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 cover page continues on the following page.)
The date of this prospectus is May 1, 1996
This Prospectus contains information about the Fund that
a prospective investor should know before applying for
certain variable annuity contracts and variable life
insurance policies offered by separate accounts of insurance
companies investing in shares of the Fund. Please read it
carefully and retain it for future reference.
Additional facts about the Trust (including the Fund)
are included in a Statement of Additional Information dated
May 1, 1996, incorporated herein by reference, which has been
filed with the Securities and Exchange Commission. For a free
copy call or write to the 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 OF PARTICIPATING INSURANCE COMPANIES.
____________________________________________________________
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS
FOR THE APPROPRIATE VA CONTRACT OR VLI POLICIES OF
PARTICIPATING INSURANCE COMPANIES. BOTH PROSPECTUSES SHOULD
BE READ AND RETAINED FOR FUTURE REFERENCE.
TABLE OF CONTENTS
Page
The Trust...................................4
Financial Highlights........................5
How the Fund Invests........................6
Investment Techniques and Restrictions......7
Portfolio Turnover.................... ... 8
How the Fund is Managed.....................9
Purchases and Redemptions..................11
Investment Return..........................11
Net Asset Value............................12
Taxes......................................13
Dividends and Distributions................15
Shareholder Communications.................15
Organization and Description of Shares. ...15
Additional Information.....................16
Appendix A: Investment Techniques and
Securities.............................A-1
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.
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 management, administrative and transfer agent
services to the Fund. Keyport Financial Services Corp. (the
Underwriter) serves as the principal underwriter for sales of
the Fund's shares to the Keyport entities. The Adviser, the
Underwriter and the Keyport entities are wholly owned
indirect subsidiaries of Liberty Financial Companies, Inc.
("LFC"). As of March 31, 1996, approximately 81.5% of the
combined voting power of LFC's outstanding voting stock was
owned, indirectly, by Liberty Mutual Insurance Company
(Liberty Mutual).
FINANCIAL HIGHLIGHTS
The table below presents certain financial information
for the Fund for the period beginning January 1, 1989 and
ending December 31, 1995. The information has been audited
and reported on by the Trust's independent auditors, KPMG
Peat Marwick LLP. The report of KPMG Peat Marwick LLP for
periods beginning on January 1, 1991 appears in the Trust's
annual report to shareholders for the fiscal year ended
December 31, 1995 (which may be obtained from the broker-
dealer offering the Participating Insurance Company's
variable annuity contracts) and is incorporated by reference
into this Statement of Additional 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 the separate accounts of Participating
Insurance Companies.
<TABLE>
<CAPTION>
Capital Appreciation Fund
Financial Highlights
(for a share outstanding throughout the period)
Years Ended December 31
1995 1994 1993 1992 1991 1990 1989
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share operating
performance:
Net asset value, beginning
of year $14.74 $16.53 $15.34 $15.32 $12.07 $14.79 $13.62
------ ------ ------ ------ ------ ------ ------
Net investment income 0.04 0.06 0.03 -- 0.21 0.19 0.23
Net realized and unrealized
gains/(losses) on
investments 1.69 0.09 5.22 2.17 4.19 (1.53) 3.90
------ ------ ------ ------ ------ ------ ------
Total from investment
operations 1.73 0.15 5.25 2.17 4.40 (1.34) 4.13
------ ------ ------ ------ ------ ------ ------
Less distributions:
Distributions from and in
excess of net investment
income (0.04) (0.07) (0.02) -- (0.15) (0.28) (0.22)
Distributions from and in
excess of net realized
gains on investments (0.10) (1.87) (4.04) (2.15) (1.00) (1.10) (2.25)
Return of capital -- -- -- -- -- -- (0.49)
------ ------ ------ ------ ------ ------ ------
Total distributions (0.14) (1.94) (4.06) (2.15) (1.15) (1.38) (2.96)
------ ------ ------ ------ ------ ------ ------
Net asset value, end of
year $16.33 $14.74 $16.53 $15.34 $15.32 $12.07 $14.79
====== ====== ====== ====== ====== ====== ======
Total return:
Total investment return 11.75% 1.19%(b) 35.68%(b) 14.48% 37.25% (8.91%) 30.84%
Ratios/supplemental data:
Net assets, end of year
(000s) $143,248 134,078 $96,544 $52,135 $41,179 $33,238 $32,176
Ratio of expenses to
average net assets 0.76% 0.80%(a) 0.84%(a) 1.01% 1.03% 1.14% 1.08%
Ratio of net investment
income to average net
assets 0.26% 0.44%(b) 0.13%(b) (0.01)% 1.35% 1.43% 1.14%
Portfolio turnover ratio 132% 144% 112% 85% 36% 121% 153%
<FN>
(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.
</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, 1995, 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 any Fund
will achieve its investment objective.
The Fund and its investment objectives and policies and
are described below. The Fund's investment objective is
fundamental and may be changed only by a vote
of the Board and of the shareholders.
More information about the portfolio securities in which
the Fund invests, including certain risks and investment
limitations, is provided in Appendix A to this Prospectus and
Appendix A in the Trust's Statement of Additional
Information.
Capital Appreciation Fund seeks to provide shareholders
with growth of capital. It pursues this objective by
investing primarily in common stocks, securities convertible
into common stocks and securities having common stock
characteristics, including rights and warrants, selected
primarily for prospective capital growth. The Fund invests in
both domestic and foreign companies.
Investments in newer and smaller companies (those having
a market capitalization of less than $500,000,000),
particularly those believed to be in the earlier phases of
growth, are emphasized. The Fund may also invest in
securities of larger, more established companies that the
Adviser believes possess some of the same characteristics as
smaller companies. While income is not an objective,
securities appearing to offer attractive possibilities for
future growth of income may be included in the Fund's
portfolio.
Investor Considerations
The type of securities in which the Fund invests may be
expected to experience wide fluctuations in price in both
rising and declining markets. The Fund may be expected to
experience a greater degree of market and financial risk than
other equity portfolios. The Fund's portfolio may include
securities that are not widely traded or new issues of
securities. The foreign companies in which the Fund invests
may include companies whose operations are limited to a
single country or group of countries. The value of such
investments may be significantly impacted by factors (both
positive and negative) affecting the local economy of such
country or countries.
INVESTMENT TECHNIQUES AND RESTRICTIONS
Techniques
The Fund may invest up to 25% of its total assets in
securities of foreign issuers as more fully described in
Appendix A to this Prospectus. The Fund typically holds
foreign companies in its portfolio.
When the Adviser believes that the currency of a
particular foreign country may suffer a substantial decline
against the U.S. dollar, it may cause the Fund to enter into
forward contracts to sell an amount of foreign currency
approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency.
The Adviser may also cause the Fund to enter into forward
foreign currency contracts to protect against loss between
trade and settlement dates resulting from changes in foreign
currency exchange rates. Such contracts will also have the
effect of limiting any gains to the Fund that would have
resulted from advantageous changes in such rates.
It is the policy of the Fund that when the Adviser deems
a temporary defensive position advisable, the Fund may
invest, without limitation (i.e., up to 100% of its assets)
in high-quality fixed-income securities, or hold assets in
cash or cash equivalents, to the extent that the Adviser
believes such alternative investments to be less risky than
those securities in which the Fund normally invests.
The Fund may invest in securities purchased on a
when-issued or delayed-delivery basis. Although the payment
terms of these securities are established at the time the
Fund enters into the commitment, the securities may be
delivered and paid for a month or more after the date of
purchase, when their value may have changed and the yields
then available in the market may be greater. The Fund will
make such commitments only with the intention of actually
acquiring the securities, but may sell the securities before
settlement date if it is deemed advisable for investment
reasons.
The Fund may also invest in securities purchased on a
standby commitment basis, which is a delayed delivery
agreement in which the Fund binds itself to accept delivery
of a security at the option of the other party to the
agreement. The Fund usually receives a commitment fee in
consideration for its standby commitment.
The Fund may make loans of its portfolio securities to
broker-dealers and banks subject to certain restrictions
described in the Trust's Statement of Additional Information.
The Fund may invest in options, futures contracts and
other derivatives as described in Appendix A to this
Prospectus and in the Trust's Statement of Additional
Information.
Restrictions on the Fund's Investments
The Fund will not (1) with respect to 75% of the value
of its total assets invest more than 5% of its total assets
in the securities of any one issuer (except that this
restriction does not apply to U.S. Government Securities);
(2) invest more than 25% of its total assets (at market) in
the securities of issuers in any particular industry (except
that this restriction does not apply to U.S. Government
Securities); (3) acquire more than 10% of the outstanding
voting securities of any one issuer; or (4) borrow money,
except as a temporary measure for extraordinary or emergency
purposes, and then the aggregate borrowings at any one time
(including any reverse repurchase agreements) may not exceed
33 1/3% of its assets (at market). The Fund will not
purchase additional securities when its borrowings, less
proceeds receivable from sales of portfolio securities,
exceed 5% of total assets. The Fund may invest in repurchase
agreements, provided that the Fund will not invest more than
15% of its net assets in repurchase agreements maturing in
more than seven days and any other illiquid securities. In
each case, if a percentage limit is satisfied at the time of
investment or borrowing, a later increase or decrease
resulting from a change in the value of a security or
decrease in the Fund's assets will not constitute a violation
of the limit.
All of the investment restrictions applicable to the
Fund are set forth in the Trust's Statement of Additional
Information.
PORTFOLIO TURNOVER
Although the Fund does not purchase securities with a
view to rapid turnover, there are no limitations on the
length of time that portfolio securities must be held and the
Fund's portfolio turnover rate may vary significantly from
year to year. A high rate of turnover of the Fund, if it
should occur, would result in increased transaction expenses,
which must be borne by the Fund. The turnover rate of the
Fund may exceed 100%. The Fund may have a higher rate of
turnover than alternative investment funds because of the
flexibility of its investment policies permitting the use of
aggressive strategies and investments. The Fund's portfolio
turnover rates are shown under "FINANCIAL HIGHLIGHTS" above.
HOW THE FUND IS MANAGED
The Trustees
The business of the Trust's series Funds is supervised
by the Trust's Board of Trustees. The Trust's Statement of
Additional Information contains the names of and biographical
information on the Trustees.
Stein Roe & Farnham Incorporated
The investment portfolio of the Fund is managed, subject
to the direction of the Board of Trustees, by Stein Roe &
Farnham Incorporated (the Adviser), One South Wacker Drive,
Chicago, Illinois 60606, pursuant to an Advisory Agreement
dated May 1, 1993. The Adviser was organized in 1986 to
succeed to the business of Stein Roe & Farnham, a partnership
that had been providing investment advisory and
administrative services since 1932. The Adviser is a wholly
owned indirect subsidiary of LFC. As of December 31, 1995,
the Adviser had assets under management of approximately
$23.0 billion.
The Adviser places orders for the purchase and sale of
securities for the Fund. In doing so, the Adviser seeks to
obtain the best combination of price and execution, which
involves a number of judgmental factors.
E. Bruce Dunn has been co-portfolio manager of the
Capital Appreciation Fund since 1991. Mr. Dunn has been
associated with the Adviser since 1964. He is Vice-President
of the Trust and a Senior Vice President of the Adviser. He
received his A.B. degree from Yale University in 1956 and his
M.B.A. from Harvard University in 1958. Mr. Dunn is a
chartered investment counselor.
Richard B. Peterson has been co-portfolio manager of the
Capital Appreciation Fund since 1991. Mr. Peterson, who
began his investment career at the Adviser in 1965 after
graduating from Carleton College and the Woodrow Wilson School
at Princeton University with a Masters in Public
Administration, rejoined the Adviser in 1991 after 15 years
of equity research and portfolio management experience with
State Farm Investment Corporation. Mr. Peterson is a Senior
Vice President of the Adviser.
The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement with the
Trust on behalf of the Fund and the Other Funds dated as of
January 3, 1995. These services include financial statement
preparation, the provision of office space and equipment and
facilities in connection with the maintenance of the Trust's
headquarters, preparation and filing of required reports and
tax returns, arrangements for meetings, maintenance of the
Trust's corporate books and records, communication with
shareholders, provision of internal legal services and
oversight of custodial, accounting and other services
provided to the Fund and the Other Funds by others. The
Adviser may, in its discretion, arrange for such services to
be provided to the Trust by LFC or by any of LFC's majority
or greater owned subsidiaries.
Under separate agreements, the Adviser also acts as the
agent of the Fund and the Other Funds for the transfer of
shares, disbursement of dividends and maintenance of
shareholder account records, and provides pricing and certain
other record keeping services to the Fund and the Other
Funds.
The Adviser pays all compensation of the Trust's
officers who are employees of the Adviser.
Advisory and Administrative Fees
The Fund pays the Adviser annual fees for investment
advisory and administrative services at the annual rates of
0.50% and 0.15%, respectively, of average daily net assets.
All fees are computed and accrued daily and paid monthly.
LFC and Liberty Mutual
LFC is a diversified and integrated asset management
organization providing insurance and investment products to
individuals and institutions through multiple distributions
channels. LFC's primary operating units include: Keyport, a
specialist in fixed and variable annuities; The Colonial
Group, Inc., sponsor of the Colonial family of mutual funds;
the Adviser; Newport Pacific Management, Inc., a specialist
in Asian equity markets; Liberty Asset Management Company, a
sponsor of closed-end funds employing a multi-managed
investment approach; and Independent Financial Marketing
Group, Inc. and the Liberty Financial Bank Group, specialists
in the design and implementation of bank marketing programs
for insurance and investment products.
Liberty Mutual is an international multi-line insurance
writer and, with its affiliates, is currently the fifth
largest writer of property-casualty insurance in the United
States.
Custodian
State Street Bank and Trust Company (State Street),
Boston, Massachusetts, is the custodian for the Fund.
Foreign securities are maintained in the custody of foreign
banks and trust companies that are members of State Street's
Global Custody Network or foreign depositories used by such
members.
Expenses of the Fund
The Fund generally will pay all its expenses, other than
those borne by the Adviser. The Adviser has voluntarily
agreed until April 30, 1997 to reimburse all expenses,
including management and administrative fees, incurred by the
Fund in excess of 0.80% of average net assets.
The Advisor would not, however, be required to reimburse
expenses to an extent which would result in the Fund's
inability to qualify as a regulated investment company under
the Internal Revenue Code.
The expenses payable by the Fund include, among other
things, the advisory and administrative fees described above;
fees for services of independent public accountants; legal
fees; transfer agent, custodian and portfolio recordkeeping
services; dividend disbursing agent and shareholder
recordkeeping and tax information services; expenses of
periodic calculations of net asset values and of equipment
for communication among the custodian, the Adviser and
others; taxes and the preparation of tax returns; brokerage
fees and commissions; interest; costs of Board and
shareholder meetings; printing prospectuses and reports to
shareholders; fees for filing reports with regulatory bodies
and the maintenance of the Trust's existence; membership dues
for industry trade associations; registration fees to federal
authorities; fees and expenses of Trustees who are not
directors, officers, employees or stockholders of the Adviser
or its affiliates; insurance and fidelity bond premiums; and
other extraordinary expenses of a non-recurring nature.
It is the policy of the Trust that expenses directly
charged or attributable to any of its particular series funds
will be paid from the assets of that fund. General expenses
of the Trust will be allocated among and charged to the
assets of each of the Trust's series funds (including the
Fund and the Other Funds) on a basis that the Trustees deem
fair and equitable, which may be (but need not be) based on
the relative assets of each such fund or the nature of the
services performed and their relative applicability to each
such fund.
PURCHASES AND REDEMPTIONS
The Participating Insurance Companies place daily orders
to purchase and redeem shares of the Fund based on, among
other things, the net amount of purchase payments to be
invested and surrender and transfer requests to be effected
on that day pursuant to the VA contracts and VLI policies.
Shares are purchased and redeemed as a result of certain
other transactions pursuant to the VA contracts and VLI
policies, including deductions for fees and charges by the
applicable insurance company separate account. The Trust
continuously offers and redeems shares at net asset value
without the addition of any selling commission, sales load or
redemption charge. Shares are sold and redeemed at their net
asset value as next determined after receipt of purchase
payments or redemption requests, respectively, by the
separate accounts. Similarly, shares are sold or redeemed as
a result of such other transactions under the VA contracts
and VLI policies at the net asset value computed for the day
on which such transactions are effected by the separate
accounts. The right of redemption may be suspended or
payments postponed whenever permitted by applicable law and
regulations.
INVESTMENT RETURN
The total return from an investment in the Fund is
measured by the distributions received (assuming reinvestment
of all distributions) plus or minus the change in the net
asset value per share for a given period. A total return
percentage is calculated by first dividing the value of a
share at the end of the period (including reinvestment of
distributions) by the value of the share at the beginning of
the period and then subtracting 1.0. The Fund's average
annual total return is determined by computing the annual
percentage change in value of a $1.00 investment in the Fund
for a specified period, assuming reinvestment of all
dividends and distributions.
Total return information describes the Fund's
performance for the period shown and does not predict future
performance. Comparison of the Fund's yield or total return
with those of alternative investments should consider
differences between the Fund and the alternative investments,
the periods and methods used in calculation of the return
being compared, and the impact of taxes on alternative
investments. The Fund's investment return figures do not
reflect the cost of insurance and other insurance company
separate account charges which vary with the VA contracts and
VLI policies offered through the separate accounts of the
Participating Insurance Companies, and which will decrease
the return realized by a contract or policyholder.
NET ASSET VALUE
The Adviser determines net asset value per share of the
Fund as of the close of regular trading on the New York Stock
Exchange (NYSE) (currently 4:00 p.m., Eastern time). Net
asset value per share is calculated for the Fund by dividing
the current market value of total portfolio assets, less all
liabilities (including accrued expenses), by the total number
of shares outstanding. Net asset value is determined on each
day when the NYSE is open, except on such days in which no
order to purchase or redeem shares is received. The NYSE is
scheduled to be open Monday through Friday throughout the
year except for certain Federal and other holidays.
U.S. Securities
Each security traded on a national securities exchange
is valued at its last sale price on that exchange on the day
of valuation or, if there are no sales that day, at the
latest bid quotation. Each over-the-counter security for
which the last sale price on the day of valuation is
available from NASDAQ is valued at that price. All other
over-the-counter securities for which reliable quotations are
available are valued at the latest bid quotation, except that
securities convertible into stock are valued at the latest
valuation from a principal market maker.
The Board has determined to value long-term debt
obligations primarily on the basis of valuations furnished by
a pricing service which may employ electronic data processing
techniques, including a so-called "matrix" system, to
determine valuations, as well as dealer-supplied quotations.
Long-term debt obligations for which reliable pricing
services are, in the opinion of the Adviser, not available
will be valued at their respective values as determined in
good faith by, or under procedures established by, the Board.
Foreign Securities
The values of foreign portfolio securities are generally
based upon market quotations which, depending upon local
convention or regulation, may be the last sales price, the
last bid or asked price, or the mean between the last bid and
asked prices as of, in each case, the close of the
appropriate exchange or other designated time. Trading in
securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed at various
times before the close of business on each day on which the
NYSE is open. Trading of these securities may not take place
on every NYSE business day. In addition, trading may take
place in various foreign markets on Saturdays or on other
days when the NYSE is not open and on which the Fund's net
asset value is not calculated. Therefore, such calculation
does not take place contemporaneously with the determination
of the prices of many of the portfolio securities used in
such calculation and the value of the Fund's portfolio may be
significantly affected on days when shares of the Fund may
not be purchased or redeemed.
Other assets and securities of the Fund are valued at a
fair value as determined in good faith by, or under
procedures established by, the Board.
TAXES
The Fund has elected to be treated and to qualify as a
"regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986 (Code). As a result of such
election, for any tax year in which the Fund meets the
investment limitations and the distribution, diversification
and other requirements referred to below, the Fund will not
be subject to Federal income tax, and the income of the Fund
will be treated as the income of its shareholders. Under
current law, since the shareholders are life insurance
company "segregated asset accounts," they will not be subject
to income tax currently on this income to the extent such
income is applied to increase the values of VA contracts and
VLI policies.
Among the conditions for qualification and avoidance of
taxation at the Trust level, Subchapter M imposes investment
limitations, distribution requirements, and requirements
relating to the diversification of investments. The
requirements of Subchapter M may affect the investments made
by the Fund. Any of the applicable diversification
requirements could require a sale of assets of the Fund that
would affect the net asset value of the Fund.
In addition, the Tax Reform Act of 1986 made certain
changes to the tax treatment of regulated investment
companies, including the imposition of a nondeductible 4%
excise tax on certain undistributed amounts. To avoid this
tax, the Fund must declare and distribute to its shareholders
by the end of each calendar year, at least 98% of ordinary
income earned during that calendar year, and at least 98% of
capital gain net income, net of carry-forward losses, if any,
realized for the twelve-month period ending October 31 of
that year, plus any remaining undistributed income from the
prior year.
Pursuant to the requirements of Section 817(h) of the
Code, the only shareholders of the Trust and its series funds
will be Participating Insurance Companies and their separate
accounts that fund VA contracts, VLI policies and other
variable insurance contracts. The prospectus that describes a
particular VA contract or VLI policy discusses the taxation
of separate accounts and the owner of such contract or
policy.
The Fund intends to comply with the requirements of
Section 817(h) and the related regulations thereunder issued
by the Treasury Department. These provisions impose certain
diversification requirements affecting the securities in
which the Fund may invest and other limitations. The
diversification requirements of Section 817(h) of the Code
are in addition to the diversification requirements under
Subchapter M and the Investment Company Act of 1940. The
consequences of failure to meet the requirements of Section
817(h) could result in taxation of the Participating
Insurance Companies offering the VA contracts and VLI
policies and immediate taxation of all owners of the
contracts and policies to the extent of appreciation on
investment under the contracts. The Trust believes that the
Fund is in compliance with these requirements.
The Secretary of the Treasury may issue additional
rulings or regulations that will prescribe the circumstances
in which an owner of a variable insurance contract's control
of the investments of a segregated asset account may cause
such owner, rather than the insurance company, to be treated
as the owner of the assets of a segregated asset account. It
is expected that such regulations would have prospective
application. However, if a ruling or regulation were not
considered to set forth a new position, the ruling or
regulation could have retroactive effect.
The Trust therefore may find it necessary, and reserves
the right to take action to assure, that a VA contract or VLI
policy continues to qualify as an annuity or insurance
contract under Federal tax laws. The Trust, for example, may
be required to alter the investment objectives of the Fund or
substitute the shares of the Fund for those of another. No
such change of investment objectives or substitution of
securities will take place without notice to the contract and
policy owners with interests invested in the Fund and without
prior approval of the Securities and Exchange Commission, or
the approval of a majority of such owners, to the extent
legally required.
To the extent the Fund invests in foreign securities,
investment income received by the Fund from sources within
foreign countries may be subject to foreign income taxes
withheld at the source. The United States has entered into
tax treaties with many foreign countries which entitle the
Fund to a reduced rate of tax or exemption from tax on such
income.
The Fund's foreign currency gains and losses from
foreign currency dispositions, foreign-currency denominated
debt securities and payables or receivables, and foreign
currency forward contracts are subject to special tax rules
that generally cause them to be recharacterized as ordinary
income and losses, and may affect the timing and amount of
the Fund's recognition of income, gain or loss.
In order to avoid adverse tax consequences for the Fund,
the Fund may be required to limit its equity investments in
non-U.S. corporations that are treated as "passive foreign
investment companies" under the Code.
It is impossible to determine the effective rate of
foreign tax in advance since the amount of the Fund's assets,
if any, to be invested within various countries will
fluctuate and the extent to which tax refunds will be
recovered is uncertain. The Fund intends to operate so as to
qualify for treaty-reduced tax rates where applicable.
The preceding is a brief summary of some relevant tax
considerations. This discussion is not intended as a complete
explanation or a substitute for careful tax planning and
consultation with individual tax advisers.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare and distribute, as dividends
or capital gains distributions, at least annually,
substantially all of its net investment income and net
profits realized from the sale of portfolio securities, if
any, to its shareholders (Participating Insurance Companies'
separate accounts). The net investment income of the Fund
consists of all dividends or interest received by the Fund,
less estimated expenses (including the investment advisory
and administrative fees). Income dividends will be declared
and distributed annually. All net short-term and long-term
capital gains of the Fund, net of carry-forward losses, if
any, realized during the fiscal year, are declared and
distributed periodically, no less frequently than annually.
All dividends and distributions are reinvested in additional
shares of the Fund at net asset value, as of the record date
for the distributions.
SHAREHOLDER COMMUNICATIONS
Owners of VA contracts and VLI policies, issued by a
Participating Insurance Company or for which shares of the
Fund are available as an investment vehicle, receive from the
applicable Participating Insurance Company unaudited semi-
annual financial statements and audited year-end financial
statements of the Fund certified by the Trust's independent
auditors. Each report shows the investments owned by the
Fund and provides other information about the Trust and its
operations. Copies of such reports may be obtained from the
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.
Each share of the Fund is entitled to participate pro
rata in any dividends and other distributions declared by the
Board with respect to the Fund, and all shares of the Fund
have equal rights in the event of liquidation of the Fund.
Shareholders of each of the Fund and each Other Fund are
entitled to one vote for each share of that series fund held
on any matter presented to shareholders. Shares of the Fund
and the Other Funds will vote separately as individual series
when required by the 1940 Act or other applicable law or when
the Board determines that the matter affects only the
interests of one or more funds, such as, for example, a
proposal to approve an amendment to that fund's Advisory
Agreement, but shares of the Fund and all of the Other Funds
vote together, to the extent required by the 1940 Act, in the
election or selection of Trustees and independent
accountants.
The shares of the Trust do not have cumulative voting
rights, which means that the holders of more than 50% of the
shares of the Fund and the Other Funds, taken together,
voting for the election of Trustees can elect all of the
Trustees, and, in such event, the holders of the remaining
shares will not be able to elect any Trustees.
The Fund is not required by law to hold regular annual
meetings of shareholders and does not intend to do so.
However, special meetings may be called for purposes such as
electing or removing Trustees or changing fundamental
policies.
The Trust is required to hold a shareholders' meeting to
elect Trustees to fill vacancies in the event that less than
a majority of Trustees were elected by shareholders.
Trustees may also be removed by the vote of two-thirds of the
outstanding shares at a meeting called at the request of
shareholders whose interests represent 10% or more of the
outstanding shares of the Trust.
Under Massachusetts law, shareholders of a business
trust may, under certain circumstances, be held personally
liable for the obligations of the Trust. However, the
Trust's Declaration of Trust disclaims liability of the
shareholders, the Trustees, or officers of the Trust for acts
or obligations of the Trust, which are binding only on the
assets and property of the Trust (or the applicable series
fund thereof) and requires that notice of such disclaimer be
given in each agreement, obligation, or contract entered into
or executed by the Trust or the Board. The Declaration of
Trust provides for indemnification out of the Trust's assets
(or the applicable Fund) for all losses and expenses of any
shareholder held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is believed to be
remote because it is limited to circumstances in which the
disclaimer is inoperative and the Trust itself is unable to
meet its obligations. The risk to any one series fund of
sustaining a loss on account of liabilities incurred by
another series fund also is believed to be remote.
ADDITIONAL INFORMATION
This Prospectus including the Statement of Additional
Information which has been incorporated by reference herein,
does not contain all the information set forth in the
Registration Statement filed by the Trust with the Securities
and Exchange Commission under the Securities Act of 1933.
Copies of the Registration Statement may be obtained from the
Commission or may be examined at the office of the Commission
in Washington, D.C.
<PAGE>
APPENDIX A
INVESTMENT TECHNIQUES
AND SECURITIES
FOREIGN INVESTMENTS
The Fund may invest up to 25% of its total assets in
securities of foreign issuers that are not publicly traded in
the U.S., which for this purpose do not include securities
represented by American Depositary Receipts (ADRs) or
securities guaranteed by a U.S. person.
Foreign Securities
While investment in foreign securities is intended to
reduce risk by providing further diversification, such
investments involve sovereign risk in addition to the credit
and market risks normally associated with domestic
securities. These include sovereign risks and risks
pertaining to the local economy in the country or countries
in which the foreign company conducts business. Foreign
investments may be affected favorably or unfavorably by
changes in currency rates and exchange control regulations.
There may be less publicly available information about a
foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to
those applicable to U.S companies. Securities of some foreign
companies are less liquid or more volatile than securities of
U.S. companies, and foreign brokerage commissions and
custodian fees are generally higher than in the U.S.
Investments in foreign securities may also be subject to
other risks different from those affecting U.S. investments,
including local political or economic developments,
expropriation or nationalization of assets, imposition of
withholding taxes on dividend or interest payments, currency
blockage (which would prevent cash from being brought back to
the U.S.), and sometimes less advantageous legal,
operational, and financial protection applicable to foreign
sub-custodial arrangements. These risks are carefully
considered by the Adviser prior to the purchase of these
securities.
Foreign Currency Transactions
When the Fund invests in foreign securities, such
securities usually will be denominated in, or salable for,
foreign currencies, and the Fund temporarily may hold funds
in foreign currencies. Thus, the value of Fund shares will be
affected by changes in exchange rates.
As one way of managing exchange rate risk, the Fund may
enter into forward currency exchange contracts (agreements to
purchase or sell currencies at a specified price and date).
The exchange rate for the transaction (the amount of currency
the Fund will deliver or receive when the contract is
completed) is fixed when the Fund enters into the contract.
The Fund usually will enter into these contracts to stabilize
the U.S. dollar value of a security it has agreed to buy or
sell. The Fund intends to use these contracts to hedge the
U.S. dollar value of a security it already owns or intends to
purchase, particularly if the Fund expects a decrease in the
value of the currency in which the foreign security is
denominated. Although the Fund will attempt to benefit from
using forward contracts, the success of its hedging strategy
will depend on the Adviser's ability to predict accurately
the future exchange rates between foreign currencies and the
U.S. dollar. The value of Fund's investments denominated in
foreign currencies will depend on the relative strength of
those
currencies and the U.S. dollar, and the Fund may be affected
favorably or unfavorably by changes in the exchange rates or
exchange control regulations between foreign currencies and
the dollar. Changes in foreign currency exchange rates also
may affect the value of dividends and interest earned, gains
and losses realized on the sale of securities, and net
investment income and gains, if any, to be distributed to
shareholders by the Fund.
STANDBY COMMITMENTS
The Fund may invest in securities purchased on a standby
commitment basis, as described below.
A standby commitment is a delayed delivery agreement in
which the Fund binds itself to accept delivery of a security
at the option of the other party to the agreement. The Fund
usually receives a commitment fee in consideration for its
standby commitment. At the time the Fund enters into a
binding obligation to purchase securities on a standby
commitment basis, liquid assets of the Fund having a value of
at least as great as the purchase price of the securities to
be purchased will be segregated on the books of the Fund and
held by its custodian throughout the period of the
obligation.
If the value of the securities that the Fund has
committed to purchase increases, the other party may exercise
its right not to deliver the securities, in which case the
Fund only would retain its commitment fee and forego any
appreciation of those securities. If the value of the
securities that the Fund has committed to purchase decreases,
the other party would probably deliver the securities, in
which case the Fund would absorb the loss between the
purchase price and the decreased market value, which loss may
significantly exceed the commitment fee.
LENDING PORTFOLIO SECURITIES
The Fund may lend portfolio securities in limited
amounts, as described below.
The Fund may lend securities to brokers, dealers and
financial institutions pursuant to agreements requiring that
the loans be continuously secured by liquid assets as
collateral equal at all times in value to at least the market
value of the securities loaned. Such securities loans will
not be made with respect to a Fund if as a result the
aggregate of all outstanding securities loans exceeds 15% of
the value of its total assets taken at their current value.
The Fund continues to receive interest or dividends on the
securities loaned and would also receive an additional return
that may be in the form of a fixed fee or a percentage of the
collateral. The Fund would have the right to call the loan
and obtain the securities loaned at any time on notice of not
more than five business days. The Fund would not have the
right to vote the securities during the existence of the loan
but would call the loan to permit voting of the securities
if, in the Adviser's judgment, a material event requiring a
shareholder vote would otherwise occur before the loan was
repaid. In the event of bankruptcy or other default of the
borrower, the Fund could experience both delays in
liquidating the loan collateral or recovering the loaned
securities and losses including (a) possible decline in the
value of the collateral or in the value of the securities
loaned during the period while the Fund seeks to enforce its
rights thereto, (b) possible subnormal levels of income and
lack of access to income during this period, and (c) expenses
of enforcing its rights. However, loans may be made only to
borrowers approved by the Board, when the income to be earned
from the loan, in the opinion of the Adviser, justifies the
attendant risks.
OPTIONS, FUTURES AND OTHER DERIVATIVES
Consistent with its objective, the Fund may purchase and
write both call options and put options on securities,
indexes and foreign currencies, enter into interest rate,
index and foreign currency futures contracts and options on
such futures contracts, and purchase other types of forward
or investment contracts linked to individual securities,
indexes or other benchmarks ("derivative products") in order
to achieve its desired investment objective, to provide
additional revenue, or to hedge against changes in security
prices, interest rates or currency fluctuations. A Fund may
write a call or put option only if the option is covered.
There can be no assurance that a liquid market will exist
when a Fund seeks to close out a derivative product position.
In addition, because of low margin deposits required, the use
of futures contracts involves a high degree of leverage, and
may result in losses in excess of the amount of the margin
deposit. Successful use of derivative products depends on
the Adviser's ability to predict correctly changes in the
level and the direction of security prices, interest rates,
currency exchange rates, and other market factors, but even a
well-conceived transaction may be unsuccessful because of an
imperfect correlation between the cash and the derivative
product markets. For additional information with respect to
these matters, please refer to the Statement of Additional
Information.
<PAGE> S-1
STEINROE VARIABLE INVESTMENT TRUST
CAPITAL APPRECIATION FUND
Federal Reserve Plaza
600 Atlantic Avenue, Boston, Massachusetts 02210
Statement of Additional Information
Dated May 1, 1996
This Statement of Additional Information is not a prospectus,
but provides additional information which should be read in
conjunction with the Capital Appreciation Fund's Prospectus dated
May 1, 1996 and any supplement thereto. The Prospectus may be
obtained at no charge by calling or writing the 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-9
TRUST CHARGES AND EXPENSES..............................S-11
CUSTODIAN...............................................S-11
PORTFOLIO TRANSACTIONS..................................S-12
NET ASSET VALUE.........................................S-15
INVESTMENT PERFORMANCE..................................S-15
RECORD SHAREHOLDERS.....................................S-16
INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS...........S-16
APPENDIX A - Investment Techniques and Securities.......A-1
<PAGE> S-2
COMMENCEMENT OF OPERATIONS
Capital Appreciation Fund (Fund) is a series fund of the
SteinRoe Variable Investment Trust (Trust), an open-end,
diversified management investment company currently consisting of
five funds with differing investment objectives, policies and
restrictions. Other funds may be added or deleted from time to
time. The Trust issues shares of beneficial interest in each of
its series funds that represent interests in a separate portfolio
of securities and other assets. The series funds of the Trust
other than the Fund are referred to hereinafter as "Other Funds."
MIXED AND SHARED FUNDING
The Trust serves as a funding medium for VA contracts and VLI
policies of Participating Insurance Companies, (as such term is
defined in the Prospectus), so-called mixed and shared funding.
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.
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;
<PAGE> S-3
(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.
<PAGE> S-4
The Fund is also subject to the following restrictions and
policies, which are not fundamental and may be changed by the
Trustees without shareholder approval.
The Fund may not :
(a) invest in companies for the purpose of exercising control
or management;
(b) purchase more than 3% of the stock of another investment
company; or purchase stock of other investment companies
equal to more than 5% of the Fund's total assets (valued
at time of purchase) in the case of any one other
investment company and 10% of such assets (valued at the
time of purchase) in the case of all other investment
companies in the aggregate; any such purchases are to be
made in the open market where no profit to a sponsor or
dealer results from the purchase, other than the
customary broker's commission, except for securities
acquired as part of a merger, consolidation or
acquisition of assets;
(c) mortgage, pledge, hypothecate or in any manner transfer,
as security for indebtedness, any securities owned or
held by it, except as may be necessary in connection with
(i) permitted borrowings and (ii) options, futures and
options on futures;
(d) issue senior securities, except to the extent permitted
by the Investment Company Act of 1940 (including
permitted borrowings);
(e) purchase portfolio securities for the Fund from, or sell
portfolio securities to, any of the officers and
directors or Trustees of the Trust or of its investment
adviser;
(f) invest more than 5% of its net assets (valued at time of
purchase) in warrants, nor more than 2% of its net assets
in warrants that are not listed on the New York or
American Stock Exchanges;
(g) write an option on a security unless the option is issued
by the Options Clearing Corporation, an exchange or
similar entity;
(h) buy or sell an option on a security, a futures contract
or an option on a futures contract unless the option, the
futures contract or the option on the futures contract is
offered through the facilities of a recognized securities
association or listed on a recognized exchange or similar
entity;
(i) purchase a put or call option if the aggregate premiums
paid for all put and call options exceed 20% of its net
assets (less the amount by which any such positions are
in-the-money), excluding put and call options purchased
as closing transactions; or
<PAGE> S-5
(j) invest more than 15% of the Fund's net assets (taken at
market value at the time of each purchase) in illiquid
securities including repurchase agreements maturing in
more than seven days.
Additional Voluntary Restrictions
The Fund also is subject to the following additional
restrictions and policies under certain applicable insurance laws
pertaining to variable annuity contract separate accounts. These
policies and restrictions are not fundamental and may be changed
by the Trustees without shareholder approval:
The borrowing limits for the Fund are (1) 10% of net asset
value when borrowing for any general purpose and (2) 25% of net
asset value when borrowing as a temporary measure to facilitate
redemptions. For this purpose, net asset value is the market
value of all investments or assets owned less outstanding
liabilities of the Fund at the time that any new or additional
borrowing is undertaken.
The Fund also will be subject to the following
diversification guidelines pertaining to investments in foreign
securities:
1. The Fund will be invested in a minimum of five different
foreign countries at all times when it holds investments
in foreign securities. However, this minimum is reduced
to four when foreign country investments comprise less
than 80% of the Fund's net asset value; to three when less
than 60% of such value; to two when less than 40% and to
one when less than 20%.
2. Except as set forth in item 3 below, the Fund will have no
more than 20% of its net asset value invested in
securities of issuers located in any one foreign country.
3. The Fund may have an additional 15% of its value invested
in securities of issuers located in any one of the
following countries: Australia, Canada, France, Japan,
the United Kingdom or the Federal Republic of Germany.
If a percentage limit with respect to any of the foregoing
fundamental and non-fundamental policies is satisfied at the time
of investment or borrowing, a later increase or decrease in the
Fund's assets will not constitute a violation of the limit.
PORTFOLIO TURNOVER
The portfolio turnover of the Fund will vary from year to
year. Although the Fund will not trade in securities for short-
term profits, when circumstances warrant securities may be sold
without regard to the length of time held. Portfolio turnover for
the Fund is shown under "FINANCIAL HIGHLIGHTS" in the Prospectus.
See "PORTFOLIO TURNOVER" in the
<PAGE> S-6
Prospectus for a discussion of certain factors which may produce
relatively high turnover in the Fund.
A 100% turnover rate would occur if all of the securities in
the portfolio were sold and either repurchased or replaced within
one year. The Fund pays brokerage commissions in connection with
options and futures transactions and effecting closing purchase or
sale transactions, as well as for the purchases and sales of other
portfolio securities other than fixed income securities. If the Fund
writes a substantial number of call or put options (on securities or
indexes) or engages in the use of futures contracts or options on
futures contracts (all referred to as "Collateralized Transactions"),
and the market prices of the securities underlying the Collateralized
Transactions move inversely to the Collateralized Transaction, there
may be a very substantial turnover of the portfolios.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus
under the headings "PURCHASES AND REDEMPTIONS" and "NET ASSET
VALUE."
The Fund's net asset value is determined on days on which the
New York Stock Exchange is open for trading. The Exchange is
regularly closed on Saturdays and Sundays and on New Year's Day,
the third Monday in February, Good Friday, the last Monday in May,
Independence Day, Labor Day, Thanksgiving and Christmas. If one
of these holidays falls on a Saturday or Sunday, the Exchange will
be closed on the preceding Friday or the following Monday,
respectively. Net asset value will not be determined on days when
the Exchange is closed unless, in the judgment of the Trustees,
the net asset value of the Fund should be determined on any such
day, in which case the determination will be made at 4:00 p.m.,
Eastern time.
The Trust reserves the right to suspend or postpone
redemptions of shares of the Fund during any period when: (a)
trading on the Exchange is restricted, as determined by the
Commission, or the Exchange is closed for other than customary
weekend and holiday closing; (b) the Commission has by order
permitted such suspension; or (c) an emergency, as determined by
the Commission, exists, making disposal of portfolio securities or
the valuation of net assets of the Fund not reasonably
practicabl
TRUSTEES AND OFFICERS
The following table sets forth certain information with
respect to the Trustees and officers of the Trust:
<PAGE> S-7
Position(s) held Principal occupations
Name and Address with the Trust during past five years
- ---------------------- --------------- ----------------------
Richard R. Christensen President and President, Liberty Investment
Federal Reserve Plaza Trustee Services, Inc.; since 1994,
600 Atlantic Avenue President, Liberty Asset
Boston, MA 02210 /1/ Management Company
John A. Bacon Jr. Trustee Private investor;
4N640 Honey Hill Road Director, Duplex Products,
Box 296 Inc.
Wayne, IL 60184
Salvatore Macera Trustee Private investor
20 Rowes Wharf
Boston, MA 02109
Dr. Thomas E. Stitzel Trustee Professor of Finance,
2208 Tawny Woods Place College of Business,
Boise, ID 83706 Boise State University;
business consultant and author
Gary A. Anetsberger Treasurer Senior Vice President,
One South Wacker Drive Stein Roe & Farnham Incorporated
Chicago, IL 60606 since April 1996; Vice President
prior thereto
Sharon R. Robertson Controller Associate, Stein Roe & Farnham
One South Wacker Drive Incorporated
Chicago, IL 60606
Richard B. Peterson Vice President Senior Vice President,
One South Wacker Drive Stein Roe & Farnham Incorporated
Chicago, IL 60606 (1991 to present); Vice President,
State Farm Investment Management
Corporation (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.
- --------
<PAGE> S-8
E. Bruce Dunn Vice President Senior Vice President,
One South Wacker Drive Stein Roe & Farnham
Chicago, IL 60606 Incorporated.
Harvey B. Hirschhorn Vice President Executive Vice President,
One South Wacker Drive Stein Roe & Farnham
Chicago, IL 60606 Incorporated
Michael T. Kennedy Vice President Senior Vice President (October
One South Wacker Drive 1994 to present), Vice President
Chicago, IL 60606 (1992 to October 1994), Associate
(prior thereto), Stein Roe &
Farnham Incorporated.
Jane M. Naeseth Vice President Senior Vice President
One South Wacker Drive (1991 to present), Vice
Chicago, IL 60606 President (1989-1990),
Stein Roe & Farnham Incorporated.
Eric P. Gustafson Vice President Senior Vice President (April 1996
One South Wacker to present), Vice President (1994 to
Chicago, IL 60606 present), Associate (1992-1994),
Stein Roe & Farnham Incorporated;
prior thereto, Associate, Fowler,
White, Burnett, Harley, Banick &
Strickroot, Tampa, Florida
Timothy K. Armour Vice President President, Mutual Funds division,
One South Wacker Drive Stein Roe & Farnham Incorporated
Chicago, IL 60606 since June 1992; Senior Vice
and Director of Marketing of Citibank
Illinois, prior thereto
Jilaine Hummel Bauer Vice President Senior Vice President (since April,
One South Wacker Drive 1992), Vice President, prior
Chicago, IL 60606 thereto, Stein Roe & Farnham
Incorporated
John A. Benning Secretary Senior Vice President,
Federal Reserve Plaza General Counsel and
600 Atlantic Avenue Secretary, Liberty
Boston, MA 02210 Financial Companies, Inc.
<PAGE> S-9
Kevin M. Carome Assistant Since August 1993, Associate
Federal Reserve Plaza Secretary General Counsel and (since
600 Atlantic Avenue February 1995) Vice President,
Boston, MA 02210 Liberty Financial Companies, Inc.;
prior thereto, Associate, Ropes &
Gray, Boston, Massachusetts
As indicated in the above table, certain Trustees and
officers of the Trust also hold positions with Stein Roe & Farnham
Incorporated, LFC and/or their affiliates. Certain of the
Trustees and certain officers of the Trust hold comparable
positions with certain other investment companies managed by Stein
Roe & Farnham Incorporated or sponsored by other affiliates of
LFC.
Compensation of Trustees
The table set forth below presents certain information
regarding the fees paid to the Trustees for their services in such
capacity and total fees paid to them by all other investment
companies affiliated with the Trust. Trustees do not receive any
pension or retirement benefits from the Trust. No officers of the
Trust or other individuals who are affiliated with the Trust
receive any compensation from the Trust for services provided to
it.
Compensation Table
- -----------------------------------------------------------------
Total Compensation
From the Trust and
Aggregate 1995 Affiliated Investment
Name of Trustee Compensation* Companies in 1995*
- ----------------------- ---------------- ---------------------
Richard R. Christensen -- --
John A. Bacon Jr. $18,000 $27,000
Salvatore Macera 18,000 27,000
Dr. Thomas E. Stitzel 18,000 27,000
- -----------
* Consists of Trustee fees in the amount of (i) a $10,000 annual
retainer, (ii) a $2,000 meeting fee for each meeting attended in
person and (iii) a $1,000 meeting fee for each telephone
meeting.
**Includes Trustee fees paid by the Trust and by Keyport Variable
Investment Trust
MANAGEMENT ARRANGEMENTS
As described in the Prospectus, the portfolio of the Fund is
managed by Stein Roe & Farnham Incorporated (the Adviser). The
Fund has its own Advisory Agreement with the Adviser. The Adviser
is a direct wholly owned subsidiary of SteinRoe Services, Inc.,
which in turn is a direct wholly owned subsidiary of LFC. LFC, in
turn, is a an indirect majority owned subsidiary of Liberty
Mutual.
<PAGE> S-10
The directors of the Adviser are Kenneth R. Leibler, C. Allen
Merritt, Jr., Hans P. Ziegler, Timothy K. Armour, and N. Bruce
Callow. Mr. Leibler is President and Chief Executive Officer of
LFC; Mr. Merritt is Senior Vice President, Treasurer and Chief
Financial Officer of LFC; Mr. Ziegler is Chairman and Chief
Executive Officer of the Adviser; Mr. Armour is President of the
Adviser's Mutual Funds division; Mr. Callow is President of the
Adviser's Investment Counsel division. The business address of
Messrs. Leibler and Merritt is Federal Reserve Plaza, 600 Atlantic
Avenue, Boston, Massachusetts, 02210; that of Messrs. Ziegler,
Armour and Callow is One South Wacker Drive, Chicago, Illinois
60606.
The Adviser, at its own expense, provides office space,
facilities and supplies, equipment and personnel for the
performance of its functions under the Fund's Advisory Agreement
and pays all compensation of the Trustees, officers and employees
who are employees of the Adviser.
The Fund's Advisory Agreement provides that neither the
Adviser nor any of its directors, officers, stockholders (or
partners of stockholders), agents, or employees shall have any
liability to the Trust or any shareholder of the Fund for any
error or judgment, mistake of law or any loss arising out of any
investment, or for any other act or omission in the performance by
the Adviser of its duties under the Advisory Agreement, except for
liability resulting from willful misfeasance, bad faith or gross
negligence on the Adviser's part in the performance of its duties
or from reckless disregard by the Adviser of the Adviser's
obligations and duties under the Advisory Agreement.
Under an Administration Agreement with the Trust, the Adviser
provides the Fund and each Other Fund with administrative
services, excluding investment advisory services. Specifically,
the Adviser is responsible for preparing financial statements,
providing office space and equipment in connection with the
maintenance of the headquarters of the Trust, preparation and
filing required reports and tax returns, arrangements for
meetings, maintenance of the Trust's corporate books and records,
communication with shareholders, providing internal legal services
and oversight of custodial, accounting and other services provided
to the Funds by others. The Administration Agreement provides
that the Adviser may, in its discretion, arrange for
administrative services to be provided to the Trust by LFC or any
of LFC's majority or greater owned subsidiaries.
Under separate agreements, the Adviser also acts as the agent
of the Fund and the Other Funds for the transfer of shares,
disbursement of dividends and maintenance of shareholder account
records, and provides certain pricing and other record keeping
services to the Fund. The Trust believes that the charges by the
Administrator to the Fund for these services are comparable to
those of other companies performing similar services.
<PAGE> S-11
TRUST CHARGES AND EXPENSES
Management Fees:
During fiscal 1995, 1994 and 1993, respectively, pursuant to
the advisory contract described in the Prospectus, the Fund paid
the Adviser management fees in the amount of $690,902, $583,720
and $356,650, respectively.
Administrative Expenses:
During fiscal 1995, pursuant to the Administration Agreement
described above, the Fund paid the Adviser administration fees in
the amount of $207,244. In addition, during fiscal 1995 the Fund
paid the Adviser $75,000 for transfer agent services.
Expense Limitation:
The Adviser and Administrator have agreed to reimburse all
expenses of the Fund in excess of 0.80% of average net assets
through April 30, 1997.
CUSTODIAN
State Street Bank and Trust Company (the Bank), 225 Franklin
Street, Boston, Massachusetts 02110, is the custodian for the
Fund. It is responsible for holding all securities and cash of
the Fund, receiving and paying for securities purchased,
delivering against payment securities sold, receiving and
collecting income from investments, making all payments covering
expenses of the Fund and performing other administrative duties,
all as directed by authorized persons. The Bank does not exercise
any supervisory function in such matters as purchase and sale of
portfolio securities, payment of dividends or payment of expenses
of the Fund. Portfolio securities purchased in the U.S. are
maintained in the custody of the Bank or other domestic banks or
depositories. Portfolio securities purchased outside of the U.S.
are maintained in the custody of foreign banks and trust companies
who are members of the Bank's Global Custody Network and foreign
depositories (foreign sub-custodians).
With respect to foreign sub-custodians, there can be no
assurance that the Fund, and the value of its shares, will not be
adversely affected by acts of foreign governments, financial or
operational difficulties of the foreign sub-custodians,
difficulties and costs of obtaining jurisdiction over, or
enforcing judgments against, the foreign sub-custodians or
application of foreign law to the Fund's foreign 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.
<PAGE> S-12
PORTFOLIO TRANSACTIONS
The Adviser places orders for the purchase and sale of
portfolio securities and options and futures contracts on behalf
of the Fund. The Adviser's overriding objective in effecting
portfolio transactions is to seek to obtain the best combination
of price and execution. The best net price, giving effect to
brokerage commissions, if any, and other transaction costs,
normally is an important factor in this decision, but a number of
other judgmental factors may also enter into the decision. These
include: the Adviser's knowledge of negotiated commission rates
currently available and other current transaction costs; the
nature of the security being traded; the size of the transaction;
the desired timing of the trade; the activity existing and
expected in the market for the particular security;
confidentiality; the execution, clearance and settlement
capabilities of the broker-dealer selected and others that are
considered; the Adviser's knowledge of the financial stability of
the broker-dealer selected and such other brokers or dealer; and
the Adviser's knowledge of actual or apparent operational problems
of any broker-dealer. Recognizing the value of these execution,
clearance and settlement factors, the Fund may pay a brokerage
commission in excess of that which another broker-dealer may have
charged for effecting the same transaction. Evaluations of the
reasonableness of brokerage commissions, based on the foregoing
factors, are made on an ongoing basis by the Adviser's staff while
effecting portfolio transactions. The general level of brokerage
commissions paid is reviewed by the Adviser, which reports
annually to the Board.
With respect to transactions in securities involving
brokerage commissions, when more than one broker-dealer is
believed to be capable of providing the best combination of price
and execution with respect to a particular portfolio transaction
for the Fund, the Adviser often selects a broker-dealer that has
furnished it with research products or services such as research
reports, subscriptions to financial publications and research
compilations, compilations of securities prices, earnings,
dividends, and similar data, and computer data bases, quotation
equipment and services, and research-oriented computer software
and services, and services of economic or other consultants.
Selection of brokers or dealers is not made pursuant to an
agreement or understanding with any of the broker-dealers;
however, the Adviser uses an internal allocation procedure to
identify those broker-dealers who provide it with research
products or services and the amount of research products or
services they provide, and endeavors to direct sufficient
commissions generated by its clients' accounts in the aggregate,
including the Fund, to such broker-dealers to ensure the continued
receipt of research products or services the Adviser feels are
useful. In certain instances, the Adviser receives from broker-
dealers products or services which are used both as investment
research and for administrative, marketing or other non-research
purposes. In such instances, the Adviser makes a good faith
effort to determine the relative proportions of such products or
services which may be considered as investment research. The
portion of the costs of such products or services attributable to
research usage may be defrayed by the Adviser through brokerage
commissions generated by client transactions (without prior
agreement or understanding, as noted above), while the portions of
the costs attributable to non-research usage of such products or
services is paid by the Adviser in cash. No person acting on
behalf of the Trust or the Fund is authorized, in recognition of
the value of research products or services, to pay a commission in
excess of that which another broker-dealer might have charged for
effecting the same transaction. Research products or services
furnished
<PAGE> S-13
by broker-dealers through whom the Fund effects transactions may
be used in servicing any or all of the clients of the Adviser and
not all of such research products or services are used in
connection with the management of the Fund.
As stated above, the Adviser's overriding objective in
effecting portfolio transactions for the Fund is to seek to obtain
the best combination of price and execution. However, consistent
with the provisions of the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., the Adviser may, in
selecting broker-dealers to effect portfolio transactions for the
Fund, and where more than one broker-dealer is believed capable of
providing the best combination of price and execution with respect
to a particular transaction, select a broker-dealer in recognition
of its sales of VA contracts or VLI policies offered by
Participating Insurance Companies. The Adviser maintains an
internal procedure to identify broker-dealers which have sold VA
contracts or VLI policies, and the amount of VA contracts or VLI
policies sold by them. Except as described in the next following
sentence, neither the Trust nor the Fund nor the Adviser has
entered into any agreement with, or made any commitment to, any
unaffiliated broker-dealer which would bind the Adviser, the Trust
or the Fund to compensate any such broker-dealer, directly or
indirectly, for sales of VA contracts or VLI policies. The
Adviser has entered into an arrangement with Charles Schwab & Co.,
Inc. (Schwab) pursuant to which the Adviser pays Schwab from the
Adviser's fee for managing the Fund an amount in respect of the
Fund's assets allocable to the Fund shares held in separate
accounts of Transamerica Occidental Life Insurance Company and
First Transamerica Life Insurance Company, each a Participating
Insurance Company, in respect of VA Contracts issued by such
entities and sold to clients of Schwab. The Adviser has also
entered into a similar arrangement with Providian Life and Health
Insurance Company. 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.
<PAGE> S-14
The Trust has arranged for the Bank, as its custodian, to act
as a soliciting dealer to accept any fees available to the Bank as
a soliciting dealer in connection with any tender offer for a
Fund's portfolio securities. The Bank will credit any such fees
received against its custodial fees. In addition, the Board
periodically reviews the legal developments pertaining to and the
practicability of attempting to recapture underwriting discounts
and selling concessions when portfolio securities are purchased in
underwritten offerings. However, the Board has been advised by
counsel that recapture by a mutual fund currently is not permitted
under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc.
The Fund's purchases and sales of securities not traded on
securities exchanges generally are placed by the Adviser with
market makers for these securities on a net basis, without any
brokerage commissions being paid by the Fund. Net trading does
involve, however, transaction costs. Included in prices paid to
underwriters of portfolio securities is the spread between the
price paid by the underwriter to the issuer and the price paid by
the purchasers. The Fund's purchases and sales of portfolio
securities in the over-the-counter market usually are transacted
with a broker-dealer on a net basis without any brokerage
commission being paid by the Fund, but do reflect the spread
between the bid and asked prices. The Adviser may also transact
purchases of some portfolio securities directly with the issuers.
With respect to the Fund's purchases and sales of portfolio
securities transacted with a broker or dealer on a net basis, the
Adviser may also consider the part, if any, played by the broker
or dealer in bringing the security involved to the Adviser's
attention, including investment research related to the security
and provided to the Fund.
The table below shows information on brokerage commissions
paid by the Fund during the three year period ended December 31,
1995.
Total amount of brokerage commissions
paid during fiscal year ended 12/31/95....................$485,545
Amount of commissions paid to brokers or dealers
who supplied research services to the Adviser.............$427,443
Total dollar amount involved in such transaction......$137,912,736
- ------------------------------------------------------------------
Amount of commissions paid to brokers or dealers
that were allocated to such brokers or dealers by the
Fund's portfolio manager because of research services
provided to the Fund......................................$136,159
Total dollar amount involved in such transaction.......$59,401,841
- ------------------------------------------------------------------
Total brokerage fees paid during fiscal year
ended 12/31/94............................................$359,943
- ------------------------------------------------------------------
Total brokerage fees paid during fiscal year
ended 12/31/93............................................$160,071
<PAGE> S-15
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:
n
ERV = P(1+T)
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period or
fractional portion thereof).
For example, for a $1,000 investment in the Fund, the "Total
Return," the "Total Return Percentage," and the "Average Annual
Total Return" for the life of the Fund (from January 1, 1989 to
December 31, 1995) were:
Total Return Average Annual
Total Return Percentage Total Return
------------ ------------ -------------
Capital
Appreciation
Fund $2,874 187.29% 16.28%
The figures contained in this "Investment Performance"
section assume reinvestment of all dividends and distributions.
They are not necessarily indicative of future results. The
performance of the Fund is a result of conditions in the
securities markets, portfolio management,
<PAGE> S-16
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, 1995 the general
account of Keyport owned of record less than 25% of the
outstanding shares of the Fund.
At all meetings of shareholders of the Fund each
Participating Insurance Company will vote the shares held of
record by sub-accounts of its separate accounts only in accordance
with the instructions received from the VLI policy and VA contract
owners on behalf of whom such shares are held. All such shares as
to which no instructions are received (as well as, in the case of
Keyport, all shares held by its general account) will be voted in
the same proportion as shares as to which instructions are
received (with Keyport's general account shares being voted in the
proportions determined by instructing owners of Keyport VLI
policies and VA contracts). Accordingly, each Participating
Insurance Company disclaims beneficial ownership of the shares of
the Fund held of record by the sub-accounts of its separate
accounts (or, in the case of Keyport, its general account). The
Trust has not been informed that any Participating Insurance
Company knows of any owner of a VA contract or VLI policy which on
March 31, 1995 owned beneficially 5% or more of the outstanding
shares of the Fund.
INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
KPMG Peat Marwick LLP are the Trust's independent auditors.
The financial statements incorporated by reference in this SAI
have been so incorporated, and the schedule of financial
highlights has been included in the Prospectus, in reliance upon
the report of KPMG Peat Marwick LLP given on the authority of said
firm as experts in accounting and auditing.
<PAGE> S-17
The financial statements of the Trust with respect to the
Fund and Report of Independent Auditors appearing in the December
31, 1995 Annual Report of the Trust are incorporated in this SAI
by reference.
<PAGE> A-1
APPENDIX A
INVESTMENT TECHNIQUES AND SECURITIES
OPTIONS, FUTURES AND OTHER DERIVATIVES
The Fund may purchase and write both call options and put
options on securities, indexes and foreign currencies, and enter
into interest rate, index and foreign currency futures contracts
and options on such futures contracts ("futures options") in order
to achieve its investment objective, to provide additional
revenue, or to hedge against changes in security prices, interest
rates or currency exchange rates. The Fund also may use other
types of options, futures contracts, futures options and other
types of forward or investment contracts linked to individual
securities, interest rates, foreign currencies, indices or other
benchmarks ("derivative products") currently traded or
subsequently developed and traded, provided the Trustees
determines that their use is consistent with the Fund's investment
objective.
Options on Securities and Indexes
The Fund may purchase and write both put and call options on
securities, indexes or foreign currencies in standardized
contracts traded on recognized securities exchanges, boards of
trade or similar entities, or quoted on NASDAQ. The Fund also may
purchase agreements, sometimes called cash puts, which may
accompany the purchase of a new issue of bonds from a dealer that
the Fund might buy as a temporary defensive measure.
An option on a security (or index or foreign currency) is a
contract that gives the purchase (holder) of the option, in return
for a premium, the right to buy from (call) or sell to (put) the
seller (writer) of the option the security underlying the option
(or the cash value of the index or a specified quantity of the
foreign currency) at a specified exercise price at any time during
the term of the option (normally not exceeding nine months). The
writer of an option on an individual security or on a foreign
currency has the obligation upon exercise of the option to deliver
the underlying security or foreign currency upon payment of the
exercise price or to pay the exercise price upon delivery of the
underlying security or foreign currency. Upon exercise, the
writer of an option on an index is obligated to pay the difference
between the cash value of the index and the exercise price
multiplied by the specified multiplier for the index option. (An
index is designed to reflect specified facets of a particular
financial or securities market, a specific group of financial
instruments or securities, or certain economic indicators.)
The Fund will write call options and put options only if they
are "covered." For example, in the case of a call option on a
security, the option is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration upon
conversion or exchange of other securities held in its portfolio
(or, if additional cash consideration is required, cash or cash
equivalents in such amount are held in a segregated account by its
custodian).
<PAGE> A-2
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.
<PAGE> A-3
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 Funds may purchase and write call and put futures
options. Futures options possess many of the same characteristics
as options on securities, indexes and foreign currencies
(discussed above). A futures option gives the holder the right,
in return for the premium paid, to assume a long position (call)
or a short position (put) in a futures contract at a specified
exercise price at any time during the period of the option. Upon
exercise of a call option, the holder acquires a long position in
the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true.
To the extent required by regulatory authorities having
jurisdiction over the Fund, it will limit its use of futures
contracts and futures options to hedging transactions. For
example, the Fund might use futures contracts to hedge against or
gain exposure to fluctuations in the general level of stock prices
or anticipated changes in interest rates or currency exchange
rates which might adversely affect either the value of the Fund's
securities or the price of the securities that
- -------------
/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.
- -------------
<PAGE> A-4
the Fund intends to purchase. Although other techniques could be
used to reduce the Fund's exposure to stock price and interest
rate and currency fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options.
The Fund will only enter into futures contracts and futures
options that are standardized and traded on an exchange, board of
trade or similar entity, or quoted on an automated quotation
system.
The success of any future transaction depends on the Adviser
correctly predicting changes in the level and direction of stock
prices, interest rates, currency exchange rates and other factors.
Should those predictions be incorrect, the Fund's return might
have been better had the transaction not been attempted; however,
in the absence of the ability to use futures contracts, the
Adviser might have taken portfolio actions in anticipation of the
same market movements with similar investment results but,
presumably, at greater transaction costs.
When a purchase or sale of a futures contract is made by the
Fund, it is required to deposit with its custodian (or broker, if
legally permitted) a specified amount of cash or U.S. Government
securities or other securities acceptable to the broker ("initial
margin"). The margin required for a futures contract is set by
the exchange on which the contact is traded and may be modified
during the term of the contract. The initial margin is in the
nature of a performance bond or good faith deposit on the futures
contract, which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been
satisfied. The Fund expects to earn interest income on its
initial margin deposits. A futures contract held by the Fund is
valued daily at the official settlement price of the exchange on
which it is traded. Each day the Fund pays or receives cash,
called "variation margin," equal to the daily change in value of
the futures contract. This process is known as "marking-to-
market." Variation margin paid or received by the Fund does not
represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would
owe the other if the futures contract had expired at the close of
the previous day. In computing daily net asset value, the Fund
will mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by
it. Such margin deposits will vary depending on the nature of the
underlying futures contract (and the related initial margin
requirements), the current market value of the option and other
futures positions held by the Fund.
Although some futures contracts call for making or taking
delivery of the underlying property, usually these obligations are
closed out prior to delivery by offsetting purchases or sales of
matching futures contracts (same exchange, underlying property and
delivery month). If an offsetting purchase price is less than the
original sale price, the Fund engaging in the transaction realizes
a capital gain, or if it is more, the Fund realizes a capital
loss. Conversely, if an offsetting sale price is more than the
original purchase price, the Fund engaging in the
<PAGE> A-5
transaction realizes a capital gain, or if it is less, the Fund
realizes a capital loss. The transaction costs must also be
included in these calculations.
Risks Associated with Futures
There are several risks associated with the use of futures
contracts and futures options. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in
the futures contract. There can be no guarantee that there will
be a correlation between price movements in the hedging vehicle
and in the portfolio securities being hedged. In addition, there
are significant differences between the securities and the
currency markets and the futures markets that could result in an
imperfect correlation between the markets, causing a given
transaction not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as:
variations in speculative market demand for futures, futures
options and the related securities or currencies, including
technical influences in futures and futures options trading and
differences between the Fund's investments being hedged and the
securities or currencies underlying the standard contracts
available for trading. For example, in the case of index futures
contracts, the composition of the index, including the issuers and
the weighting of each issue, may differ from the composition of
the Fund's portfolio, and, in the case of interest rate futures
contracts, the interest rate levels, maturities, and
creditworthiness of the issues underlying the futures contract may
differ from the financial instruments held in the Fund's
portfolio. A decision as to whether, when and how to use futures
contracts involves the exercise of skill and judgment, and even a
well-conceived transaction may be unsuccessful to some degree
because of market behavior or unexpected stock price, interest
rate or currency exchange rate trends.
Futures exchanges may limit the amount of fluctuation
permitted in certain futures contract prices during a single
trading day. The daily limit establishes the maximum amount that
the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of the current
trading session. Once the daily limit has been reached in a
futures contract subject to the limit, no more trades may be made
on that day at a price beyond that limit. The daily limit governs
only price movements during a particular trading day and therefore
does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for
several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting
some holders of futures contracts to substantial losses. Stock
index futures contracts are not normally subject to such daily
price change limitations.
There can be no assurance that a liquid market will exist at
a time when the Fund seeks to close out a futures or futures
option position. The Fund would be exposed to possible loss on
the position during the interval of inability to close, and would
continue to be required to meet margin requirements until the
position is closed. In addition, many of the contracts discussed
above are relatively new instruments without a significant long-
<PAGE> A-6
term trading history. As a result, there can be no assurance that
an active secondary market will develop or continue to exist.
Limitations on Options and Futures
The Fund will not enter into a futures contract or purchase
an option thereon if, immediately thereafter, the initial margin
deposits for futures contracts held by the Fund plus premiums paid
by it for open futures option positions, less the amount by which
any such positions are "in-the-money," /3/ would exceed 5% of the
Fund's total assets.
When purchasing a futures contract or writing a put option on
a futures contract, the Fund must maintain with its custodian (or
broker, if legally permitted) cash or cash equivalents (including
any margin) equal to the market value of such contract. When
writing a call option on a futures contract, the Fund similarly
will maintain with its custodian cash or cash equivalents
(including any margin) equal to the amount by which such option is
in-the-money until the option expires or is closed out by the
Fund.
The Fund may not maintain open short positions in futures
contracts, call options written on futures contracts or call
options written on indexes if, in the aggregate, the market value
of all such open positions exceeds the current value of the
securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative
volatility of the relationship between the portfolio and the
positions. For this purpose, to the extent the Fund has written
call options on specific securities in its portfolio, the value of
those securities will be deducted from the current market value of
the securities portfolio.
In order to comply with Commodity Futures Trading Commission
Regulation ("CFTC") 4.5 and thereby avoid being deemed a
"commodity pool operator," each Fund will use commodity futures or
commodity options contracts solely for bona fide hedging purposes
within the meaning and intent of CFTC Regulation 1.3(z), or, with
respect to positions in commodity futures and commodity options
contracts that do not come within the meaning and intent of CFTC
Regulation 1.3(z), the aggregate initial margin and premiums
required to establish such positions will not exceed 5% of the
fair market value of the assets of a Fund, after taking into
account unrealized profits and unrealized losses on any such
contracts it has entered into [in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount (as
defined in Section 190.01(x) of the CFTC Regulations) may be
excluded in computing such 5%].
- -----------
/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.
- -----------
<PAGE> A-7
Taxation of Options and Futures
If the Fund exercises a call or put option it holds, the
premium paid for the option is added to the cost basis of the
security purchased (call) or deducted from the proceeds of the
security sold (put). For cash settlement options and futures
options exercised by the Fund, the difference between the cash
received at exercise and the premium paid is a capital gain or
loss.
If a call or put option written by the Fund is exercised, the
premium is included in the proceeds of the sale of the underlying
security (call) or reduces the cost basis of the security
purchased (put). For cash settlement options and futures options
written by the Fund, the difference between the cash paid at
exercise and the premium received is a capital gain or loss.
Entry into a closing purchase transaction will result in
capital gain or loss. If an option written by the Fund was in-
the-money at the time it was written and the security covering the
option was held for more than the long-term holding period prior
to the writing of the option, any loss realized as a result of a
closing purchase transaction will be long-term. The holding
period of the securities covering an in-the-money option will not
include the period of time the option is outstanding.
If the Fund writes an equity call 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
- -----------
/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).
- -----------
<PAGE> A-8
and futures options positions, the related securities and certain
successor positions thereto) may be deferred to a later taxable
year. Sale of futures contracts or writing of call options (or
futures call options) or buying put options (or futures put
options) that are intended to hedge against a change in the value
of securities held by the Fund: (1) will affect the holding period
of the hedged securities; and (2) may cause unrealized gain or
loss on such securities to be recognized upon entry into the
hedge.
If the Fund were to enter into a short index future, short
index futures option or short index option position and the Fund's
portfolio were deemed to "mimic" the performance of the index
underlying such contract, the option or futures contract position
and the Fund's stock positions would be deemed to be positions in
a mixed straddle, subject to the above-mentioned loss deferral
rules.
In order for the Fund to continue to qualify for Federal
income tax treatment as a regulated investment company, at least
90% of its gross income for a taxable year must be derived from
qualifying income; i.e., dividends, interest, income derived from
loans of securities, and gains from the sale of securities or
foreign currencies, or other income (including but not limited to
gains from options and futures contracts). In addition, gains
realized on the sale or other disposition of securities held for
less than three months must be limited to less than 30% of the
Fund's annual gross income. Any net gain realized from futures
(or futures options) contracts will be considered gain from the
sale of securities and therefore be qualifying income for purposes
of the 90% requirement. In order to avoid realizing excessive
gains on securities held less than three months, the Fund may be
required to defer the closing out of certain positions beyond the
time when it would otherwise be advantageous to do so.
"WHEN-ISSUED" SECURITIES AND COMMITMENT AGREEMENTS
The Fund may purchase and sell securities on a when-issued
and delayed-delivery basis.
When-issued or delayed-delivery transactions arise when
securities are purchased or sold by the Fund with payment and
delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the Fund at
the time of entering into the transaction. However, yields
available in the market when delivery takes place may be higher
than the yields on securities to be delivered. When the Fund
engages in when-issued and delayed-delivery transactions, the Fund
relies on the buyer or seller, as the case may be, to consummate
the sale. Failure to do so may result in the Fund missing the
opportunity to obtain a price or yield considered to be
advantageous. When-issued and delayed-delivery transactions may
be expected to occur a month or more before delivery is due.
However, no payment or delivery is made by the Fund until it
receives payment or delivery from the other party to the
transaction. A separate account of liquid assets equal to the
value of such purchase commitments will be maintained with the
Trust's custodian until payment is made and will not be available
to meet redemption requests. When-issued and delayed-delivery
agreements are subject to risks from changes in value based upon
changes in the level of interest rates and other market factors,
<PAGE> A-9
both before and after delivery. The Fund does not accrue any
income on such securities prior to their delivery. To the extent
the Fund engages in when-issued and delayed-delivery transactions,
it will do so for the purpose of acquiring portfolio securities
consistent with its investment objectives and policies and not for
the purpose of investment leverage.
WARRANTS
The Fund may invest in warrants; however, not more than 5% of
the Fund's assets (at the time of purchase) will be invested in
warrants, other than warrants acquired in units or attached to
other securities. Warrants purchased must be listed on a national
stock exchange or the NASDAQ System. Warrants are speculative in
that they have no voting rights, pay no dividends, and have no
right with respect to the assets of the corporation issuing them.
Warrants basically are options to purchase equity securities at a
specific price valid for a specific period of time. They do not
represent ownership of the securities, but only the right to buy
them. Warrants differ from call options in that warrants are
issued by the issuer of the security that may be purchased on
their exercise, whereas call options may be written or issued by
anyone. The prices of warrants do not necessarily move parallel
to the prices of the underlying securities.
RESTRICTED SECURITIES
Restricted securities are acquired through private placement
transactions, directly from the issuer or from security holders,
generally at higher yields or on terms more favorable to investors
than comparable publicly traded securities. Privately placed
securities are not readily marketable and ordinarily can be sold
only in privately negotiated transactions to a limited number of
purchasers or in public offerings made pursuant to an effective
registration statement under the Securities Act of 1933. Private
or public sales of such securities by the Fund may involve
significant delays and expense. Private sales require
negotiations with one or more purchasers and generally produce
less favorable prices than the sale of comparable unrestricted
securities. Public sales generally involve the time and expense
of preparing and processing a registration statement under the
Securities Act of 1933 and may involve the payment of underwriting
commissions; accordingly, the proceeds may be less than the
proceeds from the sale of securities of the same class which are
freely marketable.
