<PAGE 1>
STEINROE VARIABLE INVESTMENT TRUST
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210
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SteinRoe Variable Investment Trust (Trust) is an open-end, diversified
management investment company that currently includes five separate Funds, each
with its own investment objective and policies. The four Funds described in
this prospectus and their investment objectives are:
Stein Roe Special Venture Fund, Variable Series
[bullet] Capital growth by investing primarily in common stocks, convertible
securities, and other securities selected for prospective capital
growth.
Stein Roe Growth Stock Fund, Variable Series
[bullet] Long-term growth of capital through investment primarily in common
stocks.
Stein Roe Balanced Fund, Variable Series
[bullet] High total investment return through investment in a changing mix of
securities.
Stein Roe Money Market Fund, Variable Series
[bullet] High current income from short-term money market instruments while
emphasizing preservation of capital and maintaining excellent liquidity. (The
Money Market Fund attempts to maintain its net asset value at $1.00 per share,
but there can be no assurance that it will be able to do so. An investment in
the Fund is neither insured nor guaranteed by the U.S. Government.)
There is no assurance that the objectives of the Funds will be realized.
Other Funds may be added or deleted from time to time.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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This Prospectus contains information about the Funds that a prospective investor
should know before applying for certain variable annuity contracts and variable
life insurance policies offered by separate accounts of insurance companies
investing in the Trust. Please read it carefully and retain it for future
reference.
Additional facts about the Funds are included in a Statement of Additional
Information dated May 1, 1998, incorporated herein by reference, which has been
filed with the Securities and Exchange Commission. For a free copy write to
Keyport Financial Services Corp. at 125 High Street, Boston, Massachusetts 02110
or the broker-dealer offering the variable annuity contracts and variable life
insurance policies of Participating Insurance Companies (as such term is defined
in this Prospectus).
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SHARES OF THE TRUST ARE AVAILABLE AND ARE BEING MARKETED EXCLUSIVELY AS A POOLED
FUNDING VEHICLE FOR VARIABLE ANNUITY CONTRACTS (VA CONTRACTS) AND VARIABLE LIFE
INSURANCE POLICIES (VLI POLICIES) OF PARTICIPATING INSURANCE COMPANIES.
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THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE APPROPRIATE
VA CONTRACT OR VLI POLICIES OF THE APPLICABLE PARTICIPATING INSURANCE COMPANY.
BOTH PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
The date of this prospectus is May 1, 1998
<PAGE 2>
TABLE OF CONTENTS
Page
-----
The Trust ................................................. 3
Financial Highlights ...................................... 4
How the Funds Invest ...................................... 8
Investment Techniques and Restrictions .................... 9
Portfolio Turnover ........................................ 10
How the Funds are Managed ................................. 11
Purchases and Redemptions ................................. 12
Investment Return ......................................... 12
Net Asset Value ........................................... 13
Taxes ..................................................... 13
Dividends and Distributions ............................... 14
Shareholder Communications ................................ 14
Organization and Description of Shares .................... 14
Additional Information .................................... 15
Appendix A: Investment Techniques and Securities .......... A-1
Appendix B: Description of Ratings ........................ B-1
<PAGE 3>
THE TRUST
The SteinRoe Variable Investment Trust (Trust) is an open-end, diversified
management investment company currently consisting of five Funds with differing
investment objectives, policies and restrictions. The four Funds described in
this prospectus are Stein Roe Special Venture Fund, Variable Series (Special
Venture Fund), Stein Roe Growth Stock Fund, Variable Series (Growth Stock Fund),
Stein Roe Balanced Fund, Variable Series (Balanced Fund), and Stein Roe Money
Market Fund, Variable Series (Money Market Fund) (individually referred to as a
Fund or by the defined name indicated, or collectively as the Funds). The Trust
issues shares of beneficial interest in each Fund that represent interests in a
separate portfolio of securities and other assets. The Trust may add or delete
Funds from time to time.
The Trust is the funding vehicle for variable annuity contracts (VA contracts)
and variable life insurance policies (VLI policies) offered by the separate
accounts of life insurance companies (Participating Insurance Companies).
Certain Participating Insurance Companies are affiliated with the adviser to the
Funds (Affiliated Participating Insurance Companies). As of the date of this
Prospectus, such Affiliated Participating Insurance Companies are Keyport Life
Insurance Company (Keyport), Independence Life & Annuity Company (Independence),
American Benefit Life Insurance Company (American Benefit) and Liberty Life
Assurance Company of Boston (Liberty Life). Shares of the Funds from time to
time may be sold to other unaffiliated Participating Insurance Companies.
The Participating Insurance Companies and their separate accounts are the
shareholders or investors (shareholders) of the Funds. Owners of VA contracts
and owners of VLI policies invest in sub-accounts of separate accounts of the
Participating Insurance Companies that, in turn, invest in the Funds.
The prospectuses issued by the Participating Insurance Company describe which
Funds are available to the separate accounts offering the VA contracts and VLI
policies. The Trust assumes no responsibility for those prospectuses. However,
the Board of Trustees of the Trust (Board) does monitor events to identify any
material conflicts that may arise between the interests of the Participating
Insurance Companies or between the interests of owners of VA contracts and VLI
policies. The Trust currently does not foresee any disadvantages to the owners
of VA contracts and VLI policies arising from the fact that certain interests of
the owners may differ. The Statement of Additional Information contains
additional information regarding such differing interests and related risks.
Stein Roe & Farnham Incorporated (the Adviser) provides investment advisory
services to the Funds. The Adviser also provides administrative services to the
Funds, and an affiliate of the Adviser provides transfer agency services to the
Funds. Keyport Financial Services Corp. (the Underwriter) serves as the
principal underwriter of the Trust with respect to sales of shares to Affiliated
Participating Insurance Companies. The Adviser, the Underwriter, Keyport,
Independence and American Benefit are subsidiaries of Liberty Financial
Companies, Inc. (LFC). As of March 31, 1998, approximately 72.3% of the combined
voting power of LFC's outstanding voting stock was held, indirectly, by Liberty
Mutual Life Insurance Company (Liberty Mutual). Liberty Life is a subsidiary of
Liberty Mutual.
<PAGE 4>
FINANCIAL HIGHLIGHTS
The tables below present certain financial information for each Fund
for the period beginning January 1, 1989 and ending December 31, 1997. 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, 1993 appears in the Trust's annual report to
shareholders for the fiscal year ended December 31, 1997 (which may be obtained
without charge from the Underwriter or from the Participating Insurance Company
issuing the applicable VA contract or VLI policy), and is incorporated by
reference into the Statement of Additional Information. The Funds' total returns
presented below do not reflect the cost of insurance and other insurance company
separate account charges which vary with the VA contracts and VLI policies
offered through Participating Insurance Companies.
Special Venture Fund
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Per share operating
performance:
Net asset value, beginning
of year $ 20.73 $ 16.33 $ 14.74 $ 16.53
-------- -------- -------- ---------
Net investment income 0.01 0.04 0.04 0.06
Net realized and unrealized
gains (losses) on
investments 1.25 4.36 1.69 0.09
-------- -------- -------- ---------
Total from investment
operations 1.26 4.40 1.73 0.15
-------- -------- -------- ---------
Less distributions:
Distributions from and in
excess of net
investment income (0.03) -- (0.04) (0.07)
Distributions from and in
excess of net realized
gains on investments (3.96) -- (0.10) (1.87)
Return of capital -- -- -- --
--------- --------- -------- ---------
Total distributions (3.99) -- (0.14) (1.94)
--------- --------- -------- ---------
Net asset value, end of year $ 18.00 $ 20.73 $ 16.33 $ 14.74
========= ========= ======== =========
Total return:
Total investment return 7.81% 26.94% 11.75% 1.19%(b)
Ratios/supplemental data:
Net assets, end of year
(000s) $200,590 $196,219 $143,248 $134,078
Ratio of expenses to average
net assets 0.73% 0.75% 0.76% 0.80%(a)
Ratio of net investment
income to average net
assets 0.04% 0.20% 0.26% 0.44%(b)
Portfolio turnover ratio 93% 100% 132% 144%
Average commissions
(per share) $ 0.0453 $ 0.0251 -- --
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1993 1992 1991 1990 1989
---------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Per share operating
performance:
Net asset value, beginning
of year $ 15.34 $ 15.32 $ 12.07 $ 14.79 $ 13.62
--------- ------- ------- ------- -------
Net investment income 0.03 -- 0.21 0.19 0.23
Net realized and unrealized
gains (losses) on
investments 5.22 2.17 4.19 (1.53) 3.90
--------- ------- ------- ------- -------
Total from investment
operations 5.25 2.17 4.40 (1.34) 4.13
--------- ------- ------- ------- -------
Less distributions:
Distributions from and in
excess of net
investment income (0.02) -- (0.15) (0.28) (0.22)
Distributions from and in
excess of net realized
gains on investments (4.04) (2.15) (1.00) (1.10) (2.25)
Return of capital -- -- -- -- (0.49)
--------- ------- ------- ------- -------
Total distributions (4.06) (2.15) (1.15) (1.38) (2.96)
--------- ------- ------- ------- -------
Net asset value, end of year $ 16.53 $ 15.34 $ 15.32 $ 12.07 $ 14.79
========= ======= ======= ======= =======
Total return:
Total investment return 35.68%(b) 14.48% 37.25% (8.91)% 30.84%
Ratios/supplemental data:
Net assets, end of year
(000s) $96,544 $52,135 $41,179 $33,238 $32,176
Ratio of expenses to average
net assets 0.84%(a) 1.01% 1.03% 1.14% 1.08%
Ratio of net investment
income to average net
assets 0.13%(b) (0.01)% 1.35% 1.43% 1.14%
Portfolio turnover ratio 112% 85% 36% 121% 153%
Average commissions
(per share) -- -- -- -- --
</TABLE>
- ----------
(a) These ratios were not materially affected by the reimbursement of certain
expenses by the Adviser and its affiliates.
(b) Computed giving effect to the expense limitation undertaking of the Adviser
and its affiliates.
<PAGE 5>
Growth Stock Fund
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1997 1996 1995 1994
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Per share operating
performance:
Net asset value, beginning
of year $ 28.61 $ 23.59 $ 18.11 $ 20.65
-------- -------- -------- -------
Net investment income 0.10 0.13 0.15 0.15
Net realized and unrealized
gains (losses) on
investments 8.84 4.89 6.68 (1.46)
-------- -------- -------- -------
Total from investment
operations 8.94 5.02 6.83 (1.31)
-------- -------- -------- -------
Less distributions:
Distributions from and in
excess of net
investment income (0.12) -- (0.15) (0.17)
Distributions from and in
excess of net realized
gains on investments (1.30) -- (1.20) (1.06)
Return of capital -- -- -- --
--------- --------- -------- -------
Total distributions (1.42) -- ( 1.35) (1.23)
--------- --------- -------- -------
Net asset value, end of year $ 36.13 $ 28.61 $ 23.59 $ 18.11
========= ========= ======== =======
Total return:
Total investment return 32.28% 21.28% 37.73% (6.35)%
Ratios/supplemental data:
Net assets, end of year
(000s) $213,399 $161,879 $136,834 $98,733
Ratio of expenses to average
net assets 0.71% 0.73% 0.74% 0.77%
Ratio of net investment
income to average net
assets 0.32% 0.49% 0.72% 0.75%
Portfolio turnover ratio 28% 35% 41% 72%
Average commissions
(per share) $ 0.0583 $ 0.0534 -- --
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------ ----------- ----------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Per share operating
performance:
Net asset value, beginning
of year $ 20.10 $ 19.47 $ 13.44 $ 13.88 $ 10.75
-------- ------- ------- ------- -------
Net investment income 0.13 0.11 0.17 0.19 0.17
Net realized and unrealized
gains (losses) on
investments 0.86 1.18 6.25 (0.42) 3.19
-------- ------- ------- ------- -------
Total from investment
operations 0.99 1.29 6.42 (0.23) 3.36
-------- ------- ------- ------- -------
Less distributions:
Distributions from and in
excess of net
investment income (0.12) (0.10) (0.18) (0.21) (0.18)
Distributions from and in
excess of net realized
gains on investments (0.32) (0.56) (0.21) -- --
Return of capital -- -- -- -- (1.05)
-------- ------- ------- ------- -------
Total distributions (0.44) (0.66) (0.39) (0.21) (0.23)
-------- ------- ------- ------- -------
Net asset value, end of year $ 20.65 $ 20.10 $ 19.47 $ 3.44 $ 13.88
======== ======= ======= ======= =======
Total return:
Total investment return 4.97% 6.63% 48.03% (1.65)%(b) 31.30%(b)
Ratios/supplemental data:
Net assets, end of year
(000s) $111,561 $64,402 $38,481 $17,383 $13,257
Ratio of expenses to average
net assets 0.83% 0.97% 1.15% 1.50%(a) 1.60%(a)
Ratio of net investment
income to average net
assets 0.77% 0.63% 1.15% 1.51%(b) 1.35%(b)
Portfolio turnover ratio 77% 20% 40% 39% 77%
Average commissions
(per share) -- -- -- -- --
</TABLE>
- ----------
(a) If the Fund had paid all of its expenses and there had been no reimbursement
from the Adviser and its affiliates, these ratios would have been 1.54% and
1.63% for the years ended December 31, 1990 and 1989, respectively.
(b) Computed giving effect to the expense limitation undertaking of the Adviser
and its affiliates.
<PAGE 6>
Balanced Fund
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1997 1996 1995 1994
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Per share operating
performance:
Net asset value, beginning of year $ 16.28 $ 14.08 $ 12.18 $ 13.11
-------- -------- -------- --------
Net investment income 0.53 0.57 0.48 0.51
Net realized and unrealized gains
(losses) on investments and
foreign currency transactions 1.96 1.63 2.61 (0.93)
-------- -------- -------- --------
Total from investment operations 2.49 2.20 3.09 (0.42)
-------- -------- -------- --------
Less distributions:
Distributions from and in excess
of net investment income (0.56) -- (0.48) (0.51)
Distributions from and in excess
of net realized gains on
investments (1.40) -- (0.71) --
Return of capital -- -- -- --
--------- --------- -------- --------
Total distributions (1.96) -- (1.19) (0.51)
--------- --------- -------- --------
Net asset value, end of year $ 16.81 $ 16.28 $ 14.08 $ 12.18
========= ========= ======== ========
Total return:
Total investment return 16.82% 15.63% 25.43% (3.19)%
Ratios/supplemental data:
Net assets, end of year (000s) $325,033 $299,184 $277,014 $196,278
Ratio of expenses to average
net assets 0.66% 0.67% 0.66% 0.68%
Ratio of net investment income to
average net assets 3.25% 3.68% 3.12% 4.01%
Portfolio turnover ratio (a) 44% 76% 66% 71%
Average commissions (per share) $0.0539 $ 0.0547 -- --
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1993 1992 1991 1990 1989
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Per share operating
performance:
Net asset value, beginning of year $ 12.54 $ 12.54 $ 10.26 $ 11.38 $ 10.25
-------- -------- ------- ------- -------
Net investment income 0.38 0.45 0.52 0.62 0.53
Net realized and unrealized gains
(losses) on investments and
foreign currency transactions 0.78 0.49 2.31 (0.70) 1.75
-------- -------- ------- ------- -------
Total from investment operations 1.16 0.94 2.83 (0.08) 2.28
-------- -------- ------- ------- -------
Less distributions:
Distributions from and in excess
of net investment income (0.36) (0.46) (0.44) (0.74) (0.52)
Distributions from and in excess
of net realized gains on
investments (0.23) (0.48) (0.11) (0.30) (0.46)
Return of capital -- -- -- -- (0.17)
-------- -------- ------- ------- -------
Total distributions (0.59) (0.94) (0.55) (1.04) (1.15)
-------- -------- ------- ------- -------
Net asset value, end of year $ 13.11 $ 12.54 $ 12.54 $ 10.26 $ 11.38
======== ======== ======= ======= =======
Total return:
Total investment return 9.29% 7.53% 27.93% (0.69)% 22.38%
Ratios/supplemental data:
Net assets, end of year (000s) $197,132 $113,572 $82,710 $58,368 $59,068
Ratio of expenses to average
net assets 0.69% 0.66% 0.71% 0.75% 0.78%
Ratio of net investment income to
average net assets 3.55% 3.98% 4.57% 5.30% 4.64%
Portfolio turnover ratio (a) 47% 70% 82% 111% 109%
Average commissions (per share) -- -- -- -- --
</TABLE>
- ----------
(a) The portfolio turnover ratio includes dollar roll transactions.
<PAGE 7>
Money Market Fund
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
Net investment income 0.050 0.049 0.055 0.037
-------- -------- -------- --------
Less distributions:
Distributions from net investment
income (0.050) (0.049) (0.055) (0.037)
-------- -------- -------- --------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return:
Total investment return 5.18% 5.01% 5.62% 3.81%
Ratios/supplemental data:
Net assets, end of year (000s) $67,137 $65,461 $64,992 $78,698
Ratio of expenses to average
net assets - 0.65% 0.65% 0.63% 0.62%
Ratio of net investment income
to average net assets 5.05% 4.90% 5.48% 3.73%
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Net investment income 0.027 0.034 0.056 0.076 0.087
-------- -------- -------- -------- --------
Less distributions:
Distributions from net investment
income (0.027) (0.034) (0.056) (0.076) (0.087)
-------- -------- -------- -------- --------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return:
Total investment return 2.70% 3.48% 5.79% 7.89% 9.07%
Ratios/supplemental data:
Net assets, end of year (000s) $83,049 $70,821 $77,676 $94,462 $94,313
Ratio of expenses to average
net assets 0.65% 0.67% 0.67% 0.66% 0.66%
Ratio of net investment income
to average net assets 2.68% 3.42% 5.67% 7.61% 8.68%
</TABLE>
<PAGE 8>
Further information about the performance of the Funds is contained in the
Trust's annual report to shareholders for the fiscal year ended December 31,
1997, which may be obtained without charge from the Underwriter or from the
Participating Insurance Company issuing the applicable VA contract or VLI
policy.
HOW THE FUNDS INVEST
All investments, including mutual funds, have risks, and no one mutual fund is
suitable for all investors. No one Fund by itself constitutes a complete
investment program. The net asset value of the shares of the Funds, other than
Money Market Fund, will vary with market conditions and there can be no
guarantee that any Fund will achieve its investment objective. Although Money
Market Fund attempts to stabilize its net asset value at $1.00 per share, there
can be no assurance that it will be able to do so.
Each Fund and its investment objectives and policies are described below.
Certain additional investment policies and techniques common to some or all of
the Funds are described under "INVESTMENT TECHNIQUES AND RESTRICTIONS" below.
The investment objectives are fundamental and may be changed only by a vote of
the Board and of the shareholders.
More information about the portfolio securities in which the Funds invest,
including certain risks and investment limitations, is provided in Appendix A to
this Prospectus and Appendix A in the Statement of Additional Information.
Appendix B in this Prospectus provides a description of bond ratings.
Special Venture Fund
Special Venture Fund seeks to provide shareholders with growth of capital. It
pursues this objective by investing primarily in common stocks, securities
convertible into common stocks and securities having common stock
characteristics, including rights and warrants, selected primarily for
prospective capital growth. The Fund invests in both domestic and foreign
companies.
Investments in newer and smaller companies, particularly those believed to be in
the earlier phases of growth, are emphasized. The Fund may also invest in
securities of larger, more established companies that the Adviser believes
possess some of the same characteristics as smaller companies. While income is
not an objective, securities appearing to offer attractive possibilities for
future growth of income may be included in the Fund's portfolio.
Investor Considerations. The type of securities in which the Fund invests may be
expected to experience wide fluctuations in price in both rising and declining
markets. The Fund may be expected to experience a greater degree of market and
financial risk than other equity portfolios. The Fund's portfolio may include
securities that are not widely traded or new issues of securities. The foreign
companies in which the Fund invests may include companies whose operations are
limited to a single country or group of countries. The value of such investments
may be significantly impacted by factors (both positive and negative) affecting
the local economy of such country or countries.
Growth Stock Fund
Growth Stock Fund seeks long-term growth of capital. It is expected that under
ordinary circumstances at least 65% of the total assets of the Fund will be
invested in the common stock of growth companies, including foreign companies,
whose earnings are expected to increase more rapidly than most public companies.
A growth company is one that the Adviser believes has demonstrated an ability to
increase its earnings at an above-average rate with reasonable consistency and
that has given indications of being able to continue this pattern in the
future--i.e., companies that create wealth over a long period of time. In
general, these companies should: be well managed; employ sound financial and
accounting policies; demonstrate effective research; have successful product
development and marketing; provide efficient service; possess pricing
flexibility; and earn an above average return on investment. Up to 25% of the
Fund's investments in growth companies may be in small capitalization companies
with total common stock outstanding of less than $500,000,000.
Up to 35% of the total assets of the Fund may be invested in debt securities and
securities convertible into common stock.
Investor Considerations. Investors should be aware of the possibility that
during periods of adverse economic and market conditions, the per share value of
the Fund may not move in relation to the favorable long-term earnings trend of
its portfolio companies. The foreign companies in which the Fund invests
typically are companies with global operations. Thus, in contrast to Special
Venture Fund, the Fund generally is less likely to be impacted by
country-specific risks with respect to foreign investments.
Balanced Fund
Balanced Fund seeks to provide a high total investment return. The Fund's assets
are allocated among equities, debt securities and cash. The portfolio manager
determines those allocations using the views of the Adviser's investment
strategists regarding economic, market, and other factors relative to investment
opportunities. The equity portion of the Fund's portfolio is invested primarily
in well-established companies having market capitalizations in excess of $1
billion. Under normal market
<PAGE 9>
conditions, debt securities will make up at least 25% of the Fund's total
assets. Investments in debt securities are limited to those that are within the
four highest grades (generally referred to as "investment grade") assigned by a
nationally recognized statistical rating organization, or, if unrated,
determined by the Adviser to be of comparable quality. The cash portion of the
portfolio is invested in securities similar to those permitted by the policies
of Money Market Fund.
The Adviser expects that over longer periods a larger portion of the Fund's
portfolio will consist of equity securities.
Investor Considerations. Although the Fund seeks to reduce both financial and
market risks associated with any one investment medium, performance of the Fund
will depend significantly on the additional factors of timing and mix and the
ability of the Adviser to judge and react to changing market conditions. (See
"PORTFOLIO TURNOVER.") In making asset allocation decisions, the Fund does not
attempt to make short-term market timing shifts.
Money Market Fund
Money Market Fund seeks high current income from investment in short-term money
market instruments while emphasizing preservation of capital and maintaining
excellent liquidity.
The Fund pursues this objective by investing all of its assets in U.S. dollar
denominated money market instruments maturing in thirteen months or less from
time of investment. Each security must be rated (or be issued by an issuer that
is rated with respect to its short-term debt) within the highest rating category
for short-term debt by at least two nationally recognized statistical rating
organizations ("NRSRO"), or, if unrated, determined by or under the direction of
the Board of Trustees to be of comparable quality. These securities may include:
(1) Securities issued or guaranteed by the U.S. Government or by its agencies
or instrumentalities ("U.S. Government Securities").
(2) Securities issued or guaranteed by the government of any foreign country
that have a long-term rating at time of purchase of A or better (or
equivalent rating) by at least one NRSRO.
(3) Certificates of deposit, bankers' acceptances and time deposits of any
bank (U.S. or foreign) having total assets in excess of $1 billion, or the
equivalent in other currencies (as of the date of the most recent
available financial statements) or of any branches, agencies or
subsidiaries (U.S. or foreign) of any such bank.
(4) Commercial paper of U.S. or foreign issuers, including variable rate
demand notes.
(5) Notes, bonds, and debentures having a long-term rating at time of purchase
of A or better (or equivalent rating) by at least one NRSRO.
(6) Repurchase agreements involving securities listed in (1) above.
(7) Other high-quality short-term obligations.
Under normal market conditions the Fund will invest at least 25% of its total
assets in securities of issuers in the financial services industry (which
includes, but is not limited to, banks, personal credit and business credit
institutions, and other financial service institutions).
The remaining maturity of each of the Fund's investments at the time of
investment is 13 months or less. The weighted average maturity of its investment
portfolio varies with money market conditions, but is always 90 days or less.
Although there can be no assurance that it will always be able to do so, the
Fund follows procedures designed to maintain its price per share at $1.00. (See
"NET ASSET VALUE.")
Investor Considerations. The yield from short-term investments may be lower than
yields from longer-term securities. The value of the Fund's securities
fluctuates inversely with changes in interest rates. Both the risk of an
issuer's inability to pay interest and principal on a given security (financial
risk) and the price volatility (market risk) of investment in the Fund may be
expected to be less than for certain other Funds.
Because of the Fund's policy of investing at least 25% of its assets in
securities of issuers in the financial services industry, the Fund may be more
adversely affected by changes in market or economic conditions and other
circumstances affecting the financial services industry.
INVESTMENT TECHNIQUES AND RESTRICTIONS
Techniques
Each Fund may invest up to 25% of its total assets in securities of foreign
issuers as more fully described in Appendix A to this Prospectus. Special
Venture Fund, Growth Stock Fund and Balanced Fund typically hold foreign
companies in their portfolios. Money Market Fund is less likely to invest in
foreign securities to any material extent.
When the Adviser believes that the currency of a particular foreign country may
suffer a substantial decline against the U.S. dollar, it may cause a Fund (other
than Money Market 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
<PAGE 10>
Adviser may also cause a Fund to enter into forward foreign currency contracts
to protect against loss between trade and settlement dates resulting from
changes in foreign currency exchange rates. Such contracts will also have the
effect of limiting any gains to the Fund that would have resulted from
advantageous changes in such rates.
It is the policy of each Fund that when the Adviser deems a temporary defensive
position advisable, each Fund may invest, without limitation (i.e., up to 100%
of its assets), in high-quality fixed-income securities, or hold assets in cash
or cash equivalents, to the extent the Adviser believes such alternative
investments to be less risky than those securities in which the Fund normally
invests.
Each Fund may invest in securities purchased on a when-issued or
delayed-delivery basis. Although the payment terms of these securities are
established at the time the Fund enters into the commitment, the securities may
be delivered and paid for a month or more after the date of purchase, when their
value may have changed and (with particular reference to debt securities) the
yields then available in the market may be greater. The Funds will make such
commitments only with the intention of actually acquiring the securities, but
may sell the securities before settlement date if it is deemed advisable for
investment reasons.
Each Fund may also invest in securities purchased on a standby commitment basis,
which is a delayed delivery agreement in which the Fund binds itself to accept
delivery of a security at the option of the other party to the agreement. The
Fund usually receives a commitment fee in consideration for its standby
commitment.
Except for Money Market Fund, each Fund may make loans of its portfolio
securities to broker-dealers and banks subject to certain restrictions described
in Appendix A to this Prospectus and in the Statement of Additional Information.
Each Fund other than Money Market Fund may invest in options, futures contracts
and other derivatives as described in Appendix A to this Prospectus and in the
Statement of Additional Information.
Restrictions on the Funds' Investments
No Fund will (1) with respect to 75% of the value of its total assets, invest
more than 5% of its total assets in the securities of any one issuer (except
that this restriction does not apply to (i) U.S. Government Securities or (ii)
[as to Money Market Fund only] certificates of deposit, bankers' acceptances or
repurchase agreements); (2) invest more than 25% of its total assets (at market)
in the securities of issuers in any particular industry (except that this
restriction does not apply to (i) U.S. Government Securities, (ii) [as to Money
Market Fund only] certificates of deposit, bankers' acceptances or repurchase
agreements or (iii) [as to Money Market Fund only] securities of issuers in the
financial services industry); (3) acquire more than 10% of the outstanding
voting securities of any one issuer; or (4) borrow money, except as a temporary
measure for extraordinary or emergency purposes, and then the aggregate
borrowings at any one time (including any reverse repurchase agreements) may not
exceed 33 1/3% of its assets (at market). No Fund will purchase additional
securities when its borrowings, less proceeds receivable from sales of portfolio
securities, exceed 5% of total assets. The Funds may invest in repurchase
agreements, provided that no Fund will invest more than 15% [except as to Money
Market Fund, for which the limitation is 10%] of its net assets in repurchase
agreements maturing in more than seven days and any other illiquid securities.
In each case, if a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in the value of
a security or decrease in a Fund's assets will not constitute a violation of
the limit.
All of the investment restrictions are set forth in the Statement of Additional
Information.
PORTFOLIO TURNOVER
Although no Fund purchases securities with a view to rapid turnover, there are
no limitations on the length of time that portfolio securities must be held and
a Fund's portfolio turnover rate may vary significantly from year to year. A
high rate of turnover of a Fund, if it should occur, would result in increased
transaction expenses for that Fund, which must be borne by the Fund. The
turnover rate of each Fund may exceed 100%. Special Venture Fund and Balanced
Fund may have a higher rate of turnover than the other Funds and alternative
investment funds because of the flexibility of their investment policies
permitting shifts between different types of investments (in the case of
Balanced Fund) and the use of aggressive strategies and investments (in the
case of Special Venture Fund). The portfolio turnover rates of the Funds
(other than Money Market Fund) are shown under "FINANCIAL HIGHLIGHTS" above.
In selecting broker-dealers for the purchase and sale of portfolio securities,
the Adviser may consider research and brokerage services furnished by such
broker-dealers to the Adviser and its affiliates. Subject to seeking best
execution, the Adviser may consider sales of shares of a Fund (and of other
mutual funds advised by it and its affiliates), in selecting broker-dealers for
portfolio security transactions.
<PAGE 11>
HOW THE FUNDS ARE MANAGED
The Trustees
The business of the Trust and the Funds is supervised by the Trust's Board of
Trustees. The Statement of Additional Information contains the names of and
biographical information for the Trustees.
Stein Roe & Farnham Incorporated
The investment portfolio of each Fund is managed, subject to the direction of
the Board of Trustees, by Stein Roe & Farnham Incorporated (the Adviser), One
South Wacker Drive, Chicago, Illinois 60606, pursuant to a separate Advisory
Agreement dated May 1, 1993 with each Fund other than Money Market Fund, and an
Advisory Agreement dated December 9, 1988 with Money Market Fund. The Adviser
has provided investment advisory and administrative services since 1932. The
Adviser is a wholly owned indirect subsidiary of LFC.
The Adviser places orders for the purchase and sale of securities for each Fund.
In doing so, the Adviser seeks to obtain the best combination of price and
execution, which involves a number of judgmental factors.
Richard B. Peterson has been co-portfolio manager of Special Venture Fund since
1991. Mr. Peterson is a Senior Vice President of the Adviser.
John S. McLandsborough has been co-portfolio manager of Special Venture Fund
since June, 1997. He joined the Adviser as a portfolio manager in 1996 and
became a Vice President in 1998. Mr. McLandsborough was a securities analyst
with CS First Boston from 1993 to 1995.
Growth Stock Fund is managed by Erik P. Gustafson. Mr. Gustafson joined the
Adviser in 1992 and became a Vice President of the Adviser in 1994 and a Senior
Vice President in 1996.
Harvey B. Hirschhorn is the portfolio manager for Balanced Fund. Associated with
the Adviser since 1973, Mr. Hirschhorn is an Executive Vice President of the
Adviser and its Chief Economist and Investment Strategist.
The Adviser also provides each of the Funds with administrative services
pursuant to an Administration Agreement with the Trust on behalf of each Fund
dated as of January 3, 1995. These services include financial statement
preparation, the provision of office space and equipment and facilities in
connection with the maintenance of the Trust's headquarters, preparation and
filing of required reports and tax returns, arrangements for meetings,
maintenance of the Trust's corporate books and records, communication with
shareholders, provision of internal legal services and oversight of custodial,
accounting and other services provided to the Funds by others. The Adviser may,
in its discretion, arrange for such services to be provided to the Trust by LFC
or by any of LFC's majority or greater owned subsidiaries.
Under separate agreements, the Adviser also acts as the agent of the Funds for
the transfer of shares, disbursement of dividends and maintenance of shareholder
account records, and provides certain pricing and other record keeping services
to the Funds.
The Adviser pays all compensation of the Trust's officers who are employees of
the Adviser.
Advisory and Administrative Fees
The Funds pay the Adviser annual fees for investment advisory and administrative
services based on the following schedules. All fees are computed and accrued
daily and paid monthly.
Special Venture and Growth Stock Funds: Fees at the annual rate of 0.50% (for
investment advisory services) and 0.15% (for administrative services) of average
daily net assets.
Balanced Fund: Fees at the annual rate of .45% (for investment advisory
services) and .15% (for administrative services) of average daily net asset
value.
Money Market Fund: Fees at the annual rates of .35% (for investment advisory
services) and .15% (for administrative services) of average daily net asset
value.
In addition, each Fund pays the Adviser an additional fee for accounting and
bookkeeping services in the annual amount of $25,000 plus .0025 percent of
average daily net assets in excess of $50,000,000.
LFC and Liberty Mutual
LFC is a diversified and integrated asset management company providing insurance
and investment products to individuals and institutions through multiple
distribution channels. LFC's operating units include Keyport, the Adviser, The
Colonial Group, Inc., sponsor of the Colonial family of mutual funds, Newport
Pacific Management, Inc., a specialist in the Asian equity markets, Liberty
Asset Management Company, a sponsor of closed-end funds employing a
multi-managed investment approach, and Independent Financial Marketing Group,
Inc., a specialist in the design and implementation of bank marketing programs
for insurance and investment products.
Liberty Mutual is an international multi-line insurance writer and, with its
affiliates, is one of the largest writers of property-casualty insurance in the
United States.
<PAGE 12>
Custodian
State Street Bank and Trust Company (State Street), Boston, Massachusetts, is
the custodian for the Funds. Foreign securities are maintained in the custody of
foreign banks and trust companies that are members of the State Street's Global
Custody Network or foreign depositories used by such members.
Expenses of the Funds
The Funds generally will pay all their expenses, other than those borne by the
Adviser. The Adviser has voluntarily agreed until April 30, 1999 to reimburse
all expenses, including management fees, incurred by the Funds as follows:
Fund Expenses Exceeding
- --------------------------- ----------------------------
Special Venture and Growth
Stock Funds 0.80% of average net assets
Balanced Fund 0.75% of average net assets
Money Market Fund 0.65% of average net assets
The Adviser would not, however, be required to reimburse expenses to an extent
which would result in a Fund's inability to qualify as a regulated investment
company under the Internal Revenue Code.
It is the policy of the Trust that expenses directly charged or attributable to
any particular Fund will be paid from the assets of that Fund. General expenses
of the Trust will be allocated among and charged to the assets of each of the
Funds on a basis that the Trustees deem fair and equitable, which may be based
on the relative assets of each Fund or the nature of the services performed and
their relative applicability to each Fund.
PURCHASES AND REDEMPTIONS
The Participating Insurance Companies place daily orders to purchase and redeem
shares of each Fund based on, among other things, the net amount of purchase
payments to be invested and surrender and transfer requests to be effected on
that day pursuant to the VA contracts and VLI policies. Shares are purchased and
redeemed as a result of certain other transactions pursuant to the VA contracts
and VLI policies, including deductions for fees and charges by the applicable
insurance company separate account. The Trust continuously offers and redeems
shares at net asset value without the addition of any selling commission, sales
load or redemption charge. Shares are sold and redeemed at their net asset value
as next determined after receipt of purchase payments or redemption requests,
respectively, by the separate accounts. Similarly, shares are sold or redeemed
as a result of such other transactions under the VA contracts and VLI policies
at the net asset value computed for the day on which such transactions are
effected by the separate accounts. The right of redemption may be suspended or
payments postponed whenever permitted by applicable law and regulations.
Keyport Financial Services Corp. (KFSC), a subsidiary of Keyport, serves
pursuant to an Underwriting Agreement as principal underwriter for the Trust
with respect to sales of shares to Keyport and to other Affiliated Participating
Insurance Companies. KFSC is registered as a broker-dealer under the Securities
Exchange Act of 1934 and is a member of the National Association of Securities
Dealers, Inc. KFSC's address is 125 High Street, Boston, Massachusetts 02110.
INVESTMENT RETURN
The total return from an investment in a Fund is measured by the distributions
received (assuming reinvestment of all distributions) plus or minus the change
in the net asset value per share for a given period. A total return percentage
is calculated by first dividing the value of a share at the end of the period
(including reinvestment of distributions) by the value of the share at the
beginning of the period and then subtracting 1.0. A Fund's average annual total
return is determined by computing the annual percentage change in value of a
$1,000 investment in such Fund for a specified period, assuming reinvestment of
all dividends and distributions.
Because Money Market Fund seeks to maintain a $1.00 per share value, its return
is usually quoted as a current seven-day yield, calculated by totaling the
dividends on a share of the Fund for the previous seven days and restating that
yield as an annual rate, or as an effective yield, calculated by adjusting the
current yield to assume daily compounding.
Total return information describes a Fund's performance for the period shown and
does not predict future performance. Comparison of a Fund's yield or total
return with those of alternative investments should consider differences between
the Fund and the alternative investments, the periods and methods used in
calculation of the return being compared, and the impact of taxes on alternative
investments. A Fund's investment return figures do not reflect the cost of
insurance and other insurance company separate account charges which vary with
the VA contracts and VLI policies offered through the separate accounts of the
Participating Insurance Companies, and which will decrease the return realized
by a contract or policyholder.
<PAGE 13>
NET ASSET VALUE
The Adviser determines net asset value per share of each Fund as of the close of
regular trading on the New York Stock Exchange (NYSE) (currently 4:00 p.m., New
York time). Net asset value per share is calculated for each Fund by dividing
the current market value (amortized cost value in the case of the Money Market
Fund) of total portfolio assets, less all liabilities (including accrued
expenses), by the total number of shares outstanding. Net asset value is
determined on each day when the NYSE is open, except on such days in which no
order to purchase or redeem shares is received. The NYSE is scheduled to be open
Monday through Friday throughout the year except for certain Federal and other
holidays.
Money Market Fund
The valuation of the Money Market Fund's securities is based on their amortized
cost, which does not take into account unrealized gains or losses, in an attempt
to maintain its net asset value at $1.00 per share. The extent of any deviation
between the Fund's net asset value based upon market quotations or equivalents
and $1.00 per share based on amortized cost will be examined by the Board. If
such deviation were to exceed 1/2 of 1%, the Board would consider what action,
if any, should be taken, including selling portfolio securities, increasing,
reducing, or suspending distributions or redeeming shares in kind. Assets and
securities of the Fund for which this valuation method does not produce a fair
value are valued at a fair value determined in good faith by the Board.
Other Funds
U.S. Securities. Each security traded on a national securities exchange is
valued at its last sale price on that exchange on the day of valuation or, if
there are no sales that day, at the latest bid quotation. Each over-the-counter
security for which the last sale price on the day of valuation is available
from Nasdaq is valued at that price. All other over-the-counter securities for
which reliable quotations are available are valued at the latest bid quotation,
except that securities convertible into stock are valued at the valuations
provided by a pricing service approved by the Board.
The Board has determined to value long-term debt obligations primarily on the
basis of valuations furnished by a pricing service which may employ electronic
data processing techniques, including a so-called "matrix" system, to determine
valuations, as well as dealer-supplied quotations. Long-term debt obligations
for which reliable pricing services are, in the opinion of the Adviser, not
available will be valued at their respective values as determined in good faith
by, or under procedures established by, the Board.
Foreign Securities. The values of foreign portfolio securities are generally
based upon market quotations which, depending upon local convention or
regulation, may be the last sales price, the last bid or asked price, or the
mean between the last bid and asked prices as of, in each case, the close of the
appropriate exchange or other designated time. Trading in securities on European
and Far Eastern securities exchanges and over-the-counter markets is normally
completed at various times before the close of business on each day on which the
NYSE is open. Trading of these securities may not take place on every NYSE
business day. In addition, trading may take place in various foreign markets on
Saturdays or on other days when the NYSE is not open and on which a Fund's net
asset value is not calculated. Therefore, such calculation does not take place
contemporaneously with the determination of the prices of many of the portfolio
securities used in such calculation and the value of a Fund's portfolio may be
significantly affected on days when shares of the Fund may not be purchased or
redeemed.
Other assets and securities of a Fund are valued at a fair value as determined
in good faith by, or under procedures established by, the Board.
TAXES
Each Fund has elected to be treated and to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986 (Code). As a
result of such election, for any tax year in which a Fund meets the investment
limitations and the distribution, diversification and other requirements
referred to below, that Fund will not be subject to Federal income tax, and the
income of the Fund will be treated as the income of its shareholders. Under
current law, since the shareholders are life insurance company "segregated asset
accounts," they will not be subject to income tax currently on this income to
the extent such income is applied to increase the values of VA contracts and VLI
policies.
Among the conditions for qualification and avoidance of taxation at the Trust
level, Subchapter M imposes investment limitations, distribution requirements,
and requirements relating to the diversification of investments. The
requirements of Subchapter M may affect the investments made by each Fund. Any
of the applicable diversification requirements could require a sale of assets of
a Fund that would affect the net asset value of the Fund.
Pursuant to the requirements of Section 817(h) of the Code, the only
shareholders of the Trust and its Funds will be Participating Insurance
Companies and their separate accounts that fund VA contracts, VLI policies and
other variable insurance contracts. The prospectus that describes a particular
VA contract or
<PAGE 14>
VLI policy discusses the taxation of both separate accounts and the owner of
such contract or policy.
Each Fund intends to comply with the requirements of Section 817(h) and the
related regulations issued thereunder by the Treasury Department. These
provisions impose certain diversification requirements affecting the securities
in which the Funds may invest and other limitations. The diversification
requirements of Section 817(h) of the Code are in addition to the
diversification requirements under Subchapter M and the Investment Company Act
of 1940. The consequences of failure to meet the requirements of Section 817(h)
could result in taxation of the Participating Insurance Companies offering the
VA contracts and VLI policies and immediate taxation of all owners of the
contracts and policies to the extent of appreciation on investment under the
contracts. The Trust believes it is in compliance with these requirements.
The Secretary of the Treasury may issue additional rulings or regulations that
will prescribe the circumstances in which an owner of a variable insurance
contract's control of the investments of a segregated asset account may cause
such owner, rather than the insurance company, to be treated as the owner of the
assets of a segregated asset account. It is expected that such regulations would
have prospective application. However, if a ruling or regulation were not
considered to set forth a new position, the ruling or regulation could have
retroactive effect.
The Trust therefore may find it necessary, and reserves the right to take action
to assure, that a VA contract or VLI policy continues to qualify as an annuity
or insurance contract under Federal tax laws. The Trust, for example, may be
required to alter the investment objectives of any Fund or substitute the shares
of one Fund for those of another. No such change of investment objectives or
substitution of securities will take place without notice to the contract and
policy owners with interests invested in the affected Fund and without prior
approval of the Securities and Exchange Commission, or the approval of a
majority of such owners, to the extent legally required.
To the extent a Fund invests in foreign securities, investment income received
by the Fund from sources within foreign countries may be subject to foreign
income taxes withheld at the source. The United States has entered into tax
treaties with many foreign countries which entitle a Fund to a reduced rate of
tax or exemption from tax on such income.
Gains and losses from foreign currency dispositions, foreign-currency
denominated debt securities and payables or receivables, and foreign currency
forward contracts are subject to special tax rules that generally cause them to
be recharacterized as ordinary income and losses, and may affect the timing and
amount of the Fund's recognition of income, gain or loss.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of a Fund's assets, if any, to be invested within various countries
will fluctuate and the extent to which tax refunds will be recovered is
uncertain. The Funds intend to operate so as to qualify for treaty-reduced tax
rates where applicable.
The preceding is a brief summary of some relevant tax considerations. This
discussion is not intended as a complete explanation or a substitute for careful
tax planning and consultation with individual tax advisors.
DIVIDENDS AND DISTRIBUTIONS
Each Fund intends to declare and distribute, as dividends or capital gains
distributions, at least annually, substantially all of its net investment income
and net profits realized from the sale of portfolio securities, if any, to its
shareholders (Participating Insurance Companies' separate accounts). The net
investment income of each Fund consists of all dividends or interest received by
such Fund, less estimated expenses (including the investment advisory and
administrative fees). Income dividends will be declared and distributed annually
in the case of each Fund other than Money Market Fund. With respect to Money
Market Fund, the dividends are declared daily and are reinvested monthly in
shares of Money Market Fund at the net asset value per share of $1.00. All net
short-term and long-term capital gains of each Fund, net of carry-forward
losses, if any, realized during the fiscal year, are declared and distributed
periodically, no less frequently than annually. All dividends and distributions
are reinvested in additional shares of the Fund at net asset value, as of the
record date for the distributions.
SHAREHOLDER COMMUNICATIONS
Owners of VA contracts and VLI policies, issued by a Participating Insurance
Company or for which shares of one or more Funds are the investment vehicles,
receive from the Participating Insurance Company unaudited semi-annual financial
statements and audited year-end financial statements of such Funds certified by
the Trust's independent auditors. Each report shows the investments owned by
each Fund and provides other information about the Trust and its operations.
Copies of such reports may be obtained from the Participating Insurance Company
or the Secretary of the Trust.
ORGANIZATION AND DESCRIPTION OF SHARES
The Trust is a diversified open-end management investment company as defined in
the Investment Company Act of 1940 (1940 Act) organized under an Agreement and
Declaration of Trust (Declaration of Trust) as a Massachusetts business trust on
June 9, 1987. The Declaration of Trust may be amended by a vote of either the
Trust's shareholders or the Board. The Trust is authorized to issue an unlimited
number of shares of beneficial interest without par value, in one or more series
as the Board may authorize. Each Fund is a separate series of the Trust.
<PAGE 15>
Each share of a Fund is entitled to participate pro rata in any dividends and
other distributions declared by the Board with respect to that Fund, and all
shares of a Fund have equal rights in the event of liquidation of that Fund.
Shareholders of a Fund are entitled to one vote for each share of that Fund held
on any matter presented to shareholders. Shares of the Funds will vote
separately as individual series when required by the 1940 Act or other
applicable law or when the Board determines that the matter affects only the
interests of one or more Funds, such as, for example, a proposal to approve an
amendment to that Fund's Advisory Agreement, but shares of all the Funds vote
together, to the extent required by the 1940 Act, in the election or selection
of Trustees and independent accountants.
The shares do not have cumulative voting rights, which means that the holders of
more than 50% of the shares of the Funds voting for the election of Trustees can
elect all of the Trustees, and, in such event, the holders of the remaining
shares will not be able to elect any Trustees.
The Funds are not required by law to hold regular annual meetings of their
shareholders and do not intend to do so. However, special meetings may be called
for purposes such as electing or removing Trustees or changing fundamental
policies.
The Trust is required to hold a shareholders' meeting to elect Trustees to fill
vacancies in the event that less than a majority of Trustees were elected by
shareholders. Trustees may also be removed by the vote of two-thirds of the
outstanding shares at a meeting called at the request of shareholders whose
interests represent 10% or more of the outstanding shares.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims liability of the
shareholders, the Trustees, or officers of the Trust for acts or obligations of
the Trust, which are binding only on the assets and property of the Trust (or
the applicable Fund thereof) and requires that notice of such disclaimer be
given in each agreement, obligation, or contract entered into or executed by the
Trust or the Board. The Declaration of Trust provides for indemnification out of
the Trust's assets (or the applicable Fund) for all losses and expenses of any
shareholder held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is believed to be remote because it is limited to circumstances in
which the disclaimer is inoperative and the Trust itself is unable to meet its
obligations. The risk to any one Fund of sustaining a loss on account of
liabilities incurred by another Fund also is believed to be remote.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Trust with the Securities and
Exchange Commission under the Securities Act of 1933. Copies of the Registration
Statement may be obtained from the Commission or may be examined at the office
of the Commission in Washington, D.C.
<PAGE A-1>
APPENDIX A
INVESTMENT TECHNIQUES
AND SECURITIES
OPTIONS, FUTURES AND OTHER DERIVATIVES
Consistent with its objective, except for Money Market Fund, each Fund may
purchase and write both call options and put options on securities, indexes and
foreign currencies, enter into interest rate, index and foreign currency futures
contracts and options on such futures contracts, and purchase other types of
forward or investment contracts linked to individual securities, interest rates,
foreign currencies, indexes or other benchmarks ("derivative products") in order
to achieve its desired investment objective, to provide additional revenue, or
to hedge against changes in security prices, interest rates or currency
fluctuations. A Fund may write a call or put option only if the option is
covered. There can be no assurance that a liquid market will exist when a Fund
seeks to close out a derivative product position. In addition, because of low
margin deposits required, the use of futures contracts involves a high degree of
leverage, and may result in losses in excess of the amount of the margin
deposit. Successful use of derivative products depends on the Adviser's ability
to predict correctly changes in the level and the direction of security prices,
interest rates, currency exchange rates and other market factors, but even a
well conceived transaction may be unsuccessful because of an imperfect
correlation between the cash and the derivative product markets. For additional
information, with respect to these matters, please refer to the Statement of
Additional Information.
FOREIGN INVESTMENTS
Each Fund may invest up to 25% of its total assets in securities of foreign
issuers that are not publicly traded in the U.S., which for this purpose do not
include securities represented by American Depositary Receipts (ADRs) or
securities guaranteed by a U.S. person.
Foreign Securities
While investment in foreign securities is intended to reduce risk by providing
further diversification, such investments involve risks in addition to the
credit and market risks normally associated with domestic securities. These
include sovereign risks and risks pertaining to the local economy in the country
or countries in which the foreign company conducts business. Foreign investments
may be affected favorably or unfavorably by changes in currency rates and
exchange control regulations. There may be less publicly available information
about a foreign company than about a U.S. company, and foreign companies may not
be subject to accounting, auditing and financial reporting standards and
requirements comparable to those applicable to U.S companies. Securities of some
foreign companies are less liquid or more volatile than securities of U.S.
companies, and foreign brokerage commissions and custodian fees are generally
higher than in the U.S. Investments in foreign securities may also be subject to
other risks different from those affecting U.S. investments, including local
political developments, expropriation or nationalization of assets, imposition
of withholding taxes on dividend or interest payments, currency blockage (which
would prevent cash from being brought back to the U.S.), and sometimes less
advantageous legal, operational, and financial protection applicable to foreign
sub-custodial arrangements. These risks are carefully considered by the Adviser
prior to the purchase of these securities.
Foreign Currency Transactions
When a Fund invests in foreign securities, such securities usually will be
denominated in, or salable for, foreign currencies, and the Fund temporarily may
hold funds in foreign currencies. Thus, the value of Fund shares will be
affected by changes in exchange rates.
As one way of managing exchange rate risk, each Fund may enter into forward
currency exchange contracts (agreements to purchase or sell currencies at a
specified price and date). The exchange rate for the transaction (the amount of
currency a Fund will deliver or receive when the contract is completed) is fixed
when the Fund enters into the contract. A Fund usually will enter into these
contracts to stabilize the U.S. dollar value of a security it has agreed to buy
or sell. Each Fund intends to use these contracts to hedge the U.S. dollar value
of a security it already owns or intends to purchase, particularly if a Fund
expects a decrease in the value of the currency in which the foreign security is
denominated. Although the Fund will attempt to benefit from using forward
contracts, the success of its hedging strategy will depend on the Adviser's
ability to predict accurately the future exchange rates between foreign
currencies and the U.S. dollar. The value of each Fund's investments denominated
in foreign currencies will depend on the relative strength of those currencies
and the U.S. dollar, and the Fund may be affected favorably or unfavorably by
changes in the exchange rates or exchange control regulations between foreign
currencies and the dollar. Changes in foreign currency exchange rates also may
affect the value of dividends and interest earned, gains and losses realized on
the sale of securities, and net investment income and gains, if any, to be
distributed to shareholders by a Fund.
<PAGE A-2>
U.S. GOVERNMENT SECURITIES
Each Fund may invest in certain U.S. Government Securities. Securities issued or
guaranteed by the U.S. Government include a variety of Treasury securities that
differ only in their interest rates, maturities and dates of issuance. Treasury
bills have maturities of one year or less. Treasury notes have maturities of one
to ten years and Treasury bonds generally have maturities of greater than ten
years at the date of issuance.
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include, but are not limited to, direct obligations of the
Treasury and securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
General Services Administration, Central Bank for Cooperatives, Federal Home
Loan Banks, Federal Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Maritime Administration, The Tennessee Valley
Authority, District of Columbia Armory Board, Resolution Funding Corp. and
Federal National Mortgage Association.
Some obligations of U.S. Government agencies and instrumentalities, such as
Government National Mortgage Association Pass-Through Certificates, are
supported by the full faith and credit of the U.S.; others, such as securities
of Federal Home Loan Banks, are supported by the right of the issuer to borrow
from the Treasury; still others, such as bonds issued by the Federal National
Mortgage Association, a private corporation, are supported only by the credit of
the instrumentality. Because the U.S. Government is not obligated by law to
provide support to an instrumentality it sponsors, a Fund will invest in the
securities issued by such an instrumentality only when the Adviser determines
that the credit risk with respect to the instrumentality does not make its
securities unsuitable investments for the Fund. U.S. Government Securities do
not include international agencies or instrumentalities in which the U.S.
Government, its agencies or instrumentalities participate, such as the World
Bank, the Asian Development Bank or issues insured by the Federal Deposit
Insurance Corporation or the Federal Savings and Loan Insurance Corporation.
MONEY MARKET INSTRUMENTS
Each Fund may invest in the money market instruments described below, in
addition to money market instruments such as certificates of deposit of U.S.
banks and bankers' acceptances.
Obligations of Foreign Branches of United States Banks
The obligations of foreign branches of U.S. banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by government regulation. Payment of interest
and principal upon these may also be affected by governmental action in the
country of domicile of the branch (generally referred to as sovereign risk). In
addition, evidences of ownership of such securities may be held outside the U.S.
and a Fund may be subject to the risks associated with the holding of such
property overseas. (See "FOREIGN INVESTMENTS--Foreign Securities" above.)
Obligations of United States Branches of Foreign Banks
Obligations of U.S. branches of foreign banks may be general obligations of the
parent bank in addition to the issuing branch, or may be limited by the terms of
a specific obligation and by Federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
Obligations of Foreign Banks
Obligations of foreign banks and branches of foreign banks are similar to the
obligations of U.S. banks but involve risks that are different in some respects.
Such risks may include future political and economic developments, the possible
imposition of foreign withholding taxes on interest income payable on the
obligations, possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls, or the adoption of other foreign
government restrictions that might adversely affect the payment of principal and
interest on the obligations. Additionally, there may be less public information
available about foreign banks and their branches. Foreign banks and foreign
branches of foreign banks are not regulated by U.S. banking authorities, and
generally are not bound by accounting, auditing, and financial reporting
standards comparable to U.S. banks.
Master Demand Notes
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by a Fund at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the issuer, as borrower. Master
demand notes may permit daily fluctuations in the interest rate and daily
changes in the amount borrowed. The Fund has the right to increase the
<PAGE A-3>
amount under the note at any time up to the full amount provided by the note
agreement or to decrease the amount, and the borrower may repay up to the full
amount of the note without penalty. Notes purchased by a Fund must permit the
Fund to demand payment of principal and accrued interest at any time (on not
more than seven days' notice) and to resell the note at any time to a third
party. The notes may have maturities of more than one year, provided that (i)
the Fund is entitled to payment of principal and accrued interest upon not more
than seven days' notice, and (ii) the rate of interest on such notes is adjusted
automatically at periodic intervals which normally will not exceed 31 days but
may extend up to one year. The notes will be deemed to have a maturity equal to
the longer of the period remaining to the next interest rate adjustment or the
demand notice period. Because these types of notes are direct lending
arrangements between the lender and borrower, such instruments are not normally
traded, and there is no secondary market for these notes, although they are
redeemable and thus repayable by the borrower at face value plus accrued
interest at any time. Accordingly, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. These notes
are not typically rated by credit rating agencies. A Fund may invest in such
notes only if rated or at the time of an investment the issuer meets the
criteria established for commercial paper.
Repurchase Agreements
Each Fund may enter into repurchase agreements with member banks of the Federal
Reserve System that have at least $1 billion in deposits, primary dealers in
U.S. Government Securities or other financial institutions believed by the
Adviser to be creditworthy. Under such agreements, the bank, primary dealer or
other financial institution agrees upon entering into the contract to repurchase
the security at a mutually agreed upon date and price, thereby determining the
yield during the term of the agreement. This results in a fixed rate of return
insulated from market fluctuations during such period. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price, and such value
will be determined on a daily basis by marking the underlying securities to
their market value. Although the securities subject to the repurchase agreement
might bear maturities exceeding a year, each Fund intends to enter only into
repurchase agreements which provide for settlement within a year and usually
within seven days. Securities subject to repurchase agreements will be held by
the Fund's custodian or in the Federal Reserve book-entry system. A Fund does
not bear the risk of a decline in the value of the underlying security unless
the seller defaults under its repurchase obligation. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and losses
including (a) possible declines in the value of the underlying securities during
the period while the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during this period; and
(c) expenses of enforcing its rights. The Board has established procedures to
evaluate the creditworthiness of each party with whom a Fund enters into
repurchase agreements by setting guidelines and standards of review for the
Adviser and monitoring the Adviser's actions with regard to repurchase
agreements.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements. Under a reverse
repurchase agreement, a Fund would sell securities and agree to repurchase them
at a mutually agreed upon date and price. Each Fund intends to enter into
reverse repurchase agreements to avoid otherwise having to sell securities
during unfavorable market conditions in order to meet redemptions. At the time
the Fund enters into a reverse repurchase agreement, it will establish a
segregated account with its custodian containing liquid assets having a value
not less than the repurchase price (including accrued interest) and will
subsequently monitor the account to maintain such value. Reverse repurchase
agreements involve the risk that the market value of the securities which a Fund
is obligated to repurchase may decline below the repurchase price. In the event
the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and its use of the proceeds of the
reverse repurchase agreement may effectively be restricted pending such
decision. The Staff of the Securities and Exchange Commission has taken the
position that the 1940 Act treats reverse repurchase agreements as borrowings by
a fund.
STANDBY COMMITMENTS
Each Fund may invest in securities purchased on a standby commitment basis, as
described below.
A standby commitment is a delayed delivery agreement in which the Fund binds
itself to accept delivery of a security at the option of the other party to the
agreement. The Fund usually receives a commitment fee in consideration for its
standby commitment. At the time a Fund enters into a binding obligation to
purchase securities on a standby commitment basis, liquid assets of the Fund
having a value of at least as great as the purchase price of the securities to
be purchased will be segregated on the books of the Fund and held by the
custodian throughout the period of the obligation.
If the value of the securities that the Fund has committed to purchase
increases, the other party may exercise its right not to
<PAGE A-4>
deliver the securities, in which case the Fund only would retain its commitment
fee and forego any appreciation of those securities. If the value of the
securities that the Fund has committed to purchase decreases, the other party
would probably deliver the securities, in which case the Fund would absorb the
loss between the purchase price and the decreased market value, which loss may
significantly exceed the commitment fee.
LENDING PORTFOLIO SECURITIES
Each Fund, except Money Market 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.
EQUIPMENT TRUST CERTIFICATES
Balanced Fund may invest in Equipment Trust Certificates. Equipment Trust
Certificates are a mechanism for financing the purchase of transportation
equipment, such as railroad cars and locomotives, trucks, airplanes and oil
tankers, and are described in more detail in the Statement of Additional
Information.
<PAGE B-1>
APPENDIX B
DESCRIPTION OF RATINGS
RATINGS IN GENERAL
A rating of a rating service represents the service's opinion as to the credit
quality of the security being rated. However, the ratings are general and are
not absolute standards of quality or guarantees as to the creditworthiness of an
issuer. Consequently, the Adviser believes that the quality of debt securities
in which a Fund invests should be continuously reviewed and that individual
analysts give different weightings to the various factors involved in credit
analysis. A rating is not a recommendation to purchase, sell or hold a security
because it does not take into account market value or suitability for a
particular investor. Ratings are based on current information furnished by the
issuer or obtained by the rating services from other sources that they consider
reliable. Ratings may be changed, suspended or withdrawn as a result of changes
in or unavailability of such information, or for other reasons.
The following is a description of the characteristics of ratings used by
Moody's Investors Service, Inc. (Moody's) and Standard & Poor's Corporation
(S&P), each of which is a NRSRO.
BOND RATINGS
Ratings by Moody's
Aaa. Bonds rated Aaa are judged to be the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edge." Interest
payments are protected by a large or an exceptionally stable margin and
principal is secure. Although the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such bonds.
Aa. Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa bonds or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa bonds.
A. Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered as medium grade obligations; i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of risk with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Ratings by S&P
AAA. Debt rated AAA has the highest rating. Capacity to pay interest and repay
principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
<PAGE B-2>
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC. Debt rated BB, B, CCC, or CC is regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C. This rating is reserved for income bonds on which no interest is being paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
NOTE: The ratings from AA to B may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
COMMERCIAL PAPER RATINGS
Ratings By Moody's
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its commercial paper obligations are
supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment.
Ratings by S&P
A brief description of the applicable rating symbols and their meaning follows:
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
