<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 31, 1997
SECURITIES ACT FILE NO. 33-57732
INVESTMENT COMPANY ACT FILE NO. 811-7462
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
POST-EFFECTIVE AMENDMENT NO. 12 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 13 [X]
THE SIERRA VARIABLE TRUST
--------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
9301 CORBIN AVENUE, SUITE 333
NORTHRIDGE, CALIFORNIA 91324
----------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 725-0200
KEITH B. PIPES
THE SIERRA VARIABLE TRUST
601 WEST MAIN STREET, SUITE 801
SPOKANE, WASHINGTON 99201-0613
---------------------------------------
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
JOSEPH B. KITTREDGE, JR.
ROPES & GRAY
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b), or
[ ] on [date] pursuant to paragraph (b), or
[X] 60 days after filing pursuant to paragraph (a)(1), or
[ ] 75 days after filing pursuant to paragraph (a)(2), or
[ ] on [date] pursuant to paragraph (a) of Rule 485.
<PAGE>
THE SIERRA VARIABLE TRUST
FORM N-1A
CROSS REFERENCE SHEET
PART A
<TABLE>
<CAPTION>
Item No. Prospectus Heading
- -------- ------------------
<S> <C>
1. Cover Page.......................... Cover Page
2. Synopsis............................ Highlights
3. Condensed Financial
Information......................... Financial Highlights
4. General Description of
Registrant.......................... Management of the Trust;
Investment Policies; Certain Investment
Guidelines; Special Considerations;
General Information and History
5. Management of the Fund.............. Management of the Trust-Investment Advisor, --
Sub-Advisors, --
Distributor and -Administration;
Investment Guidelines; Special Considerations
5A. Management's Discussion of
Fund Performance.................. Not Applicable
6. Capital Stock and Other
Securities.......................... Dividends, Distributions and Taxes; General Information and
History --The Trust
7. Purchase of Securities
Being Offered....................... General Information and History -- Purchase and Redemption,
and -- Net Asset Value; Management of the Trust --
Distributor
8. Redemption or Repurchase............ General Information and History -- Purchase and Redemption
9. Pending Legal Proceedings........... Not Applicable
</TABLE>
PART B
<TABLE>
<CAPTION>
Heading in Statement of
Item No. Additional Information
- -------- ----------------------
<S> <C>
10. Cover Page.................... Cover Page
11. Table of Contents............. Contents
</TABLE>
<PAGE>
<TABLE>
<S> <C>
12. General Information and
History............................ General Information and History; Management of the Trust;
see Prospectus -- "General Information and History"
13. Investment Objectives and
Policies........................... Investment Objectives and Policies of the Funds and
Portfolios
14. Management of the Fund............. Management of the Trust
15. Control Persons and Principal
Holders of Securities.............. Management of the Trust; see Prospectus -- "General
Information and History"
16. Investment Advisory and
Other Services..................... Management of the Trust; see Prospectus -- "Management of
the Trust -- Administration"
17. Brokerage Allocation and
Other Practices.................... Investment Objectives and Policies of the Funds and Portfolios
18. Capital Stock and Other
Securities......................... Management of the Trust; see Prospectus -- "Dividends,
Distributions and Taxes" and "General Information and
History"
19. Purchase, Redemption and
Pricing of Securities Being
Offered............................ Purchase and Pricing of Shares; Net Asset Value
20. Tax Status......................... Taxes; see Prospectus -- "Dividends, Distributions and Taxes"
21. Underwriters....................... Purchase and Pricing of Shares; see Prospectus --
"Management of the Trust -- Distributor"
22. Calculation of Performance
Data............................... Performance; see Prospectus -- "Performance"
23. Financial Statements............... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
SUPPLEMENT DATED MARCH 1, 1998 TO THE PROSPECTUSES OF
THE SIERRA VARIABLE TRUST,
dated May 1, 1997, as amended and supplemented to date
The Prospectuses referred to above are amended and supplemented as follows:
On December 23, 1997, the shareholders of The Sierra Variable Trust ("SVT")
approved the reorganization of the SVT Short Term Global Government Fund (the
"Merging Fund") with and into the SVT Short Term High Quality Bond Fund. As a
result, shares of the SVT Short Term Global Government Fund will no longer be
offered or sold, and will not be available for purchase by exchange.
On December 23, 1997, shareholders of each of the funds of SVT
(collectively, the "Sierra Funds") also approved the appointment of Composite
Research & Management Co. ("Composite"), an affiliate of Sierra Capital
Management, as the new investment adviser for the Sierra Funds other than the
Merging Fund (the "Continuing Sierra Funds"). The shareholders also approved the
reappointment of the sub-advisers for the Growth, Emerging Growth and
International Growth Funds of SVT. Composite will manage the portfolio
of each other Continuing Sierra Fund without a sub-adviser.
The individuals with primary responsibility for the day-to-day management
of the Fund's portfolios will remain unchanged except as follows: Gary J.
Pokrzywinski, CFA, Vice President and Senior Portfolio Manager of Composite, has
been employed by Composite since 1992 and has primary responsibility for the
day-to-day management of the SVT Short Term High Quality Bond, SVT U.S.
Government and SVT Corporate Income Funds; and Phillip M. Foreman, CFA, Vice
President and Senior Portfolio Manager of Composite, has been employed by
Composite since 1991 and has primary responsibility for the day-to-day
management of the SVT Growth and Income Fund.
Murphey Favre Securities Services, Inc., an affiliate of Composite, serves
as transfer agent for the Sierra Funds.
SVT MONEY MARKET FUND (FORMERLY THE SVT GLOBAL MONEY FUND). The name of
the Global Money Fund of the Sierra Variable Trust is now the "Money Market
Fund." The SVT Money Market Fund pursues its objective of maximizing current
income consistent with safety of principal and maintenance of liquidity by
investing in high quality management instruments. The Fund invests only in U.S.
dollar-denominated short-term, money market securities that present minimal
credit risks and meet the following rating criteria. The Fund will not purchase
a security (other than a U.S. Government security) unless the security or the
issuer with respect to a comparable security (i) is rated by at least two
nationally recognized statistical rating organizations ("NRSROs"), such as
Standard & Poor's ("S&P") or Moody's Investors Service, Inc. ("Moody's"), in one
of the two highest rating categories for short-term debt securities, (ii) is
rated in one of the two highest categories for short-term debt by the only NRSRO
that has issued a rating, or (iii) if not so rated, is determined to be of
comparable quality. At the time of investment, no security purchased by the
Fund (except securities subject to repurchase agreements and variable rate
demand notes) will have a maturity exceeding 397 days, and the Fund's average
portfolio maturity cannot exceed 90 days. Although the Fund attempts to
maintain a stable net asset value ("NAV") of $1.00, there can be no assurance
that the Fund will be able to maintain a stable NAV of $1.00.
For further information about the Sierra Funds, please call 1-800-222-5852.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE>
Part A (the Prospectus) of Post-Effective Amendment No. 10 to the
Registrant's Registration Statement on Form N-1A, filed with the Securities and
Exchange Commission on December 2, 1997, is incorporated herein by
reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1998
THE SIERRA VARIABLE TRUST
9301 CORBIN AVENUE, SUITE 333
NORTHRIDGE, CALIFORNIA 91324
<TABLE>
<CAPTION>
<S> <C>
. Money Market Fund . Emerging Growth Fund
. Bond & Stock Fund . International Growth Fund
Fund
. Short Term High Quality Bond . Capital Growth Portfolio
Fund
. U.S. Government Fund . Growth Portfolio
. Corporate Income Fund . Balanced Portfolio
. Growth and Income Fund . Value Portfolio
. Growth Fund . Income Portfolio
. Northwest Fund
</TABLE>
This Statement of Additional Information ("SAI") is not a prospectus but
supplements the information contained in the Prospectuses relating to the Money
Market Fund, Short Term High Quality Bond Fund, U.S. Government Fund, Corporate
Income Fund, Growth and Income Fund, Growth Fund, Emerging Growth Fund,
International Growth Fund, Capital Growth Portfolio, Bond & Stock Fund,
Northwest Fund, Growth Portfolio, Balanced Portfolio, Value Portfolio and Income
Portfolio of The Sierra Variable Trust (the "Trust"), dated May 1, 1997, as
revised from time to time. The SAI should be read in conjunction with the
Prospectuses, as amended or supplemented from time to time. The Trust's
Prospectus may be obtained without charge by writing to American General Life
Insurance Company ("AGL"), Attention: Annuity Administration, P.O. Box 1401,
Houston, Texas 77251-1401 or by calling AGL at 800-247-6584.
<PAGE>
CONTENTS
For ease of reference, the same section headings are used in the Prospectuses
and in this Statement of Additional Information, except as indicated below.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information and History.......................... 3
Management of the Trust.................................. 3
Investment Objectives and Policies of
the Funds and Portfolios............................... 8
(See the Prospectus "Highlights" and "Investment
Policies")
Purchase and Pricing of Shares........................... 19
(See the Prospectus "Highlights" and "Purchase
and Redemption")
Net Asset Value.......................................... 19
Performance.............................................. 20
Taxes.................................................... 24
(See the Prospectus "Dividends, Distributions
and Taxes")
Appendix - Description of Ratings........................ 26
Financial Statements..................................... 31
</TABLE>
2
<PAGE>
GENERAL INFORMATION AND HISTORY
The Sierra Variable Trust (the "Trust") is an open-end management investment
company. Some of the information required to be in this SAI is also included in
the Trust's current Prospectuses relating to the Money Market Fund, Short Term
High Quality Bond Fund, Bond & Stock Fund, Northwest Fund, U.S. Government Fund,
Corporate Income Fund, Growth and Income Fund, Growth Fund, Emerging Growth
Fund, International Growth Fund (the "Funds"), Capital Growth Portfolio, Growth
Portfolio, Balanced Portfolio, Value Portfolio and Income Portfolio (the
"Portfolios"). To avoid unnecessary repetition, references is made to related
sections of the Prospectuses. Copies of the Registration Statement as filed,
including Part C, may be obtained from the Securities and Exchange Commission
(the "SEC") by paying the charges prescribed under its rules and regulations.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS OF THE TRUST
The names of the Trustees and executive officers of the Trust, together with
information as to their dates of birth and principal business occupations during
the past five years, are set forth below. Each Trustee who is an "interested
person" of the Trust, as defined in the Investment Act of 1940, as amended (the
"1940 Act"), is indicated by an asterisk.
TRUSTEES:
ARTHUR H. BERNSTEIN, ESQ. (6/8/25)
Trustee
11661 San Vincente Blvd., #405
Los Angeles, California 90049
Mr. Bernstein is President of Bancorp Capital Group, Inc. and President of
Bancorp Venture Capital, Inc. since 1988. He has been a Trustee of Sierra Trust
Funds since 1989.
DAVID E. ANDERSON (11/17/26)
Trustee
17960 Seabreeze Drive
Pacific Palisades, California 90272
Retired, Former President & CEO GTE California, Inc. Currently involved in
the following charitable organizations as a director on the following boards:
Board Chairman, Children's Bureau Foundation; Board member, Upward Bound House
of Santa Monica; Past Campaign Chairman of United Way; Past Chairman, Los
Angeles Area Chamber of Commerce. Holds BSEE degree from Iowa State.
EDMOND R. DAVIS, ESQ. (9/24/28)
Trustee
550 South Hope Street, 21st Floor
Los Angeles, California 90071-2604
Partner, Brobeck, Phleger & Harrison. Joined the firm as a Partner in 1987 and
is responsible for estate planning, and trusts and estate matters in the Los
Angeles office.
JOHN W. ENGLISH (3/27/33)
Trustee
50 H New England Ave.
P.O. Box 640
Summit, New Jersey 07902-0640
3
<PAGE>
Retired Vice President and Chief Investment Officer, the Ford Foundation (a non-
profit charitable organization). Chairman of the Board and Director, The China
Fund, Inc. (a closed-end mutual fund). Director, The Northern Trust Company's
Benchmark Funds (an open-end mutual fund).
ALFRED E. OSBORNE, JR. PH.D. (12/7/44)
Trustee
110 Westwood Plaza, Suite C305
Los Angeles, California 90095-1481
University professor, researcher and administrator at UCLA since 1972.
Director, Times Mirror Company, ReadiCare, Inc., United States Filter
Corporation, Nordstrom, Inc., Seda Specialty Packing Corporation and Greyhound
Lines, Inc. Independent general partner, Technology Funding Venture Partners V.
Governor of the National Association of Securities Dealers, Inc.
WAYNE L. ATTWOOD, MD
Trustee
2931 S. Howard
Spokane, Washington 99203
Dr. Attwood is a retired doctor of internal medicine and gastroenterology in
Spokane, Washington.
KRISTIANNE BLAKE
Trustee
705 W. 7th, Suite D
Spokane, Washington 99204
Mrs. Blake is president of Kristianne Gates Blake, PS, an accounting services
firm specializing in personal financial planning and tax planning.
*ANNE V. FARRELL
Trustee
425 Pike Street, Suite 510
Seattle, Washington 98101
Mrs. Farrell is president and CEO of The Seattle Foundation (a charitable
foundation). In addition, she serves as a director of Washington Mutual, Inc.
*MICHAEL K. MURPHY
Trustee
PO Box 3366
Spokane, Washington 99220-3366
Mr. Murphy is Chairman and CEO of CPM Development Corporation (a holding company
which includes Central Pre-Mix Concrete Company). In addition, he serves as a
director of Washington Mutual, Inc.
*WILLIAM G. PAPESH
President and Trustee
601 W. Main Avenue
Suite 300
Spokane, WA 99201
4
<PAGE>
Mr. Papesh is president and a director of Composite and Murphey Favre Securities
Services, Inc. (the "Transfer Agent"), and an executive vice president and a
director of Composite Funds Distributor, Inc. (the "Distributor").
DANIEL L. PAVELICH
Trustee
Two Prudential Plaza
180 North Stetson Avenue, Suite 4300
Chicago, Illinois 60601
Mr. Pavelich is Chairman and CEO of BDO Seidman, a leading national accounting
and consulting firm.
JAY ROCKEY
Trustee
2121 Fifth Avenue
Seattle, Washington 98121
Mr. Rockey is Chairman and CEO of The Rockey Company (a regional public
relations firm).
RICHARD C. YANCEY
Trustee
535 Madison Avenue
New York, New York 10022
Mr. Yancey is senior advisor to Dillon, Read & Co., Inc. (a registered broker-
dealer and investment banking firm), New York, New York.
OFFICERS:
KEITH B. PIPES (12/20/55), PRESIDENT, CHIEF EXECUTIVE OFFICER
As President, Chief Financial Officer and Secretary of SCMC, he is
responsible for its general accounting, financial planning, compliance
administration, systems development and advisory operations.
MICHAEL D. GOTH (8/13/45), SENIOR VICE PRESIDENT
Since January 1991, Mr. Goth has served as Chief Operating Officer and
Portfolio Manager of Sierra Investment Advisors Corporation ("Sierra Advisors").
STEPHEN C. SCOTT (1/18/45), SENIOR VICE PRESIDENT
In August 1988 joined GW Securities to form Sierra Advisors and currently
serves as the President and Chief Investment Officer.
RICHARD W. GRANT (10/25/45), SECRETARY
Has been a Partner in the firm of Morgan, Lewis & Bockius LLP since 1989.
RICHARD H. ROSE (7/8/55), ASSISTANT TREASURER
Currently acts as Senior Vice President of First Data Investor Services
Group, Inc., a subsidiary of First Data Corp. (prior to May 6, 1994, a
subsidiary of The Boston Company Advisors, Inc. ("Boston Advisors")).
CRAIG M. MILLER (10/7/59), TREASURER, CHIEF FINANCIAL OFFICER
5
<PAGE>
Joined SCMC in 1993 as Vice President and Controller. Prior to joining SCMC,
he acted as Audit Manager in the Boston office of Coopers & Lybrand, L.L.P.
Each of the Trustees and officers of the Trust is also a trustee or officer
of Sierra Trust Funds ("STF"). Furthermore, with the exception of Mr. Rose, each
of the Trustees and officers of the Trust is also a trustee or officer of Sierra
Prime Income Fund ("SPIF") and Sierra Asset Management Portfolios ("SAMP"). STF,
SPIF and SAMP is each an investment company advised by Sierra Advisors or Sierra
Investment Services Corporation ("Sierra Services").
The address of each trustee and officer of the Trust affiliated with Sierra
Advisors or SISC is 9301 Corbin Avenue, Suite 333, Northridge, California 91324.
REMUNERATION. No director, officer or employee of Composite Research &
Management Co., the adviser to the Funds and Portfolios ("Composite"), the sub-
advisers of the Funds (the "sub-advisers"), or of any affiliate of Composite or
the sub-advisers will receive any compensation from the Trust for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee, who is not a
director, officer or employee of Composite, the sub-advisers, or any of its
affiliates, a fee of $5,000 per annum plus $1,250 per Board meeting attended and
$1,000 per Audit and Nominating Committee meeting attended (except that the
Audit Committee chairman receives $1,500 per committee meeting attended), and
reimburses them for travel and out-of-pocket expenses.
As of December 31, 1997, the Trustees and officers of the Trust owned, in the
aggregate, less than 1% of the outstanding shares of any of the Funds.
The following Compensation Table shows aggregate compensation paid to each of
the Fund's Trustees by the Fund and the Fund Complex, respectively, in the year
ended December 31, 1997.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(2) AGGREGATED (5) TOTAL COMPENSATION
COMPENSATION FROM (3) PENSION OR FROM REGISTRANT AND FUND
REGISTRANT FOR THE RETIREMENT BENEFITS (4) ESTIMATED ANNUAL COMPLEX* PAID TO TRUSTEES
(1) NAME OF PERSON, FISCAL YEAR ENDED ACCRUED AS PART OF BENEFITS UPON FOR THE YEAR ENDED
TRUSTEE POSITION DECEMBER 31, 1997 FUND EXPENSES RETIREMENT DECEMBER 31, 1997
- ------------------- ------------------ ------------------- -------------------- -------------------------
<S> <C> <C> <C> <C>
F. BRIAN CERINI** $0 $0 $0 $______
(FORMERLY, CHAIRMAN OF THE
BOARD, PRESIDENT AND
TRUSTEE)
DAVID E. ANDERSON+# _______ $0 $0 $______
TRUSTEE
ARTHUR H. BERNSTEIN, ESQ.++# _______ $0 $0 $______
TRUSTEE
EDMOND R. DAVIS, ESQ.# _______ $0 $0 $______
TRUSTEE
JOHN W. ENGLISH# _______ $0 $0 $______
TRUSTEE
ALFRED E. OSBORNE, JR.++# _______ $0 $0 $______
TRUSTEE
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
(2) AGGREGATED (5) TOTAL COMPENSATION
COMPENSATION FROM (3) PENSION OR FROM REGISTRANT AND FUND
REGISTRANT FOR THE RETIREMENT BENEFITS (4) ESTIMATED ANNUAL COMPLEX* PAID TO TRUSTEES
(1) NAME OF PERSON, FISCAL YEAR ENDED ACCRUED AS PART OF BENEFITS UPON FOR THE YEAR ENDED
TRUSTEE POSITION DECEMBER 31, 1997 FUND EXPENSES RETIREMENT DECEMBER 31, 1997
- ------------------- ------------------ ------------------- -------------------- -------------------------
<S> <C> <C> <C> <C>
WAYNE L. ATTWOOD, M.D. (age)## _______ $0 $0 $______
TRUSTEE
KRISTIANNE BLAKE (age)## _______ $0 $0 $______
TRUSTEE
ANNE V. FARRELL (age)## _______ $0 $0 $______
TRUSTEE
MICHAEL K. MURPHY (age)## _______ $0 $0 $______
TRUSTEE
WILLIAM G. PAPESH (age)## _______ $0 $0 $______
TRUSTEE
DANIEL L. PAVELICH (age)## _______ $0 $0 $______
TRUSTEE
JAY ROCKEY (age)## _______ $0 $0 $______
TRUSTEE
RICHARD C. YANCEY (age)## _______ $0 $0 $______
TRUSTEE
</TABLE>
* The Fund Complex consisted of the Trust, STF, SPIF, SAMP (the "Sierra
Funds") and Composite U.S. Government Securities, Inc., Composite Income
Fund, Inc., Composite Growth and Income Fund, Inc., Composite Cash
Management Company: Money Market Portfolio, Composite Cash Management
Company: Tax-Exempt Portfolio, Composite Tax-Exempt Bond Fund, Inc.,
Composite Northwest Fund, Inc. and Composite Bond & Stock Fund, Inc. (the
"Composite Funds").
** A Trustee who is an "interested person" as defined in the 1940 Act.
+ Mr. Anderson was paid [$____] for Audit Committee Meetings held by the
Trust.
++ Mr. Bernstein was paid [$____] and [$____] for Audit Committee Meetings held
by STF and SPIF, respectively.
# A Trustee for the Sierra Funds for the year ended 12/31/97.
## A Director or Trustee of the Composite Funds during the year ended 12/31/97.
INVESTMENT ADVISER AND SUB-ADVISERS, CUSTODIAN AND TRANSFER AGENT
Composite serves as investment adviser to each of the Funds and each sub-
adviser serves as Investment sub-adviser to one or more Funds pursuant to
separate written agreements. Certain of the services provided by, and the fees
paid to, Composite and the sub-advisers each, are described in the Prospectus
under "Management - Investment Adviser." Composite and the sub-advisers each
(i) compensates its respective Directors and pays the salaries of its respective
officers and employees employed by such companies, (ii) compensates its
respective officers and employees that are employed by the Trust, and (iii)
maintains office facilities for the Trust.
The assets of the Trust are held under bank custodianship in accordance with
the 1940 Act. Boston Safe Deposit and Trust Company serves as Custodian for the
Funds. In addition, the Trust may employ foreign sub-custodians that are
approved by the Board of Trustees to hold foreign assets. Murphey Favre
Securities Services, Inc. serves as the Trust's administrator and Transfer
Agent.
COUNSEL AND AUDITOR
[Ropes & Gray serves as counsel to the Trust and also provides legal services
to Composite; Paul, Hastings, Janofsky & Walker serves as counsel to the
Trustees who are not "interested persons" of the Trust.]
___________________________, independent accountants, located at ___________
serves as auditor of the Trust.
7
<PAGE>
ORGANIZATION OF THE TRUST
The Trust is organized as an unincorporated business trust under the laws of
the Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated January 27, 1993, as amended from time to time (the "Declaration of
Trust"). Certificates representing shares in the Trust are not physically
issued. The Trust's Custodian and the Trust's Transfer Agent maintain a record
of each shareholder's ownership of Trust shares. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Trustees can elect all Trustees. Shares are transferable but
have no preemptive, conversion or subscription rights. Shareholders generally
vote by Fund, except with respect to the election of Trustees and the selection
of independent accountants.
Under normal circumstances, there will be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office promptly will call a shareholders' meeting for the
election of Trustees. Under the 1940 Act, shareholders of record of no less than
two-thirds of the outstanding shares of the Trust may remove a Trustee through a
declaration in writing or by vote cast in person or by proxy at a meeting called
for that purpose. Under the Declaration of Trust, the Trustees are required to
call a meeting of shareholders for the purpose of voting upon the question of
removal of any such Trustee when requested in writing to do so by the
shareholders of record of not less than 10% of the Trust's outstanding shares.
The record owner of all the Trust's shares is Separate Account D of AGL.
However, Contract owners may be deemed to have beneficial ownership of shares
allocable to their Contracts. As of January 31, 1998, to the Trust's knowledge,
no Contract owner had shares allocable to Contracts equal to more than five
percent of any Fund.
Massachusetts law provides that the shareholders, under certain circumstances,
could be held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or a
Trustee. The Declaration of Trust provides for indemnification from the Trust's
property 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 limited to circumstances
in which the Trust would be unable to meet its obligations, a possibility that
the Trust's management believes is remote. Upon payment of any liability
incurred by the Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the Trust. The Trustees intend to
conduct the operations of the Trust in such a way so as to avoid, to the extent
possible, ultimate liability of the shareholders for liabilities of the Trust.
8
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS AND PORTFOLIOS
The Prospectuses discuss the investment objective or objectives of each
of the Funds and Portfolios and the policies to be employed to achieve such
objectives. This section contains supplemental information concerning the types
of securities and other instruments in which the Funds and Portfolios may
invest, the investment policies and portfolio strategies that the Funds and
portfolios may utilize and certain risks attendant to such investments, policies
and strategies.
MONEY MARKET QUALITY AND MATURITY REQUIREMENTS
The Money Market Fund will purchase only those instruments which meet the
applicable quality requirements described below. The Fund will not purchase
security (other than a U.S. Government security) unless the security or the
issuer with respect to comparable securities (i) is rated by at least two
nationally recognized statistical rating organizations ("NRSROs") such as
standard & Poor's Corporation ("S&P"), Moody's Investors Service,
Inc.("Moody's"), Duff & Phelps ("Duff") or Fitch Investors Service, Inc.
("Fitch"),in one of the two highest rating categories for short-term debt
securities,(ii) is rated by the only NRSRO that has issued a rating in one of
such NRSRO's two highest categories for short-term debt, or (iii) if not so
rated, the security is determined to be of comparable quality. In addition, no
more than 5% of the Fund's total assets will be invested in securities rated in
the second highest rating category by the requisite NRSROs and, no more than 1%
of the Fund's total assets will be invested in the securities of any one such
issuer. A description of the rating systems of S&P, Moody's, Duff and Fitch is
contained in the Appendix to this SAI.
At the time of investment, no security purchased by the Fund (except
securities subject to repurchase agreements and variable rate demand notes)can
have a maturity exceeding 397 days, and the Fund's average portfolio maturity
cannot exceed 90 days. The short average maturity of the portfolio enhances the
Fund's ability to maintain share prices at $1.00 which, in turn, provides both
stability of value and liquidity to shareholders. There can be no assurances,
however, that the Fund will be able to maintain net asset values at $1.00 per
share.
STRATEGIES AVAILABLE TO ALL FUNDS AND PORTFOLIOS
BANK OBLIGATIONS. Domestic commercial banks organized under federal law
are supervised and examined by the Comptroller of the Currency and are required
to be members of the Federal Reserve System and to be insured by the federal
Deposit Insurance Corporation (the "FDIC"). Domestic banks organized under state
law are supervised and examined by state banking authorities but are members of
the Federal Reserve System only if they elect to join. Most state banks are
insured by the FDIC (although such insurance may not be of material benefit to a
Fund or Portfolio, depending upon the principal amount of certificates of
deposit ("CDs") of each state bank held by a Fund or Portfolio) and are subject
to federal examination and to a substantial body of federal law and regulation.
As a result of federal and state laws and regulations, domestic branches of
domestic banks are, among other things, generally required to maintain specific
levels of reserves, and are subject to other supervision and regulation designed
to promote financial soundness.
Obligations of foreign branches of U.S. banks and of foreign branches of
foreign banks, such as CDs and time deposits ("TDs"), 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 governmental regulation. Obligations of
foreign branches of U.S. banks and foreign banks are subject to the risks
associated with investing in foreign securities generally. Foreign branches of
U.S. banks and foreign branches of foreign banks are not necessarily subject to
the same or similar regulatory requirements that apply to U.S. banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial recordkeeping requirements. In addition, less information may be
publicly available about a foreign branch of a U.S. bank or about a foreign bank
than about a U.S. bank.
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
governmental action in the country in which the foreign bank has its head
office. A U.S. branch of a foreign bank may or may not be subject to reserve
requirements imposed by the Federal Reserve System or by the state in which the
branch is located if the branch is licensed in that state. In addition, branches
licensed by the Comptroller of the Currency and branches licensed by certain
states ("State Branches") may or may not be required to (1) pledge to the
regulator by depositing assets with a designated bank within the state an amount
of its assets equal to 5% of its total liabilities, or (2) maintain assets
within the state in an amount equal to a specified percentage of the aggregate
amount of liabilities of the foreign bank payable at or through all of its
agencies or branches within the state. The deposits of State Branches may not
necessarily be insured by the FDIC. In addition, there may be less publicly
available information about a U.S. branch of a foreign bank than about a U.S.
bank.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign banks and foreign branches of U.S. banks, Composite or the
Fund's sub-adviser will carefully evaluate such investments on a case-by-case
basis.
A Fund or Portfolio may purchase a CD, TD or bankers' acceptances issued by
a bank, savings and loan association or other banking institution with less than
$1 billion in assets (a "Small Issuer Bank Obligation") only so long as the
issuer is a member of the FDIC or supervised by the Office of thrift Supervision
(the "OTS"), and so long as the principal amount of the small Issuer Bank
Obligation is fully insured by the FDIC and is no more than $100,000. Each of
the Funds will at any one time hold only one Small Issuer Bank Obligation from
any one issuer.
Savings and loan associations whose CDs, TDs and bankers' acceptances may
be purchased by the Funds and Portfolios are supervised by the OTS and insured
by the Savings Association Insurance Fund, which is administered by the FDIC and
is backed by the full faith and credit of the United States government. As a
result, such savings and loan associations are subject to regulation and
examination.
<PAGE>
MORTGAGE-BACKED SECURITIES. The Mortgage-Backed Securities in which all
Funds may invest may be classified as governmental or government-related,
depending on the issuer or guarantor. Governmental mortgage-backed securities
are backed by the full faith and credit of the United States. GNMA, the
principal U.S. guarantor of such securities, is a wholly owned U.S. Government
corporation within the Department of Housing and Urban Development. Government-
related Mortgage-Backed Securities which are not backed by the full faith and
credit of the United States include those issued by FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders, which
is subject to general regulation by the Secretary of Housing and Urban
Development. Pass-through securities issued by FNMA are guaranteed as to timely
payment of principal and interest by FNMA. FHLMC is a corporate instrumentality
of the United States, the stock of which is owned by the Federal Home Loan Bank.
Participation certificates representing interests in mortgages from FHLMC's
national portfolio are guaranteed as to the timely payment of interest and
ultimate collection of principal by FHLMC. In addition, the U.S. Government Fund
may invest in commercial mortgage-backed securities. While these securities
generally are structured with one or more types of credit enhancement, they are
issued by non-governmental entities and are not guaranteed by governmental
agency or instrumentality.
Entities may create mortgage loan pools offering pass-through investments
in addition to those described above. The mortgages underlying these securities
may be alternative mortgage instruments, that is, mortgage instruments in which
principal or interest payments may vary or terms to maturity may be shorter than
previously customary. As new types of mortgage-backed securities are developed
and offered to investors, the Funds and Portfolios will, consistent with their
respective investment objectives and policies, consider making investments in
such new types of securities.
The average maturity of pass-through pools of mortgage-backed securities
varies with the maturities of the underlying mortgage instruments. In addition,
a pool's stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the location of the
mortgaged property and the age of the mortgage. Because prepayment rates of
individual mortgage pools vary widely, it is not possible to accurately predict
the average life of a particular pool. Common industry practice, for example, is
to assume that prepayments will result in a 7-to 9-year average life for pools
of fixed-rate 30-year mortgages. Pools of mortgages with other maturities of
different characteristics will have varying average life assumptions.
RATINGS AS INVESTMENT CRITERIA. In general, the ratings of NRSROs, such as
Moody's, S&P, Duff and Fitch, represent the opinions of these agencies as to the
quality of securities which they rate. It should be emphasized, however, that
such ratings are relative and subjective and are not absolute standards of
quality. These ratings will be used by the Funds as initial criteria for the
selection of portfolio securities, but the Funds will also rely upon the
independent advice of Composite or the relevant sub-adviser to evaluate
potential investments. The Appendix to this SAI contains further information
concerning the ratings of these services and their significance.
To the extent that the rating given by a rating service for securities may
change as a result of changes in such organizations or their rating systems, the
Funds and Portfolios will attempt to use comparable ratings as standards for its
investments in accordance with the investment policies contained in the
Prospectuses and in this SAI.
REPURCHASE AGREEMENTS. Each Fund and Portfolio may invest in repurchase
agreements without limitation as to amount.
U.S. GOVERNMENT SECURITIES. U.S. Government Securities include debt
obligations of varying maturities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities. U.S. Government Securities include direct
obligations of the U.S. Treasury, and securities issued or guaranteed by the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the Untied States, Small Business Administration, Government National
Mortgage Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks,
Resolution Trust Corporation, Federal Land Banks, Federal National Mortgage
Association ("FNMA"), Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board and Student Loan Marketing Association.
Direct obligations of the U.S. Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. Because the
U.S. Government is not obligated by law to provide support to an instrumentality
it sponsors, a Fund or Portfolio will invest in obligations issued by such an
instrumentality only if Composite or the Fund's sub-adviser determines that the
credit risk with respect to the instrumentality does not make its securities
unsuitable for investment by the Fund or Portfolio.
STRATEGIES AVAILABLE TO ALL FUNDS, EXCEPT MONEY MARKET FUND, AND THE PORTFOLIOS
FUTURES ACTIVITIES. The Portfolios and Funds may enter into futures
contracts and options on futures contracts that are traded on a U.S. exchange or
board of trade. These investments may be made by the Fund involved for the
purpose of hedging against changes in the value of its portfolio securities due
to anticipated changes in interest rates and market conditions. The ability of a
Fund to trade in futures contracts and options on futures contracts may be
materially limited by the requirement of the Internal Revenue Code of 1986, as
amended (the "Code"), applicable to a regulated investment company. See
"Taxes"below. In addition to the uses of futures described above, all Funds
except the Money Market Fund may use futures for certain other purposes.
See"Strategic Transactions."
FUTURES CONTRACTS. An interest rate futures contract provides for the
future sale by one party and the purchase by the other party of a certain amount
of a specific financial instrument (debt security) at a specified price, date,
time and place. A bond index futures contract 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 price at which the index contract was originally
written. No physical delivery of the underlying securities in the index is made.
The purpose of entering into a futures contract by a Fund is to protect the
Fund from fluctuations in the value of its securities caused by anticipated
changes in interest rates or market conditions without necessarily buying or
selling the securities. Of course, since the value of portfolio securities will
far exceed the value of the futures contracts entered into by a Fund, an
increase in the value of the futures contract would only mitigate - but not
totally offset - the decline in the value of the portfolio.
No consideration is paid or received by a Fund upon entering into a future
contract. Initially, a Fund would be required to deposit with the broker an
amount of cash or cash equivalents equal to approximately 1% to 10%of the
contract amount (this amount is subject to change by the board of trade on which
the contract is traded and members of such board of trade may charge a higher
amount). This amount is known as "initial margin" and is in its nature the
equivalent of a performance bond or good faith deposit on the contract, which is
returned to a Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. Subsequent payments, known
as"variation margin," to and from the broker, will be made daily as the price of
the index or securities underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as "marking-to-market." At any time prior to the expiration of a
future contract, a Fund may elect to close the position by taking an opposite
position, which will operate to terminate the Fund's existing position in the
contract.
There are several risks in connection with the use of futures contracts as
a hedging device. Successful use of futures contracts by a Fund is subject to
the ability of Composite or the Fund's sub-adviser to correctly predict
movements in the direction of interest rates or changes in market conditions.
These predictions involve skills and techniques that may be different from those
involved in the management of the portfolio being hedged. In addition, there can
be no assurance that there will be a correlation between movements in the price
of the underlying index or securities and movements in the price of the
securities which are the subject of the hedge. A decision of whether, when and
how to hedge involves the exercise of skill and judgment, and even a well-
conceived hedge may be unsuccessful to some degree because of market behavior or
unexpected trends in interest rates.
Although the Funds intend to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to
the daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, a Fund would be required to make
<PAGE>
daily cash payments of variation margin. In such circumstances, an increase in
the value of the portion of the portfolio being hedged, if any, may partially or
completely offset losses on the futures contract. However, as described above,
there is no guarantee that the price of the securities being hedged will, in
fact, correlate with the price movements in a futures contract and thus provide
an offset to losses on the futures contract.
To ensure that transactions constitute bona fide hedges in instances
involving the purchase or sale of a futures contract, the Funds will be required
to either (i) segregate sufficient cash or other liquid assets to cover the
outstanding position or (ii) cover the futures contract by either owning the
instruments underlying the futures contract or by holding a portfolio of
securities with characteristics substantially similar to the underlying index or
stock index comprising the futures contract or by holding a separate option
permitting it to purchase or sell the same futures contract. Because of the
imperfect correlation between the movements in the price of underlying indexes
or stock indexes of various futures contracts and the movement of the price of
securities in the Funds' portfolios, the Funds will periodically make
adjustments to its index futures contracts positions to appropriately reflect
the relationship between the underlying portfolio and the indexes. The Fund
will not maintain short positions in index or stock index futures contracts,
options written on index or stock index futures contracts and options written on
indexes or stock indexes, if in the aggregate, the value of these positions
exceeds the current market value of its securities portfolio plus or minus the
unrealized gain or loss on those positions, adjusted for the historical
volatility relationship between the portfolio and the index contracts.
OPTIONS ON FUTURES CONTRACTS. An option on a futures contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the futures
contract at a specified exercise price at any time prior to the expiration date
of the option. Upon exercise of an option, the delivery of the futures position
by the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The potential loss related
to the purchase of an option on futures contracts is limited to the premium paid
for the option (plus transaction costs). Because the price of the option to the
purchaser is fixed at the point of sale, there are no daily cash payments to
reflect changes in the value of the underlying contract; however, the value of
the option does change daily and that change would be reflected in the net asset
value of the fund holding the options.
The Funds may purchase and write put and call options on futures contracts
that are traded on a U.S. exchange or board of trade as a hedge against changes
in the value of its portfolio securities, and may enter into closing
transactions with respect to such options to terminate existing positions. There
is no guarantee that such closing transactions can be effected.
There are several risks relating to options on futures contracts. The
ability to establish and close out positions on such options will be subject to
the existence of a liquid market. In addition, the purchase of put or call
options will be based upon predictions as to anticipated interest rate and
market trends by Composite or the relevant sub-adviser, which could prove to be
inaccurate. Even if these expectations are correct, there may be an imperfect
correlation between the change in the value of the options and the portfolio
securities hedged. In addition to the uses of options described above, all Funds
except the Money Market Fund may use options for certain other purposes. See
"Strategic Transactions."
OPTIONS ON SECURITIES. The Funds may write covered put options and covered
call options on securities, purchase put and call options on securities and
enter into closing transactions. The Funds may not write put options with
respect to more than 50% of their total assets.
Options written by a Fund will normally have expiration dates between one
and nine months from the date written. The exercise price of the options may be
below, equal to or above the market values of the underlying securities at the
times the options are written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the-money" and"out-of-the-money,"
respectively. A Fund may write (1) in-the-money call options when Composite or
its sub-adviser expects that the price of the underlying security will remain
flat or decline moderately during the option period, (2) at-the-money call
options when Composite or its sub-adviser expects that the price of the
underlying security will remain flat or advance moderately during the option
period and (3) out-of-the-money call options when Composite or its sub-adviser
expects that the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. In any of the preceding situations, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments as such call options described
above.
So long as the obligation of the Fund as the writer of an option continues,
the Fund may be assigned an exercise notice by the broker-dealer through which
the option was sold, requiring the Fund to deliver, in the case of a call, or
take delivery of, in the case of a put, the underlying security against payment
of the exercise price. This obligation terminates when the option expires or the
Fund effects a closing purchase transaction. The Fund cannot longer effect a
closing purchase transaction with respect to an option once it has been assigned
an exercise notice. To secure its obligation to deliver the underlying security
when it writes a call option, or to pay for the underlying security when it
writes a put option, the Fund will be required to deposit in escrow the
underlying security or other assets in accordance with the rules of the Options
Clearing Corporation (the "OCC") and of the securities exchange on which the
option is written.
An option may be closed out only when there exists a secondary market for
an option of the same series on a recognized securities exchange or in the over-
the-counter market (see "Over the Counter Options," below). In light of this
fact and current trading conditions, the Fund expects to purchase or write call
or put options issued by the OCC, as well as the following national securities
exchanges on which options are traded: The Chicago Board Options exchange
(CBOE), The Board of Trade of the City of Chicago (CBT), American Stock Exchange
(AMEX), Philadelphia Stock Exchange (PHLX), Pacific Stock Exchange(PSE) and the
New York Stock Exchange (NYSE).
The Fund may realize a profit or loss upon entering into closing
transactions. In cases where the Fund has written an option, it will realize a
profit if the cost of the closing purchase transaction is less than the premium
received upon writing the original option, and will incur a loss if the cost of
the closing purchase transaction exceeds the premium received upon writing the
original option. Similarly, when the Fund has purchased an option and engages in
a closing sale transaction, the Fund will realize a profit or loss to the extent
that the amount received in the closing sale transaction is more or less than
the premium the Fund initially paid for the original option plus the related
transaction costs.
To facilitate closing transactions, the Fund will generally purchase or
write only those options for which Composite or its sub-adviser believes there
is an active secondary market although there is no assurance that sufficient
trading interest to create a liquid secondary market on a securities exchange
will exist for any particular option or at any particular time, and for some
options no such secondary market may exist. A liquid secondary market in an
option may cease to exist for a variety of reasons. In the past, for example,
higher than anticipated trading activity or order flow, or other unforeseen
events, have at times rendered certain of the facilities of the OCC and the
securities exchanges inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such events, it might
not be possible to effect closing transactions in particular options. If as a
covered call option writer the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise.
Securities exchanges have established limitations governing the maximum
number of calls and puts of each class which may be held or written, or
exercised within certain time periods, by an investor or group of investors
acting in concert (regardless of whether the options are written on the same or
different securities exchanges or are held, written or exercised in one or more
accounts or through one or more brokers). It is possible that the particular
Fund and other clients of Composite and its sub-advisers and certain of
their affiliates may be considered to be such a group. A securities exchange may
order the liquidation of positions found to be in violation of these limits and
it may impose certain other sanctions.
In the case of options written by a Fund that are deemed covered by virtue
of the Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying security with respect to which the Fund has written
options may exceed the time within which the Fund must
<PAGE>
make delivery in accordance with an exercise notice. In these instances, the
Fund may purchase or temporarily borrow the underlying securities for purposes
of physical delivery. By so doing, the Fund will not bear any market risk, since
the Fund will have the absolute right to receive from the issuer of the
underlying security an equal number of shares to replace the borrowed stock. The
Fund may however, incur additional transaction costs or interest expenses in
connection with any such purchase or borrowing.
Additional risks exist with respect to mortgage-backed U.S. Government
Securities for which the Fund may write covered call options. If a Fund writes
covered call options on a mortgage-backed security, the security that it holds
as cover may, because of scheduled amortization of unscheduled prepayments,
cease to be sufficient cover. The Fund will compensate by purchasing an
appropriate additional amount of mortgage-backed securities. In addition to the
uses of options described above, all Funds except the Money Market Fund may use
options for certain other purposes. See "Strategic Transactions."
OPTIONS ON SECURITIES INDEXES. In addition to options on securities, the
Funds may also purchase and sell call and put options on securities indexes.
Such options give the holder the right to receive a cash settlement during the
term of the option based upon the difference between the exercise price and the
value of the index.
Options on securities indexes entail risks in addition to the risks of
options on securities. Because exchange trading of options on securities indexes
is relatively new, the absence of a liquid secondary market to closeout an
option position is more likely to occur, although the Fund generally will
purchase or write such an option only if Composite or its sub-adviser believes
the option can be closed out.
Use of options on securities indexes also entails the risk that trading in
such options may be interrupted if trading in certain securities included in the
index is interrupted. The Fund will not purchase or write such options unless
Composite or its sub-adviser believes the market is sufficiently developed for
the risk of trading in such options to be no greater than the risk of trading in
options on securities.
Price movements in the Fund's portfolio may not correlate precisely with
movements in the level of an index and, therefore, the use of options on
securities indexes cannot serve as a complete hedge. Because options on
securities indexes require settlement in cash, the Fund may be forced to
liquidate portfolio securities to meet settlement obligations. In addition to
the uses of options described above, all Funds except the Money Market Fund may
use options for certain other purposes. See "Strategic Transactions."
STRATEGIES AVAILABLE TO ALL FUNDS EXCEPT MONEY MARKET FUND
OVER THE COUNTER OPTIONS. Over the Counter Options ("OTC Options") can be
closed out only by agreement with the primary dealer in the transaction, and
thus any OTC Options and their underlying securities or currencies are
considered illiquid. With OTC Options, terms such as expiration date, exercise
price and premium are agreed upon between the Fund and the transacting dealer,
without the intermediation of a third party such as the OCC. Any OTC Options
written by a Fund (other than OTC Currency Options) will be with a qualified
dealer pursuant to an agreement under which the Fund may repurchase the option
at a formula price at which the Fund would have the absolute right to repurchase
an OTC Option it has sold. OTC Options will be considered illiquid in an amount
equal to the formula price, less the amount by which the option is"in-the-
money."
REVERSE REPURCHASE AGREEMENTS. Under the 1940 Act, reverse repurchase
agreements may be considered borrowings by the seller; accordingly each of the
Funds will limit its investments in reverse repurchase agreements and other
borrowings to no more than 33 1/3% of its total assets. A Fund will not engage
in reverse repurchase transactions for the purpose of leverage.
STRATEGIC TRANSACTIONS. No Fund currently intends to enter into Strategic
Transactions, excluding Strategic Transactions that are "covered" or entered
into for bona fide hedging purposes, that are in the aggregate principal amount
in excess of 15% of the Fund's net assets.
Strategic Transactions have associated risks including possible default by
the other party to the transaction, illiquidity and, to the extent Composite's
or the sub-adviser's view as to certain market movements is incorrect, losses
greater than if they had not been used. Use of put and call options, currency
transactions or options and futures transactions entails certain risks as
described herein and in the Appendix to the Prospectuses in sections relating to
such investment or instruments. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized.
The Funds may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple foreign currency
transactions (including forward foreign currency exchange contracts) and any
combination of futures, options and foreign currency transactions (each
separately, a "component" transaction), instead of a single transaction, as part
of a single strategy when, in the opinion of Composite or the sub-adviser, it is
in the best interest of the Fund to do so. A combined transaction may contain
elements of risk that are present in each of its component transactions.
The use of Strategic Transactions for portfolio management purposes
involves special considerations and risks. Additional risks pertaining to
particular strategies that make up Strategic Transactions are described in other
sections to this SAI. Successful use of most Strategic Transactions depends upon
Composite's or the sub-adviser's ability to predict movements of the overall
securities and interest rate markets, which requires different skills than
predicting changes in the prices of individual securities. There can be no
assurance that any particular strategy adopted will succeed. There may be
imperfect correlation, or even no correlation, between price movements of
Strategic Transactions and price movements of the related portfolio or currency
positions. Such a lack of correlation might occur due to factors unrelated to
the value of the related portfolio or currency positions, such as speculative or
other pressures on the markets in which Strategic Transactions are traded.
Strategic Transactions, if successful, can reduce risk of loss or enhance
income, by wholly or partially offsetting the negative effect of, or accurately
predicting, unfavorable price movements or currency fluctuations in the related
portfolio or currency position. However, Strategic Transactions can also reduce
the opportunity for gain by offsetting the positive effect of favorable price
movements in the positions. In addition, a Fund might be required to maintain
assets as "cover," maintain segregated accounts or make margin payments when it
takes positions in Strategic Transactions involving obligations to third parties
(i.e., Strategic Transactions other than purchased options). These requirements
might impair the Fund's ability to sell a portfolio security or currency
position or make an investment at a time when it would otherwise be favorable to
do so, or require that the Fund sell a portfolio security or currency position
at a disadvantageous time.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS. A segregated
account in the name of the Funds consisting of cash or liquid debt securities
equal to the amount of when-issued or delayed-delivery commitments will be
established at Boston Safe, the Trust's custodian. For the purpose of
determining the adequacy of the securities in the accounts, the deposited
securities will be valued at market or fair value. If the market or fair value
of the securities declines, additional cash or securities will be placed in the
account daily so that the value of the account will equal the amount of such
commitments by the Fund. On the settlement date, the Fund will meet its
obligations from then-available cash flow, the sale of securities held in the
segregated account, the sale of other securities or, although it would not
normally expect to do so, from the sale of securities purchased on a when-issued
or delayed-delivery basis themselves (which may have a greater or lesser value
than the Fund's payment obligations).
STRATEGIES AVAILABLE TO ALL FUNDS EXCEPT U.S. GOVERNMENT
AMERICAN DEPOSITARY RECEIPTS ("ADRs"), EUROPEAN DEPOSITARY
RECEIPTS("EDRs"), CONTINENTAL DEPOSITARY RECEIPTS ("CDRs") AND GLOBAL DEPOSITARY
RECEIPTS ("GDRs") ADRs are securities, typically issued by a U.S. financial
institution (a "depositary"), that evidence ownership interests in a security or
a pool of securities issued by a foreign issuer and deposited with the
depositary. ADRs include American Depositary Shares and New York Shares. EDRs,
which are sometimes referred to as CDRs, are securities, typically issued by a
non-U.S. financial institution, that evidence ownership interests in a security
or a pool of securities issued by either a U.S. or foreign issuer. GDRs are
issued globally and evidence a similar ownership arrangement. Generally, ADRs
are designed for trading in the U.S. securities market, EDRs are designed for
trading in European securities market and GDRs are designed for trading in non-
U.S. securities markets. ADRs, EDRs, CDRs and GDRs may be available for
investment through "sponsored" or "unsponsored" facilities. A sponsored
facility is established jointly by the issuer of the security underlying the
receipt and a depositary, whereas an unsponsored facility may be established by
a depositary without participation by the issuer of the receipt's underlying
security. Holders of an unsponsored depositary receipt generally bear all the
costs of the unsponsored facility. The depositary of an unsponsored facility
frequently is under no
<PAGE>
obligation to distribute shareholder communications received from the issuer of
the deposited security or to pass through to the holders of the receipts voting
rights with respect to the deposited securities.
LENDING OF PORTFOLIO SECURITIES. Each of the Funds will adhere to the
following conditions whenever its portfolio securities are loaned: (1) the Fund
must receive at least 100% cash collateral or equivalent securities from the
borrower; (2) the borrower must increase the collateral whenever the market
value of the securities rises above the level of the collateral; (3) the Fund
must be able to terminate the loan at any time; (4) the Fund must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities and any increase in market value; (5) the
Fund may pay only reasonable custodian fees in connection with the loan; and (6)
voting rights on the loaned securities may pass to the borrower, provided that
if a material event adversely affecting the investment occurs, the Trust's Board
of Trustees must terminate the loan and regain the right to vote the securities.
From time to time, the Funds may pay a part of the interest earned from the
investment of the collateral received for securities loaned to the borrower
and/or a third party that is unaffiliated with the Trust and that is acting as a
"finder."
STRATEGIES AVAILABLE TO ALL FUNDS EXCEPT MONEY MARKET AND U.S. GOVERNMENT
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Funds may engage in currency
exchange transactions to protect against uncertainty in the level of future
exchange rates. The Funds' dealings in forward currency exchange contracts will
be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward foreign
currency with respect to specific receivables or payables of the Fund generally
arising in connection with the purchase or sale of its portfolio securities.
Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency. A
Fund may not position hedge with respect to a particular currency to an extent
greater than the aggregate market value (at the time of making such sale) of the
securities held in its portfolio denominated or quoted in or currently
convertible into that particular currency.
If a Fund enters into a position hedging transaction, the Trust's custodian
or sub-custodian will, except in circumstances where segregated accounts are not
required by the 1940 Act and the rules adopted thereunder, place cash, U.S.
Government Securities or high-grade debt obligations in a segregated account for
the Fund in an amount at least equal to the value of the Fund's total assets
committed to the consummation of the forward contract. For each forward foreign
currency exchange contract that is used to hedge a securities position
denominated in a foreign currency, but for which the hedging position no longer
provides, in the opinion of Composite or the sub-adviser, sufficient protection
to consider the contract to be a hedge, the Fund maintains with its custodian a
segregated account of cash, U.S. Government Securities or other liquid assets in
an amount at least equal to the portion of the contract that is no longer
sufficiently covered by such hedge. If the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in the
account so that the value of the account will equal the amount of the Fund's
unhedged exposure(in the case of securities denominated in a foreign currency)
or commitment with respect to the contract. Hedging transactions may be made
from any foreign currency into U.S. dollars or into other appropriate
currencies.
At or before the maturity of a forward contract, a Fund may either sell a
portfolio security and make delivery of the currency, or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
amount of the currency that it is obligated to deliver. If the Fund retains the
portfolio security and engages in an offsetting transaction, the Fund, at the
time of execution of the offsetting transaction, will incur a gain or a loss to
the extent that movement has occurred in forward contract prices. Should
forward prices decline during the period between the Fund's entering into a
forward contract for the sale of currency and the date it enters into an
offsetting contract for the purchase of the currency, the Fund will realize
again to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices
increase, the Fund will suffer a loss to the extent the price of the currency it
has agreed to purchase exceeds the price of the currency it has agreed to sell.
The cost to a Fund of engaging in currency transactions varies with factors
such as the currency involved, the length of the contract period and the
prevailing market conditions. Because transactions in currency exchange are
usually conducted on a principal basis, no fees or commissions are involved.
The use of forward currency contracts does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of exchange
that can be achieved in the future. In addition, forward currency contracts may
limit the risk of loss due to a decline in the value of the hedged currency
increase.
If a devaluation of a currency is generally anticipated, a Fund may not be
able to contract to sell the currency at a price above the devaluation level it
anticipates.
The Funds, in addition, may combine forward currency exchange contracts
with investments in securities denominated in other currencies in an attempt to
create a combined investment position, the overall performance of which will be
similar to that of a security denominated in a Fund's underlying currency. For
instance, a Fund could purchase a U.S. dollar-denominated security and at the
same time enter into a forward currency exchange contract to exchange U.S.
dollars for its underlying currency at a future date. By matching the amount of
U.S. dollars to be exchanged with the anticipated value of the U.S. dollar-
denominated security, the Fund may be able to "lock in" the foreign currency
value of the security and adopt a synthetic investment position whereby the
Fund's overall investment return from the combined position is similar to the
return from purchasing a foreign currency-denominated instrument.
There is a risk in adopting a synthetic investment position. It is
impossible to forecast with absolute precision what the market value of a
particular security will be at any given time. If the value of a security
denominated in the U.S. dollar or other foreign currency is not exactly matched
with a Fund's obligation under a forward currency exchange contract on the date
of maturity, the Fund may be exposed to some risk of loss from fluctuations in
that currency.
Although Composite and each sub-adviser will attempt to hold such
mismatching to a minimum, there can be no assurance that Composite or the sub-
adviser will be able to do so. Although the foreign currency market is not
believed to be necessarily more volatile than the market in other commodities,
there is less protection against defaults in the forward trading to currencies
than there is in trading such currencies on an exchange because such forward
contracts are not guaranteed by an exchange or clearing house. The CFTC has
indicated that it may assert jurisdiction over forward contracts in foreign
currencies and attempt to prohibit certain entities from engaging in such
transactions. In the event that such prohibition included the Fund, it would
cease trading such contracts. Cessation of trading might adversely affect the
performance of a Fund.
In addition to the uses of foreign currency exchange transactions described
above, all Funds except the Money Market and the U.S. Government Funds may use
foreign currency exchange transactions for certain other purposes. See
"Strategic Transactions."
OPTIONS ON FOREIGN CURRENCIES. The Funds may purchase and write put and
call options on foreign currencies for the purpose of hedging against declines
in the U.S. dollar value of foreign currency-denominated portfolio securities
and against increases in the U.S. dollar cost of such securities to be acquired.
Such hedging includes cross hedging and proxy hedging where the options to buy
or sell currencies involve other currencies besides the U.S. dollar. As one
example, a decline in the U.S. dollar value of a foreign currency in which
securities are denominated will reduce the U.S. dollar value of the securities,
even if their value in the foreign currency remains constant. To protect
against diminutions in the value of securities held by a Fund in a particular
foreign currency, the Fund may purchase put options on the foreign currency. If
the value of the currency does decline, the Fund will have the right to sell the
currency for a fixed amount in U.S. dollars and will thereby offset, in whole or
in part, the adverse effect on its portfolio that otherwise would have resulted.
When an increase in the U.S. dollar value of a currency in which securities to
be acquired are denominated is projected, thereby increasing the cost of the
securities, the Fund conversely may purchase call options on the currency. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Fund deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, if currency exchange rates do not move in the direction, or
to the extent anticipated, the Fund could sustain losses on transactions in
foreign currency options that would require it to forego a portion or all of the
benefits of advantageous changes in the rates.
The Fund may also write covered call options on foreign currencies for the
types of hedging purposes described above. As one example, when a Fund
anticipates a decline in the U.S. dollar value of foreign currency-denominated
securities due to adverse fluctuations in exchange rates, it could, instead of
purchasing a put option, write a covered call option on the
<PAGE>
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Fund would be required to purchase or sell the underlying currency at a loss
that may not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Fund may also be required to forego all or a
portion of the benefits that might otherwise have been obtained from favorable
movements in exchange rates.
A call option written on a foreign currency by a Fund is "covered" if the
Fund owns the underlying foreign currency covered by the call or has an absolute
and immediate right to acquire the foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by Boston Safe, or by a designated sub-custodian) upon conversion or exchange of
other foreign currency held by the Fund. A call option also is covered if the
Fund has a call on the same foreign currency and in the same principal amount as
the call written when the exercise price of the call held(1) is equal to or less
than the exercise price of the call written or (2) is greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
U.S. Government Securities and other liquid assets in a segregated account with
Boston Safe or with a designated sub-custodian.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on those
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to those transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the OCC, thereby reducing the risk of
counter party default. Further, a liquid secondary market in options traded on a
national securities exchange may exist, potentially permitting the Fund to
liquidate open positions at a profit prior to their exercise or expiration, or
to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options are
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exercise and settlement of exchange-traded foreign
currency options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions or
taxes would prevent the orderly settlement of foreign currency option exercises,
or would result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise. For a discussion of the risks involved in OTC Options
in foreign currency, see "Over the Counter Options" above.
In addition to the uses of options on foreign currencies described above,
all Funds except the Money Market and U.S. Government Funds may use options on
foreign currencies for certain other purposes. See "Strategic
Transactions."
STRATEGY AVAILABLE TO GROWTH, BOND & STOCK AND EMERGING GROWTH FUNDS
LOWER-RATED SECURITIES. The Growth, Bond & Stock and Emerging Growth Funds
may invest up to 35% of its total assets in non-investment grade securities
(rated Ba and lower by Moody's or BB and lower by Standard & Poor's) or unrated
securities. Such securities carry a high degree of risk (including the
possibility of default or bankruptcy of the issuer of such securities),
generally involve greater volatility of price and risk of principal and income,
and may be less liquid, than securities in the higher rating categories and are
considered speculative. See the Appendix to this SAI for a more complete
description of the ratings assigned by ratings organizations and their
respective characteristics.
The recent economic downturn disrupted the high yield market and impaired
the ability of issuers to repay principal and interest. Also, an increase in
interest rates could further adversely affect the value of such obligations held
by the Fund. Prices and yields of high yield securities will fluctuate over time
and may affect the Fund's net asset value. In addition, investments in high
yield zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent that
there is no established retail secondary market or because of a decline in the
value of such securities. A thin trading market may limit the ability of the
Trustees to accurately value high yield securities in the Fund's portfolio and
to dispose of those securities. Adverse publicity and investor perceptions may
decrease the value and liquidity of high yield securities. These securities may
also involve special registration responsibilities, liabilities and costs.
Credit quality in the high yield securities market can change suddenly and
unexpectedly, and even recently-issued credit ratings may not fully reflect the
actual risks posed by a particular high yield security. For these reasons,
neither Composite nor any sub-adviser relies exclusively on ratings issued by
established credit rating agencies, but supplements such ratings with its own
independent and ongoing review of credit quality. The achievement of the Fund's
investment objectives by investment in such securities may be more dependent on
Composite's or its sub-adviser's credit analysis than is the case for higher
quality bonds. Should the rating of a portfolio security be downgraded, the
Fund's Sub-Adviser will determine whether it is in the best interest of the Fund
to retain the security.
Prices for below investment grade securities may be affected by legislative
and regulatory developments. For example, new federal rules require savings and
loan institutions to gradually reduce their holdings of this type of security.
Also, Congress from time to time has considered legislation which would restrict
or eliminate the corporate tax deduction for interest payments on these
securities and would regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type.
STRATEGY AVAILABLE TO GROWTH, EMERGING GROWTH AND INTERNATIONAL GROWTH FUNDS
SECURITIES IN DEVELOPING COUNTRIES. Although most of the investments of the
Growth, Emerging Growth and International Growth Funds are made insecurities of
companies in (or governments of) developed countries, up to 5% of the total
assets of the Growth Fund and Emerging Growth Fund and up to 30% of the total
assets of the International Growth Fund may be invested in securities of
companies in (or governments of) developing or emerging countries (sometimes
referred to as "emerging markets") as well. A developing or emerging country is
generally considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets of
developing or emerging countries involves exposure to economic structures that
are generally less diverse and mature, and to political systems that can be
expected to have less stability than those of developed countries. Historical
experience indicates that the markets of developing or emerging countries have
been more volatile than the markets of the more mature economies of developed
countries; however, such markets often have provided higher rates of return to
investors.
INVESTMENT RESTRICTIONS OF THE PORTFOLIOS
The following investment restrictions have been adopted by the Trust with
respect to the Portfolios as fundamental policies. A fundamental policy
affecting a particular Portfolio may not be changed without the vote of a
majority of the outstanding shares of the affected Portfolio. Majority is
defined in the 1940 Act as the lesser of (a) 67% or more of the shares present
at a shareholder meeting, if the holders of more than 50% of the outstanding
shares of the Trust are present or represented by proxy, or (b) more than 50%of
the outstanding shares. Each Portfolio will not;
1. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent the
Fund from purchasing or selling options or futures contracts or from investing
in securities or other instruments backed by physical commodities);
2. Purchase or sell real estate including limited partnership interests,
although it may purchase and sell securities of companies that deal in real
estate and may purchase and sell securities that are secured by interests in
real estate;
3. Make loans to any person, except loans of portfolio securities to the
extent that no more than 33 1/3% of its total assets would be lent to other
parties, but this limitation does not apply to purchases of debt securities or
repurchase agreements;
4. (i) Purchase more than 10% of any class of the outstanding voting securities
of any issuer
<PAGE>
(except other investment companies as defined in the 1940 Act) and (ii) purchase
securities of an issuer (except obligations of the U.S. Government and its
agencies and instrumentalities and securities of other investment companies as
defined in the 1940 Act) if as a result, with respect to 75% of its total
assets, more than 5% of the Portfolio's total assets, at market value, would be
invested in the securities of such issuer;
5. Issue senior securities (as defined in the 1940 Act) except as permitted by
rule, regulation or order of the SEC;
6. Will not borrow, except from banks for temporary or emergency (not
leveraging) purposes including the meeting of redemption requests that might
otherwise require the untimely disposition of securities in an aggregate amount
not exceeding 30% of the value of the Portfolio's total assets (including the
amount borrowed) valued at market less liabilities (not including the amount
borrowed) at the time the borrowing is made; and whenever borrowings by a
Portfolio, including reverse repurchase agreements, exceed 5% of the value of a
Portfolio's total assets, the Portfolio will not purchase any securities;
7. Underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933 Act in
the disposition of restricted securities; and
8. Write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
In addition, each Portfolio has adopted non-fundamental investment
limitations as stated below and in its prospectus. Such limitations may be
changed without shareholder approval. Each Portfolio will not:
1. Pledge, mortgage, or hypothecate any of its assets except to secure
borrowings permitted by the Portfolio's fundamental limitation on borrowing;
2. Invest for the purpose of exercising control over management of any company;
3. Invest its assets in securities of any investment company, except (i) by
purchase in the open market involving only customary brokers' commissions; (ii)
in connection with mergers, acquisitions of assets or consolidations; (iii) as
permitted by SEC exemptive order; or (iv) as otherwise permitted by the 1940
Act;
4. Purchase warrants if, by reason of such purchase, more than 5% of the value
of the Portfolio's net assets (taken at market value) would be invested in
warrants, valued at the lower of cost or market; included within this amount,
but not to exceed 2% of the value of the Fund's net assets, may be warrants that
are not listed on a recognized stock exchange;
5. Purchase or hold illiquid securities, which are securities that cannot be
disposed of for their approximate market value in seven days or less (which
terms include repurchase agreements and time deposits maturing in more than
seven days) if, in the aggregate, more than 15% of its net assets would be
invested in illiquid securities;
6. Purchase securities on margin, except that a Portfolio may obtain any short-
term credits necessary for the clearance of purchases and sales of securities.
For purposes of this restriction, the deposit or payment of initial or variation
margin in connection with futures contracts or related options will not be
deemed to be a purchase of securities on margin; and
7. Purchase or hold lower rated bonds ("junk bonds"), directly or indirectly,
if, in the aggregate, 35% or more of its net assets would be invested, directly
or indirectly, in junk bonds.
INVESTMENT RESTRICTIONS OF THE FUNDS OTHER THAN THE BOND & STOCK AND NORTHWEST
FUNDS
The investment restrictions numbered 1 through 15 below have been adopted
by the Trust with respect to the Funds (other than the Bond & Stock and
Northwest Funds) as fundamental policies. A fundamental policy may not be
changed without the vote of a majority of the outstanding voting securities of
the Trust, as defined in the 1940 Act. Investment restrictions 16 through 19 may
be changed by vote of a majority of the Trust's Board of Trustees at any
time.
The investment policies adopted by the Trust prohibit a Fund from:
1. Purchasing the securities of any issuer (other than U.S. Government
Securities) if as a result more than 5% of the value of the Fund's total assets
would be invested in the securities of the issuer (the "5% Limitation"), except
that up to 25% of the value of the Fund's total assets may be invested without
regard to the 5% Limitation; provided that the entire investment portfolio of
the Money Market Fund is subject to the 5% Limitation. However, the Money Market
Fund will be able to invest more than 5% of its total assets in the securities
of a single issuer for a period of up to three Business Days after the purchase
thereof; provided that the Fund may not hold more than one such investment at
any time.
2. Purchasing more than 10% of the securities of any class of any one issuer;
provided that this limitation shall not apply to investments in U.S. Government
Securities; provided further that this restriction shall not apply to the Growth
Fund; and provided further that the Growth Fund shall not own more than 10% of
the outstanding voting securities of a single issuer.
3. Purchasing securities on margin, except that the Fund may obtain any short-
term credits necessary for the clearance of purchases and sales of securities.
For purposes of this restriction, the deposit or payment of initial or variation
margin in connection with futures contracts or related options will not be
deemed to be a purchase of securities on margin.
4. Making short sales of securities or maintaining a short position; provided
that this restriction shall not apply to the Growth and International Growth
Funds.
5. Borrowing money, except that (a) the Fund may (i) enter into Reverse
Repurchase Agreements or (ii) borrow from banks for temporary (not leveraging)
purposes, including the
<PAGE>
meeting of redemption requests that might otherwise require the untimely
disposition of securities or pending settlement of securities transactions or
for emergency or extraordinary purposes in an aggregate amount not exceeding 30%
of the value of the Fund's total assets (including the amount borrowed) valued
at market less liabilities (not including the amount borrowed) at the time the
borrowing is made, (b) all of the Funds except the Money Market Fund may enter
into (i) futures contracts, and (ii) dollar roll transactions. Whenever
borrowings pursuant to (a) above (except that with respect to the Short Term
High Quality Bond, U.S. Government, Corporate Income, Growth and Income and
Emerging Growth Funds, pursuant to (a)(ii) above) exceed 5% of the value of a
Fund's total assets, (w) continuous asset coverage of at least 300% is required;
(x) in the event such asset coverage falls below 300% due to market fluctuations
or otherwise, the Fund must within 3 days reduce the amount of its borrowings so
that asset coverage will again be at least 300%, even if disadvantageous from an
investment standpoint; (y) borrowing pursuant to (a) over 5% must be repaid
before making additional investments; and (z) any interest paid on such
borrowings will reduce income. The Short Term High Quality Bond, U.S.
Government, Corporate Income, Growth and Income and Emerging Growth Funds may
not borrow money or enter into Reverse Repurchase Agreements or Dollar Roll
Transactions in the aggregate in excess of 33 1/3% of the Fund's total assets
(after giving effect to any such transaction).
6. Pledging, hypothecating, mortgaging or otherwise encumbering more than 30%
of the value of the Fund's total assets. For purposes of this restriction, (a)
the deposit of assets in escrow in connection with the writing of covered put or
call options and the purchase of securities on a when-issued or delayed-delivery
basis and (b) collateral arrangements with respect to (i) the purchase and sale
of options on securities, options on indexes and options on foreign currencies,
and (ii) initial or variation margin for futures contracts will not be deemed to
be pledges of a Fund's assets.
7. Underwriting the securities of other issuers, except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, by virtue
of disposing of portfolio securities.
8. Purchasing or selling real estate or interests in real estate, except that
the Fund may purchase and sell securities that are secured, directly or
indirectly, by real estate and may purchase securities issued by companies that
invest or deal in real estate.
9. Investing in commodities, except that all of the Funds except the Money
Market Fund may invest in futures contracts and options on futures contracts.
The entry into forward foreign currency exchange contracts is not and shall not
be deemed to involve investing in commodities.
10. Investing in oil, gas or other mineral exploration or development
programs.
11. Making loans to others, except through the purchase of qualified debt
obligations, loans of portfolio securities (except in the case of the U.S.
Government Fund) and the entry into repurchase agreements.
12. Purchasing any securities that would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in the securities
of issuers conducting their principal business activities in the same industry,
except in the case of the Money Market Fund, which under normal market
conditions shall have at least 25% of its total assets invested in bank
obligations; provided that this limitation shall not apply to the purchase of
U.S. Government Securities.
13. Purchasing, writing or selling puts, calls, straddles, spreads or
combinations thereof; provided that this restriction shall not apply to any of
the Funds except the Money Market Fund; and provided further that (a) all of the
Funds except the Money Market and Short Term Global Government Funds may
purchase, write and sell covered put and call options on securities, (b) all of
the funds except the Money Market Fund may purchase, write and sell futures
contracts and options on futures contracts, (c) all of the Funds except the
Money Market Fund may purchase and write put and call options on stock indexes,
and (d) the International Growth Fund may purchase put and call options and
write cover call options on foreign currency contracts.
14. With respect to the Growth Fund, investing more than 35% of the Fund's
assets in non-investment grade debt securities.
15. With respect to the Short Term High Quality Bond Fund, having a dollar-
weighted average portfolio maturity in excess of five years.
16. With respect to the Growth and Emerging Growth Funds, investing more than
25% of the Fund's assets in foreign securities.
17. Purchasing securities that are not readily marketable if more than 10% of
the total assets of the Money Market Fund, or more than 15% of the total assets
of the Short Term High Quality Bond, U.S. Government, Corporate Income, Growth
and Income, Growth, Emerging Growth and International Growth Funds, would be
invested in such securities, including, but not limited to: (1) repurchase
agreements with maturities greater than seven calendar days; (2) time deposits
maturing in more than seven calendar days; (3) to the extent a liquid secondary
market does not exist for the instruments, futures contracts and options
thereon; (4) certain over-the-counter options, as described in this SAI; (5)
certain variable rate demand notes having a demand period of more than seven
days; and (6) certain Rule 144A restricted securities that are deemed to be
illiquid.
18. Making investments for the purpose of exercising control or management.
19. Purchasing or selling interests in real estate limited partnerships.
The percentage limitations contained in the restrictions listed above apply
at the time of purchases of securities.
INVESTMENT RESTRICTIONS OF THE BOND & STOCK AND THE NORTHWEST FUNDS
The Bond & Stock and Northwest Funds have adopted the fundamental
investment restrictions below. Each of the Bond & Stock and Northwest Funds may
not:
. invest more than 5%* of its total assets in any single issuer other than
U.S. government securities, except that up to 25% of a Fund's assets may be
invested without regard to this 5% limitation;
. acquire more than 10%* of the voting securities of any one company;
. invest in real estate or commodities;
. invest in oil, gas or other mineral leases;
. invest more than 25%* of its assets in any single industry;*
. buy securities on margin, mortgage or pledge its securities;
. act as underwriter of securities issued by others;
. borrow money for investment purposes (it may borrow up to 5% of its total
assets for emergency, non-investment purposes);
. lend money (except for the execution of repurchase agreements);
. issue senior securities.
In addition, as a matter of non-fundamental policy, the Bond & Stock and
Northwest Funds may not invest more than 15%* of its assets in illiquid
securities.
* Percentage at the time the investment is made.
PORTFOLIO TURNOVER
Portfolio turnover considerations for the Portfolios are addressed in the
Trust's prospectus.
The Money Market Fund, a money market fund, attempts to increase yields by
trading to take advantage of short-term market variations, which results in high
portfolio turnover. Because purchases and sales of money market instruments are
usually effected as principal transactions, this policy does not result in high
brokerage commissions to the Fund. The Growth and Income, Growth, Emerging
Growth and International Growth Funds (together, the "Equity Funds")and the
Short Term High Quality Bond, the U.S. Government and the Corporate Income Funds
(collectively, the "Bond Funds") do not intend to seek profits through short-
term trading. Nevertheless, the Funds will not consider portfolio turnover rate
a limiting factor in making investment decisions.
Under certain market conditions, the Equity Funds and the Bond Funds may
experience increased portfolio turnover as a result of such Fund's options
activities. For instance, the exercise of a substantial number of options
written by the Fund (due to appreciation of the underlying security in the case
of call options or depreciation of the underlying security in the case of put
options) could result in a turnover rate in excess of 100%. A portfolio
turnover rate of 100% would occur if all of the Fund's securities that are
included in the computation of turnover were replaced once during a period of
one year. The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the year by the monthly average
value of portfolio securities. Securities with remaining maturities of one year
or less at the date of acquisition are excluded from the calculation.
Certain other practices that may be employed by the Funds could result in
high portfolio turnover. For example, portfolio securities may be sold in
anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what Composite or a Fund's
sub-adviser believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities may occur for
reasons not directly related to the investment quality of particular issues or
the general movement of interest rates, such as changes in the overall demand
for, or supply of, various types of securities.
PORTFOLIO TRANSACTIONS
Purchases and sales of Fund shares by a Portfolio are effected directly
through the Trust's distributor, Sierra Services. In addition, all decisions to
buy and sell securities, including Fund shares, are made by Sierra Services,
subject to the overall review of the Trustees.
<PAGE>
Most of the purchases and sales of securities for a Fund, whether
transacted on a securities exchange or over-the-counter, will be effected in the
primary trading market for the securities. Decisions to buy and sell securities
for a Fund are made by Composite or its sub-adviser, which also is responsible
for placing these transactions, subject to the overall review of the Trust's
Trustees. Although investment decisions for each Fund are made independently
from those of the other accounts managed by Composite or its sub-adviser, those
other accounts may make investments of the same type as the Fund. When a Fund
and one or more other accounts managed by Composite or its sub-adviser are
prepared to invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner believed by
Composite or the sub-adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by a Fund or the size
of the position obtained or disposed of by the Fund. In other cases, however, it
is believed that the coordination and the ability to participate in volume
transactions will be to the benefit of the Fund.
Transactions on U.S. exchanges involve the payment of negotiated brokerage
commissions. With respect to exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. There is generally no
stated commission in the case of securities traded in the over-the-counter
markets, but the prices of those securities include undisclosed commissions or
concessions, and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down U.S. Government Securities may
be purchased directly from the U.S. Treasury or from the issuing agency or
instrumentality.
In selecting brokers or dealers to execute portfolio transactions on behalf
of a Fund, Composite or the Fund's sub-adviser seeks the best overall terms
available. In assessing the best overall terms available for any transaction,
Composite or the sub-adviser will consider the factors Composite or the sub-
adviser deems relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution capability of the
broker or dealer and the reasonableness of the commission, if any, for the
specific transaction and on a continuing basis. In addition, each Advisery
agreement between the Trust and Composite and each sub-advisery agreement
between Composite and a sub-adviser authorizes the Adviser or sub-adviser, in
selecting brokers or dealers to execute a particular transaction and in
evaluating the best overall terms available, to consider the brokerage and
research services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934, as amended) provided to the Trust, the other Funds and/or
other accounts over which Composite or the sub-advisers or its affiliates
exercise investment discretion. As a result, Composite or a sub-adviser may
cause a Fund to pay a broker-dealer, which provides brokerage and research
services to Composite or the sub-adviser, an amount of disclosed commission for
effecting a securities transaction in excess of the commission that another
broker-dealer would have charged for effecting that transaction. The fees under
the Advisery agreements between the Trust and the Adviser are not reduced by
reason of the receipt by the Adviser or sub-advisers of brokerage and research
services. The Trust's Trustees will periodically review the commissions paid by
the Funds to determine if the commissions paid over representative periods of
time were reasonable in relation to the benefits received by the Trust.
[Over-the-counter purchases and sales are transacted directly with
principal market makers except in those cases in which better prices and
executions may be obtained elsewhere. For the three fiscal years ended December
31, 1994, December 31, 1995 and December 31, 1996, the Trust paid brokerage
commissions of approximately $0, $0 and $3,086, respectively, to J.P. Morgan.
For the fiscal year ended December 31, 1994, December 31, 1995 and December 31,
1996, commissions paid to J.P. Morgan represented approximately 0%, 0% and 51%,
respectively, of the total amount of brokerage commissions paid in such period
and which were paid on transactions that represented 0%, 0% and 47%
respectively, of the aggregate dollar amount of transactions that incurred
commissions paid by the Trust during such period. For the three fiscal years
ended December 31, 1994, December 31, 1995 and December 31, 1996, the Trust paid
brokerage commissions of approximately $126, $0 and$2,945, respectively, to
Donaldson, Lufkin & Jenrette. For the fiscal years ended December 31, 1994,
December 31, 1995 and December 31, 1996, commissions paid to Donaldson, Lufkin &
Jenrette represented approximately 100%, 0% and 49%,respectively, of the total
amount of brokerage commissions paid in such period and which were paid on
transactions that represented 3%, 0% and 53%respectively, of the aggregate
dollar amount of transactions that incurred commissions paid by the Trust during
such period.]
<PAGE>
For the fiscal years ended December 31, 1994 1995, 1996 and 1997, the Funds
paid the following brokerage commissions*:
<TABLE>
<CAPTION>
1997
--------------------------------------------------
Amount Paid for Aggregate
Brokerage Brokerage and Transaction
Fund Commissions Research Amount
- ---- ------------ ----------------- -----------
<S> <C> <C> <C>
Money Market Fund $0 $0 $0
Short Term High Quality Bond Fund $__ $0 $__
U.S. Government Fund $__ $0 $__
Corporate Income Fund $0 $0 $0
Growth and Income Fund $__ $0 $__
Growth Fund $__ $0 $__
Emerging Growth Fund $__ $0 $__
International Growth Fund $__ $0 $__
Total for Trust $__ $0 $__
Amount Paid to
Affiliated
Broker-Dealers $__ $0 $__
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------
Amount Paid for Aggregate
Brokerage Brokerage and Transaction
Fund Commissions Research Amount
- ---- ----------- ---------------- ------------
<S> <C> <C> <C>
Money Market Fund $0 $0 $0
Short Term High Quality Bond Fund $3,514 $0 $20,845,613
Short Term Global Government Fund $1,000 $0 $49,500
U.S. Government Fund $9,844 $0 $206,916,397
Corporate Income Fund $0 $0 $0
Growth and Income Fund $106,187 $0 $78,909,538
Growth Fund $215,458 $0 $226,603,698
Emerging Growth Fund $79,295 $0 $48,481,530
International Growth Fund $345,365 $0 $99,133,129
Total for Trust $760,663 $0 $680,939,405
Amount Paid to
Affiliated
Broker-Dealers $6,031 $0 $3,405,755
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------------------
Amount Paid for Aggregate
Brokerage Brokerage and Transaction
Fund Commissions Research Amount
- ---- ------------ ----------------- ------------
<S> <C> <C> <C>
Global Money Fund $0 $0 $0
Short Term High Quality Bond Fund $2,332 $0 $164,272
Short Term Global Government Fund $0 $0 $0
U.S. Government Fund $2,430 $0 $75,222,018
Corporate Income Fund $0 $0 $0
Growth and Income Fund $108,464 $0 $61,223,495
Growth Fund $283,404 $0 $1,281,740,556
Emerging Growth Fund $114,232 $0 $372,208,173
International Growth Fund $164,195 $0 $535,107,481
Total for Trust $675,057
Amount Paid to $0
Affiliated
Broker-Dealers
</TABLE>
<TABLE>
<CAPTION>
1994
---------------------------------------------------
Amount Paid for Aggregate
Brokerage Brokerage and Transaction
Fund Commissions Research Amount
- ---- ------------ ----------------- ------------
<S> <C> <C> <C>
Global Money Fund $0 $0 $0
Short Term High Quality Bond Fund $0 $0 $0
Short Term Global Government Fund $0 $0 $0
U.S. Government Fund $0 $0 $0
Corporate Income Fund $0 $0 $0
Growth and Income Fund $38,101 $0 $29,470,747
Growth Fund $183,469 $0 $791,695,782
Emerging Growth Fund $58,799 $0 $120,185,937
International Growth Fund $195,231 $0 $50,945,896
Total for Trust $475,600
Amount Paid to
Affiliated $126
Broker-Dealers
</TABLE>
- --------------------
* The Money Market, Short Term High Quality Bond, U.S. Government,
Corporate Income, Growth and Income, Growth, Emerging Growth and International
Growth Funds commenced operations on May 10, 1993, January 12, 1994, May 12,
1993, May 6, 1993, May 7, 1993, January 12, 1994, May 7, 1993, January 12, 1994
and May 7, 1993, respectively.
The Trust is required to identify any securities of its "regular
brokers or dealers" (as such term is defined in the 1940 Act) which the Trust
has acquired during its most recent fiscal year. As of December 31, 1996, the
Growth and Income Fund held common stock of Dean Witter, Discover & Company
valued at $669,125.
<PAGE>
PURCHASE AND PRICING OF SHARES
Shares in the Portfolios and the Funds are purchased and redeemed and net
asset value is calculated in the manner described in the Prospectus.
REDEMPTIONS
The right of redemption of shares of a Portfolio or Fund may be suspended or
the date of payment postponed (1) for any periods during which the NYSE is
closed (other than for customary weekend and holiday closings), (2) when trading
in the markets the Fund (or underlying Fund of a Portfolio) normally utilizes is
restricted, or an emergency, as defined by the rules and regulations of the SEC,
exists making disposal of the Fund's investments or determination of its net
asset value not reasonably practicable or (3) for such other periods as the SEC
by order may permit for protection of the Fund's shareholders.
DISTRIBUTIONS IN KIND. If the Board of Trustees determines that it would be
detrimental to the best interests of the shareholders of a Portfolio or Fund to
make a redemption payment wholly in cash, the Trust may pay any portion of a
redemption by distribution in kind of portfolio securities in lieu of cash.
Securities issued in a distribution in kind will be readily marketable, although
shareholders receiving distributions in kind may incur brokerage commissions
when subsequently redeeming shares of those securities.
NET ASSET VALUE
The Trust will not calculate the net asset value of the Funds and Portfolios
on certain holidays. On those days, securities held by a Fund may nevertheless
be actively traded, and the value of the Fund's shares could be significantly
affected.
The assets of each Fund and Portfolio are valued according to generally
accepted accounting principles and applicable law. Generally, a Fund's or
Portfolio's investments are valued at market value or, in the absence of a
market value with respect to any portfolio securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees:
o A security that is primarily traded on a U.S. or foreign exchange
(including securities traded through the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ")) is valued at the last
sale price on that exchange or, if there were no sales during the day, at
the current quoted bid price.
o Securities that are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, except that when an occurrence subsequent to the time
a value was so established is determined by the Trust's Board of Trustees or
its delegates.
o Over-the-counter securities that are not reported on the NASDAQ System
and securities listed or traded on certain foreign exchanges whose
operations are similar to the U.S. over-the-counter market are valued on the
basis of the bid price at the close of business on each day.
o An option is generally valued at the last sale price or, in the absence
of a last sale price, the last offer price.
o Investments in U.S. Government securities (other than short-term
securities) are valued at the average of the quoted bid and asked prices in
the over-the-counter market.
o Short-term investments that mature in 60 days or less are valued at
amortized cost when the Board of Trustees determines that this constitutes
fair value; assets of the Money Market Fund are also valued at amortized
cost.
o The value of a futures contract equals the unrealized gain or loss on
the contract, which is determined by marking the contract to the current
settlement price for a like contract acquired on the day on which the
futures contract is being valued. A settlement price may not be used if the
market makes a limited move with respect
19
<PAGE>
to the security or index underlying the futures contract. In such event, the
futures contract will be valued at a fair market price to be determined by
or under the direction of the Trust's Board of Trustees.
o Shares of open-end investment companies are valued at the net asset
value per share last or, contemporaneously calculated.
In carrying out the Board's valuation policies, First Data Investor Services
Group, Inc. ("FDISG"), a wholly-owned subsidiary of First Data Corporation, as
sub-administrator, may consult with one or more independent pricing services
("Pricing Services") retained by the Trust. Debt securities of U.S. issuers
(other than U.S. Government securities and short-term investments) are valued by
FDISG, as sub-administrator, after consultation with the Pricing Service. The
procedures of the Pricing Service are reviewed periodically by the officers of
the Trust under the general supervision and responsibility of the Board of
Trustees.
VALUATION OF THE MONEY MARKET FUND. The valuation of the portfolio securities
of the Money Market Fund is based upon amortized costs, which does not take into
account unrealized capital gains or losses. Amortized cost valuation involves
initially valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund would receive if it sold the instrument.
The use by the Money Market Fund of the amortized cost method of valuing its
respective portfolio securities is permitted by a rule adopted by the SEC.
Under this rule, the Money Market Fund must maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of thirteen months or less and invest only in securities
determined by the Board of Trustees of the Trust to present minimal credit risks
and meet certain rating criteria described in the Prospectus above. Pursuant to
the rule, the Board of Trustees also has established procedures designed to
stabilize, to the extent reasonably possible, the Fund's price per share as
computed for the purpose of sales and redemptions at $1.00. Such procedures
include review of the Fund's portfolio holdings by the Board of Trustees, at
such intervals as it may deem appropriate, to determine whether the Fund's net
asset values calculated by using available market quotations or market
equivalents deviates from $1.00 per share based on amortized cost.
The rule also provides that the extent of any deviation between the Fund's net
asset values based upon available market quotations or market equivalents and
the $1.00 per share net asset values based on amortized cost must be examined by
the Board of Trustees. In the event the Board of Trustees determines that a
deviation exists which may result in material dilution or other unfair results
to investors or existing shareholders, pursuant to the rule the Board of
Trustees must cause the Trust to take such corrective action as the Board deems
necessary and appropriate including: selling portfolio instruments prior to
maturity to realize capital gains or losses or shorten average portfolio
maturity; withholding dividends or paying distributions from capital or capital
gains; redeeming shares in kind; or establishing a net asset value per share by
using available market quotations.
PERFORMANCE
From time to time, the Trust may quote the performance of a Portfolio or Fund
in terms of yield, effective yield, actual distributions, total return or
capital appreciation in reports or other communications to shareholders or in
advertising material. Fund or Portfolio performance will be advertised only if
accompanied by the comparable performance for the corresponding separate
account.
ANNUITY CONTRACT OWNER VALUES WILL DEPEND NOT ONLY ON THE PERFORMANCE OF THE
FUNDS OR PORTFOLIOS, BUT ALSO ON THE MORTALITY AND EXPENSE RISK CHARGES, THE
ADMINISTRATIVE CHARGES, AND ANY APPLICABLE SALES CHARGES UNDER THE ANNUITY
CONTRACTS. THE TOTAL RETURNS OF THE FUNDS REFLECT THE AGREEMENT OF THE FUNDS'
INVESTMENT ADVISER TO VOLUNTARILY WAIVE FEES AND BEAR CERTAIN EXPENSES. TOTAL
RETURNS WOULD HAVE BEEN LOWER IF THESE FEES AND EXPENSES HAD NOT BEEN WAIVED.
MONEY MARKET FUND YIELD INFORMATION
20
<PAGE>
The "yield" of the Money Market Fund refers to the income generated by an
investment in the Fund over a 7-day period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The "effective yield" is calculated similarly but, when annualized, the income
earned by an investment in a Fund is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment.
The yield for the Money Market Fund is computed by: (1) determining the net
change, exclusive of capital changes, in the value of a hypothetical pre-
existing account in the Fund having a balance of one share at the beginning of a
seven calendar day period for which yield is to be quoted, (2) subtracting a
hypothetical charge reflecting deductions from shareholder accounts, (3)
dividing the net change by the value of the account at the beginning of the
period to obtain the base period return, and (4) annualizing the results (i.e.,
multiplying the base period return by 365/7). The net change in the value of
the account reflects the value of additional share purchased with dividends
declared on the original share and any such additional shares and income
received or accrued but not declared as a dividend, but does not include
realized gains and losses or unrealized appreciation or depreciation. In
addition, the Money Market Fund may calculate a compounded effective annualized
yield by adding 1 to the base period return (calculated as described above),
raising the sum to a power equal to 365/7 and subtracting 1.
Based upon the foregoing calculation, for the 7-day period ended December 31,
1997, the yield for the Money Market Fund was ____%, and the effective yield for
the Money Market Fund for the same period was ____%.
The Money Market Fund yield may be compared with the yields of other
investments. It should not, however, be compared to the return on fixed rate
investments which guarantee rates of interest for specified periods, such as the
interest guarantees in an annuity contract or bank deposits.
TOTAL RETURN INFORMATION
From time to time, a Fund, other than the Money Market Fund, or Portfolio may
advertise its "average annual total return" or "aggregate total return" over
various periods of time. Such average annual total return figures show the
average percentage change in value of an investment in the Fund or Portfoilo
from the beginning date of the measuring period to the end of the measuring
period. These figures reflect changes in the price of the Fund's or Portfolio's
shares and assume that any income dividends and/or capital gains distributions
made by the Fund or Portfolio during the period were reinvested in shares of
that Fund or Portfolio. Figures will be given for recent one-, five- and ten-
year periods (if applicable), and may be given for other periods as well (such
as from commencement of the Fund's or Portfolio's operations, or on a year-by-
year basis).
When considering "average" total return figures for periods longer than one
year, it is important to note that the relevant Fund's or Portfolio's annual
total return for any one year in the period might have been greater or less than
the average for the entire period. A Fund or Portfoilo may also use "aggregate"
total return figures for various periods representing the cumulative change in
value of an investment in the Fund or Portfolio for a specific period (again
reflecting changes in the Fund's or Portfolio's share prices and assuming
reinvestment of dividends and distributions). Aggregate total returns may be
shown by means of schedules, charts or graphs and may indicate subtotals of the
various components of total return (i.e., change in value of initial investment,
income dividends and capital gains distributions).
Average annual total return is computed according to a formula prescribed by
the SEC. The formula can be expressed as follows: P(1 + T)n = ERV, where P = a
hypothetical initial payment of $1,000; T = average annual total return; n =
number of years; and ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the designated time period as of the end of
such period or the life of the fund. The formula for calculating aggregate
total return can be expressed as (ERV/P)-1.
21
<PAGE>
Based on the foregoing, the average annual total returns for the fiscal year
ended December 31, 1997 and from inception through December 31, 1997 and the
aggregate total returns for the Funds from inception through December 31, 1997,
were as follows*:
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN AVERAGE AGGREGATE
FOR FISCAL ANNUAL TOTAL TOTAL RETURN
YEAR ENDED RETURN SINCE SINCE
FUND* 12/31/97 INCEPTION INCEPTION
- -------------------- -------- --------- ---------
<S> <C> <C> <C>
Global Money Fund ____ _____ ____
</TABLE>
- -----------
* As of December 31, 1997, the Bond & Stock and Northwest Funds had not yet
commenced operations.
(a) Commenced operations on May 10, 1993.
The total returns shown for the Funds are not an estimate or guarantee of
future performance and do not take into account charges at the annuity and
separate account level.
The performance of any or all of the Funds or Portfolios may be compared in
advertisements and sales literature to the performance of other variable annuity
issuers in general and to the performance of particular types of variable
annuities investing in mutual funds, or series of mutual funds, with investment
objectives similar to each of the Funds. Lipper Analytical Services, Inc.
("Lipper") and the Variable Annuity Research and Data Service ("VARDS(R)") are
independent services which monitor and rank the performance of variable annuity
issuers in each of the major categories of investment objectives on an industry-
wide basis. Lipper's rankings include variable life issuers as well as variable
annuity issuers. VARDS(R) rankings compare only variable annuity issuers. The
performance analyses prepared by Lipper and VARDS(R) rank such issuers on the
basis of total return, assuming reinvestment of dividends and distributions, but
do not take sales charges, redemption fees or certain expense deductions at the
separate account level into consideration. In addition, VARDS(R) prepares risk
adjusted rankings, which consider the effects of market risk on total return
performance.
In addition, performance of each Fund or Portfolio may be compared in
advertisements and sales literature to the following benchmarks: (1) the
Standard & Poor's 500 Index, which represents an unmanaged weighted index of 500
industrial, transportation, utility and financial companies that represent
approximately 80% of the market capitalization of the U.S. equity markets,
widely regarded by investors as representative of the stock market; (2) the
Consumer Price Index, published by the U.S. Bureau of Labor Statistics, a
statistical measure of change, over time, in the prices of goods and services in
major expenditure groups and generally considered to be a measure of inflation;
(3) the Lehman Brothers Mutual Fund Short World Multi-Market Index, which
includes all debt instruments of the United States and 12 major countries
(determined by Lehman) denominated in dollars with maturities of one to five
years; (4) the Lehman Brothers Mutual Fund U.S. Mortgage Index, which includes
all agency mortgage-backed securities; (5) the Lehman Brothers Mutual Fund Debt
BBB-Rated Index, which represents all investment-grade corporate debt
securities; (6) the Morgan Stanley Capital International EAFE (Europe,
Australia, Far East) Index, which includes 1050 companies representing the stock
markets of Europe, Australia, New Zealand and the Far East; and (7) the U.S.
Government 90-Day Treasury Bill rate. Generally, an index represents the market
value of an unmanaged group of securities, regarded by investors as
representative of a particular market. An index does not reflect any asset-based
charges for investment management or other expenses. The performance information
may also include evaluations of the funds published by nationally recognized
ranking services and by financial publications that are nationally recognized,
such as Business Week, Forbes, Institutional Investor, Money and The Wall Street
Journal.
TAXES
The following discussion of federal income tax consequences is based on the
Code and the regulations issued thereunder as in effect on the date of this SAI.
New legislation, as well as administrative changes or court decisions,
22
<PAGE>
may significantly change the conclusions expressed herein and may have a
retroactive effect with respect to the transactions contemplated herein.
Each of the Funds and Portfolios intends to qualify as a "regulated investment
company" ("RIC") under Subchapter M of the Code. A Fund or Portfolio that is a
RIC and distributes to its shareholders at least 90% of its taxable net
investment income (including, for this purpose, its net realized short-term
capital gains) and 90% of its tax-exempt interest income (reduced by certain
expenses), will not be liable for federal income taxes to the extent its taxable
net investment income and its net realized long-term and short-term capital
gains, if any, are distributed to its shareholders.
A number of technical rules are prescribed for computing net investment income
and net capital gains. For example, the Fund or Portfolio is generally treated
as receiving dividends on the ex-dividend date. Also, certain foreign currency
losses and capital losses arising after October 31 of a given year may be
treated as if they arise on the first day of the next taxable year.
In order to qualify as a RIC under the Code, in addition to satisfying the
distribution requirement described above, each Fund must (a) derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities, or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures, and forward contracts; (b)
derive less than 30% of its gross income each taxable year from the sale or
other disposition of the following items if held for less than three months: (i)
stock or securities, (ii) options, futures or forward contracts (other than
options futures, or forward contracts on foreign currencies), and (iii) foreign
currencies (or options, futures, or forward contracts on foreign currencies)
that are not directly related to the company's business of investing in stock or
securities; and (c) diversify its holdings so that, at the end of each fiscal
quarter of the Fund's taxable year, (i) at least 50% of the market value of the
Fund's assets is represented by cash and cash items, U.S. Government Securities,
securities of other Registered Investment Companies ("RICs"), and other
securities, with such other securities limited, in respect of any one issuer, to
an amount that does not exceed 10% of the voting securities of such issuer or 5%
of the value of the Fund's total assets; and (ii) not more than 25% of the value
of its assets is invested in the securities (other than U.S. Government
Securities and securities of other RICs) of any one issuer or two or more
issuers which the Fund controls and which are engaged in the same, similar or
related trades or businesses.
If a Fund or Portfolio fails to qualify as a RIC for any year, all of its
income will be subject to tax at corporate rates, and its distributions
(including capital gain distributions) will be taxable as ordinary income
dividends to its shareholders to the extent of the Fund's or Portfolio's current
and accumulated earnings and profits.
In addition to qualifying under subchapter M by meeting the requirements
described above, each Fund and Portfolio intends to qualify as diversified under
Subchapter L so that non-qualified variable annuity contracts funded by the
Trust will not fail to qualify as annuities for tax purposes. In general, for a
Fund or Portfolio to meet the investment diversification requirements of
Subchapter L of the Code, Treasury regulation 1.817-5 requires that no more than
55% of the total value of the assets of the Fund or Portfolio be represented by
any one investment, no more than 70% by any two investments, no more than 80% by
three investments and no more than 90% by four investments. Generally, for
purposes of the regulations, all securities of the same issuer are treated as
one investment. In the context of U.S. Government securities (including any
security that is issued, guaranteed or insured by the United States or an
instrumentality of the United States), each U.S. Government agency or
instrumentality is treated as a separate issuer. In the context of shares of
registered investment companies (including shares of the Trust), each series,
fund or portfolio is treated as a separate issuer. Compliance with the
Subchapter L regulations is tested on the last day of each calendar year
quarter.
Notwithstanding the distribution requirement described above, which only
requires a Fund or Portfolio to distribute at least 90% of its annual investment
company taxable income and does not require any minimum distribution of net
capital gain, a regulated investment company is generally subject to a
nondeductible 4% excise tax to the extent it fails to distribute by the end of
any calendar year at least 98% of its ordinary income for that year and 98% of
its capital gain net income for the one-year period ending on October 31 of that
year, plus certain other amounts.
The excise tax is inapplicable to any RIC all of the shareholders of which are
either tax-exempt pension trusts or separate accounts of life insurance
companies funding variable contracts. Although each Fund and Portfolio believes
that it is not
23
<PAGE>
subject to the excise tax, each Fund and Portfolio intends to make the
distributions required to avoid the imposition of the tax, provided such
payments and distributions are determined to be in the best interest of such
Fund's or Portfolio's shareholders.
Dividends declared by a Fund in October, November, or December of any year and
payable to shareholders of record on a date in such month will be deemed to have
been paid by the Fund or Portfolio and received by the shareholders on December
31 of that year if paid by the Fund or Portfolio at any time during the
following January.
24
<PAGE>
DESCRIPTION OF S&P, MOODY'S, DUFF AND FITCH RATINGS
DESCRIPTION OF S&P CORPORATE BOND RATINGS
AAA-Debt rated AAA has the highest rating assigned by S&P. 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 debt 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 adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB-Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC or C-Debt rated BB, B, CCC, CC or C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
C 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.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions that could
lead to inadequate capacity to meet timely interest and principal payments.
The 'BB' rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied 'BBB-' rating.
B Debt rate 'B' has greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions would likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category
also is used for debt subordinated to senior debt that is assigned an actual
or implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a current identifiable vulnerability to default,
and is dependent on favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of principal. In the event
of adverse business, financial, or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The 'CCC' rating
category also is used for debt subordinated to senior debt that is assigned
an actual or implied 'B' or 'B-' rating.
CC The rating 'CC' is typically applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC' rating.
C The rating 'C' is typically applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating
may be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
C1-Debt rated C1 is reserved for income bonds on which no interest is being
paid.
D-Debt is rated D when the issue is in payment default, or the obligor has
filed for bankruptcy. The D rating is used when interest or principal
payments are not made on the date due, even if the applicable grace period
has not expired, unless S&P believes that such payments will be made during
such grace period.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
25
<PAGE>
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa-Bonds which are rated Aaa are judged to be of 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 by an exceptionally stable
margin and principal is secure. While 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 issues.
Aa-Bonds which are 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 securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
A-Bonds which are 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 some time in the future.
Baa-Bonds which are 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 danger 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 class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
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 security ranks in the lower end of its generic rating
category.
DESCRIPTION OF DUFF CORPORATE BOND RATINGS
AAA-Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA-High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic conditions.
A-Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
26
<PAGE>
BBB-Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according
to industry conditions or company fortunes.
BB- Overall quality may move up or down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not be
met when due.
B Financial protection factors will fluctuate widely according to economic
cycles, industry conditions and/or company fortunes.
B- Potential exists for frequent changes in the rating within this category
or into a higher or lower rating grade.
CCC Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
DESCRIPTION OF FITCH CORPORATE BOND RATINGS
AAA-Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA-Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A-Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and to repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB-Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and to repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
27
<PAGE>
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D
Bonds are in default on interest and/or principal payments. Such bonds are
extremely speculative and should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of the obligor. 'DDD'
represents the highest potential for recovery on these bonds, and 'D'
represents the lowest potential for recovery.
PLUS (+) MINUS (-)
Plus and minus signs are used with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs,
however, are not used in the DDD, DD, or D categories.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Debt determined to possess extremely strong safety
characteristics is denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Debt carrying this designation has an adequate capacity for timely
payment. It is, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B Debt rated 'B' is regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the obligation is in payment default.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
- -- Leading market positions in well established industries. -- High rates of
return on funds employed. -- Conservative capitalization structure with moderate
reliance on debt and ample asset protection. -- Broad margins in earnings
coverage of fixed financial charges and high internal cash generation. -- Well-
established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME Issuers rate Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF DUFF'S COMMERCIAL PAPER RATINGS
28
<PAGE>
Duff 1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
GOOD GRADE
Duff 2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
SATISFACTORY GRADE
Duff 3 Satisfactory liquidity and other protection factors qualify issue as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
NON-INVESTMENT GRADE
Duff 4 Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
DEFAULT
Duff 5 Issuer failed to meet scheduled principal and/or interest payments.
DESCRIPTION OF FITCH'S COMMERCIAL PAPER RATINGS
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
'F-1+'.
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned 'F-1+' and 'F-1' ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
however, near-term adverse changes could cause these securities to be rated
below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual or imminent payment
default.
LOC The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
29
<PAGE>
THE SIERRA VARIABLE TRUST
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Financial Highlights for the fiscal year ended December 31, 1997.*
Financial statements as of December 31, 1997.*
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Financial Highlights
Portfolio of Investments
Notes to Financial Statements
* To be filed by amendment
(b) Exhibits:
* Filed herewith.
1(a) Agreement and Declaration of Trust, dated January 29, 1993,
originally filed as exhibit to Registration Statement on Form N-
1A February 2, 1993, is incorporated by reference to Post-
Effective Amendment No. 7 filed on February 28, 1997.
1(b)-1 Amendment No. 1 to the Trust's Agreement and Declaration of
Trust, dated April 27, 1993, originally filed as an exhibit to
Post-Effective Amendment No. 1 October 13, 1993, is incorporated
by reference to Post-Effective Amendment No. 7 filed on February
28, 1997.
1(b)-2 Amendment No. 2 to the Trust's Agreement and Declaration of
Trust, dated September 22, 1993, originally filed as an
exhibit to Post-Effective Amendment No. 1 October 13, 1993,
is incorporated by reference to Post-Effective Amendment No.
7 filed on February 28, 1997.
1(c)-1 Not applicable.
2 By-Laws of the Trust, originally filed as exhibit to
Registration Statement on Form N-1A February 2, 1993, is
incorporated by reference to Post-Effective Amendment No. 7
filed on February 28, 1997.
3 Not Applicable.
4 Not Applicable.
5(a)-1 Form of Management Agreement, dated as of January __, 1998,
between the Trust and Composite Research & Management Co.
("Composite").*
<PAGE>
5(a)-8 Not applicable.
5(b)-1 Form of Sub-Adviser Agreement, dated as of January __, 1998
between Composite and Janus Capital Corporation ("Janus")
with respect to the Growth Fund and the Emerging Growth
Fund.*
5(b)-2 Form of Sub-Adviser Agreement, dated as of January __, 1998,
between Composite and Warburg, Pincus Counsellors, Inc.
("Warburg") with respect to the International Growth Fund.*
6(a) Form of Distribution Agreement, dated January __, 1998,
between the Trust and Composite Funds Distributor, Inc.*
6(b)-1 Participation Agreement, regarding Sierra Advantage among the
Trust, Composite, Composite Funds Distributor, Inc., American
General Life Insurance Company ("American General") and
American General Securities Incorporated ("American General
Securities"), dated as of January __, 1998 --- --- to be
filed by amendment.
8(a)-1 Custody Agreement, dated as of January 1, 1996, between the
Trust and Boston Safe Deposit & Trust Company is incorporated
by reference to Exhibit 8(a) of Post-Effective Amendment
No. 7 filed on February 28, 1997.
8(b) Form of Transfer Agent Contract, dated as of January __,
1998, between the Trust and Murphy Favre Securities Services,
Inc. ("Murphey Favre") --- --- to be filed by amendment.
9(a)-1 Form of Administration Agreement dated January __, 1998
between the Trust and Murphey Favre --- --- to be filed by
amendment.
10 Consent and Opinion of Counsel with Rule 24f-2 Notice filed
with the Securities and Exchange Commission on February 24,
1997.
11(a)-1 Powers of Attorney with respect to Registration Statements
and Amendments thereto signed by the following persons in
their capacities as Trustees and, where applicable, officers
of the Trust: David E. Anderson, Arthur H. Bernstein, F.
Edmond R. Davis, Alfred E. Osborne, Jr., and Keith B. Pipes,
originally filed as an exhibit to Pre-Effective Amendment No.
1 on March 29, 1993, are incorporated by reference to Post-
Effective Amendment No. 7 on February 28, 1997.
11(a)-2 Powers of Attorney with respect to Registration Statements
and Amendments thereto signed by the following persons in
their capacities as Trustees of the Trust: William G. Papesh
and Michael K. Murphy.*
<PAGE>
11(d) Indemnification Agreement, dated as of May 3, 1993, among
Sierra Advisors, Sierra Services, American General, and
American General Securities, was filed as an exhibit to Post-
Effective Amendment No. 1 on October 13, 1993.
12 Not Applicable.
13 Not Applicable.
14 Not Applicable.
15 Not Applicable.
16 Schedule for Computation of Performance Information -- to be
filed by amendment.
17 N/A
Item 25. Persons Controlled by or Under Common Control with Registrant
The Trust is a business trust organized under the laws of the
Commonwealth of Massachusetts. Separate Account D of American General Life
Insurance Company is the sole shareholder of, and may be deemed to control, the
Trust. American General Life Insurance Company is a subsidiary of American
General Corporation.
The list of American General Corporation's active subsidiaries is
hereby incorporated by reference to Item 26 of the Form N-4 registration
statement of American General Life Insurance Company and its Separate Account D,
File Nos. 33-57730 and 811-2441.
The Registrant is operated under the supervision of Composite. Composite
is affiliated with Murphey Favre Securities Services, Inc., which serves as
transfer agent for the Registrant. An affiliate of Composite, Composite Funds
Distributor, Inc. serves as the principal underwriter and distributor for the
Registrant. Composite, Murphey Favre Securities Services, Inc. and Composite
Funds Distributor, Inc. serve in their same capacities for the four other
registered investment companies (constituting [36] portfolios).
Composite, Murphey Favre Securities Services, Inc. and Composite Funds
Distributor, Inc. are all wholly-owned subsidiaries of Washington Mutual, Inc.
and are all incorporated under the laws of the State of Washington.
Item 26. Number of Holders of Securities
Not Applicable.
Item 27. Indemnification
Article VIII of the Registrant's Agreement and Declaration of Trust
provides in relevant part:
The Trust shall indemnify each of its Trustees and officers (including
<PAGE>
persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest as
a shareholder, creditor or otherwise) (hereinafter referred to as a
"Covered Person") against all liabilities and expenses, including but
not limited to amounts paid in satisfaction of judgments, in compromise
or as fines and penalties, and counsel fees reasonably incurred by any
Covered Person in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, before any
court or administrative or legislative body, in which such Covered
Person may be or may have been involved as a party or otherwise or with
which such Covered Person may be or may have been threatened, while in
office or thereafter, by reason of being or having been such a Covered
Person except with respect to any matter as to which such Covered
Person shall have been finally adjudicated in any such action, suit or
other proceeding to be liable to the Trust or its Shareholders by
reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Covered
Person's office. Expenses, including counsel fees so incurred by any
such Covered Person (but excluding amounts paid in satisfaction of
judgments, in compromise or as fines or penalties), shall be paid from
time to time by the Trust in advance of the final disposition of any
such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such Covered Person to repay amounts so paid to the Trust if
it is ultimately determined that indemnification of such expenses is
not authorized under this Article; provided, however, that either (a)
such Covered Person shall have provided appropriate security for such
undertaking, (b) the Trust shall be insured against losses arising from
any such advance payments or (c) either a majority of the disinterested
Trustees acting on the matter (provided that a majority of the
disinterested Trustees then in office act on the matter), or
independent legal counsel in a written opinion, shall have determined,
based upon a review of readily available facts (as opposed to a full
trial type inquiry) that there is reason to believe that such Covered
Person will be found entitled to indemnification under this Article.
As to any matter disposed of (whether by a compromise payment, pursuant
to a consent decree or otherwise) without an adjudication by a court,
or by any other body before which the proceeding was brought, that such
Covered Person is liable to the Trust or its Shareholders by reason of
wilful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office,
indemnification shall be provided if (a) approved, after notice that it
involves such indemnification, by at least a majority of the
disinterested Trustees acting on the matter (provided that a majority
of the disinterested Trustees then in office act on the matter) upon a
determination, based upon a review of readily available facts (as
opposed to a full trial type inquiry) that such Covered Person is not
liable to the Trust or its Shareholders by reasons of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office, or (b) there has
been obtained an opinion in writing of independent legal counsel, based
upon a review of readily available facts (as opposed to a full trial
<PAGE>
type inquiry) to the effect that such indemnification would not protect
such Person against any liability to the Trust to which he or she would
otherwise be subject by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office. Any approval pursuant to this Section shall not prevent
the recovery from any Covered Person of any amount paid to such Covered
Person in accordance with this Section as indemnification if such
Covered Person is subsequently adjudicated by a court of competent
jurisdiction to have been liable to the Trust or its Shareholders by
reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Covered
Person's office.
Item 28(a). Business and Other Connections of Investment Adviser --
Registrant's Investment Adviser is Composite, a wholly-owned
subsidiary of Washington Mutual, Inc., a Washington corporation. Composite
serves in that capacity for other registered investment companies (constituting
[__] portfolios).
Item 29. Principal Underwriter
(a) Composite Funds Distributor, Inc., the Distributor of the Trust,
currently acts as distributor for The Sierra Trust Funds.
(c) Not Applicable.
Item 30. Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 3(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Trust, 9301 Corbin Avenue,
Northridge, CA and 601 West Main Avenue, Suite 801, Spokane, Washington 99201.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
Shareholders, upon request and without charge.
<PAGE>
**********
NOTICE
**********
A copy of the Agreement and Declaration of Trust of The Sierra Variable
Trust (the "Trust") is on file with the Secretary of State of the Commonwealth
of Massachusetts and notice is hereby given that this Registration Statement has
been executed on behalf of the Trust by an officer of the Trust as an officer
and by its Trustees as trustees and not individually and the obligations of or
arising out of this Registration Statement are not binding upon any of the
Trustees, officers or shareholders individually but are binding only upon the
assets and property of the Trust.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the
"1933 Act"), and the Investment Company Act of 1940, as amended, the Registrant
has duly caused this Post-Effective Amendment No. 12 to the Registrant's
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Northridge, in the State of California on the
30th of December, 1997.
THE SIERRA VARIABLE TRUST
By: Keith B. Pipes
-----------------------------------
Keith B. Pipes
President
Pursuant to the requirements of the 1933 Act, as amended, this Post-
Effective Amendment No. 12 has been signed below by the following persons in
their capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
KEITH B. PIPES President December 30, 1997
- -------------------------------------
Keith B. Pipes
(Principal Executive Officer)
CRAIG M. MILLER Treasurer and Chief December 30, 1997
- ------------------------------------- Financial Officer
Craig M. Miller*
(Principal Financial and Accounting
Officer)
DAVID E. ANDERSON Trustee December 30, 1997
- -------------------------------------
David E. Anderson*
ARTHUR H. BERNSTEIN Trustee December 30, 1997
- -------------------------------------
Arthur H. Bernstein*
EDMOND R. DAVIS Trustee December 30, 1997
- -------------------------------------
Edmond R. Davis*
JOHN W. ENGLISH Trustee December 30, 1997
- -------------------------------------
John W. English*
ALFRED E. OSBORNE, JR. PH.D. Trustee December 30, 1997
- -------------------------------------
Alfred E. Osborne, Jr., Ph.D.*
WILLIAM G. PAPESH Trustee December 30, 1997
- -------------------------------------
William G. Papesh
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Trustee December 30, 1997
- -------------------------------------
Wayne L. Attwood, MD
Trustee December 30, 1997
- -------------------------------------
Kristianne Blake
Trustee December 30, 1997
- -------------------------------------
Anne V. Farrell
MICHAEL K. MURPHY Trustee December 30, 1997
- -------------------------------------
Michael K. Murphy**
Trustee December 30, 1997
- -------------------------------------
Daniel L. Pavelich
Trustee December 30, 1997
- -------------------------------------
Jay Rockey
Trustee December 30, 1997
- -------------------------------------
Richard C. Yancey
*By: KEITH B. PIPES
---------------------------------
Keith B. Pipes
Attorney-in-Fact
**By: WILLIAM G. PAPESH
--------------------------------
William G. Papesh
Attorney-in-Fact
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
5(a)-1 Form of Management Agreement, dated as of January __, 1998, between
the Trust and Composite Research & Management Co. ("Composite").
5(b)-1 Form of Sub-Adviser Agreement, dated as of January __, 1998 between
Composite and Janus Capital Corporation ("Janus") with respect to the
Growth Fund and the Emerging Growth Fund.
5(b)-2 Form of Sub-Adviser Agreement, dated as of January __, 1998, between
Composite and Warburg, Pincus Counsellors, Inc. ("Warburg") with
respect to the International Growth Fund.
6(a) Form of Distribution Agreement, dated January __, 1998, between the
Trust and Composite Funds Distributor, Inc.
11(a)-2 Powers of Attorney with respect to Registration Statements and
Amendments thereto signed by the following persons in their
capacities as Trustees of the Trust: William G. Papesh and Michael
K. Murphy.
<PAGE>
THE SIERRA VARIABLE TRUST
INVESTMENT MANAGEMENT AGREEMENT
INVESTMENT MANAGEMENT AGREEMENT (this "Agreement"), dated January __, 1998,
between The Sierra Variable Trust, a Massachusetts business trust, (the
"Trust"), on behalf of each of its series which are listed on the signature page
of this Agreement (each referred to herein as a "Fund" and collectively the
"Funds") and Composite Research & Management Co., a Washington corporation (the
"Manager").
W I T N E S S E T H
-------------------
WHEREAS, the Trust is an open-end series management investment company,
registered under the Investment Company Act of 1940 (the "1940 Act"); and
WHEREAS, the Trust, desires to retain the Manager to render investment
management services to each Fund, and the Manager is willing to render such
services;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereto agree as follows:
1. Appointment. The Trust hereby appoints the Manager to act as investment
manager to each Fund for the period and on the terms set forth in this
Agreement. The Manager accepts such appointment and agrees to render the
services herein described, for the compensation herein provided.
2. Management. Subject to the supervision of the Board of Trustees of the
Trust, the Manager shall manage the investment operations of each Fund and the
composition of each Fund's portfolio, including the purchase, retention and
disposition of securities therefor, in accordance with such Fund's investment
objectives, policies and restrictions as stated in the Prospectus and Statement
of Additional Information (as such terms are hereinafter defined) and
resolutions of the Trust's Board of Trustees and subject to the following
understandings:
(a) The Manager shall provide supervision of each Fund's investments,
furnish a continuous investment program for each Fund's portfolio and
determine from time to time what securities will be purchased, retained, or
sold by each Fund, and what portion of the assets will be invested or held
as cash.
(b) The Manager, in the performance of its duties and obligations under
this Agreement, shall act in conformity with the Agreement and Declaration
of Trust of the Trust and the investment policies of the Funds as
determined by the Board of Trustees of the Trust.
(c) The Manager shall determine the securities to be purchased or sold by
each Fund and shall place orders for the purchase and sale of portfolio
securities, pursuant to its determinations, with brokers or dealers
selected by the Manager. In executing
<PAGE>
portfolio transactions and selecting brokers or dealers, the Manager shall
use its best efforts to seek on behalf of each Fund the best overall terms
available. In assessing the best overall terms available for any
transaction, the Manager may consider all factors it deems relevant,
including the breadth of the market in the security, the price of the
security, the size of the transaction, the timing of the transaction, the
reputation, financial condition, experience, and execution capability of a
broker or dealer, the amount of commission, and the value of any brokerage
and research services (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934), provided by a broker or dealer. The
Manager is authorized to pay to a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for a Fund which is in excess of the amount of commission
another broker or dealer would have charged for effecting the transaction
if the Manager determines in good faith that such commission was reasonable
in relation to the value of the brokerage and research services provided by
such broker or dealer, viewed in terms of that particular transaction or in
terms of the overall responsibilities of the Manager to the Fund and/or
other accounts over which the Manager exercises investment discretion.
(d) On occasions when the Manager deems the purchase or sale of a security
to be in the best interest of a Fund as well as other fiduciary accounts
for which it has investment responsibility, the Manager, to the extent
permitted by applicable laws and regulations, may aggregate the securities
to be so sold or purchased in order to obtain the best execution, most
favorable net price or lower brokerage commissions.
(e) Subject to the provisions of the Agreement and Declaration of Trust of
the Trust and the 1940 Act, the Manager, at its expense, may select and
contract with one or more investment sub-advisers (the "sub-adviser") for
each Fund to perform some or all of the services for which it is
responsible pursuant to this Section 2. The Manager shall be solely
responsible for the compensation of any sub-adviser of a Fund for its
services to such Fund. The Manager may terminate the services of any sub-
adviser at any time in its sole discretion, and shall, at such time, assume
the responsibilities of such sub-adviser unless and until a successor sub-
adviser is selected. To the extent that more than one sub-adviser is
selected, the Manager shall, in its sole discretion, determine the amount
of the Fund's assets allocated to each such sub-adviser.
3. Services Not Exclusive. The investment management services rendered by the
Manager hereunder to the Funds are not to be deemed exclusive, and the Manager
shall have the right to render similar services to others, including, without
limitation, other investment companies.
4. Expenses. During the term of this Agreement, the Manager shall pay all
expenses incurred by it in connection with its activities under this Agreement
including the salaries and expenses of any of the officers or employees of the
Manager who act as officers, Trustees or employees of the Trust but excluding
the cost of securities purchased for the Funds and the amount of any brokerage
fees and commissions incurred in executing portfolio transactions for the Funds,
and shall provide the Funds with suitable office space. Other expenses to be
2
<PAGE>
incurred in the operation of the Funds (other than those borne by any third
party), including without limitation, taxes, interest, brokerage fees and
commissions, fees of Trustees who are not officers, directors, or employees of
the Manager, federal registration fees and state Blue Sky qualification fees,
administration fees, bookkeeping, charges of custodians, transfer and dividend
disbursing agents' fees, certain insurance premiums, industry association fees,
outside auditing and legal expenses, costs of maintaining the Funds' or the
Trust's existence, costs of independent pricing services, costs attributable to
investor services (including, without limitation, telephone and personnel
expenses), costs of preparing, printing and distributing prospectuses to
existing shareholders, costs of stockholders' reports and meetings of
shareholders and Trustees of the Funds or the Trust, as applicable, and any
extraordinary expenses will be borne by the Funds.
5. Compensation. For the services provided pursuant to this Agreement, the
Trust shall pay to the Manager as full compensation therefor a monthly fee
computed on the average daily net assets at the annual rate for each Fund as
stated in Schedule A attached hereto. The Trust acknowledges that the Manager,
as agent for the Funds, will allocate a portion of the fee equal to the sub-
advisory fee payable to the sub-advisor, if any, under its sub-advisory
agreement to the sub-advisor for sub-advisory services. The Trust acknowledges
that the Manager, as agent for the Funds, may allocate a portion of the fee to
Murphey Favre Securities Services, Inc. for administrative services, portfolio
accounting and regulatory compliance systems. The Manager also from time to
time and in such amounts as it shall determine in its sole discretion may
allocate a portion of the fee to Composite Funds Distributor, Inc. for
facilitating distribution of the Funds. This payment would be made from revenue
which otherwise would be considered profit to the Manager for its services.
This disclosure is being made to the Trust solely for the purpose of conforming
with requirements of the Washington Department of Revenue for exclusion of
revenue from the Washington Business and Occupation Tax.
6. Limitation of Liability. The Manager shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust in connection
with the matters to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement.
7. Delivery of Documents. The Trust has heretofore delivered to the Manager
true and complete copies of each of the following documents and shall promptly
deliver to it all future amendments and supplements thereto, if any:
(a) Agreement and Declaration of Trust as presently in effect and as
amended from time to time;
(b) Bylaws of the Trust;
(c) Registration Statement under the Securities Act of 1933 and under the
1940 Act of the Trust on Form N-1A, and all amendments thereto, as filed
with the Securities
3
<PAGE>
and Exchange Commission (the "Registration Statement") relating to the
Trust and the shares of the Funds;
(d) Notification of Registration of the Trust under the 1940 Act on Form
N-8A;
(e) Prospectuses of the Trust relating to shares of the Funds (such
prospectuses as presently in effect and/or as amended or supplemented from
time to time, the "Prospectus"); and
(f) Statement of Additional Information of the Trust relating to shares of
the Funds (such statement as presently in effect and/or as amended or
supplemented from time to time, the "Statement of Additional Information").
8. Duration and Termination. This Agreement shall become effective as of the
date first above-written for an initial period of two years and shall continue
thereafter so long as such continuance is specifically approved at least
annually (a) by the vote of the Board of Trustees including a majority of those
members of the Trust's Board of Trustees who are not parties to this Agreement
or "interested persons" of any such party, cast in person at a meeting called
for that purpose, or by vote of a majority of the outstanding voting securities
of each Fund. Notwithstanding the foregoing, (a) this Agreement may be
terminated with respect to any Fund at any time, without the payment of any
penalty, by either the Trust (by vote of the Trust's Board of Trustees or by
vote of a majority of the outstanding voting securities of the Fund) or the
Manager, on sixty (60) days prior written notice to the other and (b) shall
automatically terminate in the event of its assignment. As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested persons" and "assignment" shall have the meanings assigned to such
terms in the 1940 Act.
9. Amendments. No provision of this Agreement may be amended, modified,
waived or supplemented except by a written instrument signed by the party
against which enforcement is sought. No amendment of this Agreement shall be
effective until approved in accordance with any applicable provisions of the
1940 Act.
10. Use of Name and Logo. The Trust agrees that it shall furnish to the
Manager, prior to any use or distribution thereof, copies of all prospectuses,
statements of additional information, proxy statements, reports to stockholders,
sales literature, advertisements, and other material prepared for distribution
to stockholders of the Trust or to the public, which in any way refer to or
describe the Manager or which include any trade names, trademarks or logos of
the Manager or of any affiliate of the Manager. The Trust further agrees that
it shall not use or distribute any such material if the Manager reasonably
objects in writing to such use or distribution within five (5) business days
after the date such material is furnished to the Manager.
The Manager and/or its affiliates own the names "Sierra", "Composite" and
any other names which may be listed from time to time on a Schedule B to be
attached hereto that they may develop for use in connection with the Trust,
which names may be used by the Trust only
4
<PAGE>
with the consent of the Manager and/or its affiliates. The Manager, on behalf of
itself and/or its affiliates, consents to the use by the Trust of such names or
any other names embodying such names, but only on condition and so long as (i)
this Agreement shall remain in full force, (ii) the Fund and the Trust shall
fully perform, fulfill and comply with all provisions of this Agreement
expressed herein to be performed, fulfilled or complied with by it, and (iii)
the Manager is the manager of each Fund of the Trust. No such name shall be used
by the Trust at any time or in any place or for any purposes or under any
conditions except as provided in this section. The foregoing authorization by
the Manager, on behalf of itself and/or its affiliates, to the Trust to use such
names as part of a business or name is not exclusive of the right of the Manager
and/or its affiliates themselves to use, or to authorize others to use, the
same; the Trust acknowledges and agrees that as between the Manager and/or its
affiliates and a Fund or the Trust, the Manager and/or its affiliates have the
exclusive right so to use, or authorize others to use, such names, and the Trust
agrees to take such action as may reasonably be requested by the Manager, on
behalf of itself and/or its affiliates, to give full effect to the provisions of
this section (including, without limitation, consenting to such use of such
names). Without limiting the generality of the foregoing, the Trust agrees that,
upon (i) any violation of the provisions of this Agreement by the Trust or (ii)
any termination of this Agreement, by either party or otherwise, the Trust will,
at the request of the Manager, on behalf of itself and/or its affiliates, made
within six months after such violation or termination, use its best efforts to
change the name of the Trust so as to eliminate all reference, if any, to such
names and will not thereafter transact any business in a name containing such
names in any form or combination whatsoever, or designate itself as the same
entity as or successor to an entity of such names, or otherwise use such names
or any other reference to the Manager and/or its affiliates, except as may be
required by law. Such covenants on the part of the Trust shall be binding upon
it, its Trustees, officers, shareholders, creditors and all other persons
claiming under or through it.
The provisions of this section shall survive termination of this Agreement.
11. Notices. Any notice or other communication required to be given pursuant
to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, if to the Trust: 601 W. Main Ave., Suite 300,
Spokane, Washington 99201; or if to the Manager: 1201 Third Avenue, Suite
1220, Seattle, Washington 98101; or to either party at such other address as
such party shall designate to the other by a notice given in accordance with the
provisions of this section.
12. Miscellaneous.
(a) Except as otherwise expressly provided herein or authorized by the
Board of Trustees of the Trust from time to time, the Manager for all
purposes herein shall be deemed to be an independent contractor and shall
have no authority to act for or represent the Trust in any way or otherwise
be deemed an agent of the Trust.
<PAGE>
(b) The Trust shall furnish or otherwise make available to the Manager
such information relating to the business affairs of the Trust as the
Manager at any time or from time to time reasonably requests in order to
discharge its obligations hereunder.
(c) This Agreement shall be governed by and construed in accordance with
the laws of The Commonwealth of Massachusetts and shall inure to the
benefit of the parties hereto and their respective successors.
(d) If any provision of this Agreement shall be held or made invalid or by
any court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
13. Agreement and Declaration of Trust and Limitation of Liability. A copy of
the Agreement and Declaration of Trust of the Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts, and notice is hereby
given that this Agreement is executed by an officer of the Trust on behalf of
the Trustees of the Trust, as trustees and not individually, on further behalf
of the Funds, and that the obligations of this Agreement shall be binding upon
the assets and properties of each Fund, individually, and shall not be binding
upon the assets and property of any other Fund or series of the Trust or upon
any of the Trustees, officers, employees, agents or shareholders of the Funds or
the Trust individually.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the date first above-written.
THE SIERRA VARIABLE TRUST, on behalf of its
series
SHORT TERM HIGH QUALITY BOND FUND,
GROWTH FUND,
EMERGING GROWTH FUND ,
INTERNATIONAL GROWTH FUND,
GLOBAL MONEY FUND,
U.S. GOVERNMENT FUND,
CORPORATE INCOME FUND,
GROWTH AND INCOME FUND,
CAPITAL GROWTH PORTFOLIO,
GROWTH PORTFOLIO,
BALANCED PORTFOLIO,
VALUE PORTFOLIO, and
INCOME PORTFOLIO
By: __________________________________
Name:
Title:
Attest:
By: ___________________________________
Name:
Title:
COMPOSITE RESEARCH &
MANAGEMENT CO.
By: ___________________________________
William G. Papesh
President
Attest:
By: ___________________________________
Sharon L. Howells
Secretary
<PAGE>
SCHEDULE A
THE SIERRA VARIABLE TRUST
INVESTMENT MANAGEMENT AGREEMENT
The fees to be charged to The Sierra Variable Trust for services provided under
this Agreement (including any sub-advisory fees) are as follows:
<TABLE>
<CAPTION>
FIRST OVER
$500M $500M
------- -------
<S> <C> <C> <C> <C> <C>
Global Money Fund ................. 0.500% 0.400%
U.S. Government Fund .............. 0.600% 0.500%
Corporate Income Fund ............. 0.650% 0.500%
FIRST OVER
$ 25M $ 25M
------ ------
Growth Fund ....................... 0.950% 0.875%
FIRST $200M- OVER
$200M $500M $500M
------ ------ ------
Short-Term High Quality Bond Fund . 0.500% 0.450% 0.400%
FIRST $25M- OVER
$25M $500M $500M
------ ------ ------
Emerging Growth Fund .............. 0.900% 0.850% 0.750%
FIRST $50M- OVER
$50M $125M $125M
------ ------ ------
International Growth Fund ......... 0.950% 0.850% 0.750%
FIRST $100M- $200M- $400M- OVER
$100M $200M $400M $500M $500M
------ ------ ------ ------ ------
Growth & Income Fund .............. 0.800% 0.750% 0.700% 0.650% 0.575%
</TABLE>
<TABLE>
<CAPTION>
ALL ASSET LEVELS
-----------------
<S> <C>
Capital Growth Portfolio ......... 0.10%
Growth Portfolio ................. 0.10%
Balanced Portfolio ............... 0.10%
Value Portfolio .................. 0.10%
</TABLE>
<PAGE>
INVESTMENT SUB-ADVISORY AGREEMENT
This Agreement is made and entered into this _____ day of January, 1998, by
and between Composite Research & Management Co. (the "Manager"), a corporation
organized under the laws of the State of Washington and Janus Capital
Corporation (the "Sub-Adviser"), a corporation organized under the laws of the
State of Colorado.
W I T N E S S E T H
-------------------
WHEREAS, the Manager is engaged in the business of rendering investment
advisory and management services, is registered as an investment adviser under
the Investment Advisers Act of 1940, (the "Advisers Act"), and is the investment
adviser to the Growth Fund and the Emerging Growth Fund of The Sierra Variable
Trust (the "Trust"), an unincorporated business trust organized under the laws
of the Commonwealth of Massachusetts pursuant to a Management Contract, dated as
of _______________, 1997, between the Manager and the Trust (the "Management
Contract");
WHEREAS, the Trust is engaged in business as an open-end, management
investment company and is so registered under the Investment Company Act of
1940, (the "1940 Act");
WHEREAS, the Trust offers a number of investment portfolios, each with its
own investment objective and strategies, and of which two investment portfolios
are the Growth Fund and the Emerging Growth Fund (each a "Fund" and together,
the "Funds");
WHEREAS, the Sub-Adviser is engaged in the business of rendering investment
advisory and management services and is registered as an investment adviser
under the Advisers Act;
WHEREAS, the Manager is authorized to retain sub-advisers and desires to
retain the Sub-Adviser to furnish investment advisory and management services to
the Funds and the Sub-Adviser is willing to furnish such services;
NOW, THEREFORE, in consideration of the mutual agreements herein contained,
it is hereby agreed by and among the parties hereto as follows:
1. Investment Description; Appointment
The Manager, with the approval of the Trust, desires to employ and hereby
appoints the Sub-Adviser to act as investment sub-adviser to the Funds. The
Sub-Adviser accepts the appointment and agrees to furnish the services described
herein for the compensation set forth below.
In performance of its duties, the Sub-Adviser will comply with the
limitations specified in the Trust's Master Trust Agreement, the By-laws of the
Trust and the stated investment objectives, policies and restrictions of each
Fund as set forth in the Trust's Registration Statement
<PAGE>
on Form N-1A, File No. 33-57732, as in effect and which may be amended from time
to time (the "Registration Statement"), and in such manner and to such extent as
may from time to time be approved by the Board of Trustees of the Trust. Copies
of the Registration Statement, have been or will be submitted to the Sub-
Adviser. Copies of all amendments or supplements to the Registration Statement
and the Trust's Agreement and Declaration of Trust will be provided to the Sub-
Adviser during the continuance of this Agreement before or at the time such
amendments or supplements become effective.
The Manager agrees to furnish the Sub-Adviser with minutes of meetings of
the Board of Trustees of the Trust to the extent they may affect the duties of
the Sub-Adviser, a certified copy of any financial statements or reports
prepared by certified or independent public accountants for the Trust which
relate to the Funds, and with copies of any financial statements or reports made
by the Trust to its shareholders or to any governmental body or securities
exchange, and any further materials or information which the Sub-Adviser may
reasonably request to enable it to perform its functions under this Agreement.
2. Services as Investment Sub-Adviser
Subject to the supervision of the Board of Trustees of the Trust and of the
Manager, the Sub-Adviser will (a) maintain compliance procedures for the Funds
that the Sub-Adviser believes are adequate to ensure its compliance with the
applicable provisions of the 1940 Act and the Advisers Act, (b) make investment
decisions for the Funds in accordance with each Fund's investment objective(s)
and policies as stated in each Fund's Registration Statement and, after notice
to the Sub-Adviser, as they may be amended from time to time, (c) place purchase
and sale orders on behalf of the Funds to effectuate the investment decisions
made, (d) maintain books and records with respect to the securities transactions
of the Funds in accordance with the 1940 Act and the Advisers Act and the rules
adopted thereunder and will furnish to the Manager quarterly, annual and special
reports as the Manager may reasonably request; and (e) treat confidentially and
as proprietary information of the Trust, all records and other information
relative to the Trust and prior, present or potential shareholders; and will not
knowingly use such records and information for any purpose other than
performance of its responsibilities and duties hereunder, except after prior
notification to and approval in writing by the Trust, which approval shall not
be unreasonably withheld and such records may not be withheld where the Sub-
Adviser may be exposed to civil or criminal contempt proceedings for failure to
comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Trust. In providing those services, the
Sub-Adviser will supervise each Fund's investments and conduct a continual
program of investment, evaluation and, if appropriate, sale and reinvestment of
each Fund's assets.
Subject to the supervision of the Manager and in accordance with the
investment objective and policies as stated in the Trust's Registration
Statement, the Sub-Adviser is authorized, in its discretion and without prior
consultation with the Manager, to buy, sell, lend and otherwise trade in any
stocks, bonds and other securities and investment instruments on
2
<PAGE>
behalf of each Fund, without regard to the length of time the securities have
been held and the resulting rate of portfolio turnover or any tax
considerations, and so long as consistent with the foregoing, the majority or
the whole of each Fund may be invested in such proportions of stocks, bonds,
other securities or investment instruments, or cash as the Sub-Adviser shall
determine. In addition, the Sub-Adviser will furnish the Funds or the Manager
with whatever statistical information the Company or the Manager may reasonably
request with respect to the instruments that a Fund may hold or contemplate
purchasing.
3. Brokerage
Subject to (i) the over-riding objective of obtaining the best possible
execution of orders; and (ii) review and approval of the Board of Trustees of
the Trust, which may be conducted as often as quarterly, the Sub-Adviser shall
place all orders for the purchase and sale of investments for the Funds with
brokers, dealers, futures commissions merchants, or other sources (hereafter,
"brokers or dealers") selected by the Sub-Adviser, which may include brokers or
dealers affiliated with the Sub-Adviser. All transactions with any affiliated
person of the Trust, or where any such affiliated person acts as broker or agent
in connection with any such transaction, shall be accomplished in compliance
with the 1940 Act, the Advisers Act, the Securities Exchange Act of 1934, as
amended, the rules adopted thereunder and the procedures adopted thereunder by
the Trust. As provided in the Management Contract, any entity or person
associated with the Manager or Sub-Adviser which is a member of a national
securities exchange is authorized to effect any transaction on such exchange for
the account of a Fund which is permitted by Section 11(a) of the Securities
Exchange Act of 1934 and Rule 11a2-2(T) thereunder, and the Trust has consented
to the retention of compensation for the transactions in accordance with Rule
11a2-2(T)(2)(iv). Purchase or sell orders for the Funds may be aggregated with
contemporaneous purchase or sell orders of other clients of the Sub-Adviser;
provided that (i) no advisory account will be favored by the Sub-Adviser over
any other account; (ii) each client of the Sub-Adviser who participates in such
an aggregated order will participate at the average share price, with all
transaction costs shared on a pro rata basis; (iii) only advisory clients'
transactions will be aggregated for such an aggregated order; and (iv) the
accounts of clients whose orders are aggregated will be segregated on the Sub-
Adviser's books and records so as to identify the particular client who has the
beneficial interest therein. The Sub-Adviser shall use its best efforts to
obtain execution of Fund transactions at prices which are advantageous to such
Fund and at commission rates that are reasonable in relation to the benefits
received. However, the Sub-Adviser may select brokers or dealers on the basis
that they provide brokerage, research, or other services or products to a Fund
and/or other accounts serviced by the Sub-Adviser. The Sub-Adviser may pay a
broker or dealer an amount of commission for effecting a securities transaction
in excess of the amount of commission or dealer spread another broker or dealer
would have charged for effecting that transaction if the Sub-Adviser determines
in good faith that such amount of commission was reasonable in relation to the
value of the brokerage and research products and/or services provided by such
broker or dealer. This determination, with respect to brokerage and research
services or products, may be viewed in terms of either that particular
transaction or the overall responsibilities which the Sub-Adviser and its
affiliates have with
3
<PAGE>
respect to a Fund and to accounts over which they exercise investment
discretion, and not all such services or products may be used by the Sub-Adviser
in managing a Fund; provided that with respect to such transaction and such
determination the affiliates of the Sub-Adviser shall have the same
responsibilities to the Funds as the Sub-Adviser has under this Agreement.
4. Information Provided to the Trust
The Sub-Adviser will keep the Trust and the Manager informed of
developments materially affecting each Fund of which the Sub-Adviser becomes
aware and will, on its own initiative, furnish the Trust and the Manager on at
least a quarterly basis with whatever information the Sub-Adviser believes is
appropriate for this purpose.
5. Standard of Care
The Sub-Adviser shall exercise its best judgment in rendering the services
described in paragraphs 2 and 3 above. Except as may otherwise be provided by
federal or state securities laws, the Sub-Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement (the conduct excepted in this
sentence shall be referred to as "Disqualifying Conduct").
6. Compensation
In consideration of the services rendered pursuant to this Agreement, the
Manager will pay the Sub-Adviser on the first business day of each month a fee
for the previous month at the annual rate of .55% of each Fund's average daily
net assets up to $25 million and .50% of each Fund's average daily net assets in
excess of $25 million. The fee for the first month shall be prorated based upon
the number of days the account was open in that month. Upon any termination of
this Agreement before the end of a month, the fee for such part of that month
shall be prorated according to the proportion that such period bears to the full
monthly period and shall be payable upon the date of termination of this
Agreement. For the purpose of determining fees payable to the Sub-Adviser, the
value of each Fund's net assets shall be computed at the times and in the manner
specified in the Registration Statement.
7. Expenses
The Sub-Adviser will bear all of its expenses in performing its services
under this Agreement, which expenses shall not include brokerage fees or
commissions in connection with the effectuation of securities transactions. The
Sub-Adviser shall bear no expenses of the Trust, a Fund or the Manager. The
Trust bears the expenses described in its Registration Statement. Any
reimbursement of advisory fees required by the Management Contract between the
Trust
4
<PAGE>
and the Manager or any voluntary or statutory expense limitation provision shall
be the sole responsibility of the Manager.
8. Services to Other Companies or Accounts
The Manager understands that the Sub-Adviser now acts, will continue to act
and may act in the future as investment adviser to fiduciary and other managed
accounts and as investment adviser to one or more other investment companies or
series of investment companies, and the Manager has no objection to the Sub-
Adviser so acting, provided that whenever a Fund and one or more other accounts
or investment companies advised by the Sub-Adviser have available funds for
investment, investments suitable and appropriate for each will be allocated in a
manner reasonably equitable to each entity. Similarly, opportunities to sell
securities will be allocated in such an equitable manner. The Manager
recognizes that in some cases this procedure may limit the size of the position
that may be acquired or disposed of for a Fund. In addition, the Manager
understands that the persons employed by the Sub-Adviser to assist in the
performance of the Sub-Adviser's duties hereunder will not devote their full
time to such service and nothing contained herein shall be deemed to limit or
restrict the right of the Sub-Adviser or any affiliate of the Sub-Adviser to
engage in and devote time and attention to other business or to render services
of whatever kind or nature. The Manager recognizes and agrees that the Sub-
Adviser may provide advice to other clients which may differ from or be
identical to advice given with respect to a Fund.
9. Term of Agreement
This Agreement shall become effective upon its execution, shall continue
for a one year term and shall continue thereafter, with respect to a Fund, so
long as such continuance is specifically approved at least annually by (i) the
Board of Trustees of the Trust or (ii) a vote of a "majority" (as defined in the
1940 Act) of the Fund's outstanding voting securities, provided that in either
event the continuance is also approved by a majority of the Board of Trustees
who are not "interested persons" (as defined in the 1940 Act) of any party to
this Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval. This Agreement is terminable, with respect to a Fund,
without penalty, on 60 days written notice by the Manager, the Board of Trustees
of the Trust or by vote of holders of a majority of the Fund's shares, or upon
60 days written notice, by the Sub-Adviser and will terminate automatically upon
any termination of the Management Contract. In addition, this Agreement will
also terminate automatically in the event of its assignment (as defined in the
1940 Act). The Sub-Adviser agrees to notify the Manager of any circumstances
that to its best knowledge and belief might result in this Agreement being
deemed to be assigned.
5
<PAGE>
10. Representations of the Manager and the Sub-Adviser
The Manager represents that (i) a copy of the Trust's Agreement and
Declaration of Trust, dated January 27, 1993, together with all amendments
thereto, is on file in the office of the Secretary of the Commonwealth of
Massachusetts, (ii) the appointment of the Sub-Adviser has been duly authorized;
(iii) it has acted and will continue to act in conformity with the 1940 Act and
other applicable laws; and (iv) it is authorized to perform the services herein.
The Sub-Adviser represents that it is authorized to perform the services
described herein.
11. Indemnification
The Manager shall indemnify and hold harmless the Sub-Adviser from and
against any and all claims, losses, liabilities or damages (including reasonable
attorneys' fees and other related expenses), howsoever arising from or in
connection with this Agreement or the performance by the Sub-Adviser of its
duties hereunder; provided, however, that nothing contained herein shall require
that the Sub-Adviser be indemnified for Disqualifying Conduct.
12. Amendment of this Agreement
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought. No amendment of this Agreement shall be effective with respect to a
Fund until approved by vote of a majority of the outstanding voting securities
of the Fund, and by the vote, cast in person at a meeting called for the purpose
of voting on such approval, of a majority of the Trustees of the Trust who are
not interested persons of the Trust or of the Manager or of the Sub-Adviser.
13. Entire Agreement
This Agreement constitutes the entire agreement between the parties hereto.
14. Governing Law
This Agreement shall be governed in accordance with the laws of the
Commonwealth of Massachusetts.
15. Miscellaneous
(a) Unless the Manager gives the Sub-Adviser written instructions to the
contrary, the Sub-Adviser shall vote all proxies solicited by or with respect to
the issuers of securities in which assets of a Fund may be invested. The Sub-
Adviser shall use its best good faith judgment to vote such proxies in a manner
which best serves the interests of such Fund's shareholders.
6
<PAGE>
(b) The Manager shall provide the Sub-Adviser with a copy of each Fund's
agreement (the "Custody Agreement") with the Custodian (the "Custodian")
designated to hold the assets of the Fund and any modification thereto in
advance. Each Fund's assets shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement. The Sub-Adviser shall have no liability for the acts or omissions of
the Custodian. Any assets added to a Fund shall be delivered directly to the
Custodian.
(c) The Manager agrees and acknowledges that the Sub-Adviser is the sole
owner of the name and mark "Janus" and that all use of any designation comprised
in whole or part of Janus (a "Janus Mark") under this Agreement shall inure to
the benefit of the Sub-Adviser. The use by the Trust on its own behalf or on
behalf of a Fund of any Janus Mark in any advertisement or sales literature or
other materials promoting a Fund shall be with the consent of the Sub-Adviser.
The Trust and the Manager shall not, without the consent of the Sub-Adviser,
make representations regarding the Sub-Adviser intended to be disseminated to
the investing public in any disclosure document, advertisement or sales
literature or other materials promoting a Fund. Such consent shall not be
required for any documents or other materials intended for broker-dealer use
only, for use by the Trust's trustees and for internal use by the Trust and the
Manager. Consent by the Sub-Adviser to such use of any Janus Mark and any such
representation shall not be unreasonably withheld and shall be deemed to be
given if no written objection is received by the Trust, such Fund or the Manager
within 3 business days after the request is made by the Trust, a Fund or the
Manager for such use of any Janus Mark or any such representation. Upon
termination of this Agreement for any reason, the Trust and the Manager shall
cease all use of any Janus Mark(s) as soon as reasonably practicable.
(d) The Sub-Adviser agrees and acknowledges that the Trust is the sole
owner of the name and mark "The Sierra Variable Trust" and the Manager is the
sole owner of the name and mark "Composite Research & Management Co." and that
any and all use of any designation comprised in whole or in part of "The Sierra
Variable Trust" or "Composite Research & Management Co." (a "Composite Mark")
under this Agreement shall inure to the benefit of the Trust or the Manager,
respectively. The use by the Sub-Adviser on its own behalf of any Composite
Mark in any advertisement or sales literature or other materials promoting the
Sub-Adviser shall be with the consent of the Trust or the Manager, respectively.
The Sub-Adviser shall not, without the consent of the Trust or the Manager, as
applicable, make representations regarding the Trust, a Fund or the Manager in
any disclosure document, advertisement or sales literature or other materials
promoting the Sub-Adviser. Consent by the Trust and the Manager to such use of
any Composite Mark and any such representations shall not be unreasonably
withheld and shall be deemed to be given if no written objection is received by
the Sub-Adviser within 5 business days after the request by the Sub-Adviser is
made for such use of any Composite Mark or any such representations. Upon
termination of this Agreement for any reason, the Sub-Adviser shall cease any
and all use of any Composite Mark as soon as reasonably practicable.
7
<PAGE>
(e) The Sub-Adviser may perform its services through any employee, officer
or agent of the Sub-Adviser, and the Trust and the Funds shall not be entitled
to the advice, recommendation, or judgment of any specific person.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be duly
executed as of the date first written above.
ATTEST: COMPOSITE RESEARCH &
MANAGEMENT CO.
______________ By:_____________________________________
Name: Name:
Title: Title:
ATTEST: JANUS CAPITAL CORPORATION
- --------- By:_____________________________________
Name: Name:
Title: Title:
8
<PAGE>
SUB-ADVISER AGREEMENT
Sub-Adviser Agreement executed as of January __, 1998 between Composite
Research & Management Co., a Washington corporation (the "Manager"), and WARBURG
PINCUS ASSET MANAGEMENT, INC., a Delaware corporation (the "Sub-Adviser").
W I T N E S S E T H
-------------------
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. Services to Be Rendered by Sub-adviser to the Sierra Variable Trust.
(a) Subject always to the control of the Trustees of The Sierra
Variable Trust, a Massachusetts business trust (the "Trust") and to the
overall supervision of the Manager, the Sub-Adviser, at its expense as
provided herein, will render the following services to the International
Growth Fund (the "Fund") of the Trust. The Sub-Adviser will furnish
continuously an investment program for the portfolio represented by shares
of the Fund and will make investment decisions on behalf of the Fund with
respect to all of the assets of the Fund, including cash and cash
equivalents and will place all orders for the purchase and sale of
portfolio securities of the Fund and for the investment, reinvestment and
management of cash or cash equivalents of the Fund. The Sub-Adviser is
hereby appointed and shall serve as attorney-in-fact and agent of the Fund
for the limited purposes of executing account documentation, agreements,
contracts and other documents as the Sub-Adviser may be requested by
brokers, dealers, counterparties and other persons in connection with the
Sub-Adviser's management of the assets of the Fund.
(i) In the performance of its duties, the Sub-Adviser will comply
with the provisions of the Agreement and Declaration of Trust, the By-
laws of the Trust and the stated investment objectives, policies and
restrictions of the Fund as set forth in its registration statement on
Form N-1A, File No. 33-57732, and will use its best efforts to
safeguard and promote the welfare of the Fund, and to comply with
other policies which the Trustees or the Manager, as the case may be,
may from time to time determine. Copies of the Trust's Registration
Statement, including exhibits, Agreement and Declaration of Trust and
By-laws, in each case as amended to date, have been or will be
provided to the Sub-Adviser, and the Manager agrees promptly to
provide the Sub-Adviser with all amendments or supplements to the
Registration Statement, Agreement and Declaration of Trust and By-
laws.
(ii) The Sub-Adviser shall make its officers and employees
available to the Manager at reasonable times to review investment
policies of the Fund and to consult with the Manager regarding the
investment affairs of the Fund.
<PAGE>
(iii) The Manager agrees, on an ongoing basis, to notify the
Sub-Adviser expressly in writing of each change in the fundamental and
nonfundamental investment policies of the Fund. The Manager desires
to engage and hereby appoints the Sub-Adviser to act as investment
sub-adviser to the Fund to which appointment the Trust agrees. The
Sub-Adviser accepts the appointment and agrees to furnish the services
described herein for the compensation set forth herein.
(b) The Sub-Adviser, at its expense, will furnish all necessary office
space and equipment, bookkeeping and clerical services (excluding
shareholder accounting and transfer agency services) required for it to
perform its duties hereunder and will pay all salaries, fees and expenses
of any officer of the Trust who is an employee of, or otherwise affiliated
with, the Sub-Adviser and is not an employee of, or otherwise affiliated
with, the Manager; provided that no person who is an employee of, or
otherwise affiliated with, the Sub-Adviser shall serve as a Trustee of the
Trust.
(c) The Manager agrees to provide the Sub-Adviser with such assistance
as may be reasonably requested by the Sub-Adviser in connection with its
activities pertaining to the Fund under this Agreement, including, without
limitation, information concerning the Fund, its funds available, or to
become available, for investment and generally as to the condition of the
Fund's affairs.
(d) In fulfilling its obligations hereunder, the Sub-Adviser shall be
entitled to rely on and act in accordance with, and the Manager agrees to
hold the Sub-Adviser harmless for any act or omission taken in good faith
in reliance on, information and instructions, which may be standing
instructions, provided to the Sub-Adviser by the Manager, the Trust's
administrator, or other agent of the Manager designated by the Manager.
Such information and instructions shall be conveyed to the Sub-Adviser in a
timely manner so as to permit the Sub-Adviser to take such action as may be
required in an orderly fashion. The Manager agrees to provide or cause to
be provided to the Sub-Adviser on an ongoing basis, such information as is
reasonably requested by the Sub-Adviser for performance by the Sub-Adviser
of its obligations under this Agreement, and the Sub-Adviser shall not be
in breach of any term of this Agreement or be deemed to have acted
negligently if the Manager fails to provide or cause to be provided such
information and the Sub-Adviser relies on the information most recently
furnished to the Sub-Adviser. The Manager will promptly provide the Sub-
Adviser with any procedures applicable to the Sub-Adviser adopted from time
to time by the Board of Trustees of the Trust and agrees to promptly
provide the Sub-Adviser copies of all amendments thereto.
(e) In the selection of brokers, dealers, futures commissions
merchants or any other sources of portfolio investments for the Fund
(hereafter, "brokers or dealers") and the placing of orders for the
purchase and sale of portfolio investments for the Fund, the Sub-Adviser
shall use its best efforts to obtain the most favorable price and execution
2
<PAGE>
available, except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. In
using its best efforts to obtain the most favorable price and execution
available, the Sub-Adviser, bearing in mind the Fund's best interests at
all times, shall consider all factors it deems relevant, including by way
of illustration, price, the size of the transaction, the nature of the
market for the security, the amount of the commission, the timing of the
transaction taking into account market prices and trends, the reputation,
experience and financial stability of the broker or dealer involved and the
quality of service rendered by the broker or dealer in other transactions.
Subject to such policies as the Trustees of the Trust may determine that
are communicated in writing to the Sub-Adviser as provided in Section
1(a)(iii) hereof, the Sub-Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of its having caused the Trust to pay, on behalf
of the Fund, a broker or dealer that provides brokerage and research
services to the Sub-Adviser an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction,
if the Sub-Adviser determines in good faith that such amount of commission
was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Sub-Adviser's overall responsibilities over
time with respect to the Trust and to other clients of the Sub-Adviser as
to which the Sub-Adviser exercises investment discretion. As provided in
the Management Contract referred to in Section 3 below, the Trust agrees
that any entity or person associated with the Manager or Sub-Adviser that
is a member of a national securities exchange is authorized to effect any
transaction on such exchange for the account of the Fund that is permitted
by Section 11(a) of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), or Rule 11a2-2(T) thereunder, and the Trust has consented to
the retention of compensation for such transactions in accordance with
Section 11(a) or Rule 11a2-2(T)(2)(iv) under the 1934 Act.
(f) In selecting brokers or dealers to execute a particular
transaction, and in evaluating the best price and execution available, the
Sub-Adviser is authorized to consider the brokerage and research services
(within the meaning of Section 28(e) of the 1934 Act) provided to the Sub-
Adviser or any affiliated person of the Sub-Adviser. Subject to the
requirements of Section 17(e) of the Investment Company Act of 1940, as
amended (the "1940 Act"), the Sub-Adviser is specifically authorized to
select an affiliated person of the Sub-Adviser to execute brokerage, but in
no event principal, transactions for the Fund. On occasions when the Sub-
Adviser deems the purchase or sale of a security to be in the best interest
of the Fund as well as other clients, the Sub-Adviser, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities to be purchased or sold in order to
obtain the most favorable execution and/or lower brokerage commissions, if
any, and efficient execution. In such event, allocation of securities so
sold or purchased, as well as the expenses incurred in the transaction,
will be made by the Sub-Adviser in the manner the
3
<PAGE>
Sub-Adviser considers to be the most equitable and consistent with its
fiduciary obligation over time to the Fund and to such other clients.
Furthermore, the Trust and the Manager recognize that the Sub-Adviser may
give advice, and take action, with respect to its other clients that may
differ from the advice given, or the time or nature of action taken, with
respect to the Fund.
(g) The Sub-Adviser shall not be obligated to pay any expenses of or
for the Fund not expressly assumed by the Sub-Adviser pursuant to this
Section 1 other than as provided in Section 3.
(h) The Sub-Adviser shall maintain all books and records with respect
to the Fund's portfolio transactions required by subparagraphs (b)(5) -
(b)(11) and paragraph (f) of Rule 31a-1 under the 1940 Act, and shall
render to the Board of Trustees of the Trust such periodic and special
reports as the Board may reasonably request.
2. Other Agreements, Etc.
The Manager understands that the Sub-Adviser now acts, will continue to act
and may act in the future as investment adviser to fiduciary and other managed
accounts and as investment adviser to one or more other investment companies or
series of investment companies, and the Manager has no objection to the Sub-
Adviser so acting, provided that whenever the Fund and one or more other
accounts or investment companies advised by the Sub-Adviser have available funds
for investment, investments suitable and appropriate for each will be allocated
in accordance with procedures believed to be equitable to each entity over time.
Similarly, opportunities to sell securities will be allocated in an equitable
manner over time. The Manager recognizes that in some cases this procedure may
adversely affect the size of the position that may be acquired or disposed of
for the Fund. In addition, the Manager understands that the persons employed by
the Sub-Adviser to assist the performance of the Sub-Adviser's duties hereunder
will not devote their full time to such service and nothing contained herein
shall be deemed to limit or restrict the right of the Sub-Adviser or any
affiliate of the Sub-Adviser to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature.
3. Compensation to Be Paid by the Manager to the Sub-adviser.
The Manager will pay to the Sub-Adviser as compensation for the Sub-
Adviser's services rendered and for the expenses borne by the Sub-Adviser
pursuant to Section 1, a fee, computed and paid monthly at the annual rate of
0.50% of the Fund's average daily net assets. Such average daily net asset
value of the Fund shall be determined by taking an average of all of the
determinations of such net asset value during such month at the close of
business on each business day during such month while this contract is in
effect. For the purposes of determining fees payable to the Sub-Adviser, the
value of the net assets of the Fund shall be computed at the times and in the
manner specified in the Prospectus or Statement of Additional Information
4
<PAGE>
relating to the Fund as from time to time in effect. Such fee shall be payable
for each month within 10 business days after the end of such month.
Notwithstanding the foregoing, in the event that any reduction in the fees
paid to the Manager under the investment advisory agreement between the Trust
and the Manager and relating to the Fund (the "Management Contract") shall be
required as a result of any statutory or regulatory limitation on investment
company expenses, there shall be a proportionate reduction in the fee payable to
the Sub-Adviser hereunder; provided that the Sub-Adviser will never be required
to pay more than the amount of fees it receives.
If the Sub-Adviser shall serve for less than the whole of a month, the
foregoing compensation shall be prorated.
4. Assignment Terminates this Agreement; Amendments of this Contract.
This Agreement shall automatically terminate, without the payment of any
penalty, in the event of its assignment or in the event that the Management
Contract shall have terminated for any reason; and this Agreement shall not be
amended unless such amendment be approved at a meeting by the affirmative vote
of a majority of the outstanding shares of the Fund, and by the vote, cast in
person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager or of the Sub-Adviser.
5. Indemnifications.
(a) The Manager shall indemnify the Sub-Adviser and its controlling
persons, officers, directors, employees, agents, legal representatives and
persons controlled by it (collectively, "Sub-Adviser Related Persons") to
the fullest extent permitted by law against any and all loss, damage,
judgements, fines, amounts paid in settlement and reasonable expenses,
including attorneys' fees (collectively "Losses"), incurred by the Sub-
Adviser or Sub-Adviser Related Persons arising from or in connection with
this Agreement or the performance by the Sub-Adviser or Sub-Adviser Related
Persons of its or their duties hereunder, including, without limitation,
such Losses arising under any applicable law or that may be based upon any
untrue statement of a material fact contained in the Trust's registration
statement, or any amendment thereof or any supplement thereto, or the
omission to state therein a material fact known or which should have been
known and was required to be stated therein or necessary to make the
statements therein not misleading, unless such statement or omission was
made in reliance upon written information furnished to the Manager by the
Sub-Adviser or a Sub-Adviser Related Person; except to the extent any such
Losses result from willful misfeasance, bad faith, gross negligence or
reckless disregard on the part of the Sub-Adviser or a Sub-Adviser Related
Person in the performance of any of its duties under, or in connection
with, this Agreement.
5
<PAGE>
(b) The Sub-Adviser shall indemnify the Manager and its controlling
persons, officers, directors, employees, agents, legal representatives and
persons controlled by it (collectively, "Manager Related Persons") to the
fullest extent permitted by law against any and all Losses incurred by the
Manager or Manager Related Persons arising from or in connection with this
Agreement or the performance by the Manager or Manager Related Persons of
its or their duties hereunder so long as such Losses arise out of the Sub-
Adviser's failure to perform its responsibilities to the Manager, the Fund
or the Trust hereunder, including, without limitation, such Losses arising
under any applicable law or that may be based upon any untrue statement of
a material fact contained in the Trust's registration statement, or any
amendment thereof or any supplement thereto, or the omission to state
therein a material fact known or which should have been known and was
required to be stated therein or necessary to make the statements therein
not misleading, to the extent that such statement or omission was based on
information provided by the Sub-Adviser or a Sub-Adviser Related Person
unless such statement or omission was made in reliance upon written
information furnished to the Sub-Adviser or Sub-Adviser Related Person by
the Manager or a Manager Related Person; and except to the extent any such
Losses result from willful misfeasance, bad faith, gross negligence or
reckless disregard on the part of the Manager or a Manager Related Person
in the performance of any of its duties under, or in connection with, this
Agreement.
(c) The indemnifications provided in this Section 5 shall survive the
termination of this Agreement.
6. Effective Period and Termination of this Agreement.
This Agreement shall become effective upon its execution, and shall remain
in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) The Trust may at any time terminate this Agreement by not more
than sixty (60) days written notice delivered or mailed by registered mail,
postage prepaid, to the Manager and the Sub-Adviser, or
(b) If (i) the Trustees of the Trust or the shareholders by the
affirmative vote of a majority of the outstanding shares of the Fund, and
(ii) a majority of the Trustees of the Trust who are not interested persons
of the Trust or of the Manager or of the Sub-Adviser, by vote cast in
person at a meeting called for the purpose of voting on such approval, do
not specifically approve at least annually the continuance of this
Agreement, then this Agreement shall automatically terminate as at the
close of business on the second anniversary of its execution, or upon the
expiration of one year from the effective date of the last such
continuance, whichever is later; provided, however, that if the continuance
of this Agreement is submitted to the shareholders of the Fund for their
approval and such shareholders fail to approve such continuance of this
Agreement as
6
<PAGE>
provided herein, the Sub-Adviser may continue to serve hereunder in a
manner consistent with the 1940 Act and the Rules and Regulations
thereunder, or
(c) The Manager may at any time terminate this Agreement by not less
than sixty (60) days written notice delivered or mailed by registered mail,
postage prepaid, to the Sub-Adviser, and the Sub-Adviser may at any time
terminate this Agreement by not less than ninety (90) days written notice
delivered or mailed by registered mail, postage prepaid, to the Manager.
Action by the Trust under (a) above may be taken either (i) by vote of a
majority of its Trustees, or (ii) by the affirmative vote of a majority of the
outstanding shares of the Fund.
Termination of this Agreement pursuant to this Section 6 shall be without
the payment of any penalty.
7. Certain Information.
The Sub-Adviser shall promptly notify the Manager in writing of the
occurrence of any of the following events: (a) the Sub-Adviser shall fail to be
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended from time to time, or under the laws of any jurisdiction in which the
Sub-Adviser is required to be registered as an investment adviser in order to
perform its obligations under this Agreement, (b) the Sub-Adviser shall have
been served or otherwise have notice of any action, suit, proceeding, inquiry or
investigation, at law or in equity, before or by any court, public board or
body, involving the affairs of the Trust and (c) there shall be any change in
the control of the Sub-Adviser.
8. Certain Definitions.
(a) For the purposes of this Agreement, the "affirmative vote of a
majority of the outstanding shares" of the Fund means the affirmative vote,
at a duly called and held meeting of shareholders, (i) of the holders of
67% or more of the shares of the Fund present (in person or by proxy) and
entitled to vote at such meeting, if the holders of more than 50% of the
outstanding shares of or the Fund entitled to vote at such meeting are
present in person or by proxy, or (ii) of the holders of more than 50% of
the outstanding shares of the Fund entitled to vote at such meeting,
whichever is less.
(b) For the purposes of this Agreement, the terms "affiliated person",
"control", "interested person" and "assignment" shall have their respective
meanings defined in the 1940 Act and the Rules and Regulations thereunder,
subject, however, to such exemptions as may be granted by the Securities
and Exchange Commission under the 1940 Act; the term "specifically approve
at least annually" shall be construed in a manner consistent with the 1940
Act and the Rules and Regulations thereunder; and the
7
<PAGE>
term "brokerage and research services" shall have the meaning given in the
1934 Act and the Rules and Regulations thereunder.
9. Nonliability of Sub-adviser.
The Sub-Adviser shall exercise its best judgment in rendering its services
under this agreement. Except as may otherwise be provided by federal or state
securities laws and in Section 5 hereof, in the absence of willful misfeasance,
bad faith or gross negligence on the part of the Sub-Adviser, or reckless
disregard of its obligations and duties hereunder, the Sub-Adviser shall not be
subject to any liability to the Trust or the Fund, or to any shareholder of the
Fund, for any act or omission in the course of, or connected with, rendering
services hereunder.
10. Limitation of Liability of the Trustees and Shareholders.
A copy of the Agreement and Declaration of Trust of the Trust is on file
with the Secretary of The Commonwealth of Massachusetts, and notice is hereby
given that this instrument is reviewed and approved on behalf of the Trust by
the Trustees of the Trust as Trustees and not individually and that the
obligations of this instrument are not binding upon any of the Trustees or
shareholders individually but are binding only upon the assets and property of
the Fund.
11. Use of Names.
(a) It is understood that the name "Warburg Pincus Asset Management,
Inc." or any derivative thereof or logo associated with that name is the
valuable property of the Sub-Adviser and its affiliates and that the Trust
and/or the Fund have the right to use such name (or derivative or logo) in
offering materials of the Trust and/or Fund only with the prior written
approval of the Sub-Adviser and for so long as the Sub-Adviser is an
investment sub-adviser to the Trust and/or the Fund; provided that the
Trust and the Fund may use such name (or derivative or logo) without such
prior written approval in offering materials of the Trust to the extent
that (i) such materials simply list the Sub-Adviser as the Sub-Adviser to
the Fund as part of a listing of the investment sub-advisers to the series
or portfolios of the Trust with a brief description of the Sub-Adviser's
experience and duties hereunder; (ii) such materials include such name (or
derivative or logo) and any related information that has been previously
approved by the Sub-Adviser or that is required to be disclosed by
applicable law or regulation, such as information disclosed in the Trust's
registration statement; or (iii) such materials are intended for broker-
dealer use only, for use by the Trust's Trustees, or for internal use by
the Trust and the Manager. Such prior written approval of the Sub-Adviser
shall not be unreasonably withheld and shall be deemed to be given if no
written objection is received by the Trust, the Fund or the Manager within
three business days after the request is made by the Trust, the Fund or the
Manager for such use. Upon termination of this Agreement, the Trust and the
Fund
8
<PAGE>
shall forthwith cease to use such name (or derivative or logo) as soon as
reasonably practicable.
(b) It is understood that the names "The Sierra Variable Trust," and
"Composite Research & Management Co." or any derivatives thereof or logos
associated with such names is the valuable property of the Trust and/or the
Manager and their affiliates and that the Sub-Adviser or its affiliates
have the right to use such names (or derivatives or logos) in marketing
materials of the Sub-Adviser or its affiliates only with the prior written
approval of the Manager or the Trust, as applicable, and for so long as the
Sub-Adviser is an investment sub-adviser to the Trust and/or the Fund;
provided that the Sub-Adviser or its affiliates may use such names (or
derivatives or logos) without such prior written approval in marketing
materials of the Sub-Adviser or its affiliates to the extent that (i) such
materials simply list the Trust or the Fund as part of a listing of the
investment companies advised by the Sub-Adviser or its affiliates with a
brief description of the Trust or the Fund; or (ii) such materials include
such names (or derivatives or logos) and any related information that has
been previously approved by the Trust or the Manager, as applicable, or
that is required to be disclosed by applicable law or regulation, such as
information disclosed in the Form ADV or Form BD of the Sub-Adviser or its
affiliates; or (iii) such materials are intended for broker-dealer use only
or for internal use by the Sub-Adviser. Such prior written approval of the
Manager or the Trust, as applicable, shall not be unreasonably withheld and
shall be deemed to be given if no written objection is received by the Sub-
Adviser within three business days after the request is made by the Sub-
Adviser for such use. Upon termination of this Agreement, the Sub-Adviser
and its affiliates shall forthwith cease to use such names (or derivatives
or logos) as soon as reasonably practicable.
9
<PAGE>
IN WITNESS WHEREOF, the Manager and the Sub-Adviser have each caused this
instrument to be signed below in duplicate on its behalf by its duly authorized
representative, all as of the day and year first above written.
COMPOSITE RESEARCH & MANAGEMENT CO.
By ____________________________________
Name:
Title:
WARBURG PINCUS ASSET MANAGEMENT, INC.
By ____________________________________
Name:
Title:
10
<PAGE>
DISTRIBUTION CONTRACT
THIS DISTRIBUTION CONTRACT (this "Agreement"), dated this ____ day of
____________, 1998, between The Sierra Variable Trust, a Massachusetts business
trust (the "Trust"), on behalf of each of its series which are listed on the
signature page of this Agreement (each a "Fund" and collectively the "Funds"),
and Composite Funds Distributor, Inc., a Washington corporation doing business
at Seattle, Washington, herein sometimes referred to as the "Distributor."
RECITALS
--------
WHEREAS, the Trust is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act")
and the Funds are separate series of the Trust;
WHEREAS, each Fund and the Distributor desire to enter into an
agreement that sets forth standard terms and conditions for distribution and
other services for Trust shares; the shareholders of each Fund are and will be
separate accounts in unit investment trust form ("Eligible Separate Accounts")
of insurance companies or portfolios holding interests in such Funds in
connection with asset allocation programs;
WHEREAS, variable annuity and insurance product ("Variable Products")
net premiums and considerations will be allocated to Eligible Separate Accounts
for investment in each Fund;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration the receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. APPOINTMENT. The Trust hereby affirms the appointment of Composite
Funds Distributor, Inc. as the agent for distribution of Trust shares and grants
Distributor the right to sell Trust shares on behalf of each Fund and on terms
set forth in this Agreement. The Distributor accepts such appointment and agrees
to render the services herein set forth for the payments herein provided
(including reimbursement of expenses).
2. The Trust has approved a Memorandum of "Procedures for Monitoring
Potential Conflicts Among Insurance Company Shareholders" (the "Procedures").
This Distribution Contract shall be subject to the provisions of the Procedures,
the terms of which are incorporated herein by reference, made a part hereof and
controlling. The procedures may be amended or superseded, without prior notice,
and this Agreement shall be deemed amended to the extent the Procedures are
amended or superseded. The Distributor represents and warrants that it will act
in a manner consistent with such Procedures as so set forth and as they may be
amended or superseded, so long as it is a Distributor of the Trust. This
provision shall survive the termination of this Agreement.
1
<PAGE>
3. The Distributor is hereby authorized, from time to time, to enter
into separate written agreements ("Participation Agreements" or, individually, a
"Participation Agreement"), on terms and conditions not inconsistent with this
Agreement, with insurance companies which have Eligible Separate Accounts and
which agree to participate in the distribution of Trust shares, directly or
through affiliated broker-dealers (collectively, with the insurance companies
the "Participating Insurance Companies"), by means of distribution of Variable
Products and to use their best efforts to solicit applications for Variable
Products. Each Participation Agreement shall be entered into jointly with the
Participating insurance Company and the Eligible Separate Account. The
Distributor may not enter into any Participation Agreement with any
Participating Insurance Company that is more favorable than that maintained with
any other Participating Insurance Company and Eligible Separate Account.
4. Such Participating Insurance Companies and their agents or
representatives soliciting applications for Variable Products shall be duly and
appropriately licensed, registered or otherwise qualified for the sale of
Variable Products under any applicable insurance laws and any applicable
securities of one or more states or other jurisdictions in which Variable
Products may be lawfully sold. Each such Participating Insurance Company shall
be both registered as a broker-dealer under the Securities Exchange Act and a
member of the NASD. Each such Participating Insurance Company shall agree to
comply with all laws and regulations, whether federal or state, and whether
relating to insurance, securities or other general areas, including but not
limited to the record-keeping and sales supervision requirements of such laws
and regulations.
5. DELIVERY OF DOCUMENTS. The Trust and/or each Fund has furnished the
Distributor with copies of:
(a) Agreement and Declaration of Trust and all amendments thereto
for the Trust (as amended from time to time, the "Declaration of
Trust");
(b) Bylaws and all amendments thereto for the Trust (as amended from
time to time, the "Bylaws"); and
(c) The Trust's registration statement, prospectus and statement of
additional information, then in effect (the "Registration Statement")
under the Securities Act of 1933, as amended (the "1933 Act") and the
1940 Act.
From time to time, the Trust will furnish the Distributor with current
copies of all amendments or supplements to the foregoing, if any, and all
documents, notices and reports filed with the Securities and Exchange Commission
(the "SEC") and will make available, upon request, evidence of payment of
registration fees imposed from time to time by the States in which securities of
each Fund are sold by the Distributor.
2
<PAGE>
6. DUTIES OF THE DISTRIBUTOR. The Distributor shall provide each Fund
with the benefit of its best judgment, efforts and facilities in rendering its
services as Distributor. The Distributor will act as the exclusive Distributor
of the Trust's shares, subject to the supervision of the Trust's Board of
Trustees and the following understandings: (i) the Trust's Board of Trustees
shall be responsible for and control the conduct of each Fund's affairs; (ii) in
all matters relating to the performance of this Agreement, the Distributor will
act in conformity with the Declaration of Trust and Bylaws of the Trust and the
Registration Statement of each Fund and with the instructions and directions of
the Trust's Board of Trustees; (iii) the Distributor will conform to and comply
with applicable requirements of the 1940 Act, the 1933 Act and all other
applicable federal or state laws and regulations. In carrying out its
obligations hereunder, the Distributor shall:
(a) Provide to the Trust's Board of Trustees, at least quarterly, a
written report of the amounts expended in connection with all
distribution services rendered pursuant to this Agreement, including an
explanation of the purposes for which such expenditures were made; and
(b) Take, on behalf of each Fund, all actions which appear to be
necessary to carry into effect the distribution of each Fund's shares
as provided in paragraph 4.
7. DISTRIBUTION OF SHARES. It is mutually understood and agreed that
the Distributor does not undertake to sell all or any specific portion of the
Trust shares. The Trust shall not sell any of its shares except through the
Distributor. Notwithstanding the provisions of the foregoing sentence:
(a) The Distributor may, and when requested by the Trust, shall,
suspend its efforts to effectuate sales of the Trust shares at any time
when in the opinion of the Distributor or of the Trust no sales should
be made because of a need to revise a Registration Statement, or
because of market or other economic considerations or abnormal
circumstances of any kind. Either party in its sole discretion may
reject orders for the purchase of such shares;
(b) The Trust may withdraw the offering of its shares (i) at any
time with the consent of the Distributor or (ii) without such consent
when so required by the provisions of any statute or of any order, rule
or regulation of any governmental body having jurisdiction;
(c) Purchases and redemptions of Trust shares shall be at the net
asset value of the appropriate Fund, computed as set forth in the most
recent Prospectus and Statement of Additional Informations relating to
the Trust contained in its Registration Statement on Form N-1A, File
No. 33-57732, or any amendments thereto, and any supplements thereto
("Registration Statement"). Trust shares may not be sold or transferred
except to an Eligible Separate Account or a Fund with the prior
approval of the Trust's Board of Trustees.
3
<PAGE>
(d) The Distributor is not authorized by the Trust to provide any
information or to make any representations other than those contained
in the appropriate Registration Statements, or contained in shareholder
reports or other material that may be prepared by or on behalf of the
Trust for Distributor's use. This shall not be construed to prevent the
Distributor from preparing and distributing sales literature or other
material as it may deem appropriate.
8. The Trust shall not pay any compensation to the Distributor for
services as principal underwriter herein, nor shall the Trust reimburse the
Distributor for any expenses related to such services. The Distributor may, but
need not, pay or charge other Participating Insurance Companies pursuant to
agreements as described in 3.
9. EXPENSES. The expenses connected with distribution shall be
allocable between the Trust and the Distributor as follows:
(a) The Distributor shall furnish the services of personnel to the
extent that such services are required to carry out its obligations
under this Agreement.
(b) The Trust assumes and shall pay or cause to be paid the
following expenses incurred on its behalf:
Registration of shares including the expense of printing and
distributing prospectuses to existing shareholders; expenses incurred for
maintaining the Trust's or Fund's existence, taxes and expenses related to
portfolio transactions; charges and expenses of any registrar, custodian or
depository for portfolio securities and other property, and any stock transfer,
dividend or account agent or agents; all taxes, including securities issuance
and transfer taxes, and fees payable to federal, state or other governmental
agencies; costs and expenses in connection with the registration and maintenance
of registration of the Trust and its shares with the SEC and various states and
other jurisdictions (including filing fees, legal fees and disbursements of
counsel); expenses of shareholders' and directors' meetings and preparing,
printing, and mailing of proxy statements and reports to shareholders; fees and
travel expenses of directors who are not "interested persons" as that term is
defined in the 1940 Act; expenses incident to the payment of any dividend,
distribution, withdrawal or redemption, whether in shares or in cash; charges
and expenses of any outside service used for pricing of the Trust's shares; fees
and expenses of legal counsel and of independent accountants; membership dues of
industry associations; postage (excluding postage for promotional and sales
literature); insurance premiums on property of personnel (including, but not
limited to legal claims and liabilities and litigation costs and any
indemnification related thereto); and all other charges and costs of the Trust's
operation unless otherwise explicitly provided herein.
(c) The Distributor will bear all expenses incurred in connection
with its performance of the services described herein and the incurring
of distribution expenses under this Agreement. For purposes of this
Agreement, "distribution expenses" of the Distributor shall mean all
expenses borne by the Distributor which represent payment for
activities primarily intended to result in the sale of Trust shares.
4
<PAGE>
10. NON-EXCLUSIVITY. The services of the Distributor are not exclusive
and the Distributor shall be entitled to render distribution or other services
to others (including other investment companies) and to engage in other
activities. It is understood and agreed that officers of the Distributor may
serve as officers or trustees of the Trust, and that officers or trustees of the
Trust may serve as officers of the Distributor to the extent permitted by law;
and that officers of the Distributor are not prohibited from engaging in any
other business activity or from rendering services to any other person, or from
serving as partners, officers or directors of any other firm or corporation,
including other investment companies and broker/dealers.
11. TERM AND APPROVAL. This Agreement shall become effective as of the
date first above written for an initial period of two years, and shall continue
in force and effect from year to year thereafter, provided that, with respect to
the Trust or the Trust shares, such continuance is specifically approved at
least annually:
(a) By the Trust's Board of Trustees, including the
affirmative vote of a majority of the Board of Trustees of the Trust
who are not (i) parties to this Agreement, (ii) interested persons of
any such party (as defined in Section 2(a)(19) of the 1940 Act), or
(iii) persons having a direct or indirect financial interest in the
operation of this Agreement or any agreement related to this Agreement
(the "Qualified Trustees") by votes cast in person at a meeting called
for the purpose of voting on such approval, or
(b) By the vote of a majority of the outstanding voting
securities of the Fund (as defined in Section 2(a)(42) of the 1940
Act).
12. TERMINATION. This Agreement may be terminated, with respect to the
Trust or the Trust share, at any time, without the payment of any penalty, on
sixty (60) days' written notice, by vote of the Board of Trustees of the Trust,
or by a vote of a majority of the Qualified Trustees, or by a vote of a majority
of the outstanding voting securities of the Fund (as defined in Section 2(a)(42)
of the 1940 Act), or by the Distributor on sixty (60) days' written notice to
the Fund. The notice provided for herein may be waived by either party. This
Agreement shall automatically terminate in the event of its assignment, the term
"assignment" for this purpose having the meaning set forth in Section (a)(4) of
the 1940 Act.
13. REPRESENTATIONS AND WARRANTIES. The Trust represents and warrants
to the Distributor that any registration statement, prospectus and statement of
additional information, when such Registration Statement becomes effective, will
include all statements required to be contained therein in conformity with the
1933 Act, the 1940 Act and the rules and regulations of the SEC; that all
statements of fact contained in any registration statement, prospectus or
statement of additional information will be true and correct when such
Registration Statement becomes effective; and that neither any registration
statement nor any prospectus or statement of additional information when such
Registration Statement becomes effective will include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading to a purchaser of
shares. The Distributor may, but shall not be obligated to, propose from time to
time such amendment or amendments to any registration statement and such
supplement or supplements
5
<PAGE>
to any prospectus or statement of additional information as, in the light of
future developments, may, in the opinion of the Distributor's counsel, be
necessary or advisable. If the Trust shall not propose such amendment or
amendments and/or supplement or supplements within fifteen (15) days after
receipt by the Trust of a written request from the Distributor to do so, the
Distributor may, at its option, terminate this Agreement. The Trust shall not
file any amendment to any registration statement or supplement to any prospectus
or statement of additional information without giving the Distributor reasonable
notice thereof in advance; provided, however, that nothing contained in this
Agreement shall in any way limit the Trust's right to file at any time such
amendments to any registration statement and/or supplements to any prospectus or
statement of additional information, of whatever character, as the Trust may
deem advisable, such right being in all respects absolute and unconditional.
14. AMENDMENTS. This Agreement may be amended, with respect to any Fund
or Class, by the parties hereto only if such amendment is specifically approved
(i) by the Board of Trustees of the Trust or by the vote of majority of
outstanding voting securities of the Fund, and (ii) by a majority of the
Qualified Trustees, which vote must be cast in person at a meeting called for
the purpose of voting on such approval.
15. INDEMNIFICATION.
15.1 The Trust authorizes the Distributor and any
dealers with whom Distributor has entered into dealer agreements to
use any prospectus or statement of additional information furnished
by the Trust from time to time, in connection with the sale of
shares of each Fund. The Trust agrees to indemnify, defend and hold
Distributor, its several officers and directors, and any person who
controls Distributor within the meaning of Section 15 of the 1933
Act, free and harmless from and against any and all claims,
demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and
any counsel fees incurred in connection therewith) which
Distributor, its officers and directors, or any such controlling
person, may incur under the 1933 Act, the 1940 Act or common law or
otherwise, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any
registration statement, any prospectus or any statement of
additional information, or arising out of or based upon any
omission or alleged omission to state a material fact required to
be stated in any registration statement, any prospectus or any
statement of additional information, or necessary to make the
statements in any of them not misleading; provided, however, that
the Trust's agreement to indemnify the Distributor, its officers or
directors, and any such controlling person shall not be deemed to
cover any claims, demands, liabilities or expenses arising out of
or based upon any statements or representations made by Distributor
or its representatives or agents other than such statements and
representations as are contained in any registration statement,
prospectus or statement of additional information and in such
financial and other statements as are furnished to the Distributor
pursuant to paragraph 2 hereof; and further
6
<PAGE>
provided that the Trust's agreement to indemnify the Distributor
and the Trust's representations and warranties shall not be deemed
to cover any liability to the Trust or its shareholders to which
Distributor would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of
its duties, or by reason of Distributor' reckless disregard of its
obligations and duties under this Agreement. The Trust's agreement
to indemnify Distributor, its officers and directors, and any such
controlling person, as aforesaid, is expressly conditioned upon the
Trust's being notified of any action brought against Distributor,
its officers or directors, or any such controlling person, such
notification to be given by letter or by telegram addressed to the
Trust at its principal office stated herein and sent to the Trust
by the person against whom such action is brought, within ten (10)
days after the summons or other first legal process shall have been
served. The failure so to notify the Trust of any such action shall
not relieve the Trust from any liability that the Trust may have to
the person against whom such action is brought by reason of any
such untrue or alleged untrue statement or omission or alleged
omission otherwise than on account of the Trust's indemnity
agreement contained in this paragraph 12.1. The Trust's
indemnification agreement contained in this paragraph 12.1 and the
Trust's representations and warranties in this Agreement shall
remain operative and in full force and effect regardless of any
investigation made by or on behalf of Distributor, its officers and
directors, or any controlling person, and shall survive the
delivery of any shares. This agreement of indemnity will inure
exclusively to Distributor's benefit, to the benefit of its several
officers and directors and their respective estates, and to the
benefit of the controlling persons and their successors. The Trust
agrees to notify Distributor promptly of the commencement of any
litigation or proceedings against the Trust or any of its officers
or trustees in connection with the issuance and sale of any shares.
15.2 Distributor agrees to indemnify, defend and hold
the Trust, its several officers and trustees, and any person who
controls the Trust within the meaning of Section 15 of the 1933
Act, free and harmless from and against any and all claims,
demands, liabilities and expenses (including the costs of
investigating or defending such claims, demands or liabilities and
any counsel fees incurred in connection therewith) that the Trust,
its officers or trustees or any such controlling person may incur
under the 1933 Act, the 1940 Act or common law or otherwise, but
only to the extent that such liability or expense incurred by the
Trust, its officers or trustees or such controlling person
resulting from such claims or demands shall arise out of or be
based upon (a) any unauthorized sales literature, advertisements,
information, statements or representations or (b) any untrue or
allegedly untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Trust
and used in the answers to any of the items of the Registration
Statement or in the corresponding statements made in the prospectus
or statement of additional information, or shall arise out of or be
based upon any omission or alleged omission to state a material
fact in connection with such information furnished in writing by
Distributor to the Trust and required to be stated in such answers
or necessary to make such information
7
<PAGE>
not misleading. Distributor's agreement to indemnify the Trust, its
officers and trustees, and any such controlling person, as
aforesaid, is expressly conditioned upon Distributor being notified
of any action brought against the Trust, its officers or trustees,
or any such controlling person, such notification to be given by
letter or telegram addressed to Distributor at its principal office
as stated herein and sent to Distributor by the person against whom
such action is brought, within ten days after the summons or other
first legal process shall have been served. The failure so to
notify the Distributor of any such action shall not relieve
Distributor from any liability that the Distributor may have to the
Trust, its officers or trustees, or to such controlling person by
reason of any such untrue or alleged untrue statement or omission
or alleged omission otherwise than on account of Distributor's
indemnity agreement contained in this paragraph 12.2. The
Distributor agrees to notify the Trust promptly of the commencement
of any litigation or proceedings against Distributor or any of its
officers or directors in connection with the issuance and sale of
any shares.
15.3 In case any action shall be brought against any
indemnified party under paragraph 12.1 or 12.2, and it shall notify
the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in, and, to the
extent that it shall wish to do so, to assume the defense thereof
with counsel satisfactory to such indemnified party. If the
indemnifying party opts to assume the defense of such action, the
indemnifying party will not be liable to the indemnified party for
any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof other than
(a) reasonable costs of investigation or the furnishing of
documents or witnesses and (b) all reasonable fees and expenses of
separate counsel to such indemnified party if (i) the indemnifying
party and the indemnified party shall have agreed to the retention
of such counsel or (ii) the indemnified party shall have concluded
reasonably that representation of the indemnifying party and the
indemnified party by the same counsel would be inappropriate due to
actual or potential differing interests between them in the conduct
of the defense of such action.
16. LIABILITY OF THE DISTRIBUTOR. In the performance of its duties
hereunder, the Distributor shall be obligated to exercise care and diligence and
to act in good faith and to use its best efforts within reasonable limits to
insure the accuracy of all services performed under this Agreement, but the
Distributor shall not be liable for any act or omission which does not
constitute willful misfeasance, bad faith or gross negligence on the part of the
Distributor or reckless disregard by the Distributor of its duties under this
Agreement.
17. NOTICES. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of the Trust
shall be 601 West Main Avenue, Spokane, WA 99201, and the address of the
Distributor shall be 1201 Third Avenue, Seattle, WA 98101.
8
<PAGE>
18. DECLARATION OF TRUST AND LIMITATION OF LIABILITY. A copy of the
Declaration of Trust of the Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts, and notice is hereby given that this Agreement is
executed by an officer of the Trust on behalf of the trustees of the Trust, as
trustees and not individually, on further behalf of each Fund, and that the
obligations of this Agreement with respect to each Fund shall be binding upon
the assets and properties of the Fund only and shall not be binding upon the
assets and properties of any other Fund or series of the Trust or upon any of
the trustees, officers, employees, agents or shareholders of the Fund or the
Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.
THE SIERRA VARIABLE TRUST, on behalf of its series
SHORT TERM HIGH QUALITY BOND FUND,
GROWTH FUND,
EMERGING GROWTH FUND
INTERNATIONAL GROWTH FUND
MONEY MARKET FUND
U.S. GOVERNMENT FUND
CORPORATE INCOME FUND
GROWTH AND INCOME FUND
BOND & STOCK FUND
NORTHWEST FUND
CAPITAL GROWTH PORTFOLIO
GROWTH PORTFOLIO
BALANCED PORTFOLIO
VALUE PORTFOLIO
INCOME PORTFOLIO
By:
-----------------------------
Name:
Title:
Attest:
By:
----------------------------
Name:
Title:
9
<PAGE>
COMPOSITE FUNDS DISTRIBUTOR, INC.
By:
----------------------------------
William G. Papesh
President
Attest:
By:
-----------------------------
Sharon L. Howells
Secretary
10
<PAGE>
Sierra Trust Funds
Sierra Variable Trust
Sierra Prime Income Fund
Sierra Asset Management Portfolios
The Composite Funds
Composite U.S. Government Securities, Inc.
Composite Income Fund, Inc.
Composite Growth & Income Fund, Inc.
Composite Tax-Exempt Bond Fund Inc.
Composite Northwest Fund, Inc.
Composite Bond & Stock Fund, Inc.
Composite Cash Management Company
POWER OF ATTORNEY
-----------------
The individual whose signature appears below does hereby constitute and
appoint William G. Papesh, Keith B. Pipes and John T. West, and each of them
acting alone, as his/her true and lawful attorney and agent, with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorney and agent may deem necessary or
advisable or which may be required to enable each of Sierra Trust Funds, Sierra
Variable Trust, Sierra Prime Income Fund, Sierra Asset Management Portfolios,
The Composite Funds, Composite U.S. Government Securities, Inc., Composite
Income Fund, Inc., Composite Growth & Income Fund, Inc., Composite Tax-Exempt
Bond Fund Inc., Composite Northwest Fund, Inc., Composite Bond & Stock Fund,
Inc. and Composite Cash Management Company (collectively, the "Registrants") to
comply with the Securities Act of 1933, as amended (the"1933 Act") and the
Investment Company Act of 1940, as amended (the "1940 Act"), and any rules,
regulations or requirements of the Securities and Exchange Commission in respect
thereof, in connection with each Registrant's Registration Statement on Form N-
1A pursuant to the 1933 Act and/or the 1940 Act, together with any and all
amendments thereto, including specifically, but without limiting the generality
of the foregoing, the power and authority to sign in the name and on behalf of
the undersigned as a trustee or director (as appropriate) of each Registrant
such Registration Statement and any and all such amendments filed with the
Securities and Exchange Commission under the 1933 Act and/or the 1940 Act, and
any other instruments or documents related thereto, and the undersigned does
hereby ratify and confirm all that said attorney and agent shall do or cause to
be done by virtue hereof.
/s/ MICHAEL K. MURPHY
-------------------------------
Michael K. Murphy
Date: December 30, 1997
<PAGE>
Sierra Trust Funds
Sierra Variable Trust
Sierra Prime Income Fund
Sierra Asset Management Portfolios
The Composite Funds
Composite U.S. Government Securities, Inc.
Composite Income Fund, Inc.
Composite Growth & Income Fund, Inc.
Composite Tax-Exempt Bond Fund Inc.
Composite Northwest Fund, Inc.
Composite Bond & Stock Fund, Inc.
Composite Cash Management Company
POWER OF ATTORNEY
-----------------
The individual whose signature appears below does hereby constitute and
appoint Keith B. Pipes and John T. West, and each of them acting alone, as
his/her true and lawful attorney and agent, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorney and agent may deem necessary or advisable or
which may be required to enable each of Sierra Trust Funds, Sierra Variable
Trust, Sierra Prime Income Fund, Sierra Asset Management Portfolios, The
Composite Funds, Composite U.S. Government Securities, Inc., Composite Income
Fund, Inc., Composite Growth & Income Fund, Inc., Composite Tax-Exempt Bond
Fund Inc., Composite Northwest Fund, Inc., Composite Bond & Stock Fund, Inc. and
Composite Cash Management Company (collectively, the "Registrants") to comply
with the Securities Act of 1933, as amended (the"1933 Act") and the Investment
Company Act of 1940, as amended (the "1940 Act"), and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with each Registrant's Registration Statement on Form N-1A pursuant
to the 1933 Act and/or the 1940 Act, together with any and all amendments
thereto, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign in the name and on behalf of the
undersigned as a trustee or director (as appropriate) of each Registrant such
Registration Statement and any and all such amendments filed with the Securities
and Exchange Commission under the 1933 Act and/or the 1940 Act, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorney and agent shall do or cause to be done by
virtue hereof.
WILLIAM G. PAPESH
-------------------------------
William G. Papesh
Date: December 30, 1997
