996 Annual Report of
the Trust are incorporated in this Statement of Additional Information by
reference.
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<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).
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<PAGE>
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.
A-2
<PAGE>
Certain Mortgage Pass-Through Certificates purchased will represent
interests in mortgage pools containing graduated payment adjustable rate
mortgage loans or "GPARMs." These are adjustable interest rate mortgage loans
with a graduated payment feature. The scheduled monthly payment amount on this
type of loan at the beginning of the loan term is insufficient to fully amortize
the loan; that is, the scheduled payments are insufficient to pay off the entire
loan during the term. Because the monthly mortgage payments during the early
years of graduated payment mortgage loans may not even be sufficient to pay the
current interest due, GPARMs may involve negative amortization; that is, the
unpaid principal balance of the mortgage loan may increase because any unpaid
balance of the interest due will be added to the principal amount of the
mortgage loan. GPARMs also involve increases in the payment amount, because at
one or more times during the early years of the loan term, the monthly mortgage
payments (principal and interest) increase to a level that will fully amortize
the loan. The monthly payment amount may also be increased (or decreased) to
reflect changes in the interest rate. In addition, the loan term may be
lengthened or shortened from time to time, corresponding to an increase or
decrease in the interest rate.
GNMA Certificates
GNMA Certificates 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.
A-3
<PAGE>
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.
A-4
<PAGE>
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.
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%
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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
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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.
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.
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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
determine 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
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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.
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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.
Futures Contracts and Options on Futures Contracts
Each Fund may use interest rate, index and foreign currency futures
contracts. An interest rate, index or foreign currency futures contract provides
for the future sale by one party and purchase by another party of a specified
quantity of a financial instrument, the cash value of an index(2) or a specified
quantity of a foreign currency at a specified price and time. A public market
exists in futures contracts covering a number of indexes (including, but not
limited to, the Standard & Poor's 500 Stock Index, the Value Line Composite
Index and the New York Stock Exchange Composite Index), certain financial
instruments (including, but not limited to: U.S. Treasury bonds, U.S. Treasury
notes and Eurodollar certificates of deposit) and foreign currencies. Other
index and financial instrument futures contracts are available and it is
expected that additional futures contracts will be developed and traded.
The Funds may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities,
indexes and foreign currencies (discussed above). A futures option gives the
holder the right, in return for the premium paid, to assume a long position
(call) or a short position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option, the
opposite is true.
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(2) A futures contract on an index is an agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the index value at which the index contract was originally
written. Although the value of a securities index is a function of the value of
certain specified securities, no physical delivery of those securities is made.
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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
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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.
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Limitations on Options and Futures
A Fund will not enter into a futures contract or purchase an option
thereon if, immediately thereafter, the initial margin deposits for futures
contracts held by that Fund plus premiums paid by it for open futures option
positions, less the amount by which any such positions are "in-the-money,"(3)
would exceed 5% of the Fund's total assets.
When purchasing a futures contract or writing a put option on a futures
contract, a Fund must maintain with its custodian (or broker, if legally
permitted) cash or cash equivalents (including any margin) equal to the market
value of such contract. When writing a call option on a futures contract, the
Fund similarly will maintain with its custodian cash or cash equivalents
(including any margin) equal to the amount by which such option is in-the-money
until the option expires or is closed out by the Fund.
A Fund may not maintain open short positions in futures contracts, call
options written on futures contracts or call options written on indexes if, in
the aggregate, the market value of all such open positions exceeds the current
value of the securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative volatility of
the relationship between the portfolio and the positions. For this purpose, to
the extent the Fund has written call options on specific securities in its
portfolio, the value of those securities will be deducted from the current
market value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission ("CFTC")
Regulation 4.5 and thereby avoid being deemed a "commodity pool operator," each
Fund will use commodity futures or commodity options contracts solely for bona
fide hedging purposes within the meaning and intent of CFTC Regulation 1.3(z),
or, with respect to positions in commodity futures and commodity options
contracts that do not come within the meaning and intent of CFTC Regulation
1.3(z), the aggregate initial margin and premiums required to establish such
positions will not exceed 5% of the fair market value of the assets of a Fund,
after taking into account unrealized profits and unrealized losses on any such
contracts it has entered into [in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount (as defined in Section 190.01(x)
of the CFTC Regulations) may be excluded in computing such 5%].
Taxation of Options and Futures
If a Fund exercises a call or put option it holds, the premium paid for
the option is added to the cost basis of the security purchased (call) or
deducted from the proceeds of the security sold (put). For cash settlement
options and futures options exercised by a Fund, the difference between the cash
received at exercise and the premium paid is a capital gain or loss.
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(3) A call option is "in-the-money" if the value of the futures contract the is
the subject of the option exceeds the exercise price. A put option is "in-the-
money" if the exercise price exceeds the value of the futures contract that is
the subject of the option.
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If a call or put option written by a Fund is exercised, the premium is
included in the proceeds of the sale of the underlying security (call) or
reduces the cost basis of the security purchased (put). For cash settlement
options and futures options written by a Fund, the difference between the cash
paid at exercise and the premium received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital gain
or loss. If an option written by a Fund was in-the-money at the time it was
written and the security covering the option was held for more than the
long-term holding period prior to the writing of the option, any loss realized
as a result of a closing purchase transaction will be long-term. The holding
period of the securities covering an in-the-money option will not include the
period of time the option is outstanding.
If a Fund writes an equity call option(4) other than a "qualified
covered call option," as defined in the Internal Revenue Code, any loss on such
option transaction, to the extent it does not exceed the unrealized gains on the
securities covering the option, may be subject to deferral until the securities
covering the option have been sold.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the earlier of delivery notice date or
expiration date. If a Fund delivers securities under a futures contract, the
Fund also realizes a capital gain or loss on those securities.
For Federal income tax purposes, a Fund generally is required to
recognize as income for each taxable year its net unrealized gains and losses as
of the end of the year on futures, futures options and non-equity options
positions ("year-end mark-to-market"). Generally, any gain or loss recognized
with respect to such positions (either by year-end mark-to-market or by actual
closing of the positions) is considered to be 60% long-term and 40% short-term,
without regard to the holding periods of the contracts. However, in the case of
positions classified as part of a "mixed straddle," the recognition of losses on
certain positions (including options, futures and futures options positions, the
related securities and certain successor positions thereto) may be deferred to a
later taxable year. Sale of futures contracts or writing of call options (or
futures call options) or buying put options (or futures put options) that are
intended to hedge against a change in the value of securities held by a Fund:
(1) will affect the holding period of the hedged securities; and (2) may cause
unrealized gain or loss on such securities to be recognized upon entry into the
hedge.
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
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(4) An equity option is defined to mean any option to buy or sell stock, and
any other option the value of which is determined by reference to an index of
stocks of the type that is ineligible to be traded on a commodity futures
exchange (e.g., an option contract on a sub-index based on the price of nine
hotel-casino stocks). The definition of equity option excludes options on broad-
based stock indexes (such as the Standard & Poor's 500 Stock Index).
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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
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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.
A-16
<PAGE>
- ------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- ------------------------------------------------------------------------------
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, 1996, 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 periods
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, 1996, 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
SteinRoe Variable Investment Trust as of December 31, 1996, 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 periods presented, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 14, 1997
<PAGE>
- -------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
SteinRoe Variable Investment Trust Capital Appreciation Fund / December 31, 1996
- -------------------------------------------------------------------------------
MARKET
SHARES VALUE
--------- -----------
COMMON STOCKS--(91.0%)
AUTO PARTS--(3.7%)
Quanex Corporation 141,000 $ 3,859,875
Superior Industries International, Inc. 150,000 3,468,750
-----------
7,328,625
-----------
BANKS/SAVINGS AND LOANS--(1.9%)
Grupo Financiero Inbursa 670,000 2,289,507
Rancho Santa Fe National Bank (a) 111,900 867,225
Southtrust Corporation 17,000 592,875
-----------
3,749,607
-----------
BROADCASTING--(9.1%)
Central European Media Enterprises (a) 214,900 6,823,075
Grupo Radio Centro ADS (a) 331,000 2,275,625
MetroNetworks, Inc. (a) 180,700 4,562,675
United Video Satellite Group, Inc. (a) 120,000 2,100,000
Valuevision International, Inc. (a) 388,000 2,085,500
-----------
17,846,875
-----------
BUSINESS SERVICES--(11.6%)
Alternative Resources Corporation (a) 100,000 1,737,500
Fiserv Inc. (a) 109,000 4,005,750
G & K Services Cl. A 251,000 9,475,250
National Processing, Inc. (a) 191,000 3,056,000
Unitog Company 120,500 3,283,625
USCS International, Inc. (a) 68,800 1,161,000
-----------
22,719,125
-----------
CHEMICALS--(1.0%)
CFC International, Inc. (a) 180,000 2,025,000
-----------
COMPUTER HARDWARE AND SOFTWARE--(3.8%)
Dr. Solomon's Group Plc ADR (a) 107,200 1,835,800
Microware Systems Corporation (a) 85,600 1,219,800
Storm Technology, Inc. (a) 194,700 924,825
Zebra Technologies Corporation (a) 145,000 3,389,375
-----------
7,369,800
-----------
CONSUMER RELATED--(2.0%)
Sola International, Inc. (a) 105,000 3,990,000
-----------
EDUCATION--(1.0%)
Firearms Training Systems, Inc. (a) 170,800 2,006,900
-----------
ELECTRONICS--(5.2%)
AVX Corp. 217,400 4,674,100
Ballantyne of Omaha, Inc. (a) 140,000 2,782,500
Kent Electronics Corporation (a) 106,000 2,729,500
-----------
10,186,100
-----------
<PAGE>
MARKET
SHARES VALUE
--------- ----------
INSURANCE--(10.5%)
Meadowbrook Insurance Group, Inc. 264,200 $ 5,548,200
Mutual Risk Management Ltd. 126,666 4,686,642
National Mutual of Asia 2,093,000 1,988,849
Protective Life Corporation 70,000 2,791,250
20th Century Industries, Inc. 328,000 5,535,000
-----------
20,549,941
-----------
MEDICAL DRUGS--(1.1%)
Ligand Pharmaceuticals, Inc. (a) 140,000 2,082,500
-----------
MEDICAL EQUIPMENT--(4.5%)
InControl, Inc. (a) 190,500 1,524,000
Urologix, Inc. (a) 119,900 1,948,375
Uroquest Medical Corporation (a) 205,000 1,383,750
Xomed Surgical Products Inc. (a) 195,400 3,908,000
-----------
8,764,125
-----------
METALS MANUFACTURING/DISTRIBUTION--(1.6%)
Wolverine Tube, Inc. (a) 89,000 3,137,250
-----------
PUBLISHING--(1.8%)
Hollinger International, Inc. 305,000 3,507,500
-----------
OIL/GAS--(13.5%)
Barrett Resources Corp. (a) 149,000 6,351,125
Cross Timbers Oil Company 89,000 2,236,125
Devon Energy Corporation 140,000 4,865,000
Diamond Offshore Drilling, Inc. (a) 65,000 3,705,000
Renaissance Energy Ltd. (a) 124,400 4,234,093
United Meridian Corporation (a) 99,000 5,123,250
-----------
26,514,593
-----------
REAL ESTATE DEVELOPMENT/MANAGEMENT--(4.5%)
CB Commercial Real Estate Services
Group, Inc. (a) 198,200 3,964,000
The Rouse Company 150,000 4,762,500
-----------
8,726,500
-----------
RETAIL--(3.4%)
Garden Botanika, Inc. (a) 236,700 2,840,400
Sunglass Hut International, Inc. (a) 252,000 1,827,000
Video Update, Inc. (a) 517,000 2,035,688
-----------
6,703,088
-----------
SPECIALTY CHEMICALS--(3.3%)
OM Group, Inc. 241,250 6,513,750
-----------
<PAGE>
SCHEDULE OF INVESTMENTS MARKET
(CONTINUED) SHARES VALUE
--------- -----------
COMMON STOCKS (CONTINUED)
TELECOMMUNICATIONS--(1.9%)
Western Wireless Corporation (a) 270,200 $ 3,749,025
------------
WHOLESALE DISTRIBUTION--(5.6%)
AmeriSource Distribution
Corporation (a) 223,700 10,793,525
Thompson PBE, Inc. (a) 35,000 218,750
------------
11,012,275
------------
TOTAL COMMON STOCKS (Cost $162,200,731) 178,482,579
------------
<PAGE>
MARKET
PAR VALUE
--------- -----------
SHORT-TERM INVESTMENTS--(8.6%)
Countrywide Home Loans
Mortgage Corp. 6.050% 1/06/97 $5,000,000 $ 4,995,799
Goldman Sachs Group Ltd.
8.250% 1/02/97 9,895,000 9,892,732
Lockheed Martin Corp. 7.250% 1/02/97 2,000,000 1,999,597
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $16,888,128) 16,888,128
------------
TOTAL INVESTMENTS--(99.6%)
(Cost $179,088,859) (b) 195,370,707
OTHER ASSETS, LESS LIABILITIES--(0.4%) 848,312
------------
NET ASSETS (100%) $196,219,019
============
(a) Non-income producing security.
(b) The cost of investments for federal income tax purposes is identical.
Gross unrealized appreciation and depreciation on investments at December
31, 1996 is as follows:
Gross unrealized appreciation: $31,331,843
Gross unrealized depreciation: (15,049,995)
-----------
$16,281,848
===========
See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SteinRoe Variable Investment Trust Capital Appreciation Fund / December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at market value (identified cost $179,088,859)..................................................... $195,370,707
Cash ........................................................................................................... 53,364
Receivable for investments sold................................................................................. 2,645,785
Receivable for fund shares sold................................................................................. 56,245
Dividends and interest receivable............................................................................... 126,870
Other assets.................................................................................................... 14,955
-------------
TOTAL ASSETS............................................................................................... 198,267,926
-------------
LIABILITIES:
Payable for investments purchased............................................................................... 111,250
Payable for fund shares repurchased............................................................................. 1,793,905
Payable to adviser.............................................................................................. 98,966
Accrued expenses payable........................................................................................ 44,786
------------
TOTAL LIABILITIES.......................................................................................... 2,048,907
------------
NET ASSETS...................................................................................................... $196,219,019
============
NET ASSETS REPRESENTED BY:
Paid-in capital.............................................................................................. $142,777,288
Accumulated undistributed net investment income.............................................................. 263,066
Accumulated undistributed net realized gains on investments and foreign currency transactions................ 36,896,871
Net unrealized appreciation on investments and foreign currencies............................................ 16,281,794
------------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES OF BENEFICIAL INTEREST........................................ $196,219,019
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING....................................................................... 9,463,629
============
NET ASSET VALUE PER SHARE....................................................................................... $20.73
========
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest income.............................................................................................. $ 805,168
Dividends (net of foreign taxes withheld).................................................................... 796,609
-----------
Total investment income.................................................................................... 1,601,777
-----------
EXPENSES:
Management fee............................................................................................... 850,612
Administrative fee........................................................................................... 255,184
Custodian fee................................................................................................ 46,972
Accounting fee............................................................................................... 28,258
Printing expense............................................................................................. 19,905
Audit and legal fees......................................................................................... 18,956
Trustees' expense............................................................................................ 11,532
Transfer agent fee........................................................................................... 7,500
Miscellaneous expense........................................................................................ 22,076
-----------
Total expenses............................................................................................. 1,260,995
-----------
Net investment income........................................................................................... 340,782
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on investments............................................................................ 37,125,858
Net realized losses on foreign currency transactions......................................................... (19,291)
Change in unrealized appreciation or depreciation on investments............................................. 1,982,076
-------------
Net increase in net assets resulting from operations............................................................ $ 39,429,425
============
See Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
SteinRoe Variable Investment Trust Capital Appreciation Fund
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995
------------ -------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 340,782 $ 367,197
Net realized gains on investments 37,125,858 1,051,804
Net realized losses on foreign currency transactions (19,291) (20,399)
Change in unrealized appreciation or depreciation on investments 1,982,076 13,894,884
------------ ------------
Net increase in net assets resulting from operations 39,429,425 15,293,486
------------ ------------
DISTRIBUTIONS DECLARED FROM:
Net investment income -- (346,798)
Distributions in excess of net investment income -- (28,200)
Net realized gains on investments -- (849,985)
------------ ------------
Total distributions -- (1,224,983)
------------ ------------
FUND SHARE TRANSACTIONS:
Proceeds from fund shares sold 59,130,137 43,757,834
Cost of fund shares repurchased (45,588,672) (49,881,536)
Distributions reinvested -- 1,224,983
------------ ------------
Net increase (decrease) in net assets resulting from fund share transactions 13,541,465 (4,898,719)
------------ ------------
Total increase in net assets 52,970,890 9,169,784
NET ASSETS:
Beginning of year 143,248,129 134,078,345
------------ ------------
End of year $196,219,019 $143,248,129
============ ============
Accumulated undistributed (overdistributed) net investment income
included in ending net assets $ 263,066 $ (77,716)
============ ============
ANALYSIS OF CHANGES IN SHARES OF BENEFICIAL INTEREST:
Shares sold 3,135,974 2,916,477
Shares repurchased (2,445,679) (3,317,111)
Distributions reinvested -- 75,757
------------ ------------
Net increase (decrease) 690,295 (324,877)
============ ============
See Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SteinRoe Variable Investment Trust Capital Appreciation Fund
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 16.33 $ 14.74 $ 16.53 $ 15.34 $ 15.32
-------- -------- -------- ------- -------
Net investment income 0.04 0.04 0.06 0.03 --
Net realized and unrealized gains
on investments and foreign currency transactions 4.36 1.69 0.09 5.22 2.17
-------- -------- -------- ------- -------
Total from investment operations 4.40 1.73 0.15 5.25 2.17
-------- -------- -------- ------- -------
Less distributions:
Dividends from and in excess of net investment income -- (0.04) (0.07) (0.02) --
Distributions from and in excess of net realized gains
on investments -- (0.10) (1.87) (4.04) (2.15)
-------- -------- -------- ------- -------
Total distributions -- (0.14) (1.94) (4.06) (2.15)
-------- -------- -------- ------- -------
Net asset value, end of year $ 20.73 $ 16.33 $ 14.74 $ 16.53 $ 15.34
======== ======== ======== ======= =======
TOTAL RETURN:
Total investment return 26.94% 11.75% 1.19%(b) 35.68%(b) 14.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $196,219 $143,248 $134,078 $96,544 $52,135
Ratio of expenses to average net assets 0.75% 0.76% 0.80%(a) 0.84%(a) 1.01%
Ratio of net investment income to average net assets 0.20% 0.26% 0.44%(b) 0.13%(b) (0.01)%
Portfolio turnover ratio 100% 132% 144% 112% 85%
Average commissions (per share) $0.0251 -- -- -- --
</TABLE>
(a) These ratios were not materially affected by the reimbursement of certain
expenses by the Adviser and Administrator.
(b) Computed giving effect to the Investment Adviser's and the Administrator's
expense limitation undertaking.
See Notes to Financial Statements
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
SteinRoe Variable Investment Trust Managed Growth Stock Fund / December 31, 1996
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
--------- -----------
COMMON STOCKS--(97.8%)
BANKS--(4.6%)
Citicorp 40,000 $ 4,120,000
MBNA Corp. 82,500 3,423,750
-----------
7,543,750
-----------
BUSINESS SERVICES--(2.3%)
First Data Corporation 100,000 3,650,000
-----------
COMPUTERS AND COMPUTER SOFTWARE--(12.1%)
Cisco Systems, Inc. (a) 40,000 2,545,000
Electronic Data Systems Corporation 60,000 2,595,000
Intel Corporation 50,000 6,546,875
Microsoft Corp. (a) 60,000 4,957,500
Parametric Technology (a) 40,000 2,055,000
Sterling Commerce, Inc. (a) 25,000 881,250
-----------
19,580,625
-----------
CONSTRUCTION--(1.7%)
Fluor Corporation 45,000 2,823,750
-----------
CONSUMER RELATED--(9.0%)
CUC International, Inc. (a) 165,000 3,918,750
The Gillette Company 75,000 5,831,250
The Proctor & Gamble Co. 45,000 4,837,500
-----------
14,587,500
-----------
DRUGS--(6.6%)
Eli Lilly & Co. 50,000 3,650,000
Merck & Co. 55,000 4,358,750
SmithKline Beecham Plc ADRs 40,000 2,720,000
-----------
10,728,750
-----------
ELECTRICAL EQUIPMENT--(3.1%)
General Electric Company 50,000 4,943,750
-----------
ENERGY--(4.6%)
Renaissance Energy Ltd. (a) 100,000 3,403,612
Schlumberger Ltd. 40,000 3,995,000
-----------
7,398,612
-----------
FINANCIAL SERVICES--(3.2%)
Federal National Mortgage Association 140,000 5,215,000
-----------
FOOD/BEVERAGE/TOBACCO--(6.5%)
The Coca Cola Company 100,000 5,262,500
Nabisco Holdings Corp. 50,000 1,943,750
Phillip Morris Companies, Inc. 30,000 3,378,750
-----------
10,585,000
-----------
<PAGE>
MARKET
SHARES VALUE
--------- -----------
HEALTH CARE--(4.1%)
Johnson & Johnson 80,000 $ 3,980,000
United Healthcare Corp. 60,000 2,700,000
------------
6,680,000
------------
HOTEL--(5.3%)
HFS, Inc. (a) 100,000 5,975,000
Sun International Hotels Ltd. (a) 70,000 2,555,000
------------
8,530,000
------------
INSURANCE--(5.7%)
American International Group, Inc. 37,500 4,059,375
The Travelers, Inc. 115,000 5,218,125
------------
9,277,500
------------
LEISURE & ENTERTAINMENT--(2.2%)
Disney (Walt) Co. 50,000 3,481,250
------------
MEDICAL SUPPLIES--(3.4%)
Baxter International Inc. 50,000 2,050,000
Medtronic, Inc. 50,000 3,400,000
------------
5,450,000
------------
RETAIL--(5.7%)
Corporate Express Inc. (a) 75,000 2,207,813
The Home Depot, Inc. 70,000 3,508,750
Kohl's Corp. (a) 90,000 3,532,500
------------
9,249,063
------------
RESTAURANTS--(2.0%)
McDonald's Corporation 70,000 3,167,500
------------
RUBBER, PLASTIC & RELATED--(2.5%)
Illinois Tool Works Inc. 50,000 3,993,750
------------
TECHNOLOGY SERVICES--(4.4%)
Tellabs Inc. (a) 90,000 3,386,250
Thermo Electron Corp. (a) 90,000 3,712,500
------------
7,098,750
------------
TELECOMMUNICATIONS--(8.8%)
Airtouch Communications (a) 85,000 2,146,250
LM Ericsson Telecommunications Co.
ADRs Class B 150,000 4,528,125
Lucent Technologies Inc. 50,000 2,312,500
Motorola, Inc. 40,000 2,455,000
WorldCom Inc. (a) 110,000 2,866,875
------------
14,308,750
------------
TOTAL COMMON STOCKS
(Cost $99,032,926) 158,293,300
------------
<PAGE>
SCHEDULE OF INVESTMENTS MARKET
(CONTINUED) PAR VALUE
---------- -----------
SHORT-TERM INVESTMENTS--(2.1%)
Goldman Sachs Group Ltd.
8.250% 1/02/97
(Cost $3,454,208) $3,455,000 $ 3,454,208
------------
TOTAL INVESTMENTS--(99.9%)
(Cost $102,487,134) (b) 161,747,508
OTHER ASSETS, LESS LIABILITIES--(0.1%) 131,466
------------
NET ASSETS (100%) $161,878,974
============
(a) Non-income producing security.
(b) The cost of investments for federal income tax purposes is $102,488,374.
Gross unrealized appreciation and depreciation at December 31, 1996 is as
follows:
Gross unrealized appreciation: $60,028,220
Gross unrealized depreciation: (769,086)
-----------
Net unrealized appreciation: $59,259,134
===========
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SteinRoe Variable Investment Trust Managed Growth Stock Fund / December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at market value (identified cost $102,487,134)..................................................... $161,747,508
Cash ........................................................................................................... 52,169
Receivable for fund shares sold................................................................................. 15,936
Dividends receivable............................................................................................ 176,359
Other assets.................................................................................................... 11,532
-------------
TOTAL ASSETS............................................................................................... 162,003,504
-------------
LIABILITIES:
Payable for fund shares repurchased............................................................................. 9,465
Management fee payable.......................................................................................... 64,641
Administrative fee payable...................................................................................... 19,409
Accrued expenses payable........................................................................................ 29,957
Other liabilities............................................................................................... 1,058
-------------
TOTAL LIABILITIES.......................................................................................... 124,530
-------------
NET ASSETS...................................................................................................... $161,878,974
============
NET ASSETS REPRESENTED BY:
Paid-in capital.............................................................................................. $ 94,453,766
Accumulated undistributed net investment income.............................................................. 688,694
Accumulated undistributed net realized gains on investments.................................................. 7,475,788
Net unrealized appreciation on investments and foreign currencies............................................ 59,260,726
-------------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES OF BENEFICIAL INTEREST........................................ $161,878,974
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING....................................................................... 5,658,471
============
NET ASSET VALUE PER SHARE....................................................................................... $28.61
======
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld).................................................................... $ 1,387,148
Interest Income.............................................................................................. 424,260
------------
Total investment income.................................................................................... 1,811,408
------------
EXPENSES:
Management fee............................................................................................... 743,602
Administrative fee........................................................................................... 223,081
Accounting fee............................................................................................... 27,448
Printing expense............................................................................................. 19,800
Custodian fee................................................................................................ 17,476
Audit and legal fees......................................................................................... 16,843
Trustees' expense............................................................................................ 10,626
Transfer agent fee........................................................................................... 7,500
Miscellaneous expense........................................................................................ 16,107
------------
Total expenses............................................................................................. 1,082,483
------------
Net investment income........................................................................................... 728,925
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on investments............................................................................ 7,580,172
Change in unrealized appreciation or depreciation on investments............................................. 20,202,757
------------
Net increase in net assets resulting from operations............................................................ $ 28,511,854
============
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
SteinRoe Variable Investment Trust Managed Growth Stock Fund
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995
------------ -------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 728,925 $ 848,442
Net realized gains on investments 7,580,172 6,765,437
Change in unrealized appreciation or depreciation on investments 20,202,757 29,815,844
------------ ------------
Net increase in net assets resulting from operations 28,511,854 37,429,723
------------ ------------
DISTRIBUTIONS DECLARED FROM:
Net investment income -- (799,977)
Net realized gains on investments -- (6,557,064)
Distributions in excess of net realized gains on investments -- (42,937)
------------ ------------
Total distributions -- (7,399,978)
------------ ------------
FUND SHARE TRANSACTIONS:
Proceeds from fund shares sold 22,263,141 23,896,709
Cost of fund shares repurchased (25,729,831) (23,225,761)
Distributions reinvested -- 7,399,978
------------ ------------
Net increase (decrease) in net assets resulting from fund share transactions (3,466,690) 8,070,926
------------ ------------
Total increase in net assets 25,045,164 38,100,671
NET ASSETS:
Beginning of year 136,833,810 98,733,139
------------ ------------
End of year $161,878,974 $136,833,810
============ ============
Accumulated undistributed (overdistributed) net investment income
included in ending net assets $ 688,694 $ (40,231)
============ ============
ANALYSIS OF CHANGES IN SHARES OF BENEFICIAL INTEREST:
Shares sold 854,357 1,121,091
Shares repurchased (997,588) (1,086,399)
Distributions reinvested -- 314,893
------------ ------------
Net increase (decrease) (143,231) 349,585
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SteinRoe Variable Investment Trust Managed Growth Stock Fund
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 23.59 $ 18.11 $ 20.65 $ 20.10 $ 19.47
--------- --------- -------- --------- --------
Net investment income 0.13 0.15 0.15 0.13 0.11
Net realized and unrealized gains (losses)
on investments............................................ 4.89 6.68 (1.46) 0.86 1.18
--------- --------- -------- --------- --------
Total from investment operations............................. 5.02 6.83 (1.31) 0.99 1.29
--------- --------- -------- --------- --------
Less distributions:
Dividends from and in excess of net investment income..... -- (0.15) (0.17) (0.12) (0.10)
Distributions from and in excess of net realized gains
on investments.......................................... -- (1.20) (1.06) (0.32) (0.56)
--------- --------- -------- --------- --------
Total distributions.......................................... -- (1.35) (1.23) (0.44) ( 0.66)
--------- --------- -------- --------- --------
Net asset value, end of year................................. $28.61 $ 23.59 $ 18.11 $ 20.65 $ 20.10
======== ======== ======= ======== =======
TOTAL RETURN:
Total investment return...................................... 21.28% 37.73% (6.35)% 4.97% 6.63%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)............................ $161,879 $136,834 $98,733 $111,561 $64,402
Ratio of expenses to average net assets...................... 0.73% 0.74% 0.77% 0.83% 0.97%
Ratio of net investment income to average net assets......... 0.49% 0.72% 0.75% 0.77% 0.63%
Portfolio turnover ratio..................................... 35% 41% 72% 77% 20%
Average commissions (per share).............................. $0.0534 -- -- -- --
</TABLE>
See Notes to Financial Statements.
<PAGE>
- -------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
SteinRoe Variable Investment Trust Managed Assets Fund / December 31, 1996
- -------------------------------------------------------------------------------
MARKET
SHARES VALUE
--------- -----------
COMMON STOCKS--(54.1%)
BANKS--(5.6%)
BankAmerica Corporation 31,000 $ 3,092,250
Bank of Boston Corp. 40,000 2,570,000
Citicorp 30,000 3,090,000
NationsBank Corp. 29,000 2,834,750
Royal Bank of Scotland Group Plc 290,000 2,789,320
Westpac Banking Corporation Ltd. 415,000 2,360,127
-----------
16,736,447
-----------
BUILDING AND CONSTRUCTION--(1.1%)
Fluor Corporation 52,000 3,263,000
-----------
CHEMICALS--(1.0%)
Praxair, Inc. 65,000 2,998,125
-----------
COMPUTERS--(0.8%)
International Business Machines 15,000 2,265,000
-----------
COMPUTER SOFTWARE AND SERVICES--(0.9%)
Electronic Data Systems Corporation 60,000 2,595,000
-----------
CONSUMER PRODUCTS--(0.8%)
First Brands Corp. 80,000 2,270,000
-----------
DATA PRODUCTS & REPRODUCTION--(0.9%)
Canon, Inc. 120,000 2,646,679
-----------
DRUGS/HEALTH CARE--(5.0%)
American Home Products Corp. 38,000 2,227,750
Elan Corporation Plc ADRs (a) 90,000 2,992,500
Eli Lilly & Company 46,000 3,358,000
Novartis ADRs (a) 55,000 3,139,697
SmithKline Beecham Plc ADRs 50,000 3,400,000
-----------
15,117,947
-----------
ELECTRICAL EQUIPMENT--(3.3%)
Emerson Electric Co. 31,000 2,999,250
General Electric Company 31,000 3,065,125
Hubbell Inc., Class B 86,000 3,719,500
-----------
9,783,875
-----------
ELECTRONICS--(3.1%)
Harris Corp. 40,000 2,745,000
Intel Corporation 27,000 3,535,313
Motorola, Inc. 50,000 3,068,750
-----------
9,349,063
-----------
<PAGE>
MARKET
SHARES VALUE
--------- -----------
ENVIRONMENTAL SERVICES--(1.0%)
WMX Technologies Inc. 90,000 $ 2,936,250
-----------
FABRICATED METAL PRODUCTS--(0.9%)
Crown Cork & Seal, Inc. 50,000 2,718,750
-----------
FERTILIZERS--(0.7%)
Potash Corp. of Saskatchewan Inc. 23,000 1,955,000
-----------
FINANCIAL SERVICES--(0.8%)
Federal National Mortgage Association 67,000 2,495,750
-----------
FOOD/BEVERAGE/TOBACCO--(2.6%)
PepsiCo, Inc. 96,000 2,808,000
Philip Morris Companies, Inc. 25,000 2,815,625
Sara Lee Corporation 60,000 2,235,000
-----------
7,858,625
-----------
HOLDING--(1.0%)
Swire Pacific Ltd. Class A 300,000 2,860,412
-----------
HOUSEWARES--(1.0%)
Newell Co. 95,000 2,992,500
-----------
INSURANCE--(1.9%)
American States Financial Corporation 110,000 2,915,000
TIG Holdings Inc. 83,000 2,811,625
-----------
5,726,625
-----------
MEDICAL SUPPLIES--(1.1%)
Allegiance Corporation 13,600 375,700
Baxter International Inc. 68,000 2,788,000
-----------
3,163,700
-----------
OIL/GAS--(5.6%)
Baker Hughes Inc. 85,000 2,932,500
British Petroleum Company Plc ADRs 18,000 2,544,750
Enron Corp. 72,000 3,105,000
Mobil Corporation 24,000 2,934,000
Schlumberger Ltd. 25,000 2,496,875
Sonat, Inc. 32,000 1,648,000
United Meridian Corporation (a) 22,000 1,138,500
-----------
16,799,625
-----------
<PAGE>
SCHEDULE OF INVESTMENTS MARKET
(CONTINUED) SHARES VALUE
-------- ------------
COMMON STOCKS (CONTINUED)
PAPER & FOREST PRODUCTS--(0.8%)
Plum Creek Timber Company 94,000 $ 2,444,000
-------------
PUBLISHING & BROADCASTING--(0.7%)
World Color Press, Inc. (a) 115,000 2,213,750
-------------
REAL ESTATE--(2.2%)
Avalon Properties, Inc. 76,000 2,185,000
The Rouse Company 70,587 2,241,137
Security Capital Industrial Trust 100,000 2,137,500
-------------
6,563,637
-------------
RETAIL--(3.6%)
Credit Saison Co. Ltd. 97,000 2,164,470
Controladora Comercial Mexicana
SA GDRs (a) 66,400 1,186,900
Home Depot, Inc. 55,000 2,756,875
Jusco Co. 80,000 2,708,710
Nine West Group, Inc. (a) 45,000 2,086,875
-------------
10,903,830
-------------
TELECOMMUNICATIONS--(4.0%)
Airtouch Communications, Inc. (a) 95,000 2,398,750
Frontier Corp. 90,000 2,036,250
LM Ericsson Telecommunications Co.
ADRs Class B 105,000 3,169,687
Lucent Technologies, Inc. 40,000 1,850,000
Telefonica de Argentina S.A. ADRs 100,000 2,587,500
-------------
12,042,187
-------------
TRANSPORTATION--(1.0%)
Canadian National Railway 75,000 2,850,000
-------------
UTILITIES--(1.9%)
Empresa Nacional De Electricidad
ADRs 47,000 3,290,000
Enron Global Power & Pipelines 90,000 2,430,000
-------------
5,720,000
-------------
WATER TREATMENT SYSTEMS--(0.8%)
U.S. Filter Corporation (a) 75,000 2,381,250
-------------
TOTAL COMMON STOCKS (Cost $121,588,099) 161,651,027
-------------
MISCELLANEOUS--(0.8%)
World Equity Benchmark
Shares-Japan (Cost $3,118,736) 190,000 2,481,875
-----------
<PAGE>
MARKET
PAR VALUE
-------- ------------
LONG-TERM OBLIGATIONS--(41.8%)
AIR TRANSPORTATION--(0.9%)
Federal Express Corporation 1994
Pass-Through Certificates Series
A310-A1 7.530% 9/23/06 $2,063,406 $ 2,096,111
United Airline Corporation Series
1991-A-1 9.200% 3/22/08 691,474 755,339
-----------
2,851,450
----------
ASSET-BACKED SECURITIES--(1.7%)
ALPS Pass-Through Trust Series 1994-1
Class C2 9.350% 9/15/04 1,989,855 2,039,462
American Mortgage Trust Series 1993-3
Class 3B 8.190% 9/27/22 2,130,207 2,018,009
Greentree Home Improvement Loan
Trust Series 1994-A Class A
7.050% 3/15/14 1,009,250 1,014,074
----------
5,071,545
----------
BANKS--(1.2%)
Den Danske Bank 6.550% 9/15/03 2,250,000 2,200,028
First Chicago NBD 6.125% 2/15/06 1,500,000 1,403,925
----------
3,603,953
----------
DRUGS/HEALTHCARE--(1.2%)
Nationwide Health Property Inc.
Conv. Deb. 6.250% 1/01/99 3,400,000 3,565,750
----------
FOREIGN GOVERNMENT REGIONAL BOND--(1.0%)
Corporacion Andina de Fomento
6.625% 10/14/98 (c) 2,900,000 2,904,727
----------
FINANCIAL--(1.4%)
Associates Corporation of North America
7.500% 4/15/02 4,000,000 4,139,560
----------
MORTGAGE-BACKED SECURITIES--(0.9%)
Lennar Central Partners Limited
Partnership Series 1994-1 Class C
8.120% 9/15/02 (c) 2,500,000 2,504,175
MDC Mortgage Funding Corporation
Series Q Class 5 8.850% 3/20/18 231,136 235,646
----------
2,739,821
----------
OIL/GAS--(1.5%)
Consolidated Natural Gas Conv. Deb.
7.250% 12/15/15 2,500,000 2,628,125
SFP Pipeline Holdings, Inc. Conv. Deb.
11.160% 8/15/10 1,400,000 1,736,000
----------
4,364,125
----------
<PAGE>
SCHEDULE OF INVESTMENTS MARKET
(CONTINUED) SHARES VALUE
-------- ------------
LONG-TERM OBLIGATIONS (CONTINUED)
UTILITIES--(0.8%)
Niagara Mohawk Power Corp.
8.000% 6/01/04 $2,500,000 $ 2,401,275
------------
U.S. GOVERNMENT AND AGENCY
OBLIGATIONS--(31.2%)
Federal Home Loan Mortgage
Corporation
6.500% 12/01/10 Gold 972,512 956,981
6.500% 5/01/11 Gold 955,090 939,837
6.500% 6/01/11 Gold 5,839,363 5,733,554
12.000% 7/01/20 Gold 1,581,729 1,809,102
6.500% 3/01/26 Gold 3,954,551 3,786,087
6.500% 6/01/26 Gold 2,483,332 2,377,542
Federal National Mortgage Association
8.000% 4/13/05 1,500,000 1,527,795
Government National Mortgage
Association
7.125% 7/20/25 ARM 1,337,824 1,368,233
8.000% 3/15/26 4,914,073 5,017,241
U.S. Treasury Bonds
7.250% 5/15/16 7,000,000 7,390,950
7.875% 2/15/21 4,500,000 5,084,325
7.125% 2/15/23 4,000,000 4,174,000
U.S. Treasury Notes
6.375% 1/15/99 7,500,000 7,572,525
6.875% 8/31/99 7,500,000 7,658,925
7.875% 8/15/01 3,000,000 3,198,900
6.250% 2/15/03 7,750,000 7,738,375
5.750% 8/15/03 6,000,000 5,814,300
7.500% 2/15/05 8,000,000 8,549,520
6.500% 5/15/05 3,500,000 3,521,455
6.500% 8/15/05 6,750,000 6,790,635
6.500% 7/15/06 2,250,000 2,337,322
------------
93,347,604
------------
TOTAL LONG-TERM OBLIGATIONS
(Cost $123,974,040) 124,989,810
------------
MARKET
PAR VALUE
-------- ------------
SHORT-TERM INVESTMENTS--(2.3%)
Goldman Sachs Group 8.250% 1/02/97
(Cost $6,998,396) $7,000,000 $ 6,998,396
------------
TOTAL INVESTMENTS (99.0%)
(Cost $255,679,271) (b) 296,121,108
OTHER ASSETS, LESS LIABILITIES--(1.0%) 3,063,112
------------
NET ASSETS (100%) $299,184,220
============
(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, 1996 is as
follows:
Gross unrealized appreciation: $43,150,108
Gross unrealized depreciation: (2,708,271)
------------
Net unrealized appreciation: $40,441,837
============
(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.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SteinRoe Variable Investment Trust Managed Assets Fund / December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at market value (identified cost $255,679,271)..................................................... $296,121,108
Cash ........................................................................................................... 94,613
Receivable for investments sold................................................................................. 763,962
Receivable for fund shares sold................................................................................. 642
Dividends and interest receivable............................................................................... 2,647,106
Other assets.................................................................................................... 29,910
------------
TOTAL ASSETS............................................................................................... 299,657,341
------------
LIABILITIES:
Payable for fund shares repurchased............................................................................. 256,027
Management fee payable.......................................................................................... 107,387
Administrative fee payable...................................................................................... 35,834
Accrued expenses payable........................................................................................ 38,033
Other liabilities............................................................................................... 35,840
------------
TOTAL LIABILITIES.......................................................................................... 473,121
------------
NET ASSETS...................................................................................................... $299,184,220
============
NET ASSETS REPRESENTED BY:
Paid-in capital.............................................................................................. $223,300,752
Accumulated undistributed net investment income.............................................................. 10,358,564
Accumulated undistributed net realized gains on investments.................................................. 25,080,750
Net unrealized appreciation on investments and foreign currencies............................................ 40,444,154
------------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES OF BENEFICIAL INTEREST........................................ $299,184,220
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING....................................................................... 18,379,437
============
NET ASSET VALUE PER SHARE....................................................................................... $16.28
======
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest income............................................................................................ $ 8,967,749
Dividends (net of foreign taxes withheld).................................................................. 3,452,126
-----------
Total investment income.................................................................................. 12,419,875
-----------
EXPENSES:
Management fee............................................................................................. 1,293,967
Administrative fee......................................................................................... 431,322
Printing expense........................................................................................... 37,310
Accounting fee............................................................................................. 30,900
Custodian fee.............................................................................................. 27,814
Audit and legal fees....................................................................................... 26,796
Trustees' expense.......................................................................................... 17,301
Transfer agent fee......................................................................................... 7,500
Miscellaneous expense...................................................................................... 34,560
----------
Total expenses........................................................................................... 1,907,470
----------
Net investment income......................................................................................... 10,512,405
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on investments and foreign currency..................................................... 25,179,094
Change in unrealized appreciation or depreciation on investments........................................... 5,972,813
-----------
Net increase in net assets resulting from operations.......................................................... $41,664,312
===========
</TABLE>
See Notes to Financial statements.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
SteinRoe Variable Investment Trust Managed Assets Fund
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995
------------ -------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 10,512,405 $ 8,566,666
Net realized gains on investments and foreign currency 25,179,094 779,937
Change in unrealized appreciation or depreciation on investments 5,972,813 28,886,194
------------ ------------
Net increase in net assets resulting from operations 41,664,312 50,232,797
------------ ------------
DISTRIBUTIONS DECLARED FROM:
Net investment income -- (8,589,529)
Distributions in excess of net investment income -- (192,094)
Net realized losses on investments -- (12,796,378)
Distributions in excess of net realized gains on investments -- (135,229)
------------ ------------
Total distributions -- (21,713,230)
------------ ------------
FUND SHARE TRANSACTIONS:
Proceeds from fund shares sold 23,322,625 21,591,908
Cost of fund shares repurchased (42,816,350) (40,012,684)
Distributions reinvested -- 21,713,230
Strategic Managed Assets Fund Substitution -- 48,923,531
------------ ------------
Net increase (decrease) in net assets resulting from fund share transactions (19,493,725) 52,215,985
------------ ------------
Total increase in net assets 22,170,587 80,735,552
NET ASSETS:
Beginning of year 277,013,633 196,278,081
------------ ------------
End of year 299,184,220 277,013,633
============ ============
Accumulated undistributed (overdistributed) net investment income
included in ending net assets $ 10,358,564 $ (192,094)
============ ============
ANALYSIS OF CHANGES IN SHARES OF BENEFICIAL INTEREST:
Shares sold 1,550,496 1,590,395
Shares repurchased (2,845,909) (2,911,681)
Distributions reinvested -- 1,549,182
Strategic Managed Assets Fund Substitution -- 3,333,520
------------ ------------
Net increase (decrease) (1,295,413) 3,561,416
============ ============
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SteinRoe Variable Investment Trust Managed Assets Fund
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 14.08 $ 12.18 $ 13.11 $ 12.54 $ 12.54
--------- --------- --------- --------- ---------
Net investment income........................................ 0.57 0.48 0.51 0.38 0.45
Net realized and unrealized gains (losses)
on investments............................................ 1.63 2.61 (0.93) 0.78 0.49
--------- --------- --------- --------- ----------
Total from investment operations............................. 2.20 3.09 (0.42) 1.16 0.94
--------- --------- --------- --------- ---------
Less distributions:
Dividends from and in excess of net investment income..... -- (0.48) (0.51) (0.36) (0.46)
Distributions from and in excess of net realized gains
on investments.......................................... -- (0.71) -- (0.23) (0.48)
--------- --------- --------- --------- ---------
Total distributions.......................................... -- (1.19) (0.51) (0.59) (0.94)
--------- --------- --------- --------- ---------
Net asset value, end of year................................. $ 16.28 $ 14.08 $ 12.18 $ 13.11 $ 12.54
======== ======== ======== ======== ========
TOTAL RETURN:
Total investment return...................................... 15.63% 25.43% (3.19)% 9.29% 7.53%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)............................ $299,184 $277,014 $196,278 $197,132 $113,572
Ratio of expenses to average net assets...................... 0.67% 0.66% 0.68% 0.69% 0.66%
Ratio of net investment income to average net assets......... 3.68% 3.12% 4.01% 3.55% 3.98%
Portfolio turnover ratio (a)................................. 76% 66% 71% 47% 70%
Average Commissions (per share).............................. $0.0547 -- -- -- --
</TABLE>
(a) The portfolio turnover ratio includes dollar roll transactions.
See Notes to Financial Statements.
<PAGE>
- -------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
SteinRoe Variable Investment Trust Mortgage Securities Income Fund /
December 31, 1996
- -------------------------------------------------------------------------------
MARKET
PAR VALUE
--------- -----------
ASSET-BACKED SECURITIES--(4.5%)
ALPS Pass-Through Trust Series 1994-1
Class C2 9.350% 9/15/04 $ 994,927 $1,019,761
First Boston Home Equity Loan Pass-
Through Certificates Series 1993-H1,
Class A-IO (effective yield 12.820%)
9/28/13 6,652,285 258,641
Greentree Home Improvement Loan
Trust Series 1994-A Class A
7.050% 3/15/14 756,937 760,556
Green Tree Financial Corporation
Series 1996-9 Class B1
7.650% 1/15/28 1,350,000 1,360,328
----------
TOTAL ASSET-BACKED SECURITIES
(Cost $3,343,062) 3,399,286
----------
MORTGAGE-BACKED SECURITIES--(11.7%)
American Mortgage Trust Series 1993-3
Class 3B 8.190% 9/27/22 804,745 762,359
Citicorp Mortgage Securities, Inc.
Series 1987-10 10.000% 7/01/17 169,209 176,308
Comfed Savings Bank Adjustable Rate
Mortgage Series 1987-1A
7.642% 1/01/18 161,800 137,530
Glendale Federal Savings & Loan
Series 1978-A 9.125% 1/25/08 32,177 33,616
Imperial Savings & Loan Adjustable
Rate Mortgage Series 1987-4A
10.169% 7/25/17 33,070 35,601
Kidder Peabody Acceptance Corp
Series 1987-1 Class A
8.750% 7/25/17 42,038 41,653
MDC Mortgage Funding Corporation
Series Q Class 5 8.850% 3/20/18 346,704 353,469
Merrill Lynch Mortgage Investments Inc.
8.000% 12/20/18 Series 20-D 1,554,035 1,569,902
7.088% 12/26/25 Series 1995-C3
Class A3 ARM 2,000,000 1,986,880
5.880% 11/15/26 Series 1987-A ARM 104,672 104,175
Nomura Asset Securities Corporation
MBS Series 1996-MD5 Class A1B
7.120% 4/13/36 1,000,000 1,006,560
PS CMO Trust Series 1994-C1-A2
7.920% 8/15/02 722,486 741,545
Republic Federal Savings & Loan
Association Series 1987-1
7.500% 2/28/17 7,662 7,572
Sears Mortgage Securities Corp.
Series 1987-A 6.500% 3/25/17 25,083 24,437
<PAGE>
MARKET
PAR VALUE
--------- -----------
MORTGAGE-BACKED SECURITIES (CONTINUED)
Structured Asset Securities Corporation
Series 1996-CFL Class X1-IO
(effective yield 12.960%) 2/25/28 $13,138,526 $ 680,576
Series 1996-CFL Class C
6.525% 2/25/28 1,242,500 1,214,544
-----------
TOTAL MORTGAGE-BACKED SECURITIES
(Cost $8,887,046) 8,876,727
-----------
UTILITY SECURITIES--(2.7%)
National Power Co. Plc 7.125% 7/11/01
(Cost $1,997,260) 2,000,000 2,027,240
-----------
FEDERAL HOME LOAN MORTGAGE
CORPORATION CERTIFICATES--(20.0%)
8.500% 5/01/06 Gold 160,471 167,340
6.500% various due dates to
6/01/09 Gold 1,942,551 1,907,352
10.750% 11/01/09 269,233 293,085
11.250% various due dates to 11/01/15 120,673 134,890
10.500% various due dates to 2/01/19 442,298 484,732
12.000% 7/01/13 91,925 104,478
12.000% 7/01/20 Gold 1,138,845 1,302,555
7.500% various due dates to
5/01/24 Gold 8,523,778 8,580,240
7.000% 1/01/26 2,258,541 2,216,622
-----------
TOTAL FEDERAL HOME LOAN MORTGAGE
CORPORATION CERTIFICATES
(Cost $14,984,617) 15,191,294
-----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION CERTIFICATES--(32.8%)
10.500% 2/01/01 136,242 143,310
12.250% 9/01/12 FHA/VA
Guaranteed 85,485 97,932
10.250% 2/01/16 161,290 177,343
10.000% various due dates to 3/01/16 392,493 423,916
9.000% various due dates to 5/01/20 299,215 318,204
8.500% various due dates to 12/01/24 890,810 929,490
6.000% various due dates to 2/01/25 13,597,779 12,994,139
7.000% various due dates to 8/01/25 5,735,886 5,701,769
6.500% various due dates to 1/01/26 4,326,663 4,128,119
-----------
TOTAL FEDERAL NATIONAL MORTGAGE
ASSOCIATION CERTIFICATES
(Cost $24,904,700) 24,914,222
-----------
<PAGE>
SCHEDULE OF INVESTMENTS MARKET
(CONTINUED) PAR VALUE
--------- -----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION CERTIFICATES--(18.7%)
11.500% various due dates to 5/15/13 $ 512,320 $ 582,282
8.500% 2/15/17 213,841 225,470
10.000% various due dates to 11/15/19 741,110 812,442
9.000% various due dates to 1/15/20 2,132,742 2,279,990
8.000% various due dates to 8/15/22 3,448,662 3,558,532
9.500% various due dates to 8/15/22 2,408,989 2,615,059
7.000% 4/15/23 559,944 551,197
6.500% various due dates to 7/15/24 919,066 880,673
7.125% 7/20/25 ARM 2,675,648 2,736,466
-----------
TOTAL GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION CERTIFICATES
(Cost $14,162,923) 14,242,111
-----------
REAL ESTATE MORTGAGE INVESTMENT
CONDUITS--(2.0%)
Federal Home Loan Mortgage
Corporation Series 11-C
9.500% 4/15/19 90,601 93,718
Federal National Mortgage Association
Trust Series 1988-4Z
9.250% 3/25/18 1,342,097 1,397,781
Federal National Mortgage Association
Trust Series 1991-91SA-IO
(effective yield 14.400%) 7/25/98 10,705 59,784
-----------
TOTAL REAL ESTATE MORTGAGE
INVESTMENT CONDUITS
(Cost $1,546,694) 1,551,283
-----------
MARKET
PAR VALUE
--------- -----------
U.S. GOVERNMENT SECURITIES--(5.8%)
U.S. Treasury Bonds
6.500% 8/15/05 $ 750,000 $ 754,515
6.750% 8/15/26 2,350,000 2,368,142
U.S. Treasury Note 7.000% 7/15/06 1,250,000 1,298,513
-----------
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $4,406,294) 4,421,170
-----------
SHORT-TERM INVESTMENTS--(0.9%)
Goldman Sachs Group Ltd. 8.250% 1/02/97
(Cost $689,842) 690,000 689,842
-----------
TOTAL INVESTMENTS--(99.1%)
(Cost $74,922,438) 75,313,175
OTHER ASSETS, LESS LIABILITIES (0.9%) 695,976
-----------
NET ASSETS (100%) $76,009,151
===========
(a) The cost of investments for federal income tax purposes is identical.
Gross unrealized appreciation and depreciation at December 31, 1996 is as
follows:
Gross unrealized appreciation: $962,495
Gross unrealized depreciation: (571,758)
----------
Net unrealized appreciation: $390,737
==========
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SteinRoe Variable Investment Trust Mortgage Securities Income Fund / December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at market value (identified cost $74,922,438)...................................................... $75,313,175
Cash ........................................................................................................... 52,560
Interest receivable............................................................................................. 681,400
Other assets.................................................................................................... 32,705
-----------
TOTAL ASSETS............................................................................................... 76,079,840
-----------
LIABILITIES:
Payable for fund shares repurchased............................................................................. 4,031
Management fee payable.......................................................................................... 24,181
Administrative fee payable...................................................................................... 9,063
Accrued expenses payable........................................................................................ 33,414
-----------
TOTAL LIABILITIES.......................................................................................... 70,689
-----------
NET ASSETS...................................................................................................... $76,009,151
===========
NET ASSETS REPRESENTED BY:
Paid-in capital.............................................................................................. $78,959,171
Accumulated overdistributed net investment income............................................................ (299,012)
Accumulated net realized losses on investments............................................................... (3,041,745)
Net unrealized appreciation on investments................................................................... 390,737
-----------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES OF BENEFICIAL INTEREST........................................ $76,009,151
===========
SHARES OF BENEFICIAL INTEREST OUTSTANDING....................................................................... 7,724,091
===========
NET ASSET VALUE PER SHARE....................................................................................... $9.84
=====
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
INTEREST INCOME................................................................................................. $ 6,202,847
-----------
EXPENSES:
Management fee............................................................................................... 334,914
Administrative fee........................................................................................... 125,593
Custodian fee................................................................................................ 27,650
Accounting fee............................................................................................... 25,829
Audit and legal fees......................................................................................... 23,449
Printing expense............................................................................................. 8,922
Trustees' expense............................................................................................ 7,787
Transfer agent fee........................................................................................... 7,500
Miscellaneous expense........................................................................................ 39,287
-----------
Gross expenses............................................................................................. 600,931
Fee refund................................................................................................... (14,831)
-----------
Net expenses............................................................................................... 586,100
-----------
Net investment income........................................................................................... 5,616,747
REALIZED AND UNREALIZED LOSSES ON INVESTMENTS:
Net realized losses on investments........................................................................... (196,495)
Change in unrealized appreciation or depreciation on investments............................................. (1,957,496)
------------
Net increase in net assets resulting from operations............................................................ $ 3,462,756
===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
SteinRoe Variable Investment Trust Mortgage Securities Income Fund
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995
------------ -------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 5,616,747 $ 5,354,601
Net realized gains (losses) on investments (196,495) 653,056
Change in unrealized appreciation or depreciation on investments (1,957,496) 5,388,182
------------ ------------
Net increase in net assets resulting from operations 3,462,756 11,395,839
------------ ------------
DISTRIBUTIONS DECLARED FROM:
Net investment income (5,616,747) (5,354,601)
Distributions in excess of net investment income (83,288) (145,396)
------------ ------------
Total distributions (5,700,035) (5,499,997)
------------ ------------
FUND SHARE TRANSACTIONS:
Proceeds from fund shares sold 4,581,248 6,851,307
Cost of fund shares repurchased (33,813,119) (14,865,209)
Distributions reinvested 5,700,035 5,499,997
Colonial-Keyport Government Fund Substitution -- 25,976,819
------------ ------------
Net increase (decrease) in net assets resulting from fund share transactions (23,531,836) 23,462,914
------------ ------------
Total increase (decrease) in net assets (25,769,115) 29,358,756
NET ASSETS:
Beginning of year 101,778,266 72,419,510
------------ ------------
End of year 76,009,151 101,778,266
============ ============
Accumulated overdistributed net investment income included in ending net assets $ (299,012) $ (129,284)
============ ============
ANALYSIS OF CHANGES IN SHARES OF BENEFICIAL INTEREST:
Shares sold 447,078 680,330
Shares redeemed (3,321,354) (1,486,896)
Distributions reinvested 579,272 542,406
Colonial-Keyport Government Fund Substitution -- 2,477,593
------------ ------------
Net increase (decrease) (2,295,004) 2,213,433
============ ============
</TABLE>
See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SteinRoe Variable Investment Trust Mortgage Securities Income Fund
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 10.16 $ 9.28 $ 10.17 $ 10.26 $ 10.42
------- -------- ------- ------- -------
Net investment income........................................ 0.78 0.57 0.73 0.65 0.63
Net realized and unrealized gains (losses)
on investments............................................ (0.30) 0.89 (0.89) (0.01) (0.01)
------- -------- ------- ------- -------
Total from investment operations............................. 0.48 1.46 (0.16) 0.64 0.62
------- -------- ------- ------- -------
Less distributions:
Dividends from and in excess of net investment income..... (0.80) (0.58) (0.73) (0.65) (0.62)
Distributions from and in excess of net realized gains
on investments.......................................... -- -- -- (0.08) (0.16)
------- -------- ------- ------- -------
Total distributions.......................................... (0.80) (0.58) (0.73) (0.73) (0.78)
------- -------- ------- ------- -------
Net asset value, end of year................................. $ 9.84 $ 10.16 $ 9.28 $ 10.17 $ 10.26
======= ======== ======= ======= =======
TOTAL RETURN:
Total investment return...................................... 4.70% 15.74% (1.57)%(b) 6.26%(b) 5.95%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)............................ $76,009 $101,778 $72,420 $91,195 $67,353
Ratio of expenses to average net assets...................... 0.70%(a) 0.69% 0.70%(a) 0.76%(a) 0.90%
Ratio of net investment income to average net assets......... 6.71%(b) 6.76% 6.71%(b) 6.64%(b) 6.72%
Portfolio turnover ratio (c)................................. 72% 112% 241% 187% 169%
</TABLE>
(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 0.72%, 0.71%, and 0.76%
for the years ended December 31, 1996, 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.
<PAGE>
- -------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
SteinRoe Variable Investment Trust Cash Income Fund / December 31, 1996
- -------------------------------------------------------------------------------
MARKET
PAR VALUE
--------- -----------
COMMERCIAL PAPER--(79.3%)
BUSINESS CREDIT INSTITUTION--(18.2%)
Finova Capital Corp. 5.801% 1/13/97 $3,000,000 $ 2,994,300
General Motors Acceptance Corp.
5.526% 1/02/97 3,000,000 2,999,542
NS Finance Inc. (L.O.C. Industrial
Bank of Japan Ltd.) 5.761% 1/22/97 3,000,000 2,989,973
Orix America Inc. (L.O.C.
Norinchukin Bank) 5.754% 3/18/97 3,000,000 2,964,533
-----------
11,948,348
-----------
COSMETICS--(4.6%)
Cosmair Inc. (gtd. by L'Oreal SA)
6.028% 1/24/97 3,000,000 2,988,500
-----------
INDUSTRIAL--(9.2%)
CSC Enterprises 5.529% 1/14/97 3,100,000 3,093,843
Whirlpool Corp. 5.487% 3/20/97 3,000,000 2,964,900
-----------
6,058,743
-----------
INVESTING INSTITUTIONS--(4.6%)
Enterprise Funding Corp.
5.789% 1/09/97 3,000,000 2,996,153
-----------
LENDING INSTITUTIONS--(13.7%)
Oak Funding Corp. 5.520% 3/04/97 3,000,000 2,971,842
Old Line Funding Corp.
5.503% 1/13/97 3,000,000 2,994,530
Windmill Funding Corp.
6.016% 1/09/97 3,000,000 2,996,000
-----------
8,962,372
-----------
OTHER FINANCIAL--(25.3%)
Beta Finance Corp. 6.038% 1/30/97 1,000,000 995,167
Countrywide Home Loan (gtd. by
Countrywide Credit Industries)
5.706% 1/07/97 3,000,000 2,997,155
ITT Hartford Group Inc.
6.158% 1/08/97 1,955,000 1,952,662
McKenna Triangle National Corp.
6.460% 1/02/97 1,608,000 1,607,711
Thames Asset Global Securitization
5.577% 1/06/97 3,000,000 2,997,688
Tri-Lateral Capital USA
5.630% 1/15/97 3,000,000 2,993,466
Working Capital Management
5.748% 1/16/97 3,000,000 2,992,850
-----------
16,536,699
-----------
<PAGE>
MARKET
PAR VALUE
--------- -----------
RUBBER--(3.7%)
Bridgestone/Firestone, Inc.
(L.O.C. Fuji Bank Ltd.)
5.726% 1/15/97 $2,419,000 $ 2,413,638
-----------
TOTAL COMMERCIAL PAPER
(Cost $51,904,453) 51,904,453
-----------
SOVEREIGN--(4.3%)
Venantius AB (gtd. by Kingdom of Sweden)
5.514% 3/04/97
(Cost $2,823,250) 2,850,000 2,823,250
-----------
U.S. GOVERNMENT AGENCY OBLIGATION--(5.3%)
Federal Home Loan Banks 5.750%
Optional Call 4/09/97
(Cost $3,500,000) 3,500,000 3,500,000
-----------
YANKEE CERTIFICATES OF DEPOSIT--(13.8%)
Fuji Bank Chicago Ltd.
5.690% 1/14/97 3,000,000 3,000,011
Sanwa Bank Ltd. 5.740% 1/13/97 3,000,000 2,999,939
Sumitomo Bank Ltd 5.660% 1/13/97 3,000,000 3,000,010
-----------
TOTAL YANKEE CERTIFICATES OF DEPOSIT
(Cost $8,999,960) 8,999,960
-----------
TOTAL INVESTMENTS--(102.7%)
(Cost $67,227,663) (a) 67,227,663
OTHER ASSETS, LESS LIABILITIES (-2.7%) (1,766,271)
-----------
NET ASSETS (100%) $65,461,392
===========
(a) The cost of investments for federal income tax purposes is
identical. There is no unrealized appreciation or depreciation
at December 31, 1996.
*The interest rate is the effective rate at the date of purchase.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SteinRoe Variable Investment Trust Cash Income Fund / December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at market value (identified cost $67,227,663)...................................................... $67,227,663
Cash ........................................................................................................... 50,591
Receivable for fund shares sold................................................................................. 1,722,061
Dividends and interest receivable............................................................................... 28,414
Other assets.................................................................................................... 9,432
-----------
TOTAL ASSETS............................................................................................... 69,038,161
-----------
LIABILITIES:
Payable for investments purchased............................................................................... 3,500,000
Payable for fund shares repurchased............................................................................. 12,353
Management fee payable.......................................................................................... 17,886
Administrative fee payable...................................................................................... 7,953
Accrued expenses payable........................................................................................ 38,577
-----------
TOTAL LIABILITIES.......................................................................................... 3,576,769
-----------
NET ASSETS...................................................................................................... $65,461,392
===========
NET ASSETS REPRESENTED BY:
Paid-in capital.............................................................................................. $65,461,392
-----------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES OF BENEFICIAL INTEREST........................................ $65,461,392
===========
SHARES OF BENEFICIAL INTEREST OUTSTANDING....................................................................... 65,461,392
===========
NET ASSET VALUE PER SHARE....................................................................................... $1.00
=====
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the year ended December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
INTEREST INCOME................................................................................................. $3,641,641
----------
EXPENSES:
Management fee............................................................................................... 229,758
Administrative fee........................................................................................... 98,468
Custodian fee................................................................................................ 20,564
Accounting fee............................................................................................... 25,463
Audit and legal fees......................................................................................... 18,466
Transfer agent fee........................................................................................... 7,500
Printing expense............................................................................................. 5,444
Trustees' expense............................................................................................ 6,755
Miscellaneous expense........................................................................................ 14,858
----------
Total expenses............................................................................................. 427,276
----------
Net investment income........................................................................................... 3,214,365
----------
Net increase in net assets resulting from operations............................................................ $3,214,365
==========
</TABLE>
See Notes top Financial Statements
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
SteinRoe Variable Investment Trust Cash Income Fund
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995
------------ -------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 3,214,365 $ 3,775,313
----------- -----------
Net increase in net assets resulting from operations 3,214,365 3,775,313
----------- -----------
DISTRIBUTIONS DECLARED FROM:
Net investment income (3,214,365) (3,775,313)
----------- -----------
FUND SHARE TRANSACTIONS:
Proceeds from fund shares sold 57,327,084 56,499,769
Cost of fund shares repurchased (60,072,108) (73,981,455)
Distributions reinvested 3,214,365 3,775,313
----------- -----------
Net increase (decrease) in net assets resulting from fund share transactions 469,341 (13,706,373)
----------- -----------
Total increase (decrease) in net assets 469,341 (13,706,373)
NET ASSETS:
Beginning of year 64,992,051 78,698,424
----------- -----------
End of year 65,461,392 64,992,051
=========== ===========
ANALYSIS OF CHANGES IN SHARES OF BENEFICIAL INTEREST:
Shares sold 57,327,084 56,499,769
Shares repurchased (60,072,108) (73,981,455)
Distributions reinvested 3,214,365 3,775,313
----------- -----------
Net increase (decrease) 469,341 (13,706,373)
=========== ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SteinRoe Variable Investment Trust Cash Income Fund
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<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 0.049 0.055 0.037 0.027 0.034
------- ------- ------- ------- -------
Less distributions:
Distributions from net investment income (0.049) (0.055) (0.037) (0.027) (0.034)
------- ------- ------- ------- -------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
TOTAL RETURN:
Total investment return 5.01% 5.62% 3.81% 2.70% 3.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $65,461 $64,992 $78,698 $83,049 $70,821
Ratio of expenses to average net assets 0.65% 0.63% 0.62% 0.65% 0.67%
Ratio of net investment income to average net assets 4.90% 5.48% 3.73% 2.68% 3.42%
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES
SteinRoe Variable Investment Trust (the "Trust"), an open-end man age ment
investment company, was organized as a Massachusetts business trust on June 9,
1987. At December 31, 1996, 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--seeks capital growth by investing in
equity securities
Managed Growth Stock Fund--seeks long-term growth of capital by investing
65 percent of total assets in growth companies
Managed Assets Fund--seeks high total investment return by investing in
equity and debt securities
Mortgage Securities Income Fund--seeks highest possible level of current
income by investing at least 65 percent of total assets in mortgage
pass-through certificates
Cash Income Fund--seeks 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
insurance companies and, in the case of Capital Appreciation Fund, also of
Transamerica Life Companies and Great-West Life & Annuity Insurance Company.
Stein Roe 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., a subsidiary of Keyport Life Insurance Company ("Keyport"),
serves as the underwriter of the Trust. Keyport, the Adviser and the Transfer
Agent are direct subsidiaries of Liberty Financial Companies, Inc. At December
31, 1996, various affiliated insurance companies of Liberty Financial
Companies Inc. owned 100 percent of the outstanding shares of all Funds,
except for Capital Appreciation Fund, of which Liberty Financial Companies
Inc. affiliates owned 94.1 percent, Transamerica Life Companies owned 5.5
percent and Great-West Life & Annuity Insurance Company owned 0.4 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. 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.
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
delivery 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.
Managed Assets Fund and 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 days to 60 days, substantially similar
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
securities at an agreed upon price and date. 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--Mortgage Securities Income Fund has 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,
as of December 31, 1996, the Fund reclassified $86,439 reflecting a decrease
in accumulated net investment income and a decrease in accumulated net
realized losses on investments. Net investment income, net realized gains
(losses) on investments, and net assets were not affected by this change.
There were no reclassifications of distributions for any of the other funds.
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
nonassessable. Shareholders would be entitled to share proportionally in the
net assets of a Fund available for distribution to shareholders upon
liquidation of a Fund.
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, 1996,
Mortgage Securities Income Fund had a capital loss carryforward of $3,041,745,
which will expire between 2002 and 2004, if not utilized. The cost of
<PAGE>
investments purchased and proceeds from investments sold, excluding short-term
investments, for the year ended December 31, 1996, for the Funds, excluding
Cash Income Fund, were as follows:
MORTGAGE
CAPITAL MANAGED MANAGED SECURITIES
APPRECIATION GROWTH ASSETS INCOME
FUND STOCK FUND FUND FUND
------------ ------------ ---------- -------------
Cost of investments
purchased $161,131,031 $49,254,886 $222,176,324 $58,722,319
Proceeds from
investments sold 156,425,956 50,420,471 202,590,094 67,957,054
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. Cash Income Fund declares dividends daily and
reinvests all dividends declared monthly in additional shares at net asset
value. Income and capital gains 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 principal
paydowns.
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,
1996:
ANNUAL RATE(S) AS A
PERCENT OF
FUND(S) AVERAGE DAILY NET ASSETS
------- ----------------------
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%
As of December 31, 1996, 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, 1996, Capital Appreciation Fund,
Managed Growth Stock Fund, Managed Assets Fund, Mortgage Securities Income
Fund and Cash Income Fund incurred charges of $28,258, $27,448, $30,900,
$25,829, and $25,463, 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Adviser has agreed to reimburse all expenses, including management fees,
incurred by the Funds as follows:
FUND(S) EXPENSES EXCEEDING
------- -------------------------
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, 1997.
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"), and (ii) shares of Mortgage
Securities Income Fund ("MSIF") for shares of Colonial-Keyport Government Fund
("CKGF"). CKGF is a 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; and $25,976,819 of MSIF, which were
substituted for shares of CKGF.
<PAGE>
STEINROE VARIABLE INVESTMENT TRUST
CAPITAL APPRECIATION FUND
Federal Reserve Plaza
600 Atlantic Avenue, Boston, Massachusetts 02210
Statement of Additional Information
Dated May 1, 1997
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, 1997 and any supplement
thereto. The Prospectus may be obtained at no charge by calling or writing the
broker-dealer offering the Participating Insurance Company's variable annuity
contracts.
TABLE OF CONTENTS
Page
Commencement of Operations.................................S-2
Mixed and Shared Funding...................................S-2
Investment Restrictions....................................S-2
Portfolio Turnover.........................................S-5
Purchases and Redemptions..................................S-6
Trustees and Officers......................................S-6
Management Arrangements....................................S-8
Trust Charges and Expenses.................................S-9
Custodian.................................................S-10
Portfolio Transactions....................................S-10
Net Asset Value...........................................S-13
Investment Performance....................................S-13
Record Shareholders.......................................S-14
Independent Auditors and Financial Statements.............S-15
Appendix A................................................S-16
<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 that commenced operations on January 1,
1989. 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." 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
The Trust serves as a funding medium for VA contracts and VLI policies
of Participating Insurance Companies, so-called mixed and shared funding.
Certain Participating Insurance Companies are affiliated with the Adviser to the
Fund. The Fund may from time to time become a funding vehicle for VA contracts
and VLI policies of other Participating Insurance Companies, including
non-affiliated entities and entities affiliated with Stein Roe & Farnham
Incorporated (Adviser) or Liberty Mutual Insurance Company.
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;
S-2
<PAGE>
(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 :
S-3
<PAGE>
(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:
S-4
<PAGE>
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 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 portfolio.
S-5
<PAGE>
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 (NYSE) is open
for trading. The NYSE 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 NYSE will be closed on the preceding
Friday or the following Monday, respectively. Net asset value will not be
determined on days when the NYSE 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 NYSE is
restricted, as determined by the Commission, or the NYSE 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:
<TABLE>
<CAPTION>
Position(s) held Principal occupations
Name and Address Age with the Trust during past five years
---------------- --- ---------------- ----------------------
<S> <C> <C> <C>
Richard R. Christensen(1) President and Trustee President, Liberty Investment Services,
Federal Reserve Plaza Inc.; since 1994, President, Liberty Asset
600 Atlantic Avenue Management Company
Boston, MA 02210
John A. Bacon Jr. Trustee Private investor; Director, Duplex Products,
4N640 Honey Hill Road Inc.
Box 296
Wayne, IL 60184
Salvatore Macera Trustee Private investor
20 Rowes Wharf
Boston, MA 02109
Dr. Thomas E. Stitzel Trustee Professor of Finance, College of Business,
2208 Tawny Woods Place Boise State University; business consultant
Boise, ID 83706 and author
- ----------
(1) Trustee who is an "interested person," as defined in the Investment
Company Act of 1940, of the Trust, the Adviser or a Participating Insurance
Company which is an affiliate of the Trust or the Adviser.
S-6
<PAGE>
Gary A. Anetsberger 41 Treasurer Senior Vice President, Stein Roe & Farnham
One South Wacker Drive Incorporated since April 1996; Vice
Chicago, IL 60606 President prior thereto
Sharon R. Robertson 35 Controller Associate, Stein Roe & Farnham Incorporated
One South Wacker Drive
Chicago, IL 60606
Richard B. Peterson 56 Vice President Senior Vice President, Stein Roe & Farnham
One South Wacker Drive Incorporated
Chicago, IL 60606
E. Bruce Dunn 63 Vice President Senior Vice President, Stein Roe & Farnham
One South Wacker Drive Incorporated.
Chicago, IL 60606
Harvey B. Hirschhorn 47 Vice President Executive Vice President, Stein Roe &
One South Wacker Drive Farnham Incorporated
Chicago, IL 60606
Michael T. Kennedy 35 Vice President Senior Vice President (October 1994 to
One South Wacker Drive present), Vice President (1992 to October
Chicago, IL 60606 1994), Stein Roe & Farnham Incorporated
Jane M. Naeseth 47 Vice President Senior Vice President, Stein Roe & Farnham
One South Wacker Drive Incorporated
Chicago, IL 60606
Erik P. Gustafson 33 Vice President Senior Vice President (April 1996 to
One South Wacker Drive present), Vice President (1994 to present),
Chicago, IL 60606 Associate (1992-1994), Stein Roe & Farnham
Incorporated
Timothy K. Armour 48 Vice President President, Mutual Funds division, Stein Roe
One South Wacker Drive & Farnham Incorporated since June 1992;
Chicago, IL 60606 Senior Vice and Director of Marketing of
Citibank Illinois, prior thereto
Jilaine Hummel Bauer 41 Vice President Senior Vice President, Stein Roe & Farnham
One South Wacker Drive Incorporated
Chicago, IL 60606
John A. Benning 62 Secretary Senior Vice President, General Counsel and
Federal Reserve Plaza Secretary, Liberty Financial Companies, Inc.
600 Atlantic Avenue
Boston, MA 02210
S-7
<PAGE>
Kevin M. Carome 41 Assistant Secretary Since August 1993, Associate General Counsel
Federal Reserve Plaza and (since February 1995) Vice President,
600 Atlantic Avenue Liberty Financial Companies, Inc.; prior
Boston, MA 02210 thereto, Associate, Ropes & Gray, Boston,
Massachusetts
</TABLE>
As indicated in the above table, certain Trustees and officers of the
Trust also hold positions with Stein Roe & Farnham Incorporated, LFC and/or
their affiliates. Certain of the Trustees and certain officers of the Trust hold
comparable positions with certain other investment companies managed by Stein
Roe & Farnham Incorporated or sponsored by other affiliates of LFC.
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
Aggregate 1996 Trust and Affiliated Investment
Name of Trustee Compensation* Companies in 1996**
--------------- -------------- --------------------------------
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. Beginning in 1997, the fee for meetings
attended in person has been increased to $3,000 per meeting.
**Includes Trustee fees paid by the Trust and by Keyport Variable Investment
Trust.
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 wholly owned direct subsidiary of
SteinRoe Services, Inc., which in turn is a wholly owned direct subsidiary of
LFC. LFC, in turn, is an indirect majority owned subsidiary of Liberty Mutual.
The directors of the Adviser are Kenneth R. Leibler, Harold W. Cogger,
C. Allen Merritt, Jr., Hans P. Ziegler, and Timothy K. Armour. Mr. Leibler is
President and Chief Executive Officer of LFC; Mr. Cogger is Executive Vice
President of LFC; Mr. Merritt is Executive Vice President and Treasurer of LFC;
Mr. Ziegler is Chairman and Chief Executive Officer of the Adviser; and Mr.
Armour is President of the Adviser's Mutual Funds division. The business address
of Messrs. Leibler, Cogger and Merritt is
S-8
<PAGE>
Federal Reserve Plaza, 600 Atlantic Avenue, Boston, Massachusetts, 02210; that
of Messrs. Ziegler and Armour 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
Advisory Agreement and pays all compensation of the Trustees, officers and
employees who are employees of the Adviser.
The 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 1996, 1995 and 1994, respectively, pursuant to the
advisory contract described in the Prospectus, the Fund paid the Adviser
management fees in the amount of $850,612, $690,902, and $583,720, respectively.
Administrative Expenses:
During fiscal 1996, 1995 and 1994, pursuant to the Administration
Agreement described above, the Fund paid the Adviser or an affiliate thereof
administration fees in the amount of $255,184, $207,244 and $175,116,
respectively. In addition, during fis-
S-9
<PAGE>
cal 1996 the Fund paid the Adviser or an affiliate thereof $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, 1998.
Pursuant to such limit, the Fund's total expenses were reduced in 1996 by ____.
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 sub-custodial 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
S-10
<PAGE>
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 portion 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. The Adviser may also receive research in connection with
selling concessions and designations in fixed price offerings in which the Fund
participates. 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
Conduct 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
S-11
<PAGE>
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 arrangements with sponsors of programs
for the sale of VA contracts issued by Participating Insurance Companies which
are not affiliates of the Adviser pursuant to which the Adviser pays the sponsor
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 such
Participating Insurance Companies, in respect of VA contracts issued by such
entities and sold to through such arrangements. 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 the 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 Conduct 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
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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 periods indicated.
Total amount of brokerage commissions paid during fiscal
year ended 12/31/96............................................... $316,995
Amount of commissions paid to brokers or dealers who
supplied re- search services to the Adviser....................... $294,393
Total dollar amount involved in such transaction.................. $129,739,445
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.......................................................... $79,837
Total dollar amount involved in such transaction.................. $34,560,978
Total brokerage fees paid during fiscal year ended
12/31/95.......................................................... $485,545
Total brokerage fees paid during fiscal year ended
12/31/94.......................................................... $353,943
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:
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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 at the end 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, 1996) were:
Total Return Average Annual Total
Total Return Percentage Return
------------ ------------ --------------------
$3,647 264.75% 17.56%
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 Life
Insurance Company (Keyport), a Participating Insurance Company. At March 31,
1997 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 instruc-
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tions 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,
1997 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 Statement of Additional
Information 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, 1996 Annual Report
of the Trust are incorporated in this Statement of Additional Information by
reference.
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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 determine 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).
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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.
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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 index(2) or a specified
quantity of a foreign currency at a specified price and time. A public market
exists in futures contracts covering a number of indexes (including, but not
limited to, the Standard & Poor's 500 Stock Index, the Value Line Composite
Index and the New York Stock Exchange Composite Index), certain financial
instruments (including, but not limited to: U.S. Treasury bonds, U.S. Treasury
notes and Eurodollar certificates of deposit) and foreign currencies. Other
index and financial instrument futures contracts are available and it is
expected that additional futures contracts will be developed and traded.
The Fund 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
- ----------
(2) A futures contract on an index is an agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the index value at which the index contract was originally written.
Although the value of a securities index is a function of the value of certain
specified securities, no physical delivery of those securities is made.
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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 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 realizes a capital
gain, or if it is less, the Fund realizes a capital loss. The transaction costs
must also be included in these calculations.
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Risks Associated with Futures
There are several risks associated with the use of futures contracts
and futures options. A purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. There can be no
guarantee that there will be a correlation between price movements in the
hedging vehicle and in the portfolio securities being hedged. In addition, there
are significant differences between the securities and the currency markets and
the futures markets that could result in an imperfect correlation between the
markets, causing a given transaction not to achieve its objectives. The degree
of imperfection of correlation depends on circumstances such as: variations in
speculative market demand for futures, futures options and the related
securities or currencies, including technical influences in futures and futures
options trading and differences between the Fund's investments being hedged and
the securities or currencies underlying the standard contracts available for
trading. For example, in the case of index futures contracts, the composition of
the index, including the issuers and the weighting of each issue, may differ
from the composition of the Fund's portfolio, and, in the case of interest rate
futures contracts, the interest rate levels, maturities, and creditworthiness of
the issues underlying the futures contract may differ from the financial
instruments held in the Fund's portfolio. A decision as to whether, when and how
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
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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 ("CFTC")
Regulation 4.5 and thereby avoid being deemed a "commodity pool operator," the
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 the 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 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
- ----------
(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.
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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 option(4) other than a "qualified
covered call option," as defined in the Internal Revenue Code, any loss on such
option transaction, to the extent it does not exceed the unrealized gains on the
securities covering the option, may be subject to deferral until the securities
covering the option have been sold.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the earlier of delivery notice date or
expiration date. If 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
- ----------
(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).
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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
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
S-23
<PAGE>
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.
S-24
<PAGE>
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, 1996
Statements of Assets and Liabilities as of December 31, 1996
Statements of Operations for the year ended December 31, 1996
Statements of Changes in Net Assets for each of the years in the
two-year period ended December 31, 1996
Financial Highlights for each of the years in the five-year period
ended December 31, 1996
Said financial statements are included in this filing as part of Part
B.
C-1
<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]
C-2
<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)
C-3
<PAGE>
(i) Participation Agreement among the Trust, on behalf of the
Capital Appreciation Fund, Great-West Life & Annuity Insurance
Company, Stein Roe & Farnham Incorporated and Charles Schwab &
Co., Inc.
(j) Participation Agreement among the Trust, on behalf of the
Capital Appreciation Fund, Providian Life and Health Insurance
Company and Stein Roe & Farnham Incorporated.
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. Calculation of Yields and Total Returns (9)
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.
C-4
<PAGE>
(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).
(9) Incorporated by Reference to Post-Effective Amendment No. 12 to this
Registration Statement, filed April, 1996.
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 four 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, 1997, Liberty Mutual Insurance Company ("LMIC"),
Boston, Massachusetts, owned, indirectly, approximately 80.6% 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.
C-5
<PAGE>
Item 26. Number of Holders of Securities
As of March 31, 1997 the number of record holders of shares of
beneficial interest of each series ("Fund") of the Trust was as follows:
Title of Class Number of Record
Shares of Beneficial Interest of Holders
- -------------------------------- ----------------
Capital Appreciation Fund 17
Managed Growth Stock Fund 13
Managed Assets Fund 12
Mortgage Securities Income Fund 10
Cash Income Fund 17
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.
For a two-year business history of officers and directors of the
Adviser, please refer to the Form ADV of Stein Roe & Farnham Incorporated and to
the section of the Statement of Additional Information (Part B) entitled
"Investment Advisory Services."
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 the Registrant (as reflected in the Statement of Additional
Information (Part B)) or other investment companies managed by the Adviser.
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.
C-6
<PAGE>
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 and President None
William L. Dixon Vice President - Compliance None
Francis E.
Reinhart Vice President - Administration None
and Director
John E. Arant, III Vice President - Chief Sales Officer None
and Director
James J. Klopper Clerk None
Donald A. Truman Assistant 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.
C-7
<PAGE>
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.
C-8
<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 Amendment 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 25th day of April, 1997. 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 25, 1997
- -------------------------- Executive Officer;
Richard R. Christensen Trustee
/s/ Gary A. Anetsberger* Treasurer; Principal April 25, 1997
- ----------------------- Financial Officer
Gary A. Anetsberger
/s/ Sharon R. Robertson* Controller; Principal April 25, 1997
- ----------------------- Accounting Officer
Sharon R. Robertson
/s/ John A. Bacon Jr.* Trustee April 25, 1997
- ---------------------
John A. Bacon Jr.
/s/ Salvatore Macera * Trustee April 25, 1997
- ---------------------
Salvatore Macera
/s/ Thomas E. Stitzel* Trustee April 25, 1997
- ---------------------
Thomas E. Stitzel
*By /s/ Kevin M. Carome
-----------------------
Kevin M. Carome
Attorney-in-fact
C-9
<PAGE>
EXHIBIT LIST
================= ========================================================
Exhibit Description
================= ========================================================
9(i) Participation Agreement with Great-West Life & Annuity
Insurance Company
================= ========================================================
9(j) Participation Agreement with Providian Life and Health
Insurance Company
================= ========================================================
11 Consent of Independent Auditors
================= ========================================================
17 Financial Data Schedule
================= ========================================================
EXHIBIT 9(i)
TABLE OF CONTENTS
ARTICLE I. Sale of Fund Shares.................................3
ARTICLE II. Representations and Warranties......................7
ARTICLE III. Prospectuses and Proxy Statements; Voting..........10
ARTICLE IV. Sales Material and Information.....................13
ARTICLE V. Fees and Expenses..................................15
ARTICLE VI. Diversification and Qualification..................16
ARTICLE VII. Potential Conflicts and Compliance With
Shared Funding Exemptive Order ....................19
ARTICLE VIII. Indemnification ...................................22
ARTICLE IX. Applicable Law.....................................31
ARTICLE X. Termination........................................32
ARTICLE XI. Notices............................................35
ARTICLE XII. Miscellaneous......................................36
SCHEDULE A Contracts..........................................40
SCHEDULE B Designated Portfolios..............................41
SCHEDULE C Administrative Services............................42
SCHEDULE D Reports per Section 6.6............................43
SCHEDULE E Expenses...........................................46
<PAGE>
PARTICIPATION AGREEMENT
-----------------------
Among
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STEINROE VARIABLE INVESTMENT TRUST,
STEIN ROE & FARNHAM INCORPORATED
and
CHARLES SCHWAB & CO., INC.
THIS AGREEMENT, made and entered into as of this ____ day of
_______________, 1996 by and among GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(hereinafter "GWL&A"), a Colorado life insurance company, on its own behalf and
on behalf of its Separate Account Variable Annuity-1 Series Account (the
"Account"); STEINROE VARIABLE INVESTMENT TRUST, a business trust organized under
the laws of Massachusetts (hereinafter the "Fund"); STEIN ROE & FARNHAM
INCORPORATED (hereinafter the "Adviser"), a Delaware corporation; and CHARLES
SCHWAB & CO., INC., a California corporation (hereinafter "Schwab").
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and/or
variable annuity contracts (collectively, the "Variable Insurance Products") to
be offered by insurance companies, including GWL&A, which have entered into
participation agreements similar to this Agreement (hereinafter "Participating
Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each designated a "Portfolio" and representing the interest in
a particular managed portfolio of securities and other assets; and
1
<PAGE>
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission (hereinafter the "SEC"), dated July 1, 1988 (File No.
812-7044), granting Participating Insurance Companies and variable annuity and
variable life insurance separate accounts exemptions from the provisions of
sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as
amended, (hereinafter the "1940 Act") and Rules 6e- 2(b)(15) and 6e-3(T)(b)(15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity and variable life insurance separate accounts of
life insurance companies that may or may not be affiliated with one another
(hereinafter the "Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and shares of the Portfolio(s) are registered under
the Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and any applicable state
securities laws; and
WHEREAS, GWL&A has registered or will register certain variable annuity
contracts supported wholly or partially by the Account (the "Contracts") under
the 1933 Act and said Contracts are listed in Schedule A attached hereto and
incorporated herein by reference, as it may be amended from time to time by
mutual written agreement; and
WHEREAS, the Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of GWL&A on
July 24, 1995, to set aside and invest assets attributable to the Contracts; and
WHEREAS, GWL&A has registered the Account as a unit investment trust
under the 1940 Act and has registered the securities deemed to be issued by the
Account under the 1933 Act; and
2
<PAGE>
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, GWL&A intends to purchase shares in the Portfolio(s) listed in
Schedule B attached hereto and incorporated herein by reference, as it may be
amended from time to time by mutual written agreement (the "Designated
Portfolio(s)"), on behalf of the Account to fund the Contracts, and the Fund is
authorized to sell such shares to unit investment trusts such as the Account at
net asset value; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Account also intends to purchase shares in other open-end
investment companies or series thereof not affiliated with the Fund (the
"Unaffiliated Funds") on behalf of the Account to fund the Contracts; and
WHEREAS, Schwab will perform certain services for the Fund and Adviser
in connection with the Contracts;
NOW, THEREFORE, in consideration of their mutual promises, GWL&A,
Schwab, the Fund and the Adviser agree as follows:
ARTICLE I. Sale of Fund Shares
-------------------
1.1. The Fund agrees to sell to GWL&A those shares of the Designated
Portfolio(s) which the Account orders, executing such orders on each Business
Day at the net asset value next computed after receipt by the Fund or its
designee of the order for the shares of the Portfolios. For purposes of this
Section 1.1, GWL&A shall be the designee of the Fund for receipt of such orders
and receipt by such designee shall constitute receipt by the Fund, provided that
the Fund receives notice of any such order by 9:00 a.m. Eastern time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the SEC.
3
<PAGE>
1.2. The Fund agrees to make shares of the Designated Portfolio(s)
available for purchase at the applicable net asset value per share by GWL&A and
the Account on those days on which the Fund calculates its Designated
Portfolio(s)' net asset value pursuant to rules of the SEC, and the Fund shall
calculate such net asset value on each day which the New York Stock Exchange is
open for trading. Notwithstanding the foregoing, the Board of Trustees of the
Fund (hereinafter the "Board") may refuse to sell shares of any Portfolio to any
person, or suspend or terminate the offering of shares of any Portfolio if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Board acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.3. The Fund will not sell shares of the Designated Portfolio(s) to
any other Participating Insurance Company, separate account or any Qualified
Plan unless an agreement containing provisions substantially the same as
Sections 2.1, 3.5, 3.6, 3.7, and Article VII of this Agreement is in effect to
govern such sales.
1.4. The Fund agrees to redeem for cash, on GWL&A's request, any full
or fractional shares of the Fund held by GWL&A, executing such requests on each
Business Day at the net asset value next computed after receipt by the Fund or
its designee of the request for redemption. Requests for redemption identified
by GWL&A, or its agent, as being in connection with surrenders, annuitizations,
or death benefits under the Contracts, upon prior written notice, may be
executed within seven (7) calendar days after receipt by the Fund or its
designee of the requests for redemption. If permitted by an order of the SEC
under Section 22(e) of the 1940 Act, the Fund shall be permitted to delay
sending redemption proceeds to GWL&A beyond the foregoing deadlines; provided,
however, that the Account receives similar relief to defer paying proceeds to
Contractowners, and further, that the Account is treated no less favorably than
the other shareholders of the Designated Portfolio(s). This Section 1.4 may be
amended, in writing, by the parties consistent with the requirements of the 1940
Act and interpretations thereof. For purposes of this Section 1.4, GWL&A shall
be the designee of the Fund for receipt of requests for redemption and
4
<PAGE>
receipt by such designee shall constitute receipt by the Fund, provided that the
Fund receives notice of any such request for redemption by 9:00 A.M. Eastern
time on the next following Business Day.
1.5. The Parties hereto acknowledge that the arrangement contemplated
by this Agreement is not exclusive; the Fund's shares may be sold to other
Participating Insurance Companies (subject to Section 1.3 and Article VI hereof)
and the cash value of the Contracts may be invested in other investment
companies.
1.6. GWL&A shall pay for Fund shares by 11:00 a.m. Eastern time on the
next Business Day after an order to purchase Fund shares is made in accordance
with the provisions of Section 1.1 hereof. Payment shall be in federal funds
transmitted by wire and/or by a credit for any shares redeemed the same day as
the purchase.
1.7. The Fund shall pay and transmit the proceeds of redemptions of
Fund shares by 11:00 a.m. Eastern Time on the next Business Day after a
redemption order is received in accordance with Section 1.4 hereof. Payment
shall be in federal funds transmitted by wire and/or a credit for any shares
purchased the same day as the redemption.
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to GWL&A or the Account. Shares
ordered from the Fund will be recorded in an appropriate title for the Account
or the appropriate sub-account of the Account.
1.9. The Fund or its designee shall furnish same day notice (by wire or
telephone, followed by written confirmation) to GWL&A of any income, dividends
or capital gain distributions payable on the Designated Portfolio(s)' shares.
GWL&A hereby elects to receive all such income dividends and capital gain
distributions as are payable on the Portfolio shares in additional shares of
that Portfolio. GWL&A reserves the right to revoke this election and to receive
all such income dividends and capital gain distributions in cash.
5
<PAGE>
The Fund or its designee shall notify GWL&A by the end of the next following
Business Day of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each
Designated Portfolio available to GWL&A on each Business Day as soon as
reasonably practical after the net asset value per share is calculated and shall
use its best efforts to make such net asset value per share available by 6:00
p.m. Eastern time. In the event of an error in the computation of a Designated
Portfolio's net asset value per share ("NAV") or any dividend or capital gain
distribution (each, a "pricing error"), the Adviser or the Fund shall
immediately notify GWL&A as soon as possible after discovery of the error. Such
notification may be verbal, but shall be confirmed promptly in writing in
accordance with Article XI of this Agreement. A pricing error shall be corrected
as follows: (a) if the pricing error is less than $0.01 per share, then no
corrective action need be taken; (b) if the pricing error is greater than $0.01
per share, but less than 1/2 of 1% of the Designated Portfolio's NAV at the time
of the error, then the Adviser shall reimburse the Designated Portfolio for any
loss, after taking into consideration any positive effect of such error;
however, no adjustments to Contractowner accounts need be made; and (c) if the
pricing error is equal to or greater than 1/2 of 1% of the Designated
Portfolio's NAV at the time of the error, then the Adviser shall reimburse the
Designated Portfolio for any loss (without taking into consideration any
positive effect of such error) and shall reimburse GWL&A for the costs of
adjustments made to correct Contractowner accounts in accordance with the
provisions of Schedule E. If an adjustment is necessary to correct a material
error which has caused Contractowners to receive less than the amount to which
they are entitled, the number of shares of the applicable sub-account of such
Contractowners will be adjusted and the amount of any underpayments shall be
credited by the Adviser to GWL&A for crediting of such amounts to the applicable
Contractowners accounts. Upon notification by the Adviser of any overpayment due
to a material error, GWL&A or Schwab, as the case may be, shall promptly remit
to Fund any overpayment that has not been paid to Contractowners; however,
Adviser acknowledges that Schwab and GWL&A do not intend to seek additional
payments from any Contractowner who, because of a pricing error, may have
underpaid for units of interest credited to his/her account. In no event
shall Schwab or GWL&A be liable to Contractowners for any such adjustments or
6
<PAGE>
underpayment amounts. A pricing error within categories (b) or (c) above shall
be deemed to be "materially incorrect" or constitute a "material error" for
purposes of this Agreement.
The standards set forth in this Section 1.10 are based on the Parties'
understanding of the views expressed by the staff of the Securities and Exchange
Commission ("SEC") as of the date of this Agreement. In the event the views of
the SEC staff are later modified or superseded by SEC or judicial
interpretation, the parties shall amend the foregoing provisions of this
Agreement to comport with the appropriate applicable standards, on terms
mutually satisfactory to all Parties.
ARTICLE II. Representations and Warranties
------------------------------
2.1. GWL&A represents and warrants that the securities deemed to be
issued by the Account under the Contracts are or will be registered under the
1933 Act; that the Contracts will be issued and sold in compliance in all
material respects with all applicable federal and state laws and that the sale
of the Contracts shall comply in all material respects with state insurance
suitability requirements. GWL&A further represents and warrants that it is an
insurance company duly organized and in good standing under applicable law and
that it has legally and validly established the Account prior to any issuance or
sale of units thereof as a segregated asset account under Section 10-7-401, et.
seq. of the Colorado Insurance Law and has registered the Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts.
2.2. The Fund represents and warrants that Designated Portfolio(s)
shares sold pursuant to this Agreement shall be registered under the 1933 Act,
duly authorized for issuance and sold in compliance with all applicable federal
securities laws including without limitation the 1933 Act, the 1934 Act, and the
1940 Act and that the Fund is and shall remain registered under the 1940 Act.
The Fund shall amend the registration statement for its shares under the 1933
Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares.
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2.3. The Fund reserves the right to adopt a plan pursuant to Rule 12b-1
under the 1940 Act and to impose an asset-based or other charge to finance
distribution expenses as permitted by applicable law and regulation. In any
event, the Fund and Adviser agree to comply with applicable provisions and SEC
staff interpretations of the 1940 Act to assure that the investment advisory or
management fees paid to the Adviser by the Fund are in accordance with the
requirements of the 1940 Act. To the extent that the Fund decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have its
Board, a majority of whom are not interested persons of the Fund, formulate and
approve any plan pursuant to Rule 12b-1 under the 1940 Act to finance
distribution expenses.
2.4. The Fund represents and warrants that it will make every effort to
ensure that the investment policies, fees and expenses of the Designated
Portfolio(s) are and shall at all times remain in compliance with the insurance
and other applicable laws of the State of - Colorado and any other applicable
state to the extent required to perform this Agreement. The Fund further
represents and warrants that it will make every effort to ensure that Designated
Portfolio(s) shares will be sold in compliance with the insurance laws of the
State of Colorado and all applicable state insurance and securities laws. The
Fund shall register and qualify the shares for sale in accordance with the laws
of the various states if and to the extent required by applicable law. GWL&A and
the Fund will endeavor to mutually cooperate with respect to the implementation
of any modifications necessitated by any change in state insurance laws,
regulations or interpretations of the foregoing that affect the Designated
Portfolio(s) (a "Law Change"), and to keep each other informed of any Law Change
that becomes known to either party. In the event of a Law Change, the Fund
agrees that, except in those circumstances where the Fund has advised GWL&A that
its Board of Directors has determined that implementation of a particular Law
Change is not in the best interest of all of the Fund's shareholders with an
explanation regarding why such action is lawful, any action required by a Law
Change will be taken.
8
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2.5. The Fund represents and warrants that it is lawfully organized and
validly existing under the laws of the Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act.
2.6. The Adviser represents and warrants that it is and shall remain
duly registered under all applicable federal and state securities laws and that
it shall perform its obligations for the Fund in compliance in all material
respects with the laws of the State of Delaware and any applicable state and
federal securities laws.
2.7. The Fund and the Adviser represent and warrant that all of their
respective officers, employees, investment advisers, and other individuals or
entities dealing with the money and/or securities of the Fund are, and shall
continue to be at all times, covered by a blanket fidelity bond or similar
coverage for the benefit of the Fund in an amount not less than the minimal
coverage required by Rule 17g-1 under the 1940 Act or related provisions as may
be promulgated from time to time. The aforesaid bond shall include coverage for
larceny and embezzlement and shall be issued by a reputable bonding company.
2.8. Schwab represents and warrants that it has completed, obtained and
performed, in all material respects, all registrations, filings, approvals, and
authorizations, consents and examinations required by any government or
governmental authority as may be necessary to perform this Agreement. Schwab
does and will comply, in all material respects, with all applicable laws, rules
and regulations in the performance of its obligations under this Agreement.
2.9. The Fund will provide GWL&A with as much advance notice as is
reasonably practicable of any material change affecting the Designated
Portfolio(s) (including, but not limited to, any material change in the
registration statement or prospectus affecting the Designated Portfolio(s)) and
any proxy solicitation affecting the Designated Portfolio(s) and consult with
GWL&A in order to implement any such change in an orderly manner, recognizing
the expenses of changes and attempting to minimize such expenses by
implementing them in conjunction with
9
<PAGE>
regular annual updates of the prospectus for the Contracts. The Fund or Adviser
agree to share equitably in expenses incurred by GWL&A as a result of actions
taken by the Fund, consistent with the allocation of expenses contained in
Schedule E attached hereto and incorporated herein by reference.
2.10. GWL&A represents and warrants, for purposes other than
diversification under Section 817 of the Internal Revenue Code of 1986 as
amended ("the Code"), that the Contracts are currently treated as annuity
contracts under applicable provisions of the Code, and that it will make every
effort to maintain such treatment and that it will notify Schwab, the Fund and
the Adviser immediately upon having a reasonable basis for believing that the
Contracts have ceased to be so treated or that they might not be so treated in
the future. In addition, GWL&A represents and warrants that the Account is a
"segregated asset account" and that interests in the Account are offered
exclusively through the purchase of or transfer into a "variable contract"
within the meaning of such terms under Section 817 of the Code and the
regulations thereunder. GWL&A will use every effort to continue to meet such
definitional requirements, and it will notify Schwab, the Fund, and the Adviser
immediately upon having a reasonable basis for believing that such requirements
have ceased to be met or that they might not be met in the future.
ARTICLE III. Prospectuses and Proxy Statements; Voting
-----------------------------------------
3.1. At least annually, the Fund or the Adviser shall provide GWL&A and
Schwab with as many copies of the Fund's current prospectus for the Designated
Portfolio(s) as GWL&A and Schwab may reasonably request for marketing purposes
(including distribution to Contractowners with respect to new sales of a
Contract). If requested by GWL&A in lieu thereof, the Adviser or Fund shall
provide such documentation (including a camera-ready copy and/or computer
diskette of the current prospectus for the Designated Portfolio(s)) and other
assistance as is reasonably necessary in order for GWL&A once each year (or more
frequently if the prospectuses for the Designated Portfolio(s) are amended) to
have the prospectus for the Contracts and the Fund's prospectus for the
Designated Portfolio(s) printed together in one document. The Fund and Adviser
agree that the
10
<PAGE>
prospectuses (and semi-annual and annual reports) for the Designated
Portfolio(s) will describe only the Designated Portfolio(s) and will not name or
describe any other portfolios or series that may be in the Fund unless required
by law.
3.2. If applicable state or federal laws or regulations require that
the Statement of Additional Information ("SAI") for the Fund be distributed to
all Contractowners, then the Fund and/or the Adviser shall provide GWL&A with
copies of the Fund's SAI or documentation thereof for the Designated
Portfolio(s) in such quantities, with expenses to be borne in accordance with
Schedule E hereof, as GWL&A may reasonably require to permit timely distribution
thereof to Contractowners. The Adviser and/or the Fund shall also provide SAIs
to any Contractowner or prospective owner who requests such SAI from the Fund
(although it is anticipated that such requests will be made to GWL&A or Schwab).
3.3. The Fund and/or the Adviser shall provide GWL&A and Schwab with
copies of the Fund's proxy material, reports to stockholders and other
communications to stockholders for the Designated Portfolio(s) in such quantity,
with expenses to be borne in accordance with Schedule E hereof, as GWL&A may
reasonably require to permit timely distribution thereof to Contractowners.
3.4. It is understood and agreed that, except with respect to
information regarding GWL&A or Schwab provided in writing by that party, neither
GWL&A nor Schwab are responsible for the content of the prospectus or SAI for
the Designated Portfolio(s). It is also understood and agreed that, except with
respect to information regarding the Fund, the Adviser or the Designated
Portfolio(s) provided in writing by the Fund or the Adviser, neither the Fund
nor Adviser are responsible for the content of the prospectus or SAI for the
Contracts.
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<PAGE>
3.5. If and to the extent required by law GWL&A shall:
(i) solicit voting instructions from Contractowners;
(ii) vote the Designated Portfolio(s) shares in accordance with
instructions received from Contractowners: and
(iii) vote Designated Portfolio shares for which no instructions have
been received in the same proportion as Designated Portfolio(s)
shares for which instructions have been received from
Contractowners, so long as and to the extent that the SEC
continues to interpret the 1940 Act to require pass-through
voting privileges for variable contract owners. GWL&A reserves
the right to vote Fund shares held in any segregated asset
account in its own right, to the extent permitted by law.
3.6. GWL&A shall be responsible for assuring that each of its separate
accounts holding shares of a Designated Portfolio calculates voting privileges
as directed by the Fund and agreed to by GWL&A and the Fund. The Fund agrees to
promptly notify GWL&A of any changes of interpretations or amendments of the
Shared Funding Exemptive Order.
3.7. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings (except insofar as the SEC may interpret Section 16 of the 1940
Act not to require such meetings) or, as the Fund currently intends, comply with
Section 16(c) of the 1940 Act (although the Fund is not one of the trusts
described in Section 16(c) of that Act) as well as with Sections 16(a) and, if
and when applicable, 16(b). Further, the Fund will act in accordance with the
SEC's interpretation of the requirements of Section 16(a) with respect to
periodic elections of directors or trustees and with whatever rules the
Commission may promulgate with respect thereto. The Fund reserves the right,
upon 45 days prior written notice to GWL&A and Schwab, to take all actions
including but not limited to the dissolution, merger, and sale of all assets of
the Fund or any Designated Portfolio upon the sole authorization of the Board,
acting in good faith and in light of their fiduciary duties under the 1940 Act
and to the extent permitted by the laws of the Commonwealth of Massachusetts and
the 1940 Act.
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ARTICLE IV. Sales Material and Information
------------------------------
4.1. GWL&A and Schwab shall furnish, or shall cause to be furnished, to
the Fund or its designee, a copy of each piece of sales literature or other
promotional material that GWL&A or Schwab, respectively, develops or proposes to
use and in which the Fund (or a Portfolio thereof), its Adviser or one of its
sub-advisers or the underwriter for the Fund shares is named in connection with
the Contracts, at least ten (10) Business Days prior to its use. No such
material shall be used if the Fund or its designee objects to such use within
five (5) Business Days after receipt of such material.
4.2. GWL&A and Schwab shall not give any information or make any
representations or statements on behalf of or concerning the Fund in connection
with the sale of the Contracts other than the information or representations
contained in the registration statement or prospectus for the Fund shares, as
such registration statement and prospectus may be amended or supplemented from
time to time, or in reports or proxy statements for the Fund, or in sales
literature or other promotional material approved by the Fund or its designee or
by the Adviser, except with the permission of the Fund or its designee or the
Adviser.
4.3. The Fund or Adviser shall furnish, or shall cause to be furnished,
to GWL&A and Schwab, a copy of each piece of sales literature or other
promotional material in which GWL&A and/or its separate account(s), or Schwab is
named at least ten (10) Business Days prior to its use. No such material shall
be used if GWL&A or Schwab objects to such use within five (5) Business Days
after receipt of such material.
4.4. The Fund and the Adviser shall not give any information or make
any representations on behalf of GWL&A or concerning GWL&A, the Account, or the
Contracts other than the
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<PAGE>
information or representations contained in a registration statement or
prospectus for the Contracts, as such registration statement and prospectus may
be amended or supplemented from time to time, or in reports for the Account, or
in sales literature or other promotional material approved by GWL&A or its
designee, except with the permission of GWL&A.
4.5. GWL&A, the Fund and the Adviser shall not give any information or
make any representations on behalf of or concerning Schwab, or use Schwab's name
except with the permission of Schwab.
4.6. The Fund will provide to GWL&A and Schwab at least one complete
copy of all registration statements, prospectuses, SAIs, reports, proxy
statements, sales literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments to any of the
above, that relate to the Designated Portfolio(s), contemporaneously with the
filing of such document(s) with the SEC or NASD or other regulatory authorities.
4.7. GWL&A or Schwab will provide to the Fund at least one complete
copy of all registration statements, prospectuses, SAIs, reports, solicitations
for voting instructions, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Contracts or the Account,
contemporaneously with the filing of such document(s) with the SEC, NASD, or
other regulatory authority.
4.8. For purposes of Articles IV and VIII, the phrase "sales literature
and other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media; e.g.,
on-line networks such as the Internet or other electronic media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts
14
<PAGE>
of any other advertisement, sales literature, or published article), educational
or training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, SAIs, shareholder reports, and proxy materials and any other
material constituting sales literature or advertising under the NASD rules, the
1933 Act or the 1940 Act.
4.9. At the request of any party to this Agreement, each other party
will make available to the other party's independent auditors and/or
representative of the appropriate regulatory agencies, all records, data and
access to operating procedures that may be reasonably requested in connection
with compliance and regulatory requirements related to this Agreement or any
party's obligations under this Agreement.
ARTICLE V. Fees and Expenses
-----------------
5.1. The Fund and the Adviser shall pay no fee or other compensation to
GWL&A under this Agreement, and GWL&A shall pay no fee or other compensation to
the Fund or Adviser under this Agreement, although the parties hereto will bear
certain expenses in accordance with Schedule E, Articles III, V, and other
provisions of this Agreement.
5.2. All expenses incident to performance by the Fund and the Adviser
under this Agreement shall be paid by the appropriate party, as further provided
in Schedule E. The Fund shall see to it that all shares of the Designated
Portfolio(s) are registered and authorized for issuance in accordance with
applicable federal law and, if and to the extent required, in accordance with
applicable state laws prior to their sale.
5.3. The parties shall bear the expenses of routine annual distribution
(mailing costs) of the Fund's prospectus and distribution (mailing costs) of the
Fund's proxy materials and reports to owners of Contracts offered by GWL&A, in
accordance with Schedule E.
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<PAGE>
5.4. The Fund and the Adviser acknowledge that a principal feature of
the Contracts is the Contractowner's ability to choose from a number of
unaffiliated mutual funds (and portfolios or series thereof), including the
Designated Portfolio(s) and the Unaffiliated Funds, and to transfer the
Contract's cash value between funds and portfolios. The Fund and the Adviser
agree to cooperate with GWL&A and Schwab in facilitating the operation of the
Account and the Contracts as described in the prospectus for the Contracts,
including but not limited to cooperation in facilitating transfers between
Unaffiliated Funds.
5.5. Schwab agrees to provide certain administrative services,
specified in Schedule C attached hereto and incorporated herein by reference, in
connection with the arrangements contemplated by this Agreement. The parties
acknowledge and agree that the services referred to in this Section 5.5 are
recordkeeping, shareholder communication, and other transaction facilitation and
processing, and related administrative services only and are not the services of
an underwriter or a principal underwriter of the Fund and that Schwab is not an
underwriter for the shares of the Designated Portfolio(s), within the meaning of
the 1933 Act or the 1940 Act.
5.6. As compensation for the services specified in Schedule C hereto,
the Adviser agrees to pay Schwab a monthly Administrative Service Fee based on
the percentage per annum on Schedule C hereto applied to the average daily value
of the shares of the Designated Portfolio(s) held in the Account with respect to
Contracts sold by Schwab. This monthly Administrative Service Fee is due and
payable before the 15th (fifteenth) day following the last day of the month to
which it relates.
ARTICLE VI. Diversification and Qualification
---------------------------------
6.1. The Fund and the Adviser represent and warrant that the Fund will
at all times sell its shares and invest its assets in such a manner as to ensure
that the Contracts will be treated as annuity contracts under the Code, and the
regulations issued thereunder. Without limiting the scope of the foregoing, the
Fund and Adviser represent and warrant that the Fund and each Designated
16
<PAGE>
Portfolio thereof will at all times comply with Section 817(h) of the Code and
Treasury Regulation ss.1.817-5, as amended from time to time, and any Treasury
interpretations thereof, relating to the diversification requirements for
variable annuity, endowment, or life insurance contracts and any amendments or
other modifications or successor provisions to such Section or Regulations. The
Fund and the Adviser agree that shares of the Designated Portfolio(s) will be
sold only to Participating Insurance Companies and their separate accounts.
6.2. No shares of any Designated Portfolio of the Fund will be sold to
the general public.
6.3. The Fund and the Adviser represent and warrant that the Fund and
each Designated Portfolio is currently qualified as a Regulated Investment
Company under Subchapter M of the Code, and that each Designated Portfolio will
maintain such qualification (under Subchapter M or any successor or similar
provisions) as long as this Agreement is in effect.
6.4. The Fund or the Adviser will notify GWL&A immediately upon having
a reasonable basis for believing that the Fund or any Designated Portfolio has
ceased to comply with the aforesaid Section 817(h) diversification or Subchapter
M qualification requirements or might not so comply in the future.
6.5. Without in any way limiting the effect of Sections 8.3 and 8.4
hereof and without in any way limiting or restricting any other remedies
available to GWL&A or Schwab, the Adviser will pay all costs associated with or
arising out of any failure, or any anticipated or reasonably foreseeable
failure, of the Fund or any Designated Portfolio to comply with Sections 6.1,
6.2, or 6.3 hereof, including all costs associated with reasonable and
appropriate corrections or responses to any such failure; such costs may
include, but are not limited to, the costs involved in creating, organizing, and
registering a new investment company as a funding medium for the Contracts
and/or the costs of obtaining whatever regulatory authorizations are required to
substitute shares of another investment company for those of the failed
Portfolio (including but not limited to an order pursuant to Section 26(b) of
the 1940 Act); such costs are to include, but are not limited to, fees and
expenses
17
<PAGE>
of legal counsel and other advisors to GWL&A and any federal income taxes or tax
penalties and interest thereon (or "toll charges" or exactments or amounts paid
in settlement) incurred by GWL&A with respect to itself or owners of its
Contracts in connection with any such failure or anticipated or reasonably
foreseeable failure.
6.6. The Fund at the Fund's expense shall provide GWL&A or its designee
with reports certifying compliance with the aforesaid Section 817(h)
diversification and Subchapter M qualification requirements, at the times
provided for and substantially in the form attached hereto as Schedule D and
incorporated herein by reference; provided, however, that providing such reports
does not relieve the Fund of its responsibility for such compliance or of its
liability for any non-compliance.
6.7. GWL&A agrees that if the Internal Revenue Service ("IRS") asserts
in writing in connection with any governmental audit or review of GWL&A or, to
GWL&A's knowledge, or any Contractowner that any Designated Portfolio has failed
to comply with the diversification requirements of Section 817(h) of the Code or
GWL&A otherwise becomes aware of any facts that could give rise to any claim
against the Fund or the Adviser as a result of such a failure or alleged
failure:
(a) GWL&A shall promptly notify the Fund and the Adviser of such
assertion or potential claim;
(b) GWL&A shall consult with the Fund and the Adviser as to how to
minimize any liability that may arise as a result of such failure
or alleged failure;
(c) GWL&A shall use its best efforts to minimize any liability of the
Fund and the Adviser resulting from such failure, including,
without limitation, demonstrating, pursuant to Treasury
Regulations, Section 1.817-5(a)(2), to the commissioner of the
IRS that such failure was inadvertent;
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<PAGE>
(d) any written materials to be submitted by GWL&A to the IRS, any
Contractowner or any other claimant in connection with any of the
foregoing proceedings or contests (including, without limitation,
any such materials to be submitted to the IRS pursuant to
Treasury Regulations, Section 1.817-5(a)(2)) shall be provided by
GWL&A to the Fund and the Adviser (together with any supporting
information or analysis) within at least two (2) business days
prior to submission;
(e) GWL&A shall provide the Fund and the Adviser with such
cooperation as the Fund and the Adviser shall reasonably request
(including, without limitation, by permitting the Fund and the
Adviser to review the relevant books and records of GWL&A) in
order to facilitate review by the Fund and the Adviser of any
written submissions provided to it or its assessment of the
validity or amount of any claim against it arising from such
failure or alleged failure;
(f) GWL&A shall not with respect to any claim of the IRS or any
Contractowner that would give rise to a claim against the Fund
and the Adviser (i) compromise or settle any claim, (ii) accept
any adjustment on audit, or (iii) forego any allowable
administrative or judicial appeals, without the express written
consent of the Fund and the Adviser, which shall not be
unreasonably withheld; provided that, GWL&A shall not be required
to appeal any adverse judicial decision unless the Fund and the
Adviser shall have provided an opinion of independent counsel to
the effect that a reasonable basis exists for taking such appeal;
and further provided that the Fund and the Adviser shall bear the
costs and expenses, including reasonable attorney's fees,
incurred by GWL&A in complying with this clause (f).
ARTICLE VII. Potential Conflicts and Compliance With
Shared Funding Exemptive Order
---------------------------------------
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any
19
<PAGE>
state insurance regulatory authority; (b) a change in applicable federal or
state insurance, tax, or securities laws or regulations, or a public ruling,
private letter ruling, no-action or interpretative letter, or any similar action
by insurance, tax, or securities regulatory authorities; (c) an administrative
or judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Designated Portfolio are being managed; (e) a difference in
voting instructions given by variable annuity contract and variable life
insurance contract owners or by contract owners of different Participating
Insurance Companies; or (f) a decision by a Participating Insurance Company to
disregard the voting instructions of contract owners. The Board shall promptly
inform GWL&A if it determines that an irreconcilable material conflict exists
and the implications thereof.
7.2. GWL&A will report any potential or existing conflicts of which it
is aware to the Board. GWL&A will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by GWL&A to
inform the Board whenever contract owner voting instructions are to be
disregarded. Such responsibilities (other than the duty to report, which is
unqualified) shall be carried out by GWL&A with a view only to the interests of
its Contractowners.
7.3. If it is determined by a majority of the Board, or a majority of
its directors who are not interested persons of the Fund, the Adviser or any
sub-adviser to any of the Designated Portfolios (the "Independent Directors"),
that a material irreconcilable conflict exists, GWL&A and other Participating
Insurance Companies shall, at their expense and to the extent reasonably
practicable (as determined by a majority of the Independent Directors), take
whatever steps are necessary to remedy or eliminate the irreconcilable material
conflict, up to and including: (1) withdrawing the assets allocable to some or
all of the separate accounts from the Fund or any Designated Portfolio and
reinvesting such assets in a different investment medium, including (but not
limited to) another Designated Portfolio of the Fund, or submitting the question
whether such segregation should be implemented to a vote of all affected
contract owners and, as appropriate, segregating the assets of any appropriate
group (i.e., annuity contract owners, life insurance contract
20
<PAGE>
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision
by GWL&A to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, GWL&A may be
required, at the Fund's election, to withdraw the Account's investment in the
Fund and terminate this Agreement; provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the Independent
Directors. Any such withdrawal and termination must take place within six (6)
months after the Fund gives written notice that this provision is being
implemented, and until the end of that six month period the Adviser and the Fund
shall continue to accept and implement orders by GWL&A for the purchase (and
redemption) of shares of the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to GWL&A conflicts with the
majority of other state regulators, then GWL&A will withdraw the Account's
investment in the Fund and terminate this Agreement within six months after the
Board informs GWL&A in writing that it has determined that such decision has
created an irreconcilable material conflict; provided, however, that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board. Until the end of the foregoing six month
period, the Fund shall continue to accept and implement orders by GWL&A for the
purchase (and redemption) of shares of the Fund.
21
<PAGE>
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the Independent Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Fund be required to establish a new funding medium for the Contracts. GWL&A
shall not be required by Section 7.3 to establish a new funding medium for the
Contracts if an offer to do so has been declined by vote of a majority of
Contractowners materially adversely affected by the irreconcilable material
conflict. In the event that the Board determines that any proposed action does
not adequately remedy any irreconcilable material conflict, then GWL&A will
withdraw the Account's investment in the Fund and terminate this Agreement
within six (6) months after the Board informs GWL&A in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall be
limited to the extent required by any such material irreconcilable conflict as
determined by a majority of the Independent Trustees.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies,
as appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
rules are applicable: and (b) Sections 3.5, 3.6, 3.7, 7.1, 7.2, 7.3, 7.4, and
7.5 of this Agreement shall continue in effect only to the extent that terms and
conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1. Indemnification By GWL&A
8.1(a). GWL&A agrees to indemnify and hold harmless the Fund and
the Adviser and each of their officers and directors or trustees and each
person, if any, who controls the Fund or the Adviser within the meaning of
Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes
of this Section 8.1) against any and all losses, claims, expenses, damages,
liabilities (including amounts paid in settlement with the written consent of
GWL&A) or litigation (including reasonable legal and other expenses) to which
the Indemnified Parties may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims,
22
<PAGE>
expenses, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares or the
Contracts and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the
registration statement or pro- spectus or SAI covering the
Contracts or contained in the Contracts or sales literature for
the Contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or nec- essary to make the statements therein not
misleading, provided that this Agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon
and in conformity with information furnished in writing to GWL&A
or Schwab by or on behalf of the Adviser or Fund for use in the
registration statement or prospectus for the Contracts or in the
Contracts or sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or
Fund shares; or
(ii) arise out of or are based upon of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature of the
Fund not supplied by GWL&A or persons under its control) or
wrongful conduct of GWL&A or persons under its control, with
respect to the sale or distribution of the Contracts or Fund
Shares; or
(iii) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in a registration
statement, prospectus, or sales literature of the Fund, or any
amendment thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, if such a statement or omission was made in reliance
upon information furnished in writing to the Fund by or on behalf
of GWL&A; or
(iv) arise as a result of any failure by GWL&A to provide the services
and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by GWL&A in this Agreement or
arise out of or result from any other material breach of this
Agreement by GWL&A, including without limitation Section 2.10 and
Section 6.7 hereof,
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
23
<PAGE>
8.1(b). GWL&A shall not be liable under this indemnification
provision with respect to any losses, claims, expenses, damages, liabilities or
litigation to which an Indemnified Party would otherwise be subject by reason of
such Indemnified Party's willful misfeasance, bad faith, or negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement or to
any of the Indemnified Parties.
8.1(c). GWL&A shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified GWL&A in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify GWL&A of any such claim shall not
relieve GWL&A from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision, except to the extent that GWL&A has been prejudiced
by such failure to give notice. In case any such action is brought against the
Indemnified Parties, GWL&A shall be entitled to participate, at its own expense,
in the defense of such action. GWL&A also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from GWL&A to such party of GWL&A's election to assume the defense
thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and GWL&A will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify GWL&A of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund Shares or the Contracts or the operation of the
Fund.
<PAGE>
8.2. Indemnification by Schwab
8.2(a). Schwab agrees to indemnify and hold harmless the Fund and
the Adviser and each of their officers and directors or trustees and each
person, if any, who controls the Fund or Adviser within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section 8.2) against any and all losses, claims, expenses, damages and
liabilities (including amounts paid in settlement with the written consent of
Schwab) or litigation (including reasonable legal and other expenses), to which
the Indemnified Parties may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the sale
or acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon Schwab's dissemination of
information regarding the Fund that is both (A) materially
incorrect and (B) that was neither contained in the Fund's
registration statement or sales literature nor other promotional
material of the Fund prepared by the Fund or provided in writing
to Schwab, or approved in writing, by or on behalf of the Fund or
the Adviser; or
(ii) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in sales
literature or other promotional material prepared by Schwab for
the Contracts or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading, provided that this Agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon
and in conformity with information furnished in writing to GWL&A
or Schwab by or on behalf of the Adviser or the Fund or to Schwab
by GWL&A for use in the registration statement or prospectus for
the Contracts or in the Contracts or sales literature (or any
amendment or supplement) or otherwise for use in connection with
the sale of the Contracts; or
(iii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature of the
Fund not supplied by Schwab or persons under its control) or
wrongful conduct of Schwab or persons under its control, with
respect to the sale or distribution of the Contracts; or
(iv) arise as a result of any failure by Schwab to provide the
services and furnish the materials under the terms of this
Agreement; or
25
<PAGE>
(v) arise out of or result from any material breach of any
representation and/or warranty made by Schwab in this
Agreement or arise out of or result from any other material
breach of this Agreement by Schwab;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). Schwab shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement or to
any of the Indemnified Parties.
8.2(c). Schwab shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified Schwab in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify Schwab of any such claim shall not
relieve Schwab from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision, except to the extent that Schwab has been prejudiced
by such failure to give notice. In case any such action is brought against the
Indemnified Parties, Schwab shall be entitled to participate, at its own
expense, in the defense of such action. Schwab also shall be entitled to assume
the defense thereof, with counsel satisfactory to the party named in the action.
After notice from Schwab to such party of Schwab's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and Schwab will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
26
<PAGE>
8.2(d). The Indemnified Parties will promptly notify Schwab of
the commencement of any litigation or proceedings against them in connection
with the issuance or sale of the Fund Shares or the Contracts or the operation
of the Fund.
8.3. Indemnification by the Adviser
8.3(a). The Adviser agrees to indemnify and hold harmless GWL&A
and Schwab and each of their directors and officers and each person, if any, who
controls GWL&A or Schwab within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, expenses, damages, liabilities (including
amounts paid in settlement with the written consent of the Adviser) or
litigation (including reasonable legal and other expenses) to which the
Indemnified Parties may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the sale
or acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
registration statement or prospectus or SAI or sales literature
or other promotional material of the Fund prepared by the Fund or
the Adviser (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this Agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reli- ance upon
and in conformity with information furnished in writing to the
Adviser or the Fund by or on behalf of GWL&A or Schwab for use in
the registration statement or prospectus for the Fund or in sales
literature (or any amendment or supplement) or otherwise for use
in connection with the sale of the Contracts or the Fund shares;
or
(ii) arise out of or are based upon of statements or representations
(other than statements or representations contained in the
registration statement, prospectus, SAI or sales literature or
other promotional material for the Contracts not supplied by the
Adviser or persons under its control) or wrongful conduct of the
Fund or the Adviser or persons under their control, with respect
to the sale or distribution of the Contracts or Fund shares; or
27
<PAGE>
(iii) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in a registration
statement, prospectus, SAI, or sales literature covering the
Contracts, or any amendment thereof or supplement thereto, or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement
or statements therein not misleading, if such statement or
omission was made in reliance upon information furnished in
writing to GWL&A or Schwab by or on behalf of the Adviser or the
Fund; or
(iv) arise as a result of any failure by the Fund or the Adviser to
provide the services and furnish the materials under the terms of
this Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification and
other qualification requirements specified in Article VI of this
Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Fund or the Adviser in
this Agreement or arise out of or result from any other material
breach of this Agreement by the Adviser or the Fund; or
(vi) arise out of or result from the incorrect or untimely calculation
or reporting of the daily net asset value per share or dividend
or capital gain distribution rate;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof. This indemnification is in addition to and apart from the
responsibilities and obligations of the Adviser specified in Article VI hereof.
8.3(b). The Adviser shall not be liable under this
indemnification provision with respect to any losses, claims, expenses, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
negligence in the performance of such Indemnified Party's duties or by reason of
such Indemnified Party's reckless disregard of obligations or duties under this
Agreement or to any of the Indemnified Parties.
8.3(c). The Adviser shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Adviser in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent),
28
<PAGE>
but failure to notify the Adviser of any such claim shall not relieve the
Adviser from any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this indemnification
provision, except to the extent that the Adviser has been prejudiced by such
failure to give notice. In case any such action is brought against the
Indemnified Parties, the Adviser will be entitled to participate, at its own
expense, in the defense thereof. The Adviser also shall be entitled to assume
the defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Adviser to such party of the Adviser's election to assume
the defense thereof, the Indemnified Party shall bear the fees and expenses of
any additional counsel retained by it, and the Adviser will not be liable to
such party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.3(d). GWL&A and Schwab agree promptly to notify the Adviser of
the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the Contracts
or the operation of the Account.
8.4. Indemnification By the Fund
8.4(a). The Fund agrees to indemnify and hold harmless GWL&A and
Schwab and each of their directors and officers and each person, if any, who
controls GWL&A or Schwab within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.4)
against any and all losses, claims, expenses, damages, liabilities (including
amounts paid in settlement with the written consent of the Fund) or litigation
(including reasonable legal and other expenses) to which the Indemnified Parties
may be required to pay or become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, expenses, damages,
liabilities or expenses (or actions in respect thereof) or settlements, are
related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether
29
<PAGE>
unintentional or in good faith or otherwise, to comply
with the diversification and other qualification requirements
specified in Article VI of this Agreement); or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Fund; or
(iii) arise out of or result from the incorrect or untimely
calculation or reporting of the daily net asset value per share
or dividend or capital gain distribution rate;
as limited by and in accordance with the provisions of Sections 8.4(b) and
8.4(c) hereof.
8.4(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, expenses, damages, liabilities or
litigation to which an Indemnified Party would otherwise be subject by reason of
such Indemnified Party's willful misfeasance, bad faith, or negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement or to
any of the Indemnified Parties.
8.4(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve it from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise than on account
of this indemnification provision, except to the extent that the Fund has been
prejudiced by such failure to give notice. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund shall also be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred
30
<PAGE>
by such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.4(d). GWL&A and Schwab each agree promptly to notify the Fund
of the commencement of any litigation or proceeding against itself or any of its
respective officers or directors in connection with the Agreement, the issuance
or sale of the Contracts, the operation of the Account, or the sale or
acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
--------------
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Colorado,
without regard to the Colorado Conflict of Laws provisions.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to, the
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
ARTICLE X. Termination
-----------
10.1. This Agreement shall terminate:
(a) at the option of any party, with or without cause, with
respect to some or all Portfolios, upon six (6) months advance
written notice delivered to the other parties; provided, however,
that such notice shall not be given earlier than six (6) months
following the date of this Agreement; or
(b) at the option of GWL&A or Schwab by written notice to the
other parties with respect to any Portfolio based upon GWL&A's or
Schwab's reasonable and good faith determination that shares of
such Portfolio are not reasonably available to meet the
requirements of the Contracts; or
31
<PAGE>
(c) at the option of GWL&A or Schwab by written notice to the
other parties with respect to any Portfolio in the event any of
the Portfolio's shares are not registered, issued or sold in
accordance with applicable state and/ or federal law or such law
precludes the use of such shares as the underlying investment
media of the Contracts issued or to be issued by GWL&A; or
(d) at the option of the Fund in the event that formal
administrative proceedings are instituted against GWL&A or Schwab
by the NASD, the SEC, the Insurance Commissioner or like official
of any state or any other regulatory body regarding GWL&A's or
Schwab's duties under this Agreement or related to the sale of
the Contracts, the operation of any Account, or the purchase of
the Fund shares, or shares or sponsor of any Unaffiliated Fund,
if, in each case, the Fund reasonably determines in its sole
judgment exercised in good faith, that any such administrative
proceedings will have a material adverse effect upon the ability
of GWL&A or Schwab to perform its obligations under this
Agreement or would have a material adverse impact upon the Fund;
or
(e) at the option of GWL&A or Schwab in the event that formal
administrative proceedings are instituted against the Fund or the
Adviser by the NASD, the SEC, or any state securities or
insurance department or any other regulatory body, if Schwab or
GWL&A reasonably determines in its sole judgment exercised in
good faith, that any such administrative proceedings will have a
material adverse effect upon the ability of the Fund or the
Adviser to perform their obligations under this Agreement; or
(f) at the option of GWL&A by written notice to the Fund and the
Adviser with respect to any Portfolio if GWL&A reasonably and in
good faith believes that the Portfolio will fail to meet the
Section 817(h) diversification requirements or Subchapter M
qualifications specified in Article VI hereof; or
(g) at the option of either the Fund or the Adviser, if (i) the
Fund or Adviser, respectively, shall determine, in their sole
judgment reasonably exercised in good faith, that either GWL&A or
Schwab has suffered a material adverse change in their business
or financial condition or is the subject of material adverse
publicity and that material adverse change or publicity will have
a material adverse impact on GWL&A's or Schwab's ability to
perform its obligations under this Agreement, (ii) the Fund or
the Adviser notifies GWL&A or Schwab, as appropriate, of that
determination and its intent to terminate this Agreement, and
(iii) after considering the actions taken by GWL&A or Schwab and
any other changes in circumstances since the giving of such a
notice, the determination of the Fund or the Adviser shall
continue to apply on the sixtieth (60th) day following the giving
of that notice, which sixtieth day shall be the effective date of
termination; or
(h) at the option of either GWL&A or Schwab, if (i) GWL&A or
Schwab, respectively, shall determine, in its sole judgment
reasonably exercised in good faith,
32
<PAGE>
that either the Fund or the Adviser has suffered a material
adverse change in its business or financial condition or is the
subject of material adverse publicity and that material adverse
change or publicity will have a material adverse impact on the
Fund's or the Adviser's ability to perform its obligations under
this Agreement, (ii) GWL&A or Schwab notifies the Fund or the
Adviser, as appropriate, of that determination and its intent to
terminate this Agreement, and (iii) after considering the actions
taken by the Fund or the Adviser and any other changes in
circumstances since the giving of such a notice, the
determination of GWL&A or Schwab shall continue to apply on the
sixtieth (60th) day following the giving of that notice, which
sixtieth day shall be the effective date of termination; or
(i) at the option of GWL&A in the event that formal
administrative proceedings are instituted against Schwab by the
NASD, the Securities and Exchange Commission, or any state
securities or insurance department or any other regulatory body
regarding Schwab's duties under this Agreement or related to the
sale of the Fund's shares or the Contracts, the operation of any
Account, or the purchase of the Fund shares, provided, however,
that GWL&A determines in its sole judgment exercised in good
faith, that any such administrative proceedings will have a
material adverse effect upon the ability of Schwab to perform its
obligations related to the Contracts; or
(j) at the option of Schwab in the event that formal
administrative proceedings are instituted against GWL&A by the
NASD, the Securities and Exchange Commission, or any state
securities or insurance department or any other regulatory body
regarding GWL&A's duties under this Agreement or related to the
sale of the Fund's shares or the Contracts, the operation of any
Account, or the purchase of the Fund shares, provided, however,
that Schwab determines in its sole judgment exercised in good
faith, that any such administrative proceedings will have a
material adverse effect upon the ability of GWL&A to perform its
obligations related to the Contracts; or
(k) at the option of any non-defaulting party hereto in the event
of a material breach of this Agreement by any party hereto (the
"defaulting party") other than as described in 10.1(a)-(j);
provided, that the non-defaulting party gives written notice
thereof to the defaulting party, with copies of such notice to
all other non-defaulting parties, and if such breach shall not
have been remedied within thirty (30) days after such written
notice is given, then the non-defaulting party giving such
written notice may terminate this Agreement by giving thirty (30)
days written notice of termination to the defaulting party.
10.2. Notice Requirement. No termination of this Agreement shall be
effective unless and until the party terminating this Agreement gives prior
written notice to all other parties of its intent to terminate, which notice
shall set forth the basis for the termination. Furthermore,
33
<PAGE>
(a) in the event any termination is based upon the provisions of
Article VII, or the provisions of Section 10.1(a), 10.1(g) or
10.1(h) of this Agreement, the prior written notice shall be
given in advance of the effective date of termination as required
by those provisions unless such notice period is shortened by
mutual written agreement of the parties;
(b) in the event any termination is based upon the provisions of
Section 10.1(d), 10.1(e), 10.1(i) or 10.1(j) of this Agreement,
the prior written notice shall be given at least sixty (60) days
before the effective date of termination; and
(c) in the event any termination is based upon the provisions of
Section 10.1(b), 10.1(c) or 10.1(f), the prior written notice
shall be given in advance of the effective date of termination,
which date shall be determined by the party sending the notice.
10.3. Effect of Termination. Notwithstanding any termination of this
Agreement, other than as a result of a failure by either the Fund or GWL&A to
meet Section 817(h) of the Code diversification requirements, the Fund and the
Adviser shall, at the option of GWL&A or Schwab, continue to make available
additional shares of the Designated Portfolio(s) pursuant to the terms and
conditions of this Agreement, for all Contracts in effect on the effective date
of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Designated
Portfolio(s), redeem investments in the Designated Portfolio(s) and/or invest in
the Designated Portfolio(s) upon the making of additional purchase payments
under the Existing Contracts. The parties agree that this Section 10.3 shall not
apply to any terminations under Article VII and the effect of such Article VII
terminations shall be governed by Article VII of this Agreement.
10.4. Surviving Provisions. Notwithstanding any termination of this
Agreement, each party's obligations under Article VIII to indemnify other
parties shall survive and not be affected by any termination of this Agreement.
In addition, with respect to Existing Contracts, all provisions of this
Agreement shall also survive and not be affected by any termination of this
Agreement.
10.5. Survival of Agreement. A termination by Schwab shall terminate
this Agreement only as to Schwab, and this Agreement shall remain in effect as
to the other parties; provided,
34
<PAGE>
however, that in the event of a termination by Schwab the other parties shall
have the option to terminate this Agreement upon 60 (sixty) days notice, rather
than the six (6) months specified in Section 10.1(a).
ARTICLE XI. Notices
-------
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
SteinRoe Variable Investment Trust
c/o Liberty Investment Services, Inc.
600 Atlantic Avenue
Boston, MA 02210
Attention: Secretary
If to GWL&A:
Great-West Life & Annuity Insurance Company
8515 East Orchard Road
Englewood, CO 80111
Attention: Assistant Vice President, Savings Products
If to the Adviser:
Stein Roe & Farnham Incorporated
One South Wacker Drive
Chicago, IL 60606
Attention: Secretary
If to Schwab:
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104
Attention: General Counsel
35
<PAGE>
ARTICLE XII. Miscellaneous
-------------
12.1. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information without the express written consent
of the affected party until such time as such information may come into the
public domain. Without limiting the foregoing, no party hereto shall disclose
any information that another party has designated as proprietary.
12.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.3. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.4. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.5. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the Colorado Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the variable annuity
operations of GWL&A are being conducted in a manner consistent with the Colorado
Variable Annuity Regulations and any other applicable law or regulations.
12.6. Any controversy or claim arising out of or relating to this
Agreement, or breach thereof, may be settled by arbitration in a forum jointly
selected by the relevant parties (but if
36
<PAGE>
applicable law requires some other forum, then such other forum) in accordance
with the Commercial Arbitration Rules of the American Arbitration Association,
or other arbitration rules as mutually agreed upon by the relevant parties, and
judgment upon the award rendered by the arbitrators may be entered in any court
having jurisdiction thereof.
12.7. The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto.
12.9. Schwab and GWL&A are hereby expressly put on notice of the
limitation of liability as set forth in the Declarations of Trust of the Fund
and the Adviser and agree that the obligations assumed by the Fund and the
Adviser pursuant to this Agreement shall be limited in any case to the Fund and
Adviser and their respective assets and neither Schwab nor GWL&A shall seek
satisfaction of any such obligation from the shareholders of the Fund or the
Adviser, the Trustees, officers, employees or agents of the Fund or Adviser, or
any of them.
12.10. The Fund and the Adviser agree that the obligations assumed by
GWL&A and Schwab pursuant to this Agreement shall be limited in any case to
GWL&A and Schwab and their respective assets and neither the Fund nor the
Adviser shall seek satisfaction of any such obligation from the shareholders of
the GWL&A or Schwab, the directors, officers, employees or agents of the GWL&A
or Schwab, or any of them.
12.11. No provision of this Agreement may be deemed or construed to
modify or supersede any contractual rights, duties, or indemnifications, as
between the Adviser and the Fund.
37
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
By its authorized officer,
By: /s/ Robert K. Shaw
------------------------
Title: Vice President, Marketing and Product Development
Date: October 25, 1996
STEINROE VARIABLE INVESTMENT TRUST
By its authorized officer,
By: /s/ Jilaine Hummel Bauer
------------------------
Title: Vice President
Date: October 21, 1996
STEIN ROE & FARNHAM INCORPORATED
By its authorized officer,
By: /s/ Jilaine Hummel Bauer
------------------------
Title: Senior Vice President and Secretary
Date: October 21, 1996
CHARLES SCHWAB & CO., INC.
By its authorized officer,
By: /s/ Jeff Benton
------------------------
Title: Vice President, Annuities and Life Insurance
Date: October 24, 1996
38
<PAGE>
Schwab Variable Annuity
SCHEDULE A
----------
Contracts Form Numbers
--------- ------------
Great-West Life & Annuity Insurance Company
- -------------------------------------------
Group Variable/Fixed Annuity Contract J434
Individual Variable/Fixed Annuity Contract J434IND
39
<PAGE>
SCHEDULE B
----------
Designated Portfolios
- ---------------------
SteinRoe Capital Appreciation Fund
40
<PAGE>
SCHEDULE C
----------
Administrative Services
-----------------------
To be performed by Charles Schwab & Co., Inc.
A. Schwab will provide the properly registered and licensed personnel and
systems needed for all customer servicing and support - for both fund and
annuity information and questions - including:
respond to Contractowner inquiries;
delivery of prospectus - both fund and annuity;
entry of initial and subsequent orders;
transfer of cash to insurance company and/or funds;
explanations of fund objectives and characteristics;
entry of transfers between funds;
fund balance and allocation inquiries;
mail fund prospectus.
B. For the services, Schwab shall receive a fee of 0.25% per annum applied to
the average daily value of the shares of the fund held by Schwab's customers,
payable by the Adviser directly to Schwab, such payments being due and payable
within 15 (fifteen) days after the last day of the month to which such payment
relates.
C. The Fund will calculate and Schwab will verify with GWL&A the asset balance
for each day on which the fee is to be paid pursuant to this Agreement with
respect to each Designated Portfolio.
D. Schwab will communicate all purchase, withdrawal, and exchange orders it
receives from its customers to GWL&A who will retransmit them to each fund.
41
<PAGE>
SCHEDULE D
----------
Reports per Section 6.6
-----------------------
With regard to the reports relating to the quarterly testing of
compliance with the requirements of Section 817(h) and Subchapter M under the
Internal Revenue Code (the "Code") and the regulations thereunder, the Fund
shall provide within twenty (20) Business Days of the close of the calendar
quarter a report to GWL&A in the Form D1 attached hereto and incorporated herein
by reference, regarding the status under such sections of the Code of the
Designated Portfolio(s), and if necessary, identification of any remedial action
to be taken to remedy non-compliance.
With regard to the reports relating to the year-end testing of
compliance with the requirements of Subchapter M of the Code, referred to
hereinafter as "RIC status," the Fund will provide the reports on the following
basis: (i) the last quarter's quarterly reports can be supplied within the
20-day period, and (ii) a year-end report will be provided 45 days after the end
of the calendar year. However, if a problem with regard to RIC status, as
defined below, is identified in the third quarter report, on a weekly basis,
starting the first week of December, additional interim reports will be provided
specially addressing the problems identified in the third quarter report. If any
interim report memorializes the cure of the problem, subsequent interim reports
will not be required.
A problem with regard to RIC status is defined as any violation of the
following standards, as referenced to the applicable sections of the Code:
(a) Less than ninety percent of gross income is derived from sources
of income specified in Section 851(b)(2);
(b) Thirty percent or greater gross income is derived from the sale or
disposition of assets specified in Section 851(b)(3);
42
<PAGE>
(c) Less than fifty percent of the value of total assets consists of
assets specified in Section 851(b)(4)(A); and
(d) No more than twenty-five percent of the value of total assets is
invested in the securities of one issuer, as that requirement is set
forth in Section 851(b)(4)(B).
43
<PAGE>
FORM D1
CERTIFICATE OF COMPLIANCE
I, _______________, a duly authorized officer, director or agent of
_______________ Fund hereby swear and affirm that Fund is in compliance with all
requirements of Section 817(h) and Subchapter M of the Internal Revenue Code
(the "Code") and the regulations thereunder as required in the Fund
Participation Agreement among Great-West Life & Annuity Insurance Company,
Charles Schwab & Co., Inc. and ______________ other than the exceptions
discussed below:
Exceptions Remedial Action
- ---------- ---------------
- -------------------- -------------------------------------------------
- -------------------- -------------------------------------------------
- -------------------- -------------------------------------------------
- -------------------- -------------------------------------------------
- -------------------- -------------------------------------------------
- -------------------- -------------------------------------------------
If no exception to report, please indicate "None."
Signed this ___ day of ____, _________.
--------------------------------------
(Signature)
By:
----------------------------------
(Type or Print Name and
Title/Position)
<PAGE>
SCHEDULE E
----------
EXPENSES
--------
The Fund and/or Adviser, and GWL&A will coordinate the functions and pay the
costs of the completing these functions based upon an allocation of costs in the
tables below. Costs shall be allocated to reflect the Fund's share of the total
costs determined according to the number of pages of the Fund's respective
portions of the documents.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Item Function Party Responsible for Party Responsible
Coordination for Expense
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mutual Fund Printing of combined GWL&A Fund or Adviser,
Prospectus prospectuses as applicable
- ----------------------------------------------------------------------------------------------------------------------
Fund or Adviser shall GWL&A Fund or Adviser,
supply GWL&A with as applicable
such numbers of the
Designated Portfolio(s)
prospectus(es) as
GWL&A shall
reasonably request
- ----------------------------------------------------------------------------------------------------------------------
Distribution to New GWL&A GWL&A
and Inforce Clients
- ----------------------------------------------------------------------------------------------------------------------
Distribution to Schwab Schwab
Prospective Clients
- ----------------------------------------------------------------------------------------------------------------------
Product Prospectus Printing for Inforce GWL&A GWL&A
Clients
- ----------------------------------------------------------------------------------------------------------------------
Printing for Prospective GWL&A Schwab
Clients
- ----------------------------------------------------------------------------------------------------------------------
Distribution to New GWL&A GWL&A
and Inforce Clients
- ----------------------------------------------------------------------------------------------------------------------
Distribution to Schwab Schwab
Prospective Clients
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Mutual Fund If Required by Fund or Fund or Adviser Fund or Adviser
Prospectus Update & Adviser
Distribution
- ----------------------------------------------------------------------------------------------------------------------
If Required by GWL&A GWL&A
GWL&A
- ----------------------------------------------------------------------------------------------------------------------
If Required by Schwab Schwab Schwab
- ----------------------------------------------------------------------------------------------------------------------
Product Prospectus If Required by Fund or GWL&A Fund or Adviser
Update & Distribution Adviser
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Item Function Party Responsible for Party Responsible
Coordination for Expense
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
If Required by GWL&A GWL&A
GWL&A
- ----------------------------------------------------------------------------------------------------------------------
If Required by Schwab Schwab Schwab
- ----------------------------------------------------------------------------------------------------------------------
Mutual Fund SAI Printing Fund or Adviser Fund or Adviser
- ----------------------------------------------------------------------------------------------------------------------
Distribution GWL&A GWL&A
- ----------------------------------------------------------------------------------------------------------------------
Product SAI Printing GWL&A GWL&A
- ----------------------------------------------------------------------------------------------------------------------
Distribution GWL&A GWL&A
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Item Function Party Responsible for Party Responsible
Coordination for Expense
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proxy Material for Printing if proxy Fund or Adviser Fund or Adviser
Mutual Fund: required by Law
- ----------------------------------------------------------------------------------------------------------------------
Distribution (including GWL&A Fund or Adviser
labor) if proxy required
by Law
- ----------------------------------------------------------------------------------------------------------------------
Printing & distribution GWL&A GWL&A
if required by GWL&A
- ----------------------------------------------------------------------------------------------------------------------
Printing & distribution GWL&A Schwab
if required by Schwab
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Item Function Party Responsible for Party Responsible
Coordination for Expense
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mutual Fund Annual & Printing of combined GWL&A Fund or Adviser
Semi-Annual Report reports
- ----------------------------------------------------------------------------------------------------------------------
Distribution GWL&A GWL&A and
Schwab
- ----------------------------------------------------------------------------------------------------------------------
Other communication If Required by the Schwab Fund or Adviser
to New and Prospective Fund or Adviser
clients
- ----------------------------------------------------------------------------------------------------------------------
If Required by Schwab GWL&A
GWL&A
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Item Function Party Responsible for Party Responsible
Coordination for Expense
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
If Required by Schwab Schwab Schwab
- ----------------------------------------------------------------------------------------------------------------------
Other communication Distribution (including GWL&A Fund or Adviser
to inforce labor) if required by
the Fund or Adviser
- ----------------------------------------------------------------------------------------------------------------------
If Required by GWL&A GWL&A
GWL&A
- ----------------------------------------------------------------------------------------------------------------------
If Required by Schwab GWL&A Schwab
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Item Function Party Responsible for Party Responsible
Coordination for Expense
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Errors in Share Price Cost of error to GWL&A Fund or Adviser
calculation pursuant to participants
Section 1.10
- ----------------------------------------------------------------------------------------------------------------------
Cost of administrative GWL&A Fund or Adviser
work to correct error
- ----------------------------------------------------------------------------------------------------------------------
Operations of the Fund All operations and Fund or Adviser Fund or Adviser
related expenses,
including the cost of
registration and
qualification of shares,
taxes on the issuance or
transfer of shares, cost
of management of the
business affairs of the
Fund, and expenses
paid or assumed by the
fund pursuant to any
Rule 12b-1 plan
- ----------------------------------------------------------------------------------------------------------------------
Operations of the Federal registration of GWL&A GWL&A
Account units of separate
account (24f-2 fees)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
47
EXHIBIT 9(j)
PARTICIPATION AGREEMENT
-----------------------
Among
STEINROE VARIABLE INVESTMENT TRUST
STEIN ROE & FARNHAM INCORPORATED
and
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
THIS AGREEMENT, made and entered into as of this ____ day of ________,
1997 by and among PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY, (hereinafter
"Insurance Company"), a Missouri company, on its own behalf and on behalf of its
Separate Account V (the "Account"); STEINROE VARIABLE INVESTMENT TRUST, a
business trust organized under the laws of Massachusetts (hereinafter the
"Fund"); and STEIN ROE & FARNHAM INCORPORATED (hereinafter the "Adviser"), a
Delaware corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and/or
variable annuity Contracts (collectively, the "Variable Insurance Products") to
be offered by insurance companies which have entered into participation
agreements similar to this Agreement (hereinafter "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each designated a "Portfolio" and representing the interest in
a particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission (hereinafter the "SEC"), dated July 1, 1988 (File No.
812-7044), granting Participating Insurance Companies and variable annuity and
variable life insurance separate accounts exemptions from the provisions of
sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as
amended, (hereinafter the "1940 Act") and Rules 6e-2(b)(15) and 6e-3(T) (b)(15)
thereunder, to the extent necessary to permit shares of the Fund to
<PAGE>
be sold to and held by variable annuity and variable life insurance separate
accounts of life insurance companies that may or may not be affiliated with one
another (hereinafter the "Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and shares of the Portfolio(s) are registered under
the Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and any applicable state
securities laws; and
WHEREAS, Insurance Company has registered or will register certain
variable annuity Contracts supported wholly or partially by the Account (the
"Contracts") under the 1933 Act and said Contracts are listed in Schedule A
hereto, as it may be amended from time to time by mutual written agreement; and
WHEREAS, the Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of Insurance
Company on February 14, 1992, to set aside and invest assets attributable to the
Contracts; and
WHEREAS Insurance Company has registered or will register the Account
as a unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, Insurance Company intends to purchase shares in the Portfolio(s)
listed in Schedule B hereto, as it may be amended from time to time by mutual
written agreement (the "Designated Portfolio(s)"), on behalf of the Account to
fund the aforesaid Contracts, and the Fund is authorized to sell such shares to
unit investment trusts such as the Account at net asset value; and
WHEREAS, Insurance Company will perform certain services for the Fund
and Adviser in connection with the Contracts; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Account also intends to purchase shares in other open-end
investment companies or series
2
<PAGE>
thereof not affiliated with the Trust (the "Unaffiliated Funds") on behalf of
the Account to fund the Contracts; and
NOW, THEREFORE, in consideration of their mutual promises, Insurance
Company, the Fund and the Adviser agree as follows:
ARTICLE I. Sale of Fund Shares
-------------------
1.1. The Fund agrees to sell to Insurance Company those shares of the
Designated Portfolio(s) which the Account orders, executing such orders on a
daily basis at the net asset value next computed after receipt by the Fund or
its designee of the order for the shares of the Portfolios. For purposes of this
Section 1.1, Insurance Company shall be the designee of the Fund for receipt of
such orders and receipt by such designee shall constitute receipt by the Fund,
provided that the Fund receives notice of the applicable order by 10:00 a.m.
Eastern time on the next following Business Day. "Business Day" shall mean any
day on which the New York Stock Exchange is open for trading and on which the
Fund calculates its net asset value pursuant to the rules of the SEC.
1.2. The Fund agrees to make shares of the Designated Portfolio(s)
available for purchase at the applicable net asset value per share by Insurance
Company and the Account on those days on which the Fund calculates its
Designated Portfolio(s)' net asset value pursuant to rules of the SEC, and the
Fund shall calculate such net asset value on each day which the New York Stock
Exchange is open for trading. Notwithstanding the foregoing, the Board of
Trustees of the Fund (hereinafter the "Board") may refuse to sell shares of any
Portfolio to any person, or suspend or terminate the offering of shares of any
Portfolio if such action is required by law or by regulatory authorities having
jurisdiction or is, in the sole discretion of the Board acting in good faith and
in light of their fiduciary duties under federal and any applicable state laws,
necessary in the best interests of the shareholders of such Portfolio.
1.3. The Fund will not sell shares of the Designated Portfolio(s) to
any other insurance company or separate account unless an agreement containing
provisions substantially the same as Sections 2.1, 3.6, 3.7, 3.8, and Article
VII of this Agreement is in effect to govern such sales.
3
<PAGE>
1.4. The Fund agrees to redeem for cash on Insurance Company's request,
any full or fractional shares of the Fund held by Insurance Company, executing
such requests on a daily basis at the net asset value next computed after
receipt by the Fund or its designee of the request for redemption. Requests for
redemption identified by Insurance Company, or its agent, as being in connection
with surrenders, annuitizations, or death benefits under the Contracts, upon
prior written notice, will be executed within seven (7) calendar days after
receipt by the Fund or its designee of the requests for redemption. If permitted
by an order of the SEC under Section 22(e) of the 1940 Act, the Fund shall be
permitted to delay sending redemption proceeds to Insurance Company beyond the
foregoing deadlines, provided, however, that the Account receives similar relief
to defer paying proceeds to Contract Owners, and further, that the Account is
treated no less favorably than the other shareholders of the Designated
Portfolios. This Section 1.4 may be amended, in writing, by the parties
consistent with the requirements of the 1940 Act and interpretations thereof.
For purposes of this Section 1.4, Insurance Company shall be the designee of the
Fund for receipt of requests for redemption and receipt by such designee shall
constitute receipt by the Fund, provided that the Fund receives notice of the
applicable request for redemption by 10:00 a.m. Eastern time on the next
following Business Day.
1.5. The Parties hereto acknowledge that the arrangement contemplated
by this Agreement is not exclusive; the Fund's shares may be sold to other
insurance companies (subject to Section 1.3 and Article VI hereof) and the cash
value of the Contracts may be invested in Unaffiliated Funds.
1.6. Insurance Company shall pay for Fund shares by 11:00 a.m. Eastern
time on the next Business Day after an order to purchase Fund shares is made in
accordance with the provisions of Section 1.1 hereof. Payment shall be in
federal funds transmitted by wire and/or by a credit for any shares redeemed the
same day as the purchase.
1.7. The Fund shall pay and transmit the proceeds of redemptions of
Fund shares by 11:00 a.m. Eastern time on the next Business Day after a
redemption order is received in accordance with Section 1.4 hereof. Payment
shall be in federal funds transmitted by wire and/or a credit for any shares
purchased the same day as the redemption.
4
<PAGE>
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to Insurance Company or the Account.
Shares ordered from the Fund will be recorded in an appropriate title for the
Account or the appropriate sub-account of the Account.
1.9. The Fund or its designee shall furnish same day notice (by wire or
telephone, followed by written confirmation) to Insurance Company of any income,
dividends or capital gain distributions payable on the Designated Portfolio(s)'
shares. Insurance Company hereby elects to receive all such income dividends and
capital gain distributions as are payable on the Portfolio shares in additional
shares of that Portfolio. Insurance Company reserves the right to revoke this
election and to receive all such income dividends and capital gain distributions
in cash. The Fund or its designee shall notify Insurance Company by the end of
the next following Business Day of the number of shares so issued as payment of
such dividends and distributions.
1.10. The Fund shall make the net asset value per share for each
Designated Portfolio available to Insurance Company on a daily basis as soon as
reasonably practical after the net asset value per share is calculated and shall
use its best efforts to make such net asset value per share available by 6:00
p.m. Eastern time. The Fund or its designee shall notify Insurance Company by
5:45 p.m. Eastern time in the event that the Fund cannot meet such 6:00 p.m.
deadline. In such event the Fund shall use its best efforts to make such value
available as soon thereafter as is practicable. If the Fund provides incorrect
share net asset value information, Insurance Company shall be entitled to an
adjustment to the number of shares purchased or redeemed to reflect the correct
net asset value per share (and, if and to the extent necessary, Insurance
Company shall make adjustments to the number of units credited and/or unit
values for the Contracts for the periods affected). In the event adjustments are
required to correct any error in computation of a Portfolio's net asset value
per share, or dividend or capital gain distribution, the Adviser or the fund
shall notify Insurance company as soon as possible after discovering the need
for such adjustments. Notification can be made verbally, but must be confirmed
in writing. If an adjustment is necessary to correct an error which has caused
Contract Owners to receive less than the amount to which they
5
<PAGE>
are entitled, the number of shares of the applicable Contract Owners accounts.
If Contract Owners have received amounts in excess of the amounts to which they
otherwise would have been entitled prior to an adjustment for an error,
Insurance Company, when requested by the Adviser of the Fund, will make a good
faith attempt to collect such excess amounts from the Contract Owners. Any
overpayments that have not yet been paid to Contract Owners will be remitted by
Insurance Company upon notification by the Adviser of such overpayment. In no
event shall Insurance Company be liable to Fund or Advisor for any such
adjustments or overpayment amounts or be required to collect excess amounts from
Contract Owners where prohibited by law or regulation.
ARTICLE II. Representations and Warranties
------------------------------
2.1. Insurance Company represents and warrants that the Contracts are
or will be registered under the 1933 Act; that the Contracts will be issued and
sold in compliance in all material respects with all applicable federal and
state laws and that the sale of the Contracts shall comply in all material
respects with state insurance suitability requirements. Insurance Company
further represents and warrants that it is an insurance company duly organized
and in good standing under applicable law and that it has legally and validly
established the Account prior to any issuance or sale thereof as a segregated
asset account under applicable law (Sections 376 and 400 of the Missouri
Insurance Law) and has registered the Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts.
2.2. The Fund represents and warrants that Designated Portfolio shares
sold pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with all applicable federal
securities laws including without limitation the 1933 Act, the 1934 Act, and the
1940 Act and that the Fund is and shall remain registered under the 1940 Act.
The Fund shall amend the Registration statement for its shares under the 1933
Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares.
2.3. The Fund reserves the right to adopt a plan pursuant to Rule 12b-l
under the 1940 Act and to impose an asset-based or other charge to finance
distribution expenses as permitted by applicable law and regulation. In any
event, the Fund and Adviser agree to comply with applicable provisions and SEC
staff interpretations of the 1940 Act to assure that the investment
6
<PAGE>
advisory or management fees paid to the Adviser by the Fund are legitimate and
not excessive. To the extent that the Fund decides to finance distribution
expenses pursuant to Rule 12b-1, the Fund undertakes to have a Board, a majority
of whom are not interested persons of the Fund, formulate and approve any plan
pursuant to Rule 12b-l under the 1940 Act to finance distribution expenses.
2.4. The Fund represents and warrants that the investment policies,
fees and expenses of the Designated Portfolio(s) are and shall at all times
remain in compliance with the insurance and other applicable laws of the State
of Missouri any other applicable state to the extent required to perform this
Agreement. The Fund further represents and warrants that Designated Portfolio
shares will be sold in compliance with the insurance laws of the State of
Missouri all applicable state insurance and securities laws. Insurance Company
will advise the Fund of any applicable changes in Missouri law that affect the
Designated Portfolios, and the Fund will be deemed to be in compliance with this
Section 2.4 so long as the Fund complies with such advice of Insurance Company.
The Fund shall register and qualify the shares for sale in accordance with the
laws of the various states only if and to the extent deemed advisable by the
Fund with the concurrence of Insurance Company.
2.5. The Fund represents and warrants that it is lawfully organized and
validly existing under the laws of the Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act and the
Exemptive Order and that the Fund is and shall at all times maintain
qualification as a Regulated Investment Company under Subchapter M of the Code
(as defined below).
2.6. The Adviser represents and warrants that it is and shall remain
duly registered under all applicable federal and state securities laws and that
it shall perform its obligations for the Fund in compliance in all material
respects with the laws of the State of Delaware and any applicable state and
federal securities laws, including registration as an investment advisor under
the Investment Advisors Act of 1940.
2.7. The Fund and the Adviser represent and warrant that all of their
officers, employees, investment advisers, and other individuals or entities
dealing with the money and/or securities of
7
<PAGE>
the Fund are, and shall continue to be at all times, covered by a blanket
fidelity bond or similar coverage for the benefit of the Fund in an amount not
less than the minimal coverage required by Section 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.8. The Fund will provide Insurance Company with as much advance
notice as is reasonably practicable of any material change affecting the
Designated Portfolio(s) (including, but not limited to, any material change in
its registration statement or prospectus affecting the Designated Portfolio(s)
and any proxy solicitation affecting the Designated Portfolio(s)) and consult
with Insurance Company in order to implement any such change in an orderly
manner, recognizing the expenses of changes and attempting to minimize such
expenses by implementing them in conjunction with regular annual updates of the
prospectus for the Contracts. The Fund or Adviser agree to share equitably in
expenses incurred by Insurance Company as a result of actions taken by the Fund,
consistent with the allocation of expenses contained in Schedule C.
2.9. The Insurance Company represents, assuming that the Fund complies
with Article VI of this Agreement, that the Contracts are currently treated as
annuity Contracts under applicable provisions of the Internal Revenue Code of
1986 ("the Code"), as amended, and that it will make every effort to maintain
such treatment and that it will notify the Fund immediately upon having a
reasonable basis for believing that the Contracts have ceased to be so treated
or that they might not be so treated in the future.
2.10. Insurance Company represents and warrants that it will not
purchase Fund shares with assets derived from tax-qualified retirement plans
except indirectly, through Contracts purchased in connection with such plans.
2.11. Insurance Company represents and warrants that it will not
transfer or otherwise convey shares of any Designated Portfolio, without the
prior written consent of the Fund, which consent shall not be unreasonably
withheld.
8
<PAGE>
ARTICLE III. Prospectuses and Proxy Statements; Voting
-----------------------------------------
3.1. At least annually, the Fund or the Adviser shall provide Insurance
Company with as many copies of the Fund's current prospectus for the Designated
Portfolio(s) as Insurance Company may reasonably request for marketing purposes
(including distribution to Contract Owners with respect to new sales of a
Contract). If requested by Insurance Company in lieu thereof, the Adviser or
Fund shall provide such documentation (including a final copy of the new
prospectus for the Designated Portfolio(s)) and other assistance as is
reasonably necessary in order for Insurance Company once each year (or more
frequently if the prospectus for the Designated Portfolio are amended) to have
the prospectus for the Contracts and the Fund's prospectus for the Designated
Portfolio(s) printed together in one document. The Fund and Adviser agree that
the prospectus, and semi-annual and annual reports for the Designated
Portfolio(s) provided pursuant to this Section 3.1 will describe only the
Designated Portfolio(s) and will not name or describe any other portfolios or
series that may be in the Fund unless required by law.
3.2. If applicable state or federal laws or regulations require that
the Statement of Additional Information ("SAI") for the Fund be distributed to
all Contract purchasers, then the Adviser or the Fund shall provide Insurance
Company with the Fund's SAI or documentation thereof in such quantities and/or
with expenses to be borne in accordance with Schedule C hereof.
3.3. The Fund or the Adviser shall provide Insurance Company with as
many copies of the Fund's SAI as each of them may reasonably request. The Fund
or the Adviser shall also provide such SAI to any owner of a Contract or
prospective owner who requests such SAI (although it is anticipated that such
requests will be made to Insurance Company).
3.4. The Fund shall provide Insurance Company with copies of its
prospectus, SAI, proxy material, reports to stockholders and other
communications to stockholders for the Designated Portfolio(s) in such quantity
as Insurance Company shall reasonably require for distributing to Contract
Owners.
3.5. It is understood and agreed that, except with respect to
information regarding Insurance Company provided in writing by that party,
Insurance Company is not responsible for
9
<PAGE>
the content of the prospectus or SAI for the Designated Portfolio(s). It is also
understood and agreed that, except with respect to information regarding the
Fund, Adviser or the Designated Portfolio(s) provided in writing by the Fund or
Adviser, neither the Fund nor Adviser are responsible for the content of the
prospectus or SAI for the Contracts.
3.6. If and to the extent required by law Insurance Company shall:
(i) solicit voting instructions from Contract Owners;
(ii) vote the Designated Portfolio shares in accordance with
instructions received from Contract Owners; and
(iii) vote Designated Portfolio shares for which no instructions have
been received in the same proportion as Designated Portfolio
shares for which instructions have been received from Contract
Owners, so long as and to the extent that the SEC continues to
interpret the 1940 Act to require pass-through voting privileges
for variable Contract Owners. Insurance Company reserves the
right to vote Fund shares held in any segregated asset account in
its own right, to the extent permitted by law.
3.7. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts holding shares of a Designated
Portfolio calculates voting privileges in the manner required by the Shared
Funding Exemptive Order. Insurance Company represents that its procedures
currently are in compliance in all material respects with such requirements. The
Fund agrees to promptly notify Insurance Company of any changes of
interpretations or amendments of the Shared Funding Exemptive Order.
3.8. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings (except insofar as the SEC may interpret Section 16 of the 1940
Act not to require such meetings) or, as the Fund currently intends, comply with
Section 16(c) of the 1940 Act (although the Fund is not one of the trusts
described in Section 16(c) of that Act) as well as with Sections 16(a) and, if
and when applicable, 16(b). Further, the Fund will act in accordance with the
SEC's interpretation of the requirements of Section 16(a) with respect to
periodic elections of directors or trustees and with whatever rules the
Commission may promulgate with respect thereto. The Fund reserves the
10
<PAGE>
right, upon 45 days prior written notice to Insurance Company, to take all
actions, including but not limited to, the dissolution, merger, and sale of all
assets of the Fund or any Designated Portfolio upon the sole authorization of
the Board, to the extent permitted by the laws of The Commonwealth of
Massachusetts and the 1940 Act.
ARTICLE IV. Sales Material and Information.
-------------------------------
4.1. Insurance Company shall furnish, or shall cause to be furnished,
to the Fund or its designee, a copy of each piece of major sales literature or
other significant promotional material that Insurance Company develops or
proposes to use and in which the Fund (or a Portfolio thereof), its investment
adviser or one of its sub-advisers or the underwriter for the Fund shares is
named in connection with the Contracts, at least 10 (ten) Business Days prior to
its use. No such material shall be used if the Fund or its designee objects to
such use within 5 (five) Business Days after receipt of such material. The Fund
reserves the right to review any pieces of sales literature or other promotional
material that are not deemed major or significant.
4.2. Insurance Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Adviser, except with the permission of the Fund or the
Adviser.
4.3. The Fund or Adviser shall furnish, or shall cause to be furnished,
to Insurance Company, a copy of each piece of major sales literature or other
significant promotional material in which Insurance Company and/or its separate
account(s) is named at least 10 (ten) Business Days prior to its use. No such
material shall be used if Insurance Company objects to such use within 5 (five)
Business Days after receipt of such material.
4.4. The Fund and the Adviser shall not give any information or make
any representations on behalf of Insurance Company or concerning Insurance
Company, the Account, or the Contracts other than the information or
representations contained in a registration
11
<PAGE>
statement or prospectus for the Contracts, as such registration statement and
prospectus may be amended or supplemented from time to time, or in reports for
the Account, or in sales literature or other promotional material approved by
Insurance Company or its designee, except with the permission of Insurance
Company.
4.5. The Fund will provide to Insurance Company at least one complete
copy of all registration statements, prospectuses, SAIs, reports, proxy
statements, major sales literature and other significant promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that date to the Designated Portfolio(s), contemporaneously
with the filing of such document(s) with the SEC or NASD or other regulatory
authorities.
4.6. Insurance Company will provide to the Fund at least one complete
copy of all registration statements, prospectuses, SAIs, reports, solicitations
for voting instructions, major sales literature and other significant
promotional materials, applications for exemptions, requests for no-action
letters, and all amendments to any of the above, that relate to the Contracts or
the Account, contemporaneously with the filing of such document(s) with the SEC,
NASD, or other regulatory authority.
4.7. For purposes of this Article IV, the phrase "sales literature and
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, SAIs, shareholder reports, and proxy materials.
4.8. At the request of any party to this Agreement, each other party
will make available to the other party's independent auditors and/or
representative of the appropriate regulatory
12
<PAGE>
agencies, all records, data and access to operating procedures that may be
reasonably requested in connection with compliance and regulatory requirements
related to this Agreement or any party's obligations under this Agreement.
ARTICLE V. Fees and Expenses
-----------------
5.1. The Fund and the Adviser shall pay no fee or other compensation to
Insurance Company under this Agreement, and Insurance Company shall pay no fee
or other compensation to the Fund or Adviser under this Agreement, although the
parties hereto will bear certain expenses in accordance with Schedule C,
Articles III, V, and other provisions of this Agreement.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund, as further provided in Schedule C. The Fund
shall see to it that all shares of the Designated Portfolio(s) are registered
and authorized for issuance in accordance with applicable federal law and, if
and to the extent deemed advisable by the Fund, in accordance with applicable
state laws prior to their sale.
5.3. The parties shall bear the expenses of routine annual distribution
(mailing costs) of the Fund's prospectus and distribution (mailing costs) of the
Fund's proxy materials and reports to owners of Contracts offered by Insurance
Company, as provided in Schedule C.
5.4. The Fund and Adviser acknowledge that a principal feature of the
Contracts is the Contract owner's ability to choose from a number of
unaffiliated mutual funds (and portfolios or series thereof), including the
Designated Portfolio(s) and the Unaffiliated Funds, and to transfer the
Contract's cash value between funds and portfolios. The Fund and Adviser agree
to cooperate with Insurance Company facilitating the operation of the Account
and the Contracts as intended, including but not limited to, cooperation in
facilitating transfers between Unaffiliated Funds.
5.5. Insurance Company agrees to provide certain administrative
services in connection with the arrangements contemplated by this Agreement. The
parties acknowledge and agree that the services referred to in this Section 5.5
are recordkeeping, shareholder communication, and other transaction facilitation
and processing, and related administrative services only and are not
13
<PAGE>
the services of an underwriter or a principal underwriter of the Fund and that
Insurance Company not an underwriter for the shares of the Designated
Portfolio(s), within the meaning of the 1933 Act or the 1940 Act.
ARTICLE VI. Diversification and Qualification
---------------------------------
6.1. The Fund and Adviser represent and warrant that the Fund will at
all times sell its shares and invest its assets in such a manner as to ensure
that the Contracts will be treated as annuity Contracts under the Code, and the
regulations issued thereunder. Without limiting the scope of the foregoing, the
Fund and Adviser represent and warrant that the Fund and each Designated
Portfolio thereof will at all times comply with Section 817(h) of the Code and
Treasury Regulation ss.1.817-5, as amended from time to time, and any Treasury
interpretations thereof, relating to the diversification requirements for
variable annuity, endowment, or life insurance Contracts and any amendments or
other modifications or successor provisions to such Section or Regulations. The
Fund and the Adviser agree that shares of the Designated Portfolio(s) will be
sold only to Participating Insurance Companies and their separate accounts.
6.2. No shares of any series or portfolio of the Fund will be sold to
the general public.
6.3. The Fund and Adviser represent and warrant that the Fund and each
Designated Portfolio is currently qualified as a Regulated Investment Company
under Subchapter M of the Code, and that it will maintain such qualification
(under Subchapter M or any successor or similar provisions) as long as this
Agreement is in effect.
6.4. The Fund or Adviser will notify Insurance Company immediately upon
having a reasonable basis for believing that the Fund or any Portfolio has
ceased to comply with the aforesaid Section 817(h) diversification or Subchapter
M qualification requirements or might not so comply in the future.
6.5. The Fund and Adviser acknowledge that full compliance with the
requirements referred to in Sections 6.1, 6.2, and 6.3 hereof is absolutely
essential because any failure to meet those requirements would result in the
Contracts not being treated as annuity Contracts for federal income tax
purposes, which would have adverse tax consequences for Contract Owners
14
<PAGE>
and could also adversely affect Insurance Company corporate tax liability. The
Fund and Adviser also acknowledge that it is solely within their power and
control to meet those requirements. Accordingly, without in any way limiting the
effect of Section 8.3 hereof and without in any way limiting or restricting any
other remedies available to Insurance Company, the Adviser will pay all costs
associated with or arising out of any failure, or any anticipated or reasonably
foreseeable failure, of the Fund or any Designated Portfolio to comply with
Sections 6.1, 6.2, or 6.3 hereof, including all costs associated with reasonable
and appropriate corrections or responses to any such failure; such costs may
include, but are not limited to, the costs involved in creating, organizing, and
registering a new investment company as a funding medium for the Contracts
and/or the costs of obtaining whatever regulatory authorizations are required to
substitute shares of another investment company for those of the failed
Portfolio (including but not limited to an order pursuant to Section 26(b) of
the 1940 Act); such costs are to include, but are not limited to, fees and
expenses of legal counsel and other advisors to Insurance Company and any
federal income taxes or tax penalties (or "toll charges" or exactments or
amounts paid in settlement) incurred by Insurance Company with respect to itself
or owners of its Contracts in connection with any such failure or anticipated or
reasonably foreseeable failure.
6.6. The Fund shall be in compliance with the aforesaid Section 817(h)
diversification and Subchapter M qualification requirements, and will notify
Insurance Company if the Fund shall ever be out of compliance.
ARTICLE VII. Potential Conflicts and Compliance With
Shared Funding Exemptive Order
---------------------------------------
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the Contract Owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Designated Portfolio(s) are being managed; (e) a difference in voting
15
<PAGE>
instructions given by variable annuity contract and variable life insurance
Contract Owners; or (f) a decision by a Participating Insurance Company to
disregard the voting instructions of Contract Owners. The Board shall promptly
inform Insurance Company if it determines that an irreconcilable material
conflict exists and the implications thereof.
7.2. Insurance Company will report any potential or existing conflicts
of which it is aware to the Board. Insurance Company will assist the Board in
carrying out its responsibilities under the Shared Funding Exemptive Order, by
providing the Board with all information reasonably necessary for the Board to
consider any issues raised. This includes, but is not limited to, an obligation
by Insurance Company to inform the Board whenever Contract Owner voting
instructions are to be disregarded. Such responsibilities (other than the duty
to report, which is unqualified) shall be carried out by Insurance Company with
a view only to the interests of its Contract Owners.
7.3. If it is determined by a majority of the Board, or a majority of
its directors who are not interested persons of the Fund, the Adviser or any
sub-adviser to any of the Portfolios (the "Independent Directors"), that a
material irreconcilable conflict exists, Insurance Company and other
Participating Insurance Companies shall, at their expense and to the extent
reasonably practicable (as determined by a majority of the Independent
Directors), take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, up to and including: (1) withdrawing the
assets allocable to some or all of the separate accounts from the Fund or any
Designated Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Designated Portfolio of the Fund,
or submitting the question whether such segregation should be implemented to a
vote of all affected Contract Owners and, as appropriate, segregating the assets
of any appropriate group (i.e., annuity Contract Owners, life insurance Contract
Owners, or variable Contract Owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
Contract Owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision
by Insurance Company to disregard contract owner voting instructions and that
decision represents a minority
16
<PAGE>
position or would preclude a majority vote, Insurance Company may be required,
at the Fund's election, to withdraw the Account's investment in the Fund and
terminate this Agreement; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the Independent
Directors. Any such withdrawal and termination must take place within six (6)
months after the Fund gives written notice that this provision is being
implemented, and until the end of the effective date of such termination the
Fund shall continue to accept and implement orders by Insurance Company the
purchase (and redemption) of shares of the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to Insurance Company conflicts
with the majority of other state regulators, then Insurance Company will
withdraw the Account's investment in the Fund and terminate this Agreement
within six months after the Board informs Insurance Company in writing that it
has determined that such decision has created an irreconcilable material
conflict; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Until the
end of the effective date of such termination the Fund shall continue to accept
and implement orders by Insurance Company for the purchase (and redemption) of
shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the Independent Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Fund be required to establish a new funding medium for the Contracts.
Insurance Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract Owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then Insurance Company will withdraw the Account's investment in the
Fund and terminate this Agreement within six (6) months after the Board informs
Insurance Company in writing of the foregoing determination; provided, however,
that such
17
<PAGE>
withdrawal and termination shall be limited to the extent required by
any such material irreconcilable conflict as determined by a majority of the
Independent Trustees.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies,
as appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
rules are applicable: and (b) Sections 3.6, 3.7, 3.8, 7.1, 7.2, 7.3, 7.4, and
7.5 of this Agreement shall continue in effect only to the extent that terms and
conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
---------------
8.1. Indemnification By Insurance Company
8. l(a). Insurance Company agrees to indemnify and hold harmless the
Fund and its officers and each member of its Board and the Adviser
(collectively, the "Indemnified Parties" for purposes of this Section 8.1)
against any and all losses, claims, expenses, damages, liabilities (including
amounts paid in settlement with the written consent of Insurance Company) or
litigation (including legal and other expenses) to which the Indemnified Parties
may become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, expenses, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the
registration statement or prospectus or SAI for the Contracts or
contained in the Contracts or sales literature for the Contracts
(or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this Agreement to indemnify shall not
apply as to any Indemnified Party if such
18
<PAGE>
statement or omission or such alleged statement or omission was
made in reliance upon and in conformity with information
furnished in writing to Insurance Company on behalf of the
Adviser or Fund for use in the registration statement or
prospectus for the Contracts or in the Contracts or sales
literature (or any amendment or supplement) or otherwise for use
in connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in any
registration statement, prospectus, or SAI for any Unaffiliated
Fund, or arise out of or are based upon the omission or alleged
omission to state therein a material fact or necessary to make
the statements therein not misleading, or otherwise pertain to or
arise in connection with the availability of any Unaffiliated
Funds as an underlying funding vehicle in respect of the
Contracts; or
(iii) arise out of or are based upon statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature of the
Fund not supplied by Insurance Company or persons under its
control) or wrongful conduct of Insurance Company or persons
under its control, with respect to the sale or distribution of
the Contracts or Fund Shares; or
(iv) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in a registration
statement, prospectus, or sales literature of the Fund or any
amendment thereof or supplement thereto or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading if such a statement or omission was made in reliance
upon information furnished in writing to the Fund by or on behalf
of Insurance Company; or
(v) arise as a result of any failure by Insurance Company to provide
the services and furnish the materials under the terms of this
Agreement; or
(vi) arise out of or result from any material breach of any
representation and/or warranty made by Insurance Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by Insurance Company.
as limited by and in accordance with any provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1 (b). Insurance Company shall not be liable under this
indemnification provision with respect to any losses, claims, expenses, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
negligence in the performance of such Indemnified Party's duties or by reason of
19
<PAGE>
such Indemnified Party's reckless disregard of obligations or duties under this
Agreement or to the Fund, whichever is applicable.
8.1 (c). Insurance Company shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified Insurance Company in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify Insurance Company
of any such claim shall not relieve Insurance Company from any liability which
it may have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision, except to the
extent that Insurance Company has been prejudiced by such failure to give
notice. In case any such action is brought against the Indemnified Parties,
Insurance Company shall be entitled to participate, at its own expense, in the
defense of such action. Insurance Company also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from Insurance Company to such party of Insurance Company's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and Insurance
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.1 (d). The Indemnified Parties will promptly notify Insurance Company
of the commencement of any litigation or proceedings against them in connection
with the issuance or sale of the Fund Shares or the Contracts or the operation
of the Fund should such litigation or proceedings represent, allege or concern a
material breach of any representation, warranty or covenant of this Agreement.
8.2. Indemnification by the Adviser
8.2 (a). The Adviser agrees to indemnify and hold harmless Insurance
Company and each of its directors and officers and each person, if any, who
controls Insurance Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of
20
<PAGE>
this Section 8.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Adviser)
or litigation (including legal and other expenses) to which the Indemnified
Parties may become subject under any statute or regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
registration statement or prospectus or SAI or sales literature
of the Fund (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this Agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon
and in conformity with information furnished in writing to the
Adviser or Fund by or on behalf of Insurance Company for use in
the registration statement or prospectus for the Fund or in sales
literature (or any amendment or supplement) or otherwise for use
in connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or are based upon statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature for the
Contracts not supplied by the Adviser or persons under its
control) or wrongful conduct of the Fund or Adviser or persons
under their control, with respect to the sale or distribution of
the Contracts or Fund shares; or
(iii) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in a registration
statement, prospectus or sales literature covering the Contracts,
or any amendment thereof or supplement thereto, or the omission
or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statement or
statements therein not misleading, if such statement or omission
was made in reliance upon information furnished in writing to
Insurance Company by or on behalf of the Adviser or Fund; or
(iv) arise as a result of any failure by the Fund or Adviser to
provide the services and furnish the materials under the terms of
this Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification and
other qualification requirements specified in Article VI of this
Agreement); or
21
<PAGE>
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Fund or Adviser in
this Agreement or arise out of or result from any other material
breach of this Agreement by the Adviser;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof. This indemnification is in addition to and apart from the
responsibilities and obligations of the Adviser specified in Article VI hereof.
8.2(b). The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or negligence in the
performance or such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
Insurance Company or the Account, whichever is applicable.
8.2(c). The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Adviser of any
such claim shall not relieve the Adviser from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision, except to the extent that the Adviser
has been prejudiced by such failure to give notice. In case any such action is
brought against the Indemnified Parties, the Adviser will be entitled to
participate, at its own expense, in the defense thereof. The Adviser also shall
be entitled to assume the defense thereof, with counsel satisfactory to the
party named in the action. After notice from the Adviser to such party of the
Adviser's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Adviser will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
22
<PAGE>
8.2(d). Insurance Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of the Account should such litigation or proceedings represent, allege
or concern a material breach of any representation, warranty or covenant of this
Agreement.
8.3. Indemnification By the Fund
8.3(a). The Fund agrees to indemnify and hold harmless Insurance
Company and each of its directors and officers and each person, if any, who
controls Insurance Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, expenses, damages, liabilities (including
amounts paid in settlement with the written consent of the Fund) or litigation
(including legal and other expenses) to which the Indemnified Parties may be
required to pay or may become subject under any statute or regulation, at common
law or otherwise, insofar as such losses, claims, expenses, damages, liabilities
or expenses (or actions in respect thereof) or settlements, are related to the
operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in good
faith or otherwise, to comply with the diversification and other
qualification requirements specified in Article VI of this
Agreement); or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund; or
(iii) arise out of or result from the incorrect or untimely
calculation or reporting of the daily net asset value per share
or dividend or capital gain distribution rate;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith,
23
<PAGE>
or negligence in the performance of such Indemnified Party's duties or by reason
of such Indemnified Party's reckless disregard of obligations and duties under
this Agreement or to Insurance Company, the Fund, the Adviser or the Account,
whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision, except to the extent that the Fund
has been prejudiced by such failure to give notice. In case any such action is
brought against the Indemnified Parties, the Fund will be entitled to
participate, at its own expense, in the defense thereof. The Fund also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Fund to such party of the Fund's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Fund will
not be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.3(d). Insurance Company agrees promptly to notify the Fund of the
commencement of any litigation or proceeding against itself or any of its
respective officers or directors in connection with the Agreement, the issuance
or sale of the Contracts, the operation of the Account, or the sale or
acquisition of shares of the Fund should such litigation or proceedings
represent, allege or concern a material breach of any representation, warranty
or covenant of this Agreement.
24
<PAGE>
ARTICLE IX. Applicable Law
--------------
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to, the
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
25
<PAGE>
ARTICLE X. Termination
-----------
10.1. This Agreement shall terminate:
(a) at the option of any party, with or without cause, with respect
to some or all Designated Portfolios, upon one ( 1 ) year advance
written notice delivered to the other parties; provided, however,
that such notice shall not be given earlier than one year
following the date of this Agreement; or
(b) at the option of Insurance Company by written notice to the other
parties with respect to any Designated Portfolio based upon
Insurance Company reasonable and good faith determination that
shares of such Designated Portfolio are not reasonably available
to meet the requirements of the Contracts; or
(c) at the option of Insurance Company by written notice to the other
parties with respect to any Designated Portfolio in the event any
of the Designated Portfolio's shares are not registered, issued
or sold in accordance with applicable state and/or federal law or
such law precludes the use of such shares as the underlying
investment media of the Contracts issued or to be issued by
Insurance Company; or
(d) at the option of the Fund in the event that formal administrative
proceedings are instituted against Insurance Company by the NASD,
the SEC, the Insurance Commissioner or like official of any state
or any other regulatory body regarding Insurance Company's duties
under this Agreement or related to the sale of the Contracts, the
operation of any Account, or the purchase of the Fund shares or
the shares or sponsor of any Unaffiliated Fund, provided,
however, that the Fund determines in its sole judgment exercised
reasonably and in good faith, that any such administrative
proceedings will have a material adverse effect upon the ability
of Insurance Company to perform its obligations under this
Agreement or would have a material adverse impact upon the Fund;
or
(e) at the option of Insurance Company in the event that formal
administrative proceedings are instituted against the Fund or
Adviser by the NASD, the SEC, or any state securities or
insurance department or any other regulatory body, provided,
however, that Insurance Company determines in its sole judgment
exercised reasonably and in good faith, that any such
administrative proceedings will have a material adverse effect
upon the ability of the Fund or Adviser to perform its
obligations under this Agreement; or
(f) at the option of Insurance Company by written notice to the Fund
and the Adviser with respect to any Portfolio if Insurance
Company reasonably and
26
<PAGE>
in good faith believes that the Portfolio will fail to meet the
Section 817(h) diversification requirements or Subchapter M
qualifications specified in Article VI hereof; or
(g) at the option of either the Fund or the Adviser, if (i) the Fund
or Adviser, respectively, shall determine, in their sole judgment
reasonably exercised in good faith, that Insurance Company has
suffered a material adverse change in their business or financial
condition or is the subject of material adverse publicity and
that material adverse change or publicity will have a material
adverse impact on Insurance Company's ability to perform its
obligations under this Agreement, (ii) the Fund or Adviser
notifies Insurance Company of that determination and its intent
to terminate this Agreement, and (iii) after considering the
actions taken by Insurance Company and any other changes in
circumstances since the giving of such a notice, the
determination of the Fund or Adviser shall continue to apply on
the sixtieth (60th) day following the giving of that notice,
which sixtieth day shall be the effective date of termination; or
(h) at the option of Insurance Company, if (i) Insurance Company
shall determine, in its sole judgment reasonably exercised in
good faith, that either the Fund or the Adviser have suffered a
material adverse change in their business or financial condition
or is the subject of material adverse publicity and that material
adverse change or publicity will have a material adverse impact
on the Fund's or Adviser's ability to perform its obligations
under this Agreement, (ii) Insurance Company notifies the Fund or
Adviser, as appropriate, of that determination and its intent to
terminate this Agreement, and (iii) after considering the actions
taken by the Fund or Adviser and any other changes in
circumstances since the giving of such a notice, the
determination of Insurance Company shall continue to apply on the
sixtieth (60th) day following the giving of that notice, which
sixtieth (60th) day shall be the effective date of termination;
or
10.2. Notice Requirement. No termination of this Agreement shall be
effective unless and until the party terminating this Agreement gives prior
written notice to all other parties of its intent to terminate, which notice
shall set forth the basis for the termination.
10. 3. Effect of Termination. Notwithstanding any termination of this
Agreement, the Fund and the Adviser shall, at the option of Insurance Company
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Designated
Portfolio(s) (as in effect on such
27
<PAGE>
date), redeem investments in such Designated Portfolio(s) and/or invest in such
Designated Portfolio(s) upon the making of additional purchase payments under
the Existing Contracts. The parties agree that this Section 10.3 shall not apply
to any terminations under Article VII and the effect of such Article VII
terminations shall be governed by Article VII of this Agreement.
10.4. Surviving Provisions. Notwithstanding any termination of this
Agreement, each party's obligations under Article VIII to indemnify other
parties shall survive and not be affected by any termination of this Agreement.
In addition, with respect to Existing Contracts, all provisions of this
Agreement shall also survive and not be affected by any termination of this
Agreement.
ARTICLE XI. Notices
-------
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
SteinRoe Variable Investment Trust
c/o Liberty Investment Services, Inc.
600 Atlantic Avenue
Boston, MA 02210
Attention: Secretary
If to Insurance Company:
Providian Corporation
400 West Market Street
Louisville, KY 40202
ATTN: John Fendig
Attention:
28
<PAGE>
If to the Adviser:
Stein Roe & Farnham Incorporated
One South Wacker Drive
Chicago, IL 60606
Attention: Secretary
ARTICLE XII. Miscellaneous
12.1. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information without the express written consent
of the affected party until such time as such information may come into the
public domain. Without limiting the foregoing, no party hereto shall disclose
any information designated as proprietary by another party.
12.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.3. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.4. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.5. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the NASD and state insurance regulators) and
shall permit such authorities reasonable access to its books and records in
connection with any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby. Notwithstanding the generality of the
foregoing, each party hereto further agrees to furnish the Missouri Insurance
Commission with any information
29
<PAGE>
or reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the variable annuity
operations of Insurance Company are being conducted in a manner consistent with
the Missouri Variable Annuity Regulations and any other applicable law or
regulations.
12.6. The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
12.7. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto.
12.8. All persons dealing with the Fund and any Designated Portfolio
shall look solely to the assets of such Designated Portfolio for the enforcement
of any claims against the Fund hereunder. Each other party acknowledges and
agrees that none of the Trustees, officers or shareholders of the Fund shall
have any personal liability for any obligations entered into by or on behalf of
the Fund.
30
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
By its authorized officer,
By:
-------------------------------------
Title:
-------------------------------------
Date:
-------------------------------------
Adviser:
STEIN ROE & FARNHAM INCORPORATED
By its authorized officer,
By:
-------------------------------------
Title:
-------------------------------------
Date:
-------------------------------------
Fund:
STEINROE VARIABLE INVESTMENT TRUST,
ON BEHALF OF THE DESIGNATED
PORTFOLIO(S)
By its authorized officer,
By:
-------------------------------------
Title:
-------------------------------------
Date:
-------------------------------------
31
<PAGE>
SCHEDULE A
----------
Form
Contracts Numbers
--------- -------
Providian Advisor's Edge Variable Annuity
<PAGE>
SCHEDULE B
----------
SteinRoe Capital Appreciation Fund
<PAGE>
SCHEDULE C
----------
Expenses
--------
1. The Fund and Insurance Company will pay the costs of printing and/or
distributing copies of the documents based upon an allocation of costs
that reflects the Fund's share of the total costs determined according to
the number of pages of the parties' and other funds' respective portions
of the documents.
2. The Adviser and Insurance Company will pay the costs of printing and/or
distributing copies of the documents based upon an allocation of costs
that reflects the Adviser's share of the total costs determined according
to the number of pages of the parties' and other funds' respective
portions of the documents.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
RESPONSIBLE
ITEM FUNCTION PARTY
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PROSPECTUS
- ---------------------------------------------------------------------------------------------------------------------
Annual Update Printing 1
Distribution 1
- ---------------------------------------------------------------------------------------------------------------------
New Sales: Marketing (supply and distribution of prospectuses to persons 2
who have not yet invested in a Designated Portfolio)
Delivery of prospectuses to satisfy legal prospectus delivery
requirements (e.g., copies sent with confirmations of sales) 1
- ---------------------------------------------------------------------------------------------------------------------
Existing Owners: Supply quantities described in Section 3.4 1
Distribution 1
- ---------------------------------------------------------------------------------------------------------------------
Interim Updates
- ---------------------------------------------------------------------------------------------------------------------
New Sales: Marketing (supply and distribution of prospectuses to persons 2
who have not yet invested in a Designated Portfolio)
Delivery of prospectuses to satisfy legal prospectus delivery
requirements (e.g., copies sent with confirmations of sales) 1
If required by Participating Insurance Company (PIC) PIC
C-1
<PAGE>
- ---------------------------------------------------------------------------------------------------------------------
Existing Owners: If required by Fund or Adviser: Fund
If required by PIC: PIC
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL Same as Prospectus Same
INFORMATION
- ---------------------------------------------------------------------------------------------------------------------
PROXY MATERIALS OF THE Printing Fund
FUND
Distribution
(a) If required by law: Fund
(b) If required by participating insurance company PIC
- ---------------------------------------------------------------------------------------------------------------------
ANNUAL REPORTS & OTHER Printing Fund
COMMUNICATIONS WITH
SHAREHOLDERS OF THE FUND Distribution 1
- ---------------------------------------------------------------------------------------------------------------------
OPERATIONS OF FUND All operations and related expenses, including the cost of Fund
registration and qualification of the Fund's shares,
preparation and filing of the Fund's prospectus and
registration statement, proxy materials and reports,
the preparation of all statements and notices
required by any federal or state law and all taxes
on the issuance of the Fund's shares, and all costs
of management of the business
affairs of the Fund.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
C-2
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 to 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
Chicago, Illinois
April 25, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> CAPITAL APPRECIATION FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 179089
<INVESTMENTS-AT-VALUE> 195371
<RECEIVABLES> 2829
<ASSETS-OTHER> 68
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 198268
<PAYABLE-FOR-SECURITIES> 111
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1938
<TOTAL-LIABILITIES> 2049
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 142777
<SHARES-COMMON-STOCK> 9464
<SHARES-COMMON-PRIOR> 8773
<ACCUMULATED-NII-CURRENT> 263
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 36897
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16282
<NET-ASSETS> 196219
<DIVIDEND-INCOME> 797
<INTEREST-INCOME> 805
<OTHER-INCOME> 0
<EXPENSES-NET> 1261
<NET-INVESTMENT-INCOME> 341
<REALIZED-GAINS-CURRENT> 37126
<APPREC-INCREASE-CURRENT> 1982
<NET-CHANGE-FROM-OPS> 39429
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 59130
<NUMBER-OF-SHARES-REDEEMED> (45589)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 52971
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (78)
<OVERDIST-NET-GAINS-PRIOR> (210)
<GROSS-ADVISORY-FEES> 851
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1261
<AVERAGE-NET-ASSETS> 169198
<PER-SHARE-NAV-BEGIN> 16.33
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 4.36
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.73
<EXPENSE-RATIO> .75
<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-30-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 67228
<INVESTMENTS-AT-VALUE> 67228
<RECEIVABLES> 1751
<ASSETS-OTHER> 60
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 69038
<PAYABLE-FOR-SECURITIES> 3500
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 77
<TOTAL-LIABILITIES> 3577
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 65461
<SHARES-COMMON-STOCK> 65461
<SHARES-COMMON-PRIOR> 64992
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 65461
<NET-ASSETS> 0
<DIVIDEND-INCOME> 3641
<INTEREST-INCOME> 0
<OTHER-INCOME> 427
<EXPENSES-NET> 3214
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 3214
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 3214
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 57327
<NUMBER-OF-SHARES-SOLD> 60072
<NUMBER-OF-SHARES-REDEEMED> 3214
<SHARES-REINVESTED> 469
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 230
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 427
<AVERAGE-NET-ASSETS> 65645
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .049
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .049
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .65
<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-30-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 255679
<INVESTMENTS-AT-VALUE> 296121
<RECEIVABLES> 3412
<ASSETS-OTHER> 125
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 299657
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 473
<TOTAL-LIABILITIES> 473
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 223301
<SHARES-COMMON-STOCK> 18379
<SHARES-COMMON-PRIOR> 19674
<ACCUMULATED-NII-CURRENT> 10358
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 25081
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 40444
<NET-ASSETS> 299184
<DIVIDEND-INCOME> 3452
<INTEREST-INCOME> 8968
<OTHER-INCOME> 0
<EXPENSES-NET> 1907
<NET-INVESTMENT-INCOME> 10513
<REALIZED-GAINS-CURRENT> 25179
<APPREC-INCREASE-CURRENT> 5973
<NET-CHANGE-FROM-OPS> 41664
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23323
<NUMBER-OF-SHARES-REDEEMED> (42816)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 22171
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (154)
<OVERDIST-NET-GAINS-PRIOR> (98)
<GROSS-ADVISORY-FEES> 1294
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1907
<AVERAGE-NET-ASSETS> 285986
<PER-SHARE-NAV-BEGIN> 14.08
<PER-SHARE-NII> .57
<PER-SHARE-GAIN-APPREC> 1.63
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.28
<EXPENSE-RATIO> .67
<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-30-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 102488
<INVESTMENTS-AT-VALUE> 161748
<RECEIVABLES> 192
<ASSETS-OTHER> 64
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 162004
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 125
<TOTAL-LIABILITIES> 125
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 94454
<SHARES-COMMON-STOCK> 5658
<SHARES-COMMON-PRIOR> 5802
<ACCUMULATED-NII-CURRENT> 688
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7476
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 59261
<NET-ASSETS> 161879
<DIVIDEND-INCOME> 1387
<INTEREST-INCOME> 424
<OTHER-INCOME> 0
<EXPENSES-NET> 1082
<NET-INVESTMENT-INCOME> 729
<REALIZED-GAINS-CURRENT> 7580
<APPREC-INCREASE-CURRENT> 20203
<NET-CHANGE-FROM-OPS> 28512
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 22263
<NUMBER-OF-SHARES-REDEEMED> (25730)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 25045
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (40)
<OVERDIST-NET-GAINS-PRIOR> (104)
<GROSS-ADVISORY-FEES> 744
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1082
<AVERAGE-NET-ASSETS> 147912
<PER-SHARE-NAV-BEGIN> 23.59
<PER-SHARE-NII> .13
<PER-SHARE-GAIN-APPREC> 4.89
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 28.61
<EXPENSE-RATIO> .73
<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-30-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 74922
<INVESTMENTS-AT-VALUE> 75313
<RECEIVABLES> 682
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 85
<TOTAL-ASSETS> 76080
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 71
<TOTAL-LIABILITIES> 71
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 78959
<SHARES-COMMON-STOCK> 7724
<SHARES-COMMON-PRIOR> 10019
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (299)
<ACCUMULATED-NET-GAINS> (3042)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 391
<NET-ASSETS> 76009
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6203
<OTHER-INCOME> 0
<EXPENSES-NET> 586
<NET-INVESTMENT-INCOME> 5617
<REALIZED-GAINS-CURRENT> (196)
<APPREC-INCREASE-CURRENT> (1957)
<NET-CHANGE-FROM-OPS> 3463
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5700)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4581
<NUMBER-OF-SHARES-REDEEMED> (33813)
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<OVERDISTRIB-NII-PRIOR> (129)
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<AVERAGE-NET-ASSETS> 83729
<PER-SHARE-NAV-BEGIN> 10.16
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<PER-SHARE-GAIN-APPREC> (.30)
<PER-SHARE-DIVIDEND> (.80)
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<EXPENSE-RATIO> .7
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
