As filed with the Securities and Exchange Commission
on January 25, 1996.
Registration Nos. 33-88792
811-8960
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. 2 [X]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 2 [X]
(Check appropriate box or boxes.)
LPT VARIABLE INSURANCE SERIES TRUST
__________________________________________________
(Exact name of registrant as specified in charter)
1755 Creekside Oaks Drive
Sacramento, CA 95833
________________________________________ __________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (916) 641-4200
George Nicholson
London Pacific Life and Annuity Company
3109 Poplarwood Court
Raleigh, North Carolina 27604
(Name and Address of Agent For Service)
Copies to:
Raymond A. O'Hara III, Esq.
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Filing.
Calculation of Registration Fee under the Securities Act of 1933:
$500 - Registrant is registering an indefinite number of securities under
the Securities Act of 1933 pursuant to Investment Company Act Rule 24f-2.
==============================================================================
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
LPT VARIABLE INSURANCE SERIES TRUST
CROSS REFERENCE SHEET
(as required by rule 404(c))
<TABLE>
<CAPTION>
<S> <C> <C>
PART A
N-1A
- --------
Item No. Location
- -------- ----------------------------
1. Cover Page......................... Cover Page
2. Synopsis........................... Not Applicable
3. Condensed Financial Information.... Not Applicable
4. General Description of Registrant.. Cover Page; Investment
Objectives and Policies;
Additional Information
5. Management of the Fund............. Management of the Trust;
Additional Information
6. Capital Stock and Other Securities. Sales and Redemptions;
Net Asset Value; Tax Status,
Dividends and Distributions;
Additional Information
7. Purchase of Securities Being
Offered....................... Net Asset Value; Sales and
Redemptions
8. Redemption or Repurchase........... Sales and Redemptions;
Net Asset Value
9. Pending Legal Proceedings.......... Not Applicable
PART B
10. Cover Page......................... Cover Page
11. Table of Contents.................. Cover Page
12. General Information and History.... Not Applicable
13. Investment Objectives and Policies. Investment Objectives and
Policies of the Trust;
Investment Restrictions;
Portfolio Turnover
</TABLE>
CROSS REFERENCE SHEET (cont'd)
(as required by rule 404(c))
<TABLE>
<CAPTION>
<S> <C> <C>
N-1A
- --------
Item No. Location
- -------- ---------------------------------
14. Management of the Fund............. Management of the Trust
15. Control Persons and Principal
Holders of Securities......... Management of the Trust
16. Investment Advisory and Other
Services...................... Management of the Trust;
Independent Accountants;
Custodian
17. Brokerage Allocation............... Management of the Trust
(Brokerage and Research
Services)
18. Capital Stock and Other Securities. Sales and Redemptions (Part A);
Net Asset Value (Part A); Tax
Status, Dividends and Distribu-
tions (Part A); Organization and
Capitalization; Additional
Information (Part A)
19. Purchase, Redemption and Pricing of
Securities Being Offered...... Determination of Net Asset
Value; Sales and Redemptions
(Part A)
20. Tax Status......................... Taxes; Dividends and
Distributions
21. Underwriters....................... Not Applicable
22. Calculations of Yield Quotations of
Money Market Funds............ Performance Information
23. Financial Statements............... Not Applicable
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Reginstration Statement.
PART A
MAS VALUE PORTFOLIO
LPT VARIABLE INSURANCE SERIES TRUST
1755 CREEKSIDE OAKS DRIVE
SACRAMENTO, CALIFORNIA 95833
CLASS A SHARES
LPT Variable Insurance Series Trust (the "Trust") is an open-end, series
management investment company which currently offers shares of beneficial
interest of eight series (the "Portfolios"), each of which has a different
investment objective and represents the entire interest in a separate
portfolio of investments. THIS PROSPECTUS CONTAINS INFORMATION PERTAINING TO
THE MAS VALUE PORTFOLIO ONLY. This Portfolio is currently available to the
public only through variable annuity contracts ("VA Contracts") issued by
London Pacific Life and Annuity Company ("Life Company").
Please read this Prospectus before investing in the MAS Value Portfolio and
keep it for future reference. The Prospectus contains information about the
MAS Value Portfolio that a prospective investor should know before investing.
A Statement of Additional Information ("SAI") dated ________, 1996 is
available without charge upon request and may be obtained by calling the Life
Company at (800) 852-3152 or by writing to the Life Company's Annuity Service
Center, P.O. Box 29564, Raleigh, North Carolina 27626. Some of the discussions
contained in this Prospectus refer to the more detailed descriptions contained
in the SAI, which is incorporated by reference into this Prospectus and has
been filed with the Securities and Exchange Commission.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE PURCHASER OF A VA CONTRACT SHOULD READ THIS PROSPECTUS IN CONJUNCTION WITH
THE PROSPECTUS FOR HIS OR HER VA CONTRACT.
PROSPECTUS DATED ___________, 1996
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVE AND POLICIES
MAS Value Portfolio
GENERAL PORTFOLIO INFORMATION
PROSPECTUS GLOSSARY
CHARACTERISTICS AND RISKS OF STRATEGIES AND INVESTMENTS
Strategies
Investments
MANAGEMENT OF THE TRUST
Investment Adviser
Advisory Fee Waiver
Expense Reimbursement
Organizational Expenses of the Trust
Sub-Adviser
Sub-Advisory Fees
SALES AND REDEMPTIONS
NET ASSET VALUE
PERFORMANCE INFORMATION
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
ADDITIONAL INFORMATION
INVESTMENT OBJECTIVE AND POLICIES
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment
objective of the MAS Value Portfolio is not fundamental and may be changed
without the approval of a majority of the outstanding shares of the Portfolio.
All other investment policies or limitations, unless otherwise specifically
stated, are non-fundamental and may be changed by the Trustees of the Trust
without a vote of the shareholders. There is no assurance that the Portfolio
will achieve its objective. A complete list of investment restrictions,
including those restrictions which cannot be changed without shareholder
approval, is contained in the SAI. United States Treasury Regulations
applicable to portfolios that serve as the funding vehicles for variable
annuity and variable life insurance contracts generally require that such
portfolios invest no more than 55% of the value of their assets in one
investment, 70% in two investments, 80% in three investments, and 90% in four
investments. The Portfolio intends to comply with the requirements of these
Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by the Portfolio declines below the minimum rating for securities in
which the Portfolio may invest, the Portfolio will not be required to dispose
of the security, but the Portfolio's Sub-Adviser will consider whether
continued investment in the security is consistent with the Portfolio's
investment objective.
In implementing its investment objective and policies, the Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the SAI. With respect to the Portfolio's investment policies, use
of the term "primarily" means that under normal circumstances, at least 65% of
such Portfolio's assets will be invested as indicated. A description of the
ratings systems used by the following nationally recognized statistical rating
organizations ("NRSROs") is contained in the SAI: Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc.
("Duff"), Fitch Investors Service, Inc. ("Fitch"), Thomson Bankwatch, Inc.,
IBCA Limited and IBCA Inc. New instruments, strategies and techniques,
however, are evolving continually and the Portfolio reserves authority to
invest in or implement them to the extent consistent with its investment
objectives and policies. If new instruments, strategies or techniques would
involve a material change to the information contained herein, they will not
be purchased or implemented until this Prospectus is appropriately
supplemented.
MAS VALUE PORTFOLIO
Objective:
To achieve above-average total return over a market cycle of three to five
years, consistent with reasonable risk, by investing in common stocks with
equity capitalizations usually greater than $300 million which are deemed by
the Sub-Adviser to be relatively undervalued, based on various measures such
as price/earnings ratios and price/book ratios. While capital return will be
emphasized somewhat more than income return, the Portfolio's total return will
consist of both capital and income returns. It is expected that income return
will be higher than that of a general common stock fund because stocks which
are deemed to undervalued in the marketplace have, under most market
conditions, provided higher dividend income returns than stocks which are
deemed to have long-term earnings growth potential which normally sell at
higher price/earnings ratios.
Approach:
The Sub-Adviser selects common stocks which are deemed to be undervalued
relative to the stock market in general as measured by the Standard & Poor's
500 Composite Stock Price Index, based on the value measures such as
price/earnings ratios and price/book ratios, as well as fundamental research.
Policies:
Generally at least 65% invested in EQUITY SECURITIES deemed to be undervalued
Up to 5% invested in FOREIGN EQUITIES (excluding ADRS)
DERIVATIVES may be used to pursue portfolio strategy
Capitalization Range:
Generally greater than $300 million
Allowable Investments:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
COMMON STOCK PREFERRED STOCK CONVERTIBLES ADRS
CASH EQUIVALENTS REPURCHASE AGREEMENTS FOREIGN EQUITIES RIGHTS
WARRANTS FUTURES & OPTIONS SWAPS FOREIGN CURRENCY
FORWARDS U.S. GOVERNMENTS ZERO COUPONS AGENCIES
CORPORATES FOREIGN BONDS INVESTMENT COMPANIES WHEN ISSUED
</TABLE>
Comparative Index:
S&P 500 INDEX
Strategy:
VALUE STOCK INVESTING
GENERAL PORTFOLIO INFORMATION
OBJECTIVES: The Portfolio seeks to achieve its investment objective relative
to the universe of securities in which it is authorized to invest and,
accordingly, the total return or current income achieved by the Portfolio may
not be as great as that achieved by another portfolio that can invest in a
broader range of securities.
SECURITIES LENDING/RESTRICTIONS: The Portfolio may participate in a SECURITIES
LENDING program and invest up to 15% of its net assets in securities that are
illiquid by virtue of the absence of a readily available market, or because of
legal or contractual restrictions on resale. This policy does not limit the
acquisition of restricted securities (i) eligible for resale to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933 or
(ii) commercial paper issued pursuant to Section 4(2) under the Securities Act
of 1933 that are determined to be liquid in accordance with guidelines
established by the Trust's Board of Trustees. There may be delays in selling
these securities and sales may be made at less favorable prices.
TURNOVER: The Sub-Adviser manages the Portfolio generally without regard to
restrictions on portfolio TURNOVER, except those imposed by provisions of the
federal tax laws regarding short-term trading. In general, the Portfolio will
not trade for short-term profits, but when circumstances warrant, investments
may be sold without regard to the length of time held.
CASH EQUIVALENTS: Although the Portfolio intends to remain substantially fully
invested, a small percentage of the Portfolio's assets are generally held in
the form of CASH EQUIVALENTS in order to meet redemption requests and
otherwise manage the daily affairs of the Portfolio. The Portfolio may, when
the Sub-Adviser deems that market conditions are such that a temporary
defensive approach is desirable, invest in cash equivalents or the
FIXED-INCOME SECURITIES listed as Allowable Investments.
CONCENTRATION: Concentration is defined as investment of 25% or more of the
Portfolio's total assets in the securities of issuers operating in any one
industry. Except as provided in the Portfolio's specific investment policies,
the Portfolio will not concentrate investments in any one industry.
INVESTMENT LIMITATIONS: The Portfolio has adopted certain limitations designed
to reduce its exposure to specific situations. Some of these limitations are:
(a) with respect to 75% of its assets, the Portfolio will not purchase
securities of any issuer if, as a result, more than 5% of the Portfolio's
total assets taken at market value would be invested in the securities of any
single issuer except that this restriction does not apply to securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities;
(b) with respect to 75% of its assets, the Portfolio will not purchase a
security if, as a result, the Portfolio would hold more than 10% of the
outstanding voting securities of any issuer;
(c) the Portfolio will not invest more than 5% of its total assets in
the securities of issuers (other than securities issued or guaranteed by U.S.
or foreign governments or political subdivisions thereof) which have (with
predecessors) a record of less than three years of continuous operation;
(d) the Portfolio will not acquire any securities of companies within
one industry, other than mortgage-backed securities, if, as a result of such
acquisition, more than 25% of the value of the Portfolio's total assets would
be invested in securities of companies within such industry; provided,
however, that (1) there shall be no limitation on the purchase of obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or instruments issued by U.S. banks the Portfolio adopts a
temporary defensive position; (2) utility companies will be divided according
to their services, for example, gas, gas transmission, electric and telephone
will each be considered a separate industry; (3) financial service companies
will be classified according to the end users of their services, for example,
automobile finance, bank finance and diversified finance will each be
considered a separate industry; and (4) asset-backed securities will be
classified according to the underlying assets securing such securities.
(e) the Portfolio will not make loans except (i) by purchasing debt
securities in accordance with its investment objectives and policies, or
entering into REPURCHASE AGREEMENTS, (ii) by lending its portfolio securities
and (iii) by lending portfolio assets to other Portfolios of the Trust, so
long as such loans are not inconsistent with the Investment Company Act of
1940, as amended or the Rules and Regulations, or interpretations or orders of
the Securities and Exchange Commission thereunder;
(f) the Portfolio will not borrow money, except (i) as a temporary
measure for extraordinary or emergency purposes or (ii) in connection with
reverse repurchase agreements provided that (i) and (ii) in combination do not
exceed 33 1/3% of the Portfolio's total assets (including the amount borrowed)
less liabilities (exclusive of borrowings);
(g) the Portfolio will not pledge, mortgage, or hypothecate any of its
assets to an extent greater than 50% of its total assets at fair market value;
and
(h) the Portfolio will not invest its assets in securities of any
investment company, except by purchase in the open market involving only
customary brokers' commissions or in connection with mergers, acquisitions of
assets or consolidations and except as may otherwise be permitted by the
Investment Company Act of 1940, as amended.
Limitations (a), (b), (d), (e), and (f), and certain other limitations
described in the Statement of Additional Information are fundamental and may
be changed only with the approval of the holders of a majority of the shares
of the Portfolio. The other investment limitations described here and in the
Statement of Additional Information are not fundamental policies meaning that
the Board of Trustees may change them without shareholder approval. If a
percentage limitation on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value or total cost of the
Portfolio's assets will not be considered a violation of the restriction, and
the sale of securities will not be required.
PROSPECTUS GLOSSARY
CHARACTERISTICS AND RISKS OF STRATEGIES AND INVESTMENTS
STRATEGIES
FOREIGN INVESTING: Investors should recognize that investing in securities
issued by foreign companies or governments involves certain special
considerations which are not typically associated with investing in U.S.
companies. Since the securities of foreign issuers may be denominated in
foreign currencies, and since the Portfolio may temporarily hold uninvested
reserves in bank deposits of foreign currencies prior to reinvestment or
conversion to U.S. dollars, the Portfolio may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
and may incur costs in connection with conversions between various currencies.
As non-U.S. companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to U.S. companies, there may be less publicly available information
about certain foreign companies than about U.S. companies. Securities of some
non-U.S. companies may be less liquid and more volatile than securities of
comparable U.S. companies. There is generally less government supervision and
regulation of stock exchanges, brokers and listed companies than in the U.S.
With respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those
countries. Additionally, there may be difficulty in obtaining and enforcing
judgments against foreign issuers.
Although the Portfolio will endeavor to achieve the most favorable execution
costs in its portfolio transactions in foreign securities, fixed commissions
on many foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. In addition, it is expected that the expenses
for custodial arrangements of the Portfolio's foreign securities will be
greater than the expenses for the custodial arrangements for handling U.S.
securities of equal value. Certain foreign governments levy withholding taxes
against dividend and interest income. Although in some countries a portion of
these taxes is recoverable, the non-recovered portion of foreign withholding
will reduce the income the Portfolio receives from the companies comprising
the Portfolio's investments.
SECURITIES LENDING: The Portfolio may lend its securities to qualified
brokers, dealers, banks and other financial institutions for the purpose of
realizing additional income. Loans of securities will be collateralized by
cash, letters of credit, or securities issued or guaranteed by the U.S.
Government or its agencies. The collateral will equal at least 100% of the
current market value of the loaned securities. In addition, the Portfolio
will not loan its portfolio securities to the extent that greater than
one-third of its total assets, at fair market value, would be committed to
loans at that time.
TURNOVER: It is expected that the turnover rate for the Portfolio will not
exceed 100%. A 100% rate of turnover would occur, for example, if all of the
Portfolio's securities are replaced within a one year period.
High rates of portfolio turnover necessarily result in correspondingly heavier
brokerage and portfolio trading costs which are paid by a portfolio. Trading
in FIXED-INCOME SECURITIES does not generally involve the payment of brokerage
commissions, but does involve indirect transaction costs. In addition to
portfolio trading costs, higher rates of portfolio turnover may result in the
realization of capital gains.
VALUE STOCK INVESTING: Emphasizes common stocks which are deemed by the
Sub-Adviser to be undervalued relative to the stock market in general as
measured by the Standard & Poor's 500 Composite Stock Price Index, based on
value measures such as price/earnings ratios and price/book ratios. Value
stocks are generally dividend paying common stocks. However, non-dividend
paying stocks may also be selected for their value characteristics.
INVESTMENTS
The Portfolio may invest in the securities defined below in accordance with
its listing of Allowable Investments and any quality or policy constraints.
ADRS--American Depository Receipts: are dollar-denominated securities which
are listed and traded in the United States, but which represent claims to
shares of foreign stocks. ADRs may be either sponsored or unsponsored.
Unsponsored ADR facilities typically provide less information to ADR holders.
AGENCIES: are securities which are not guaranteed by the U.S. Government, but
which are issued, sponsored or guaranteed by a federal agency or federally
sponsored agency such as the Student Loan Marketing Association, Resolution
Funding Corporation, or any of several other agencies.
CASH EQUIVALENTS: are short-term fixed-income instruments comprising:
(1) Time deposits, certificates of deposit (including marketable
variable rate certificates of deposit) and bankers' acceptances issued by a
commercial bank or savings and loan association. Time deposits are
non-negotiable deposits maintained in a banking institution for a specified
period of time at a stated interest rate. Time deposits maturing in more than
seven days will not be purchased by the Portfolio, and time deposits maturing
from two business days through seven calendar days will not exceed 15% of the
total assets of the Portfolio. Certificates of deposit are negotiable
short-term obligations issued by commercial banks or savings and loan
associations against funds deposited in the issuing institution. Variable
rate certificates of deposit are certificates of deposit on which the interest
rate is periodically adjusted prior to their stated maturity based upon a
specified market rate. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower usually in connection with an international
commercial transaction (to finance the import, export, transfer or storage of
goods).
The Portfolio may invest in obligations of U.S. banks, foreign branches of
U.S. banks (Eurodollars), and U.S. branches of foreign banks (Yankee dollars),
Euro and Yankee dollar investments will involve some of the same risks of
investing in international securities that are discussed in the FOREIGN
INVESTING section of this Prospectus.
A Portfolio will not invest in any security issued by a commercial bank unless
(i) the bank has total assets of at least $1 billion, or the equivalent in
other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation, (ii) in the case
of U.S. banks, it is a member of the Federal Deposit Insurance Corporation,
and (iii) in the case of foreign branches of U.S. banks, the security is
deemed by the Sub-Adviser to be of an investment quality comparable with other
debt securities which may be purchased by the Portfolio;
(2) The Portfolio may invest in commercial paper rated at time of
purchase by one or more NRSROs in one of their two highest categories, (e.g.
A-1 or A-2 by Standard & Poor's or Prime 1 or Prime 2 by Moody's), or, if not
rated, issued by a corporation having an outstanding unsecured debt issue
rated high-grade by a NRSRO (e.g. A or better by Moody's, Standard & Poor's or
Fitch);
(3) Short-term corporate obligations rated high-grade at the time of
purchase by a NRSRO (e.g. A or better by Moody's, Standard & Poor's or Fitch);
(4) Government Obligations including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in interest rates, maturities and dates of
issue;
(5) Government Agency securities issued or guaranteed by U.S. Government
sponsored instrumentalities and Federal agencies. These include securities
issued by the Federal Home Loan Banks, Federal Land Bank, Farmers Home
Administration, Farm Credit Banks, Federal Intermediate Credit Bank, Federal
National Mortgage Association, Federal Financing Bank, the Tennessee Valley
Authority, and others; and
(6) Repurchase agreements collateralized by securities listed above.
COMMON STOCKS: are EQUITY SECURITIES which represent an ownership interest in
a publicly held corporation, entitling the shareholder to voting rights and
receipt of dividends paid based on proportionate ownership.
CONVERTIBLES: a convertible bond or shares of convertible PREFERRED STOCK
which may be exchanged for a fixed number of shares of COMMON STOCK at the
purchaser's option.
CORPORATES: corporate bonds: are debt instruments issued by private
corporations. Bondholders, as creditors, have a prior legal claim over common
and preferred stockholders of the corporation as to both income and assets for
the principal and interest due to the bondholder. The Portfolio will buy
Corporates subject to any quality constraints. If a security held by the
Portfolio is downgraded, the Portfolio may retain the security.
DERIVATIVES: A financial instrument whose value and performance are based on
the value and performance of another security or financial instrument. The
Sub-Adviser will use derivatives only in circumstances where they offer the
most economic means of improving the risk/reward profile of the Portfolio.
The Sub-Adviser will not use derivatives to increase portfolio risk above the
level that could be achieved in the Portfolio using only traditional
investment securities. In addition, the Sub-Adviser will not use derivatives
to acquire exposure to changes in the value of assets or indexes that by
themselves would not be purchased for the Portfolio. Any applicable
limitations are described under each investment definition.
Derivative Security Transactions: The Portfolio may enter into OTC DERIVATIVES
transactions (SWAPS, Caps, Floors, Puts, etc., but excluding foreign exchange
contracts) with counterparties that are approved by the Sub-Adviser in
accordance with guidelines established by the Board of Trustees. These
guidelines provide for a minimum credit rating for each counterparty and
various credit enhancement techniques (for example, collateralization of
amounts due from counterparties) to limit exposure to counterparties with
ratings below AA.
EQUITY SECURITIES: Commonly include but are not limited to COMMON STOCK,
PREFERRED STOCK, ADRS, RIGHTS, WARRANTS, CONVERTIBLES (when referring to
Convertible Preferred Stock) and FOREIGN EQUITIES. PREFERRED STOCK is
contained in both the definition of EQUITY SECURITIES and FIXED-INCOME
SECURITIES since it exhibits characteristics commonly associated with each
type.
FIXED-INCOME SECURITIES: Commonly include but are not limited to U.S.
GOVERNMENTS, ZERO COUPONS, AGENCIES, CORPORATES, CONVERTIBLES, CASH
EQUIVALENTS, REPURCHASE AGREEMENTS, PREFERRED STOCK, and FOREIGN BONDS.
PREFERRED STOCK is contained in both the definition of EQUITY SECURITIES and
FIXED-INCOME SECURITIES since it exhibits characteristics commonly associated
with each type of security.
FOREIGN CURRENCY: Portfolios investing in foreign securities will regularly
transact security purchases and sales in foreign currencies. The Portfolio
may hold foreign currency or purchase or sell currencies on a forward basis
(see FORWARDS).
FOREIGN EQUITIES: are COMMON STOCK, PREFERRED STOCK, RIGHTS and WARRANTS of
foreign issuers. Investing in foreign companies involves certain special
considerations which are not typically associated with investing in U.S.
companies (see FOREIGN INVESTING).
FOREIGN BONDS: are FIXED-INCOME SECURITIES denominated in foreign currency
including: (1) obligations issued or guaranteed by foreign national
governments, their agencies, instrumentalities, or political subdivisions; (2)
debt securities issued, guaranteed or sponsored by supranational organizations
established or supported by several national governments, including the World
Bank, the European Community, the Asian Development Bank and others; and (3)
non-government foreign corporate debt securities.
FORWARDS: Forward Foreign Currency Exchange Contracts: are DERIVATIVES which
are used to protect against uncertainty in the level of future foreign
exchange rates. A forward foreign currency exchange contract is an obligation
to purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon the parties, at
a price set at the time of the contract. Such contracts, which protect the
value of the Portfolio's investment securities against a decline in the value
of a currency, do not eliminate fluctuations caused by changes in the local
currency prices of the securities, but rather, they simply establish an
exchange rate at a future date. Also, although such contracts minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time they limit any potential gain that might be realized should the value of
such currency increase.
FUTURES & OPTIONS--Futures Contracts, Options on Futures Contracts and
Options: are DERIVATIVES. Futures contracts provide for the sale by one party
and purchase by another party of a specified amount of a specific security, at
a specified future time and price. An option is a legal contract that gives
the holder the right to buy or sell a specified amount of the underlying
security or futures contract at a fixed or determinable price upon the
exercise of the option. A call option conveys the right to buy and a put
option conveys the right to sell a specified quantity of the underlying
security.
The Portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts in
combination with its outstanding obligations with respect to options
transactions would exceed 50% of its total assets, and such that it will
maintain assets sufficient to meet its obligations under such contracts in a
segregated account with the custodian bank or will otherwise comply with the
SEC's position on asset coverage.
Possible Risks Involved: The primary risks associated with the use of futures
and options are (i) imperfect correlation between the change in market value
of the securities held by the Portfolio and the prices of futures and options
relating to the stocks, bonds or futures contracts purchased or sold by the
Portfolio; and (ii) possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures position which could
have an adverse impact on the Portfolio's ability to execute futures and
options strategies. Additional risks associated with options transactions are
(i) the risk that an option will expire worthless; (ii) the risk that the
issuer of an over-the-counter option will be unable to fulfill its obligation
to the Portfolio due to bankruptcy or related circumstances; (iii) the risk
that options may exhibit greater short-term price volatility than the
underlying security; and (iv) the risk that the Portfolio may be forced to
forego participation in the appreciation of the value of underlying
securities, futures contracts or currency due to the writing of a covered call
option.
INVESTMENT COMPANIES: The Portfolio is permitted to invest in shares of other
open-end or closed-end investment companies as permitted. The Investment
Company Act of 1940, as amended, generally prohibits the Portfolio from
acquiring more than 3% of the outstanding voting shares of an open-end
investment company and limits such investments to no more than 5% of the
Portfolio's total assets in any one open-end investment company and no more
than 10% in any combination of open-end investment companies.
To the extent the Portfolio invests a portion of its assets in Investment
Companies, those assets will be subject to the expenses of the purchased
investment company as well as to the expenses of the Portfolio itself. The
Portfolio may not purchase shares of any affiliated investment company.
PREFERRED STOCK: are non-voting ownership shares in a corporation which pay a
fixed or variable stream of dividends.
REPURCHASE AGREEMENTS: are transactions by which the Portfolio purchases a
security and simultaneously commits to resell that security to the seller (a
bank or securities dealer) at an agreed upon price on an agreed upon date
(usually within seven days of purchase). The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated
to the coupon rate or date of maturity of the purchased security. In these
transactions, the securities purchased by the Portfolio have a total value in
excess of the value of the repurchase agreement and are held by the
Portfolio's custodian bank or an approved third party for the benefit of the
Portfolio until repurchased. Such agreements permit the Portfolio to keep all
its assets at work while retaining overnight flexibility in pursuit of
investments of a longer term nature. The Sub-Adviser will continually monitor
the value of the underlying securities to ensure that their value, including
accrued interest, always equals or exceeds the repurchase price.
RIGHTS: represent a preemptive right of stockholders to purchase additional
shares of a stock at the time of a new issuance, before the stock is offered
to the general public, allowing the stockholder to retain the same ownership
percentage after the new stock offering.
SWAPS: Swap Contracts are DERIVATIVES in the form of a contract or other
similar instrument which is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specified index and agreed upon
notional amount. The term specified index includes, but is not limited to,
currencies, fixed interest rates, prices and total return on interest rate
indices, fixed-income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example,
the Portfolio may agree to swap the return generated by a fixed-income index
for the return generated by a second fixed-income index. The currency swaps
in which the Portfolio may enter will generally involve an agreement to pay
interest streams calculated by reference to interest income linked to a
specified index in one currency in exchange for a specified index in another
currency. Such swaps may involve initial and final exchanges that correspond
to the agreed upon notional amount.
The Portfolio will usually enter into swaps on a net basis, i.e., the two
return streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two returns. The Portfolio's
obligations under a swap agreement will be accrued daily (offset against any
amounts owing to the Portfolio) and any accrued but unpaid net amounts owed to
a swap counterparty will be covered by the maintenance of a segregated account
consisting of cash, U.S. Government securities, or high grade debt
obligations. The Portfolio will not enter into any swap agreement unless the
commercial paper, senior debt or claims paying abilities of the counterparty
are rated AA and A-1 or better by Standard & Poor's Corporation or Aa and P-1
or better by Moody's Investors Services, Inc., rated comparably by another
NRSRO or determined by the Sub-Adviser to be of comparable quality.
Possible Risks Involved: Interest rate and total rate of return swaps do not
involve the delivery of securities, other underlying assets, or principal.
Accordingly, the risk of loss with respect to interest rate and total rate of
return swaps is limited to the net amount of interest payments that the
Portfolio is contractually obligated to make. If the other party to an
interest rate or total rate of return swap defaults, the Portfolio's risk of
loss consists of the net amount of interest payments that the Portfolio is
contractually entitled to receive. In contrast, currency swaps usually
involve the delivery of the entire principal value of one designated currency
in exchange for the other designated currency. Therefore, the entire
principal value of a currency swap is subject to the risk that the other party
to the swap will default on its contractual delivery obligations. If there is
a default by the counterparty, the Portfolio may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has
grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Swaps that include caps, floors, and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Sub-Adviser is incorrect in its forecasts of
market value, interest rates, and currency exchange rates, the investment
performance of the Portfolio would be less favorable than it would have been
if this investment technique were not used.
U.S. GOVERNMENTS: U.S. Treasury securities: are FIXED-INCOME SECURITIES which
are backed by the full faith and credit of the U.S. Government as to the
payment of both principal and interest.
WARRANTS: are options issued by a corporation which give the holder the option
to purchase stock.
WHEN-ISSUED SECURITIES: are securities purchased at a certain price even
though the securities may not be delivered for up to 90 days. The Portfolio
will maintain with the custodian a separate account with a segregated
portfolio of liquid, high-grade debt securities or cash in an amount at least
equal to these commitments. No payment or delivery is made by the Portfolio
in a when-issued transaction until the Portfolio receives payment or delivery
from the other party to the transaction. Although the Portfolio receives no
income from the above described securities prior to delivery, the market value
of such securities is still subject to change. As a consequence, it is
possible that the market price of the securities at the time of delivery may
be higher or lower than the purchase price.
ZERO COUPONS: Zero Coupon Obligations are FIXED-INCOME SECURITIES that do not
make regular interest payments. Instead, zero coupon obligations are sold at
substantial discounts from their face value. The difference between a zero
coupon obligation's issue or purchase price and its face value represents the
imputed interest an investor will earn if the obligation is held until
maturity. Zero coupon obligations may offer investors the opportunity to earn
higher yields than those available on ordinary interest-paying obligations of
similar credit quality and maturity. However, zero coupon obligation prices
may also exhibit greater price volatility than ordinary fixed-income
securities because of the manner in which their principal and interest are
returned to the investor.
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER
Under an Investment Advisory Agreement dated January 9, 1996, LPIMC
Insurance Marketing Services, 1755 Creekside Oaks Drive, Sacramento, CA 95833
(the "Adviser"), manages the investment strategies and policies of the
Portfolios and the Trust, subject to the control of the Trustees.
The Adviser is a registered investment adviser organized under the laws of
California. The Adviser is a wholly-owned subsidiary of the Life Company.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate
a continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies and restrictions and to determine from time to time securities to be
purchased, sold, retained or lent by the Trust and implement those decisions.
The Investment Advisory Agreement also provides that the Adviser shall manage
the Trust's business and affairs and shall provide such services required for
effective administration of the Trust as are now provided by employees or
other agents engaged by the Trust. The Investment Advisory Agreement further
provides that the Adviser shall furnish the Trust with office space and
necessary personnel, pay ordinary office expenses, pay all executive salaries
of the Trust and furnish, without expense to the Trust, the services of such
members of its organization as may be duly elected officers or Trustees of the
Trust. The Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at the Adviser's own cost and expense, for the purpose of
managing the investment of the assets of one or more Portfolios of the Trust.
As full compensation for its services under the Investment Advisory Agreement
with respect to the MAS Value Portfolio, the Trust will pay the Adviser a
monthly fee at the following annual rates based on the average daily net
assets of the Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO ADVISORY FEE
- ------------------- -------------------------------------
<S> <C>
MAS Value Portfolio .875% of first $25 million of average
daily net assets
.625% of next $75 million of average
daily net assets
.50% of next $400 million of average
daily net assets
.45% of average daily net assets over
and above $500 million.
</TABLE>
ADVISORY FEE WAIVER
Adviser has agreed to waive its entire advisory fee for the Portfolio for the
initial three (3) months of the Portfolio's investment operations and to
waive .25% of its advisory fee for the next three (3) months thereafter.
EXPENSE REIMBURSEMENT
The Life Company has voluntarily agreed to reimburse the Portfolio for certain
expenses (excluding brokerage commissions and management fees) in excess of
1.29%. The Life Company has reserved the right to withdraw or modify its
policy of expense reimbursement for the Portfolio. If expenses were not
reimbursed, anticipated actual expenses would be approximately 1.80%.
ORGANIZATIONAL EXPENSES OF THE TRUST
The Life Company will pay for all organizational expenses of the Trust
including contribution of the initial "seed money" to the Trust.
SUB-ADVISER
The Adviser has engaged the Sub-Adviser for the Portfolio to make investment
decisions and place orders. In accordance with the Portfolio's investment
objective and policies and under the supervision of the Adviser and the
Trust's Board of Trustees, the Portfolio's Sub-Adviser is responsible for the
day to day investment management of the Portfolio, makes investment decisions
for the Portfolio and places orders on behalf of the Portfolio to effect the
investment decisions made as provided in a Sub-Advisory Agreement among the
Sub-Adviser, the Adviser and the Trust.
The Sub-Adviser for the Portfolio is Miller Anderson & Sherrerd, LLP, a
Pennsylvania limited liability partnership founded in 1969 and located at One
Tower Bridge, West Conshohocken, PA 19428. The Sub-Adviser is wholly-owned by
certain indirect subsidiaries of the Morgan Stanley Group, Inc. The
Sub-Adviser is an Equal Opportunity/Affirmative Action Employer which provides
investment services to other investment companies, employee benefit plans,
endowment funds, foundations and other institutional investors. As of the
date of this Prospectus, the Sub-Adviser had in excess of $35 billion in
assets under management.
The investment professionals of the Sub-Adviser who are primarily responsible
for the day-to-day management of the Portfolio are Robert J. Marcin and A.
Morris Williams, Jr. Mr. Marcin, a partner in the Sub-Adviser, joined the
Sub-Adviser in 1988 and is responsible for managing the Value Portfolio of MAS
Funds. Mr. Williams, also a partner in the Sub-Adviser, joined the
Sub-Adviser in 1973 and is responsible for managing the same Portfolios of the
MAS Funds as Mr. Marcin.
SUB-ADVISORY FEES
Under the terms of the Sub-Advisory Agreement, the Adviser shall pay to the
Sub-Adviser, as full compensation for services rendered under the Sub-Advisory
Agreement with respect to the Portfolio, monthly fees at the following annual
rates based on the average daily net assets of the Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISORY FEE
-------------------------------------
<S> <C>
MAS Value Portfolio .625% of first $25 million of average
daily net assets.
.375% of the next $75 million of
average daily net assets
.25% of the next $400 million of
average daily net assets
.20% of average daily net assets
over and above $500 million
</TABLE>
PORTFOLIO TRANSACTIONS
The Sub-Advisory Agreement authorizes the Sub-Adviser to select the brokers or
dealers that will execute the purchases and sales of investment securities for
the Portfolio and directs the Sub-Adviser to use its best efforts to obtain
the best execution with respect to all transactions for the Portfolio. In
doing so, the Portfolio may pay higher commission rates than the lowest
available when the Sub-Adviser believes it is reasonable to do so in light of
the value of the research, statistical, and pricing services provided by the
broker effecting the transaction.
It is not the Portfolio's practice to allocate brokerage or principal business
on the basis of sales of shares which may be made through intermediary brokers
or dealers. However, the Sub-Adviser may place portfolio orders with
qualified broker-dealers who recommend the Portfolio or who act as agents in
the purchase of shares of the Portfolio for their clients.
Some securities considered for investment by the Portfolio may also be
appropriate for other clients served by the Sub-Adviser. If purchase or sale
of securities consistent with the investment policies of the Portfolio and one
or more of these other clients served by the Sub-Adviser is considered at or
about the same time, transactions in such securities will be allocated among
the Portfolio and clients in a manner deemed fair and reasonable by the
Sub-Adviser. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the Sub-Adviser, and the
results of such allocations, are subject to periodic review by the Trust's
Trustees.
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the
Trust will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees
and charges relating to the VA Contract.)
The separate account of the Life Company places orders to purchase and redeem
shares of each Portfolio based on, among other things, the amount of
contributions to be invested and surrender and transfer requests to be
effected on that day pursuant to the VA contracts issued by the Life Company.
Orders received by the Trust are effected on days on which the New York Stock
Exchange is open for trading, at the net asset value per share next determined
after receipt of the order. For orders received before 4:00 p.m. New York
time, such purchases and redemptions of shares of each Portfolio are effected
at the respective net asset values per share determined as of 4:00 p.m. New
York time on that day. See "Net Asset Value", below and "Determination of Net
Asset Value" in the Trust's SAI. Payment for redemptions will be made within
seven days after receipt of a redemption request in good order. No fee is
charged the separate account of the Life Company when it redeems Portfolio
shares. The Trust may suspend the sale of shares at any time and may refuse
any order to purchase shares.
The Trust may suspend the right of redemption of shares of any Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than for customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted; (ii) when
the Securities and Exchange Commission determines that a state of emergency
exists which makes the sale of portfolio securities or the determination of
net asset value not reasonably practicable; (iii) as the Securities and
Exchange Commission may by order permit for the protection of the security
holders of the Trust; or (iv) at any time when the Trust may, under applicable
laws and regulations, suspend payment on the redemption of its shares.
NET ASSET VALUE
Each Portfolio calculates the net asset value of its shares by dividing the
total value of its assets (the securities held by the Portfolio, plus any cash
or other assets, including interest and dividends accrued but not yet
received), less its total liabilities, by the total number of shares
outstanding. Shares are valued as of the close of trading on the New York
Stock Exchange (usually considered 4:00 p.m. Eastern Time) each day the New
York Stock Exchange is open. Portfolio securities for which market quotations
are readily available are stated at market value. Short-term investments that
will mature in 60 days or less are valued using amortized cost, which the
Trust's Board of Trustees has determined approximates market value. Amortized
cost valuation means that a debt security with a maturity at purchase of 60
days or less is valued at its acquisition cost and a debt security originally
purchased with a maturity in excess of 60 days, which currently has a maturity
of 60 days or less, is valued at the market or fair value of the security on
the 61st day prior to maturity (each as adjusted for amortization of premium
or discount) rather than at current market value. All other securities and
assets are valued at their fair value following procedures approved by the
Trust's Board of Trustees. See "Determination of Net Asset Value" in the SAI
for a description of the special valuation procedures for options and futures
contracts.
Certain Portfolios are expected to invest in foreign securities listed on
foreign stock exchanges or debt securities of the United States and foreign
governments and corporations. Some of these securities trade on days other
than Business Days, as defined below. Foreign securities quoted in foreign
currencies are translated into United States dollars at the exchange rates at
1:00 p.m. Eastern Time or at such other rates as a Sub-Adviser may determine
to be appropriate in computing net asset value. As a result, fluctuations in
the value of such currencies in relation to the United States dollar will
affect the net asset value of a Portfolio's shares even though there has not
been any change in the market values of such securities.
Because of time zone differences, foreign exchanges and securities markets
will usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be
determined as of the earlier closing of such exchanges and securities markets.
However, events affecting the values of such foreign securities may
occasionally occur between the earlier closing of such exchanges and
securities markets and the closing of the New York Stock Exchange which will
not be reflected in the computation of the net asset value of the Portfolios.
If an event materially affecting the value of such foreign securities occurs
during such period of which a Sub-Adviser becomes aware, then such securities
will be valued at fair value as determined in good faith, or in accordance
with procedures adopted, by the Trust's Board of Trustees.
PERFORMANCE INFORMATION
Performance information for each of the Portfolios may also be presented from
time to time in advertisements and sales literature. The Portfolios may
advertise several types of performance information. These are the "yield,"
"average annual total return" and "aggregate total return". Each of these
figures is based upon historical results and is not necessarily representative
of the future performance of any Portfolio.
The yield of a Portfolio's shares is determined by annualizing net investment
income earned per share for a stated period (normally one month or thirty
days) and dividing the result by the net asset value per share at the end of
the valuation period. The average annual total return and aggregate total
return figures measure both the net investment income generated by, and the
effect of any realized or unrealized appreciation or depreciation of the
underlying investments in, the Portfolio's portfolio for the period in
question, assuming the reinvestment of all dividends. Thus, these figures
reflect the change in the value of an investment in a Portfolio's shares
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter
(or if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Portfolio). Average annual total return
figures are annualized and, therefore, represent the average annual percentage
change over the period in question. Total return figures are not annualized
and represent the aggregate percentage or dollar value change over the period
in question. For more information regarding the computation of yield, average
annual total return and aggregate total return, see "Performance Information"
in the SAI.
Any Portfolio performance information presented will also include performance
information for the Life Company separate accounts investing in the Trust
which will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
Sub-Advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec
Research Survey of Non-U.S. Equity Fund Returns, Frank Russell International
Universe, Kiplinger's Personal Finance, and Financial Services Week. Any
such comparisons or rankings are based on past performance and the statistical
computation performed by publications and services, and are not necessarily
indications of future performance. Because the Portfolios are managed
investment vehicles investing in a wide variety of securities, the securities
owned by a Portfolio will not match those making up an index.
Although the MAS Value Portfolio is newly-organized and does not yet have its
own performance record, it has the same investment objective and follows
substantially the same investment strategies as the Value Portfolio of the MAS
Funds, a mutual fund whose shares are sold to the public. The Sub-Adviser for
the MAS Value Portfolio is the investment adviser of the Value Portfolio of
the MAS Funds.
Set forth below is the historical performance of the Value Portfolio of the
MAS Funds. Investors should not consider this performance data as an
indication of the future performance of the MAS Value Portfolio. The
performance figures shown below reflect the deduction of the historical fees
and expenses paid by the Value Portfolio of the MAS Funds, and not those to be
paid by the Portfolio. The figures also do not reflect the deduction of any
insurance fees or charges which are imposed by the Life Company in connection
with its sale of VA Contracts. Investors should refer to the separate account
prospectus describing the VA Contracts for information pertaining to these
insurance fees and charges. The insurance separate account fees will have a
detrimental effect on the performance of the Portfolio. The results shown
reflect the reinvestment of dividends and distributions, and were calculated
in the same manner that will be used by the MAS Value Portfolio to calculate
its own performance.
The following table shows the average annualized total returns for the fiscal
year ended December 31, 1995, of a 1-year, 5-year and 10-year investment and
of an investment since inception in the Value Portfolio of the MAS Funds, as
well as a comparison with the Standard & Poor's 500 Composite Stock Price
Index, an unmanaged index generally considered to be representative of the
stock market.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Since Inception
---------- ---------
Fund 1 Year 5 Year 10 Year Inception Date
- ----------------------------------- ------- ------- -------- ---------- ---------
Value Portfolio of MAS Funds....... 38.75% 20.96% 15.47% 16.92% 11/5/84
Standard & Poor's 500 Stock Index.. 37.53% 16.56% 14.86% 16.46% From 12/1/84
</TABLE>
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
Each Portfolio of the Trust intends to qualify and elect to be treated as a
regulated investment company that is taxed under the rules of Subchapter M of
the Internal Revenue Code. As such an electing regulated investment company,
a Portfolio will not be subject to federal income tax on its net ordinary
income and net realized capital gains to the extent that at least 90% of such
income and gains are distributed to the separate account of the Life Company
which hold its shares. For further information concerning federal income tax
consequences for the holders of the VA Contracts of the Life Company,
investors should consult the prospectus used in connection with the issuance
of their VA Contracts.
Each of the Portfolios will declare and distribute dividends from net ordinary
income at least annually and will distribute its net realized capital gains,
if any, at least annually. Distributions of ordinary income and capital gains
will be made in shares of such Portfolios unless an election is made on behalf
of a separate account to receive distributions in cash. The Life Company will
be informed at least annually about the amount and character of distributions
from the Trust for federal income tax purposes.
ADDITIONAL INFORMATION
The Trust was established as a Massachusetts business trust under the laws of
Massachusetts by a Declaration of Trust dated January 23, 1995, as amended
(the "Declaration of Trust"). Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. The Declaration of Trust contains an
express disclaimer of shareholder liability in connection with Trust property
or the acts, obligations, or affairs of the Trust. The Declaration of Trust
also provides for indemnification out of a Portfolio's property of any
shareholder of that Portfolio held personally liable for the claims and
liabilities to which a shareholder may become subject by reason of being or
having been a shareholder. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Portfolio itself would be unable to meet its obligations. A
copy of the Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts.
The Trust has an unlimited authorized number of shares of beneficial interest.
Shares of the Trust are entitled to one vote per share (with proportional
voting for fractional shares) and are freely transferable, and, in liquidation
of a Portfolio, shareholders of the Portfolio are entitled to receive pro rata
the net assets of the Portfolio. Although no Portfolio is required to hold
annual meetings of its shareholders, shareholders have the right to call a
meeting to elect or remove Trustees or to take other actions as provided in
the Declaration of Trust. Shareholders have no preemptive rights.
The Trust is authorized to subdivide each series (Portfolio) into two or more
classes. Currently, shares of the Portfolios are divided into Class A and
Class B. Each class of shares of a Portfolio is entitled to the same rights
and privileges as all other classes of the Portfolio, provided however, that
each class bears the expenses related to its distribution arrangements, as
well as any other expenses attributable to the class and unrelated to managing
the Portfolio's portfolio securities. Any matter that affects only the
holders of a particular class of shares may be voted on only by such
shareholders. Through this Prospectus, the Trust offers Class A shares in the
Portfolio.
The Trust's custodian is State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
MFS TOTAL RETURN PORTFOLIO
LPT VARIABLE INSURANCE SERIES TRUST
1755 CREEKSIDE OAKS DRIVE
SACRAMENTO, CALIFORNIA 95833
CLASS A SHARES
LPT Variable Insurance Series Trust (the "Trust") is an open-end, series
management investment company which currently offers shares of beneficial
interest of eight series (the "Portfolios"), each of which has a different
investment objective and represents the entire interest in a separate
portfolio of investments. THIS PROSPECTUS CONTAINS INFORMATION PERTAINING TO
THE MFS TOTAL RETURN PORTFOLIO ONLY. This Portfolio is currently available to
the public only through variable annuity contracts ("VA Contracts") issued by
London Pacific Life and Annuity Company ("Life Company").
Please read this Prospectus before investing in the MFS Total Return Portfolio
and keep it for future reference. The Prospectus contains information about
the MFS Total Return Portfolio that a prospective investor should know before
investing.
A Statement of Additional Information ("SAI") dated ________, 1996 is
available without charge upon request and may be obtained by calling the Life
Company at (800) 852-3152 or by writing to the Life Company's Annuity Service
Center, P.O. Box 29564, Raleigh, North Carolina 27626. Some of the discussions
contained in this Prospectus refer to the more detailed descriptions contained
in the SAI, which is incorporated by reference into this Prospectus and has
been filed with the Securities and Exchange Commission.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE PURCHASER OF A VA CONTRACT SHOULD READ THIS PROSPECTUS IN CONJUNCTION WITH
THE PROSPECTUS FOR HIS OR HER VA CONTRACT.
PROSPECTUS DATED ___________, 1996
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives
Investment Policies
Risk Factors
MANAGEMENT OF THE TRUST
Investment Adviser
Advisory Fee Waiver
Expense Reimbursement
Organizational Expenses of the Trust
Sub-Adviser
Sub-Advisory Fees
Sub-Advisory Fee Waiver
SALES AND REDEMPTIONS
NET ASSET VALUE
PERFORMANCE INFORMATION
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
ADDITIONAL INFORMATION
APPENDIX A
DESCRIPTION OF BOND RATINGS
INVESTMENT OBJECTIVES AND POLICIES
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment
objectives and policies of the MFS Total Return Portfolio described below,
including Options, Options on Foreign Currency, Futures Contracts, Options on
Futures Contracts and Forward Contracts, are not fundamental and may be
changed without shareholder approval. A change in the Portfolio's investment
objectives may result in the Portfolio having investment objectives different
from the objectives which the shareholder considered appropriate at the time
of investment in the Portfolio. The SAI includes a discussion of other
investment policies and a listing of specific investment restrictions, which
govern the Portfolio's investment policies. The specific investment
restrictions listed in the SAI may not be changed without shareholder approval
(see "Investment Restrictions" in the SAI). The Portfolio's investment
limitations, policies and rating standards are adhered to at the time of
purchase or utilization of assets; a subsequent change in circumstances will
not be considered to result in a violation of policy. United States Treasury
Regulations applicable to portfolios that serve as the funding vehicles for
variable annuity and variable life insurance contracts generally require that
such portfolios invest no more than 55% of the value of their assets in one
investment, 70% in two investments, 80% in three investments, and 90% in four
investments. The Portfolio intends to comply with the requirements of these
Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by the Portfolio declines below the minimum rating for securities in
which the Portfolio may invest, the Portfolio will not be required to dispose
of the security, but the Portfolio's Sub-Adviser will consider whether
continued investment in the security is consistent with the Portfolio's
investment objective.
In implementing its investment objective and policies, the Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the SAI. With respect to the Portfolio's investment policies, use
of the term "primarily" means that under normal circumstances, at least 65% of
such Portfolio's assets will be invested as indicated. A description of the
ratings systems used by the following nationally recognized statistical rating
organizations ("NRSROs") is contained in Appendix A: Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P"), and Fitch
Investors Service, Inc. ("Fitch"). New instruments, strategies and
techniques, however, are evolving continually and the Portfolio reserves
authority to invest in or implement them to the extent consistent with its
investment objectives and policies. If new instruments, strategies or
techniques would involve a material change to the information contained
herein, they will not be purchased or implemented until this Prospectus is
appropriately supplemented.
INVESTMENT OBJECTIVES
The Portfolio's primary investment objective is to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent
with the prudent employment of capital. While current income is the primary
objective, the Portfolio believes that there should also be a reasonable
opportunity for growth of capital and income, since many securities offering a
better than average yield may also possess growth potential. Thus, in
selecting securities for its portfolio, the Portfolio considers each of these
objectives. Generally, at least 25% of the Portfolio's assets will be
invested in fixed income securities and at least 40% and no more than 75% of
the Portfolio's assets will be invested in equity securities. Any investment
involves risk and there can be no assurance that the Portfolio will achieve
its investment objectives.
INVESTMENT POLICIES
The Portfolio's policy is to invest in a broad list of securities, including
short-term obligations. The list may be diversified not only by companies and
industries, but also by type of security. Fixed income securities and equity
securities (which include: common and preferred stocks; securities such as
bonds, warrants or rights that are convertible into stock; and depositary
receipts for those securities) may be held by the Portfolio. Some fixed
income securities may also have a call on common stock by means of a
conversion privilege or attached warrants. The Portfolio may vary the
percentage of assets invested in any one type of security in accordance with
the Sub-Adviser's interpretation of economic and money market conditions,
fiscal and monetary policy and underlying security values. The Portfolio's
debt investments may consist of both "investment grade" securities (rated Baa
or better by Moody's or BBB or better by S&P or Fitch) and securities that are
unrated or are in the lower rating categories (rated Ba or lower by Moody's or
BB or lower by S&P or Fitch) (commonly known as "junk bonds" ) including up to
20% of its net assets in nonconvertible fixed income securities that are in
these lower rating categories and comparable unrated securities (see "Risk
Factors - Lower Rated Bonds" below). Generally, most of the Portfolio's
long-term debt investments will consist of "investment grade" securities. See
Appendix A to this Prospectus for a description of these ratings. It is not
the Portfolio's policy to rely exclusively on ratings issued by established
credit rating agencies but rather to supplement such ratings with the
Sub-Adviser's own independent and ongoing review of credit quality.
U.S. GOVERNMENT SECURITIES: The Portfolio may also invest in U.S. Government
securities, including: (1) U.S. Treasury obligations, which differ only in
their interest rates, maturities and times of issuance: U.S. Treasury bills
(maturities of one year or less); U.S. Treasury notes (maturities of one to
ten years); and U.S. Treasury bonds (generally maturities of greater than ten
years), all of which are backed by the full faith and credit of the U.S.
Government; and (2) obligations issued or guaranteed by U.S. Government
agencies or instrumentalities, some of which are backed by the full faith and
credit of the U.S. Treasury, e.g., direct pass-through certificates of the
Government National Mortgage Association ("GNMA"); some of which are supported
by the right of the issuer to borrow from the U.S. Government, e.g.,
obligations of Federal Home Loan Banks; and some of which are backed only by
the credit of the issuer itself, e.g., obligations of the Student Loan
Marketing Association.
MORTGAGE PASS-THROUGH SECURITIES: The Portfolio may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the case of
securities guaranteed by GNMA); or guaranteed by U.S. Government-sponsored
corporations (such as the Federal National Mortgage Association or the Federal
Home Loan Mortgage Corporation, which are supported only by the discretionary
authority of the U.S. Government to purchase the agency's obligations).
Mortgage pass-through securities may also be issued by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers). See the SAI for a further discussion of these securities.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Fixed income
securities that the Portfolio may invest in also include zero coupon bonds,
deferred interest bonds and bonds on which the interest is payable in kind
("PIK bonds"). Zero coupon and deferred interest bonds are debt obligations
which are issued or purchased at a significant discount from face value. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity or the first interest payment date at
a rate of interest reflecting the market rate of the security at the time of
issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide for a period of delay before the
regular payment of interest begins. PIK bonds are debt obligations which
provide that the issuer thereof may, at its option, pay interest on such bonds
in cash or in the form of additional debt obligations. Such investments
benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of such cash. Such investments may experience greater
volatility in market value due to changes in interest rates than debt
obligations which make regular payments of interest. The Portfolio will
accrue income on such investments for tax and accounting purposes, as
required, which is distributable to shareholders and which, because no cash is
received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Portfolio's distribution obligations.
FOREIGN SECURITIES: The Portfolio may invest up to 20% (and generally expects
to invest between 5% and 20%) of its total assets in foreign securities which
are not traded on a U.S. exchange (not including American Depositary
Receipts). Investing in securities of foreign issuers generally involves
risks not ordinarily associated with investing in securities of domestic
issuers. These include changes in currency rates, exchange control
regulations, governmental administration or economic or monetary policy (in
the United States or abroad) or circumstances in dealings between nations.
Costs may be incurred in connection with conversions between various
currencies. Special considerations may also include more limited information
about foreign issuers, higher brokerage costs, different accounting standards
and thinner trading markets. Foreign securities markets may also be less
liquid, more volatile and less subject to government supervision than in the
United States. Investments in foreign countries could be affected by other
factors including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods. The Portfolio may hold foreign currency received
in connection with investments in foreign securities when, in the judgment of
the Sub-Adviser, it would be beneficial to convert such currency into U.S.
dollars at a later date, based on anticipated changes in the relevant exchange
rate. The Portfolio may also hold foreign currency in anticipation of
purchasing foreign securities. See the SAI for further discussion of foreign
securities and the holding of foreign currency, as well as the associated
risks.
EMERGING MARKET SECURITIES: Consistent with the Portfolio's objective and
policies, the Portfolio may invest in securities of issuers whose principal
activities are located in emerging market countries. Emerging market
countries include any country determined by the Adviser to have an emerging
market economy, taking into account a number of factors, including whether the
country has a low-to middle-income economy according to the International Bank
for Reconstruction and Development, the country's foreign currency debt
rating, its political and economic stability and the development of its
financial and capital markets. The Adviser determines whether an Issuer's
principal activities are located in an emerging market country by considering
such factors as its country of organization, the principal trading market for
its securities and the source of its revenues and assets. The issuer's
principal activities generally are deemed to be located in a particular
country if: (a) the security is issued or guaranteed by the government of that
country or any of its agencies, authorities or instrumentalities; (b) the
issuer is organized under the laws of, and maintains a principal office in,
that country; (c) the issuer has its principal securities trading market in
that country; (d) the issuer derives 50% or more of its total revenues from
goods sold or services performed in that country; or (e) the issuer has 50% or
more of its assets in that country.
BRADY BONDS: The Portfolio may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public and
private entities in certain emerging markets for new bonds in connection with
debt restructuring under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan
debt restructurings have been implemented to date in Argentina, Brazil,
Bulgaria, Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria,
Panama, the Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been
issued only recently, and for that reason do not have a long payment history.
Brady Bonds may be collateralized or uncollateralized, are issued in various
currencies (but primarily the U.S. dollar) and are actively traded in
over-the-counter secondary markets. U.S. dollar-denominated, collateralized
Brady Bonds, which may be fixed rate bonds or floating-rate bonds, are
generally collateralized in full as to principal by U.S. Treasury zero coupon
bonds having the same maturity as the bonds. Brady Bonds are often viewed as
having three or four valuation components: the collateralized repayment of
principal at final maturity; the collateralized interest payments; the
uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the
"residual risk"). In light of the residual risk of Brady Bonds and the
history of defaults of countries issuing Brady Bonds with respect to
commercial bank loans by public and private entities, investments in Brady
Bonds may be viewed as speculative.
AMERICAN DEPOSITARY RECEIPTS: The Portfolio may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually
a bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on
United States securities exchanges, the Sub-Adviser does not treat them as
foreign securities. However, they are subject to many of the risks of foreign
securities such as changes in exchange rates and more limited information
about foreign issuers.
REPURCHASE AGREEMENTS: The Portfolio may enter into repurchase agreements in
order to earn income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the Portfolio acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Portfolio's right to liquidate the
securities may be restricted (during which time the value of the securities
could decline). As discussed in the SAI, the Portfolio has adopted certain
procedures intended to minimize risk.
LENDING OF SECURITIES: The Portfolio may seek to increase its income by
lending portfolio securities. Such loans will usually be made only to member
firms (and subsidiaries thereof) of the New York Stock Exchange and to member
banks of the Federal Reserve System, and would be required to be secured
continuously by collateral in cash, or an irrevocable letter of credit or U.S.
Government securities maintained on a current basis at an amount at least
equal to the market value of the securities loaned. The Portfolio will
continue to collect the equivalent of interest on the securities loaned and
will also receive either interest (through investment of cash collateral) or a
fee (if the collateral is U.S. Government securities).
"WHEN-ISSUED" SECURITIES: The Portfolio may purchase securities on a
"when-issued" or on a "forward delivery" basis, which means that the
securities will be delivered to the Portfolio at a future date usually beyond
customary settlement time. The commitment to purchase a security for which
payment will be made on a future date may be deemed a separate security. The
Portfolio does not pay for the securities until received, and does not start
earning interest on the securities until the contractual settlement date. In
order to invest its assets immediately, while awaiting delivery of securities
purchased on such basis, the Portfolio will normally invest in cash,
short-term money market instruments and high quality debt securities.
INDEXED SECURITIES: The Portfolio may invest in indexed securities whose value
is linked to foreign currencies, interest rates, commodities, indices, or
other financial indicators. Most indexed securities are short to intermediate
term fixed-income securities whose values at maturity or interest rates rise
or fall according to the change in one or more specified underlying
instruments. Indexed securities may be positively or negatively indexed (i.e.,
their value may increase or decrease if the underlying instrument
appreciates), and may have return characteristics similar to direct
investments in the underlying instrument or to one or more options on the
underlying instrument. Indexed securities may be more volatile than the
underlying instrument itself.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Portfolio may enter into mortgage
"dollar roll" transactions with selected banks and broker-dealers pursuant to
which the Portfolio sells mortgage-backed securities for delivery in the
future (generally within 30 days) and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a
specified future date. The Portfolio will only enter into covered rolls. A
"covered roll" is a specific type of dollar roll for which there is an
offsetting cash position or a cash equivalent security position which matures
on or before the forward settlement date of the dollar roll transaction. The
transactions in mortgage "dollar rolls", together with all other transactions
which are considered borrowing, will not exceed 33 1/3% of the Portfolio's
assets.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Portfolio may invest a
portion of its assets in "loan participations." By purchasing a loan
participation, the Portfolio acquires some or all of the interest of a bank or
other lending institution in a loan to a corporate borrower. Many such loans
are secured, and most impose restrictive covenants which must be met by the
borrower. These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. The
Portfolio may also purchase trade or other claims against companies, which
generally represent money owed by the company to a supplier of goods or
services. These claims may also be purchased at a time when the company is in
default. Certain of the loan participations acquired by the Portfolio may
involve revolving credit facilities or other standby financing commitments
which obligate the Portfolio to pay additional cash on a certain date or on
demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loan
participations and other direct investments may not be in the form of
securities or may be subject to restrictions on transfer, and only limited
opportunities may exist to resell such instruments. As a result, the
Portfolio may be unable to sell such investments at an opportune time or may
have to resell them at less than fair market value. For a further discussion
of loan participations and the risks related to transactions therein, see the
SAI.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to
different types of investments, the Portfolio may enter into interest rate
swaps, currency swaps and other types of available swap agreements, such as
caps, collars and floors. Swaps involve the exchange by the Portfolio with
another party of cash payments based upon different interest rate indices,
currencies, or other prices or rates, such as the value of mortgage prepayment
rates. For example, in the typical interest rate swap, the Portfolio might
exchange a sequence of cash payments based on a floating rate index for cash
payments based on a fixed rate. Payments made by both parties to a swap
transaction are based on a principal amount determined by the parties.
The Portfolio may also purchase and sell caps, floors and collars. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the
counterparty. For example, the purchase of an interest rate cap entitles the
buyer, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal
amount from the counterparty selling such interest rate cap. The sale of an
interest rate floor obligates the seller to make payments to the extent that a
specified interest rate falls below an agreed-upon level. A collar
arrangement combines elements of buying a cap and selling a floor.
Swap agreements will tend to shift the Portfolio's investment exposure from
one type of investment to another. For example, if the Portfolio agreed to
exchange payments in dollars for payments in foreign currency, in each case
based on a fixed rate, the swap agreement would tend to decrease the
Portfolio's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar
to buying or writing options. Depending on how they are used, swap agreements
may increase or decrease the overall volatility of the Portfolio's investments
and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Portfolio's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Portfolio may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. See the SAI for the risks involved in these
activities.
RESTRICTED SECURITIES: The Portfolio may also purchase securities that are not
registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a
continuing review of the trading markets for a specific Rule 144A security,
whether such security is liquid and thus not subject to the Portfolio's
limitation on investing not more than 15% of its net assets in illiquid
investments. The Board of Trustees has adopted guidelines and delegated to
the Sub-Adviser the daily function of determining and monitoring the liquidity
of Rule 144A securities. The Board, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Board will
carefully monitor the Portfolio's investments in Rule 144A securities,
focusing on such important factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect
of decreasing the level of liquidity in the Portfolio to the extent that
qualified institutional buyers become for a time uninterested in purchasing
Rule 144A securities held in the Portfolio's portfolio. Subject to the
Portfolio's 15% limitation on investments in illiquid investments, the
Portfolio may also invest in restricted securities that may not be sold under
Rule 144A, which presents certain risks. As a result, the Portfolio might not
be able to sell these securities when the Sub-Adviser wishes to do so, or
might have to sell them at less than fair value. In addition, market
quotations are less readily available. Therefore, judgment may at times play
a greater role in valuing these securities than in the case of unrestricted
securities.
CORPORATE ASSET-BACKED SECURITIES: The Portfolio may invest in corporate
asset-backed securities. These securities, issued by trusts and special
purpose corporations, are backed by a pool of assets, such as credit card or
automobile loan receivables, representing the obligations of a number of
different parties. Corporate asset-backed securities present certain risks.
For instance, in the case of credit card receivables, these securities may not
have the benefit of any security interest in the related collateral. See the
SAI for further information on these securities.
OPTIONS ON SECURITIES: The Portfolio may write (sell) covered put and call
options on securities and purchase put and call options on securities. The
Portfolio will write such options for the purpose of increasing its return
and/or to protect the value of its portfolio. In particular, where the
Portfolio writes an option which expires unexercised or is closed out by the
Portfolio at a profit, it will retain the premium paid for the option, which
will increase its gross income and will offset in part the reduced value of a
portfolio security in connection with which the option may have been written
or the increased cost of portfolio securities to be acquired. In contrast,
however, if the price of the security underlying the option moves adversely to
the Portfolio's position, the option may be exercised and the Portfolio will
be required to purchase or sell the security at a disadvantageous price,
resulting in losses which may only be partially offset by the amount of the
premium. The Portfolio may also write combinations of put and call options on
the same security, known as "straddles." Such transactions can generate
additional premium income but also present increased risk.
The Portfolio may purchase put or call options in anticipation of declines in
the value of portfolio securities or increases in the value of securities to
be acquired. In the event that such declines or increases occur, the
Portfolio may be able to offset the resulting adverse effect on its portfolio,
in whole or in part, through the options purchased. The risk assumed by the
Portfolio in connection with such transactions is limited to the amount of the
premium and related transaction costs associated with the option, although the
Portfolio may be required to forfeit such amounts in the event that the prices
of securities underlying the options do not move in the direction or to the
extent anticipated.
The Portfolio may also enter into options on the yield "spread," or yield
differential, between two securities, a transaction referred to as a "yield
curve" option, for hedging and non-hedging (an effort to increase current
income) purposes. In contrast to other types of options, a yield curve option
is based on the difference between the yields of designated securities rather
than the actual prices of the individual securities, and is settled through
cash payments. Accordingly, a yield curve option is profitable to the holder
if this differential widens (in the case of a call) or narrows (in the case of
a put), regardless of whether the yields of the underlying securities increase
or decrease. Yield curve options written by the Portfolio will be covered as
described in the SAI. The trading of yield curve options is subject to all of
the risks associated with trading other types of options, as discussed below
under "Risk Factors" and in the SAI. In addition, such options present risks
of loss even if the yield on one of the underlying securities remains
constant, if the spread moves in a direction or to an extent which was not
anticipated.
OPTIONS ON STOCK INDICES: The Portfolio may write (sell) covered call and put
options and purchase call and put options on stock indices. The Portfolio may
write options on stock indices for the purpose of increasing its gross income
and to protect its portfolio against declines in the value of securities it
owns or increases in the value of securities to be acquired. When the
Portfolio writes an option on a stock index, and the value of the index moves
adversely to the holder's position, the option will not be exercised, and the
Portfolio will either close out the option at a profit or allow it to expire
unexercised. The Portfolio will thereby retain the amount of the premium,
which will increase its gross income and offset part of the reduced value of
portfolio securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges against adverse
price fluctuations, since any such fluctuations will be offset only to the
extent of the premium received by the Portfolio for the writing of the option.
In addition, if the value of an underlying index moves adversely to the
Portfolio's option position, the option may be exercised, and the Portfolio
will experience a loss which may only be partially offset by the amount of the
premium received.
The Portfolio may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to
attempt to reduce the risk of missing a market or industry segment advance.
The Portfolio's possible loss in either case will be limited to the premium
paid for the option, plus related transaction costs.
OPTIONS ON FOREIGN CURRENCIES: The Portfolio may also purchase and write
options on foreign currencies ("Options on Foreign Currencies") for the
purpose of protecting against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired. As in the case of other types of options, however, the writing of
an Option on Foreign Currency will constitute only a partial hedge, up to the
amount of the premium received, and the Portfolio may be required to purchase
or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an Option on Foreign Currency may
constitute an effective hedge against fluctuations in exchange rates although,
in the event of rate movements adverse to the Portfolio's position, it may
forfeit the entire amount of the premium paid for the option plus related
transaction costs. The Portfolio may also choose to, or be required to,
receive delivery of the foreign currencies underlying Options on Foreign
Currencies it has entered into. Under certain circumstances, such as where
the Sub-Adviser believes that the applicable exchange rate is unfavorable at
the time the currencies are received or the Sub-Adviser anticipates, for any
other reason, that the exchange rate will improve, the Portfolio may hold such
currencies for an indefinite period of time. See "Investment Objectives and
Policies - Foreign Securities" in the SAI for information on the risks
associated with holding foreign currency.
FUTURES CONTRACTS: The Portfolio may enter into contracts for the purchase or
sale for future delivery of fixed income securities or foreign currencies or
contracts based on indices of securities or currencies (including any index of
U.S. or foreign securities) as such instruments become available for trading
("Futures Contracts"). Such transactions will be entered into for hedging
purposes, in order to protect the Portfolio's current or intended investments
from the effects of changes in interest or exchange rates or declines in a
securities market, as well as for non-hedging purposes, to the extent
permitted by applicable law. The Portfolio will incur brokerage fees when it
purchases and sells Futures Contracts, and will be required to maintain margin
deposits. In addition, Futures Contracts entail risks. Although the
Sub-Adviser believes that use of such contracts will benefit the Portfolio, if
its investment judgment about the general direction of interest or exchange
rates or a securities market is incorrect, the Portfolio's overall performance
may be poorer than if it had not entered into any such contract and the
Portfolio may realize a loss. The Portfolio will not enter into any Futures
Contract if immediately thereafter the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the
value of its total assets.
OPTIONS ON FUTURES CONTRACTS: The Portfolio may purchase and write options on
Futures Contracts ("Options on Futures Contracts") for hedging purposes or for
non-hedging purposes to the extent permitted by applicable law. Purchases of
Options on Futures Contracts may present less risk in hedging the Portfolio's
portfolio than the purchase or sale of the underlying Futures Contracts since
the potential loss is limited to the amount of the premium plus related
transaction costs, although it may be necessary to exercise the option to
realize any profit, which results in the establishment of a futures position.
The writing of Options on Futures Contracts, however, does not present less
risk than the trading of Futures Contracts and will constitute only a partial
hedge, up to the amount of the premium received. In addition, if an option is
exercised, the Portfolio may suffer a loss on the transaction.
FORWARD CONTRACTS: The Portfolio may enter into forward foreign currency
exchange contracts for the purchase or sale of a fixed quantity of a foreign
currency at a future date ("Forward Contracts"). The Portfolio may enter into
Forward Contracts for hedging purposes as well as for non-hedging purposes
(i.e., speculative purposes). By entering into transactions in Forward
Contracts, for hedging purposes, the Portfolio may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of Forward
Contracts entered into for non-hedging purposes, the Portfolio may sustain
losses which will reduce its gross income. Such transactions, therefore,
could be considered speculative. Forward Contracts are traded
over-the-counter and not on organized commodities or securities exchanges. As
a result, Forward Contracts operate in a manner distinct from exchange-traded
instruments, and their use involves certain risks beyond those associated with
transactions in Futures Contracts or options traded on exchanges. The
Portfolio may choose to, or be required to, receive delivery of the foreign
currencies underlying Forward Contracts it has entered into. Under certain
circumstances, such as where the Sub-Adviser believes that the applicable
exchange rate is unfavorable at the time the currencies are received or the
Sub-Adviser anticipates, for any other reason, that the exchange rate will
improve, the Portfolio may hold such currencies for an indefinite period of
time. The Portfolio may also enter into a Forward Contract on one currency to
hedge against risk of loss arising from fluctuations in the value of a second
currency (referred to as a "cross hedge") if, in the judgment of the
Sub-Adviser, a reasonable degree of correlation can be expected between
movements in the values of the two currencies. The Portfolio has established
procedures consistent with statements of the SEC and its staff regarding the
use of Forward Contracts by registered investment companies, which requires
use of segregated assets or "cover" in connection with the purchase and sale
of such contracts. See "Description of Securities, Investment Policies and
Risk Factors - Foreign Securities" in the SAI for information on the risks
associated with holding foreign currency.
RISK FACTORS
LOWER RATED BONDS: The Portfolio may invest in fixed income securities rated
Baa by Moody's or BBB by S&P or Fitch and comparable unrated securities.
These securities, while normally exhibiting adequate protection parameters,
have speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income
securities.
The Portfolio may also invest in securities rated Ba or lower by Moody's or BB
or lower by S&P or Fitch and comparable unrated securities (commonly known as
"junk bonds") to the extent described above. No minimum rating standard is
required by the Portfolio. These securities are considered speculative and,
while generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including the
possibility of default or bankruptcy of the issuers of such securities) and
may involve greater volatility of price (especially during periods of economic
uncertainty or change) than securities in the higher rated categories.
However, since yields vary over time, no specific level of income can ever be
assured. These lower rated high yielding fixed income securities generally
tend to reflect economic changes and short-term corporate and industry
developments to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although
these lower rated fixed income securities are also affected by changes in
interest rates, the market's perception of their credit quality, and the
outlook for economic growth). In the past, economic downturns or an increase
in interest rates have, under certain circumstances, caused a higher incidence
of default by the issuers of these securities and may do so in the future,
especially in the case of highly leveraged issuers. During certain periods,
the higher yields on the Portfolio's lower rated high yielding fixed income
securities are paid primarily because of the increased risk of loss of
principal and income, arising from such factors as the heightened possibility
of default or bankruptcy of the issuers of such securities. Due to the fixed
income payments of these securities, the Portfolio may continue to earn the
same level of interest income while its net asset value declines due to
portfolio losses, which could result in an increase in the Portfolio's yield
despite the actual loss of principal. The market for these lower rated fixed
income securities may be less liquid than the market for investment grade
fixed income securities, and judgment may at times play a greater role in
valuing these securities than in the case of investment grade fixed income
securities. Changes in the value of securities subsequent to their
acquisition will not affect cash income or yield to maturity to the Portfolio
but will be reflected in the net asset value of shares of the Portfolio. See
the SAI for more information on lower rated securities.
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the Portfolio will
enter into transactions in options, Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies for hedging purposes, such
transactions nevertheless involve certain risks. For example, a lack of
correlation between the instrument underlying an option or Futures Contract
and the assets being hedged, or unexpected adverse price movements, could
render the Portfolio's hedging strategy unsuccessful and could result in
losses. The Portfolio also may enter into transactions in options, Futures
Contracts, Options on Futures Contracts and Forward Contracts for other than
hedging purposes, which involves greater risk. In particular, such
transactions may result in losses for the Portfolio which are not offset by
gains on other portfolio positions, thereby reducing gross income. In
addition, foreign currency markets may be extremely volatile from time to
time. There also can be no assurance that a liquid secondary market will
exist for any contract purchased or sold, and the Portfolio may be required to
maintain a position until exercise or expiration, which could result in
losses. The SAI contains a description of the nature and trading mechanics of
options, Futures Contracts, Options on Futures Contracts, Forward Contracts
and Options on Foreign Currencies, and includes a discussion of the risks
related to transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts
may be entered into on U.S. exchanges regulated by the Commodity Futures
Trading Commission and on foreign exchanges. In addition, the securities
underlying options, Futures Contracts and Options on Futures Contracts traded
by the Portfolio will include both domestic and foreign securities.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities may
be intensified in the case of investments in emerging markets. Securities of
many issuers in emerging markets may be less liquid and more volatile than
securities of comparable domestic issuers. Emerging markets also have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of the Portfolio is uninvested and no return is earned thereon. The
inability of the Portfolio to make intended security purchases due to
settlement problems could cause the Portfolio to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result in losses to the Portfolio due to subsequent declines in
value of the portfolio security, a decrease in the level of liquidity in the
portfolio, or if the Portfolio has entered into a contract to sell the
security, in possible liability to the purchaser. Certain markets may require
payment for securities before delivery and in such markets the Portfolio bears
the risk that the securities will not be delivered and that the Portfolio's
payments will not be returned. Securities prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be
predominantly based on only a few industries, may be highly vulnerable to
changes in local or global trade conditions, and may suffer from extreme and
volatile debt burdens or inflation rates. Local securities markets may trade
a small number of securities and may be unable to respond effectively to
increases in trading volume, potentially making prompt liquidation of
substantial holdings difficult or impossible at times. Securities of issuers
located in countries with emerging markets may have limited marketability and
may be subject to more abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Portfolio
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation or capital, as well as by the
application to the Portfolio of any restrictions on investments.
in certain foreign emerging market debt obligations may be restricted or
controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Portfolio.
PORTFOLIO TRADING: The Portfolio will be managed actively with respect to the
Portfolio's fixed income securities and the asset allocations modified as the
Sub-Adviser deems necessary. Although the Portfolio does not intend to seek
short-term profits, fixed income securities in its portfolio will be sold
whenever the Sub-Adviser believes it is appropriate to do so without regard to
the length of time the particular asset may have been held.
With respect to its equity securities, the Portfolio does not intend to trade
in securities for short-term profits and anticipates that portfolio securities
ordinarily will be held for one year or longer. However, the Portfolio will
effect trades whenever it believes that changes in its portfolio securities
are appropriate. The Portfolio's anticipated portfolio turnover rate is 150%.
Because the Portfolio is expect to have a portfolio turnover rate in excess of
100%, transaction costs incurred by the Portfolio and the realized capital
gains and losses of the Portfolio may be greater than that of a portfolio with
a lesser portfolio turnover rate.
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER
Under an Investment Advisory Agreement dated January 9, 1996, LPIMC
Insurance Marketing Services, 1755 Creekside Oaks Drive, Sacramento, CA 95833
(the "Adviser"), manages the investment strategies and policies of the
Portfolios and the Trust, subject to the control of the Trustees.
The Adviser is a registered investment adviser organized under the laws of
California. The Adviser is a wholly-owned subsidiary of the Life Company.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate
a continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies and restrictions and to determine from time to time securities to be
purchased, sold, retained or lent by the Trust and implement those decisions.
The Investment Advisory Agreement also provides that the Adviser shall manage
the Trust's business and affairs and shall provide such services required for
effective administration of the Trust as are now provided by employees or
other agents engaged by the Trust. The Investment Advisory Agreement further
provides that the Adviser shall furnish the Trust with office space and
necessary personnel, pay ordinary office expenses, pay all executive salaries
of the Trust and furnish, without expense to the Trust, the services of such
members of its organization as may be duly elected officers or Trustees of the
Trust. The Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at the Adviser's own cost and expense, for the purpose of
managing the investment of the assets of one or more Portfolios of the Trust.
As full compensation for its services under the Investment Advisory Agreement
with respect to the MFS Total Return Portfolio, the Trust will pay the Adviser
a monthly fee at the following annual rates based on the average daily net
assets of the Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO ADVISORY FEE
- -------------------------- ----------------------------------------
<S> <C>
MFS Total Return Portfolio .75% of first $200 million of average
daily net assets
.70% of the next $1.1 billion of average
daily net assets
.65% of average daily net assets over
and above $1.3 billion.
</TABLE>
ADVISORY FEE WAIVER
The Adviser has agreed to waive its advisory fee for the Portfolio for the
initial six (6) months of the Portfolio's investment operations.
EXPENSE REIMBURSEMENT
The Life Company has voluntarily agreed to reimburse the Portfolio for certain
expenses (excluding brokerage commissions and management fees) in excess of
1.29%. The Life Company has reserved the right to withdraw or modify its
policy of expense reimbursement for the Portfolio. If expenses were not
reimbursed, anticipated actual expenses would be approximately 1.65% for
the year ending 12/31/96.
ORGANIZATIONAL EXPENSES OF THE TRUST
The Life Company will pay for all organizational expenses of the Trust
including contribution of the initial "seed money" to the Trust.
SUB-ADVISER
The Adviser has engaged the Sub-Adviser for the Portfolio to make investment
decisions and place orders. In accordance with the Portfolio's investment
objective and policies and under the supervision of the Adviser and the
Trust's Board of Trustees, the Portfolio's Sub-Adviser is responsible for the
day to day investment management of the Portfolio, makes investment decisions
for the Portfolio and places orders on behalf of the Portfolio to effect the
investment decisions made as provided in a Sub-Advisory Agreement among the
Sub-Adviser, the Adviser and the Trust. The selection of investments and the
way they are managed depend on conditions and trends in the economy and the
financial marketplaces.
The Sub-Adviser for the Portfolio is Massachusetts Financial Services Company,
500 Boylston Street, Boston, Massachusetts 02116. The Sub-Adviser is
America's oldest mutual fund organization. The Sub-Adviser and its
predecessor organizations have a history of money management dating from 1924
and the founding of the first mutual fund in the United States, Massachusetts
Investors Trust. Net assets under the management of the Sub-Adviser were
approximately $42.2 billion on behalf of approximately 1.8 million investor
accounts as of December 31, 1995. As of such date, the Sub-Adviser managed
approximately $17.8 billion of assets in equity securities and $20.6 billion
of assets in fixed income securities. Approximately $3.4 billion of assets
managed by the Sub-Adviser are invested in securities of foreign issuers and
non-U.S. dollar denominated securities of U.S. issuers. The Sub-Adviser is a
wholly-owned subsidiary of Sun Life Assurance Company of Canada (U.S.) which
in turn is a wholly-owned subsidiary of Sun Life Assurance Company of Canada
("Sun Life"). The Directors of the Sub-Adviser are A. Keith Brodkin, Jeffrey
L. Shames, John R. Gardner, John D. McNeil and Arnold D. Scott. Mr. Brodkin
is the Chairman, Mr. Shames is the President and Mr. Scott is the Secretary
and a Senior Executive Vice President of the Sub-Adviser. Messrs. McNeil and
Gardner are the Chairman and the President, respectively, of Sun Life. Sun
Life, a mutual life insurance company, is one of the largest international
life insurance companies and has been operating in the U.S. since 1895,
establishing a headquarters office in the U.S. in 1973. The executive
officers of the Sub-Adviser report to the Chairman of Sun Life.
David M. Calabro, a Vice President of the Adviser, Geoffrey L. Kurinsky, a
Senior Vice President of the Adviser, Judith N. Lamb, a Vice President of the
Adviser, Lisa B. Nurme, a Vice President of the Adviser, and Maura A.
Shaughnessy, a Vice President of the Adviser, are the Portfolio's portfolio
managers. Mr. Calabro is the head of this portfolio management team and a
manager of the common stock portion of the Portfolio's portfolio. Mr. Calabro
has been employed by the Adviser since 1992 and served as an analyst and
sector portfolio manager with Fidelity Investments prior to that time. Mr.
Kurinsky, the manager of the Portfolio's fixed income securities, has been
employed by the Adviser since 1987. Ms. Lamb, the manager of the Portfolio's
convertible securities, has been employed by the Adviser since 1992 and served
as an analyst with Fidelity Investments prior to that time. Ms. Nurme, a
manager of the common stock portion of the Portfolio's portfolio, has been
employed by the Adviser since 1987. Ms. Shaughnessy, also a manager of the
common stock portion of the Portfolio's portfolio, has been employed by the
Adviser since 1991 and served as an analyst with Harvard Management Company
prior to that time.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment
management in 1868, and HYPO-BANK (Bayerische Hypotheken-und Weschsel-Bank
AG), the oldest publicly listed bank in Germany, founded in 1835. As part of
this alliance, the portfolio managers and investment analysts of MFS and
Foreign & Colonial will share their views on a variety of investment related
issues, such as the economy, securities markets, portfolio securities and
their issuers, investment recommendations, strategies and techniques, risk
analysis, trading strategies and other portfolio management matters. MFS will
have access to the extensive international equity investment expertise of
Foreign & Colonial, and Foreign & Colonial will have access to the extensive
U.S. equity investment expertise of MFS. One or more MFS investment analysts
are expected to work for an extended period with Foreign & Colonial's
portfolio managers and investment analysts at their offices in London. In
return, one or more Foreign & Colonial employees are expected to work in a
similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for the
Portfolio's portfolio as well as for portfolios of other clients of MFS or
clients of Foreign & Colonial. Some simultaneous transactions are inevitable
when several clients receive investment advice from MFS and Foreign &
Colonial, particularly when the same security is suitable for more than one
client. While in some cases this arrangement could have a detrimental effect
on the price or availability of the security as far as the Portfolio is
concerned, in other cases, however, it may produce increased investment
opportunities for the Portfolio.
SUB-ADVISORY FEES
Under the terms of the Sub-Advisory Agreement, the Adviser shall pay to the
Sub-Adviser, as full compensation for services rendered under the Sub-Advisory
Agreement with respect to the Portfolio, monthly fees at the following annual
rates based on the average daily net assets of the Portfolio.
<TABLE>
<CAPTION>
<S> <C>
Portfolio Sub-Advisory Fees
- -------------------------- -------------------------------------
MFS Total Return Portfolio .50% of first $200 million of average
daily net assets.
.45% of the next $1.1 billion of
average daily net assets.
.40% of average daily net assets
over and above $1.3 billion.
</TABLE>
SUB-ADVISORY FEE WAIVER
The Sub-Adviser has agreed to waive its entire sub-advisory fee due under the
Sub-Advisory Agreement for the initial six (6) months of the Portfolio's
investment operations.
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the
Trust will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees
and charges relating to the VA Contract.)
The separate account of the Life Company places orders to purchase and redeem
shares of each Portfolio based on, among other things, the amount of
contributions to be invested and surrender and transfer requests to be
effected on that day pursuant to the VA contracts issued by the Life Company.
Orders received by the Trust are effected on days on which the New York Stock
Exchange is open for trading, at the net asset value per share next determined
after receipt of the order. For orders received before 4:00 p.m. New York
time, such purchases and redemptions of shares of each Portfolio are effected
at the respective net asset values per share determined as of 4:00 p.m. New
York time on that day. See "Net Asset Value", below and "Determination of Net
Asset Value" in the Trust's SAI. Payment for redemptions will be made within
seven days after receipt of a redemption request in good order. No fee is
charged the separate account of the Life Company when it redeems Portfolio
shares. The Trust may suspend the sale of shares at any time and may refuse
any order to purchase shares.
The Trust may suspend the right of redemption of shares of any Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than for customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted; (ii) when
the Securities and Exchange Commission determines that a state of emergency
exists which makes the sale of portfolio securities or the determination of
net asset value not reasonably practicable; (iii) as the Securities and
Exchange Commission may by order permit for the protection of the security
holders of the Trust; or (iv) at any time when the Trust may, under applicable
laws and regulations, suspend payment on the redemption of its shares.
NET ASSET VALUE
Portfolio calculates the net asset value of its shares by dividing the total
value of its assets (the securities held by the Portfolio, plus any cash or
other assets, including interest and dividends accrued but not yet received),
less its total liabilities, by the total number of shares outstanding. Shares
are valued as of the close of trading on the New York Stock Exchange (usually
considered 4:00 p.m. Eastern Time) each day the New York Stock Exchange is
open. Portfolio securities for which market quotations are readily available
are stated at market value. Short-term investments that will mature in 60
days or less are valued using amortized cost, which the Trust's Board of
Trustees has determined approximates market value. Amortized cost valuation
means that a debt security with a maturity at purchase of 60 days or less is
valued at its acquisition cost and a debt security originally purchased with a
maturity in excess of 60 days, which currently has a maturity of 60 days or
less, is valued at the market or fair value of the security on the 61st day
prior to maturity (each as adjusted for amortization of premium or discount)
rather than at current market value. All other securities and assets are
valued at their fair value following procedures approved by the Trust's Board
of Trustees. See "Determination of Net Asset Value" in the SAI for a
description of the special valuation procedures for options and futures
contracts.
Certain Portfolios are expected to invest in foreign securities listed on
foreign stock exchanges or debt securities of the United States and foreign
governments and corporations. Some of these securities trade on days other
than Business Days, as defined below. Foreign securities quoted in foreign
currencies are translated into United States dollars at the exchange rates at
1:00 p.m. Eastern Time or at such other rates as a Sub-Adviser may determine
to be appropriate in computing net asset value. As a result, fluctuations in
the value of such currencies in relation to the United States dollar will
affect the net asset value of a Portfolio's shares even though there has not
been any change in the market values of such securities.
Because of time zone differences, foreign exchanges and securities markets
will usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be
determined as of the earlier closing of such exchanges and securities markets.
However, events affecting the values of such foreign securities may
occasionally occur between the earlier closing of such exchanges and
securities markets and the closing of the New York Stock Exchange which will
not be reflected in the computation of the net asset value of the Portfolios.
If an event materially affecting the value of such foreign securities occurs
during such period of which a Sub-Adviser becomes aware, then such securities
will be valued at fair value as determined in good faith, or in accordance
with procedures adopted, by the Trust's Board of Trustees.
PERFORMANCE INFORMATION
Performance information for each of the Portfolios may also be presented from
time to time in advertisements and sales literature. The Portfolios may
advertise several types of performance information. These are the "yield,"
"average annual total return" and "aggregate total return". Each of these
figures is based upon historical results and is not necessarily representative
of the future performance of any Portfolio.
The yield of a Portfolio's shares is determined by annualizing net investment
income earned per share for a stated period (normally one month or thirty
days) and dividing the result by the net asset value per share at the end of
the valuation period. The average annual total return and aggregate total
return figures measure both the net investment income generated by, and the
effect of any realized or unrealized appreciation or depreciation of the
underlying investments in, the Portfolio's portfolio for the period in
question, assuming the reinvestment of all dividends. Thus, these figures
reflect the change in the value of an investment in a Portfolio's shares
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter
(or if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Portfolio). Average annual total return
figures are annualized and, therefore, represent the average annual percentage
change over the period in question. Total return figures are not annualized
and represent the aggregate percentage or dollar value change over the period
in question. For more information regarding the computation of yield, average
annual total return and aggregate total return, see "Performance Information"
in the SAI.
Any Portfolio performance information presented will also include performance
information for the Life Company separate accounts investing in the Trust
which will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
Sub-Advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec
Research Survey of Non-U.S. Equity Fund Returns, Frank Russell International
Universe, Kiplinger's Personal Finance, and Financial Services Week. Any
such comparisons or rankings are based on past performance and the statistical
computation performed by publications and services, and are not necessarily
indications of future performance. Because the Portfolios are managed
investment vehicles investing in a wide variety of securities, the securities
owned by a Portfolio will not match those making up an index.
Although the MFS Total Return Portfolio is newly-organized and does not yet
have its own performance record, it has the same investment objective and
follows substantially the same investment strategies as the MFS Total Return
Fund, a mutual fund whose shares are sold to the public. The Sub-Adviser for
the MFS Total Return Portfolio is the investment adviser of the MFS Total
Return Fund.
Set forth below is the historical performance of the MFS Total Return Fund.
Investors should not consider this performance data as an indication of the
future performance of the MFS Total Return Portfolio. The performance figures
shown below reflect the deduction of the historical fees and expenses paid by
the MFS Total Return Fund, and not those to be paid by the Portfolio. The
figures also do not reflect the deduction of any insurance fees or charges
which are imposed by the Life Company in connection with its sale of VA
Contracts. Investors should refer to the separate account prospectus
describing the VA Contracts for information pertaining to these insurance fees
and charges. The insurance separate account fees will have a detrimental
effect on the performance of the Portfolio. The results shown reflect the
reinvestment of dividends and distributions, and were calculated in the same
manner that will be used by the MFS Total Return Portfolio to calculate its
own performance.
The following table shows the average annualized total returns for the fiscal
year ended September 30, 1995, of a 1-year, 5-year and 10-year investment and
of an investment since inception in the MFS Total Return Fund, as well as a
comparison with the Standard & Poor's 500 Composite Stock Price Index, an
unmanaged index generally considered to be representative of the stock market.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Since Inception
Fund 1 Year 5 Year 10 Year Inception Date
- ---------------------------- ------ ------ ------- --------- -----------
MFS Total Return Fund....... _____% _____% _____% _____% 10-6-70
Standard & Poor's 500 Stock Index.. _____% _____% _____% _____% From 1-1-81
</TABLE>
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
Each Portfolio of the Trust intends to qualify and elect to be treated as a
regulated investment company that is taxed under the rules of Subchapter M of
the Internal Revenue Code. As such an electing regulated investment company,
a Portfolio will not be subject to federal income tax on its net ordinary
income and net realized capital gains to the extent that at least 90% of such
income and gains are distributed to the separate account of the Life Company
which hold its shares. For further information concerning federal income tax
consequences for the holders of the VA Contracts of the Life Company,
investors should consult the prospectus used in connection with the issuance
of their VA Contracts.
Each of the Portfolios will declare and distribute dividends from net ordinary
income at least annually and will distribute its net realized capital gains,
if any, at least annually. Distributions of ordinary income and capital gains
will be made in shares of such Portfolios unless an election is made on behalf
of a separate account to receive distributions in cash. The Life Company will
be informed at least annually about the amount and character of distributions
from the Trust for federal income tax purposes.
ADDITIONAL INFORMATION
The Trust was established as a Massachusetts business trust under the laws of
Massachusetts by a Declaration of Trust dated January 23, 1995, as amended
(the "Declaration of Trust"). Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. The Declaration of Trust contains an
express disclaimer of shareholder liability in connection with Trust property
or the acts, obligations, or affairs of the Trust. The Declaration of Trust
also provides for indemnification out of a Portfolio's property of any
shareholder of that Portfolio held personally liable for the claims and
liabilities to which a shareholder may become subject by reason of being or
having been a shareholder. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Portfolio itself would be unable to meet its obligations. A copy
of the Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts.
The Trust has an unlimited authorized number of shares of beneficial interest.
Shares of the Trust are entitled to one vote per share (with proportional
voting for fractional shares) and are freely transferable, and, in liquidation
of a Portfolio, shareholders of the Portfolio are entitled to receive pro rata
the net assets of the Portfolio. Although no Portfolio is required to hold
annual meetings of its shareholders, shareholders have the right to call a
meeting to elect or remove Trustees or to take other actions as provided in
the Declaration of Trust. Shareholders have no preemptive rights.
Trust is authorized to subdivide each series (Portfolio) into two or more
classes. Currently, shares of the Portfolios are divided into Class A and
Class B. Each class of shares of a Portfolio is entitled to the same rights
and privileges as all other classes of the Portfolio, provided however, that
each class bears the expenses related to its distribution arrangements, as
well as any other expenses attributable to the class and unrelated to managing
the Portfolio's portfolio securities. Any matter that affects only the
holders of a particular class of shares may be voted on only by such
shareholders. Through this Prospectus, the Trust offers Class A shares in the
Portfolio.
The Trust's custodian is State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
APPENDIX A
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. IT SHOULD BE EMPHASIZED, HOWEVER, THAT
RATINGS ARE NOT ABSOLUTE STANDARDS OF QUALITY. CONSEQUENTLY, DEBT INSTRUMENTS
WITH THE SAME MATURITY, COUPON AND RATING MAY HAVE DIFFERENT YIELDS WHILE DEBT
INSTRUMENTS OF THE SAME MATURITY AND COUPON WITH DIFFERENT RATINGS MAY HAVE
THE SAME YIELD.
MOODY'S
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 edged." 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 that make the long term risks appear somewhat larger
than in "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 sometime 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 rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons:
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa to B. The modifier 1 indicates that the company
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 company
ranks in the lower end of its generic rating category.
S&P
AAA - Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated "AA" has a strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB- Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which 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 rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
CCC-Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon 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 is also 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 that 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.
CI-The rating "CI" is reserved for income bonds on which no interest is
being paid.
D-Debt rated "D" is in payment default. The "D" rating category is used
when interest payments 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. The"D" rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
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.
NR - Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy.
FITCH
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 very 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 very high credit
quality. The obligor's ability to pay interest and 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 repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have 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
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.
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.
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 "AAA" category.
R - Indicates that Fitch does not rate the specific issue.
CONDITIONAL - A conditional rating is premised on the successful
completion of a project or the occurrence of a specific event.
SUSPENDED - A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for rating purposes.
WITHDRAWN - A rating will be withdrawn when an issue matures or is called
or refinanced and at Fitch's discretion when an issuer fails to furnish proper
and timely information.
FITCHALERT - Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for potential downgrade, or "Evolving", where
ratings may be lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
SALOMON U.S. QUALITY BOND PORTFOLIO
LPT VARIABLE INSURANCE SERIES TRUST
1755 CREEKSIDE OAKS DRIVE
SACRAMENTO, CALIFORNIA 95833
CLASS A SHARES
LPT Variable Insurance Series Trust (the "Trust") is an open-end, series
management investment company which currently offers shares of beneficial
interest of eight series (the "Portfolios"), each of which has a different
investment objective and represents the entire interest in a separate
portfolio of investments. THIS PROSPECTUS CONTAINS INFORMATION PERTAINING TO
THE SALOMON U.S. QUALITY BOND PORTFOLIO ONLY. This Portfolio is currently
available to the public only through variable annuity contracts ("VA
Contracts") issued by London Pacific Life and Annuity Company ("Life
Company").
Please read this Prospectus before investing in the Salomon U.S. Quality Bond
Portfolio and keep it for future reference. The Prospectus contains
information about the Salomon U.S. Quality Bond Portfolio that a prospective
investor should know before investing.
A Statement of Additional Information ("SAI") dated ________, 1996 is
available without charge upon request and may be obtained by calling the Life
Company at (800) 852-3152 or by writing to the Life Company's Annuity Service
Center, P.O. Box 29564, Raleigh, North Carolina 27626. Some of the discussions
contained in this Prospectus refer to the more detailed descriptions contained
in the SAI, which is incorporated by reference into this Prospectus and has
been filed with the Securities and Exchange Commission.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE PURCHASER OF A VA CONTRACT SHOULD READ THIS PROSPECTUS IN CONJUNCTION WITH
THE PROSPECTUS FOR HIS OR HER VA CONTRACT.
PROSPECTUS DATED ___________, 1996
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVE AND POLICIES
COMMON TYPES OF SECURITIES AND MANAGEMENT PRACTICES
INVESTMENT RISKS
Foreign Securities
Futures, Options and Other Derivative Instruments
Hybrid Instruments
When-Issued Securities
MANAGEMENT OF THE TRUST
Investment Adviser
Advisory Fee Waiver
Expense Reimbursement
Organizational Expenses of the Trust
Sub-Adviser
Sub-Advisory Fees
Sub-Advisory Fee Waiver
SALES AND REDEMPTIONS
NET ASSET VALUE
PERFORMANCE INFORMATION
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
ADDITIONAL INFORMATION
INVESTMENT OBJECTIVE AND POLICIES
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment
objective of the Salomon U.S. Quality Bond Portfolio is not fundamental and
may be changed without the approval of a majority of the outstanding shares of
the Portfolio. All other investment policies or limitations, unless otherwise
specifically stated, are non-fundamental and may be changed by the Trustees of
the Trust without a vote of the shareholders. There is no assurance that the
Portfolio will achieve its objective. A complete list of investment
restrictions, including those restrictions which cannot be changed without
shareholder approval, is contained in the SAI. United States Treasury
Regulations applicable to portfolios that serve as the funding vehicles for
variable annuity and variable life insurance contracts generally require that
such portfolios invest no more than 55% of the value of their assets in one
investment, 70% in two investments, 80% in three investments, and 90% in four
investments. The Portfolio intends to comply with the requirements of these
Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by the Portfolio declines below the minimum rating for securities in
which the Portfolio may invest, the Portfolio will not be required to dispose
of the security, but the Portfolio's Sub-Adviser will consider whether
continued investment in the security is consistent with the Portfolio's
investment objective.
In implementing its investment objective and policies, the Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the SAI. With respect to the Portfolio's investment policies, use
of the term "primarily" means that, under normal circumstances, at least 65%
of such Portfolio's assets will be invested as indicated. A description of
the ratings systems used by the following nationally recognized statistical
rating organizations ("NRSROs") is contained in Appendix A: Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P"). New
instruments, strategies and techniques, however, are evolving continually and
the Portfolio reserves authority to invest in or implement them to the extent
consistent with its investment objectives and policies. If new instruments,
strategies or techniques would involve a material change to the information
contained herein, they will not be purchased or implemented until this
Prospectus is appropriately supplemented.
The investment objective of the Portfolio is to obtain a high level of current
income. It is a diversified Portfolio that seeks to attain its objective by
investing primarily in debt obligations and mortgage-backed securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities
including collateralized mortgage obligations backed by such securities. The
Portfolio may also invest a portion of its assets in investment grade bonds.
At least 65% of the total assets of the Portfolio will be invested in:
(1) U.S. Treasury obligations;
(2) obligations issued or guaranteed by agencies or instrumentalities of
the U.S. Government which are backed by their own credit and may not be backed
by the full faith and credit of the U.S. Government;
(3) mortgage-backed securities guaranteed by the Government National
Mortgage Association that are supported by the full faith and credit of the
U.S. Government and mortgage-backed securities guaranteed by agencies or
instrumentalities of the U.S. Government which are supported by their own
credit but not the full faith and credit of the U.S. Government, such as the
Federal Home Loan Mortgage Corporation and the Federal National Mortgage
Association; and
(4) collateralized mortgage obligations issued by private issuers for
which the underlying mortgage-backed securities serving as collateral are
backed (i) by the credit alone of the U.S. Government agency or
instrumentality which issues or guarantees the mortgage-backed securities, or
(ii) by the full faith and credit of the U.S. Government.
Any guarantee of these types of securities in which the Portfolio invests runs
only to the principal and interest payments on the securities and not to the
market value of such securities or to the principal and interest payments on
the underlying mortgages. In addition, the guarantee only runs to the
portfolio securities held by the Portfolio and not the purchase of shares of
the Portfolio.
From time to time, a significant portion of the Portfolio's assets may be
invested in mortgage-backed securities. The mortgage-backed securities in
which the Portfolio invests represent participating interests in pools of
fixed rate and adjustable rate residential mortgage loans issued or guaranteed
by agencies or instrumentalities of the U.S. government. Mortgage-backed
securities are issued by lenders such as mortgage bankers, commercial banks
and savings and loan associations. Mortgage-backed securities generally
provide monthly payments which are, in effect, a "pass-through" of the monthly
interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans. Principal prepayments
result from the sale of the underlying property or the refinancing or
foreclosure of underlying mortgages.
The yield of mortgage-backed securities is based upon the prepayment rates of
the underlying pool of mortgage loans. Prepayments tend to increase during
periods of falling interest rates, while during periods of rising interest
rates prepayments will most likely decline. Reinvestment by the Portfolio of
scheduled principal payments and unscheduled prepayments may occur at higher
or lower rates than the original investment, thus affecting the yield of the
Portfolio. Monthly interest payments received by the Portfolio have a
compounding effect which will increase the yield to shareholders as compared
to debt obligations that pay interest semi-annually.
While the Portfolio seeks a high level of current income, it cannot invest in
instruments such as lower grade corporate obligations which offer higher
yields but are subject to greater credit risks. The Portfolio will not
knowingly invest in a high risk mortgage security. The term "high risk
mortgage security" is defined generally as any mortgage security that exhibits
significantly greater price volatility than a benchmark security, the Federal
National Mortgage Association current coupon 30-year mortgage-backed pass
through security. Shares of the Portfolio are neither insured nor guaranteed
by the U.S. Government, its agencies or instrumentalities. Neither the
issuance by nor the guarantee of a U.S. Government agency for a security
constitutes assurance that the security will not significantly fluctuate in
value or that the Portfolio will receive the originally anticipated yield on
the security.
The Portfolio may also invest up to 35% of its assets in U.S. dollar-
denominated securities rated AAA, AA, A or BBB by S&P or Aaa, Aa, A or
Baa by Moody's, or if unrated, determined to be of comparable quality to
securities in those ratings categories by the Sub-Adviser. The Portfolio may
not invest more than 10% of total assets in obligations of foreign issuers.
Investments in foreign securities will subject the Portfolio to special
considerations related to political, economic and legal conditions outside of
the U.S., as discussed under the "Investment Risks" section. These
considerations include the possibility of expropriation, nationalization,
withholding taxes on income and difficulties in enforcing judgments. Foreign
securities may be less liquid and more volatile than comparable U.S.
securities.
The Portfolio may enter into repurchase and reverse repurchase agreements,
purchase securities on a firm commitment basis, including when-issued
securities, and lend portfolio securities. The Portfolio may also enter into
mortgage "dollar rolls." For a description of these investment practices and
the risks associated with them, see "Common Types of Securities and Management
Practices" and "Investment Risks."
COMMON TYPES OF SECURITIES AND MANAGEMENT PRACTICES
This section takes a detailed look at some of the types of securities the
Portfolio may hold in its portfolio and the various kinds of investment
practices that may be used in day-to-day portfolio management. The
Portfolio's investment program is subject to further restrictions described in
the SAI.
ASSET-BACKED SECURITIES. The Portfolio may invest in asset-backed
securities. These securities are subject to prepayment risk, that is, the
possibility that prepayments on the underlying loans will cause the principal
and interest on the asset-backed securities to be paid prior to their stated
maturities. The Sub-Adviser will consider estimated prepayment rates in
calculating the average weighted maturities of the Portfolio. Unscheduled
prepayments are more likely to accelerate during periods of declining
long-term interest rates. In the event of a prepayment during a period of
declining interest rates, the Portfolio may be required to invest the
unanticipated proceeds at a lower interest rate. Prepayments during such
periods will also limit the Portfolio's ability to participate in as large a
market gain as may be experienced with a comparable security not subject to
prepayment.
BORROWING. The Portfolio may borrow money from banks for temporary or
emergency purposes and engage in certain transactions, such as reverse
repurchase agreements or mortgage "dollar rolls", which may be considered
borrowings in amounts up to 33% of its total assets. To secure borrowings the
Portfolio may mortgage or pledge securities in amounts up to 15% of its net
assets. Borrowing creates an opportunity for increased return, but, at the
same time, creates special risks. For example, borrowing may exaggerate
changes in the net asset value of the Portfolio's shares and in the return on
the Portfolio's investments. Although the principal of any borrowing will be
fixed, the Portfolio's assets may change in value during the time the
borrowing is oustanding. The Portfolio may be required to liquidate portfolio
securities at a time when it would be disadvantageous to do so in order to
make payments with respect to any borrowing, which could affect the
Sub-Adviser's strategy and the ability of the Portfolio to comply with certain
provisions of the Internal Revenue Code of 1986, as amended (the "Code") in
order to provide "pass-through" tax treatment to shareholders. Furthermore,
if the Portfolio were to engage in borrowing, an increase in interest rates
could reduce the value of the Portfolio's shares by increasing the Portfolio's
interest expense.
LENDING. In addition, the Portfolio may from time to time lend portfolio
securities to attempt to increase income through the receipt of interest on
the loan of portfolio securities. Loans of portfolio securities involve
certain risks, including the risk that the Portfolio could experience delays
in recovering the securities it lent in the event of the bankruptcy of the
borrower. As a fundamental policy, the Portfolio will not lend securities or
other assets if, as a result, more than 25% of its total assets would be lent
to other parties.
CASH POSITION. The Portfolio may hold a certain portion of its assets in
money market securities, including short-term U.S. Government securities,
commercial paper, bank obligations and repurchase agreements with a
counterparty rated in one of the two highest rating categories by a nationally
recognized statistical rating organization, maturing in one year or less. For
temporary, defensive purposes, the Portfolio may invest without limitation in
such securities. This reserve position provides flexibility in meeting
redemptions, expenses, and the timing of new investments, and serves as a
short-term defense during periods of unusual market volatility.
FIXED INCOME SECURITIES. The Portfolio may invest in fixed income
securities. Such securities would be purchased in companies which meet the
investment criteria for the Portfolio. The market value of fixed-income
obligations held by the Portfolio and, consequently, the net asset value per
share of the Portfolio can be expected to vary inversely to changes in
prevailing interest rates. Investors should also recognize that, in periods
of declining interest rates, the yields of the fixed-income Portfolio will
tend to be somewhat higher than prevailing market rates and, in periods of
rising interest rates, the fixed-income Portfolio's yields will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to the Portfolio from the continuous sales of shares will likely be
invested in instruments producing lower yields than the balance of the
Portfolio's assets, thereby reducing current yields. In periods of rising
interest rates, the opposite can be expected to occur. Prices of longer-term
securities generally increase or decrease more sharply than those of
shorter-term securities in response to interest rate changes. In addition,
obligations purchased by the Portfolio that are rated in the lower of the top
four ratings (Baa by Moody's or BBB by S&P) are considered to have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher-grade securities.
FOREIGN SECURITIES. The Portfolio, subject to its investment
restrictions, may invest in foreign securities. Such investments increase the
Portfolio's diversification and may enhance return, but they also involve some
special risks such as exposure to potentially adverse local political and
economic developments; nationalization and exchange controls; potentially
lower liquidity and higher volatility; and possible problems arising from
accounting, disclosure, settlement, and regulatory practices that differ from
U.S. standards.
FUTURES AND OPTIONS. Futures are often used to manage risk, because they
enable the investor to buy or sell an asset in the future at an agreed upon
price. Options give the investor the right, but not the obligation, to buy or
sell an asset at a predetermined price in the future. The Portfolio may buy
and sell futures contracts (and options on such contracts) to manage its
exposure to changes in securities prices and as a means of adjusting overall
exposure to certain markets. Subject to certain limits described in the SAI,
the Portfolio may purchase, sell, or write call and put options on securities
and financial indices and may invest in futures contracts or financial
indices, including interest rates or an index of U.S. Government securities,
foreign government securities or fixed income securities.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile; using them could lower the Portfolio's total
return; and the potential loss from the use of futures can exceed the
Portfolio's initial investment in such contracts. These instruments may also
be used for non-hedging purposes such as increasing the Portfolio's income.
ILLIQUID SECURITIES. The Portfolio may invest up to 15% of its net
assets in securities that are considered illiquid because of the absence of a
readily available market or due to legal or contractual restrictions.
However, certain restricted securities that are not registered for sale to the
general public but that can be resold to institutional investors ("Rule 144A
Securities") may not be considered illiquid, provided that a dealer or
institutional trading market exists. The institutional trading market is
relatively new and liquidity of the Portfolio's investment could be impaired
if trading does not further develop or declines. The Portfolio will determine
the liquidity of Rule 144A Securities under guidelines approved by the
Trustees.
HYBRID INSTRUMENTS. These instruments can combine the characteristics of
securities, futures and options. For example, the principal amount,
redemption or conversion terms of a security could be related to the market
price of some commodity, currency or securities index. Such securities may
bear interest or pay dividends at below market (or even relatively nominal)
rates. Under certain conditions, the redemption value of such an investment
could be zero. Hybrids can have volatile prices and limited liquidity and
their use by the Portfolio may not be successful.
MORTGAGE-BACKED SECURITIES. The yield characteristics of the
mortgage-backed securities in which the Portfolio may invest differ from those
of traditional debt securities. Among the major differences are that interest
and principal payments are made more frequently on mortgage-backed securities,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans generally may be prepaid at any time. As a result,
if these securities are purchased at a premium, faster than expected
prepayments will reduce yield to maturity, while slower than expected
prepayments will increase yield to maturity. Conversely, if these securities
are purchased at a discount, faster than expected prepayments will increase
yield to maturity, while slower than expected prepayments will reduce yield to
maturity. Accelerated prepayments on securities purchased at a premium also
impose a risk of loss of principal because the premium may not have been fully
amortized at the time the principal is prepaid in full. Because of the
reinvestment of prepayments of principal at current rates, mortgage-backed
securities may be less effective than Treasury bonds of similar maturity at
maintaining yields during periods of declining interest rates. When interest
rates rise, the value and liquidity of mortgage-backed securities may decline
sharply and generally will decline more than would be the case with other
fixed-income securities; however, when interest rates decline, the value of
mortgage-backed securities may not increase as much as other fixed-income
securities due to the prepayment feature. Certain market conditions may
result in greater than expected volatility in the prices of mortgage-backed
securities. For example, in periods of supply and demand imbalances in the
market for such securities and/or in periods of sharp interest rate movements,
the prices of mortgage-backed securities may fluctuate to a greater extent
than would be expected from interest rate movements alone. For a description
of multiple class mortgage pass-through securities, see "Collateralized
Mortgage Obligations and Multiclass Pass-Through Securities" below.
ADJUSTABLE RATE MORTGAGE SECURITIES. Unlike fixed rate mortgage
securities, adjustable rate mortgage securities are collateralized by or
represent interests in mortgage loans with variable rates of interest. These
variable rates of interest reset periodically to align themselves with market
rates. The Portfolio will not benefit from increases in interest rates to the
extent that interest rates rise to the point where they cause the current
coupon of the underlying adjustable rate mortgages to exceed any maximum
allowable annual or lifetime reset limits (or "cap rates") for a particular
mortgage. In this event, the value of the mortgage securities in the
Portfolio would likely decrease. Also, the Portfolio's net asset value could
vary to the extent that current yields on adjustable rate mortgage securities
are different than market yields during interim periods between coupon reset
dates or if the timing of changes to the index upon which the rate for the
underlying mortgages is based lags behind changes in market rates. During
periods of declining interest rates, income to the Portfolio derived from
adjustable rate mortgages which remain in a mortgage pool will decrease in
contrast to the income on fixed rate mortgages, which will remain constant.
Adjustable rate mortgages also have less potential for appreciation in value
as interest rates decline than do fixed rate investments.
PRIVATELY-ISSUED MORTGAGE SECURITIES. The Portfolio may also purchase
mortgage-backed securities issued by private issuers which may entail greater
risk than mortgage-backed securities that are guaranteed by the U.S.
government, its agencies or instrumentalities. Privately-issued mortgage
securities are issued by private originators of, or investors in, mortgage
loans, including mortgage bankers, commercial banks, investment banks, savings
and loan associations and special purpose subsidiaries of the foregoing.
Since privately-issued mortgage certificates are not guaranteed by an entity
having the credit status of GNMA or FHLMC, such securities generally are
structured with one or more types of credit enhancement. Such credit support
falls into two categories: (i) liquidity protection and (ii) protection
against losses resulting from ultimate default by an obligor on the underlying
assets. Liquidity protection refers to the provision of advances, generally
by the entity administering the pool of assets, to ensure that the
pass-through of payments due on the underlying pool occurs in a timely
fashion. Protection against losses resulting from ultimate default enhances
the likelihood of ultimate payment of the obligations on at least a portion of
the assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through
a combination of such approaches.
The ratings of mortgage securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency and loss
experience on the underlying pool of assets is better than expected. There
can be no assurance that the private issuers or credit enhancers of
mortgage-backed securities can meet their obligation under the relevant
policies or other forms of credit enhancement. Examples of credit support
arising out of the structure of the transaction include "senior-subordinated
securities" (multiple class securities with one or more classes subordinate to
other classes as to the payment of principal thereof and interest thereon,
with the result that defaults on the underlying assets are borne first by the
holders of the subordinated class), creation of "reserve funds" (where cash or
investments sometimes funded from a portion of the payments on the underlying
assets are held in reserve against future losses) and "over-collateralization"
(where the scheduled payments on, or the principal amount of, the underlying
assets exceed those required to make payment of the securities and pay any
servicing or other fees). The degree of credit support provided for each
issue is generally based on historical information with respect to the level
of credit risk associated with the underlying assets. Delinquency or loss in
excess of that which is anticipated could adversely affect the return on an
investment in such security.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. The Portfolio may invest in collateralized mortgage obligations.
Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mae
Certificates, but also may be collateralized by whole loans or private
pass-throughs (such collateral collectively hereinafter referred to as
"Mortgage Assets"). Multiclass pass-through securities are interests in a
trust composed of Mortgage Assets. Unless the context indicates otherwise,
all references herein to CMOs include multiclass pass-through securities.
Payments of principal and of interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distributions on the multiclass pass-through securities.
CMOs may be issued by agencies or instrumentalities of the U.S. government, or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs acquired by the Portfolio
will be limited to those issued or guaranteed by agencies or instrumentalities
of the U.S. government and, if available in the future, the U.S. government.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche", is issued at a
specified fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal of and interest on
the Mortgage Assets may be allocated among the several classes of a series of
a CMO in innumerable ways. In one structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the classes
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class
of CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full. The Portfolio has no present
intention to invest in CMO residuals. As market conditions change, and
particularly during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of the CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be
significantly reduced. Such changes can result in volatility in the market
value and in some instances reduced liquidity, of the CMO class.
The Portfolio may also invest in, among others, parallel pay CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are
structured to provide payments of principal on each payment date to more than
one class. These simultaneous payments are taken into account in calculating
the stated maturity date or final distribution date of each class, which, as
with other CMO structures, must be retired by its stated maturity date or a
final distribution date but may be retired earlier. PAC Bonds are a type of
CMO tranche or series designed to provide relatively predictable payments of
principal provided that, among other things, the actual prepayment experience
on the underlying mortgage loans falls within a predefined range. If the
actual prepayment experience on the underlying mortgage loans is at a rate
faster or slower than the predefined range or if deviations from other
assumptions occur, principal payments on the PAC Bond may be earlier or later
than predicted. The magnitude of the predefined range varies from one PAC
Bond to another; a narrower range increases the risk that prepayments on the
PAC Bond will be greater or smaller than predicted. Because of these
features, PAC Bonds generally are less subject to the risks of prepayment than
are other types of mortgage-backed securities.
MORTGAGE ROLLS. The Portfolio may enter into mortgage "dollar rolls" in
which the Portfolio sells mortgage-backed securities for delivery in the
current month and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. During
the roll period, the Portfolio foregoes principal and interest paid on the
mortgage-backed securities. The Portfolio is compensated by the difference
between the current sales price and the lower forward price for the future
purchase (often referred to as the "drop") as well as by the interest earned
on the cash proceeds of the initial sale. The Portfolio may only enter into
covered rolls involving up to 33% of the Portfolio's assets. A "covered roll"
is a specific type of dollar roll for which there is an offsetting cash
position which matures on or before the forward settlement date of the dollar
roll transaction. At the time the Portfolio enters into a mortgage "dollar
roll", it will establish a segregated account with its custodian bank in which
it will maintain cash, U.S. government securities or other liquid high grade
debt obligations equal in value to its obligations in respect of dollar rolls,
and accordingly, such dollar rolls will not be considered borrowings. Mortgage
dollar rolls involve the risk that the market value of the securities the
Portfolio is obligated to repurchase under the agreement may decline below the
repurchase price. In the event the buyer of securities under a mortgage dollar
roll files for bankruptcy or becomes insolvent, the Portfolio's use of
proceeds of the dollar roll may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Portfolio's
obligation to repurchase the securities.
PORTFOLIO TURNOVER. To a limited extent, the Portfolio may engage in
short-term transactions if such transactions further its investment objective.
The Portfolio may sell one security and simultaneously purchase another of
comparable quality or simultaneously purchase and sell the same security to
take advantage of short-term differentials in bond yields or otherwise
purchase individual securities in anticipation of relatively short-term price
gains. The rate of portfolio turnover will not be a determining factor in the
purchase and sale of such securities. However, certain tax rules may restrict
the Portfolio's ability to sell securities in some circumstances when the
security has been held for less than three months. Increased portfolio
turnover necessarily results in correspondingly higher costs including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities, and may result in the
acceleration of taxable gains.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. The Portfolio
may invest in repurchase or reverse repurchase agreements. A repurchase
agreement is a transaction in which the seller of a security commits itself at
the time of the sale to repurchase that security from the buyer at a mutually
agreed upon time and price. Repurchase agreements may be characterized as
loans which are collateralized by the underlying securities. The Portfolio
will enter into repurchase agreements only with respect to obligations that
could otherwise be purchased by the Portfolio. The Portfolio will enter into
repurchase agreements only with dealers, domestic banks or recognized
financial institutions which, in the opinion of the Sub-Adviser based on
guidelines established by the Trust's Board of Trustees, are deemed
creditworthy. The Sub-Adviser will monitor the value of the securities
underlying the repurchase agreement at the time the transaction is entered
into and at all times during the term of the repurchase agreement to ensure
that the value of the securities always equals or exceeds the repurchase
price. The Portfolio requires that additional securities be deposited if the
value of the securities purchased decreases below their resale price and does
not bear the risk of a decline in the value of the underlying security unless
the seller defaults under the repurchase obligation. In the event of default
by the seller under the repurchase agreement, the Portfolio could experience
losses that include: (i) possible decline in the value of the underlying
security during the period which the Portfolio seeks to enforce its rights
thereto; (ii) additional expenses to the Portfolio for enforcing those rights;
(iii) possible loss of all or part of the income or proceeds of the repurchase
agreement; and (iv) possible delay in the disposition of the underlying
security pending court action or possible loss of rights in such securities.
Repurchase agreements with maturities of more than seven days will be treated
as illiquid securities by the Portfolio.
When the Portfolio invests in a reverse repurchase agreement, it sells a
portfolio security to another party, such as a bank or broker-dealer, in
return for cash, and agrees to buy the security back at a future date and
price. Reverse repurchase agreements may be used to provide cash to satisfy
unusually heavy redemption requests or for other temporary or emergency
purposes without the necessity of selling portfolio securities or to earn
additional income on portfolio securities, such as Treasury bills and notes.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES. The Portfolio may purchase
securities on a firm commitment basis, including when-issued securities.
Securities purchased on a firm commitment basis are purchased for delivery
beyond the normal settlement date at a stated price and yield. No income
accrues to the purchaser of a security on a firm commitment basis prior to
delivery. Such securities are recorded as an asset and are subject to changes
in value based upon changes in the general level of interest rates. Purchasing
a security on a firm commitment basis can involve a risk that the market price
at the time of delivery may be lower than the agreed upon purchase price, in
which case there could be an unrealized loss at the time of delivery. The
Portfolio will only make commitments to purchase securities on a firm
commitment basis with the intention of actually acquiring the securities, but
may sell them before the settlement date if it is deemed advisable. The
Portfolio will establish a segregated account in which it will maintain liquid
assets in an amount at least equal in value to the Portfolio's commitments to
purchase securities on a firm commitment basis. If the value of these assets
declines, the Portfolio will place additional liquid assets in the account on
a daily basis so that the value of the assets in the account is equal to the
amount of such commitments.
ZERO COUPON AND PAY-IN-KIND BONDS. The Portfolio may invest in zero
coupon bonds or strips. Zero coupon bonds do not make regular interest
payments; rather, they are sold at a discount from face value. Principal and
accreted discount (representing interest accrued but not paid) are paid at
maturity. Strips are debt securities that are stripped of their interest
after the securities are issued, but otherwise are comparable to zero coupon
bonds. The market value of strips and zero coupons bonds generally fluctuates
in response to changes in interest rates to a greater degree than
interest-paying securities of comparable term and quality. The Portfolio may
also purchase pay-in-kind bonds. Pay-in-kind bonds pay all or a portion of
their interest in the form of debt or equity securities.
INVESTMENT RISKS
FOREIGN SECURITIES
Investments in foreign securities, including those of foreign governments,
involve risks that are different in some respects from investments in
securities of U.S. issuers, such as a heightened risk of adverse political and
economic developments and, with respect to certain countries, the possibility
of expropriation, nationalization or confiscatory taxation or limitations on
the removal of funds or other assets of the Portfolio. Securities of some
foreign companies are less liquid and more volatile than securities of
comparable domestic companies. There also may be less publicly available
information about foreign issuers than domestic issuers, and foreign issuers
generally are not subject to the uniform accounting, auditing and financial
reporting standards, practices and requirements applicable to domestic
issuers. Certain markets may require payment for securities before delivery.
The Portfolio may have limited legal recourse against the issuer in the event
of a default on a debt instrument. Delays may be encountered in settling
securities transactions in certain foreign markets. Bank custody charges are
generally higher for foreign securities.
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
The use of futures or options ("derivative instruments") exposes the Portfolio
to additional investment risks and transaction costs. If the Sub-Adviser
seeks to protect the Portfolio against potential adverse movements in the
securities or interest rate markets using these instruments, and such markets
do not move in a direction adverse to the Portfolio, the Portfolio could be
left in a less favorable position than if such strategies had not been used.
Risks inherent in the use of futures, options, forward contracts and swaps
include (1) the risk that interest rates and securities prices will not move
in the directions anticipated; (2) imperfect correlation between the price of
derivative instruments and movements in the prices of the securities or
interest rates being hedged; (3) the fact that skills needed to use these
strategies are different from those needed to select portfolio securities; (4)
the possible absence of a liquid secondary market for any particular
instrument at any time; and (5) the possible need to defer closing out certain
hedged positions to avoid adverse tax consequences.
HYBRID INSTRUMENTS
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options and futures not permitted including
volatility and lack of liquidity. Reference is made to the discussion of
futures and options herein for a discussion of these risks. Further, the
prices of the Hybrid Instrument and the related commodity may not move in the
same direction or at the same time. Hybrid Instruments may bear interest or
pay preferred dividends at below market (or even relatively nominal) rates.
Alternatively, Hybrid Instruments may bear interest at above market rates but
bear an increased risk of principal loss. In addition, because the purchase
and sale of Hybrid Instruments could take place in an over-the-counter or in a
private transaction between the Portfolio and the seller of the Hybrid
Instrument, the creditworthiness of the counter party to the transaction would
be a risk factor which the Portfolio would have to consider. Hybrid
Instruments also may not be subject to regulation of the Commodity Futures
Trading Commission ("CFTC"), which generally regulates the trading of
commodity futures by U.S. persons, the SEC (which regulates the offer and sale
of securities by and to U.S. persons), or any other governmental regulatory
authority.
WHEN-ISSUED SECURITIES
The price of such securities, which may be expressed in yield terms, is fixed
at the time the commitment to purchase is made, but delivery and payment take
place at a later date. Normally, the settlement date occurs within 90 days of
the purchase for a security issued on a when-issued basis, but may be
substantially longer for a security issued on a forward basis. During the
period between purchase and settlement, no payment is made by the Portfolio to
the issuer and no interest accrues to the Portfolio. The purchase of these
securities will result in a loss if their value declines prior to the
settlement date. This could occur, for example, if interest rates increase
prior to settlement. The longer the period between purchase and settlement,
the greater the risks. At the time the Portfolio makes the commitment to
purchase these securities, it will record the transaction and reflect the
value of the security in determining its net asset value. The Portfolio will
cover these securities by maintaining cash and/or liquid, high-grade debt
securities with its custodian bank equal in value to commitments for them
during the time between the purchase and the settlement. Therefore, the
longer this period, the longer the period during which alternative investment
options are not available to the Portfolio (to the extent of the securities
used for cover). Such securities either will mature or, if necessary, be sold
on or before the settlement date.
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER
Under an Investment Advisory Agreement dated January 9, 1996, LPIMC Insurance
Marketing Services, 1755 Creekside Oaks Drive, Sacramento, CA 95833 (the
"Adviser"), manages the investment strategies and policies of the Portfolios
and the Trust, subject to the control of the Trustees.
The Adviser is a registered investment adviser organized under the laws of
California. The Adviser is a wholly-owned subsidiary of the Life Company.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate
a continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies and restrictions and to determine from time to time securities to be
purchased, sold, retained or lent by the Trust and implement those decisions.
The Investment Advisory Agreement also provides that the Adviser shall manage
the Trust's business and affairs and shall provide such services required for
effective administration of the Trust as are now provided by employees or
other agents engaged by the Trust. The Investment Advisory Agreement further
provides that the Adviser shall furnish the Trust with office space and
necessary personnel, pay ordinary office expenses, pay all executive salaries
of the Trust and furnish, without expense to the Trust, the services of such
members of its organization as may be duly elected officers or Trustees of the
Trust. The Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at the Adviser's own cost and expense, for the purpose of
managing the investment of the assets of one or more Portfolios of the Trust.
As full compensation for its services under the Investment Advisory Agreement
with respect to the Salomon U.S. Quality Bond Portfolio, the Trust will pay
the Adviser a monthly fee at the following annual rates based on the average
daily net assets of the Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO ADVISORY FEE
- ----------------------------------- --------------------------------------
<S> <C>
Salomon U.S. Quality Bond Portfolio .55% of first $50 million of average
daily net assets
.525% of next $100 million of average
daily net assets
.50% of next $150 million of average
daily net assets
.45% of next $200 million of average
daily net assets
.425% of average daily net assets over
and above $500 million
</TABLE>
ADVISORY FEE WAIVER
The Adviser has agreed to waive its advisory fee for the Portfolio for the
initial six (6) months of the Portfolio's investment operations.
EXPENSE REIMBURSEMENT
The Life Company has voluntarily agreed to reimburse the Portfolio for certain
expenses (excluding brokerage commissions and management fees) in excess of
0.99%. The Life Company has reserved the right to withdraw or modify its
policy of expense reimbursement for the Portfolio. If expenses were not
reimbursed, anticipated actual expenses would be approximately 2.83% for the
year ending 12/31/96.
ORGANIZATIONAL EXPENSES OF THE TRUST
The Life Company will pay for all organizational expenses of the Trust
including contribution of the initial "seed money" to the Trust.
SUB-ADVISER
The Adviser has engaged the Sub-Adviser for the Portfolio to make investment
decisions and place orders. In accordance with the Portfolio's investment
objective and policies and under the supervision of the Adviser and the
Trust's Board of Trustees, the Portfolio's Sub-Adviser is responsible for the
day to day investment management of the Portfolio, makes investment decisions
for the Portfolio and places orders on behalf of the Portfolio to effect the
investment decisions made as provided in a Sub-Advisory Agreement among the
Sub-Adviser, the Adviser and the Trust.
The Sub-Adviser for the Portfolio is Salomon Brothers Asset Management Inc.
The Sub-Adviser is an indirect, wholly-owned subsidiary of Salomon Inc
incorporated in 1987, and an affiliate of Salomon Brothers Inc. The business
address of the Sub-Adviser is 7 World Trade Center, New York, New York 10048.
Through its office in New York and affiliates in London, Frankfurt, Hong Kong
and Tokyo, the Sub-Adviser provides a full range of fixed income and equity
investment advisory services for its individual and institutional clients
around the world, including central banks, pension funds, endowments,
insurance companies and various investment companies (including portfolios
thereof). As of December 31, 1995, the Sub-Adviser and its affiliates had
investment advisory responsibility for approximately $13 billion of assets.
The Sub-Adviser has access to Salomon Brothers Inc's more than 400 economists,
mortgage, bond, sovereign and equity analysts.
Steven Guterman is primarily responsible for the day-to-day management of the
Portfolio which he co-manages with Roger Lavan.
Mr. Guterman, who joined the Sub-Adviser in 1990, is a Senior Portfolio
Manager, and is responsible for the day-to-day management of portfolios
managed by the Sub-Adviser which invest primarily in mortgage-backed and U.S.
Government securities. Mr. Guterman joined Salomon Brothers Inc in 1983. He
initially worked in the mortgage research group where he became a Research
Director and later traded derivative mortgage-backed securities for Salomon
Brothers Inc.
Mr. Lavan joined the Sub-Adviser in 1990, is a Portfolio Manager, and is
responsible for investment company and institutional portfolios which invest
in mortgage-backed and U.S. Government securities. Prior to joining the
Sub-Adviser, Mr. Lavan spent four years analyzing portfolios for Salomon
Brothers Inc's Fixed Income Sales Group and Product Support Divisions. Mr.
Lavan is a Chartered Financial Analyst, a member of the New York Society of
Security Analysts, and received his MBA from Fordham University in 1990.
SUB-ADVISORY FEES
Under the terms of the Sub-Advisory Agreement, the Adviser shall pay to the
Sub-Adviser, as full compensation for services rendered under the Sub-Advisory
Agreement with respect to the Portfolio, monthly fees at the following annual
rates based on the average daily net assets of the Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISORY FEE
------------------------------------
<S> <C>
Salomon U.S. Quality Bond Portfolio .30% of first $50 million of average
daily net assets.
.275% of the next $100 million of
average daily net assets
.25% of the next $150 million of
average daily net assets
.20% of the next $200 million of
average daily net assets
.175% of average daily net assets
over and above $500 million
</TABLE>
SUB-ADVISORY FEE WAIVER
The Sub-Adviser has agreed to waive its entire sub-advisory fee due under the
Sub-Advisory Agreement for the initial six (6) months of the Portfolio's
investment operations.
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the
Trust will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees
and charges relating to the VA Contract.)
The separate account of the Life Company places orders to purchase and redeem
shares of the Portfolio based on, among other things, the amount of
contributions to be invested and surrender and transfer requests to be
effected on that day pursuant to the VA contracts issued by the Life Company.
Orders received by the Trust are effected on days on which the New York Stock
Exchange is open for trading, at the net asset value per share next determined
after receipt of the order. For orders received before 4:00 p.m. New York
time, such purchases and redemptions of shares of each Portfolio are effected
at the respective net asset values per share determined as of 4:00 p.m. New
York time on that day. See "Net Asset Value", below and "Determination of Net
Asset Value" in the Trust's SAI. Payment for redemptions will be made within
seven days after receipt of a redemption request in good order. No fee is
charged the separate account of the Life Company when it redeems Portfolio
shares. The Trust may suspend the sale of shares at any time and may refuse
any order to purchase shares.
The Trust may suspend the right of redemption of shares of the Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than for customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted; (ii) when
the Securities and Exchange Commission determines that a state of emergency
exists which makes the sale of portfolio securities or the determination of
net asset value not reasonably practicable; (iii) as the Securities and
Exchange Commission may by order permit for the protection of the security
holders of the Trust; or (iv) at any time when the Trust may, under applicable
laws and regulations, suspend payment on the redemption of its shares.
NET ASSET VALUE
The Portfolio calculates the net asset value of its shares by dividing the
total value of its assets (the securities held by the Portfolio, plus any cash
or other assets, including interest and dividends accrued but not yet
received), less its total liabilities, by the total number of shares
outstanding. Shares are valued as of the close of trading on the New York
Stock Exchange (usually considered 4:00 p.m. Eastern Time) each day the New
York Stock Exchange is open. Portfolio securities for which market quotations
are readily available are stated at market value. Short-term investments that
will mature in 60 days or less are valued using amortized cost, which the
Trust's Board of Trustees has determined approximates market value. Amortized
cost valuation means that a debt security with a maturity at purchase of 60
days or less is valued at its acquisition cost and a debt security originally
purchased with a maturity in excess of 60 days, which currently has a maturity
of 60 days or less, is valued at the market or fair value of the security on
the 61st day prior to maturity (each as adjusted for amortization of premium
or discount) rather than at current market value. All other securities and
assets are valued at their fair value following procedures approved by the
Trust's Board of Trustees. See "Determination of Net Asset Value" in the SAI
for a description of the special valuation procedures for options and futures
contracts.
Certain Portfolios of the Trust are expected to invest in foreign securities
listed on foreign stock exchanges or debt securities of the United States and
foreign governments and corporations. Some of these securities trade on days
other than Business Days, as defined below.
Because of time zone differences, foreign exchanges and securities markets
will usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be
determined as of the earlier closing of such exchanges and securities markets.
However, events affecting the values of such foreign securities may
occasionally occur between the earlier closing of such exchanges and
securities markets and the closing of the New York Stock Exchange which will
not be reflected in the computation of the net asset value of the Portfolio.
If an event materially affecting the value of such foreign securities occurs
during such period of which a Sub-Adviser becomes aware, then such securities
will be valued at fair value as determined in good faith, or in accordance
with procedures adopted, by the Trust's Board of Trustees.
PERFORMANCE INFORMATION
Performance information for the Portfolio may be presented from
time to time in advertisements and sales literature. The Portfolio may
advertise several types of performance information. These are the "yield,"
"average annual total return" and "aggregate total return". Each of these
figures is based upon historical results and is not necessarily representative
of the future performance of the Portfolio.
The yield of the Portfolio's shares is determined by annualizing net
investment income earned per share for a stated period (normally one month or
thirty days) and dividing the result by the net asset value per share at the
end of the valuation period. The average annual total return and aggregate
total return figures measure both the net investment income generated by, and
the effect of any realized or unrealized appreciation or depreciation of the
underlying investments in, the Portfolio's portfolio for the period in
question, assuming the reinvestment of all dividends. Thus, these figures
reflect the change in the value of an investment in the Portfolio's shares
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter
(or if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Portfolio). Average annual total return
figures are annualized and, therefore, represent the average annual percentage
change over the period in question. Total return figures are not annualized
and represent the aggregate percentage or dollar value change over the period
in question. For more information regarding the computation of yield, average
annual total return and aggregate total return, see "Performance Information"
in the SAI.
The Portfolio's performance information presented will also include
performance information for the Life Company separate accounts investing in
the Trust which will take into account insurance-related charges and expenses
under such insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned the Portfolio or its
Sub-Adviser by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec
Research Survey of Non-U.S. Equity Fund Returns, Frank Russell International
Universe, Kiplinger's Personal Finance, and Financial Services Week. Any
such comparisons or rankings are based on past performance and the statistical
computation performed by publications and services, and are not necessarily
indications of future performance. Because the Portfolio is managed
investment vehicles investing in a wide variety of securities, the securities
owned by the Portfolio will not match those making up an index.
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
The Portfolio Trust intends to qualify and elect to be treated as a regulated
investment company that is taxed under the rules of Subchapter M of the
Internal Revenue Code. As such an electing regulated investment company, the
Portfolio will not be subject to federal income tax on its net ordinary income
and net realized capital gains to the extent that at least 90% of such income
and gains are distributed to the separate account of the Life Company which
hold its shares. For further information concerning federal income tax
consequences for the holders of the VA Contracts of the Life Company,
investors should consult the prospectus used in connection with the issuance
of their VA Contracts.
The Portfolio will declare and distribute dividends from net ordinary income
at least annually and will distribute its net realized capital gains, if any,
at least annually. Distributions of ordinary income and capital gains will be
made in shares of the Portfolio unless an election is made on behalf of a
separate account to receive distributions in cash. The Life Company will be
informed at least annually about the amount and character of distributions
from the Trust for federal income tax purposes.
ADDITIONAL INFORMATION
The Trust was established as a Massachusetts business trust under the laws of
Massachusetts by a Declaration of Trust dated January 23, 1995, as amended
(the "Declaration of Trust"). Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. The Declaration of Trust contains an
express disclaimer of shareholder liability in connection with Trust property
or the acts, obligations, or affairs of the Trust. The Declaration of Trust
also provides for indemnification out of a Portfolio's property of any
shareholder of that Portfolio held personally liable for the claims and
liabilities to which a shareholder may become subject by reason of being or
having been a shareholder. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Portfolio itself would be unable to meet its obligations. A
copy of the Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts.
The Trust has an unlimited authorized number of shares of beneficial interest.
Shares of the Trust are entitled to one vote per share (with proportional
voting for fractional shares) and are freely transferable, and, in liquidation
of a Portfolio, shareholders of the Portfolio are entitled to receive pro rata
the net assets of the Portfolio. Although no Portfolio is required to hold
annual meetings of its shareholders, shareholders have the right to call a
meeting to elect or remove Trustees or to take other actions as provided in
the Declaration of Trust. Shareholders have no preemptive rights.
The Trust is authorized to subdivide each series (Portfolio) into two or more
classes. Currently, shares of the Portfolios are divided into Class A and
Class B. Each class of shares of a Portfolio is entitled to the same rights
and privileges as all other classes of the Portfolio, provided however, that
each class bears the expenses related to its distribution arrangements, as
well as any other expenses attributable to the class and unrelated to managing
the Portfolio's portfolio securities. Any matter that affects only the
holders of a particular class of shares may be voted on only by such
shareholders. Through this Prospectus, the Trust offers Class A shares in the
Portfolio.
The Trust's custodian is State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
APPENDIX A - RATINGS OF INVESTMENTS
COMMERCIAL PAPER RATINGS
A-1, A-2 AND PRIME-1, PRIME-2 COMMERCIAL PAPER RATINGS
Commercial paper rated by Standard & Poor's Corporation has the following
characteristics: Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated "A" or better. The issuer has access to at
least two additional channels of borrowing. Basic earnings and cash flow have
an upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated A-1 or A-2.
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's Investors Service, Inc. Among the factors considered by it
in assigning ratings are the following: (1) evaluation of the management of
the issuer; (2) economic evaluation of the issuer's industry or industries and
an appraisal of speculative-type risks which may be inherent in certain areas;
(3) evaluation of the issuer's products in relation to competition and
customer-acceptance; (4) liquidity; (5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten years; (7) financial strength of a
parent company and the relationships which exist with the issuer; and (8)
recognition by the management of obligations which may be present or may arise
as a result of public interest questions and preparations to meet such
obligations. Relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated Prime-1 or 2.
CORPORATE BONDS
STANDARD & POOR'S CORPORATION BOND RATINGS
AAA. Debt rated AAA has the highest rating assigned by Standard &
Poor's. 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 higher rated issue only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. 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 risks appear somewhat larger than in 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 sometime 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.
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.
NOTE: Moody's applies numerical modifiers, 1, 2 AND 3 in each generic
rating classification from "AA through "B" in its corporate bond rating
system. The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
STRONG INTERNATIONAL STOCK PORTFOLIO
LPT VARIABLE INSURANCE SERIES TRUST
1755 CREEKSIDE OAKS DRIVE
SACRAMENTO, CALIFORNIA 95833
CLASS A SHARES
LPT Variable Insurance Series Trust (the "Trust") is an open-end, series
management investment company which currently offers shares of beneficial
interest of eight series (the "Portfolios"), each of which has a different
investment objective and represents the entire interest in a separate
portfolio of investments. THIS PROSPECTUS CONTAINS INFORMATION PERTAINING TO
THE STRONG INTERNATIONAL STOCK PORTFOLIO ONLY. This Portfolio is currently
available to the public only through variable annuity contracts ("VA
Contracts") issued by London Pacific Life and Annuity Company ("Life
Company").
Please read this Prospectus before investing in the Strong International Stock
Portfolio and keep it for future reference. The Prospectus contains
information about the Strong International Stock Portfolio that a prospective
investor should know before investing.
A Statement of Additional Information ("SAI") dated ________, 1996 is
available without charge upon request and may be obtained by calling the Life
Company at (800) 852-3152 or by writing to the Life Company's Annuity Service
Center, P.O. Box 29564, Raleigh, North Carolina 27626. Some of the discussions
contained in this Prospectus refer to the more detailed descriptions contained
in the SAI, which is incorporated by reference into this Prospectus and has
been filed with the Securities and Exchange Commission.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THE PORTFOLIO MAY ENGAGE IN SUBSTANTIAL SHORT-TERM TRADING, WHICH MAY INCREASE
THE PORTFOLIO'S EXPENSES. THE PORTFOLIO MAY INVEST A SIGNIFICANT PORTION OF
ITS ASSETS IN ILLIQUID SECURITIES. THESE INVESTMENT POLICIES INVOLVE
SUBSTANTIAL RISK AND MAY BE CONSIDERED SPECULATIVE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE PURCHASER OF A VA CONTRACT SHOULD READ THIS PROSPECTUS IN CONJUNCTION WITH
THE PROSPECTUS FOR HIS OR HER VA CONTRACT.
PROSPECTUS DATED ___________, 1996
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVE AND POLICIES
IMPLEMENTATION OF POLICIES AND RISKS
Foreign Securities and Currencies
Foreign Investment Companies
Derivative Instruments
Illiquid Securities
Small Companies
Debt Obligations
When-Issued Securities
Mortgage Dollar Rolls and Reverse Repurchase Agreements
Portfolio Turnover
MANAGEMENT OF THE TRUST
Investment Adviser
Advisory Fee Waiver
Expense Reimbursement
Organizational Expenses of the Trust
Sub-Adviser
Sub-Advisory Fees
SALES AND REDEMPTIONS
NET ASSET VALUE
PERFORMANCE INFORMATION
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
ADDITIONAL INFORMATION
INVESTMENT OBJECTIVE AND POLICIES
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment
objective of the Strong International Stock Portfolio is not fundamental and
may be changed without the approval of a majority of the outstanding shares of
the Portfolio. All other invest-ment policies or limitations, unless otherwise
specifically stated, are non-fundamental and may be changed by the Trustees of
the Trust without a vote of the shareholders. There is no assurance that the
Portfolio will achieve its objective. A complete list of investment
restrictions, including those restrictions which cannot be changed without
shareholder approval, is contained in the SAI. United States Treasury
Regulations applicable to portfolios that serve as the funding vehicles for
variable annuity and variable life insurance contracts generally require that
such portfolios invest no more than 55% of the value of their assets in one
investment, 70% in two investments, 80% in three investments, and 90% in four
investments. The Portfolio intends to comply with the requirements of these
Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by the Portfolio declines below the minimum rating for securities in
which the Portfolio may invest, the Portfolio will not be required to dispose
of the security, but the Portfolio's Sub-Adviser will consider whether
continued investment in the security is consistent with the Portfolio's
investment objective.
In implementing its investment objective and policies, the Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the Appendix and the SAI. With respect to the Portfolio's
investment policies, use of the term "primarily" means that under normal
circumstances, at least 65% of such Portfolio's assets will be invested as
indicated. A description of the ratings systems used by the following
nationally recognized statistical rating organizations ("NRSROs") is contained
in the SAI: Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch Investors Service,
Inc. ("Fitch"), Thomson Bankwatch, Inc., IBCA Limited and IBCA Inc. New
instruments, strategies and techniques, however, are evolving continually and
the Portfolio reserves authority to invest in or implement them to the extent
consistent with its investment objectives and policies. If new instruments,
strategies or techniques would involve a material change to the information
contained herein, they will not be purchased or implemented until this
Prospectus is appropriately supplemented.
The Portfolio seeks capital growth. The Portfolio invests primarily in the
equity securities of issuers located outside the United States.
The Portfolio will invest at least 65% of its total assets in foreign equity
securities, including common stocks, preferred stocks, and securities that are
convertible into common or preferred stocks, such as warrants and convertible
bonds, that are issued by companies whose principal headquarters are located
outside the United States.
Under normal market conditions, the Portfolio expects to invest at least 90%
of its total assets in foreign equity securities. The Portfolio may, however,
invest up to 35% of its total assets in equity securities of U.S. issuers or
debt obligations, including intermediate- to long-term debt obligations of
U.S. issuers or foreign-government entities. When the Sub-Adviser determines
that market conditions warrant a temporary defensive position, the Portfolio
may invest without limitation in cash (U.S. dollars, foreign currencies, or
multicurrency units) and short-term fixed-income securities. Although the debt
obligations in which it invests will be primarily investment-grade, the
Portfolio may invest up to 5% of its total assets in non-investment-grade debt
obligations. (See "Implementation of Policies and Risks - Debt Obligations".)
The Portfolio will normally invest in securities of issuers located in at
least three foreign countries. The Sub-Adviser expects that the majority of
the Portfolio's investments will be in issuers in the following markets:
Argentina, Australia, Brazil, Chile, Cambodia, the Czech Republic, France,
Germany, Hong Kong, Hungary, India, Indonesia, Italy, Japan, Malaysia, Mexico,
the Netherlands, New Zealand, Norway, Peru, the Philippines, Poland, Russia,
Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, the
United Kingdom and Vietnam. The Portfolio will also invest in other European,
Pacific Rim, and Latin American markets.
As market and global conditions change, the Portfolio will change its
allocations among the countries of the world, and nothing herein will limit
the Portfolio's ability to invest in or avoid any particular countries or
regions. In allocating the Portfolio's assets among various countries, the
Sub-Adviser will seek economic and market environments favorable for capital
appreciation and, with respect to developing countries, economic, political,
and stock-market environments that show signs of stabilizing or improving. See
"Implementation of Policies and Risks - Foreign Securities and Currencies" for
a discussion of the special risks involved in investing in foreign securities.
In analyzing foreign companies for investment, the Sub-Adviser will ordinarily
look for one or more of the following characteristics in relation to the
company's prevailing stock price:
-- prospects for above-average sales and earnings growth and high
return on invested capital;
-- overall financial strength, including sound financial and
accounting policies and a strong balance sheet;
-- significant competitive advantages, including innovative products
and efficient service;
-- effective research, product development, and marketing;
-- pricing flexibility;
-- stable, capable management; and
-- other general operating characteristics that will enable the
company to compete successfully in its marketplace.
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the investment policies described above (and subject to certain
restrictions described below), the Portfolio may invest in the following
securities and may employ the following investment techniques, some of which
may present special risks as described below. The Portfolio may engage in
reverse repurchase agreements and mortgage dollar roll transactions. A more
complete discussion of certain of these securities and investment techniques
and the associated risks is presented in the SAI.
FOREIGN SECURITIES AND CURRENCIES
The Portfolio may invest in foreign securities, either directly or indirectly
through the use of depositary receipts. Depositary receipts are generally
issued by banks or trust companies and evidence ownership of underlying
foreign securities.
Foreign investments involve special risks, including:
-- expropriation, confiscatory taxation, and withholding taxes on
dividends and interest;
-- less extensive regulation of foreign brokers, securities markets,
and issuers;
-- less publicly available information and different accounting
standards;
-- costs incurred in conversions between currencies, possible delays
in settlement in foreign securities markets, limitations on the
use or transfer of assets (including suspension of the ability to
transfer currency from a given country), and difficulty of
enforcing obligations in other countries; and
-- diplomatic developments and political or social instability.
Foreign economies may differ favorably or unfavorably from the U.S. economy in
various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities
are less liquid and their prices more volatile than comparable U.S.
securities. Although the Portfolio generally invests only in securities that
are regularly traded on recognized exchanges or in over-the-counter markets,
from time to time foreign securities may be difficult to liquidate rapidly
without adverse price effects. Certain costs attributable to foreign
investing, such as custody charges and brokerage costs, are higher than those
attributable to domestic investing.
The risks of investing in foreign markets generally are greater for
investments in developing or emerging markets and economies in which the
Portfolio may invest. Risks of investing in such markets include:
-- less social, political, and economic stability;
-- smaller securities markets and lower trading volume, which may
result in a lack of liquidity and greater price volatility;
-- certain national policies that may restrict the Portfolio's
investment opportunities, including restrictions on investments in
issuers or industries deemed sensitive to national interests, or
expropriation or confiscation of assets or property, which could
result in the Portfolio's loss of its entire investment in that
market; and
-- less developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private
property.
In addition, brokerage commissions, custodial services, withholding taxes, and
other costs relating to investment in emerging markets generally are more
expensive than in the U.S. and certain more established foreign markets.
Economies in emerging markets generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be
affected adversely by trade barriers, exchange controls, managed adjustments
in relative currency values, and other protectionist measures negotiated or
imposed by the countries with which they trade.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Portfolio could be significantly affected by
changes in foreign currency exchange rates. The value of the Portfolio's
assets denominated in foreign currencies will increase or decrease in response
to fluctuations in the value of those foreign currencies relative to the U.S.
dollar. Currency exchange rates can be volatile at times in response to supply
and demand in the currency exchange markets, international balances of
payments, governmental intervention, speculation and other political and
economic conditions.
The Portfolio may purchase and sell foreign currency on a spot basis and may
engage in forward currency contracts, currency options, and futures
transactions for hedging or any other lawful purpose consistent with its
investment objective, including transaction hedging, anticipatory hedging, and
cross hedging. Successful use of currency instruments will depend on the
Sub-Adviser's skill in analyzing and predicting currency values, and there is
no assurance that the use of these instruments will be advantageous to the
Portfolio. (See "Derivative Instruments".)
FOREIGN INVESTMENT COMPANIES
Some of the countries in which the Portfolio invests may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. Investing through such
vehicles may involve frequent or layered fees or expenses and may also be
subject to limitation under the Investment Company Act of 1940 ("1940 Act").
DERIVATIVE INSTRUMENTS
Derivative instruments may be used by the Portfolio for any lawful purpose,
including hedging, risk management, or enhancing returns, but not for
speculation. Derivative instruments are securities or agreements whose value
is derived from the value of some underlying asset, for example, securities,
currencies, reference indexes, or commodities. Options, futures, and options
on futures transactions are considered derivative transactions. Derivatives
generally have investment characteristics that are based upon either forward
contracts (under which one party is obligated to buy and the other party is
obligated to sell an underlying asset at a specific price on a specified date)
or option contracts (under which the holder of the option has the right but
not the obligation to buy or sell an underlying asset at a specified price on
or before a specified date). Consequently, the change in value of a
forward-based derivative generally is roughly proportional to the change in
value of the underlying asset. In contrast, the buyer of an option-based
derivative generally will benefit from favorable movements in the price of the
underlying asset but is not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The seller of an option-based
derivative generally will receive fees or premiums but generally is exposed to
losses due to changes in the value of the underlying asset. Derivative
transactions may include elements of leverage and, accordingly, the
fluctuation of the value of the derivative transaction in relation to the
underlying asset may be magnified. In addition to options, futures, and
options on futures transactions, derivative transactions may include short
sales against the box, in which the Portfolio sells a security it owns for
delivery at a future date; swaps, in which the two parties agree to exchange a
series of cash flows in the future, such as interest-rate payments;
interest-rate caps, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates exceed a
specified rate, or "cap"; and interest-rate floors, under which, in return for
a premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor." Derivative
transactions may also include forward currency contracts and foreign currency
exchange-related securities.
Derivative instruments may be exchange-traded or traded in over-the-counter
transactions between private parties. Over-the-counter transactions are
subject to the credit risk of the counterparty to the instrument and are less
liquid than exchange-traded derivatives since they often can only be closed
out with the other party to the transaction. When required by SEC guidelines,
the Portfolio will set aside permissible liquid assets or securities positions
that substantially correlate to the market movements of the derivatives
transactions in a segregated account to secure its obligations under
derivative transactions. In order to maintain its required cover for a
derivative transaction, the Portfolio may need to sell portfolio securities at
disadvantageous prices or times since it may not be possible to liquidate a
derivative position.
The successful use of derivative transactions by the Portfolio is dependent
upon the Sub-Adviser's ability to correctly anticipate trends in the
underlying asset. To the extent that the Portfolio is engaging in derivative
transactions other than for hedging purposes, the Portfolio's successful use
of such transactions is more dependent upon the Sub-Adviser's ability to
correctly anticipate such trends, since losses in these transactions may not
be offset in gains in the Portfolio's investments or in lower purchase prices
for assets it intends to acquire. The Sub-Adviser's prediction of trends in
underlying assets may prove to be inaccurate, which could result in
substantial losses to the Portfolio. Hedging transactions are also subject to
risks. If the Sub-Adviser incorrectly anticipates trends in the underlying
asset, the Portfolio may be in a worse position than if no hedging had
occurred. In addition, there may be imperfect correlation between the
Portfolio's derivative transactions and the instruments being hedged.
ILLIQUID SECURITIES
The Portfolio may invest up to 15% of its net assets in illiquid securities.
Illiquid securities are those securities that are not readily marketable,
including restricted securities and repurchase obligations maturing in more
than seven days. Certain restricted securities that may be resold to
institutional investors pursuant to Rule 144A under the Securities Act of 1933
and Section 4(2) commercial paper may be considered liquid under guidelines
adopted by the Trust's Board of Trustees.
SMALL COMPANIES
The Portfolio may, from time to time, invest a substantial portion of its
assets in small companies. While smaller companies generally have potential
for rapid growth, investments in smaller companies often involve greater risks
than investments in larger, more established companies because smaller
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition,
in many instances the securities of smaller companies are traded only
over-the-counter or on a regional securities exchange, and the frequency and
volume of their trading is substantially less than is typical of larger
companies. Therefore, the securities of smaller companies may be subject to
greater and more abrupt price fluctuations. When making large sales, the
Portfolio may have to sell portfolio holdings at discounts from quoted prices
or may have to make a series of small sales over an extended period of time
due to the trading volume of smaller company securities. Investors should be
aware that, based on the foregoing factors, an investment in the Portfolio may
be subject to greater price fluctuations than an investment in a fund that
invests primarily in larger, more established companies. The Sub-Adviser's
research efforts may also play a greater role in selecting securities for the
Portfolio than in a fund that invests in larger, more established companies.
DEBT OBLIGATIONS
IN GENERAL. Debt obligations in which the Portfolio may invest will primarily
be investment grade debt obligations, although the Portfolio may invest up to
5% of its assets in non-investment grade debt obligations. The market value of
all debt obligations is affected by changes in the prevailing interest rates.
The market value of such instruments generally reacts inversely to interest
rate changes. If the prevailing interest rates decline, the market value of
debt obligations generally increases. If the prevailing interest rates
increase, the market value of debt obligations generally decreases. In
general, the longer the maturity of a debt obligation, the greater its
sensitivity to changes in interest rates.
Investment-grade debt obligations include:
-- bonds or bank obligations rated in one of the four highest rating
categories of any nationally recognized statistical rating
organization or "NRSRO" (e.g., BBB or higher by S&P);
-- U.S. government securities (as defined below);
-- commercial paper rated in one of the three highest ratings
categories of any NRSRO (e.g., A-3 or higher by S&P);
-- short-term notes rated in one of the two highest categories (e.g.,
SP-2 or higher by S&P);
-- short-term bank obligations that are rated in one of the three
highest categories by any NRSRO (e.g., A-3 or higher by S&P), with
respect to obligations maturing in one year or less;
-- repurchase agreements involving investment-grade debt obligations;
or
-- unrated debt obligations which are determined by the Sub-Adviser
to be of comparable quality.
All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by the Sub-Adviser to
consider what action, if any, the Portfolio should take consistent with its
investment objective. Investment-grade debt obligations are generally
considered to have relatively low degrees of credit risk. However, securities
rated in the fourth highest category (e.g., BBB by S&P), although considered
investment-grade have some speculative characteristics, since their issuers'
capacity for repayment may be more vulnerable to adverse economic conditions
or changing circumstances than that of higher-rated issuers.
Non-investment-grade debt obligations include:
-- securities rated as low as C by S&P or their equivalents;
-- commercial paper rated as low as C by S&P or its equivalents; and
-- unrated debt securities judged to be of comparable quality by the
Sub-Adviser.
GOVERNMENT SECURITIES. U.S. government securities are issued or guaranteed by
the U.S. government or its agencies or instrumentalities. Securities issued by
the government include U.S. Treasury obligations, such as Treasury bills,
notes, and bonds. Securities issued by government agencies or
instrumentalities include, for example, obligations of the following:
-- the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage
Association, including GNMA pass-through certificates, whose
securities are supported by the full faith and credit of the
United States;
-- the Federal Home Loan Banks, Federal Intermediate Credit Banks,
and the Tennessee Valley Authority, whose securities are supported
by the right of the agency to borrow from the U.S. Treasury;
-- the Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality; and
-- the Student Loan Marketing Association, the Interamerican
Development Bank, and International Bank for Reconstruction and
Development, whose securities are supported only by the credit
of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
WHEN-ISSUED SECURITIES
The Portfolio may invest without limitation in securities purchased on a
when-issued or delayed delivery basis. Although the payment and interest terms
of these securities are established at the time the purchaser enters into the
commitment, these securities may be delivered and paid for at a future date,
generally within 45 days. Purchasing when-issued securities allows the
Portfolio to lock in a fixed price or yield on a security it intends to
purchase. However, when the Portfolio purchases a when-issued security, it
immediately assumes the risk of ownership, including the risk of price
fluctuation until the settlement date.
The greater the Portfolio's outstanding commitments for these securities, the
greater the exposure to potential fluctuations in the net asset value of the
Portfolio. Purchasing when-issued securities may involve the additional risk
that the yield available in the market when the delivery occurs may be higher
or the market price lower than that obtained at the time of commitment.
Although the Portfolio may be able to sell these securities prior to the
delivery date, it will purchase when-issued securities for the purpose of
actually acquiring the securities, unless after entering into the commitment a
sale appears desirable for investment reasons. When required by SEC
guidelines, the Portfolio will set aside permissible liquid assets in a
segregated account to secure its outstanding commitments for when-issued
securities.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
The Portfolio may engage in reverse repurchase agreements to facilitate
portfolio liquidity, a practice common the mutual fund industry, or for
arbitrage transactions discussed below. In a reverse repurchase agreement,
the Portfolio would sell a security and enter into an agreement to repurchase
the security at a specified future date and price. The Portfolio generally
retains the right to interest and principal payments on the security. Since
the Portfolio receives cash upon entering into a reverse repurchase agreement,
it may be considered a borrowing. When required by SEC guidelines, the
Portfolio will set aside permissible liquid assets in a segregated account to
secure its obligation to repurchase the security.
The Portfolio may also enter into mortgage dollar rolls, in which the
Portfolio would sell mortgage-backed securities for delivery in the current
month and simultaneously contract to purchase substantially similar securities
on a specified future date. While the Portfolio would forego principal and
interest paid on the mortgage-backed securities during the roll period, the
Portfolio would be compensated by the difference between the current sale
price and the lower price for the future purchase as well as by any interest
earned on the proceeds of the initial sale. The Portfolio also could be
compensated through the receipt of fee income equivalent to a lower forward
price. At the time that the Portfolio would enter into a mortgage dollar
roll, it would set aside permissible liquid assets in a segregated account to
secure its obligation for the forward commitment to buy mortgage-backed
securities. Mortgage dollar roll transactions may be considered a borrowing
by the Portfolio.
The mortgage dollar rolls and reverse repurchase agreements entered into by
the Portfolio may be used as arbitrage transactions in which the Portfolio
will maintain an offsetting position in investment-grade debt obligations or
repurchase agreements that mature on or before the settlement date of the
related mortgage dollar roll or reverse repurchase agreement. Since the
Portfolio will receive interest on the securities or repurchase agreements in
which it invests the transaction proceeds, such transactions may involve
leverage. However, since such securities or repurchase agreements will be
high quality and will mature on or before the settlement date of the mortgage
dollar roll or reverse repurchase agreement, the Sub-Adviser believes that
such arbitrage transactions do not present the risks to the Portfolio that are
associated with other types of leverage.
PORTFOLIO TURNOVER
The annual portfolio turnover rate indicates changes in the Portfolio's
investments. The turnover rate may vary from year to year, as well as within a
year. It may also be affected by sales of portfolio securities necessary to
meet cash requirements for redemptions of shares. High portfolio turnover in
any year will result in the payment by shareholders of above average amounts
of taxes on realized investment gains. The Portfolio's portfolio turnover rate
is expected to exceed 100% , but generally not to exceed 200%. However, these
rates should not be considered as limiting factors.
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER
Under an Investment Advisory Agreement dated January 9, 1996, LPIMC Insurance
Marketing Services, 1755 Creekside Oaks Drive, Sacramento, CA 95833 (the
"Adviser"), manages the investment strategies and policies of the Portfolios
and the Trust, subject to the control of the Trustees.
The Adviser is a registered investment adviser organized under the laws of
California. The Adviser is a wholly-owned subsidiary of the Life Company.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate
a continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies and restrictions and to determine from time to time securities to be
purchased, sold, retained or lent by the Trust and implement those decisions.
The Investment Advisory Agreement also provides that the Adviser shall manage
the Trust's business and affairs and shall provide such services required for
effective administration of the Trust as are now provided by employees or
other agents engaged by the Trust. The Investment Advisory Agreement further
provides that the Adviser shall furnish the Trust with office space and
necessary personnel, pay ordinary office expenses, pay all executive salaries
of the Trust and furnish, without expense to the Trust, the services of such
members of its organization as may be duly elected officers or Trustees of the
Trust. The Investment Advisory Agreement provides that Adviser may retain
sub-advisers, at the Adviser's own cost and expense, for the purpose of
managing the investment of the assets of one or more Portfolios of the Trust.
As full compensation for its services under the Investment Advisory Agreement
with respect to the Strong International Stock Portfolio, the Trust will pay
the Adviser a monthly fee at the following annual rates based on the average
daily net assets of the Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO ADVISORY FEE
- ------------------------------------ -------------------------------------
<S> <C>
Strong International Stock Portfolio .75% of first $150 million of average
daily net assets
.70% of next $350 million of average
daily net assets
.65% of average daily net assets over
and above $500 million.
</TABLE>
ADVISORY FEE WAIVER
The Adviser has agreed to waive .25% of its advisory fee for the Portfolio for
the initial six (6) months of the Portfolio's investment operations.
EXPENSE REIMBURSEMENT
The Life Company has voluntarily agreed to reimburse the Portfolio for certain
expenses (excluding brokerage commissions and management fees) in excess of
1.49%. The Life Company has reserved the right to withdraw or modify its
policy of expense reimbursement for the Portfolio. If expenses were not
reimbursed, anticipated actual expenses would be approximately 2.51% for the
year ending 12/31/96.
ORGANIZATIONAL EXPENSES OF THE TRUST
The Life Company will pay for all organizational expenses of the Trust
including contribution of the initial "seed money" to the Trust.
SUB-ADVISER
The Adviser has engaged the Sub-Adviser for the Portfolio to make investment
decisions and place orders. In accordance with the Portfolio's investment
objective and policies and under the supervision of the Adviser and the
Trust's Board of Trustees, the Portfolio's Sub-Adviser is responsible for the
day to day investment management of the Portfolio, makes investment decisions
for the Portfolio and places orders on behalf of the Portfolio to effect the
investment decisions made as provided in a Sub-Advisory Agreement among the
Sub-Adviser, the Adviser and the Trust.
The Sub-Adviser for the Portfolio is Strong Capital Management, Inc., P.O. Box
2936, Milwaukee, WI 53201-2936.
The Sub-Adviser began conducting business in 1974. Since then, its principal
business has been providing continuous investment supervision for mutual
funds, individuals, and institutional accounts, such as pension funds and
profit-sharing plans. As of December 31, 1995, the Sub-Adviser had
approximately $16 billion under management. Mr. Richard S. Strong is the
controlling shareholder of the Sub-Adviser. The Sub-Adviser also acts as
investment adviser for each of the mutual funds comprising the Strong Family
of Funds.
Anthony L.T. Cragg is the portfolio manager of the Sub-Adviser for the
Portfolio. Mr. Cragg joined the Sub-Adviser in April, 1993 to develop the
Sub-Adviser's international investment activities. During the prior seven
years, he helped establish Dillon, Read International Asset Management, where
he was in charge of Japanese, Asian, and Australian investments. A graduate of
Christ Church, Oxford University, Mr. Cragg began his investment career in
1980 at Gartmore, Ltd., as an international investment manager, where his
tenure included assignments in London, Hong Kong, and Tokyo.
SUB-ADVISORY FEES
Under the terms of the Sub-Advisory Agreement, the Adviser shall pay to the
Sub-Adviser, as full compensation for services rendered under the Sub-Advisory
Agreement with respect to the Portfolio, monthly fees at the following annual
rates based on the average daily net assets of the Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISORY FEE
-------------------------------------
<S> <C>
Strong International Stock Portfolio .50% of first $150 million of average
daily net assets.
.45% of the next $350 million of
average daily net assets
.40% of average daily net assets
over and above $500 million
</TABLE>
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the
Trust will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees
and charges relating to the VA Contract.)
The separate account of the Life Company places orders to purchase and redeem
shares of each Portfolio based on, among other things, the amount of
contributions to be invested and surrender and transfer requests to be
effected on that day pursuant to the VA contracts issued by the Life Company.
Orders received by the Trust are effected on days on which the New York Stock
Exchange is open for trading, at the net asset value per share next determined
after receipt of the order. For orders received before 4:00 p.m. New York
time, such purchases and redemptions of shares of each Portfolio are effected
at the respective net asset values per share determined as of 4:00 p.m. New
York time on that day. See "Net Asset Value", below and "Determination of Net
Asset Value" in the Trust's SAI. Payment for redemptions will be made within
seven days after receipt of a redemption request in good order. No fee is
charged the separate account of the Life Company when it redeems Portfolio
shares. The Trust may suspend the sale of shares at any time and may refuse
any order to purchase shares.
The Trust may suspend the right of redemption of shares of any Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than for customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted; (ii) when
the Securities and Exchange Commission determines that a state of emergency
exists which makes the sale of portfolio securities or the determination of
net asset value not reasonably practicable; (iii) as the Securities and
Exchange Commission may by order permit for the protection of the security
holders of the Trust; or (iv) at any time when the Trust may, under applicable
laws and regulations, suspend payment on the redemption of its shares.
NET ASSET VALUE
Each Portfolio calculates the net asset value of its shares by dividing the
total value of its assets (the securities held by the Portfolio, plus any cash
or other assets, including interest and dividends accrued but not yet
received), less its total liabilities, by the total number of shares
outstanding. Shares are valued as of the close of trading on the New York
Stock Exchange (usually considered 4:00 p.m. Eastern Time) each day the New
York Stock Exchange is open. Portfolio securities for which market quotations
are readily available are stated at market value. Short-term investments that
will mature in 60 days or less are valued using amortized cost, which the
Trust's Board of Trustees has determined approximates market value. Amortized
cost valuation means that a debt security with a maturity at purchase of 60
days or less is valued at its acquisition cost and a debt security originally
purchased with a maturity in excess of 60 days, which currently has a maturity
of 60 days or less, is valued at the market or fair value of the security on
the 61st day prior to maturity (each as adjusted for amortization of premium
or discount) rather than at current market value. All other securities and
assets are valued at their fair value following procedures approved by the
Trust's Board of Trustees. See "Determination of Net Asset Value" in the SAI
for a description of the special valuation procedures for options and futures
contracts.
Certain Portfolios are expected to invest in foreign securities listed on
foreign stock exchanges or debt securities of the United States and foreign
governments and corporations. Some of these securities trade on days other
than Business Days, as defined below. Foreign securities quoted in foreign
currencies are translated into United States dollars at the exchange rates at
1:00 p.m. Eastern Time or at such other rates as a Sub-Adviser may determine
to be appropriate in computing net asset value. As a result, fluctuations in
the value of such currencies in relation to the United States dollar will
affect the net asset value of a Portfolio's shares even though there has not
been any change in the market values of such securities.
Because of time zone differences, foreign exchanges and securities markets
will usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be
determined as of the earlier closing of such exchanges and securities markets.
However, events affecting the values of such foreign securities may
occasionally occur between the earlier closing of such exchanges and
securities markets and the closing of the New York Stock Exchange which will
not be reflected in the computation of the net asset value of the Portfolios.
If an event materially affecting the value of such foreign securities occurs
during such period of which a Sub-Adviser becomes aware, then such securities
will be valued at fair value as determined in good faith, or in accordance
with procedures adopted, by the Trust's Board of Trustees.
PERFORMANCE INFORMATION
Performance information for each of the Portfolios may also be presented from
time to time in advertisements and sales literature. The Portfolios may
advertise several types of performance information. These are the "yield,"
"average annual total return" and "aggregate total return". Each of these
figures is based upon historical results and is not necessarily representative
of the future performance of any Portfolio.
The yield of a Portfolio's shares is determined by annualizing net investment
income earned per share for a stated period (normally one month or thirty
days) and dividing the result by the net asset value per share at the end of
the valuation period. The average annual total return and aggregate total
return figures measure both the net investment income generated by, and the
effect of any realized or unrealized appreciation or depreciation of the
underlying investments in, the Portfolio's portfolio for the period in
question, assuming the reinvestment of all dividends. Thus, these figures
reflect the change in the value of an investment in a Portfolio's shares
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter
(or if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Portfolio). Average annual total return
figures are annualized and, therefore, represent the average annual percentage
change over the period in question. Total return figures are not annualized
and represent the aggregate percentage or dollar value change over the period
in question. For more information regarding the computation of yield, average
annual total return and aggregate total return, see "Performance Information"
in the SAI.
Any Portfolio performance information presented will also include performance
information for the Life Company separate accounts investing in the Trust
which will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec
Research Survey of Non-U.S. Equity Fund Returns, Frank Russell International
Universe, Kiplinger's Personal Finance, and Financial Services Week. Any
such comparisons or rankings are based on past performance and the statistical
computation performed by publications and services, and are not necessarily
indications of future performance. Because the Portfolios are managed
investment vehicles investing in a wide variety of securities, the securities
owned by a Portfolio will not match those making up an index.
Although the Strong International Stock Portfolio is newly-organized and does
not yet have its own performance record, it has the same investment objective
and follows substantially the same investment strategies as the Strong
International Stock Fund, a mutual fund whose shares are sold to the public.
The Sub-Adviser for the Strong International Stock Portfolio is the investment
adviser of the Strong International Stock Fund.
Set forth below is the historical performance of the Strong International
Stock Fund. Investors should not consider this performance data as an
indication of the future performance of the Strong International Stock
Portfolio. The performance figures shown below reflect the deduction of the
historical fees and expenses paid by the Strong International Stock Fund, and
not those to be paid by the Portfolio. The figures also do not reflect the
deduction of any insurance fees or charges which are imposed by the Life
Company in connection with its sale of VA Contracts. Investors should refer
to the separate account prospectus describing the VA Contracts for information
pertaining to these insurance fees and charges. The insurance separate
account fees will have a detrimental effect on the performance of the
Portfolio. The results shown reflect the reinvestment of dividends and
distributions, and were calculated in the same manner that will be used by the
Strong International Stock Portfolio to calculate its own performance.
The following table shows the average annualized total returns for the fiscal
year ended December 31, 1995, of a 1-year investment and of an investment
since inception in the Strong International Stock Fund, as well as a
comparison with the Standard & Poor's 500 Composite Stock Price Index, an
unmanaged index generally considered to be representative of the stock market,
and the Morgan Stanley Capital International Europe, Asia and Far East (EAFE)
Index.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Since Inception
---------- ------------
Fund 1 Year 3 Year Inception Date
- ------------------------------------- ------- ------- ---------- ------------
Strong International Stock Fund _____% _____% _____% 3/4/92
Standard & Poor's 500 Stock Index _____% _____% _____% From 4/1/92
Morgan Stanley Capital International
Europe, Asia, and Far East (EAFE) _____% _____% _____% From 4/1/92
Index
</TABLE>
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
Each Portfolio of the Trust intends to qualify and elect to be treated as a
regulated investment company that is taxed under the rules of Subchapter M of
the Internal Revenue Code. As such an electing regulated investment company,
a Portfolio will not be subject to federal income tax on its net ordinary
income and net realized capital gains to the extent that at least 90% of such
income and gains are distributed to the separate account of the Life Company
which hold its shares. For further information concerning federal income tax
consequences for the holders of the VA Contracts of the Life Company,
investors should consult the prospectus used in connection with the issuance
of their VA Contracts.
Each of the Portfolios will declare and distribute dividends from net ordinary
income at least annually and will distribute its net realized capital gains,
if any, at least annually. Distributions of ordinary income and capital gains
will be made in shares of such Portfolios unless an election is made on behalf
of a separate account to receive distributions in cash. The Life Company will
be informed at least annually about the amount and character of distributions
from the Trust for federal income tax purposes.
ADDITIONAL INFORMATION
The Trust was established as a Massachusetts business trust under the laws of
Massachusetts by a Declaration of Trust dated January 23, 1995, as amended
(the "Declaration of Trust"). Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. The Declaration of Trust contains an
express disclaimer of shareholder liability in connection with Trust property
or the acts, obligations, or affairs of the Trust. The Declaration of Trust
also provides for indemnification out of a Portfolio's property of any
shareholder of that Portfolio held personally liable for the claims and
liabilities to which a shareholder may become subject by reason of being or
having been a shareholder. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Portfolio itself would be unable to meet its obligations. A
copy of the Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts.
The Trust has an unlimited authorized number of shares of beneficial interest.
Shares of the Trust are entitled to one vote per share (with proportional
voting for fractional shares) and are freely transferable, and, in liquidation
of a Portfolio, shareholders of the Portfolio are entitled to receive pro rata
the net assets of the Portfolio. Although no Portfolio is required to hold
annual meetings of its shareholders, shareholders have the right to call a
meeting to elect or remove Trustees or to take other actions as provided in
the Declaration of Trust. Shareholders have no preemptive rights.
The Trust is authorized to subdivide each series (Portfolio) into two or more
classes. Currently, shares of the Portfolios are divided into Class A and
Class B. Each class of shares of a Portfolio is entitled to the same rights
and privileges as all other classes of the Portfolio, provided however, that
each class bears the expenses related to its distribution arrangements, as
well as any other expenses attributable to the class and unrelated to managing
the Portfolio's portfolio securities. Any matter that affects only the
holders of a particular class of shares may be voted on only by such
shareholders. Through this Prospectus, the Trust offers Class A shares in the
Portfolio.
The Trust's custodian is State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
SALOMON MONEY MARKET PORTFOLIO
LPT VARIABLE INSURANCE SERIES TRUST
1755 CREEKSIDE OAKS DRIVE
SACRAMENTO, CALIFORNIA 95833
CLASS A SHARES
LPT Variable Insurance Series Trust (the "Trust") is an open-end, series
management investment company which currently offers shares of beneficial
interest of eight series (the "Portfolios"), each of which has a different
investment objective and represents the entire interest in a separate
portfolio of investments. THIS PROSPECTUS CONTAINS INFORMATION PERTAINING TO
THE SALOMON MONEY MARKET PORTFOLIO ONLY. This Portfolio is currently
available to the public only through variable annuity contracts ("VA
Contracts") issued by London Pacific Life and Annuity Company ("Life
Company").
Please read this Prospectus before investing in the Salomon Money Market
Portfolio and keep it for future reference. The Prospectus contains
information about the Salomon Money Market Portfolio that a prospective
investor should know before investing.
A Statement of Additional Information ("SAI") dated ________, 1996 is
available without charge upon request and may be obtained by calling the Life
Company at (800) 852-3152 or by writing to the Life Company's Annuity Service
Center, P.O. Box 29564, Raleigh, North Carolina 27626. Some of the discussions
contained in this Prospectus refer to the more detailed descriptions contained
in the SAI, which is incorporated by reference into this Prospectus and has
been filed with the Securities and Exchange Commission.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
PURCHASERS SHOULD BE AWARE THAT AN INVESTMENT IN THE SALOMON MONEY MARKET
PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN
BE NO ASSURANCE THAT THE SALOMON MONEY MARKET PORTFOLIO WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE PURCHASER OF A VA CONTRACT SHOULD READ THIS PROSPECTUS IN CONJUNCTION WITH
THE PROSPECTUS FOR HIS OR HER VA CONTRACT.
PROSPECTUS DATED ___________, 1996
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT LIMITATIONS
ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS
Bank Obligations
Repurchase Agreements
Firm Commitments and When-Issued Securities
Restricted Securities and Securities with Limited Trading Markets
Foreign Securities
Borrowing
Portfolio Turnover
MANAGEMENT OF THE TRUST
Investment Adviser
Advisory Fee Waiver
Expense Reimbursement
Organizational Expenses of the Trust
Sub-Adviser
Sub-Advisory Fees
Sub-Advisory Fee Waiver
SALES AND REDEMPTIONS
NET ASSET VALUE
PERFORMANCE INFORMATION
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
ADDITIONAL INFORMATION
APPENDIX A - RATINGS OF INVESTMENTS
INVESTMENT OBJECTIVE AND POLICIES
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment
objective of the Salomon Money Market Portfolio is not fundamental and may be
changed without the approval of a majority of the outstanding shares of the
Portfolio. All other investment policies or limitations, unless otherwise
specifically stated, are non-fundamental and may be changed by the Trustees of
the Trust without a vote of the shareholders. There is no assurance that the
Portfolio will achieve its objective. A complete list of investment
restrictions, including those restrictions which cannot be changed without
shareholder approval, is contained in the SAI. United States Treasury
Regulations applicable to portfolios that serve as the funding vehicles for
variable annuity and variable life insurance contracts generally require that
such portfolios invest no more than 55% of the value of their assets in one
investment, 70% in two investments, 80% in three investments, and 90% in four
investments. The Portfolio intends to comply with the requirements of these
Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by the Portfolio declines below the minimum rating for securities in
which the Portfolio may invest, the Portfolio will not be required to dispose
of the security, but the Portfolio's Sub-Adviser will consider whether
continued investment in the security is consistent with the Portfolio's
investment objective.
In implementing its investment objective and policies, the Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the SAI. A description of the ratings systems used by the following
nationally recognized statistical rating organizations ("NRSROs") is contained
in Appendix A: Moody's Investors Service, Inc. ("Moody's") and Standard &
Poor's Corporation ("S&P"). New instruments, strategies and techniques,
however, are evolving continually and the Portfolio reserves authority to
invest in or implement them to the extent consistent with its investment
objectives and policies. If new instruments, strategies or techniques would
involve a material change to the information contained herein, they will not
be purchased or implemented until this Prospectus is appropriately
supplemented. The investment objective of the Portfolio is to seek as high a
level of current income as is consistent with liquidity and the stability of
principal. The Portfolio invests in high-quality, short-term U.S.
dollar-denominated money market instruments which are deemed to mature in
thirteen months or less, and is managed so that the average portfolio maturity
of all portfolio instruments (on a dollar-weighted basis) will not exceed 90
days. The Portfolio will be "diversified" within the meaning of the
Investment Company Act of 1940 ("1940 Act"), and will seek to maintain a
stable net asset value of $1.00 per share.
The types of obligations in which the Portfolio may invest include the
following:
(1) Securities issued or guaranteed by the U.S. government or by agencies
or instrumentalities thereof;
(2) Obligations issued or guaranteed by U.S. and foreign banks ("Bank
Obligations");
(3) Commercial paper;
(4) Corporate debt obligations, including variable rate obligations;
(5) Short-term credit facilities;
(6) Asset-backed securities; and
(7) Other money market instruments;
The Portfolio will limit its portfolio investments to securities that are
determined by the Sub-Adviser to present minimal credit risks pursuant to
guidelines established by the Portfolio's Board of Trustees and which are
"Eligible Securities" at the time of acquisition by the Portfolio. The term
"Eligible Securities" includes securities rated by the "Requisite NRSROs" in
one of the two highest short-term rating categories, securities of issuers
that have received such ratings with respect to other short-term debt
securities and comparable unrated securities. "Requisite NRSROs" means (a)
any two nationally recognized statistical rating organizations ("NRSROs") that
have issued a rating with respect to a security or class of debt obligations
of an issuer, or (b) one NRSRO, if only one NRSRO has issued such a rating at
the time that the Portfolio acquires the security. The Portfolio may not
invest more than 5% of its total assets in Eligible Securities that have not
received the highest rating from the Requisite NRSROs and comparable unrated
securities ("Second Tier Securities") and may not invest more than the greater
of 1% of its total assets or $1 million in the Second Tier Securities of any
one issuer.
The Portfolio may also enter into repurchase agreements with respect to the
obligations identified above. While the maturity of the underlying securities
in a repurchase agreement transaction may be more than thirteen months, the
term of the repurchase agreement will always be less than thirteen months.
For a description of repurchase agreements and their associated risks, see
"Additional Investment Activities and Risk Factors - Repurchase Agreements."
Securities issued or guaranteed by the U.S. government or by its agencies or
instrumentalities include obligations of several kinds. Such securities in
general include a wide variety of U.S. Treasury obligations consisting of
bills, notes and bonds, which principally differ only in their interest rates,
maturities and times of issuance. Securities issued or guaranteed by U.S.
government agencies and instrumentalities are debt securities issued by
agencies or instrumentalities established or sponsored by the U.S. government
and may be backed only by the credit of the issuing agency or instrumentality.
The Portfolio will invest in such obligations only where the Sub-Adviser is
satisfied that the credit risk with respect to the issuer is minimal.
Bank Obligations that may be purchased by the Portfolio include certificates
of deposit, commercial paper, bankers' acceptances and fixed time deposits.
Fixed time deposits are obligations of branches of U.S. banks or foreign banks
which are payable at a stated maturity date and bear a fixed rate of interest.
Although fixed time deposits do not have a market, there are no contractual
restrictions on the right to transfer a beneficial interest in the deposit to
a third party. For a discussion of the risks associated with investing in
bank obligations, see "Additional Investment Activities and Risk Factors -
Bank Obligations."
The Portfolio's investments in corporate debt securities will consist of
non-convertible corporate debt securities such as bonds and debentures of
domestic issuers that have thirteen months or less remaining to maturity.
Portfolio may invest in U.S. dollar-denominated securities of non-U.S.
issuers, including obligations of non-U.S. banks or non-U.S. branches of U.S.
banks and commercial paper and other corporate debt securities of non-U.S.
issuers, where the Sub-Adviser deems the instrument to present minimal credit
risks. Investments in non-U.S. banks and non-U.S. issuers present certain
risks. See "Additional Investment Activities and Risk Factors - Foreign
Securities."
The Portfolio may also invest in high quality, short-term municipal
obligations that carry yields that are competitive with those of other types
of money market instruments in which the Portfolio may invest. Dividends paid
by the Portfolio derived from interest on municipal obligations that may be
purchased by it will be taxable to shareholders for federal income tax
purposes because the Portfolio will not qualify as an entity that can pass
through the tax-exempt character of such interest.
The Portfolio may invest in floating and variable rate obligations with stated
maturities in excess of thirteen months upon compliance with certain
conditions contained in Rule 2a-7 promulgated under the 1940 Act, in which
case such obligations will be treated, in accordance with Rule 2a-7, as having
maturities not exceeding thirteen months. Floating or variable rate
obligations bear interest at rates that are not fixed, but vary with changes
in specified market rates or indices, such as the prime rate, and at specified
intervals. Certain of the floating or variable rate obligations that may be
purchased by the Portfolio may carry a demand feature that would permit the
holder to tender them back to the issuer at par value prior to maturity. Such
obligations include variable rate master demand notes, which are unsecured
instruments issued pursuant to an agreement between the issuer and the holder
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. The Portfolio will limit its purchases of
floating and variable rate obligations to those of the same quality as it
otherwise is allowed to purchase. The Sub-Adviser will monitor on an ongoing
basis the ability of an issuer of a demand instrument to pay principal and
interest on demand.
The Portfolio may also invest in variable amount master demand notes. A
variable amount master demand note differs from ordinary commercial paper in
that it is issued pursuant to a written agreement between the issuer and the
holder, its amount may from time to time be increased by the holder (subject
to an agreed maximum) or decreased by the holder or the issuer, it is payable
on demand, the rate of interest payable on it varies with an agreed formula
and it is not typically rated by a rating agency.
The Portfolio may enter into, or acquire participations in, short-term
borrowing arrangements with corporations, consisting of either a short-term
revolving credit facility or a master note agreement payable upon demand.
Under these arrangements, the borrower may reborrow funds during the term of
the facility. The Portfolio treats any commitments to provide such advances
as a standby commitment to purchase the borrower's notes.
The Portfolio may also purchase asset-backed securities. Asset-backed
securities represent defined interests in an underlying pool of assets. Such
securities may be issued as pass-through certificates, which represent
undivided fractional interests in the underlying pool of assets.
Alternatively, asset-backed securities may be issued as interests, generally
in the form of debt securities, in a special purpose entity organized solely
for the purpose of owning the underlying assets and issuing such securities.
In the latter case, such securities are secured by and payable from a stream
of payments generated by the underlying assets. The assets underlying
asset-backed securities are often a pool of assets similar to one another,
such as motor vehicle receivables or credit card receivables. Alternatively,
the underlying assets may be particular types of securities, various
contractual rights to receive payments and/or other types of assets.
Asset-backed securities frequently carry credit protection in the form of
extra collateral, subordinate certificates, cash reserve accounts, letters of
credit or other enhancements. Any asset-backed securities held by the
Portfolio must comply with its portfolio maturity and credit quality
requirements.
Among the municipal obligations that the Portfolio may invest in are
participation certificates in a lease, an installment purchase contract or a
conditional sales contract (hereinafter collectively called "lease
obligations") entered into by a State or a political subdivision to finance
the acquisition or construction of equipment, land or facilities. Although
lease obligations do not constitute general obligations of the issuer for
which the lessee's unlimited taxing power is pledged, a lease obligation is
frequently backed by the lessee's covenant to budget for, appropriate and make
the payments due under the lease obligation. However, certain lease
obligations contain "nonappropriation" clauses which provide that the lessee
has no obligation to make lease or installment purchase payments in future
years unless money is appropriated for such purpose on a yearly basis.
Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing
that has not yet developed the depth of marketability associated with more
conventional securities. Certain investments in lease obligations may be
illiquid. The Portfolio may not invest in illiquid lease obligations if such
investments, together with all other illiquid investments, would exceed 10% of
the Portfolio's net assets. The Portfolio may, however, invest without regard
to such limitations in lease obligations which the Sub-Adviser pursuant to
guidelines which have been adopted by the Board of Trustees and subject to the
supervision of the Board, determines to be liquid.
The Portfolio may purchase securities on a firm commitment basis, including
when-issued securities. See "Additional Investment Activities and Risk
Factors - Firm Commitments and When-Issued Securities" for a description of
such securities and their associated risks.
The foregoing investment policies and activities are not fundamental and may
be changed by the Board of Trustees of the Trust without the approval of
shareholders.
INVESTMENT LIMITATIONS
The following investment restrictions and those described in the Statement of
Additional Information are fundamental policies applicable to the Portfolio
which may be changed only when permitted by law and approved by the holders of
a majority of the Portfolio's outstanding voting securities, as defined in the
1940 Act. Except for the investment restrictions set forth below and in the
Statement of Additional Information, the other policies and percentage
limitations referred to in this Prospectus and in the Statement of Additional
Information are not fundamental policies of the Portfolio and may be changed
by the Board of Trustees of the Trust without shareholder approval.
If a percentage restriction on investment or use of assets set forth below is
adhered to at the time a transaction is effected, later changes in percentages
resulting from changing values will not be considered a violation.
The Portfolio may not:
(1) purchase the securities of any one issuer, other than the U.S.
government, its agencies or instrumentalities, if immediately after such
purchase, more than 5% of the value of the Portfolio's total assets would be
invested in such issuer; provided, however, that such 5% limitation shall not
apply to repurchase agreements collateralized by obligations of the U.S.
government, its agencies or instrumentalities; and provided, further, that the
Portfolio may invest more than 5% (but no more than 25%) of the value of the
Portfolio's total assets in the securities of a single issuer;
(2) borrow money except as a temporary measure from banks for
extraordinary or emergency purposes, and in no event in excess of 15% of the
value of its total assets, except that for the purpose of this restriction,
short-term credits necessary for settlement of securities transactions are not
considered borrowings (the Portfolio will not purchase any securities at any
time while such borrowings exceed 5% of the value of its total assets);
(3) invest more than 10% of the value of its net assets in securities
which are illiquid, including repurchase agreements having notice periods of
more than seven days, fixed time deposits subject to withdrawal penalties and
having notice periods of more than seven days and receivables-backed
obligations and variable amount master demand notes that are not readily
saleable in the secondary market and with respect to which principal and
interest may not be received within seven days.
(4) pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 20% of the value of its total assets, and then only to secure
borrowings permitted by (2) above.
With respect to investment limitation (1), the Portfolio intends (as a matter
of non-fundamental policy) to limit investments in the securities of any
single issuer (other than securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities) to not more than 5% of the
Portfolio's total assets at the time of purchase, provided that the Portfolio
may invest up to 25% of its total assets in the securities of a single issuer
for a period of up to three business days.
ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS
BANK OBLIGATIONS
Banks are subject to extensive governmental regulations which may limit both
the amounts and types of loans and other financial commitments which may be
made and interest rates and fees which may be charged. The profitability of
this industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
market conditions. Also, general economic conditions play an important part in
the operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations.
Investors should also be aware that securities issued or guaranteed by foreign
banks, foreign branches of U.S. banks, and foreign government and private
issuers may involve investment risks in addition to those relating to domestic
obligations. See "--Foreign Securities" below. The Portfolio will not purchase
bank obligations which the Sub-Adviser believes, at the time of purchase, will
be subject to exchange controls or foreign withholding taxes; however, there
can be no assurance that such laws may not become applicable to certain of the
Portfolio's investments. In the event unforeseen exchange controls or foreign
withholding taxes are imposed with respect to the Portfolio's investments, the
effect may be to reduce the income received by the Portfolio on such
investments.
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements for cash management
purposes. A repurchase agreement is a transaction in which the seller of a
security commits itself at the time of the sale to repurchase that security
from the buyer at a mutually agreed upon time and price. Repurchase agreements
may be characterized as loans which are collateralized by the underlying
securities. The Portfolio will enter into repurchase agreements only with
respect to obligations that could otherwise be purchased by the Portfolio. The
Portfolio will enter into repurchase agreements only with dealers, domestic
banks or recognized financial institutions which, in the opinion of the
Sub-Adviser based on guidelines established by the Trust's Board of Trustees,
are deemed creditworthy. The Sub-Adviser will monitor the value of the
securities underlying the repurchase agreement at the time the transaction is
entered into and at all times during the term of the repurchase agreement to
ensure that the value of the securities always equals or exceeds the
repurchase price. The Portfolio requires that additional securities be
deposited if the value of the securities purchased decreases below their
resale price and does not bear the risk of a decline in the value of the
underlying security unless the seller defaults under the repurchase
obligation. In the event of default by the seller under the repurchase
agreement, the Portfolio could experience losses that include: (i) possible
decline in the value of the underlying security during the period which the
Portfolio seeks to enforce its rights thereto; (ii) additional expenses to the
Portfolio for enforcing those rights; (iii) possible loss of all or part of
the income or proceeds of the repurchase agreement; and (iv) possible delay in
the disposition of the underlying security pending court action or possible
loss of rights in such securities. Repurchase agreements with maturities of
more than seven days will be treated as illiquid securities by the Portfolio.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES
The Portfolio may purchase securities on a firm commitment basis, including
when-issued securities. Securities purchased on a firm commitment basis are
purchased for delivery beyond the normal settlement date at a stated price and
yield. No income accrues to the purchaser of a security on a firm commitment
basis prior to delivery. Such securities are recorded as an asset and are
subject to changes in value based upon changes in the general level of
interest rates. Purchasing a security on a firm commitment basis can involve a
risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss at
the time of delivery. The Portfolio will only make commitments to purchase
securities on a firm commitment basis with the intention of actually acquiring
the securities, but may sell them before the settlement date if it is deemed
advisable. The Portfolio will establish a segregated account in which it will
maintain liquid assets in an amount at least equal in value to the Portfolio's
commitments to purchase securities on a firm commitment basis. If the value of
these assets declines, the Portfolio will place additional liquid assets in
the account on a daily basis so that the value of the assets in the account is
equal to the amount of such commitments.
RESTRICTED SECURITIES AND SECURITIES WITH LIMITED TRADING MARKETS
The Portfolio may purchase securities for which there is a limited trading
market or which are subject to restrictions on resale to the public.
Investments in securities which are "restricted" may involve added expenses to
the Portfolio should the Portfolio be required to bear registration costs with
respect to such securities and could involve delays in disposing of such
securities which might have an adverse effect upon the price and timing of
sales of such securities and the liquidity of the Portfolio with respect to
redemptions. Restricted securities and securities for which there is a limited
trading market may be significantly more difficult to value due to the
unavailability of reliable market quotations for such securities, and
investment in such securities may have an adverse impact on net asset value.
FOREIGN SECURITIES
Investors should recognize that investing in the securities of foreign issuers
involves special considerations which are not typically associated with
investing in the securities of U.S. issuers. Investments in securities of
foreign issuers may involve risks arising from restrictions on foreign
investment and repatriation of capital, from differences between U.S. and
foreign securities markets, including less volume, much greater price
volatility in and relative illiquidity of foreign securities markets,
different trading and settlement practices and less governmental supervision
and regulation, from changes in currency exchange rates, from high and
volatile rates of inflation, from economic, social and political conditions
and, as with domestic multinational corporations, from fluctuating interest
rates. Other investment risks include the possible imposition of foreign
withholding taxes on certain amounts of the Portfolio's income, the possible
seizure or nationalization of foreign assets and the possible establishment of
exchange controls, expropriation, confiscatory taxation, other foreign
governmental laws or restrictions which might affect adversely payments due on
securities held by the Portfolio, the lack of extensive operating experience
of eligible foreign subcustodians and legal limitations on the ability of the
Portfolio to recover assets held in custody by a foreign subcustodian in the
event of the subcustodian's bankruptcy. In addition, there may be less
publicly-available information about a foreign issuer than about a U.S.
issuer, and foreign issuers may not be subject to the same accounting,
auditing and financial record-keeping standards and requirements as U.S.
issuers. Finally, in the event of a default in any such foreign obligations,
it may be more difficult for the Portfolio to obtain or enforce a judgment
against the issuers of such obligations.
BORROWING
The Portfolio may borrow in certain limited circumstances. See "Investment
Limitations." Borrowing creates an opportunity for increased return, but, at
the same time, creates special risks. For example, borrowing may exaggerate
changes in the net asset value of the Portfolio's shares and in the return on
the Portfolio's investments. Although the principal of any borrowing will be
fixed, the Portfolio's assets may change in value during the time the
borrowing is outstanding. The Portfolio may be required to liquidate portfolio
securities at a time when it would be disadvantageous to do so in order to
make payments with respect to any borrowing, which could affect the
Sub-Adviser's strategy and the ability of the Portfolio to comply with certain
provisions of the Internal Revenue Code of 1986, as amended (the "Code") in
order to provide "pass-through" tax treatment to shareholders. Furthermore, if
the Portfolio were to engage in borrowing, an increase in interest rates could
increase the Portfolio's interest expense.
PORTFOLIO TURNOVER
Purchases and sales of portfolio securities may be made as considered
advisable by the Portfolio's Sub-Adviser in the best interests of the
shareholders. The Portfolio intends to limit portfolio trading to the extent
practicable and consistent with its investment objectives. The Portfolio's
portfolio turnover rate may vary from year to year, as well as within a year.
The Sub-Adviser seeks to enhance the Portfolio's yield by taking advantage of
yield disparities or other factors that occur in the money market. For
example, market conditions frequently result in similar securities trading at
different prices. The Portfolio may dispose of any portfolio security prior to
its maturity if such disposition and reinvestment of the proceeds are expected
to enhance yield consistent with the Sub-Adviser's judgment as to a desirable
portfolio maturity structure or if such disposition is believed to be
advisable due to other circumstances or considerations. Subsequent to its
purchase, a portfolio security may be assigned a lower rating or cease to be
rated. Such an event would not require the disposition of the instrument, but
the Sub-Adviser will consider such an event in determining whether the
Portfolio should continue to hold the security. The policy of the Portfolio
regarding dispositions of portfolio securities and its policy of investing in
securities deemed to have maturities of thirteen months or less will result in
high portfolio turnover. A higher rate of portfolio turnover results in
increased transaction costs to the Portfolio in the form of dealer spreads.
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER
Under an Investment Advisory Agreement dated January 9, 1996, LPIMC Insurance
Marketing Services, 1755 Creekside Oaks Drive, Sacramento, CA 95833 (the
"Adviser"), manages the investment strategies and policies of the Portfolios
and the Trust, subject to the control of the Trustees.
The Adviser is a registered investment adviser organized under the laws of
California. The Adviser is a wholly-owned subsidiary of the Life Company.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate
a continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies and restrictions and to determine from time to time securities to be
purchased, sold, retained or lent by the Trust and implement those decisions.
The Investment Advisory Agreement also provides that the Adviser shall manage
the Trust's business and affairs and shall provide such services required for
effective administration of the Trust as are now provided by employees or
other agents engaged by the Trust. The Investment Advisory Agreement further
provides that the Adviser shall furnish the Trust with office space and
necessary personnel, pay ordinary office expenses, pay all executive salaries
of the Trust and furnish, without expense to the Trust, the services of such
members of its organization as may be duly elected officers or Trustees of the
Trust. The Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at the Adviser's own cost and expense, for the purpose of
managing the investment of the assets of one or more Portfolios of the Trust.
As full compensation for its services under the Investment Advisory Agreement
with respect to the Salomon Money Market Portfolio, the Trust will pay the
Adviser a monthly fee at the following annual rates based on the average daily
net assets of the Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO ADVISORY FEE
- ------------------------------ --------------------------------------
<S> <C>
Salomon Money Market Portfolio .45% of first $50 million of average
daily net assets
.425% of next $100 million of average
daily net assets
.40% of next $150 million of average
daily net assets
.35% of next $200 million of average
daily net assets
.325% of average daily net assets over
and above $500 million.
</TABLE>
ADVISORY FEE WAIVER
The Adviser has agreed to waive its advisory fee for the Portfolio for the
initial six (6) months of the Portfolio's investment operations.
EXPENSE REIMBURSEMENT
The Life Company has voluntarily agreed to reimburse the Portfolio for certain
expenses (excluding brokerage commissions and management fees) in excess of
0.89%. The Life Company has reserved the right to withdraw or modify its
policy of expense reimbursement for the Portfolio. If expenses were not
reimbursed, anticipated actual expenses would be approximately 2.83% for the
year ending 12/31/96.
ORGANIZATIONAL EXPENSES OF THE TRUST
The Life Company will pay for all organizational expenses of the Trust
including contribution of the initial "seed money" to the Trust.
SUB-ADVISER
The Adviser has engaged the Sub-Adviser for the Portfolio to make investment
decisions and place orders. In accordance with the Portfolio's investment
objective and policies and under the supervision of the Adviser and the
Trust's Board of Trustees, the Portfolio's Sub-Adviser is responsible for the
day-to-day investment management of the Portfolio, makes investment decisions
for the Portfolio and places orders on behalf of the Portfolio to effect the
investment decisions made as provided in a Sub-Advisory Agreement among the
Sub-Adviser, the Adviser and the Trust.
The Sub-Adviser for the Portfolio is Salomon Brothers Asset Management Inc.
The Sub-Adviser is an indirect, wholly-owned subsidiary of Salomon Inc
incorporated in 1987, and an affiliate of Salomon Brothers Inc. The business
address of the Sub-Adviser is 7 World Trade Center, New York, New York 10048.
Through its office in New York and affiliates in London, Frankfurt and Tokyo,
the Sub-Adviser provides a full range of fixed income and equity investment
advisory services for its individual and institutional clients around the
world, including central banks, pension funds, endowments, insurance companies
and various investment companies (including portfolios thereof). As of
December 31, 1995, the Sub-Adviser and its affiliates had investment advisory
responsibility for approximately $13 billion of assets. The Sub-Adviser has
access to Salomon Brothers Inc's more than 400 economists, mortgage, bond,
sovereign and equity analysts.
SUB-ADVISORY FEES
Under the terms of the Sub-Advisory Agreement, the Adviser shall pay to the
Sub-Adviser, as full compensation for services rendered under the Sub-Advisory
Agreement with respect to the Portfolio, monthly fees at the following annual
rates based on the average daily net assets of the Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISORY FEE
------------------------------------
<S> <C>
Salomon Money Market Portfolio .20% of first $50 million of average
daily net assets.
.175% of the next $100 million of
average daily net assets
.15% of the next $150 million of
average daily net assets
.10% of the next $200 million of
average daily net assets
.075% of average daily net assets
over and above $500 million
</TABLE>
SUB-ADVISORY FEE WAIVER
The Sub-Adviser has agreed to waive its entire sub-advisory fee due under the
Sub-Advisory Agreement for the initial six (6) months of the Portfolio's
investment operations.
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the
Trust will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees
and charges relating to the VA Contract.)
The separate account of the Life Company places orders to purchase and redeem
shares of each Portfolio based on, among other things, the amount of
contributions to be invested and surrender and transfer requests to be
effected on that day pursuant to the VA contracts issued by the Life Company.
Orders received by the Trust are effected on days on which the New York Stock
Exchange is open for trading, at the net asset value per share next determined
after receipt of the order. For orders received before 4:00 p.m. New York
time, such purchases and redemptions of shares of each Portfolio are effected
at the respective net asset values per share determined as of 4:00 p.m. New
York time on that day. See "Net Asset Value", below and "Determination of Net
Asset Value" in the Trust's SAI. Payment for redemptions will be made within
seven days after receipt of a redemption request in good order. No fee is
charged the separate account of the Life Company when it redeems Portfolio
shares. The Trust may suspend the sale of shares at any time and may refuse
any order to purchase shares.
The Trust may suspend the right of redemption of shares of the Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than for customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted; (ii) when
the Securities and Exchange Commission determines that a state of emergency
exists which makes the sale of portfolio securities or the determination of
net asset value not reasonably practicable; (iii) as the Securities and
Exchange Commission may by order permit for the protection of the security
holders of the Trust; or (iv) at any time when the Trust may, under applicable
laws and regulations, suspend payment on the redemption of its shares.
NET ASSET VALUE
The Portfolio calculates the net asset value of its shares by dividing the
total value of its assets (the securities held by the Portfolio, plus any cash
or other assets, including interest and dividends accrued but not yet
received), less its total liabilities, by the total number of shares
outstanding. Shares are valued as of 12:00 noon (Eastern Time) each day the
New York Stock Exchange is open. The Portfolio uses the amortized cost method
to value its portfolio securities and seeks to maintain a stable net asset
value of $1.00 per share. The amortized cost method involves valuing a
security at its cost and amortizing any discount or premium over the period
until maturity, regardless of the impact of fluctuating interest rates on the
market value of the security. See the Statement of Additional Information for
a more complete description of the amortized cost method.
PERFORMANCE INFORMATION
From time to time the Salomon Money Market Portfolio may make available
information as to its "yield" and "effective yield." The "yield" of the
Salomon Money Market Portfolio refers to the income generated by an investment
in the Portfolio over a seven-day period. 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 the Salomon Money
Market Portfolio is assumed to be reinvested. The effective yield will be
slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
Any Portfolio performance information presented will also include performance
information for the Life Company separate accounts investing in the Trust
which will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of the Portfolio to various indices. Advertisements may also
contain the performance rankings assigned the Portfolio or its Sub-Adviser by
various publications and statistical services, including, for example, SEI,
Lipper Analytical Services Mutual Funds Survey, Lipper Variable Insurance
Products Performance Analysis Service, Morningstar, Intersec Research Survey
of Non-U.S. Equity Fund Returns, Frank Russell International Universe,
Kiplinger's Personal Finance, and Financial Services Week. Any such
comparisons or rankings are based on past performance and the statistical
computation performed by publications and services, and are not necessarily
indications of future performance. Because the Portfolio is a managed
investment vehicle investing in a wide variety of securities, the securities
owned by the Portfolio will not match those making up an index.
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
The Portfolio intends to qualify and elect to be treated as a regulated
investment company that is taxed under the rules of Subchapter M of the
Internal Revenue Code. As such an electing regulated investment company, the
Portfolio will not be subject to federal income tax on its net ordinary income
and net realized capital gains to the extent that at least 90% of such income
and gains are distributed to the separate account of the Life Company which
hold its shares. For further information concerning federal income tax
consequences for the holders of the VA Contracts of the Life Company,
investors should consult the prospectus used in connection with the issuance
of their VA Contracts.
The Portfolio intends to declare as a dividend substantially all of its net
investment income at the close of each business day to the Portfolio's
shareholders of record at 12:00 noon (Eastern Time) on that day, and will pay
such dividends monthly. Net realized short-term capital gains of the
Portfolio, if any, will be distributed whenever the Trustees determine that
such distributions would be in the best interest of shareholders, but in any
event at least once a year. The Portfolio does not expect to realize any
long-term capital gains. Distributions of ordinary income and capital gains
will be made in shares of the Portfolio unless an election is made on behalf
of a separate account to receive distributions in cash. The Life Company will
be informed at least annually about the amount and character of distributions
from the Trust for federal income tax purposes.
ADDITIONAL INFORMATION
The Trust was established as a Massachusetts business trust under the laws of
Massachusetts by a Declaration of Trust dated January 23, 1995, as amended
(the "Declaration of Trust"). Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. The Declaration of Trust contains an
express disclaimer of shareholder liability in connection with Trust property
or the acts, obligations, or affairs of the Trust. The Declaration of Trust
also provides for indemnification out of a Portfolio's property of any
shareholder of that Portfolio held personally liable for the claims and
liabilities to which a shareholder may become subject by reason of being or
having been a shareholder. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Portfolio itself would be unable to meet its obligations. A
copy of the Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts.
The Trust has an unlimited authorized number of shares of beneficial interest.
Shares of the Trust are entitled to one vote per share (with proportional
voting for fractional shares) and are freely transferable, and, in liquidation
of a Portfolio, shareholders of the Portfolio are entitled to receive pro rata
the net assets of the Portfolio. Although no Portfolio is required to hold
annual meetings of its shareholders, shareholders have the right to call a
meeting to elect or remove Trustees or to take other actions as provided in
the Declaration of Trust. Shareholders have no preemptive rights.
The Trust is authorized to subdivide each series (Portfolio) into two or more
classes. Currently, shares of the Portfolios are divided into Class A and
Class B. Each class of shares of a Portfolio is entitled to the same rights
and privileges as all other classes of the Portfolio, provided however, that
each class bears the expenses related to its distribution arrangements, as
well as any other expenses attributable to the class and unrelated to managing
the Portfolio's portfolio securities. Any matter that affects only the
holders of a particular class of shares may be voted on only by such
shareholders. Through this Prospectus, the Trust offers Class A shares in the
Portfolio.
The Trust's custodian is State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
APPENDIX A - RATINGS OF INVESTMENTS
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS
PRIME-1 - Issuers (or related supporting institutions) rated "Prime-1"
have a 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 structures with
moderate reliance on debt and ample asset protection, broad margins in
earnings coverage of fixed financial charges and high internal cash
generation, and well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2 - Issuers (or related supporting institutions) rated "Prime-2"
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, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The two highest categories are as
follows:
A-1 - This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are 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".
MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES
MIG-1/VMIG-1 - Notes rated MIG-1/VMIG-1 are of the best quality. There is
present strong protection by established cash flows superior liquidity support
or broad-based access to the market for refinancing.
MIG-2/VMIG-2 - Notes which are rated MIG-2/VMIG-2 are of high quality.
Margins of protection are ample though not so large as in the preceding group.
STANDARD & POOR'S RATINGS OF STATE AND MUNICIPAL NOTES
SP-1 - Notes which are rated SP-1 have a very strong or strong capacity
to pay principal and interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation.
SP-2 - Notes which are rated SP-2 have a satisfactory capacity to pay
principal and interest.
FITCH SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch's short-term ratings are as follows:
F-1+ - Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
F-1 - Issues assigned this rating reflect an assurance of timely payment
only slightly less in degree than issues rated F-1+.
F-2 - 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.
LOC - The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
BERKELEY SMALLER COMPANIES PORTFOLIO
LPT VARIABLE INSURANCE SERIES TRUST
1755 CREEKSIDE OAKS DRIVE
SACRAMENTO, CALIFORNIA 95833
CLASS A SHARES
LPT Variable Insurance Series Trust (the "Trust") is an open-end, series
management investment company which currently offers shares of beneficial
interest of eight series (the "Portfolios"), each of which has a different
investment objective and represents the entire interest in a separate
portfolio of investments. THIS PROSPECTUS CONTAINS INFORMATION PERTAINING TO
THE BERKELEY SMALLER COMPANIES PORTFOLIO ONLY. This Portfolio is currently
available to the public only through variable annuity contracts ("VA
Contracts") issued by London Pacific Life and Annuity Company ("Life
Company").
Please read this Prospectus before investing in the Berkeley Smaller Companies
Portfolio and keep it for future reference. The Prospectus contains
information about the Berkeley Smaller Companies Portfolio that a prospective
investor should know before investing.
A Statement of Additional Information ("SAI") dated ________, 1996 is
available without charge upon request and may be obtained by calling the Life
Company at (800) 852-3152 or by writing to the Life Company's Annuity Service
Center, P.O. Box 29564, Raleigh, North Carolina 27626. Some of the discussions
contained in this Prospectus refer to the more detailed descriptions contained
in the SAI, which is incorporated by reference into this Prospectus and has
been filed with the Securities and Exchange Commission.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE PURCHASER OF A VA CONTRACT SHOULD READ THIS PROSPECTUS IN CONJUNCTION WITH
THE PROSPECTUS FOR HIS OR HER VA CONTRACT.
PROSPECTUS DATED ___________, 1996
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
Investment Techniques Followed by the Portfolio
General Policies
Principal Risk Factors
Investment Restrictions
MANAGEMENT OF THE TRUST
Investment Adviser
Advisory Fee Waiver
Expense Reimbursement
Organizational Expenses of the Trust
Sub-Adviser
Sub-Advisory Fees
Sub-Advisory Fee Waiver
Allocation of Portfolio Transactions
SALES AND REDEMPTIONS
NET ASSET VALUE
PERFORMANCE INFORMATION
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
ADDITIONAL INFORMATION
APPENDIX A - RATINGS OF INVESTMENTS
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment
objective of the Berkeley Smaller Companies Portfolio is not fundamental and
may be changed without the approval of a majority of the outstanding shares of
the Portfolio. All other investment policies or limitations, unless otherwise
specifically stated, are non-fundamental and may be changed by the Trustees of
the Trust without a vote of the shareholders. There is no assurance that the
Portfolio will achieve its objective. A complete list of investment
restrictions, including those restrictions which cannot be changed without
shareholder approval, is contained in the SAI. United States Treasury
Regulations applicable to portfolios that serve as the funding vehicles for
variable annuity and variable life insurance contracts generally require that
such portfolios invest no more than 55% of the value of their assets in one
investment, 70% in two investments, 80% in three investments, and 90% in four
investments. The Portfolio intends to comply with the requirements of these
Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by the Portfolio declines below the minimum rating for securities in
which the Portfolio may invest, the Portfolio will not be required to dispose
of the security, but the Portfolio's Sub-Adviser will consider whether
continued investment in the security is consistent with the Portfolio's
investment objective.
In implementing its investment objective and policies, the Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the SAI. With respect to the Portfolio's investment policies, use
of the term "primarily" means that under normal circumstances, at least 65% of
such Portfolio's assets will be invested as indicated. A description of the
ratings systems used by the following nationally recognized statistical rating
organizations ("NRSROs") is contained in the Appendix: Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P"). New
instruments, strategies and techniques, however, are evolving continually and
the Portfolio reserves authority to invest in or implement them to the extent
consistent with its investment objectives and policies. If new instruments,
strategies or techniques would involve a material change to the information
contained herein, they will not be purchased or implemented until this
Prospectus is appropriately supplemented.
INVESTMENT TECHNIQUES FOLLOWED BY THE PORTFOLIO
The Berkeley Smaller Companies Portfolio seeks long-term capital appreciation
by investing primarily in equity securities of those smaller companies that
the Sub-Adviser believes may be the industry leaders of tomorrow. The
Portfolio will select its portfolio investments primarily from among U.S. and
foreign companies with individual market capitalizations which would, at the
time of purchase, place them in the same size range as companies included in
the NASDAQ Composite Index, excluding its top 75 companies. Based on this
policy and recent U.S. share prices, the companies in which the Portfolio
invests typically will have individual market capitalizations of less than
$1.0 billion ("smaller companies"). Under normal market conditions, the
Portfolio will invest at least 65% of its total assets in smaller companies.
normal market conditions, it is expected that at least 80% of the Portfolio's
total assets will be invested in common stocks. The Portfolio may also invest
up to 20% of its total assets in other types of securities with equity
characteristics such as preferred stocks, convertible securities, warrants,
units and rights. Under normal market conditions, the Portfolio will not
invest more than 35% of its total assets in the securities of issuers located
in any one country (other than the United States). The Portfolio may invest
in both exchange-listed and over-the-counter ("OTC") securities. Although the
Portfolio may receive current income from dividends, interest and other
sources, income is only an incidental consideration in the selection of the
Portfolio's investments. Subject to prevailing market conditions, not more
than 5% of the Portfolio's total assets will be invested in the securities of
any one issuer (excluding the United States Government and its agencies), and
not more than 25% of the Portfolio's total assets will be invested in any one
industrial classification.
GENERAL POLICIES
ADRS AND EDRS. The Portfolio may also invest in both sponsored and
unsponsored American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs") and other similar global instruments. The issuance of ADRs
is typically administered by a U.S. bank or trust company, and they evidence
ownership of underlying securities issued by a foreign corporation. EDRs,
which are sometimes referred to as Continental Depositary Receipts, are
receipts issued in Europe, typically through arrangements with foreign banks
and trust companies, that evidence ownership of either foreign or U.S.
underlying securities. Unsponsored ADR and EDR programs are organized
independently and without the cooperation of the issuer of the underlying
securities. As a result, available information concerning the issuer may not
be as current as for sponsored ADRs and EDRs, and the prices of unsponsored
ADRs and EDRs may be more volatile than if they were sponsored by the issuers
of the underlying securities.
TEMPORARY STRATEGIES. Pending investment of proceeds from new sales of
Portfolio shares, to meet ordinary daily cash needs, and to retain the
flexibility to respond promptly to changes in market and economic conditions,
the Sub-Adviser may employ a temporary defensive investment strategy for the
Portfolio if the Sub-Adviser determines such a strategy to be warranted. It
is impossible to predict when or for how long the Sub-Adviser may employ such
strategies. Under such a strategy, the Portfolio may hold cash (U.S. dollars,
foreign currencies or multinational currency units) and/or invest any portion
or all of its respective assets in short-term high quality money market
instruments. For debt obligations other than commercial paper, this includes
securities rated, at the time of purchase, at least AA by Standard & Poor's or
Aa by Moody's, or if unrated, determined to be of comparable quality by the
Sub-Adviser. For commercial paper, this includes securities rated, at the
time of purchase, at least A-2 by Standard & Poor's or Prime-2 by Moody's, or
if unrated, determined to be of comparable quality by the Sub-Adviser. See
"Appendix A" for a description of these ratings.
HEDGING STRATEGIES. The Portfolio may use certain hedging strategies to
attempt to reduce the overall level of investment and currency risk normally
associated with the Portfolio's present and planned investments. There can be
no assurance that such efforts will succeed. It is currently intended that
the Portfolio will place at risk no more than 5% of its net assets in any one
of the following categories of transactions or securities: forward currency
contracts, writing of covered put and call options, purchase of put and call
options on currencies and equity and debt securities, stock index futures and
options thereon, interest rate futures and options thereon, and securities
futures and options thereon.
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transactions costs to which the
Portfolio would not be subject absent the use of these strategies. If the
Sub-Adviser's prediction of movements in the direction of interest rates,
securities prices, or currency markets are inaccurate, the adverse
consequences to the Portfolio may leave the Portfolio in a worse position
than if such strategies were not used. Risks inherent in the use of options,
foreign currency and futures contracts and options thereon include: (1)
dependence on the Sub-Adviser's ability to predict correctly movements in
the direction of interest rates, securities prices and currency markets; (2)
the imperfect correlation between the price of options and futures contracts
and options thereon and movements in the prices of the securities or
currencies being hedged; (3) the fact that the skills needed to use these
strategies are different from those needed to select portfolio securities;
(4) the possible absence of a liquid secondary market for a particular
instrument at any time; and (5) the possible need to defer closing out certain
hedged positions to avoid adverse tax consequences. The Portfolio's ability
to enter into futures contracts and options thereon is limited by the
requirements of the Internal Revenue Code for qualification as a regulated
investment company. These hedging techniques are described in the SAI.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements in
which the Portfolio acquires a high grade liquid debt security from a U.S.
bank, broker-dealer or other financial institution that simultaneously agrees
to repurchase the security at a specified time and price. Under the 1940 Act,
repurchase agreements are considered to be loans collateralized by the
underlying security and therefore will be collateralized in an amount at least
equal to the current market value of the loaned securities, plus any accrued
interest, by cash, letters of credit, U.S. government securities or other high
grade liquid debt securities which the Portfolio's custodian, or a designated
sub-custodian, segregated from other Portfolio assets. In segregating such
assets, the Portfolio's custodian either places them in a segregated account
or separately identifies them and renders them unavailable for investment by
the Portfolio.
PRINCIPAL RISK FACTORS
MARKET RISK. The Portfolio is subject to market risk (i.e., the possibility
that stock prices will decline over short, or even extended, periods).
RISKS OF INVESTING IN SMALLER COMPANIES. Shares of the Portfolio are an
appropriate investment for prospective investors who are willing and able to
assume the risks associated with the types of investments made by the
Portfolio. The smaller companies in which the Portfolio primarily invests
often have rates of sales, earnings, growth and share price appreciation that
exceed those of larger companies. However, such companies also often have
limited product lines, markets or financial resources, and investors should
note that stocks of smaller companies may have limited marketability and
typically experience more market price volatility than stocks of larger
companies, and the Portfolio's net asset value may reflect this volatility.
FOREIGN SECURITIES. Equity and bond markets outside of the United States
have, in fact, significantly outperformed United States markets from time to
time, and the Sub-Adviser believes that investments in securities of companies
based outside of the United States may provide greater long-term investment
returns than would be available from investing solely in United States
securities. It is important, however, to recognize that investments in
securities of foreign issuers involve greater risks than investments in United
States companies. There may be less information publicly available about
foreign companies, and less government regulation and supervision of foreign
stock exchanges, securities dealers and listed companies. Foreign companies
are not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies. Securities of some foreign companies are less liquid, and
their prices more volatile, than securities of comparable United States
companies. Settlement of transactions in some foreign markets may be delayed
or may be less frequent than in the United States, which could affect the
liquidity of the Portfolio's portfolio. Security trading practices abroad may
offer less protection to investors such as the Portfolio. Additionally, in
some foreign countries, there exists the possibility of expropriation,
nationalization of issuers or confiscatory taxation, limitations on the
removal of securities, property or other assets, political or social
instability, including war or other armed conflict, or diplomatic developments
which could affect United States investments in those countries. The
performance of individual foreign economies may also compare unfavorably to
that of the United States economy, and the United States dollar value of
securities denominated in currencies other than the United States dollar may
be affected unfavorably by exchange rate movements. Each of these factors
could adversely affect the value of the Portfolio's shares, as well as the
value of dividends and interest earned by the Portfolio and gains which may be
realized.
Foreign governments may withhold taxes (typically at a rate between 10% and
35% of the gross amount paid) from dividends or interest paid with respect to
securities held by the Portfolio, decreasing the net asset value of the
Portfolio. Some foreign securities are subject to brokerage taxes levied by
foreign governments, increasing the cost of such securities and reducing the
realized gain, or increasing the realized loss, on such securities at the time
of sale.
The Portfolio may invest in companies located within emerging or developing
countries, which involves exposure to economic structures that are generally
less diverse and mature, and to political systems which can be expected to
have less stability, than those of more developed countries. Such countries
may have relatively unstable governments, economies based on only a few
industries, and securities markets which trade only a small number of
securities. Historical experience indicates that emerging markets have been
more volatile than the markets of more mature economies; such markets have
also from time to time provided higher rates of return and greater risks to
investors. The Sub-Adviser believes that these characteristics of emerging
markets can be expected to continue in the future. In addition, throughout
the countries commonly referred to as the Eastern Bloc, the lack of a capital
market structure or market-oriented economy and the possible reversal of
recent favorable economic, political and social events in some of those
countries present greater risks than those associated with more developed,
market-oriented Western European countries and markets. See "Description of
Securities, Investment Policies and Risk Factors" in the SAI for a description
of these and other risks of investing in the Portfolios. The special risks of
investment in foreign exchange contracts, interest rate and forward currency
futures contracts, options on foreign currencies, and stock index futures
contracts (and options on such futures contracts) are described in the SAI.
INVESTMENT RESTRICTIONS
The Portfolio is a diversified series of the Trust. A diversified series of
shares of an investment company is required, under the 1940 Act, to follow
certain guidelines in managing its investments which may help to reduce risk.
See "Other Policies" in the SAI.
As a non-fundamental policy, the Portfolio may not invest more than 5% of its
net assets in securities restricted as to resale or in illiquid securities.
The Portfolio may not invest 25% or more of its total assets in any one
industry (other than United States Government and agency obligations). In
addition, the Portfolio may not borrow money or mortgage or pledge any of its
assets (except that the Portfolio may borrow from banks, for temporary or
emergency purposes, up to 33 1/3% of its total assets and pledge up to 33 1/3%
of its total assets in connection therewith). Any borrowings that come to
exceed the 33 1/3% limitation will be reduced within three days. The
Portfolio may not purchase securities when its borrowings exceed 5% of its
assets. The Portfolio may not make loans if, as a result, more than 33 1/3%
of the Portfolio's total assets would be lent to other parties except (i)
through the purchase of a portion of an issue of debt securities in accordance
with its investment objectives, policies, and limitations, or (ii) by engaging
in repurchase agreements with respect to portfolio securities. Portfolio
securities may be loaned only if continuously collateralized at least 100% by
"marking-to-market" daily.
See the SAI for the full text of these restrictions and the Portfolio's other
investment policies. Except for those investment restrictions designated as
fundamental in the SAI, the investment policies described in this Prospectus
and in the SAI are not fundamental policies. The Trust's Board of Trustees
may change a non-fundamental investment policy without shareholder approval.
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER
Under an Investment Advisory Agreement dated January 9, 1996, LPIMC Insurance
Marketing Services, 1755 Creekside Oaks Drive, Sacramento, CA 95833 (the
"Adviser"), manages the investment strategies and policies of the Portfolios
and the Trust, subject to the control of the Trustees.
The Adviser is a registered investment adviser organized under the laws of
California. The Adviser is a wholly-owned subsidiary of the Life Company.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate
a continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies and restrictions and to determine from time to time securities to be
purchased, sold, retained or lent by the Trust and implement those decisions.
The Investment Advisory Agreement also provides that the Adviser shall manage
the Trust's business and affairs and shall provide such services required for
effective administration of the Trust as are now provided by employees or
other agents engaged by the Trust. The Investment Advisory Agreement further
provides that the Adviser shall furnish the Trust with office space and
necessary personnel, pay ordinary office expenses, pay all executive salaries
of the Trust and furnish, without expense to the Trust, the services of such
members of its organization as may be duly elected officers or Trustees of the
Trust. The Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at the Adviser's own cost and expense, for the purpose of
managing the investment of the assets of one or more Portfolios of the Trust.
As full compensation for its services under the Investment Advisory Agreement
with respect to the Berkeley Smaller Companies Portfolio, the Trust will pay
the Adviser a monthly fee at the following annual rates based on the average
daily net assets of the Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO ADVISORY FEE
- ------------------------------------ -------------------------------------
<S> <C>
Berkeley Smaller Companies Portfolio 1.00% of first $10 million of average
daily net assets
.75% of average daily net assets
over and above $10 million
</TABLE>
ADVISORY FEE WAIVER
The Adviser has agreed to waive its advisory fee for the Portfolio for the
initial six (6) months of the Portfolio's investment operations.
EXPENSE REIMBURSEMENT
The Life Company has voluntarily agreed to reimburse the Portfolio for certain
expenses (excluding brokerage commissions and management fees) in excess of
1.39%. The Life Company has reserved the right to withdraw or modify its
policy of expense reimbursement for the Portfolio. If expenses were not
reimbursed, anticipated actual expenses would be approximately 1.81% for the
year ending December 31, 1996.
ORGANIZATIONAL EXPENSES OF THE TRUST
The Life Company will pay for all organizational expenses of the Trust
including contribution of the initial "seed money" to the Trust.
SUB-ADVISER
The Adviser has engaged the Sub-Adviser for the Portfolio to make investment
decisions and place orders. In accordance with the Portfolio's investment
objective and policies and under the supervision of the Adviser and the
Trust's Board of Trustees, the Portfolio's Sub-Adviser is responsible for the
day to day investment management of the Portfolio, makes investment decisions
for the Portfolio and places orders on behalf of the Portfolio to effect the
investment decisions made as provided in a Sub-Advisory Agreement among the
Sub-Adviser, the Adviser and the Trust.
The Sub-Adviser for the Portfolio is Berkeley Capital Management. The
Sub-Adviser is a registered investment adviser whose principal office is
located at 650 California Street, 28th Floor, San Francisco, California 94108.
The Sub-Adviser is an affiliate of Govett & Co. The Sub-Adviser has been
engaged in the investment management business since 1972, and currently
manages approximately $1.8 billion in assets for both institutional and retail
clients. Its investment management activities include investment in equities
(ranging from small capitalization to large capitalization companies), a full
range of fixed income securities, and asset allocation strategies. Berkeley
Capital Management is a wholly-owned subsidiary of the London Pacific Group
Limited, a corporation listed on the London Stock Exchange and the NASDAQ
market system with a market valuation of approximately $220 million. The
London Pacific Group, which manages or administers investment funds valued at
approximately $4.4 billion, maintains offices in Jersey (Channel Islands),
Sacramento, Raleigh, San Francisco and San Diego.
The portfolio manager for the Portfolio is Jeffrey M.K. Bernstein, who has
been a portfolio manager with the Sub-Adviser since 1995. Mr. Bernstein
graduated from Union College in 1988 and upon graduating, was employed by 13D
Research as a Securities Analyst. Subsequently, he worked as Vice President,
Investments and Securities Analyst at Cowen & Company. Immediately before
joining Berkeley Capital Management, formerly Govett Asset Management Company,
he was Vice President, Portfolio Manager at Bankers Trust Company. While at
Bankers Trust and since 1993, he was integrally involved as manager of the BT
Special Opportunity collective investment fund and assistant portfolio manager
for all of the bank's small and mid-cap funds under the Global Investment
Management division, including the BT Investment Small Cap Fund.
SUB-ADVISORY FEES
Under the terms of the Sub-Advisory Agreement, the Adviser shall pay to the
Sub-Adviser, as full compensation for services rendered under the Sub-Advisory
Agreement with respect to the Portfolio, monthly fees at the following annual
rates based on the average daily net assets of the Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISORY FEE
------------------------------------
<S> <C>
Berkeley Smaller Companies Portfolio .75% of first $10 million of average
daily net assets.
.50% of average daily net assets
over and above $10 million.
</TABLE>
SUB-ADVISORY FEE WAIVER
The Sub-Adviser has agreed to waive its entire sub-advisory fee due under the
Sub-Advisory Agreement for the initial six (6) months of the Portfolio's
investment operations.
ALLOCATION OF PORTFOLIO TRANSACTIONS
Neither the Adviser nor the Sub-Adviser has any agreement or commitment to
place orders with any particular securities dealer or dealers with respect to
the Portfolio. In placing orders for the Portfolio's investment transactions,
the Sub-Adviser seeks the best net results, analyzing such factors as price,
size of order, difficulty of execution and the operational capabilities of the
firm involved. Prior to making an investment, the Sub-Adviser performs
considerable research on the specified company and country. In underwritten
offerings, securities are usually purchased at a fixed price which includes an
amount of compensation to the underwriter. On occasion, securities may be
purchased directly from an issuer, in which case there are no commissions or
discounts. Dealers may receive commissions on futures, currency and options
transactions. Commissions on trades made through foreign securities exchanges
or OTC markets typically are fixed and generally are higher than those made
through United States securities exchanges or OTC markets.
Consistent with its obligation to obtain the best net results, the Sub-Adviser
may consider research and brokerage services provided by the securities
broker-dealer as a factor in considering through whom portfolio transactions
will be effected. The Portfolio may pay to those securities broker-dealers
who provide brokerage and research services to the Sub-Adviser a higher
commission than that charged by other securities broker-dealers if the
Sub-Adviser determines in good faith that the amount of the commission is
reasonable in relation to the value of those services in terms either of the
particular transaction, or in terms of the overall responsibility of the
Sub-Adviser to the Portfolio and to any other accounts over which the
Sub-Adviser exercises investment discretion.
The frequency of portfolio transactions, a Portfolio's turnover rate, will
vary from year to year depending on market conditions. The portfolio turnover
rate of the Portfolio is not expected to exceed 400%. Because a high turnover
rate (over 100%) increases transaction costs and may increase the incidence of
federal taxation on a Portfolio's capital, the Sub-Adviser will carefully
weigh the anticipated benefits of a portfolio transaction against expected
transaction costs and tax consequences. The Sub-Adviser will not engage in
short-term trading other than what is necessary for the prudent management of
the Portfolio's portfolio.
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the
Trust will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees
and charges relating to the VA Contract.)
The separate account of the Life Company places orders to purchase and redeem
shares of each Portfolio based on, among other things, the amount of
contributions to be invested and surrender and transfer requests to be
effected on that day pursuant to the VA contracts issued by the Life Company.
Orders received by the Trust are effected on days on which the New York Stock
Exchange is open for trading, at the net asset value per share next determined
after receipt of the order. For orders received before 4:00 p.m. New York
time, such purchases and redemptions of shares of each Portfolio are effected
at the respective net asset values per share determined as of 4:00 p.m. New
York time on that day. See "Net Asset Value", below and "Determination of Net
Asset Value" in the Trust's SAI. Payment for redemptions will be made within
seven days after receipt of a redemption request in good order. No fee is
charged the separate account of the Life Company when it redeems Portfolio
shares. The Trust may suspend the sale of shares at any time and may refuse
any order to purchase shares.
The Trust may suspend the right of redemption of shares of any Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than for customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted; (ii) when
the Securities and Exchange Commission determines that a state of emergency
exists which makes the sale of portfolio securities or the determination of
net asset value not reasonably practicable; (iii) as the Securities and
Exchange Commission may by order permit for the protection of the security
holders of the Trust; or (iv) at any time when the Trust may, under applicable
laws and regulations, suspend payment on the redemption of its shares.
NET ASSET VALUE
Each Portfolio calculates the net asset value of its shares by dividing the
total value of its assets (the securities held by the Portfolio, plus any cash
or other assets, including interest and dividends accrued but not yet
received), less its total liabilities, by the total number of shares
outstanding. Shares are valued as of the close of trading on the New York
Stock Exchange (usually considered 4:00 p.m. Eastern Time) each day the New
York Stock Exchange is open. Portfolio securities for which market quotations
are readily available are stated at market value. Short-term investments that
will mature in 60 days or less are valued using amortized cost, which the
Trust's Board of Trustees has determined approximates market value. Amortized
cost valuation means that a debt security with a maturity at purchase of 60
days or less is valued at its acquisition cost and a debt security originally
purchased with a maturity in excess of 60 days, which currently has a maturity
of 60 days or less, is valued at the market or fair value of the security on
the 61st day prior to maturity (each as adjusted for amortization of premium
or discount) rather than at current market value. All other securities and
assets are valued at their fair value following procedures approved by the
Trust's Board of Trustees. See "Determination of Net Asset Value" in the SAI
for a description of the special valuation procedures for options and futures
contracts.
This Portfolio may invest in foreign securities listed on foreign stock
exchanges or debt securities of the United States and foreign governments and
corporations. Some of these securities trade on days other than Business
Days, as defined below. Foreign securities quoted in foreign currencies are
translated into United States dollars at the exchange rates at 1:00 p.m.
Eastern Time or at such other rates as a Sub-Adviser may determine to be
appropriate in computing net asset value. As a result, fluctuations in the
value of such currencies in relation to the United States dollar will affect
the net asset value of the Portfolio's shares even though there has not been
any change in the market values of such securities.
Because of time zone differences, foreign exchanges and securities markets
will usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be
determined as of the earlier closing of such exchanges and securities markets.
However, events affecting the values of such foreign securities may
occasionally occur between the earlier closing of such exchanges and
securities markets and the closing of the New York Stock Exchange which will
not be reflected in the computation of the net asset value of the Portfolios.
If an event materially affecting the value of such foreign securities occurs
during such period of which a Sub-Adviser becomes aware, then such securities
will be valued at fair value as determined in good faith, or in accordance
with procedures adopted, by the Trust's Board of Trustees.
PERFORMANCE INFORMATION
Performance information for each of the Portfolios may also be presented from
time to time in advertisements and sales literature. The Portfolios may
advertise several types of performance information. These are the "yield,"
"average annual total return" and "aggregate total return". Each of these
figures is based upon historical results and is not necessarily representative
of the future performance of any Portfolio.
The yield of a Portfolio's shares is determined by annualizing net investment
income earned per share for a stated period (normally one month or thirty
days) and dividing the result by the net asset value per share at the end of
the valuation period. The average annual total return and aggregate total
return figures measure both the net investment income generated by, and the
effect of any realized or unrealized appreciation or depreciation of the
underlying investments in, the Portfolio's portfolio for the period in
question, assuming the reinvestment of all dividends. Thus, these figures
reflect the change in the value of an investment in a Portfolio's shares
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter
(or if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Portfolio). Average annual total return
figures are annualized and, therefore, represent the average annual percentage
change over the period in question. Total return figures are not annualized
and represent the aggregate percentage or dollar value change over the period
in question. For more information regarding the computation of yield, average
annual total return and aggregate total return, see "Performance Information"
in the SAI.
Any Portfolio performance information presented will also include performance
information for the Life Company separate accounts investing in the Trust
which will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
Sub-Advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec
Research Survey of Non-U.S. Equity Fund Returns, Frank Russell International
Universe, Kiplinger's Personal Finance, and Financial Services Week. Any
such comparisons or rankings are based on past performance and the statistical
computation performed by publications and services, and are not necessarily
indications of future performance. Because the Portfolios are managed
investment vehicles investing in a wide variety of securities, the securities
owned by a Portfolio will not match those making up an index.
Although the Berkeley Smaller Companies Portfolio is newly-organized and does
not yet have its own performance record, it has the same investment objective
and follows substantially the same investment strategies as the Govett Smaller
Companies Fund of The Govett Funds, Inc., a mutual fund whose shares are sold
to the public. The Sub-Adviser for the Berkeley Smaller Companies Portfolio
is the investment sub-adviser of the Govett Smaller Companies Fund.
Set forth below is the historical performance of the Govett Smaller Companies
Fund. Investors should not consider this performance data as an indication of
the future performance of the Berkeley Smaller Companies Portfolio. The
performance figures shown below reflect the deduction of the historical fees
and expenses paid by the Govett Smaller Companies Fund, and not those to be
paid by the Portfolio. The figures also do not reflect the deduction of any
insurance fees or charges which are imposed by the Life Company in connection
with its sale of VA Contracts. Investors should refer to the separate account
prospectus describing the VA Contracts for information pertaining to these
insurance fees and charges. The insurance separate account fees will have a
detrimental effect on the performance of the Portfolio. The results shown
reflect the reinvestment of dividends and distributions, and were calculated
in the same manner that will be used by the Govett Smaller Companies Portfolio
to calculate its own performance.
The following table shows the average annualized total returns for the fiscal
year ended December 31, 1995, of a 1-year investment and of an investment
since inception in the Govett Smaller Companies Fund, as well as a comparison
with the Standard & Poor's 500 Composite Stock Price Index, an unmanaged index
generally considered to be representative of the stock market.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Since Inception
---------- ---------
Fund 1 Year 3 Year Inception Date
- -------------------------------------- ------- ------- ---------- ---------
Govett Smaller Companies Fund......... _____% _____% _____% 12/31/92
Standard & Poor's 500 Stock Index..... _____% _____% _____% From 1/1/93
</TABLE>
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
Portfolio of the Trust intends to qualify and elect to be treated as a
regulated investment company that is taxed under the rules of Subchapter M of
the Internal Revenue Code. As such an electing regulated investment company,
a Portfolio will not be subject to federal income tax on its net ordinary
income and net realized capital gains to the extent that at least 90% of such
income and gains are distributed to the separate account of the Life Company
which hold its shares. For further information concerning federal income tax
consequences for the holders of the VA Contracts of the Life Company,
investors should consult the prospectus used in connection with the issuance
of their VA Contracts.
Each of the Portfolios will declare and distribute dividends from net ordinary
income at least annually and will distribute its net realized capital gains,
if any, at least annually. Distributions of ordinary income and capital gains
will be made in shares of such Portfolios unless an election is made on behalf
of a separate account to receive distributions in cash. The Life Company will
be informed at least annually about the amount and character of distributions
from the Trust for federal income tax purposes.
ADDITIONAL INFORMATION
The Trust was established as a Massachusetts business trust under the laws of
Massachusetts by a Declaration of Trust dated January 23, 1995, as amended
(the "Declaration of Trust"). Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. The Declaration of Trust contains an
express disclaimer of shareholder liability in connection with Trust property
or the acts, obligations, or affairs of the Trust. The Declaration of Trust
also provides for indemnification out of a Portfolio's property of any
shareholder of that Portfolio held personally liable for the claims and
liabilities to which a shareholder may become subject by reason of being or
having been a shareholder. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Portfolio itself would be unable to meet its obligations. A
copy of the Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts.
The Trust has an unlimited authorized number of shares of beneficial interest.
Shares of the Trust are entitled to one vote per share (with proportional
voting for fractional shares) and are freely transferable, and, in liquidation
of a Portfolio, shareholders of the Portfolio are entitled to receive pro rata
the net assets of the Portfolio. Although no Portfolio is required to hold
annual meetings of its shareholders, shareholders have the right to call a
meeting to elect or remove Trustees or to take other actions as provided in
the Declaration of Trust. Shareholders have no preemptive rights.
The Trust is authorized to subdivide each series (Portfolio) into two or more
classes. Currently, shares of the Portfolios are divided into Class A and
Class B. Each class of shares of a Portfolio is entitled to the same rights
and privileges as all other classes of the Portfolio, provided however, that
each class bears the expenses related to its distribution arrangements, as
well as any other expenses attributable to the class and unrelated to managing
the Portfolio's portfolio securities. Any matter that affects only the
holders of a particular class of shares may be voted on only by such
shareholders. Through this Prospectus, the Trust offers Class A shares in the
Portfolio.
The Trust's custodian is State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
APPENDIX A - RATINGS OF INVESTMENTS
COMMERCIAL PAPER RATINGS
A-1, A-2 AND PRIME-1, PRIME-2 COMMERCIAL PAPER RATINGS
Commercial paper rated by Standard & Poor's Corporation has the following
characteristics: Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated "A" or better. The issuer has access to at
least two additional channels of borrowing. Basic earnings and cash flow have
an upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated A-1 or A-2.
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's Investors Service, Inc. Among the factors considered by it
in assigning ratings are the following: (1) evaluation of the management of
the issuer; (2) economic evaluation of the issuer's industry or industries and
an appraisal of speculative-type risks which may be inherent in certain areas;
(3) evaluation of the issuer's products in relation to competition and
customer-acceptance; (4) liquidity; (5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten years; (7) financial strength of a
parent company and the relationships which exist with the issuer; and (8)
recognition by the management of obligations which may be present or may arise
as a result of public interest questions and preparations to meet such
obligations. Relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated Prime-1 or 2.
CORPORATE BONDS
STANDARD & POOR'S CORPORATION BOND RATINGS
AAA. Debt rated AAA has the highest rating assigned by Standard &
Poor's. 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 higher rated issue only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC, and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and 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.
CI. The rating CI is reserved for income bonds on which no interest is
being paid.
D. Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. 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 risks appear somewhat larger than in 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 sometime 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 rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
LEXINGTON CORPORATE LEADERS PORTFOLIO
LPT VARIABLE INSURANCE SERIES TRUST
1755 CREEKSIDE OAKS DRIVE
SACRAMENTO, CALIFORNIA 95833
CLASS A SHARES
LPT Variable Insurance Series Trust (the "Trust") is an open-end, series
management investment company which currently offers shares of beneficial
interest of eight series (the "Portfolios"), each of which has a different
investment objective and represents the entire interest in a separate
portfolio of investments. THIS PROSPECTUS CONTAINS INFORMATION PERTAINING TO
THE LEXINGTON CORPORATE LEADERS PORTFOLIO ONLY. This Portfolio is currently
available to the public only through variable annuity contracts ("VA
Contracts") issued by London Pacific Life and Annuity Company ("Life
Company"). VA Contract Owners are not "shareholders" of the Portfolio. Rather,
the Life Company and its separate account(s) are the Portfolio's shareholders.
This Portfolio is a non-diversified Portfolio of the Trust.
Please read this Prospectus before investing in the Lexington Corporate
Leaders Portfolio and keep it for future reference. The Prospectus contains
information about the Lexington Corporate Leaders Portfolio that a prospective
investor should know before investing.
A Statement of Additional Information ("SAI") dated ________, 1996 is
available without charge upon request and may be obtained by calling the Life
Company at (800) 852-3152 or by writing to the Life Company's Annuity Service
Center, P.O. Box 29564, Raleigh, North Carolina 27626. Some of the discussions
contained in this Prospectus refer to the more detailed descriptions contained
in the SAI, which is incorporated by reference into this Prospectus and has
been filed with the Securities and Exchange Commission.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE PURCHASER OF A VA CONTRACT SHOULD READ THIS PROSPECTUS IN CONJUNCTION WITH
THE PROSPECTUS FOR HIS OR HER VA CONTRACT.
PROSPECTUS DATED ___________, 1996
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVE AND POLICIES
Temporary Investments
Investment Restrictions
Repurchase Agreements
Investment Risks
Portfolio Turnover
MANAGEMENT OF THE TRUST
Investment Adviser
Advisory Fee Waiver
Expense Reimbursement
Organizational Expenses of the Trust
Sub-Adviser
Sub-Advisory Fees
SALES AND REDEMPTIONS
NET ASSET VALUE
PERFORMANCE INFORMATION
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
ADDITIONAL INFORMATION
INVESTMENT OBJECTIVE AND POLICIES
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment
objective of the Lexington Corporate Leaders Portfolio is not fundamental and
may be changed without the approval of a majority of the outstanding shares of
the Portfolio. All other investment policies or limitations, unless otherwise
specifically stated, are non-fundamental and may be changed by the Trustees of
the Trust without a vote of the shareholders. There is no assurance that the
Portfolio will achieve its objective. A complete list of investment
restrictions, including those restrictions which cannot be changed without
shareholder approval, is contained in the SAI. United States Treasury
Regulations applicable to portfolios that serve as the funding vehicles for
variable annuity and variable life insurance contracts generally require that
such portfolios invest no more than 55% of the value of their assets in one
investment, 70% in two investments, 80% in three investments, and 90% in four
investments. The Portfolio intends to comply with the requirements of these
Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by the Portfolio declines below the minimum rating for securities in
which the Portfolio may invest, the Portfolio will not be required to dispose
of the security, but the Portfolio's Sub-Adviser will consider whether
continued investment in the security is consistent with the Portfolio's
investment objective.
In implementing its investment objective and policies, the Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the SAI. With respect to the Portfolio's investment policies, use of
the term "primarily" means that under normal circumstances, at least 65% of
such Portfolio's assets will be invested as indicated. A description of the
ratings systems used by the following nationally recognized statistical rating
organizations ("NRSROs") is contained in the SAI: Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc.
("Duff"), Fitch Investors Service, Inc. ("Fitch"), Thomson Bankwatch, Inc.,
IBCA Limited and IBCA Inc. New instruments, strategies and techniques,
however, are evolving continually and the Portfolio reserves authority to
invest in or implement them to the extent consistent with its investment
objectives and policies. If new instruments, strategies or techniques would
involve a material change to the information contained herein, they will not
be purchased or implemented until this Prospectus is appropriately
supplemented.
The Portfolio's investment objective is to seek long-term capital growth and
income through investment in the common stocks of large, well-established
companies. The Portfolio will seek to maintain an equal number of shares in
each of the companies in which it invests. The companies in which the
Portfolio will invest have a large market capitalization (in excess of $1.0
billion), an established history of earnings and dividend payments, a large
number of publicly held shares and high trading volume and a high degree of
liquidity. The Portfolio's portfolio will consist substantially of the
companies listed in the Dow Jones Industrial Average (DJIA)*, but the
Portfolio is not limited in its investments to securities in the DJIA and will
purchase securities of other issuers that meet its capitalization, earnings
and other criteria for investment.Portfolio's common stock investments will be
selected from a list of approximately 100 "corporate leaders" of commerce and
industry, as determined by the Sub-Adviser. It is expected that all of the
common stock held by the Portfolio will trade on the New York Stock Exchange
and will represent dominant firms in their respective industries.
_____________________
* Dow Jones Industrial Average and DJIA are trademarks of Dow Jones &
Company, Inc. The Portfolio is neither sponsored by, nor affiliated with Dow
Jones and Company, Inc.
The current list of "corporate leaders" which may be modified throughout the
year is as follows:
<TABLE>
<CAPTION>
<S> <C>
CHEMICAL & FERTILIZERS
- ------------------------
- Du Pont (E.I. deNemours)
- Hercules Inc.
- Lubrizol Corp.
- Morton International
- Union Carbide Corp.
COMMUNICATIONS - AT & T
- ------------------------
- Cable & Wireless PLC
- Motorola Inc.
- Polygram NV
- Telecom of New Zealand
CONSUMER PRODUCTS - American Brands, Inc.
- ------------------------
- Boise Cascade Corp.
- Bowater Inc.
- Coca Cola Co.
- Conagra
- Disney Co.
- Eastman Kodak Co.
- Federal Paper Board
- Gillette Co.
- International Paper Co.
- Minnesota Mining & Mfg.
- Pepsico
- Philip Morris Co. Inc.
- Procter & Gamble Co.
- Reynolds & Reynolds Co.
- Sara Lee Corp.
- Stone Container Corp.
- Union Camp Corp.
ELECTRICAL EQUIPMENT - Avnet
- ------------------------
- Duracell International
- Eaton Corp.
- General Electric Co.
- Illinois Tool Works
- Medtronic
- Micron Technology Inc.
- Philips Electronics NV
- Tektronix
- Texas Instruments
- Westinghouse Electric
ENERGY - Columbia Gas System, Inc.
- ------------------------
- Enron Corp.
- Panhandle Eastern Corp. C12
- USX Marathon Group
FINANCIAL - American Express Co.
- ------------------------
- Bank of Boston Corp.
- Chemical Banking Corp.
- Federal Home Loan Mortgage
- Halliburton Co.
- MBNA Corp.
- Morgan & Co. (J.P.)
- Star Banc Corp.
- Travelers Inc.
- Wells Fargo & Co.
HEALTH - Abbott Laboratories
- ------------------------
- Merck + Co. Inc.
- Mylan Laboratories
- Pfizer Inc.
- Schering Plough Corp.
- Johnson & Johnson
MISC. INDUSTRIAL - Allied Signal, Inc.
- ------------------------
- Aluminum Co. of America
- Bethlehem Steel Corp.
- Black & Decker Corp.
- British Steel PLC ADR
- Caterpillar
- Cincinnati Milacron
- Deere & Co.
- Dover Corp.
- Goodrich Co. (BF)
- Goodyear Tire & Rubber
- Hewlett Packard Co.
- International Business Machines
- Parker Hannifin Corp.
- Sherwin Williams Co.
- Tenneco Inc.
- USX Corp. - US Steel
OIL INTERNATIONAL - Chevron Corp.
- ------------------------
- Exxon Corp.
- Mobil Corp.
- Texaco
- Royal Dutch Petroleum
- Schlumberger
RAILROADS - Burlington Northern/ Santa Fe
- ------------------------
- CSX Corp.
- Union Pacific Corp.
RETAILING - McDonalds Corp.
- ------------------------
- Sears, Roebuck & Co.
- WalMart Stores
TRANSPORTATION EQUIPMENT - Boeing Co.
- ------------------------
- Delta Air Lines
- General Motors Corp.
- McDonnell Douglas Corp.
- Trinity Industries
- United Technologies Corp.
UTILITIES - Consolidated Edison Co. of NY
- ------------------------
- Duke Power
- Houston Industries
- Pacific Gas & Electric Co.
- Union Electric Company
</TABLE>
The management of the Portfolio will diversify its investment portfolio
broadly and selectively among issuers and among industries. It is not
anticipated that the Portfolio's portfolio will include stocks of every
company on the then currently approved list; it will be the function of the
Sub-Adviser to invest and reinvest the Portfolio's assets in stocks selected
as most conducive to the realization of the Portfolio's objectives. Of course,
an investment in the Portfolio cannot eliminate the risks inherent in the
ownership of common stocks, and there can be no guarantee that the Portfolio's
objectives will be realized. However, the management of the Portfolio will
seek through continuous supervision to minimize these risks and to increase
the investor's opportunities for long-term capital growth.
The Portfolio's classification as a "non-diversified" series means that the
proportion of the Portfolio's assets that may be invested in the securities of
a single issuer is not limited by the Investment Company Act of 1940, as
amended ("1940 Act"). However, the Portfolio intends to conduct its operations
so as to qualify as a "regulated investment company" for purposes of the
Internal Revenue Code, which requires that, at the end of each quarter of the
taxable year, (i) at least 50% of the market value of the Portfolio's assets
be invested in cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other
securities of any one issuer counted for the purposes of this calculation only
if the value thereof is not greater than 5% of the value of the Portfolio's
total assets, and (ii) not more than 25% of the value of its total assets be
invested in the securities of any one issuer (other than U.S. Government
securities or the securities of other regulated investment companies).
TEMPORARY INVESTMENTS
In the event future economic or financial conditions adversely affect
securities of the type described above, the Portfolio may invest up to 100% of
its total assets in short-term money market securities. These short-term
instruments include securities issued or guaranteed by the U.S. Government and
its agencies, bankers' acceptances and repurchase agreements.
INVESTMENT RESTRICTIONS
The following investment restrictions are matters of fundamental policy which
may not be changed without the affirmative vote of the lesser of (a) 67% or
more of the shares of the Portfolio present at a shareholders' meeting at
which more than 50% of the outstanding shares are present or represented by
proxy or (b) more than 50% of the outstanding shares.
The Portfolio is a non-diversified series and
1. with respect to 50% of its assets, the Portfolio will not at the time
of purchase invest more than 5% of its total assets, at market value, in the
securities of one issuer (except the securities of the United States
Government);
2. with respect to the other 50% of its assets, the Portfolio will not
invest at the time of purchase more than 25% of the market value of its total
assets in any single issuer.
These two restrictions, hypothetically, could give rise to a portfolio with as
few as fourteen issues.
A complete list of all of the investment restrictions is contained in the SAI.
The percentage restrictions referred to above as well as those described in
the SAI are to be adhered to at the time of investment and are not applicable
to a later increase or decrease in percentage beyond the specified limit
resulting from change in values or net assets.
REPURCHASE AGREEMENTS
The Portfolio's investment portfolio may include repurchase agreements
("repos") with banks and dealers in U.S. Government securities. A repurchase
agreement involves the purchase by the Portfolio of an investment contract
from a bank or dealer in U.S. Government securities which contract is secured
by debt securities whose value is equal to or greater than the value of the
repurchase agreement including the agreed upon interest. The agreement
provides that the institution will repurchase the underlying securities at an
agreed upon time and price. The total amount received on repurchase would
exceed the price paid by the Portfolio, reflecting an agreed upon rate of
interest for the period from the date of the repurchase agreement to
settlement date, and would not be related to the interest rate on the
underlying securities. The difference between the total amount to be received
upon the repurchase of the securities and the price paid by the Portfolio upon
their acquisition is accrued daily as interest. If the institution defaults on
the repurchase agreement, the Portfolio will retain possession of the
underlying securities. In addition, if bankruptcy proceedings are commenced
with respect to the seller, realization of the collateral by the Portfolio may
be delayed or limited and the Portfolio may incur additional costs. In such
case the Portfolio will be subject to risks associated with changes in the
market value of the collateral securities. The Portfolio intends to limit
repurchase agreements to transactions with institutions believed by the
Sub-Adviser to present minimal credit risk.
INVESTMENT RISKS
The Portfolio's portfolio is subject to market risk (i.e., the possibility
that stock prices will decline over short, or even extended, periods). As
indicated elsewhere herein, the Portfolio is classified as non-diversified for
purposes of the 1940 Act. Since a relatively high percentage of the
Portfolio's assets may be invested in the securities of a limited number of
issuers, the Portfolio's portfolio securities may be more susceptible to any
single economic, political or regulatory occurrence than the portfolio
securities of a diversified investment company.
As described further under "Temporary Instruments", the Portfolio may, under
certain circumstances, be invested in debt instruments. To the extent it is so
invested, the value of the Portfolio's shares will fluctuate with the general
level of interest rates. When interest rates decline, the value of an
investment portfolio invested in fixed-income securities can be expected to
rise. Conversely, when interest rates rise, the value of an investment
portfolio invested in fixed-income securities can be expected to decline.
PORTFOLIO TURNOVER
In the selection of various securities, long-term potential will take
precedence over short-term market fluctuations. While management maintains the
flexibility to sell portfolio securities regardless of how long they have been
held by the Portfolio, it is anticipated that the Portfolio's annual portfolio
turnover rate will not exceed 100%. A rate of 100% could occur, for example,
if all of the securities held by the Portfolio were replaced within a period
of one year. High portfolio turnover rates can result in corresponding
increases in brokerage costs.
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER
Under an Investment Advisory Agreement dated January 9, 1996, LPIMC Insurance
Marketing Services, 1755 Creekside Oaks Drive, Sacramento, CA 95833 (the
"Adviser"), manages the investment strategies and policies of the Portfolios
and the Trust, subject to the control of the Trustees.
The Adviser is a registered investment adviser organized under the laws of
California. The Adviser is a wholly-owned subsidiary of the Life Company.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate
a continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies and restrictions and to determine from time to time securities to be
purchased, sold, retained or lent by the Trust and implement those decisions.
The Investment Advisory Agreement also provides that the Adviser shall manage
the Trust's business and affairs and shall provide such services required for
effective administration of the Trust as are now provided by employees or
other agents engaged by the Trust. The Investment Advisory Agreement further
provides that the Adviser shall furnish the Trust with office space and
necessary personnel, pay ordinary office expenses, pay all executive salaries
of the Trust and furnish, without expense to the Trust, the services of such
members of its organization as may be duly elected officers or Trustees of the
Trust. The Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at the Adviser's own cost and expense, for the purpose of
managing the investment of the assets of one or more Portfolios of the Trust.
As full compensation for its services under the Investment Advisory Agreement
with respect to the Lexington Corporate Leaders Portfolio, the Trust will pay
the Adviser a monthly fee at the following annual rates based on the average
daily net assets of the Portfolio.
<TABLE>
<CAPTION>
<S> <C>
PORTFOLIO ADVISORY FEE
- ------------------------------------- -------------------------------------
Lexington Corporate Leaders Portfolio .65% of first $10 million of average
daily net assets
.60% of next $90 million of average
daily net assets
.55% of average daily net assets over
and above $100 million.
</TABLE>
ADVISORY FEE WAIVER
The Adviser has agreed to waive .25% of its advisory fee for the Portfolio for
the initial six (6) months of the Portfolio's investment operations.
EXPENSE REIMBURSEMENT
The Life Company has voluntarily agreed to reimburse the Portfolio for certain
expenses (excluding brokerage commissions and management fees) in excess of
1.29%. The Life Company has reserved the right to withdraw or modify its
policy of expense reimbursement for the Portfolio. If expenses were not
reimbursed, anticipated actual expenses would be approximately 1.74%.
ORGANIZATIONAL EXPENSES OF THE TRUST
The Life Company will pay for all organizational expenses of the Trust
including contribution of the initial "seed money" to the Trust.
SUB-ADVISER
The Adviser has engaged the Sub-Adviser for the Portfolio to make investment
decisions and place orders. In accordance with the Portfolio's investment
objective and policies and under the supervision of the Adviser and the
Trust's Board of Trustees, the Portfolio's Sub-Adviser is responsible for the
day to day investment management of the Portfolio, makes investment decisions
for the Portfolio and places orders on behalf of the Portfolio to effect the
investment decisions made as provided in a Sub-Advisory Agreement among the
Sub-Adviser, the Adviser and the Trust.
The Sub-Adviser for the Portfolio is Lexington Management Corporation ("LMC"),
P.O. Box 1515/Park 80 West Plaza Two, Saddle Brook, New Jersey 07663. LMC,
established in 1938, currently manages over $3.8 billion in assets. LMC serves
as investment adviser to other investment companies and private and
institutional investment accounts. Included among these clients are persons
and organizations which own significant amounts of capital stock of LMC's
parent, Lexington Global Asset Managers, Inc. The clients pay fees which LMC
considers comparable to the fees paid by similarly served clients.
LMC, as the owner of the service mark "Lexington" and "Corporate Leaders", has
sublicensed the Portfolio to include the word "Lexington" and "Corporate
Leaders" as part of its corporate name, subject to revocation by LMC in the
event that the Portfolio ceases to engage LMC or its affiliates as
sub-adviser. The Portfolio will be required upon demand of LMC to change its
corporate name to delete the word "Lexington" and "Corporate Leaders"
therefrom. The Sub-Advisory Agreement will thereupon automatically terminate
and a new contract will, at such time, be submitted to a vote of the
Portfolio's shareholders.
LMC is a wholly-owned subsidiary of Lexington Global Asset Managers, Inc., a
Delaware corporation with offices at Park 80 West - Plaza Two, Saddle Brook,
NJ 07663. Descendants of Lunsford Richardson, Sr., their spouses, trusts and
other related entities have a majority voting control of outstanding shares of
Lexington Global Asset Managers, Inc.
The Portfolio is managed by an investment management team. Lawrence Kantor is
the lead manager. Mr. Kantor is Managing Director and Executive Vice President
of LMC, as well as, Vice President and Director/Trustee of the Lexington
Funds. He is also Executive Vice President of Lexington Global Asset Managers,
Inc., LMC's parent. He has 25 years investment experience. Prior to joining
LMC in 1984, Mr. Kantor was an officer of the Guardian Life Insurance Company
of America and various affiliated companies which included registered
investment companies, a broker-dealer, an investment adviser and a stock life
insurance company. He was formerly an associate member of the New York Stock
Exchange. Mr. Kantor is a graduate of Long Island University with a B.S.
Degree and attended its Graduate School of Business.
SUB-ADVISORY FEES
Under the terms of the Sub-Advisory Agreement, the Adviser shall pay to the
Sub-Adviser, as full compensation for services rendered under the Sub-Advisory
Agreement with respect to the Portfolio, monthly fees at the following annual
rates based on the average daily net assets of the Portfolio.
<TABLE>
<CAPTION>
<S> <C>
PORTFOLIO SUB-ADVISORY FEE
------------------------------------
Lexington Corporate Leaders Portfolio .40% of first $10 million of average
daily net assets.
.35% of the next $90 million of
average daily net assets
.30% of average daily net assets
over and above $100 million
</TABLE>
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the
Trust will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees
and charges relating to the VA Contract.)
The separate account of the Life Company places orders to purchase and redeem
shares of each Portfolio based on, among other things, the amount of
contributions to be invested and surrender and transfer requests to be
effected on that day pursuant to the VA contracts issued by the Life Company.
Orders received by the Trust are effected on days on which the New York Stock
Exchange is open for trading, at the net asset value per share next determined
after receipt of the order. For orders received before 4:00 p.m. New York
time, such purchases and redemptions of shares of each Portfolio are effected
at the respective net asset values per share determined as of 4:00 p.m. New
York time on that day. See "Net Asset Value", below and "Determination of Net
Asset Value" in the Trust's SAI. Payment for redemptions will be made within
seven days after receipt of a redemption request in good order. No fee is
charged the separate account of the Life Company when it redeems Portfolio
shares. The Trust may suspend the sale of shares at any time and may refuse
any order to purchase shares.
The Trust may suspend the right of redemption of shares of any Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than for customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted; (ii) when
the Securities and Exchange Commission determines that a state of emergency
exists which makes the sale of portfolio securities or the determination of
net asset value not reasonably practicable; (iii) as the Securities and
Exchange Commission may by order permit for the protection of the security
holders of the Trust; or (iv) at any time when the Trust may, under applicable
laws and regulations, suspend payment on the redemption of its shares.
NET ASSET VALUE
Each Portfolio calculates the net asset value of its shares by dividing the
total value of its assets (the securities held by the Portfolio, plus any cash
or other assets, including interest and dividends accrued but not yet
received), less its total liabilities, by the total number of shares
outstanding. Shares are valued as of the close of trading on the New York
Stock Exchange (usually considered 4:00 p.m. Eastern Time) each day the New
York Stock Exchange is open. Portfolio securities for which market quotations
are readily available are stated at market value. Short-term investments that
will mature in 60 days or less are valued using amortized cost, which the
Trust's Board of Trustees has determined approximates market value. Amortized
cost valuation means that a debt security with a maturity at purchase of 60
days or less is valued at its acquisition cost and a debt security originally
purchased with a maturity in excess of 60 days, which currently has a maturity
of 60 days or less, is valued at the market or fair value of the security on
the 61st day prior to maturity (each as adjusted for amortization of premium
or discount) rather than at current market value. All other securities and
assets are valued at their fair value following procedures approved by the
Trust's Board of Trustees. See "Determination of Net Asset Value" in the SAI
for a description of the special valuation procedures for options and futures
contracts.
Certain Portfolios are expected to invest in foreign securities listed on
foreign stock exchanges or debt securities of the United States and foreign
governments and corporations. Some of these securities trade on days other
than Business Days, as defined below. Foreign securities quoted in foreign
currencies are translated into United States dollars at the exchange rates at
1:00 p.m. Eastern Time or at such other rates as a Sub-Adviser may determine
to be appropriate in computing net asset value. As a result, fluctuations in
the value of such currencies in relation to the United States dollar will
affect the net asset value of a Portfolio's shares even though there has not
been any change in the market values of such securities.
Because of time zone differences, foreign exchanges and securities markets
will usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be
determined as of the earlier closing of such exchanges and securities markets.
However, events affecting the values of such foreign securities may
occasionally occur between the earlier closing of such exchanges and
securities markets and the closing of the New York Stock Exchange which will
not be reflected in the computation of the net asset value of the Portfolios.
If an event materially affecting the value of such foreign securities occurs
during such period of which a Sub-Adviser becomes aware, then such securities
will be valued at fair value as determined in good faith, or in accordance
with procedures adopted, by the Trust's Board of Trustees.
PERFORMANCE INFORMATION
Performance information for each of the Portfolios may also be presented from
time to time in advertisements and sales literature. The Portfolios may
advertise several types of performance information. These are the "yield,"
"average annual total return" and "aggregate total return". Each of these
figures is based upon historical results and is not necessarily representative
of the future performance of any Portfolio.yield of a Portfolio's shares is
determined by annualizing net investment income earned per share for a stated
period (normally one month or thirty days) and dividing the result by the net
asset value per share at the end of the valuation period. The average annual
total return and aggregate total return figures measure both the net
investment income generated by, and the effect of any realized or unrealized
appreciation or depreciation of the underlying investments in, the Portfolio's
portfolio for the period in question, assuming the reinvestment of all
dividends. Thus, these figures reflect the change in the value of an
investment in a Portfolio's shares during a specified period. Average annual
total return will be quoted for at least the one, five and ten year periods
ending on a recent calendar quarter (or if such periods have not yet elapsed,
at the end of a shorter period corresponding to the life of the Portfolio).
Average annual total return figures are annualized and, therefore, represent
the average annual percentage change over the period in question. Total return
figures are not annualized and represent the aggregate percentage or dollar
value change over the period in question. For more information regarding the
computation of yield, average annual total return and aggregate total return,
see "Performance Information" in the SAI.
Any Portfolio performance information presented will also include performance
information for the Life Company separate accounts investing in the Trust
which will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
Sub-Advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec
Research Survey of Non-U.S. Equity Fund Returns, Frank Russell International
Universe, Kiplinger's Personal Finance, and Financial Services Week. Any such
comparisons or rankings are based on past performance and the statistical
computation performed by publications and services, and are not necessarily
indications of future performance. Because the Portfolios are managed
investment vehicles investing in a wide variety of securities, the securities
owned by a Portfolio will not match those making up an index.
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
Each Portfolio of the Trust intends to qualify and elect to be treated as a
regulated investment company that is taxed under the rules of Subchapter M of
the Internal Revenue Code. As such an electing regulated investment company, a
Portfolio will not be subject to federal income tax on its net ordinary income
and net realized capital gains to the extent that at least 90% of such income
and gains are distributed to the separate account of the Life Company which
hold its shares. For further information concerning federal income tax
consequences for the holders of the VA Contracts of the Life Company,
investors should consult the prospectus used in connection with the issuance
of their VA Contracts.
Each of the Portfolios will declare and distribute dividends from net ordinary
income at least annually and will distribute its net realized capital gains,
if any, at least annually. Distributions of ordinary income and capital gains
will be made in shares of such Portfolios unless an election is made on behalf
of a separate account to receive distributions in cash. The Life Company will
be informed at least annually about the amount and character of distributions
from the Trust for federal income tax purposes.
ADDITIONAL INFORMATION
The Trust was established as a Massachusetts business trust
under the laws of Massachusetts by a Declaration of Trust dated January 23,
1995, as amended (the "Declaration of Trust"). Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust. The
Declaration of Trust contains an express disclaimer of shareholder liability
in connection with Trust property or the acts, obligations, or affairs of the
Trust. The Declaration of Trust also provides for indemnification out of a
Portfolio's property of any shareholder of that Portfolio held personally
liable for the claims and liabilities to which a shareholder may become
subject by reason of being or having been a shareholder. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Portfolio itself would be unable to meet
its obligations. A copy of the Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts.
The Trust has an unlimited authorized number of shares of beneficial interest.
Shares of the Trust are entitled to one vote per share (with proportional
voting for fractional shares) and are freely transferable, and, in liquidation
of a Portfolio, shareholders of the Portfolio are entitled to receive pro rata
the net assets of the Portfolio. Although no Portfolio is required to hold
annual meetings of its shareholders, shareholders have the right to call a
meeting to elect or remove Trustees or to take other actions as provided in
the Declaration of Trust. Shareholders have no preemptive rights.
The Trust is authorized to subdivide each series (Portfolio) into two or more
classes. Currently, shares of the Portfolios are divided into Class A and
Class B. Each class of shares of a Portfolio is entitled to the same rights
and privileges as all other classes of the Portfolio, provided however, that
each class bears the expenses related to its distribution arrangements, as
well as any other expenses attributable to the class and unrelated to managing
the Portfolio's portfolio securities. Any matter that affects only the holders
of a particular class of shares may be voted on only by such shareholders.
Through this Prospectus, the Trust offers Class A shares in the Portfolio.
The Trust's custodian is State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
STRONG GROWTH PORTFOLIO
LPT VARIABLE INSURANCE SERIES TRUST
1755 CREEKSIDE OAKS DRIVE
SACRAMENTO, CALIFORNIA 95833
CLASS A SHARES
LPT Variable Insurance Series Trust (the "Trust") is an open-end, series
management investment company which currently offers shares of beneficial
interest of eight series (the "Portfolios"), each of which has a different
investment objective and represents the entire interest in a separate
portfolio of investments. THIS PROSPECTUS CONTAINS INFORMATION PERTAINING TO
THE STRONG GROWTH PORTFOLIO ONLY. This Portfolio is currently available to
the public only through variable annuity contracts ("VA Contracts") issued by
London Pacific Life and Annuity Company ("Life Company").
Please read this Prospectus before investing in the Strong Growth Portfolio
and keep it for future reference. The Prospectus contains information about
the Strong Growth Portfolio that a prospective investor should know before
investing.
A Statement of Additional Information ("SAI") dated ________, 1996 is
available without charge upon request and may be obtained by calling the Life
Company at (800) 852-3152 or by writing to the Life Company's Annuity Service
Center, P.O. Box 29564, Raleigh, North Carolina 27626. Some of the discussions
contained in this Prospectus refer to the more detailed descriptions contained
in the SAI, which is incorporated by reference into this Prospectus and has
been filed with the Securities and Exchange Commission.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE PURCHASER OF A VA CONTRACT SHOULD READ THIS PROSPECTUS IN CONJUNCTION WITH
THE PROSPECTUS FOR HIS OR HER VA CONTRACT.
PROSPECTUS DATED ___________, 1996
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVE AND POLICIES
IMPLEMENTATION OF POLICIES AND RISKS
Foreign Securities and Currencies
Foreign Investment Companies
Derivative Instruments
Illiquid Securities
Small Companies
Debt Obligations
When-Issued Securities
Portfolio Turnover
MANAGEMENT OF THE TRUST
Investment Adviser
Advisory Fee Waiver
Expense Reimbursement
Organizational Expenses of the Trust
Sub-Adviser
Sub-Advisory Fees
SALES AND REDEMPTIONS
NET ASSET VALUE
PERFORMANCE INFORMATION
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
ADDITIONAL INFORMATION
INVESTMENT OBJECTIVE AND POLICIES
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment
objective of the Strong Growth Portfolio is not fundamental and may be changed
without the approval of a majority of the outstanding shares of the Portfolio.
All other investment policies or limitations, unless otherwise specifically
stated, are non-fundamental and may be changed by the Trustees of the Trust
without a vote of the shareholders. There is no assurance that the Portfolio
will achieve its objective. A complete list of investment restrictions,
including those restrictions which cannot be changed without shareholder
approval, is contained in the SAI. United States Treasury Regulations
applicable to portfolios that serve as the funding vehicles for variable
annuity and variable life insurance contracts generally require that such
portfolios invest no more than 55% of the value of their assets in one
investment, 70% in two investments, 80% in three investments, and 90% in four
investments. The Portfolio intends to comply with the requirements of these
Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by the Portfolio declines below the minimum rating for securities in
which the Portfolio may invest, the Portfolio will not be required to dispose
of the security, but the Portfolio's Sub-Adviser will consider whether
continued investment in the security is consistent with the Portfolio's
investment objective.
In implementing its investment objective and policies, the Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the SAI. With respect to the Portfolio's investment policies, use
of the term "primarily" means that under normal circumstances, at least 65% of
such Portfolio's assets will be invested as indicated. A description of the
ratings systems used by the following nationally recognized statistical rating
organizations ("NRSROs") is contained in the SAI: Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc.
("Duff"), Fitch Investors Service, Inc. ("Fitch"), Thomson Bankwatch, Inc.,
IBCA Limited and IBCA Inc. New instruments, strategies and techniques,
however, are evolving continually and the Portfolio reserves authority to
invest in or implement them to the extent consistent with its investment
objectives and policies. If new instruments, strategies or techniques would
involve a material change to the information contained herein, they will not
be purchased or implemented until this Prospectus is appropriately
supplemented.
The Portfolio seeks capital growth. The Portfolio invests primarily in equity
securities that the Sub-Adviser believes have above-average growth prospects.
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in equity securities, including common stocks, preferred stocks,
and securities that are convertible into common or preferred stocks, such as
warrants and convertible bonds. While the emphasis of the Portfolio is clearly
on equity securities, the Portfolio may invest a limited portion of its assets
in debt obligations when the Sub-Adviser perceives that they are more
attractive than stocks on a long-term basis. The Portfolio may invest up to
35% of its total assets in debt obligations, including intermediate- to
long-term corporate or U.S. government debt securities. When the Sub-Adviser
determines that market conditions warrant a temporary defensive position, the
Portfolio may invest without limitation in cash and short-term fixed income
securities. Although the debt obligations in which it invests will be
primarily investment-grade, the Portfolio may invest up to 5% of its total
assets in non-investment-grade debt obligations. (See "Implementation of
Policies and Risks - Debt Obligations.")
The Portfolio may invest up to 15% of its total assets directly in the
securities of foreign issuers. It may also invest without limitation in
foreign securities in domestic markets through depositary receipts. However,
as a matter of policy, the Sub-Adviser intends to limit total foreign
exposure, including both direct investments and depositary receipts, to no
more than 25% of the Portfolio's total assets. See "Implementation of Policies
and Risks - Foreign Securities and Currencies" for the special risks
associated with foreign investments.
The Portfolio will generally invest in companies whose earnings are believed
to be in a relatively strong growth trend, and, to a lesser extent, in
companies in which significant further growth is not anticipated but whose
market value is thought to be undervalued. In identifying companies with
favorable growth prospects, the Sub-Adviser ordinarily looks to certain other
characteristics, such as the following:
-- prospects for above-average sales and earnings growth;
-- high return on invested capital;
-- overall financial strength, including sound financial and accounting
policies and a strong balance sheet;
-- competitive advantages, including innovative products and service;
-- effective research, product development, and marketing; and
-- stable, capable management.
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the Portfolio's investment policies described above (and
subject to certain restrictions described herein), the Portfolio may invest in
the following securities and employ the following investment techniques, some
of which may present special risks as described below. The Portfolio may also
engage in reverse repurchase agreements and mortgage dollar roll transactions.
A more complete discussion of these securities and investment techniques and
their associated risks is presented in the SAI.
FOREIGN SECURITIES AND CURRENCIES
The Portfolio may invest in foreign securities, either directly or indirectly
through the use of depositary receipts. (See "Investment Objective and
Policies.") Depositary receipts are generally issued by banks or trust
companies and evidence ownership of underlying foreign securities.
Foreign investments involve special risks, including:
-- expropriation, confiscatory taxation, and withholding taxes on
dividends and interest;
-- less extensive regulation of foreign brokers, securities markets, and
issuers;
-- less publicly available information and different accounting
standards;
-- costs incurred in conversions between currencies, possible delays in
settlement in foreign securities markets, limitations on the use or
transfer of assets (including suspension of the ability to transfer
currency from a given country), and difficulty of enforcing
obligations in other countries; and
-- diplomatic developments and political or social instability.
Foreign economies may differ favorably or unfavorably from the U.S. economy in
various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities
are less liquid and their prices more volatile than comparable U.S.
securities. Although the Portfolio generally invests only in securities that
are regularly traded on recognized exchanges or in over-the-counter markets,
from time to time foreign securities may be difficult to liquidate rapidly
without adverse price effects. Certain costs attributable to foreign
investing, such as custody charges and brokerage costs, are higher than those
attributable to domestic investing.
The Portfolio may invest in securities of issuers in developing or emerging
markets and economies. Risks of investing in developing or emerging markets
include:
-- less social, political, and economic stability;
-- smaller securities markets and lower trading volume, which may result
in a lack of liquidity and greater price volatility;
-- certain national policies that may restrict the Portfolio's investment
opportunities, including restrictions on investments in issuers or
industries deemed sensitive to national interests, or expropriation or
confiscation of assets or property, which could result in the
Portfolio's loss of its entire investment in that market; and
-- less developed legal structure governing private or foreign
investments or allowing for judicial redress for injury to private
property.
In addition, brokerage commissions, custodial services, withholding taxes, and
other costs relating to investments in emerging markets generally are more
expensive than in the U.S. and certain more established foreign markets.
Economies in emerging markets generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be
affected adversely by trade barriers, exchange controls, managed adjustments
in relative currency values, and other protectionist measures negotiated or
imposed by the countries with which they trade.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Portfolio could be significantly affected by
changes in foreign currency exchange rates. The value of the Portfolio's
assets denominated in foreign currencies will increase or decrease in response
to fluctuations in the value of those foreign currencies relative to the U.S.
dollar. Currency exchange rates can be volatile at times in response to supply
and demand in the currency exchange markets, international balances of
payments, governmental intervention, speculation and other political and
economic conditions.Portfolio may purchase and sell foreign currency on a spot
basis and may engage in forward currency contracts, currency options, and
futures transactions for hedging or any other lawful purpose. (See "Derivative
Instruments".)
FOREIGN INVESTMENT COMPANIES
Some of the countries in which the Portfolio invests may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. Investing through such
vehicles may involve frequent or layered fees or expenses and may also be
subject to limitation under the Investment Company Act of 1940 (the "1940
Act").
DERIVATIVE INSTRUMENTS
Derivative instruments may be used by the Portfolio for any lawful purpose
consistent with the Portfolio's investment objective, including hedging or
managing risk but not for speculation. Derivative instruments are securities
or agreements whose value is derived from the value of some underlying asset,
for example, securities, currencies, reference indexes, or commodities.
Options, futures, and options on futures transactions are considered
derivative transactions. Derivatives generally have investment characteristics
that are based upon either forward contracts (under which one party is
obligated to buy and the other party is obligated to sell an underlying asset
at a specific price on a specified date) or option contracts (under which the
holder of the option has the right but not the obligation to buy or sell an
underlying asset at a specified price on or before a specified date).
Consequently, the change in value of a forward-based derivative generally is
roughly proportional to the change in value of the underlying asset. In
contrast, the buyer of an option-based derivative generally will benefit from
favorable movements in the price of the underlying asset but is not exposed to
corresponding losses due to adverse movements in the value of the underlying
asset. The seller of an option-based derivative generally will receive fees or
premiums but generally is exposed to losses due to changes in the value of the
underlying asset. Derivative transactions may include elements of leverage
and, accordingly, the fluctuation of the value of the derivative transaction
in relation to the underlying asset may be magnified. In addition to options,
futures, and options on futures transactions, derivative transactions may
include short sales against the box, in which the Portfolio sells a security
it owns for delivery at a future date; swaps, in which the two parties agree
to exchange a series of cash flows in the future, such as interest-rate
payments; interest-rate caps, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates exceed
a specified rate, or "cap"; and interest-rate floors, under which, in return
for a premium, one party agrees to make payments to the other to the extent
that interest rates fall below a specified level, or "floor." Derivative
transactions may also include forward currency contracts and foreign currency
exchange-related securities.
Derivative instruments may be exchange-traded or traded in over-the-counter
transactions between private parties. Over-the-counter transactions are
subject to the credit risk of the counterparty to the instrument and are less
liquid than exchange-traded derivatives since they often can only be closed
out with the other party to the transaction. When required by SEC guidelines,
the Portfolio will set aside permissible liquid assets or securities positions
that substantially correlate to the market movements of the derivatives
transactions in a segregated account to secure its obligations under
derivative transactions. In order to maintain its required cover for a
derivative transaction, the Portfolio may need to sell portfolio securities at
disadvantageous prices or times since it may not be possible to liquidate a
derivative position.
The successful use of derivative transactions by the Portfolio is dependent
upon the Sub-Adviser's ability to correctly anticipate trends in the
underlying asset. To the extent that the Portfolio is engaging in derivative
transactions other than for hedging purposes, the Portfolio's successful use
of such transactions is more dependent upon the Sub-Adviser's ability to
correctly anticipate such trends, since losses in these transactions may not
be offset in gains in the Portfolio's investments or in lower purchase prices
for assets it intends to acquire. The Sub-Adviser's prediction of trends in
underlying assets may prove to be inaccurate, which could result in
substantial losses to the Portfolio. Hedging transactions are also subject to
risks. If the Sub-Adviser incorrectly anticipates trends in the underlying
asset, the Portfolio may be in a worse position than if no hedging had
occurred. In addition, there may be imperfect correlation between the
Portfolio's derivative transactions and the instruments being hedged.
ILLIQUID SECURITIES
The Portfolio may invest up to 15% of its net assets in illiquid securities.
Illiquid securities are those securities that are not readily marketable,
including restricted securities and repurchase obligations maturing in more
than seven days. Certain restricted securities that may be resold to
institutional investors pursuant to Rule 144A under the Securities Act of 1933
and Section 4(2) commercial paper may be considered liquid under guidelines
adopted by the Trust's Board of Trustees.
SMALL COMPANIES
The Portfolio may, from time to time, invest a substantial portion of its
assets in small companies. While smaller companies generally have potential
for rapid growth, investments in smaller companies often involve greater risks
than investments in larger, more established companies because smaller
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition,
in many instances the securities of smaller companies are traded only
over-the-counter or on a regional securities exchange, and the frequency and
volume of their trading is substantially less than is typical of larger
companies. Therefore, the securities of smaller companies may be subject to
greater and more abrupt price fluctuations. When making large sales, the
Portfolio may have to sell portfolio holdings at discounts from quoted prices
or may have to make a series of small sales over an extended period of time
due to the trading volume of smaller company securities. Investors should be
aware that, based on the foregoing factors, an investment in the Portfolio may
be subject to greater price fluctuations than an investment in a fund that
invests primarily in larger, more established companies. The Sub-Adviser's
research efforts may also play a greater role in selecting securities for the
Portfolio than in a fund that invests in larger, more established companies.
DEBT OBLIGATIONS
IN GENERAL. Debt obligations in which the Portfolio may invest will primarily
be investment grade debt obligations, although the Portfolio may invest up to
5% of its assets in non-investment grade debt obligations. The market value of
all debt obligations is affected by changes in the prevailing interest rates.
The market value of such instruments generally reacts inversely to interest
rate changes. If the prevailing interest rates decline, the market value of
debt obligations generally increases. If the prevailing interest rates
increase, the market value of debt obligations generally decreases. In
general, the longer the maturity of a debt obligation, the greater its
sensitivity to changes in interest rates.
Investment-grade debt obligations include:
-- bonds or bank obligations rated in one of the four highest rating
categories of any NRSRO (e.g., BBB or higher by S&P);
-- U.S. government securities (as defined below);
-- commercial paper rated in one of the three highest ratings categories
of any NRSRO (e.g., A-3 or higher by S&P);
-- short-term notes rated in one of the two highest rating categories
(e.g., SP-2 or higher by S&P;
-- short-term bank obligations that are rated in one of the three highest
categories by any NRSRO (e.g., A-3 or higher by S&P), with respect to
obligations maturing in one year or less;
-- repurchase agreements involving investment-grade debt obligations; or
-- unrated debt obligations which are determined by the Sub-Adviser to be
of comparable quality.
All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by the Sub-Adviser to
consider what action, if any, the Portfolio should take consistent with its
investment objective. Securities rated in the fourth highest category (e.g.,
BBB by S&P), although considered investment-grade, have speculative
characteristics and may be subject to greater fluctuations in value than
higher-rated securities. Non-investment-grade debt obligations include:
-- securities rated as low as C by S&P or their equivalents;
-- commercial paper rated as low as C by S&P or its equivalents; and
-- unrated debt securities judged to be of comparable quality by the Sub-
Adviser.
GOVERNMENT SECURITIES. U.S. government securities are issued or guaranteed by
the U.S. government or its agencies or instrumentalities. Securities issued by
the government include U.S. Treasury obligations, such as Treasury bills,
notes, and bonds. Securities issued by government agencies or
instrumentalities include, for example, obligations of the following:
-- the Federal Housing Administration, Farmers Home Administration,
Export- Import Bank of the United States, Small Business
Administration, and the Government National Mortgage Association,
including GNMA pass-through certificates, whose securities are
supported by the full faith and credit of the United States;
-- the Federal Home Loan Banks, Federal Intermediate Credit Banks, and
the Tennessee Valley Authority, whose securities are supported by the
right of the agency to borrow from the U.S. Treasury;
-- the Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality; and
-- the Student Loan Marketing Association, the Interamerican Development
Bank, and International Bank for Reconstruction and Development,
whose securities are supported only by the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
WHEN-ISSUED SECURITIES
The Portfolio may invest without limitation in securities purchased on a
when-issued or delayed delivery basis. Although the payment and interest terms
of these securities are established at the time the purchaser enters into the
commitment, these securities may be delivered and paid for at a future date,
generally within 45 days. Purchasing when-issued securities allows the
Portfolio to lock in a fixed price or yield on a security it intends to
purchase. However, when the Portfolio purchases a when-issued security, it
immediately assumes the risk of ownership, including the risk of price
fluctuation.
The greater the Portfolio's outstanding commitments for these securities, the
greater the exposure to potential fluctuations in the net asset value of the
Portfolio. Purchasing when-issued securities may involve the additional risk
that the yield available in the market when the delivery occurs may be higher
or the market price lower than that obtained at the time of commitment.
Although the Portfolio may be able to sell these securities prior to the
delivery date, it will purchase when-issued securities for the purpose of
actually acquiring the securities, unless after entering into the commitment a
sale appears desirable for investment reasons. When required by SEC
guidelines, the Portfolio will set aside permissible liquid assets in a
segregated account to secure its outstanding commitments for when-issued
securities.
PORTFOLIO TURNOVER
The annual portfolio turnover rate indicates changes in the Portfolio's
nvestments. The turnover rate may vary from year to year, as well as within a
year. It may also be affected by sales of portfolio securities necessary to
meet cash requirements for redemptions of shares.The Portfolio will not
generally trade in securities for short-term profits, but, when the
Sub-Adviser determines that circumstances warrant, securities may be purchased
and sold without regard to the length of time held. Under normal market
conditions, it is anticipated that the rate of portfolio turnover of the
Portfolio generally will not exceed 150%. However, this rate should not be
considered as a limiting factor.
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER
Under an Investment Advisory Agreement dated January 9, 1996, LPIMC Insurance
Marketing Services, 1755 Creekside Oaks Drive, Sacramento, CA 95833 (the
"Adviser"), manages the investment strategies and policies of the Portfolios
and the Trust, subject to the control of the Trustees.
The Adviser is a registered investment adviser organized under the laws of
California. The Adviser is a wholly-owned subsidiary of the Life Company.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate
a continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies and restrictions and to determine from time to time securities to be
purchased, sold, retained or lent by the Trust and implement those decisions.
The Investment Advisory Agreement also provides that the Adviser shall manage
the Trust's business and affairs and shall provide such services required for
effective administration of the Trust as are now provided by employees or
other agents engaged by the Trust. The Investment Advisory Agreement further
provides that the Adviser shall furnish the Trust with office space and
necessary personnel, pay ordinary office expenses, pay all executive salaries
of the Trust and furnish, without expense to the Trust, the services of such
members of its organization as may be duly elected officers or Trustees of the
Trust. The Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at the Adviser's own cost and expense, for the purpose of
managing the investment of the assets of one or more Portfolios of the Trust.
As full compensation for its services under the Investment Advisory Agreement
with respect to the Strong Growth Portfolio, the Trust will pay the Adviser a
monthly fee at the following annual rates based on the average daily net
assets of the Portfolio.
<TABLE>
<CAPTION>
<S> <C>
PORTFOLIO ADVISORY FEE
Strong Growth Portfolio .75% of first $150 million of
average daily net assets
.70% of next $350 million of average
daily net assets
.65% of average daily net assets
over and above $500 million.
</TABLE>
ADVISORY FEE WAIVER
The Adviser has agreed to waive .25% of its advisory fee for the Portfolio for
the initial six (6) months of the Portfolio's investment operations.
EXPENSE REIMBURSEMENT
The Life Company has voluntarily agreed to reimburse the Portfolio for certain
expenses (excluding brokerage commissions and management fees) in excess of
1.29%. The Life Company has reserved the right to withdraw or modify its
policy of expense reimbursement for the Portfolio. If expenses were not
reimbursed, anticipated actual expenses would be approximately 1.91% for the
year ending 12/31/96.
ORGANIZATIONAL EXPENSES OF THE TRUST
The Life Company will pay for all organizational expenses of the Trust
including contribution of the initial "seed money" to the Trust.
SUB-ADVISER
The Adviser has engaged the Sub-Adviser for the Portfolio to make investment
decisions and place orders. In accordance with the Portfolio's investment
objective and policies and under the supervision of the Adviser and the
Trust's Board of Trustees, the Portfolio's Sub-Adviser is responsible for the
day to day investment management of the Portfolio, makes investment decisions
for the Portfolio and places orders on behalf of the Portfolio to effect the
investment decisions made as provided in a Sub-Advisory Agreement among the
Sub-Adviser, the Adviser and the Trust.
The Sub-Adviser for the Portfolio is Strong Capital Management, Inc., P.O. Box
2936, Milwaukee, WI 53201-2936.
The Sub-Adviser began conducting business in 1974. Since then, its principal
business has been providing continuous investment supervision for mutual
funds, individuals, and institutional accounts, such as pension funds and
profit-sharing plans. As of December 30, 1995, the Sub-Adviser had
approximately $16 billion under management. Mr. Richard S. Strong is the
controlling shareholder of the Sub-Adviser. The Sub-Adviser also acts as
investment adviser for each of the mutual funds comprising the Strong Family
of Funds.
Mr. Ronald C. Ognar, a Chartered Financial Analyst with more than 25 years of
investment experience, joined the Sub-Adviser in April 1993 after two years as
a principal and portfolio manager with RCM Capital Management. For
approximately three years prior to that, he was a portfolio manager at Kemper
Financial Services in Chicago. Mr. Ognar began his investment career in 1968
at LaSalle National Bank in Chicago after serving two years in the U.S. Army.
He received his bachelor's degree in accounting from the University of
Illinois in 1968.
SUB-ADVISORY FEES
Under the terms of the Sub-Advisory Agreement, the Adviser shall pay to the
Sub-Adviser, as full compensation for services rendered under the Sub-Advisory
Agreement with respect to the Portfolio, monthly fees at the following annual
rates based on the average daily net assets of the Portfolio.
<TABLE>
<CAPTION>
<S> <C>
PORTFOLIO SUB-ADVISORY FEE
Strong Growth Portfolio .50% of first $150 million of
average daily net assets.
.45% of the next $350 million of
average daily net assets
.40% of average daily net assets
over and above $500 million
</TABLE>
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the
Trust will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees
and charges relating to the VA Contract.)
The separate account of the Life Company places orders to purchase and redeem
shares of each Portfolio based on, among other things, the amount of
contributions to be invested and surrender and transfer requests to be
effected on that day pursuant to the VA contracts issued by the Life Company.
Orders received by the Trust are effected on days on which the New York Stock
Exchange is open for trading, at the net asset value per share next determined
after receipt of the order. For orders received before 4:00 p.m. New York
time, such purchases and redemptions of shares of each Portfolio are effected
at the respective net asset values per share determined as of 4:00 p.m. New
York time on that day. See "Net Asset Value", below and "Determination of Net
Asset Value" in the Trust's SAI. Payment for redemptions will be made within
seven days after receipt of a redemption request in good order. No fee is
charged the separate account of the Life Company when it redeems Portfolio
shares. The Trust may suspend the sale of shares at any time and may refuse
any order to purchase shares.
The Trust may suspend the right of redemption of shares of any Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than for customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted; (ii) when
the Securities and Exchange Commission determines that a state of emergency
exists which makes the sale of portfolio securities or the determination of
net asset value not reasonably practicable; (iii) as the Securities and
Exchange Commission may by order permit for the protection of the security
holders of the Trust; or (iv) at any time when the Trust may, under applicable
laws and regulations, suspend payment on the redemption of its shares.
NET ASSET VALUE
Each Portfolio calculates the net asset value of its shares by dividing the
total value of its assets (the securities held by the Portfolio, plus any cash
or other assets, including interest and dividends accrued but not yet
received), less its total liabilities, by the total number of shares
outstanding. Shares are valued as of the close of trading on the New York
Stock Exchange (usually considered 4:00 p.m. Eastern Time) each day the New
York Stock Exchange is open. Portfolio securities for which market quotations
are readily available are stated at market value. Short-term investments that
will mature in 60 days or less are valued using amortized cost, which the
Trust's Board of Trustees has determined approximates market value. Amortized
cost valuation means that a debt security with a maturity at purchase of 60
days or less is valued at its acquisition cost and a debt security originally
purchased with a maturity in excess of 60 days, which currently has a maturity
of 60 days or less, is valued at the market or fair value of the security on
the 61st day prior to maturity (each as adjusted for amortization of premium
or discount) rather than at current market value. All other securities and
assets are valued at their fair value following procedures approved by the
Trust's Board of Trustees. See "Determination of Net Asset Value" in the SAI
for a description of the special valuation procedures for options and futures
contracts.
Certain Portfolios are expected to invest in foreign securities listed on
foreign stock exchanges or debt securities of the United States and foreign
governments and corporations. Some of these securities trade on days other
than Business Days, as defined below. Foreign securities quoted in foreign
currencies are translated into United States dollars at the exchange rates at
1:00 p.m. Eastern Time or at such other rates as a Sub-Adviser may determine
to be appropriate in computing net asset value. As a result, fluctuations in
the value of such currencies in relation to the United States dollar will
affect the net asset value of a Portfolio's shares even though there has not
been any change in the market values of such securities.
Because of time zone differences, foreign exchanges and securities markets
will usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be
determined as of the earlier closing of such exchanges and securities markets.
However, events affecting the values of such foreign securities may
occasionally occur between the earlier closing of such exchanges and
securities markets and the closing of the New York Stock Exchange which will
not be reflected in the computation of the net asset value of the Portfolios.
If an event materially affecting the value of such foreign securities occurs
during such period of which a Sub-Adviser becomes aware, then such securities
will be valued at fair value as determined in good faith, or in accordance
with procedures adopted, by the Trust's Board of Trustees.
PERFORMANCE INFORMATION
Performance information for each of the Portfolios may also be presented from
time to time in advertisements and sales literature. The Portfolios may
advertise several types of performance information. These are the "yield,"
"average annual total return" and "aggregate total return". Each of these
figures is based upon historical results and is not necessarily representative
of the future performance of any Portfolio.
The yield of a Portfolio's shares is determined by annualizing net investment
income earned per share for a stated period (normally one month or thirty
days) and dividing the result by the net asset value per share at the end of
the valuation period. The average annual total return and aggregate total
return figures measure both the net investment income generated by, and the
effect of any realized or unrealized appreciation or depreciation of the
underlying investments in, the Portfolio's portfolio for the period in
question, assuming the reinvestment of all dividends. Thus, these figures
reflect the change in the value of an investment in a Portfolio's shares
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter
(or if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Portfolio). Average annual total return
figures are annualized and, therefore, represent the average annual percentage
change over the period in question. Total return figures are not annualized
and represent the aggregate percentage or dollar value change over the period
in question. For more information regarding the computation of yield, average
annual total return and aggregate total return, see "Performance Information"
in the SAI.
Any Portfolio performance information presented will also include performance
information for the Life Company separate accounts investing in the Trust
which will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
Sub-Advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec
Research Survey of Non-U.S. Equity Fund Returns, Frank Russell International
Universe, Kiplinger's Personal Finance, and Financial Services Week. Any
such comparisons or rankings are based on past performance and the statistical
computation performed by publications and services, and are not necessarily
indications of future performance. Because the Portfolios are managed
investment vehicles investing in a wide variety of securities, the securities
owned by a Portfolio will not match those making up an index.
Although the Strong Growth Portfolio is newly-organized and does not yet have
its own performance record, it has the same investment objective and follows
substantially the same investment strategies as the Strong Growth Fund, a
mutual fund whose shares are sold to the public. The Sub-Adviser for the
Strong Growth Portfolio is the investment adviser of the Strong Growth Fund.
Set forth below is the historical performance of the Strong Growth Fund.
Investors should not consider this performance data as an indication of the
future performance of the Strong Growth Portfolio. The performance figures
shown below reflect the deduction of the historical fees and expenses paid by
the Strong Growth Fund, and not those to be paid by the Portfolio. The
figures also do not reflect the deduction of any insurance fees or charges
which are imposed by the Life Company in connection with its sale of VA
Contracts. Investors should refer to the separate account prospectus
describing the VA Contracts for information pertaining to these insurance fees
and charges. The insurance separate account fees will have a detrimental
effect on the performance of the Portfolio. The results shown reflect the
reinvestment of dividends and distributions, and were calculated in the same
manner that will be used by the Strong Growth Portfolio to calculate its own
performance.
The following table shows the average annualized total returns for the fiscal
year ended December 31, 1995, of a 1-year investment and of an investment
since inception in the Strong Growth Fund, as well as a comparison with the
Standard & Poor's 500 Composite Stock Price Index, an unmanaged index
generally considered to be representative of the stock market.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SINCE INCEPTION
FUND 1 YEAR INCEPTION DATE
Strong Growth Fund _____% _____% 12/31/93
Standard & Poor's 500 Stock Index _____% _____% From 1/1/94
</TABLE>
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
Each Portfolio of the Trust intends to qualify and elect to be treated as a
regulated investment company that is taxed under the rules of Subchapter M of
the Internal Revenue Code. As such an electing regulated investment company,
a Portfolio will not be subject to federal income tax on its net ordinary
income and net realized capital gains to the extent that at least 90% of such
income and gains are distributed to the separate account of the Life Company
which hold its shares. For further information concerning federal income tax
consequences for the holders of the VA Contracts of the Life Company,
investors should consult the prospectus used in connection with the issuance
of their VA Contracts.
Each of the Portfolios will declare and distribute dividends from net ordinary
income at least annually and will distribute its net realized capital gains,
if any, at least annually. Distributions of ordinary income and capital gains
will be made in shares of such Portfolios unless an election is made on behalf
of a separate account to receive distributions in cash. The Life Company will
be informed at least annually about the amount and character of distributions
from the Trust for federal income tax purposes.
ADDITIONAL INFORMATION
The Trust was established as a Massachusetts business trust under the laws of
Massachusetts by a Declaration of Trust dated January 23, 1995, as amended
(the "Declaration of Trust"). Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. The Declaration of Trust contains an
express disclaimer of shareholder liability in connection with Trust property
or the acts, obligations, or affairs of the Trust. The Declaration of Trust
also provides for indemnification out of a Portfolio's property of any
shareholder of that Portfolio held personally liable for the claims and
liabilities to which a shareholder may become subject by reason of being or
having been a shareholder. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Portfolio itself would be unable to meet its obligations. A copy
of the Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts.
The Trust has an unlimited authorized number of shares of beneficial interest.
Shares of the Trust are entitled to one vote per share (with proportional
voting for fractional shares) and are freely transferable, and, in liquidation
of a Portfolio, shareholders of the Portfolio are entitled to receive pro rata
the net assets of the Portfolio. Although no Portfolio is required to hold
annual meetings of its shareholders, shareholders have the right to call a
meeting to elect or remove Trustees or to take other actions as provided in
the Declaration of Trust. Shareholders have no preemptive rights.
The Trust is authorized to subdivide each series (Portfolio) into two or more
classes. Currently, shares of the Portfolios are divided into Class A and
Class B. Each class of shares of a Portfolio is entitled to the same rights
and privileges as all other classes of the Portfolio, provided however, that
each class bears the expenses related to its distribution arrangements, as
well as any other expenses attributable to the class and unrelated to managing
the Portfolio's portfolio securities. Any matter that affects only the
holders of a particular class of shares may be voted on only by such
shareholders. Through this Prospectus, the Trust offers Class A shares in the
Portfolio.
The Trust's custodian is State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
PART B
LPT VARIABLE INSURANCE SERIES TRUST
FORM N-1A
PART B
STATEMENT OF ADDITIONAL INFORMATION
_______________, 1996
This Statement of Additional Information (this "SAI") contains information
which may be of interest to investors but which is not included in the
Prospectus of LPT Variable Insurance Series Trust (the "Trust"). This SAI is
not a prospectus and is only authorized for distribution when accompanied or
preceded by the Prospectus of the Trust dated January __, 1996. This SAI
should be read together with the Prospectus. Investors may obtain a free copy
of the Prospectus by calling London Pacific Life and Annuity Company ("Life
Company") at (800) 852-3152.
THIS SAI CONTAINS INFORMATION RELATING TO ALL PORTFOLIOS OF THE TRUST.
TABLE OF CONTENTS
PAGE
DEFINITIONS
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
DESCRIPTION OF SECURITIES, INVESTMENT POLICIES AND RISK FACTORS
Repurchase Agreements
Mortgage Dollar Rolls and Reverse Repurchase Agreements
Illiquid or Restricted Securities
Mortgage- and Asset-Backed Securities
Collateralized Mortgage Obligations (CMOs)
Foreign Securities
Depositary Receipts
Lending of Portfolio Securities
Borrowing
High-Yield (High Risk) Securities
In General
Effect of Interest Rates and Economic Changes
Payment Expectations
Credit Ratings
Liquidity and Valuation
Recent and Proposed Legislation
U.S. Government Obligations
U.S. Government Agency Securities
Bank Obligations
Savings and Loan Obligations
Price Volatility
Maturity
Credit Quality
Temporary Defensive Position
Short-Term Corporate Debt Instruments
Municipal Obligations
Municipal Lease Obligations
Eurodollar and Yankee Obligations
Brady Bonds
When Issued Securities and Forward Commitment Contracts
Warrants
Zero-Coupon, Step-Coupon and Pay-in-Kind Securities
Floating and Variable Rate Instruments
Short Sales Against the Box
Inverse Floating Rate Obligations
Loan Participations and Other Direct Indebtedness
Indexed Securities
Other Investment Companies
Foreign Investment Companies
Swaps and Related Transactions
Derivative Instruments
General Description
Special Risks of These Instruments
General Limitations on Certain Derivative Transactions
Options
Yield Curve Options
Spread Transactions
Futures Contracts
Foreign Currency-Related Derivative Strategies-Special Considerations
Forward Currency Contracts
Foreign Currency Transactions
Hybrid Instruments
Combined Transactions
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
Strong International Stock Portfolio and Strong Growth Portfolio
Salomon U.S. Quality Bond Portfolio
Salomon Money Market Portfolio
MAS Value Portfolio
Lexington Corporate Leaders Portfolio
Berkeley Smaller Companies Portfolio
MFS Total Return Portfolio
Non-Fundamental Investment Restrictions
Strong International Stock Portfolio and Strong Growth Portfolio
Salomon U.S. Quality Bond Portfolio
MAS Value Portfolio
Lexington Corporate Leaders Portfolio
Berkeley Smaller Companies Portfolio
MFS Total Return Portfolio
MANAGEMENT OF THE TRUST
Sub-Advisers
Brokerage and Research Services
Investment Decisions
DETERMINATION OF NET ASSET VALUE
TAXES
DIVIDENDS AND DISTRIBUTIONS
PERFORMANCE INFORMATION
SHAREHOLDER COMMUNICATIONS
ORGANIZATION AND CAPITALIZATION
PORTFOLIO TURNOVER
CUSTODIAN
LEGAL COUNSEL
INDEPENDENT ACCOUNTANTS
SHAREHOLDER LIABILITY
DESCRIPTION OF NRSRO RATINGS
FINANCIAL STATEMENTS
LPT VARIABLE INSURANCE SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
CLASS A SHARES
DEFINITIONS
The "Trust" -- LPT Variable Insurance Series Trust.
"Adviser" -- LPIMC Insurance Marketing Services,
the Trust's investment adviser.
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
The Trust currently offers shares of beneficial interest of eight series (the
"Portfolios") with separate investment objectives and policies. The
investment objectives and policies of each of the Portfolios of the Trust are
described in the Prospectus. This SAI contains additional information
concerning certain investment practices and investment restrictions of the
Trust.
Except as described below under "Investment Restrictions", the investment
objectives and policies described in the Prospectus and in this SAI are not
fundamental, and the Trustees may change the investment objectives and
policies of a Portfolio without an affirmative vote of shareholders of the
Portfolio.
DESCRIPTION OF SECURITIES, INVESTMENT POLICIES AND RISK FACTORS
The Prospectus for each Portfolio indicates the extent to which each
Portfolio may purchase the instruments or engage in the investment activities
described below. The discussion below supplements the information set forth
in the Portfolio Prospectuses.
REPURCHASE AGREEMENTS
The Portfolios may enter into repurchase agreements with certain banks or
non-bank dealers. In a repurchase agreement, the Portfolio buys a security at
one price, and at the time of sale, the seller agrees to repurchase the
obligation at a mutually agreed upon time and price (usually within seven
days). The repurchase agreement, thereby, determines the yield during the
purchaser's holding period, while the seller's obligation to repurchase is
secured by the value of the underlying security. Repurchase agreements permit
a Portfolio to keep all its assets at work while retaining "overnight"
flexibility in pursuit of investments of a longer-term nature. The
Sub-Adviser for each Portfolio will monitor, on an ongoing basis, the value of
the underlying securities to ensure that the value always equals or exceeds
the repurchase price plus accrued interest. Repurchase agreements could
involve certain risks in the event of a default or insolvency of the other
party to the agreement, including possible delays or restrictions upon a
Portfolio's ability to dispose of the underlying securities. Each Portfolio
will enter into repurchase agreements only with banks or dealers, which in the
opinion of each Portfolio's Sub-Adviser based on guidelines established by the
Trust's Board of Trustees, are deemed creditworthy. A Portfolio may, under
certain circumstances, deem repurchase agreements collateralized by U.S.
government securities to be investments in U.S. government securities.
Repurchase agreements with maturities of more than seven days will be treated
as illiquid securities by the Portfolios.
The Salomon U.S. Quality Bond Portfolio may invest in open repurchase
agreements which vary from the typical agreement in the following respects:
(1) the agreement has no set maturity, but instead matures upon 24 hours'
notice to the seller; and (2) the repurchase price is not determined at the
time the agreement is entered into, but is instead based on a variable
interest rate and the duration of the agreement.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
A Portfolio may engage in reverse repurchase agreements to facilitate
portfolio liquidity, a practice common in the mutual fund industry; to earn
additional income on portfolio securities, such as Treasury bills and notes;
or, with respect to the Strong International Stock Portfolio and the Strong
Growth Portfolio, for arbitrage transactions discussed below. In a reverse
repurchase agreement, a Portfolio temporarily transfers possession of a
security to another party, such as a bank, in return for cash, and agrees to
buy the security back at a future date and price. In a reverse repurchase
agreement, the Portfolio generally retains the right to interest and principal
payments on the security. Since a Portfolio receives cash upon entering into a
reverse repurchase agreement, it may be considered a borrowing and therefore
is subject to the overall percentage limitations on borrowings and the
restrictions on the purposes of borrowing described therein. (See "Borrowing"
and "Investment Restrictions.") When required by guidelines of the Securities
and Exchange Commission ("SEC"), a Portfolio will set aside permissible liquid
assets in a segregated account to secure its obligations to repurchase the
security.
A Portfolio may also enter into mortgage dollar rolls, in which the Portfolio
would sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While the Portfolio would forego principal and
interest paid on the mortgage-backed securities during the roll period, the
Portfolio would be compensated by the difference between the current sales
price and the lower price for the future purchase as well as by any interest
earned on the proceeds of the initial sale. The Portfolio also could be
compensated through the receipt of fee income equivalent to a lower forward
price. At the time the Portfolio would enter into a mortgage dollar roll, it
would set aside permissible liquid assets in a segregated account to secure
its obligation for the forward commitment to buy mortgage-backed securities.
Mortgage dollar roll transactions may be considered a borrowing by the
Portfolio. (See "Borrowing.")
The mortgage dollar rolls and reverse repurchase agreements entered into by
the Strong International Stock and Strong Growth Portfolios may be used as
arbitrage transactions in which a Portfolio will maintain an offsetting
position in investment grade debt obligations or repurchase agreements that
mature on or before the settlement date on the related mortgage dollar roll or
reverse repurchase agreement. Since a Portfolio will receive interest on the
securities or repurchase agreements in which it invests the transaction
proceeds, such transactions may involve leverage. However, since such
securities or repurchase agreements will be high quality and will mature on or
before the settlement date of the mortgage dollar roll or reverse repurchase
agreement, the Sub-Adviser believes that such arbitrage transactions do not
present the risks to the Portfolios that are associated with other types of
leverage.
ILLIQUID OR RESTRICTED SECURITIES
A Portfolio may invest in securities that are considered illiquid because of
the absence of a readily available market or due to legal or contractual
restrictions. Each Portfolio may invest up to 15% of its net assets in such
securities or, with respect to the Strong International Stock Portfolio and
Strong Growth Portfolio, such other amounts as may be permitted under the
Investment Company Act of 1940 ("1940 Act"), (except 10% with respect to the
Salomon Money Market Portfolio and 5% with respect to the Berkeley Smaller
Companies Portfolio). The Board of Trustees of the Trust has the ultimate
authority to determine, to the extent permissible under the federal securities
laws, which securities are illiquid for purposes of these limitations. Certain
securities exempt from registration or issued in transactions exempt from
registration under the Securities Act of 1933, as amended (the "1933 Act"),
including securities that may be resold pursuant to Rule 144A under the 1933
Act, may be considered liquid. The Board of Trustees has adopted guidelines
and delegated to the Sub-Advisers the daily function of determining and
monitoring the liquidity of Rule 144A securities, although it has retained
oversight and ultimate responsibility for such determinations. Although no
definitive liquidity criteria are used, the Board of Trustees has directed the
Sub-Advisers to look to such factors as (i) the nature of the market for a
security (including the institutional private resale market), (ii) the terms
of certain securities or other instruments allowing for the disposition to a
third party or the issuer thereof (e.g., certain repurchase obligations and
demand instruments), (iii) the availability of market quotations (e.g. for
securities quoted in the PORTAL system), and (iv) other permissible relevant
factors.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the 1933 Act. Where registration is required, a Portfolio may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Portfolio may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to
develop, a Portfolio might obtain a less favorable price than prevailed when
it decided to sell. Restricted securities will be priced at fair value as
determined in good faith by the Board of Trustees of the Trust. If through
the appreciation of restricted securities or the depreciation of unrestricted
securities, a Portfolio should be in a position where it has exceeded its
maximum percentage limitation with respect to its net assets which are
invested in illiquid assets, including restricted securities which are not
readily marketable, the Portfolio will take such steps as is deemed advisable,
if any, to protect liquidity.
A Portfolio may sell over-the-counter ("OTC") options and, in connection
therewith, segregate assets or cover its obligations with respect to OTC
options written by the Portfolio. The assets used as cover for OTC options
written by the Portfolio will be considered illiquid unless the OTC options
are sold to qualified dealers who agree that the Portfolio may repurchase any
OTC option it writes at a maximum price to be calculated by a formula set
forth in the option agreement. The cover for an OTC option written subject to
this procedure would be considered illiquid only to the extent that the
maximum repurchase price under the formula exceeds the intrinsic value of the
option.
Notwithstanding the above, the Sub-Adviser for the Strong International Stock
Portfolio and the Strong Growth Portfolio intends, as a matter of internal
policy, to limit each of such Portfolio's investments in illiquid securities
to 10% of its net assets.
MORTGAGE- AND ASSET-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities, such as the Government National
Mortgage Association and the Federal National Mortgage Association, or by
private issuers, generally originators and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks, investment
bankers, and special purpose entities (collectively, "private lenders").
Mortgage-backed securities issued by private lenders may be supported by pools
of mortgage loans or other mortgage-backed securities that are guaranteed,
directly or indirectly, by the U.S. government or one of its agencies or
instrumentalities, or they may be issued without any governmental guarantee of
the underlying mortgage assets but with some form of non-governmental credit
enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first lien
mortgage loans or interests therein, but include assets such as motor vehicle
installment sales contracts, other installment loan contracts, home equity
loans, leases of various types of property, and receivables from credit card
or other revolving credit arrangements. Payments or distributions of
principal and interest on asset-backed securities may be supported by
non-governmental credit enhancements similar to those utilized in connection
with mortgage-backed securities.
The yield characteristics of mortgage- and asset-backed securities differ
from those of traditional debt securities. Among the principal differences
are that interest and principal payments are made more frequently on mortgage-
and asset-backed securities, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if a Portfolio purchases
these securities at a premium, a prepayment rate that is faster than expected
will reduce yield to maturity, while a prepayment rate that is slower than
expected will have the opposite effect of increasing the yield to maturity.
Conversely, if a Portfolio purchases these securities at a discount, a
prepayment rate that is faster than expected will increase yield to maturity,
while a prepayment rate that is slower than expected will reduce yield to
maturity. Amounts available for reinvestment by the Portfolio are likely to
be greater during a period of declining interest rates and, as a result, are
likely to be reinvested at lower interest rates than during a period of rising
interest rates. Accelerated prepayments on securities purchased by a
Portfolio at a premium also impose a risk of loss of principal because the
premium may not have been fully amortized at the time the principal is prepaid
in full. The market for privately issued mortgage- and asset-backed
securities is smaller and less liquid than the market for government-sponsored
mortgage-backed securities.
A Portfolio may invest in stripped mortgage- or asset-backed securities,
which receive differing proportions of the interest and principal payments
from the underlying assets. The market value of such securities generally is
more sensitive to changes in prepayment and interest rates than is the case
with traditional mortgage- and asset-backed securities, and in some cases such
market value may be extremely volatile. With respect to certain stripped
securities, such as interest only and principal only classes, a rate of
prepayment that is faster or slower than anticipated may result in a Portfolio
failing to recover all or a portion of its investment, even though the
securities are rated investment grade.
STRIPPED MORTGAGE SECURITIES. The Portfolio may purchase stripped mortgage
securities which are derivative multiclass mortgage securities. Stripped
mortgage securities may be issued by agencies or instrumentalities of the U.S.
government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Stripped
mortgage securities have greater volatility than other types of mortgage
securities. Although stripped mortgage securities are purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers, the market for such securities has not yet been fully
developed. Accordingly, stripped mortgage securities are generally illiquid
and to such extent, together with any other illiquid investments, will be
subject to the Portfolio's applicable restriction on investments in illiquid
securities.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped
mortgage security will have at least one class receiving only a small portion
of the interest and a larger portion of the principal from the mortgage
assets, while the other class will receive primarily interest and only a small
portion of the principal. In the most extreme case, one class will receive
all of the interest ("IO" or interest-only), while the other class will
receive all of the principal ("PO" or principal-only class). The yield to
maturity on IOs, POs and other mortgage-backed securities that are purchased
at a substantial premium or discount generally are extremely sensitive not
only to changes in prevailing interest rates but also to the rate of principal
payments (including pre-payments) on the related underlying mortgage assets,
and a rapid rate of principal payments may have a material adverse effect on
such securities' yield to maturity. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Portfolio
may fail to fully recoup its initial investment in these securities even if
the securities have received the highest rating by a nationally recognized
statistical rating organization.
In addition to the stripped mortgage securities described above, the
Portfolio may invest in similar securities such as Super POs and Levered IOs
which are more volatile than POs, IOs and IOettes. Risks associated with
instruments such as Super POs are similar in nature to those risks related to
investments in POs. Risks connected with Levered IOs and IOettes are similar
in nature to those associated with IOs. The Portfolio may also invest in
other similar instruments developed in the future that are deemed consistent
with its investment objective, policies and restrictions. POs may generate
taxable income from the current accrual of original issue discount, without a
corresponding distribution of cash to the Portfolio.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
CMOs are bonds that are collateralized by whole loan mortgages or mortgage
pass-through securities. The bonds issued in a CMO transaction are divided
into groups, and each group of bonds is referred to as a "tranche." Under the
traditional CMO structure, the cash flows generated by the mortgages or
mortgage pass-through securities in the collateral pool are used to first pay
interest and then pay principal to the CMO bondholders. The bonds issued under
a CMO structure are retired sequentially as opposed to the pro rata return of
principal found in traditional pass-through obligations. Subject to the
various provisions of individual CMO issues the cash flow generated by the
underlying collateral (to the extent it exceeds the amount required to pay the
stated interest) is used to retire the bonds. Under the CMO structure, the
repayment of principal among the different tranches is prioritized in
accordance with the terms of the particular CMO issuance. The "fastest-pay"
tranche of bonds, as specified in the prospectus for the issue, would
initially receive all principal payments. When that tranche of bonds is
retired, the next tranche, or tranches, in the sequence, as specified in the
prospectus, receive all of the principal payments until they are retired. The
sequential retirement of bonds groups continues until the last tranche, or
group of bonds, is retired. Accordingly, the CMO structure allows the issuer
to use cash flows of long maturity, monthly-pay collateral to formulate
securities with short, intermediate and long final maturities and expected
average lives.
In recent years, new types of CMO structures have evolved. These include
floating rate CMOs, planned amortization classes, accrual bonds, and CMO
residuals. These newer structures affect the amount and timing of principal
and interest received by each tranche from the underlying collateral. Under
certain of these new structures, given classes of CMOs have priority over
others with respect to the receipt of prepayments on the mortgages. Therefore,
depending on the type of CMOs in which a Portfolio invests, the investment may
be subject to a greater or lesser risk of prepayment than other types of
mortgage-related securities.
The primary risk of any mortgage security is the uncertainty of the timing of
cash flows. For CMOs, the primary risk results from the rate of prepayments on
the underlying mortgages serving as collateral. An increase or decrease in
prepayment rates (resulting from a decrease or increase in mortgage interest
rates) will affect the yield, average life, and price of CMOs. The prices of
certain CMOs, depending on their structure and the rate of prepayments, can be
volatile. Some CMOs may also not be as liquid as other securities.
FOREIGN SECURITIES
Investment by a Portfolio in securities issued by companies or other issuers
whose principal activities are outside the United States involves significant
risks not present in U.S. investments. The value of securities denominated in
foreign currencies and of dividends and interest paid with respect to such
securities will fluctuate based on the relative strength of the U.S. dollar.
In addition, less publicly available information is generally available about
foreign companies, particularly those not subject to the disclosure and
reporting requirements of the U.S. securities laws. Foreign companies are not
bound by uniform accounting, auditing, and financial reporting requirements
and standards of practice comparable to those applicable to U.S. companies.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the repatriation of monies or other
assets of a Portfolio, political or financial instability or diplomatic and
other developments which could affect such investments. Further, the economies
of particular countries or areas of the world may perform less favorably than
the economy of the U.S. and the U.S. dollar value of securities denominated in
currencies other than the U.S. dollar may be affected unfavorably by exchange
rate movements. Each of these factors could influence the value of a
Portfolio's shares, as well as the value of dividends and interest earned by a
Portfolio and the gains and losses which it realizes. It is anticipated that
in most cases the best available market for foreign securities will be on
exchanges or in over-the-counter markets located outside of the U.S. However,
foreign securities markets, while growing in volume and sophistication, are
generally not as developed as those in the U.S., and securities of some
foreign companies (particularly those located in developing countries) are
generally less liquid and more volatile than securities of comparable U.S.
companies. Foreign security trading practices, including those involving
securities settlement where Portfolio assets may be released prior to receipt
of payment, may expose a Portfolio to increased risk in the event of a failed
trade or the insolvency of a foreign broker-dealer. In addition, foreign
brokerage commissions and other fees are generally higher than on securities
traded in the U.S. and may be non-negotiable. These is less overall
governmental supervision and regulation of securities exchanges, securities
dealers, and listed companies than in the U.S.
The Portfolios may invest in foreign securities that are restricted against
transfer within the U.S. or to U.S. persons. Although securities subject to
such transfer restrictions may be marketable abroad, they may be less liquid
than foreign securities of the same class that are not subject to such
restrictions.
DEPOSITARY RECEIPTS
A Portfolio may invest in foreign securities by purchasing depositary
receipts, including American Depositary Receipts ("ADRs") and European
Depositary Receipts ("EDRs"), or other securities convertible into securities
or issuers based in foreign countries. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. Generally, ADRs, in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets, while EDRs,
in bearer form, may be denominated in other currencies and are designed for
use in European securities markets. ADRs are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities.
EDRs are European receipts evidencing a similar arrangement. For purposes of
a Portfolio's investment policies, ADRs and EDRs are deemed to have the same
classification as the underlying securities they represent. Thus, an ADR or
EDR representing ownership of common stock will be treated as common stock.
ADR facilities may be established as either "unsponsored" or "sponsored."
While ADRs issued under these two types of facilities are in some respects
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants. A
depositary may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depositary requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored
ADRs generally bear all the costs of such facilities. The depositary usually
charges fees upon the deposit and withdrawal of the deposited securities, the
conversion of dividends into U.S. dollars, the disposition of non-cash
distributions, and the performance of other services. The depositary of an
unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. Sponsored ADR facilities are created in generally the
same manner as unsponsored facilities, except that the issuer of the deposited
securities enters into a deposit agreement with the depositary. The deposit
agreement sets out the rights and responsibilities of the issuer, the
depositary and the ADR holders. With sponsored facilities, the issuer of the
deposited securities generally will bear some of the costs relating to the
facility (such as dividend payment fees of the depositary), although ADR
holders continue to bear certain other costs (such as deposit and withdrawal
fees). Under the terms of most sponsored arrangements, depositories agree to
distribute notices of shareholder meetings and voting instructions, and to
provide shareholder communications and other information to the ADR holders at
the request of the issuer of the deposited securities.
LENDING OF PORTFOLIO SECURITIES
A Portfolio is authorized to lend its portfolio securities to broker-dealers
or institutional investors that the Sub-Adviser deems qualified, but only when
the borrower maintains with the Portfolio's custodian bank collateral either
in cash or money market instruments in an amount at least equal to the market
value of the securities loaned, plus accrued interest and dividends,
determined on a daily basis and adjusted accordingly. However, the Portfolios
do not presently intend to engage in such lending. In determining whether to
lend securities to a particular broker-dealer or institutional investor, the
Sub-Adviser will consider, and during the period of the loan will monitor, all
relevant facts and circumstances, including the creditworthiness of the
borrower. A Portfolio will retain authority to terminate any loans at any
time. The Portfolios may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the interest earned
on the cash or money market instruments held as collateral to the borrower or
placing broker. The Portfolios will receive reasonable interest on the loan
or a flat fee from the borrower and amounts equivalent to any dividends,
interest or other distributions on the securities loaned. The Portfolios will
retain record ownership of loaned securities to exercise beneficial rights,
such as voting and subscription rights and rights to dividends, interest or
other distributions, when retaining such rights is considered to be in a
Portfolio's interest.
Other than the Salomon Money Market Portfolio, each of the Portfolios may
lend up to 33 1/3% of the total value of its securities (except 30% with
respect to the MFS Total Return Portfolio and 25% with respect to the Salomon
U.S. Quality Bond Portfolio).
BORROWING
The Portfolios may borrow money from banks, limited by each Portfolio's
investment restriction as to the percentage of its total assets that it may
borrow, and may engage in mortgage dollar roll transactions and reverse
repurchase agreements which may be considered a form of borrowing. (See
"Mortgage Dollar Rolls and Reverse Repurchase Agreements," above.) In
addition, the Strong International Stock Portfolio and the Strong Growth
Portfolio may borrow up to an additional 5% of their respective total assets
from banks for temporary or emergency purposes. A Portfolio will not purchase
securities when bank borrowings exceed 5% of the Portfolio's total assets.
HIGH-YIELD (HIGH RISK) SECURITIES
IN GENERAL. Certain Portfolios have the authority to invest in non-investment
grade debt securities (up to 5% of its net assets with respect to the Strong
International Stock and Strong Growth Portfolios). Non-investment grade debt
securities (hereinafter referred to as "lower-quality securities") include (i)
bonds rated as low as C by Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("S&P"), or Fitch Investors Service, Inc.
("Fitch"), or CCC by Duff & Phelps, Inc. ("D&P"); (ii) commercial paper rated
as low as C by S&P, Not Prime by Moody's or Fitch 4 by Fitch; and (iii)
unrated debt obligations of comparable quality. Lower-quality securities,
while generally offering higher yields than investment grade securities with
similar maturities, involve greater risks, including the possibility of
default or bankruptcy. They are regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal. The
special risk considerations in connection with investments in these securities
are discussed below. Refer to "Description of NRSRO Ratings" for a discussion
of securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower-quality and
comparable unrated securities market is relatively new and its growth has
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such an
economic downturn could severely disrupt the market for and adversely affect
the value of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of lower-quality and comparable unrated securities tend to reflect
individual corporate developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Lower-quality and comparable unrated securities also tend to
be more sensitive to economic conditions than are higher-rated securities. As
a result, they generally involve more credit risks than securities in the
higher-rated categories. During an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower-quality and
comparable unrated securities may experience financial stress and may not have
sufficient revenues to meet their payment obligations. The issuer's ability
to service its debt obligations may also be adversely affected by specific
corporate developments, the issuer's inability to meet specific projected
business forecasts or the unavailability of additional financing. The risk of
loss due to default by an issuer of these securities is significantly greater
than issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the
issuer of a lower-quality or comparable unrated security defaulted, a
Portfolio might incur additional expenses to seek recovery. Periods of
economic uncertainty and changes would also generally result in increased
volatility in the market prices of these securities and thus in the
Portfolio's net asset value.
As previously stated, the value of a lower-quality or comparable unrated
security will decrease in a rising interest rate market, and accordingly so
will a Portfolio's net asset value. If a Portfolio experiences unexpected net
redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities
(discussed below), a Portfolio may be forced to liquidate these securities at
a substantial discount. Any such liquidation would reduce the Portfolio's
asset base over which expenses could be allocated and could result in a
reduced rate of return for the Portfolio.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an issuer
is able to refinance the securities, or otherwise redeem them, a Portfolio may
have to replace the securities with a lower yielding security, which would
result in a lower return for the Portfolio.
CREDIT RATINGS. Credit ratings issued by credit-rating agencies evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In
addition, credit rating agencies may or may not make timely changes in a
rating to reflect changes in the economy or in the condition of the issuer
that affect the market value of the security. Consequently, credit ratings
are used only as a preliminary indicator of investment quality. Investments in
lower-quality and comparable unrated securities will be more dependent on the
Sub-Adviser's credit analysis than would be the case with investments in
investment-grade debt securities. The Sub-Advisers employ their own credit
research and analysis, which includes a study of existing debt, capital
structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history and the current
trend of earnings. The Sub-Advisers continually monitor the investments in
each Portfolio's portfolio and carefully evaluate whether to dispose of or to
retain lower-quality and comparable unrated securities whose credit ratings or
credit quality may have changed.
LIQUIDITY AND VALUATION. A Portfolio may have difficulty disposing of certain
lower-quality and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets
in all lower-quality and comparable unrated securities, there is no
established retail secondary market for many of these securities. The
Portfolios anticipate that such securities could be sold only to a limited
number of dealers or institutional investors. To the extent a secondary
trading market does exist, it is generally not as liquid as the secondary
market for higher-rated securities. The lack of a liquid secondary market may
have an adverse impact on the market price of the security. As a result, the
Portfolio's asset value and ability to dispose of particular securities, when
necessary to meet the Portfolio's liquidity needs or in response to a specific
economic event, may be impacted. The lack of a liquid secondary market for
certain securities may also make it more difficult for a Portfolio to obtain
accurate market quotations for purposes of valuing the Portfolio's
investments. Market quotations are generally available on many lower-quality
and comparable unrated issues only from a limited number of dealers and may
not necessarily represent firm bids of such dealers or prices for actual
sales. During periods of thin trading, the spread between bid and asked
prices is likely to increase significantly. In addition, adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of lower-quality and comparable unrated
securities, especially in a thinly traded market.
RECENT AND PROPOSED LEGISLATION. Recent legislation has been adopted, and
from time to time proposals have been discussed, regarding new legislation
designed to limit the use of certain lower-quality and comparable unrated
securities by certain issuers. An example of legislation is a recent law
which requires federally insured savings and loan associations to divest their
investments in these securities over time. It is not currently possible to
determine the impact of the recent legislation or the proposed legislation on
the lower-quality and comparable unrated securities market. However, it is
anticipated that if additional legislation is enacted or proposed, it could
have a material affect on the value of these securities and the existence of a
secondary trading market for the securities.
U.S. GOVERNMENT OBLIGATIONS
U.S. Government Obligations include bills, notes, bonds, and other debt
securities issued by the U.S. Treasury. These are direct obligations of the
U.S. government and differ mainly in the length of their maturities.
U.S. GOVERNMENT AGENCY SECURITIES
Securities issued or guaranteed by Federal agencies and U.S. Government
sponsored instrumentalities may or may not be backed by the full faith and
credit of the United States. In the case of securities not backed by the full
faith and credit of the United States, the investor must look principally to
the agency or instrumentality issuing or guaranteeing the obligation for
ultimate repayment, and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not meet its
commitment. Agencies which are backed by the full faith and credit of the
United States include the Export Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain debt issued by Resolution Funding
Corporation has both its principal and interest backed by the full faith and
credit of the U.S. Treasury in that its principal is defeased by U.S. Treasury
zero coupon issues, while the U.S. Treasury is explicitly required to advance
funds sufficient to pay interest on it, if needed. Certain agencies and
instrumentalities, such as the Government National Mortgage Association, are,
in effect, backed by the full faith and credit of the United States through
provisions in their charters that they may make "indefinite and unlimited"
drawings on the Treasury, if needed to service its debt. Debt from certain
other agencies and instrumentalities, including the Federal Home Loan Bank and
Federal National Mortgage Association, are not guaranteed by the United
States, but those institutions are protected by the discretionary authority of
the U.S. Treasury to purchase certain amounts of their securities to assist
the institution in meeting its debt obligations. Finally, other agencies and
instrumentalities, such as the Farm Credit System and the Federal Home Loan
Mortgage Corporation, are federally chartered institutions under Government
supervision, but their debt securities are backed only by the credit
worthiness of those institutions, not the U.S. Government.
Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration and The Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency organized
under Federal charter with Government supervision. Instrumentalities issuing
or guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Intermediate Credit
Banks and the Federal National Mortgage Association.
BANK OBLIGATIONS
Bank obligations include, but are not limited to, negotiable certificates of
deposit, bankers' acceptances and fixed time deposits. The Berkeley Smaller
Companies Portfolio will limit its investments in U.S. bank obligations to
obligations of U.S. banks (including foreign branches) which have more than $1
billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. The
Berkeley Smaller Companies Portfolio will limit its investments in foreign
bank obligations to U.S. dollar denominated obligations of foreign banks which
at the time of investment (i) have more than $10 billion, or the equivalent in
other currencies, in total assets; (ii) in terms of assets are among the 75
largest foreign banks in the world; (iii) have branches or agencies in the
U.S.; and (iv) in the opinion of the Sub-Adviser are of an investment quality
comparable with obligations of U.S. banks which may be purchased by the Govett
Smaller Companies Portfolio.
Fixed time deposits are obligations of U.S. banks, of foreign branches of
U.S. banks, or of foreign banks which are payable at a stated maturity date
and bear a fixed rate of interest. Generally, fixed time deposits may be
withdrawn on demand by the investor, but they may be subject to early
withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. Although fixed time deposits do not have
a market, there are no contractual restrictions on a Portfolio's right to
transfer a beneficial interest in the deposit to a third party. It is the
policy of the Berkeley Smaller Companies Portfolio not to invest in (i) fixed
time deposits subject to withdrawal penalties, other than overnight deposits;
(ii) repurchase agreements with more than seven days to maturity; or (iii)
other illiquid securities, if in the aggregate more than 5% of the value of
its net assets would be so invested.
Obligations of foreign banks and foreign branches of United States banks
involve somewhat different investment risks from those affecting obligations
of United States banks, including the possibilities that liquidity could be
impaired because of future political and economic developments, that the
obligations may be less marketable than comparable obligations of United
States banks, that a foreign jurisdiction might impose withholding taxes on
interest income payable on those obligations, that foreign deposits may be
seized or nationalized, that foreign governmental restrictions (such as
foreign exchange controls) may be adopted which might adversely affect the
payment of principal and interest on those obligations and that the selection
of those obligations may be more difficult because there may be less publicly
available information concerning foreign banks, or the accounting, auditing
and financial reporting standards, practices and requirements applicable to
foreign banks differ from those applicable to United States banks. In that
connection, foreign banks are not subject to examination by any United States
government agency or instrumentality.
SAVINGS AND LOAN OBLIGATIONS
The Portfolios may invest in savings and loan obligations which are
negotiable certificates of deposit and other short-term debt obligations of
savings and loan associations.
DEBT OBLIGATIONS
A Portfolio may invest a portion of its assets in debt obligations. Issuers
of debt obligations have a contractual obligation to pay interest at a
specified rate on specified dates and to repay principal on a specified
maturity date. Certain debt obligations (usually intermediate- and long-term
bonds) have provisions that allow the issuer to redeem or "call" a bond before
its maturity. Issuers are most likely to call such securities during periods
of falling interest rates.
PRICE VOLATILITY. The market value of debt obligations is affected by changes
in prevailing interest rates. The market value of a debt obligation generally
reacts inversely to interest-rate changes, meaning, when prevailing interest
rates decline, an obligation's price usually rises, and when prevailing
interest rates rise, an obligation's price usually declines. A fund portfolio
consisting primarily of debt obligations will react similarly to changes in
interest rates.
MATURITY. In general, the longer the maturity of a debt obligation, the
higher its yield and the greater its sensitivity to changes in interest rates.
Conversely, the shorter the maturity, the lower the yield but the greater the
price stability. Commercial paper is generally considered the shortest form
of debt obligation. The term "bond" generally refers to securities with
maturities longer than two years. Bonds with maturities of three years or
less are considered short-term, bonds with maturities between three and seven
years are considered intermediate-term, and bonds with maturities greater than
seven years are considered long-term.
CREDIT QUALITY. The values of debt obligations may also be affected by
changes in the credit rating or financial condition of their issuers.
Generally, the lower the quality rating of a security, the higher the degree
of risk as to the payment of interest and return of principal. To compensate
investors for taking on such increased risk, those issuers deemed to be less
creditworthy generally must offer their investors higher interest rates than
do issuers with better credit ratings.
In conducting their credit research and analysis, the Sub-Advisers consider
both qualitative and quantitative factors to evaluate the creditworthiness of
individual issuers. The Sub-Advisers also rely, in part, on credit ratings
compiled by a number of NRSROs. See the Appendix for additional information.
TEMPORARY DEFENSIVE POSITION. When a Sub-Adviser determines that market
conditions warrant a temporary defensive position, the Portfolios may invest
without limitation in cash and short-term fixed income securities, including
U.S. government securities, commercial paper, banker's acceptances,
certificates of deposit, and time deposits.
SHORT-TERM CORPORATE DEBT INSTRUMENTS
A Portfolio may invest in commercial paper, which refers to short-term,
unsecured promissory notes issued by U.S. and foreign corporations to finance
short-term credit needs. Commercial paper is usually sold on a discount basis
and has a maturity at the time of issuance not exceeding nine months.
A Portfolio may also invest in non-convertible corporate debt securities
(e.g., bonds and debentures) with no more than one year remaining to maturity
at the date of settlement. Corporate debt securities with a remaining maturity
of less than one year tend to become extremely liquid and are traded as money
market securities.
The Berkeley Smaller Companies Portfolio's commercial paper investments at
the time of purchase will be rated at least A-2 by Standard & Poor's or
Prime-2 by Moody's, or if unrated, will be of comparable quality as determined
by the Sub-Adviser. The Berkeley Smaller Companies Portfolio's short-term
investments in corporate bonds and debentures (which must have maturities at
the date of purchase of one year or less) must be rated at the time of
settlement at least AA by Standard & Poor's or Aa by Moody's. See "Description
of NRSRO Ratings" for information about Moody's and Standard & Poor's ratings.
MUNICIPAL OBLIGATIONS
Municipal Obligations include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Municipal Obligations may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses, and obtaining funds to loan to
other public institutions and facilities. In addition, certain types of
industrial development bonds are issued by or on behalf of public authorities
to obtain funds to provide privately-operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit, port
or parking facilities, air or water pollution control facilities for water
supply, gas, electricity or sewage or solid waste disposal. Such obligations
are included with the term Municipal Obligations if the interest paid thereon
qualifies as exempt from federal income tax.
Other types of industrial development bonds, the proceeds of which are used
for the construction, equipment, repair or improvement of privately operated
industrial or commercial facilities, may constitute Municipal Obligations,
although the current federal tax laws place substantial limitations on the
size of such issues.
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations are secured by revenues derived from the lease of
property to state and local government units. The underlying leases typically
are renewable annually by the governmental user, although the lease may have a
term longer than one year. If the governmental user does not appropriate
sufficient funds for the following year's lease payments, the lease will
terminate, with the possibility of default on the lease obligations and
significant loss to a Portfolio. In the event of a termination, assignment or
sublease by the governmental user, the interest paid on the municipal lease
obligation could become taxable, depending upon the identity of the succeeding
user.
EURODOLLAR AND YANKEE OBLIGATIONS
Eurodollar bank obligations are dollar-denominated certificates of deposit
and time deposits issued outside the U.S. capital markets by foreign branches
of banks and by foreign banks. Yankee bank obligations are dollar-denominated
obligations issued in the U.S. capital markets by foreign banks.
Eurodollar and Yankee obligations are subject to the same risks that pertain
to domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent, Yankee) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from flowing
across their borders. Other risks include: adverse political and economic
developments; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes, and the
expropriation or nationalization of foreign issuers.
BRADY BONDS
A portion of a Portfolio's fixed -income investments may be invested in
certain debt obligations customarily referred to as "Brady Bonds", which are
created through the exchange of existing commercial bank loans to foreign
entities for new obligations in connection with debt restructuring under a
plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady
(the "Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not have a
long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they
are actively traded in the over-the-counter secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling
interest payments or, in the case of floating rate bonds, initially is equal
to at least one year's rolling interest payments based on the applicable
interest rate at that time and is adjusted at regular intervals thereafter.
Certain Brady Bonds are entitled to "value recovery payments" in certain
circumstances, which in effect constitute supplemental interest payments but
generally are not collateralized. Brady Bonds are often viewed as having three
or four valuation components: (i) the collateralized repayment of principal at
final maturity; (ii) the collateralized interest payments; (iii) the
uncollateralized interest payments; and (iv) any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constitute the "residual
risk"). In the event of a default with respect to Collateralized Brady Bonds
as a result of which the payment obligations of the issuer are accelerated,
the U.S. Treasury zero coupon obligations held as collateral for the payment
of principal will not be distributed to investors, nor will such obligations
be sold and the proceeds distributed. The collateral will be held by the
collateral agent to the scheduled maturity of the defaulted Brady Bonds, which
will continue to be outstanding, at which time the face amount of the
collateral will equal the principal payments which would have then been due on
the Brady Bonds in the normal course. In addition, in light of the residual
risk of the Brady Bonds and, among other factors, the history of default with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative.
Brady Plan debt restructurings totaling approximately $73 billion have been
implemented to date in Argentina, Brazil, Bulgaria, Costa Rica, Dominican
Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the Philippines, Poland,
Uruguay and Venezuela, with the largest proportion of Brady Bonds having been
issued to date by Mexico and Venezuela. Brazil has announced plans to issue
Brady Bonds aggregating approximately $35 billion, based on current estimates.
There can be no assurance that the circumstances regarding the issuance of
Brady Bonds by these countries will not change.
WHEN ISSUED SECURITIES AND FORWARD COMMITMENT CONTRACTS
A Portfolio may from time to time purchase securities on a "when-issued"
basis. The price of debt obligations purchased on a when-issued basis, which
may be expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment for the securities take place at a
later date. Normally, the settlement date occurs within one month of the
purchase. During the period between the purchase and settlement, no payment is
made by a Portfolio to the issuer and no interest on the debt obligations
accrues to the Portfolio. Forward commitments involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of a Portfolio's
other assets. While when-issued securities may be sold prior to the settlement
date, the Portfolios intend to purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment
reasons. At the time a Portfolio makes the commitment to purchase a security
on a when-issued basis, it will record the transaction and reflect the value
of the security in determining its net asset value. The Portfolios do not
believe that their respective net asset values will be adversely affected by
purchases of securities on a when-issued basis.
The Portfolios will maintain cash and marketable securities equal in value to
commitments for when-issued securities. Such segregated securities either will
mature or, if necessary, be sold on or before the settlement date. When the
time comes to pay for when-issued securities, a Portfolio will meet its
obligations from then-available cash flow, sale of the securities held in the
separate account, described above, sale of other securities or, although it
would not normally expect to do so, from the sale of the when-issued
securities themselves (which may have a market value greater or less than the
Portfolio's payment obligation).
WARRANTS
A Portfolio may acquire warrants. Warrants are securities giving the holder
the right, but not the obligation, to buy the stock of an issuer at a given
price (generally higher than the value of the stock at the time of issuance)
during a specified period or perpetually. Warrants may be acquired separately
or in connection with the acquisition of securities. Warrants do not carry
with them the right to dividends or voting rights with respect to the
securities that they entitle their holder to purchase, and they do not
represent any rights in the assets of the issuer. As a result, warrants may
be considered more speculative than certain other types of investments. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities, and a warrant ceases to have value if it is not
exercised prior to its expiration date.
ZERO-COUPON, STEP-COUPON AND PAY-IN-KIND SECURITIES
A Portfolio may invest in zero-coupon, step-coupon, and pay-in-kind
securities. These securities are debt securities that do not make regular
cash interest payments. Zero-coupon and step-coupon securities are sold at a
deep discount to their face value. Pay-in-kind securities pay interest
through the issuance of additional securities. Because such securities do not
pay current cash income, the price of these securities can be volatile when
interest rates fluctuate. While these securities do not pay current cash
income, federal income tax law requires the holders of zero-coupon,
step-coupon, and pay-in-kind securities to include in income each year the
portion of the original issue discount (or deemed discount) and other non-cash
income on such securities accruing that year. The Salomon U.S. Quality Bond
Portfolio may invest up to 10% of its assets in zero coupon bonds or strips.
Strips are debt securities that are stripped of their interest after the
securities are issued, but otherwise are comparable to zero coupon bonds.
FLOATING AND VARIABLE RATE INSTRUMENTS
Certain of the floating or variable rate obligations that may be purchased by
a Portfolio may carry a demand feature that would permit the holder to tender
them back to the issuer of the instrument or to a third party at par value
prior to maturity. Some of the demand instruments purchased by a Portfolio are
not traded in a secondary market and derive their liquidity solely from the
ability of the holder to demand repayment from the issuer or third party
providing credit support. If a demand instrument is not traded in a secondary
market, a Portfolio will nonetheless treat the instrument as "readily
marketable" for the purposes of its investment restriction limiting
investments in illiquid securities unless the demand feature has a notice
period of more than seven days; if the notice period is greater than seven
days, the demand instrument will be characterized as "not readily marketable"
for such purpose.
A Portfolio's right to obtain payment at par on a demand instrument could be
affected by events occurring between the date such Portfolio elects to demand
payment and the date payment is due that may affect the ability of the issuer
of the instrument or third party providing credit support to make payment when
due, except when such demand instruments permit same day settlement. To
facilitate settlement, these same day demand instruments may be held in book
entry form at a bank other than the Trust's custodian subject to a
sub-custodian agreement approved by the Trust between that bank and the
Trust's custodian.
SHORT SALES AGAINST THE BOX
A Portfolio may sell securities short against the box to hedge unrealized
gains on portfolio securities. Selling securities short against the box
involves selling a security that a Portfolio owns or has the right to acquire,
for delivery at a specified date in the future. If a Portfolio sells
securities short against the box, it may protect unrealized gains, but will
lose the opportunity to profit on such securities if the price rises.
INVERSE FLOATING RATE OBLIGATIONS
Certain Portfolios may invest in inverse floating rate obligations, or
"inverse floaters." Inverse floaters have coupon rates that vary inversely at
a multiple of a designated floating rate (which typically is determined by
reference to an index rate, but may also be determined through a dutch auction
or a remarketing agent) (the "reference rate"). Inverse floaters may
constitute a class of CMOs with a coupon rate that moves inversely to a
designated index, such as LIBOR (London Inter-Bank Offered Rate) or COFI (Cost
of Funds Index). Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase
in the coupon rate. In addition, like most other fixed income securities, the
value of inverse floaters will generally decrease as interest rates increase.
Inverse floaters exhibit substantially greater price volatility than fixed
rate obligations having similar credit quality, redemption provisions and
maturity, and inverse floater CMOs exhibit greater price volatility than the
majority of mortgage pass-through securities or CMOs. In addition, some
inverse floater CMOs exhibit extreme sensitivity to changes in prepayments. As
a result, the yield to maturity of an inverse floater CMO is sensitive not
only to changes in interest rates but also to changes in prepayment rates on
the related underlying mortgage assets.
Loan Participations and Other Direct Indebtedness
A Portfolio may purchase loan participations and other direct claims against
a borrower. In purchasing a loan participation, a Portfolio acquires some or
all of the interest of a bank or other lending institution in a loan to a
corporate borrower. Many such loans are secured, although some may be
unsecured. Such loans may be in default at the time of purchase. Loans that
are fully secured offer the Portfolio more protection than an unsecured loan
in the event of non-payment of scheduled interest or principal. However, there
is no assurance that the liquidation of collateral from a secured loan would
satisfy the corporate borrower's obligation, or that the collateral can be
liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which a
Portfolio would assume all of the rights of the lending institution in a loan,
or as an assignment, pursuant to which the Portfolio would purchase an
assignment of a portion of a lender's interest in a loan either directly from
the lender or through an intermediary. A Portfolio may also purchase trade or
other claims against companies, which generally represent money owed by the
company to a supplier of goods or services. These claims may also be purchased
at a time when the company is in default.
Certain of the loan participations acquired by a Portfolio may involve
revolving credit facilities or other standby financing commitments which
obligate a Portfolio to pay additional cash on a certain date or on demand.
These commitments may have the effect of requiring a Portfolio to increase its
investment in a company at a time when a Portfolio might not otherwise decide
to do so (including at a time when the company's financial condition makes it
unlikely that such amounts will be repaid). To the extent that a Portfolio is
committed to advance additional funds, it will at all times hold and maintain
in a segregated account cash or other high grade debt obligations in an amount
sufficient to meet such commitments.
A Portfolio's ability to receive payments of principal, interest and other
amounts due in connection with these investments will depend primarily on the
financial condition of the borrower. In selecting the loan participations and
other direct investments which a Portfolio will purchase, the Sub-Adviser will
rely upon its (and not that of the original lending institutions) own credit
analysis of the borrower. As a Portfolio may be required to rely upon another
lending institution to collect and pass on to the Portfolio amounts payable
with respect to the loan and to enforce a Portfolio's rights under the loan,
an insolvency, bankruptcy or reorganization of the lending institution may
delay or prevent a Portfolio from receiving such amounts. In such cases, a
Portfolio will evaluate as well the creditworthiness of the lending
institution and will treat both the borrower and the lending institution as an
"issuer" of the loan participation for purposes of certain investment
restrictions pertaining to the diversification of a Portfolio's investments.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Investments in
such loans may involve additional risks to a Portfolio. For example, if a loan
is foreclosed, a Portfolio could become part owner of any collateral, and
would bear the costs and liabilities associated with owning and disposing of
the collateral. In addition, it is conceivable that under emerging legal
theories of lender liability, a Portfolio could be held liable as a co-lender.
It is unclear whether loans and other forms of direct indebtedness offer
securities law protections against fraud and misrepresentation. In the absence
of definitive regulatory guidance, a Portfolio relies on the Sub-Adviser's
research in an attempt to avoid situations where fraud or misrepresentation
could adversely affect the Portfolio. In addition, loan participations and
other direct investments may not be in the form of securities or may be
subject to restrictions on transfer, and only limited opportunities may exist
to resell such instruments. As a result, a Portfolio may be unable to sell
such investments at an opportune time or may have to resell them at less than
fair market value. To the extent that the Sub-Adviser determines that any such
investments are illiquid, a Portfolio will include them in the investment
limitations described below.
INDEXED SECURITIES
A Portfolio may purchase securities whose prices are indexed to the prices of
other securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators. Index securities may include
securities that have embedded swaps (see "Swaps and Related Transactions") and
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than
U.S. dollar-denominated securities of equivalent issuers. Currency-indexed
securities may be positively or negatively indexed; that is, their maturity
value may increase when the specified currency value increases, resulting in a
security that performs similarly to a foreign-denominated instrument, or their
maturity value may decline when foreign currencies increase, resulting in a
security whose price characteristics are similar to a put on the underlying
currency. Currency-indexed securities may also have prices that depend on the
values of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies.
OTHER INVESTMENT COMPANIES
As indicated under "Investment Restrictions", a Portfolio may from time to
time invest in securities of other investment companies. The return on such
investments will be reduced by the operating expenses, including investment
advisory and administration fees, of such investment funds, and will be
further reduced by the Portfolio expenses, including management fees; that is,
there will be a layering of certain fees and expenses.
FOREIGN INVESTMENT COMPANIES
Some of the countries in which a Portfolio may invest may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. Investing through such
vehicles may involve frequent or layered fees or expenses and may also be
subject to limitation under the 1940 Act. Under the 1940 Act, a Portfolio may
invest up to 10% of its assets in shares of investment companies and up to 5%
of its assets in any one investment company as long as the investment does not
represent more than 3% of the voting stock of the acquired investment company.
SWAPS AND RELATED TRANSACTIONS
A Portfolio may enter into interest rate swaps, currency swaps and other
types of available swap agreements, such as caps, collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a
Portfolio's exposure to long or short-term interest rates (in the U.S. or
abroad), foreign currency values, mortgage securities, corporate borrowing
rates, or other factors such as securities prices or inflation rates. Swap
agreements can take many different forms and are known by a variety of names.
A Portfolio is not limited to any particular form or variety of swap agreement
if the Sub-Adviser determines it is consistent with the Portfolio's investment
objective and policies.
A Portfolio will maintain cash or appropriate liquid assets with its
custodian to cover its current obligations under swap transactions. If a
Portfolio enters into a swap agreement on a net basis (i.e., the two payment
streams are netted out, with the Portfolio receiving or paying as the case may
be, only the net amount of the two payments), the Portfolio will maintain cash
or liquid assets with its Custodian with a daily value at least equal to the
excess, if any, of the Portfolio's accrued obligations under the swap
agreement over the accrued amount the Portfolio is entitled to receive under
the agreement. If the Portfolio enters into a swap agreement on other than a
net basis, it will maintain cash or liquid assets with a value equal to the
full amount of the Portfolio's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If a
Sub-Adviser is incorrect in its forecasts of such factors, the investment
performance of the Portfolio would be less than what it would have been if
these investment techniques had not been used. If a swap agreement calls for
payments by the Portfolio, the Portfolio must be prepared to make such
payments when due. In addition, if the counterparty's creditworthiness
declined, the value of the swap agreement would be likely to decline,
potentially resulting in losses. If the counterparty defaults, the Portfolio's
risk of loss consists of the net amount of payments that the Portfolio is
contractually entitled to receive. The Portfolio anticipates that it will be
able to eliminate or reduce its exposure under these arrangements by
assignment or other disposition or by entering into an offsetting agreement
with the same or another counterparty.
DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION. As discussed in the Prospectus, the Sub-Advisers for
certain Portfolios may use a variety of derivative instruments, including
options, futures contracts (sometimes referred to as "futures"), options on
futures contracts, and forward currency contracts for any lawful purpose, such
as to hedge a Portfolio's investments, risk management, or to attempt to
enhance returns.
The use of these instruments is subject to applicable regulations of the SEC,
the several options and futures exchanges upon which they may be traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, a Portfolio's ability to use these instruments will
be limited by tax considerations.
In addition to the products, strategies and risks described below and in the
Prospectus, the Sub-Advisers expect to discover additional derivative
instruments and other hedging techniques. These new opportunities may become
available as the Sub-Advisers develop new techniques or as regulatory
authorities broaden the range of permitted transactions. The Sub-Advisers may
utilize these opportunities to the extent that they are consistent with a
Portfolio's investment objective and permitted by a Portfolio's investment
limitations and applicable regulatory authorities.
SPECIAL RISKS OF THESE INSTRUMENTS. The use of derivative instruments
involves special considerations and risks as described below. Risks
pertaining to particular instruments are described in the sections that
follow.
(1) Successful use of most of these instruments depends upon a
Sub-Adviser's ability to predict movements of the overall securities and
currency markets, which requires different skills than predicting changes in
the prices of individual securities. While the Sub-Advisers are experienced
in the use of these instruments, there can be no assurance that any particular
strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of an instrument and price movements of investments
being hedged. For example, if the value of an instrument used in a short
hedge (such as writing a call option, buying a put option, or selling a
futures contract) increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the
markets in which these instruments are traded. The effectiveness of hedges
using instruments on indices will depend on the degree of correlation between
price movements in the index and price movements in the investments being
hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can
also reduce opportunity for gain by offsetting the positive effect of
favorable price movements in the hedged investments. For example, if a
Portfolio entered into a short hedge because the Sub-Adviser projected a
decline in the price of a security in the Portfolio's investments, and the
price of that security increased instead, the gain from that increase might be
wholly or partially offset by a decline in the price of the instrument.
Moreover, if the price of the instrument declined by more than the increase in
the price of the security, a Portfolio could suffer a loss.
(4) As described below, a Portfolio might be required to maintain
assets as "cover," maintain segregated accounts, or make margin payments when
it takes positions in these instruments involving obligations to third parties
(i.e., instruments other than purchased options). If a Portfolio were unable
to close out its positions in such instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. The requirements might impair a Portfolio's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that a Portfolio sell a
portfolio security at a disadvantageous time. A Portfolio's ability to close
out a position in an instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of the other party to the transaction ("counter
party") to enter into a transaction closing out the position. Therefore,
there is no assurance that any hedging position can be closed out at a time
and price that is favorable to a Portfolio.
GENERAL LIMITATIONS ON CERTAIN DERIVATIVE TRANSACTIONS. The Trust will file a
notice of eligibility for exclusion from the definition of the term "commodity
pool operator" with the CFTC and the National Futures Association, which
regulate trading in the futures markets. Pursuant to Rule 4.5 of the
regulations under the Commodity Exchange Act (the "CEA"), the notice of
eligibility will include representations that the Trust will use futures
contracts and related options solely for bona fide hedging purposes within the
meaning of CFTC regulations, provided that the Trust may hold other positions
in futures contracts and related options that do not qualify as a bona fide
hedging position if the aggregate initial margin deposits and premiums
required to establish these positions, less the amount by which any such
options positions are "in the money," do not exceed 5% of the Trust's net
assets. Adoption of these guidelines does not limit the percentage of the
Trust's assets at risk to 5%.
In addition, (i) the aggregate value of securities underlying call options on
securities written by a Portfolio or obligations underlying put options on
securities written by a Portfolio determined as of the date the options are
written will not exceed 50% of the Portfolio's net assets; (ii) the aggregate
premiums paid on all options purchased by a Portfolio and which are being held
will not exceed 20% of the Portfolio's net assets; (iii) a Portfolio will not
purchase put or call options, other than hedging positions, if, as a result
thereof, more than 5% of its total assets would be so invested; and (iv) the
aggregate margin deposits required on all futures and options on futures
transactions being held will not exceed 5% of a Portfolio's total assets.
The foregoing limitations are not fundamental policies of the Portfolios and
may be changed by the Trust's Board of Trustees without shareholder approval
as regulatory agencies permit.
Transactions using options (other than purchased options) expose a Portfolio
to counter-party risk. To the extent required by SEC guidelines, a Portfolio
will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities, other options, or futures or
(2) cash and liquid high grade debt securities with a value sufficient at all
times to cover its potential obligations to the extent not covered as provided
in (1) above. A Portfolio will also set aside cash and/or appropriate liquid
assets in a segregated custodial account if required to do so by the SEC and
CFTC regulations. Assets used as cover or held in a segregated account cannot
be sold while the position in the corresponding option or futures contract is
open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of a Portfolio's assets to segregated accounts
as a cover could impede portfolio management or the Portfolio's ability to
meet redemption requests or other current obligations.
OPTIONS. A Portfolio may purchase and write put and call options on
securities, on indices of securities, and foreign currency, and enter into
closing transactions with respect to such options to terminate an existing
position. The purchase of call options serves as a long hedge, and the
purchase of put options serves as a short hedge. Writing put or call options
can enable a Portfolio to enhance income by reason of the premiums paid by the
purchaser of such options. Writing call options serves as a limited short
hedge because declines in the value of the hedged investment would be offset
to the extent of the premium received for writing the option. However, if the
security appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the Portfolio
will be obligated to sell the security at less than its market value or will
be obligated to purchase the security at a price greater than that at which
the security must be sold under the option. All or a portion of any assets
used as cover for OTC options written by a Portfolio would be considered
illiquid to the extent described under "Illiquid or Restricted Securities."
Writing put options serves as a limited long hedge because increases in the
value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security depreciates to a
price lower than the exercise price of the put option, it can be expected that
the put option will be exercised and the Portfolio will be obligated to
purchase the security at more than its market value.
The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying
investment, and general market conditions. Options that expire unexercised
have no value. Options used by a Portfolio may include European-style options.
This means that the option is only exercisable at its expiration. This is in
contrast to American-style options which are exercisable at any time prior to
the expiration date of the option.
A Portfolio may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, a Portfolio may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, a Portfolio may terminate a position in a
put or call option it had purchased by writing an identical put or call
option; this is known as a closing sale transaction. Closing transactions
permit a Portfolio to realize the profit or limit the loss on an option
position prior to its exercise or expiration.
A Portfolio may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. OTC options are
contracts between a Portfolio and the other party to the transaction ("counter
party") (usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when a Portfolio purchases or writes an OTC option, it
relies on the counter party to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counter party to do so
would result in the loss of any premium paid by a Portfolio as well as the
loss of any expected benefit of the transaction.
A Portfolio's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Portfolios intend to
purchase or write only those exchange-traded options for which there appears
to be a liquid secondary market. However, there can be no assurance that such
a market will exist at any, particular time. Closing transactions can be made
for OTC options only by negotiating directly with the counter party, or by a
transaction in the secondary market if any such market exists. Although a
Portfolio will enter into OTC options only with counter parties that are
expected to be capable of entering into closing transactions with the
Portfolio, there is no assurance that the Portfolio will in fact be able to
close out an OTC option at a favorable price prior to expiration. In the
event of insolvency of the counter party, a Portfolio might be unable to close
out an OTC option position at any time prior to its expiration.
If a Portfolio were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call
option written by a Portfolio could cause material losses because the
Portfolio would be unable to sell the investment used as cover for the written
option until the option expires or is exercised.
A Portfolio may engage in options transactions on indices in much the same
manner as the options on securities discussed above, except the index options
may serve as a hedge against overall fluctuations in the securities markets
in general.
The writing and purchasing of options is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. Imperfect correlation between the
options and securities markets may detract from the effectiveness of attempted
hedging.
YIELD CURVE OPTIONS: A Portfolio may also enter into options on the "spread,"
or yield differential, between two fixed income securities, in transactions
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is
settled through cash payments. Accordingly, a yield curve option is profitable
to the holder if this differential widens (in the case of a call) or narrows
(in the case of a put), regardless of whether the yields of the underlying
securities increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, a Portfolio may purchase or write such options for
hedging purposes. For example, a Portfolio may purchase a call option on the
yield spread between two securities, if it owns one of the securities and
anticipates purchasing the other security and wants to hedge against an
adverse change in the yield spread between the two securities. A Portfolio may
also purchase or write yield curve options for other than hedging purposes
(i.e., in an effort to increase its current income) if, in the judgment of the
Sub-Adviser, a Portfolio will be able to profit from movements in the spread
between the yields of the underlying securities. The trading of yield curve
options is subject to all of the risks associated with the trading of other
types of options. In addition, however, such options present risk of loss even
if the yield of one of the underlying securities remains constant, if the
spread moves in a direction or to an extent which was not anticipated. Yield
curve options written by a Portfolio will be "covered". A call (or put) option
is covered if the Portfolio holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or cash equivalents sufficient to cover the Portfolio's net
liability under the two options. Therefore, a Portfolio's liability for such a
covered option is generally limited to the difference between the amount of
the Portfolio's liability under the option written by the Portfolio less the
value of the option held by the Portfolio. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter and because they
have been only recently introduced, established trading markets for these
securities have not yet developed.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a
certain percentage of the Portfolio's assets (the "SEC illiquidity ceiling").
The Sub-Advisers intend to limit a Portfolio's writing of over-the-counter
options in accordance with the following procedure. Except as provided below,
the Portfolios intend to write over-the-counter options only with primary U.S.
government securities dealers recognized by the Federal Reserve Bank of New
York. Also, the contracts which a Portfolio will have in place with such
primary dealers will provide that the Portfolio has the absolute right to
repurchase an option it writes at any time at a price which represents the
fair market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based
on a multiple of the premium received by the Portfolio for writing the option,
plus the amount, if any, of the option's intrinsic value (i.e., the amount
that the option is in-the-money). The formula may also include a factor to
account for the difference between the price of the security and the strike
price of the option if the option is written out-of-money. A Portfolio will
treat all or a part of the formula price as illiquid for purposes of the SEC
illiquidity ceiling. A Portfolio may also write over-the-counter options with
non-primary dealers, including foreign dealers, and will treat the assets used
to cover these options as illiquid for purposes of such SEC illiquidity
ceiling.
SPREAD TRANSACTIONS. A Portfolio may purchase covered spread options from
securities dealers. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives a
Portfolio the right to put, or sell, a security that it owns at a fixed dollar
spread or fixed yield spread in relationship to another security that a
Portfolio does not own, but which is used as a benchmark. The risk to the
Portfolio in purchasing covered spread options is the cost of the premium paid
for the spread option and any transaction costs. In addition, there is no
assurance that closing transactions will be available. The purchase of spread
options will be used to protect the Portfolio against adverse changes in
prevailing credit quality spreads, i.e., the yield spread between high quality
and lower quality securities. Such protection is only provided during the
life of the spread option.
FUTURES CONTRACTS. A Portfolio may enter into futures contracts, including
interest rate, index, and foreign currency futures. A Portfolio may also
purchase put and call options, and write covered put and call options, on
futures in which it is allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered
call options on futures contracts can serve as a limited short hedge, and
writing covered put options on futures contracts can serve as a limited long
hedge, using a strategy similar to that used for writing covered options in
securities. A Portfolio's hedging may include purchases of futures as an
offset against the effect of expected increases in securities prices and
currency exchange rates and sales of futures as an offset against the effect
of expected declines in securities prices and currency exchange rates. A
Portfolio's futures transactions may be entered into for any lawful purpose
such as hedging purposes, risk management, or to enhance returns. A Portfolio
may also write put options on futures contracts while at the same time
purchasing call options on the same futures contracts in order to create
synthetically a long futures contract position. Such options would have the
same strike prices and expiration dates. A Portfolio will engage in this
strategy only when a Sub-Adviser believes it is more advantageous to the
Portfolio than is purchasing the futures contract.
To the extent required by regulatory authorities, the Portfolios only enter
into futures contracts that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts could be used
to reduce a Portfolio's exposure to market, currency, or interest rate
fluctuations, the Portfolio may be able to hedge its exposure more effectively
and perhaps at a lower cost through using futures contracts.
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (e.g.
debt security) or currency for a specified price at a designated date, time,
and place. An index futures contract is an agreement pursuant to which the
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 futures contract was
originally written. Transaction costs are incurred when a futures contract is
bought or sold and margin deposits must be maintained. A futures contract may
be satisfied by delivery or purchase, as the case may be, of the instrument,
the currency, or by payment of the change in the cash value of the index.
More commonly, futures contracts are closed out prior to delivery by entering
into an offsetting transaction in a matching futures contract. Although the
value of an index might be a function of the value of certain specified
securities, no physical delivery of those securities is made. If the
offsetting purchase price is less than the original sale price, the Portfolio
realizes a gain; if it is more, the Portfolio realizes a loss. Conversely, if
the offsetting sale price is more than the original purchase price, the
Portfolio realizes a gain; if it is less, the Portfolio realizes a loss. The
transaction costs must also be included in these calculations. There can be
no assurance, however, that a Portfolio will be able to enter into an
offsetting transaction with respect to a particular futures contract at a
particular time. If the Portfolio is not able to enter into an offsetting
transaction, the Portfolio will continue to be required to maintain the margin
deposits on the futures contract.
No price is paid by a Portfolio upon entering into a futures contract.
Instead, at the inception of a futures contract, the Portfolio is required to
deposit in a segregated account with its custodian, in the name of the futures
broker through whom the transaction was effected, "initial margin" consisting
of cash, U.S. government securities or other liquid, high grade debt
obligations, in an amount generally equal to 10% or less of the contract
value. Margin must also be deposited when writing a call or put option on a
futures contract, in accordance with applicable exchange rules. Unlike margin
in securities transactions, initial margin on futures contracts does not
represent a borrowing, but rather is in the nature of a performance bond or
good-faith deposit that is returned to the Portfolio at the termination of the
transaction if all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, the Portfolio may be
required by an exchange to increase the level of its initial margin payment,
and initial margin requirements might be increased generally in the future by
regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Portfolio's obligations to or from a
futures broker. When a Portfolio purchases an option on a future, the premium
paid plus transaction costs is all that is at risk. In contrast, when the
Portfolio purchases or sells a futures contract or writes a call or put option
thereon, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If a Portfolio has
insufficient cash to meet daily variation margin requirements, it might need
to sell securities at a time when such sales are disadvantageous. Purchasers
and sellers of futures positions and options on futures can enter into
offsetting closing transactions by selling or purchasing, respectively, an
instrument identical to the instrument held or written. Positions in futures
and options on futures may be closed only on an exchange or board of trade
that provides a secondary market. The Portfolios intend to enter into futures
transactions only on exchanges or boards of trade where there appears to be a
liquid secondary market. However, there can be no assurance that such a
market will exist for a particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a future or option on a futures contract can vary
from the previous day's settlement price; once that limit is reached, no
trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a Portfolio were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Portfolio
would continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Portfolio would
continue to be required to make daily variation margin payments and might be
required to maintain the position being hedged by the future or option or to
maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and
might be compelled to liquidate futures or options on futures contracts
positions whose prices are moving unfavorably to avoid being subject to
further calls. These liquidations could increase price volatility of the
instruments and distort the normal price relationship between the futures or
options and the investments being hedged. Also, because initial margin
deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the future markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
FOREIGN CURRENCY-RELATED DERIVATIVE STRATEGIES-SPECIAL CONSIDERATIONS. A
Portfolio may also use options and futures on foreign currencies and forward
currency contracts to hedge against movements in the values of the foreign
currencies in which the Portfolio's securities are denominated. The Portfolio
may utilize foreign currency-related derivative instruments for any lawful
purposes such as for bona fide hedging or to seek to enhance returns through
exposure to a particular foreign currency. Such currency hedges can protect
against price movements in a security the Portfolio owns or intends to acquire
that are attributable to changes in the value of the currency in which it is
denominated. Such hedges do not, however, protect against price movements in
the securities that are attributable to other causes.
A Portfolio might seek to hedge against changes in the value of a particular
currency when no hedging instruments on that currency are available or such
hedging instruments are more expensive than certain other hedging instruments.
In such cases, the Portfolio may hedge against price movements in that
currency by entering into transactions using hedging instruments on another
foreign currency or a basket of currencies, the values of which the
Sub-Adviser believes will have a high degree of positive correlation to the
value of the currency being hedged. The risk that movements in the price of
the hedging instrument will not correlate perfectly with movements in the
price of the currency being hedged is magnified when this strategy is used.
The value of derivative instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such hedging
instruments, the Portfolio could be disadvantaged by having to deal in the odd
lot market (generally consisting of transactions of less than $1 million) for
the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions
in the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is
a global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain
open, significant price and rate movements might take place in the underlying
markets that cannot be reflected in the markets for the derivative instruments
until they reopen.
Settlement of derivative transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency.
Thus, the Portfolio might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents
and might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
Permissible foreign currency options will include options traded primarily in
the OTC market. Although options on foreign currencies are traded primarily
in the OTC market, the Portfolio will normally purchase OTC options on foreign
currency only when the Sub-Adviser believes a liquid secondary market will
exist for a particular option at any specific time.
FORWARD CURRENCY CONTRACTS. A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by
the parties, at a price set at the time the contract is entered into.
A Portfolio may enter into forward currency contracts to purchase or sell
foreign currencies for a fixed amount of U.S. dollars or another foreign
currency for any lawful purpose. Such transactions may serve as long hedges
- -- for example, a Portfolio may purchase a forward currency contract to lock
in the U.S. dollar price of a security denominated in a foreign currency that
a Portfolio intends to acquire. Forward currency contracts may also serve as
short hedges -- for example, the Portfolio may sell a forward currency
contract to lock in the U.S. dollar equivalent of the proceeds from the
anticipated sale of a security denominated in a foreign currency.
A Portfolio may seek to hedge against changes in the value of a particular
currency by using forward contracts on another foreign currency or a basket of
currencies, the value of which the Sub-Adviser believes will have a positive
correlation to the values of the currency being hedged. In addition, the
Portfolio may use forward currency contracts to shift exposure to foreign
currency fluctuations from one country to another. For example, if a
Portfolio owns securities denominated in a foreign currency and the
Sub-Adviser believes that currency will decline relative to another currency,
it might enter into a forward contract to sell an appropriate amount of the
first foreign currency, with payment to be made in the second foreign
currency. Transactions that use two foreign currencies are sometimes referred
to as "cross hedges." Use of different foreign currency magnifies the risk
that movements in the price of the instrument will not correlate or will
correlate unfavorably with the foreign currency being hedged.
The cost to the Portfolio of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When the Portfolio enters into a forward currency contract, it
relies on the counter party to make or take delivery of the underlying
currency at the maturity of the contract. Failure by the counter party to do
so would result in the loss of any expected benefit of the transaction.
As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument held or written. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counter party. Thus, there can be no
assurance that the Portfolio will in fact be able to close out a forward
currency contract at a favorable price prior to maturity. In addition, in the
event of insolvency of the counter party, the Portfolio might be unable to
close out a forward currency contract at any time prior to maturity. In
either event, the Portfolio would continue to be subject to market risk with
respect to the position, and would continue to be required to maintain a
position in securities denominated in the foreign currency or to maintain cash
or securities in a segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the
foreign currency contract has been established. Thus, the Portfolio might
need to purchase or sell foreign currencies in the spot (cash) market to the
extent such foreign currencies are not covered by forward contracts. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
FOREIGN CURRENCY TRANSACTIONS
Although the Strong International Stock Portfolio values its assets daily in
U.S. dollars, it is not required to convert its holdings of foreign currencies
to U.S. dollars on a daily basis. The Portfolio's foreign currencies generally
will be held as "foreign currency call accounts" at foreign branches of
foreign or domestic banks. These accounts bear interest at negotiated rates
and are payable upon relatively short demand periods. If a bank became
insolvent, the Portfolio could suffer a loss of some or all of the amounts
deposited. The Portfolio may convert foreign currency to U.S. dollars from
time to time. Although foreign exchange dealers generally do not charge a
stated commission or fee for conversion, the prices posted generally include a
"spread," which is the difference between the prices at which the dealers are
buying and selling foreign currencies.
HYBRID INSTRUMENTS
Hybrid Instruments have recently been developed and combine the elements of
futures contracts or options with those of debt, preferred equity or a
depository instrument. Often these Hybrid Instruments are indexed to the price
of a commodity, a particular currency, or a domestic or foreign debt or equity
securities index. Hybrid Instruments may take a variety of forms, including,
but not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or
commodity or securities index at a future point in time, preferred stock with
dividend rates determined by reference to the value of a currency, or
convertible securities with the conversion terms related to a particular
commodity.
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures and currencies, including
volatility and lack of liquidity. Reference is made to the discussion of
futures, options, and forward contracts herein for a discussion of these
risks. Further, the prices of the Hybrid Instrument and the related commodity
or currency may not move in the same direction or at the same time. Hybrid
Instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. Alternatively, Hybrid Instruments may bear
interest at above market rates but bear an increased risk of principal loss
(or gain). In addition, because the purchase and sale of Hybrid Instruments
could take place in an over-the-counter market or in a private transaction
between a Portfolio and the seller of the Hybrid Instrument, the
creditworthiness of the counterparty to the transaction would be a risk factor
which a Portfolio would have to consider. Hybrid Instruments also may not be
subject to regulation by the CFTC, which generally regulates the trading of
commodity futures by U.S. persons, the SEC (which regulates the offer and sale
of securities by and to U.S. persons), or any other governmental regulatory
authority.
COMBINED TRANSACTIONS
The Portfolios 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, instead of
a single transaction, as part of a single hedging strategy when, in the
opinion of a Sub-Adviser, it is in the best interest of a Portfolio to do so.
A combined transaction, while part of a single strategy, may contain elements
of risk that are present in each of its component transactions and will be
structured in accordance with applicable SEC regulations and SEC staff
guidelines.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental and may not be changed
with respect to any Portfolio without the approval of a majority of the
outstanding voting securities of that Portfolio. Under the 1940 Act and the
rules thereunder, "majority of the outstanding voting securities" of a
Portfolio means the lesser of (1) 67% of the shares of that Portfolio present
at a meeting if the holders of more than 50% of the outstanding shares of that
Portfolio are present in person or by proxy, and (2) more than 50% of the
outstanding shares of that Portfolio. Any investment restrictions which
involve a maximum percentage of securities or assets shall not be considered
to be violated unless an excess over the percentage occurs immediately after,
and is caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by or on behalf of, a Portfolio, as the case may be.
STRONG INTERNATIONAL STOCK PORTFOLIO AND STRONG GROWTH PORTFOLIO
Each of the Strong Portfolios:
1. May not with respect to 75% of its total assets, purchase the
securities of any issuer (except securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities) if, as a result, (i) more
than 5% of the Portfolio's total assets would be invested in the securities of
that issuer, or (ii) the Portfolio would hold more than 10% of the outstanding
voting securities of that issuer.
2. May (i) borrow money from banks and (ii) make other investments or
engage in other transactions permissible under the 1940 Act which may involve
a borrowing such as reverse repurchase agreement and mortgage "dollar roll"
transactions, provided that the combination of (i) and (ii) shall not exceed
33 1/3% of the value of the Portfolio's total assets (including the amount
borrowed), less the Portfolio's liabilities (other than borrowings), except
that the Portfolio may borrow up to an additional 5% of its total assets (not
including the amount borrowed) from a bank for temporary or emergency purposes
(but not for leverage or the purchase of investments). The Portfolio may also
borrow money from the other Strong Funds for which it serves as investment
adviser or other persons to the extent permitted by applicable law.
3. May not issue senior securities, except as permitted under the 1940
Act.
4. May not act as an underwriter of another issuer's securities, except
to the extent that the Portfolio may be deemed to be an underwriter within
the meaning of the 1933 Act in connection with the purchase and sale of
portfolio securities.
5. May not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall not
prevent the Portfolio from purchasing or selling options, futures contracts,
or other derivative instruments, or from investing in securities or other
instruments backed by physical commodities).
6. May not make loans if, as a result, more than 33 1/3% of the
Portfolio's total assets would be lent to other persons, except through (i)
purchases of debt securities or other debt instruments, or (ii) engaging in
repurchase agreements.
7. May not purchase the securities of any issuer if, as a result, more
than 25% of the Portfolio's total assets would be invested in the securities
of issuers, the principal business activities of which are in the same
industry.
8. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prohibit the
Portfolio from purchasing or selling securities or other instruments backed by
real estate or of issuers engaged in real estate activities).
9. May, notwithstanding any other fundamental investment policy or
restriction, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental
investment objective, policies, and restrictions as the Portfolio.
SALOMON U.S. QUALITY BOND PORTFOLIO
The Salomon U.S. Quality Bond Portfolio may not:
(1) Own more than 10% of the outstanding voting securities of any one
issuer, and as to seventy-five percent (75%) of the value of the total assets
of the Portfolio, purchase the securities of any one issuer (except cash items
and "government securities" as defined under the 1940 Act, if immediately
after and as a result of such purchase, the value of the holdings of the
Portfolio in the securities of such issuer exceeds 5% of the value of the
Portfolio's total assets.
(2) Invest more than 25% of the value of its respective assets in any
particular industry (other than U.S. Government securities).
(3) Invest directly in real estate or interests in real estate; however,
the Portfolio may own debt or equity securities issued by companies engaged in
those businesses.
(4) Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this limitation
shall not prevent the Portfolio from purchasing or selling options, futures,
swaps and forward contracts or from investing in securities or other
instruments backed by physical commodities).
(5) Lend any security or make any other loan if, as a result, more than
25% of the Portfolio's total assets would be lent to other parties (but this
limitation does not apply to purchases of commercial paper, debt securities or
repurchase agreements).
(6) Act as an underwriter of securities issued by others, except to the
extent that the Portfolio may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio.
(7) Invest more than 15% of the Portfolio's net assets in securities
which are restricted as to disposition under federal securities law, or
securities with other legal or contractual restrictions or resale. This
limitation does not apply to securities eligible for resale pursuant to Rule
144A of the 1933 Act which the Board of Trustees has determined to be liquid.
(8) Purchase or retain the securities of any issuer if any of the
officers, trustees or directors of the Trust or the investment adviser or
sub-adviser owns beneficially more than 1/2 of 1% of the securities of such
issuer and together they own more than 5% of the securities of such issuer.
(9) The Portfolio will not issue senior securities except that it may
borrow money for temporary or emergency purposes (not for leveraging or
investment) in an amount not exceeding 25% of the value of its respective
total assets (including the amount borrowed) less liabilities (other than
borrowings). If borrowings exceed 25% of the value of the Portfolio's total
assets by reason of a decline in net assets, the Portfolio will reduce its
borrowings within three business days to the extent necessary to comply with
the 25% limitation. This policy shall not prohibit reverse repurchase
agreements, deposits of assets to margin or guarantee positions in futures,
options, swaps and forward contracts, or the segregation of assets in
connection with such contracts.
SALOMON MONEY MARKET PORTFOLIO
The Salomon Money Market Portfolio may not:
(1) purchase any securities which would cause more than 25% of the value
of its total assets at the time of such purchase to be invested in securities
of one or more issuers conducting their principal business activities in the
same industry, provided that there is no limitation with respect to
investment in obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, with respect to bank obligations or with
respect to repurchase agreements collateralized by any of such obligations;
(2) own more than 10% of the outstanding voting stock or other
securities, or both, of any one issuer (other than securities of the U.S.
government or any agency or instrumentality thereof);
(3) purchase shares of other investment companies (except as part of a
merger, consolidation or reorganization or purchase of assets approved by the
Portfolio's shareholders), provided that the Portfolio may purchase shares of
any registered open-end investment company that determines its net asset value
per share based on the amortized cost- or penny-rounding method, if
immediately after any such purchase the Portfolio does not (a) own more than
3% of the outstanding voting stock of any one investment company, (b) invest
more than 5% of the value of its total assets in any one investment company,
or (c) invest more than 10% of the value of its total assets in the aggregate
in securities of investment companies;
(4) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for the
clearance of transactions);
(5) sell securities short;
(6) purchase or sell commodities or commodity contracts, including
futures contracts;
(7) invest for the purpose of exercising control over management of any
company;
(8) make loans, except that the Portfolio may (a) purchase and hold debt
instruments (including bonds, debentures or other obligations and certificates
of deposit, banker's acceptances and fixed time deposits) in accordance with
its investment objectives and policies; and (b) enter into repurchase
agreements with respect to portfolio securities;
(9) underwrite the securities of other issuers, except to the extent
that the purchase of investments directly from the issuer thereof and later
disposition of such securities in accordance with the Portfolio's investment
program may be deemed to be an underwriting;
(10) purchase real estate or real estate limited partnership interests
(other than money market securities secured by real estate or interests
therein or securities issued by companies that invest in real estate or
interests therein);
(11) invest directly in interests in oil, gas or other mineral
exploration development programs or mineral leases; or
(12) purchase warrants.
With respect to the Salomon Money Market Portfolio, for the purpose of
applying the above percentage restrictions and the percentage investment
limitations set forth in the Prospectus to receivables-backed obligations,
both the special purpose entity issuing the receivables-backed obligations and
the issuer of the underlying receivables will be considered an issuer.
MAS VALUE PORTFOLIO
The MAS Value Portfolio may not:
(1) invest in physical commodities or contracts on physical commodities;
(2) purchase or sell real estate, although it may purchase and sell
securities of companies which deal in real estate, other than real estate
limited partnerships, and may purchase and sell marketable securities which
are secured by interests in real estate;
(3) make loans except: (i) by purchasing debt securities in accordance
with its investment objectives and policies, or entering into repurchase
agreements, subject to the limitations described in (h) below (ii) by lending
its portfolio securities and (iii) by lending portfolio assets to other
Portfolios of the Trust, so long as such loans are not inconsistent with the
1940 Act or the Rules and Regulations, or interpretations or orders of the SEC
thereunder;
(4) with respect to 75% of its assets, purchase a security if, as a
result, it would hold more than 10% (taken at the time of such investment) of
the outstanding voting securities of any issuer;
(5) with respect to 75% of its assets, purchase securities of any issuer
if, as a result, more than 5% of the Portfolio's total assets, taken at market
value at the time of such investment, would be invested in the securities of
such issuer except that this restriction does not apply to securities issued
or guaranteed by the U.S. government or its agencies or instrumentalities;
(6) borrow money, except (i) as a temporary measure for extraordinary or
emergency purposes (ii) in connection with reverse repurchase agreement
provided that (i) and (ii) in combination do not exceed 33 1/3% of the
Portfolio's total assets (including the amount borrowed) less liabilities
(exclusive of borrowings);
(7) underwrite the securities of other issuers (except to the extent
that the Portfolio may be deemed to be an underwriter within the meaning of
the 1933 Act in the disposition of restricted securities);
(8) acquire any securities of companies within one industry, if as a
result of such acquisition, more than 25% of the value of the Portfolio's
total assets would be invested in securities of companies within such
industry; provided, however, that there shall be no limitation on the purchase
of obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, when any such Portfolio adopts a temporary defensive
position.
LEXINGTON CORPORATE LEADERS PORTFOLIO
The Lexington Corporate Leaders Portfolio will not:
a. issue any senior security (as defined in the 1940 Act), except that
(a) the Portfolio may enter into commitments to purchase securities in
accordance with the Portfolio's investment program, including reverse
repurchase agreements, foreign exchange contracts, delayed delivery and
when-issued securities, which may be considered the issuance of senior
securities; (b) the Portfolio may engage in transactions that may result in
the issuance of a senior security to the extent permitted under applicable
regulations, interpretation of the 1940 Act or an exemptive order; (c) the
Portfolio may engage in short sales of securities to the extent permitted in
its investment program and other restrictions; (d) the purchase or sale of
futures contracts and related options shall not be considered to involve the
issuance of senior securities; and (e) subject to fundamental restrictions,
the Portfolio may borrow money as authorized by the 1940 Act.
b. act as an underwriter of securities except to the extent that, in
connection with the disposition of portfolio securities by the Portfolio, the
Portfolio may be deemed to be an underwriter under the provisions of the 1933
Act.
c. purchase real estate, interests in real estate or real estate limited
partnership interests except that, to the extent appropriate under its
investment program, the Portfolio may invest in securities secured by real
estate or interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests therein;
d. invest in commodity contracts, except that the Portfolio may, to the
extent appropriate under its investment program, purchase securities of
companies engaged in such activities, may enter into transactions in financial
and index futures contracts and related options, may engage in transactions on
a when-issued or forward commitment basis, and may enter into forward currency
contracts.
e. make loans, except that, to the extent appropriate under its
investment program, the Portfolio may (a) purchase bonds, debentures or other
debt securities, including short-term obligations, (b) enter into repurchase
transactions and (c) lend portfolio securities provided that the value of such
loaned securities does not exceed one-third of the Portfolio's total assets;
f. hold more than 5% of the value of its total assets in the securities
of any one issuer or hold more than 10% of the outstanding voting securities
of any one issuer. This restriction applies only to 50% of the value of the
Portfolio's total assets. Securities issued or guaranteed by the U.S.
government, its agencies and instrumentalities are excluded from this
restriction;
g. concentrate its investments in any one industry except that the
Portfolio may invest up to 25% of its total assets in securities issuers
principally engaged in any one industry. This limitation, however, will not
apply to securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, securities invested in, or repurchase agreements for,
U.S. Government securities, and certificates of deposit, or bankers'
acceptances, or securities of U.S. banks and bank holding companies;
h. borrow money, except that (a) the Portfolio may enter into certain
futures contracts and options related thereto; (b) the Portfolio may enter
into commitments to purchase securities in accordance with the Portfolio's
investment program, including delayed delivery and when-issued securities and
reverse repurchase agreements; (c) for temporary emergency purposes, the
Portfolio may borrow money in amounts not exceeding 5% of the value of its
total assets at the time when the loan is made; (d) the Portfolio may pledge
its portfolio securities or receivable or transfer or assign or otherwise
encumber them in an amount not exceeding one-third of the value of its total
assets; and (e) for purposes of leveraging, the Portfolio may borrow money
from banks (including its custodian bank), only if, immediately after such
borrowing, the value of the Portfolio's assets, including the amount borrowed,
less its liabilities, is equal to at least 300% of the amount borrowed, plus
all outstanding borrowings. If at any time, the value of the Portfolio's
assets fails to meet the 300% asset coverage requirement relative only to
leveraging, the Portfolio will, within three days (not including Sundays and
holidays), reduce its borrowings to the extent necessary to meet the 300%
test.
BERKELEY SMALLER COMPANIES PORTFOLIO
The Berkeley Smaller Companies Portfolio may not:
1. Borrow money or mortgage or pledge any of its assets, except that
the Portfolio may borrow from banks, for temporary or emergency purposes, up
to 33-1/3% of its total assets and pledge up to 33-1/3% of its total assets in
connection therewith. Any borrowings that come to exceed 33-1/3% of the value
of the Portfolio's total assets at any time will be reduced within three days
(exclusive of Sundays and legal holidays) to the extent necessary to comply
with the 33-1/3% limitation. The Portfolio may not purchase securities when
borrowings exceed 5% of its assets. Borrowings for purposes of this
restriction include reverse repurchase agreements.
2. Purchase any securities on "margin," or underwrite securities,
except that the Portfolio may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of securities and except
that the Portfolio may make margin deposits in connection with futures
contracts and options.
3. Make loans if, as a result, more than 33-1/3% of the Portfolio's
total assets would be lent to other parties except (i) through the purchase of
a portion of an issue of debt securities in accordance with its investment
objectives, policies, and limitations, or (ii) by engaging in repurchase
agreements with respect to portfolio securities. Portfolio securities may be
loaned only if continuously collateralized at least 100% by
"marking-to-market" daily.
4. Invest 25% or more of its total assets in the securities of issuers
in a single industry (excluding securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities).
5. Purchase from, or sell any portfolio securities to, the Trust's
officers or Trustees, or any firm of which any such officer or Trustee is a
member, as principal, except that the Trust may deal with such persons or
firms as securities dealers and pay a customary brokerage commission; or
retain securities of any issuer, if to the knowledge of the Trust, one or more
of its officers, Trustees or investment managers own beneficially more than
one-half of 1% of the securities of such issuer and all such persons together
own beneficially more than 5% of such securities.
6. Purchase the securities of any issuer(other than securities issued
or guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result thereof, the Portfolio, would own more than
10% of the outstanding voting securities of such issuer.
7. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit the Portfolio from (a) making
any otherwise permitted borrowings, mortgages or pledges, or (b) entering into
option contracts, futures contracts, forward contracts or repurchase
transactions.
8. With respect to 75% of its total assets, invest in securities of any
one issuer if immediately after, and as a result of such investment, more than
5% of the total assets of the Portfolio, taken at market value, would be
invested in the securities of such issuer. This restriction does not apply to
investments in U.S. Government or agency securities.
9. Make investments for the purpose of exercising control, or
underwrite the securities of other issuers, except insofar as the Portfolio
may be technically deemed an underwriter in connection with the disposition of
its portfolio securities.
10. Purchase interests in oil, gas or other mineral exploration or
development programs, including mineral leases, although the Portfolio may
invest in common stocks of companies which invest in or sponsor such programs.
11. Purchase or sell real estate or real estate limited partnerships or
securities issued by companies that invest in real estate or interests
therein.
12. Purchase commodities or commodity contracts (including futures
contracts), except that the Portfolio may purchase securities of issuers which
invest or deal in commodities or commodity contracts.
MFS TOTAL RETURN PORTFOLIO
The MFS Total Return Portfolio shall not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed and then only as a temporary measure for extraordinary or emergency
purposes;
(2) underwrite securities issued by other persons except insofar as the
Series may technically be deemed an underwriter under the Securities Act of
1933, as amended (the "1933 Act") in selling a portfolio security;
(3) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein
and securities of companies, such as real estate investment trusts, which deal
in real estate or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (excluding currencies and any type of
option, Futures Contracts and Forward Contracts) in the ordinary course of its
business. The Portfolio reserves the freedom of action to hold and to sell
real estate, mineral leases, commodities or commodity contracts (including
currencies and any type of option, Futures Contracts and Forward Contracts)
acquired as a result of the ownership of securities;
(4) issue any senior securities except as permitted by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to any type
of swap, option, Forward Contracts and Futures Contracts and collateral
arrangements with respect to initial and variation margin are not deemed to be
the issuance of a senior security;
(5) make loans to other persons. For these purposes, the purchase of
commercial paper, the purchase of a portion or all of an issue of debt
securities, the lending of portfolio securities, or the investment of the
Portfolio's assets in repurchase agreements, shall not be considered the
making of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as
a result, more than 25% of its gross assets would be invested in securities of
issuers whose principal business activities are in the same industry (except
(1) there is no limitation with respect to obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities and repurchase
agreements collateralized by such obligations).
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are non-fundamental and may be changed
by the Trustees of the Trust without shareholder approval. Although
shareholder approval is not necessary, the Trust intends to notify its
shareholders before implementing any material change in any non-fundamental
investment restriction.
STRONG INTERNATIONAL STOCK PORTFOLIO AND STRONG GROWTH PORTFOLIO
Each of the Strong Portfolios may not:
1. Sell securities short, unless the Portfolio owns or has the right to
obtain securities equivalent in kind and amount to the securities sold short,
or unless it covers such short sale as required by the current rules and
positions of the SEC or its staff, and provided that transactions in options,
futures contracts, options on futures contracts, or other derivative
instruments are not deemed to constitute selling securities short.
2. Purchase securities on margin, except that the Portfolio may obtain
such short-term credits as are necessary for the clearance of transactions;
and provided that margin deposits in connection with futures contracts,
options on futures contracts, or other derivative instruments shall not
constitute purchasing securities on margin.
3. Invest in illiquid securities if, as a result of such investment,
more than 15% of its net assets would be invested in illiquid securities, or
such other amounts as may be permitted under the 1940 Act.
4. Purchase securities of other investment companies except in
compliance with the 1940 Act and applicable state law.
5. Invest all of its assets in the securities of a single open-end
investment management company with substantially the same fundamental
investment objective, restrictions and policies as the Portfolio.
6. Purchase the securities of any issuer (other than securities issued
or guaranteed by domestic or foreign governments or political subdivisions
thereof) if, as a result, more than 5% of its total assets would be invested
in the securities of issuers that, including predecessor or unconditional
guarantors, have a record of less than three years of continuous operation.
This policy does not apply to securities of pooled investment vehicles or
mortgage or asset-backed securities.
7. Invest in direct interests in oil, gas, or other mineral exploration
programs or leases; however, the Portfolio may invest in the securities of
issuers that engage in these activities.
8. Engage in futures or options on futures transactions which are
impermissible pursuant to Rule 4.5 under the CEA and, in accordance with Rule
4.5, will use futures or options on futures transactions solely for bona fide
hedging transactions (within the meaning of the CEA), provided, however, that
the Portfolio may, in addition to bona fide hedging transactions, use futures
and options on futures transactions if the aggregate initial margin and
premiums required to establish such positions, less the amount by which any
such options positions are in the money (within the meaning of the CEA), do
not exceed 5% of the Portfolio's net assets.
In addition, (i) the aggregate value of securities underlying call
options on securities written by the Portfolio or obligations underlying put
options on securities written by the Portfolio determined as of the date the
options are written will not exceed 50% of the Portfolio's net assets; (ii)
the aggregate premiums paid on all options purchased by the Portfolio and
which are being held will not exceed 20% of the Portfolio's net assets; (iii)
the Portfolio will not purchase put or call options, other than hedging
positions, if, as a result thereof, more than 5% of its total assets would be
so invested; and (iv) the aggregate margin deposits required on all futures
and options on futures transactions being held will not exceed 5% of the
Portfolio's total assets.
9. Pledge, mortgage or hypothecate any assets owned by the Portfolio
except as may be necessary in connection with permissible borrowings or
investments and then such pledging, mortgaging, or hypothecating may not
exceed 33 1/3% of the Portfolio's total assets at the time of the borrowing or
investment.
10. Purchase or retain the securities of any issuer if any officer or
trustee of the Trust or its investment advisor beneficially owns more than 1/2
of 1% of the securities of such issuer and such officers and trustees together
own beneficially more than 5% of the securities of such issuer.
11. Purchase warrants, valued at the lower of cost or market value, in
excess of 5% of the Portfolio's net assets. Included in that amount, but not
to exceed 2% of the Portfolio's net assets, may be warrants that are not
listed on any stock exchange. Warrants acquired by the Portfolio in units or
attached to securities are not subject to these restrictions.
12. Borrow money except (i) from banks or (ii) through reverse
repurchase agreements or mortgage dollar rolls, and will not purchase
securities when bank borrowings exceed 5% of its total assets.
13. Make any loans other than loans of portfolio securities, except
through (i) purchases of debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
SALOMON U.S. QUALITY BOND PORTFOLIO
The Salomon U.S. Quality Bond Portfolio's additional investment restrictions
are as follows:
(a) Portfolio investments in warrants, valued at the lower of cost or
market, may not exceed 5% of the value of its net assets. Included within
that amount, but not to exceed 2% of the value of a Portfolio's net assets,
may be warrants that are not listed on the New York or American Stock
Exchanges. Warrants acquired by a Portfolio in units or attached to
securities shall be deemed to be without value for the purpose of monitoring
this policy.
(b) The Portfolio does not currently intend to sell securities short,
unless they own or have the right to obtain securities equivalent in kind and
amount to the securities sold short without the payment of any additional
consideration therefor, and provided that transactions in futures, options,
swaps and forward contracts are not deemed to constitute selling securities
short.
(c) The Portfolio does not currently intend to purchase securities on
margin, except that the Portfolio may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin payments
and other deposits in connection with transactions in futures, options, swaps
and forward contracts shall not be deemed to constitute purchasing securities
on margin.
(d) The Portfolio does not currently intend to (i) purchase securities
of other investment companies, except in the open market where no commission
except the ordinary broker's commission is paid, or (ii) purchase or retain
securities issued by other open-end investment companies. Limitations (i) and
(ii) do not apply to money market funds or to securities received as
dividends, through offers of exchange, or as a result of a reorganization,
consolidation, or merger.
(e) The Portfolio does not currently intend to invest directly in oil,
gas, or other mineral development or exploration programs or leases; however,
the Portfolio may own debt or equity securities of companies engaged in those
businesses.
(f) The Portfolio intends to comply with the CFTC regulations limiting
its investments in futures and options for non-hedging purposes.
MAS VALUE PORTFOLIO
The MAS Value Portfolio will not:
(a) enter into futures contracts to the extent that its outstanding
obligations to purchase securities under these contracts in combination with
its outstanding obligations with respect to options transactions would exceed
50% of its total assets and will maintain assets sufficient to meet its
obligations under such contracts in a segregated account with the custodian
bank or will otherwise comply with the SEC's position on asset coverage.
(b) invest in puts, calls, straddles or spreads except as described
above in (a);
(c) invest in warrants, valued at the lower of cost or market, in excess
of 5% of the value of its total assets. Included within that amount, but not
to exceed 2% of the value of the Portfolio's net assets, may be warrants that
are not listed on the New York or American Stock Exchanges or an exchange with
comparable listing requirements. Warrants attached to securities are not
subject to this limitation.
(d) purchase on margin, except for use of short-term credit as may be
necessary for the clearance of purchases and sales of securities, but it may
make margin deposits in connection with transactions in options, futures, and
options on futures; or sell short unless, by virtue of its ownership of other
securities, it has the right to obtain securities equivalent in kind and
amount to the securities sold and, if the right is conditional, the sale is
made upon the same conditions. Transactions in futures contracts and options
are not deemed to constitute selling securities short;
(e) purchase or retain securities of an issuer if those officers and
trustees of the Trust or its investment adviser or sub-adviser owning more
than 1/2 of 1% of such securities together own more than 5% of such
securities;
(f) borrow money other than from banks or other Portfolios of the Trust,
provided such borrowing is not inconsistent with the 1940 Act, as amended, or
the Rules and Regulations or interpretations or orders of the Securities and
Exchange Commission thereunder; or purchase additional securities when
borrowings exceed 5% of total (gross) assets;
(g) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 33 1/3% of its total assets at fair market value;
(h) invest more than an aggregate of 15% of the net assets of the
Portfolio, determined at the time of investment, in securities subject to
legal or contractual restrictions on resale or securities for which there are
no readily available markets, including repurchase agreements having
maturities of more than seven days and OTC options provided that there is no
limitation with respect to or arising out of investment in (i) securities that
have legal or contractual restrictions on resale but have a readily available
market or (ii) securities that are not registered under the 1933 Act but which
can be sold to qualified institutional investors in accordance with Rule 144A
under the 1933 Act;
(i) invest for the purpose of exercising control over management of any
company;
(j) invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions or
in connection with mergers, acquisitions of assets or consolidations and
except as may otherwise be permitted by the 1940 Act, as amended;
(k) invest more than 5% of its total assets in securities of issuers
(other than securities issued or guaranteed by U.S. or foreign governments or
political subdivisions thereof) which have (with predecessors) a record of
less than three years' continuous operation; and
(l) write or acquire options or interests in oil, gas or other mineral
exploration or development programs or leases.
LEXINGTON CORPORATE LEADERS PORTFOLIO
The Lexington Corporate Leaders Portfolio will not:
i. purchase the securities of any other investment company, except as
permitted under the 1940 Act.
ii. purchase any securities on margin or make short sales of
securities, other than short sales "against the box", or purchase securities
on margin except for short-term credits necessary for clearance of portfolio
transactions, provided that this restriction will not be applied to limit the
use of options, futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment programs of
the Portfolio.
iii. buy securities from or sell securities (other than securities
issued by the Portfolio) to any of its officers, trustees or its investment
adviser or sub-adviser or distributor as principal.
iv. contract to sell any security or evidence of interest therein,
except to the extent that the same shall be owned by the Portfolio.
v. purchase securities of an issuer if to the Portfolio's knowledge,
one or more of the Trustees or officers of the Trust, the adviser or the
sub-adviser individually owns beneficially more than 0.5% and together own
beneficially more than 5% of the securities of such issuer nor will the
Portfolio hold the securities of such issuer.
vi. except for investments which, in the aggregate, do not exceed 5% of
the Portfolio's total assets taken at market value, purchase securities unless
the issuer thereof or any company on whose credit the purchase was based has a
record of at least three years continuous operations prior to the purchase.
vii. invest for the purpose of exercising control over or management of
any company.
viii. write, purchase or sell puts, calls or combinations thereof.
However, the Portfolio may invest up to 15% of the value of its assets in
warrants. This restriction on the purchase of warrants does not apply to
warrants attached to, or otherwise included in, a unit with other securities.
ix. The Portfolio will not invest more than 15% of its total assets in
illiquid securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in the
usual course of business without taking a materially reduced price. Such
securities include, but are not limited to, time deposits and repurchase
agreements with maturities longer than seven days. Securities that may be
resold under Rule 144A or securities offered pursuant to Section 4(2) of the
1933 Act, shall not be deemed illiquid solely by reason of being unregistered.
The Sub-Adviser shall determine whether a particular security is deemed to be
liquid based on the trading markets for the specific security and other
factors.
x. The Portfolio will not purchase interests in oil, gas, mineral
leases or other exploration programs; however, this policy will not prohibit
the acquisition of securities of companies engaged in the production or
transmission of oil, gas or other materials.
BERKELEY SMALLER COMPANIES PORTFOLIO
The Berkeley Smaller Companies Portfolio does not currently intend to:
(i) Engage in any reverse repurchase agreements if, as a result, more
than 5% of the Portfolio's net assets would be subject to reverse repurchase
agreements.
(ii) Purchase or otherwise acquire any security or enter into a
repurchase agreement with respect to any security if, as a result, more than
5% of the Portfolio's net assets (taken at current value) would be invested in
repurchase agreements not entitling the holder to payment of interest and
principal within seven days, or in securities that are illiquid by virtue of
legal or contractual restrictions on resale or for which there is no readily
available market.
(iii) Purchase securities of another investment company, except as
permitted by the 1940 Act and other applicable laws.
(iv) Lend assets, other than portfolio securities, to other parties,
except by purchasing debt securities and engaging in repurchase agreements.
Portfolio securities may be loaned only if continuously collateralized at
least 100% by "marking-to-market" daily. The Portfolio, however, does not
currently intend to lend its portfolio securities during the current fiscal
year.
(v) Make short sales of securities or maintain a short position, unless
at all times when a short position is open the Portfolio owns an equal amount
of such securities or securities convertible or exchangeable into, without
payment of any further consideration, securities of the same issuer as, and
equal in amount to, the securities sold short ("short sales against the box"),
and unless not more than 5% of the Portfolio's net assets (taken at market
value) is held as collateral for such sales at any one time.
(vi) Purchase a security if, as a result thereof, more than 5% of the
Portfolio's net assets would be invested in warrants or more than 2% of such
Portfolio's net assets will be invested in warrants which are not listed on
the American or New York Stock Exchange.
(vii) Purchase the securities of any issuer if, as a result thereof,
more than 5% of the value of the total assets of the Portfolio would be
invested in the securities of companies which, including predecessors, have a
record of less than three years' continuous operations.
The U.S. Government has from time to time imposed restrictions, through
taxation and otherwise, on foreign investments by U.S. entities such as the
Portfolio. If such restrictions should be reinstituted for the Portfolio, it
might become necessary for the Portfolio to invest all or substantially all of
its securities in U.S. securities. In such event, the Board of Trustees would
reevaluate the Portfolio's investment objective and policies, but would adopt
any revised investment objectives and fundamental policies only after approval
by the shareholders holding a majority (as defined in the 1940 Act) of the
shares of the Portfolio.
The Portfolio's ability to borrow money creates special risks not associated
with funds that have similar investment objectives and policies but do not
have the ability to borrow money or borrow at the same level as the Portfolio.
Borrowings by the Portfolio may have either a positive or negative effect on
its level of investment income. Any investment income or gains earned from
amounts borrowed which is in excess of the interest due on and other costs of
such borrowings may cause the Portfolio's investment income to be greater than
would otherwise be the case. Conversely, if the investment performance of any
amounts borrowed fails to cover the interest due on and other costs of such
borrowings, the Portfolio's investment income will be less than would
otherwise be the case.
MFS TOTAL RETURN PORTFOLIO
The MFS Total Return Portfolio will not:
(1) invest in illiquid investments, including securities subject to
legal or contractual restrictions on resale or for which there is no readily
available market (e.g., trading in the security is suspended, or, in the case
of unlisted securities, where no market exists) if more than 15% of the
Portfolio's assets (taken at market value) would be invested in such
securities. Repurchase agreements maturing in more than seven days will be
deemed to be illiquid for purposes of the Portfolio's limitation on investment
in illiquid securities. Securities that are not registered under the 1933 Act
and sold in reliance on Rule 144A thereunder, but are determined to be liquid
by the Trust's Board of Trustees (or its delegee), will not be subject to this
15% limitation;
(2) purchase securities issued by any other investment company in excess
of the amount permitted by the 1940 Act, except when such purchase is part of
a plan of merger or consolidation;
(3) purchase any securities or evidences of interest therein on margin,
except that the Portfolio may obtain such short-term credit as may be
necessary for the clearance of any transaction and except that the Portfolio
may make margin deposits in connection with any type of swap, option, Futures
Contracts and Forward Contracts;
(4) sell any security which the Portfolio does not own unless by virtue
of its ownership of other securities the Portfolio has at the time of sale a
right to obtain securities without payment of further consideration equivalent
in kind and amount to the securities sold and provided that if such right is
conditional, the sale is made upon the same conditions;
(5) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross
assets. For purposes of this restriction, collateral arrangements with respect
to any type of swap, option, Futures Contracts and Forward Contracts and
payments of initial and variation margin in connection therewith, are not
considered a pledge of assets;
(6) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the purchase, ownership, holding or sale
of (1) warrants where the grantor of the warrants is the issuer of the
underlying securities or (ii) put or call options or combinations thereof with
respect to securities, indices of securities, swaps, foreign currencies and
Futures Contracts;
(7) invest for the purpose of exercising control of management.
These investment restrictions are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.
MANAGEMENT OF THE TRUST
The Trust's Board of Trustees has the responsibility for the overall
management of the Trust, including general supervision and review of their
investment activities. The Board of Trustees, in turn, appoints the officers
who are responsible for administering the day-to-day operations of the Trust.
Listed below are the Trustees and officers of the Trust and their affiliations
and principal occupations for the past five years.
<TABLE>
<CAPTION>
<S> <C> <C>
Position Held Principal Occupation
Name and Address With the Trust During Past 5 Years
- ------------------- ---------------------- -------------------------------
Mark E. Prillaman* President, Principal Executive Vice President
Executive Officer and and Chief Marketing Officer of
Trustee the Life Company and Adviser
since February 1994;
prior thereto, Regional
Marketing Director, American
Skandia Assurance Company
Lawrence F. Graham Trustee Olympia & York
Stephen J. Klein Trustee Consultant, Computer and
Communications Technology
from 1995 to present; Vice
President and Partner,
Effron Enterprises,
Incorporated and Plan
Sponsor from 1985 to 1995.
Raymond L. Pfeister Trustee Principal, Chief Marketing
Officer of Fred Alger
Management, Inc.
Jerry T. Tamura Vice President and Vice President of the Life
Secretary Company since 1989.
James Winther Trustee
<FN>
* Interested person of the Trust within the meaning of the 1940 Act.
</TABLE>
Each Trustee of the Trust who is not an interested person of the Trust or
Adviser or Sub-Adviser receives fee of $2,500 for attendance at each Trustees'
meeting and is reimbursed for expenses incurred in connection with attending
Trustees' meetings. No Trustee receives any other compensation directly from
the Trust.
The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, except if it is determined in the manner specified in the Declaration
of Trust that they have not acted in good faith in the reasonable belief that
their actions were in the best interests of the Trust or that such
indemnification would relieve any officer or Trustee of any liability to the
Trust or its shareholders by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of his or her duties. The Trust, at its
expense, may provide liability insurance for the benefit of its Trustees and
officers.
Under the Investment Advisory Agreement between the Trust and the Adviser
(the "Investment Advisory Agreement"), the Adviser, at its expense, provides
the Portfolios with investment advisory services and advises and assists the
officers of the Trust in taking such steps as are necessary or appropriate to
carry out the decisions of its Trustees regarding the conduct of business of
the Trust and each Portfolio. The fees to be paid under the Investment
Advisory Agreement are set forth in the Trust's prospectus.
Under the Investment Advisory Agreement, the Adviser is obligated to
formulate a continuing program for the investment of the assets of each
Portfolio of the Trust in a manner consistent with each Portfolio's investment
objectives, policies and restrictions and to determine from time to time
securities to be purchased, sold, retained or lent by the Trust and implement
those decisions, subject always to the provisions of the Trust's Declaration
of Trust and By-laws, and of the Investment Company Act of 1940, and subject
further to such policies and instructions as the Trustees may from time to
time establish.
The Investment Advisory Agreement further provides that the Adviser shall
furnish the Trust with office space and necessary personnel, pay ordinary
office expenses, pay all executive salaries of the Trust and furnish, without
expense to the Trust, the services of such members of its organization as may
be duly elected officers or Trustees of the Trust.
Under the Investment Advisory Agreement, the Trust is responsible for all its
other expenses including, but not limited to, the following expenses: legal,
auditing or accounting expenses, Trustees' fees and expenses, insurance
premiums, brokers' commissions, taxes and governmental fees, reports and
notices to shareholders, and fees and disbursements of custodians, transfer
agents, registrars, shareholder servicing agents and dividend disbursing
agents, and certain expenses with respect to membership fees of industry
associations.
The Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at the Adviser's own cost and expense, for the purpose of
managing the investment of the assets of one or more Portfolios.
The Investment Advisory Agreement provides that neither the Adviser nor any
director, officer or employee of the Adviser will be liable for any loss
suffered by the Trust in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations and duties. In addition, the
Agreement provides for indemnification of the Adviser by the Trust.
The Investment Advisory Agreement may be terminated without penalty by vote
of the Trustees, as to any Portfolio by the shareholders of that Portfolio, or
by the Adviser on 60 days written notice. The Agreement also terminates
without payment of any penalty in the event of its assignment. In addition,
the Investment Advisory Agreement may be amended only by a vote of the
shareholders of the affected Portfolio(s), and provides that it will continue
in effect from year to year only so long as such continuance is approved at
least annually with respect to each Portfolio by vote of either the Trustees
or the shareholders of the Portfolio, and, in either case, by a majority of
the Trustees who are not "interested persons" of the Adviser. In each of the
foregoing cases, the vote of the shareholders is the affirmative vote of a
"majority of the outstanding voting securities" as defined in the 1940 Act.
The Adviser has undertaken to bear certain operating expenses of each
Portfolio as described in the Prospectus.
State Street Bank and Trust Company provides certain accounting and other
services to the Trust.
SUB-ADVISERS
Each of the Sub-Advisers described in the Prospectus serves as Sub-Adviser to
one or more of the Portfolios of the Trust pursuant to separate written
agreements. Certain of the services provided by, and the fees paid to, the
Sub-Advisers are described in the Prospectus under "Management of the Trust -
Sub-Advisers."
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges and other agency transactions involve
the payment by the Trust of negotiated brokerage commissions. Such
commissions vary among different brokers. Also, a particular broker may
charge different commissions according to such factors as the difficulty and
size of the transaction. Transactions in foreign securities often involve the
payment of fixed brokerage commissions, which are generally higher than those
in the United States. There is generally no stated commission in the case of
securities traded in the over-the-counter markets, but the price paid by the
Trust usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Trust includes a disclosed,
fixed commission or discount retained by the underwriter or dealer.
It is currently intended that the Sub-Advisers will place all orders for the
purchase and sale of portfolio securities for the Trust and buy and sell
securities for the Trust through a substantial number of brokers and dealers.
In so doing, the Sub-Advisers will use their best efforts to obtain for the
Trust the best price and execution available. In seeking the best price and
execution, the Sub-Advisers, having in mind the Trust's best interests, will
consider all factors they deem 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-dealer involved, and the quality of service rendered
by the broker-dealer in other transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional
investors to receive research, statistical, and quotation services from
broker-dealers which execute portfolio transactions for the clients of such
advisers. Consistent with this practice, the Sub-Advisers may receive
research, statistical, and quotation services from any broker-dealers with
which they place the Trust's portfolio transactions. These services, which in
some cases may also be purchased for cash, include such matters as general
economic and security market reviews, industry and company reviews,
evaluations of securities, and recommendations as to the purchase and sale of
securities. Some of these services may be of value to the Sub-Advisers and/or
their affiliates in advising various other clients (including the Trust),
although not all of these services are necessarily useful and of value in
managing the Trust. The management fees paid by the Trust are not reduced
because the Sub-Advisers and/or their affiliates may receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, a
Sub-Adviser may cause a Portfolio to pay a broker-dealer which provides
brokerage and research services to the Sub-Adviser an amount of disclosed
commission for effecting a securities transaction for the Portfolio in excess
of the commission which another broker-dealer would have charged for effecting
that transaction provided that the Sub-Adviser determines in good faith that
such commission was reasonable in relation to the value of the brokerage and
research services provided by such broker-dealer viewed in terms of that
particular transaction or in terms of all of the accounts over which
investment discretion is so exercised. A Sub-Adviser's authority to cause a
Portfolio to pay any such greater commissions is also subject to such policies
as the Adviser or the Trustees may adopt from time to time.
INVESTMENT DECISIONS. Investment decisions for the Trust and for the other
investment advisory clients of the Sub-Advisers are made with a view to
achieving their respective investment objectives and after consideration of
such factors as their current holdings, availability of cash for investment,
and the size of their investments generally. Frequently, a particular
security may be bought or sold for only one client or in different amounts and
at different times for more than one but less than all clients. Likewise, a
particular security may be bought for one or more clients when one or more
other clients are selling the security. In addition, purchases or sales of
the same security may be made for two or more clients of a Sub-Adviser on the
same day. In such event, such transactions will be allocated among the
clients in a manner believed by the Sub-Adviser to be equitable to each. In
some cases, this procedure could have an adverse effect on the price or amount
of the securities purchased or sold by the Trust. Purchase and sale orders
for the Trust may be combined with those of other clients of a Sub-Adviser in
the interest of achieving the most favorable net results for the Trust.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined daily as of
4:00 p.m. New York time on each day the New York Stock Exchange is open for
trading. The New York Stock Exchange is normally closed on the following
national holidays: New Year's Day, President's Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
The value of a foreign security is determined in its national currency as of
the close of trading on the foreign exchange on which it is traded or as of
4:00 p.m. New York time, if that is earlier, and that value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined.
The net asset value of the shares of the Portfolios is determined by dividing
the total assets of the Portfolio, less all liabilities, by the total number
of shares outstanding. Securities traded on a national securities exchange or
quoted on the NASDAQ National Market System are valued at their last-reported
sale price on the principal exchange or reported by NASDAQ or, if there is no
reported sale, and in the case of over-the-counter securities not included in
the NASDAQ National Market System, at a bid price estimated by a broker or
dealer. Debt securities, including zero-coupon securities, and certain
foreign securities will be valued by a pricing service. Other foreign
securities will be valued by the Trust's custodian. Securities for which
current market quotations are not readily available and all other assets are
valued at fair value as determined in good faith by the Trustees, although the
actual calculations may be made by persons acting pursuant to the direction of
the Trustees.
If any securities held by a Portfolio are restricted as to resale, their fair
value is generally determined as the amount which the Trust could reasonably
expect to realize from an orderly disposition of such securities over a
reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the
restrictions on disposition of the securities (including any registration
expenses that might be borne by the Trust in connection with such
disposition). In addition, specific factors are also generally considered,
such as the cost of the investment, the market value of any unrestricted
securities of the same class (both at the time of purchase and at the time of
valuation), the size of the holding, the prices of any recent transactions or
offers with respect to such securities, and any available analysts' reports
regarding the issuer.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
New York Stock Exchange. The values of these securities used in determining
the net asset value of the Trust's shares are computed as of such times.
Also, because of the amount of time required to collect and process trading
information as to large numbers of securities issues, the values of certain
securities (such as convertible bonds and U.S. Government Securities) are
determined based on market quotations collected earlier in the day at the
latest practicable time prior to the close of the Exchange. Occasionally,
events affecting the value of such securities may occur between such times and
the close of the Exchange which will not be reflected in the computation of
the Trust's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value, in the manner described above.
The proceeds received by each Portfolio for each issue or sale of its shares,
and all income, earnings, profits, and proceeds thereof, subject only to the
rights of creditors, will be specifically allocated to such Portfolio, and
constitute the underlying assets of that Portfolio. The underlying assets of
each Portfolio will be segregated on the Trust's books of account, and will be
charged with the liabilities in respect of such Portfolio and with a share of
the general liabilities of the Trust. Expenses with respect to any two or
more Portfolios may be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can
otherwise be fairly made.
TAXES
Each Portfolio of the Trust intends to qualify each year and elect to be
taxed as a regulated investment company under Subchapter M of the United
States Internal Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal
income tax on any of its net investment income or net realized capital gains
that are distributed to the separate account of the Life Company. As a
Massachusetts business trust, a Portfolio under present law will not be
subject to any excise or income taxes in Massachusetts.
In order to qualify as a "regulated investment company," a Portfolio must,
among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities, or foreign currencies, and
other income (including gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities,
or currencies; (b) derive less than 30% of its gross income from the sale or
other disposition of certain assets (including stock and securities) held less
than three months; (c) diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the value of its total assets
consists of cash, cash items, U.S. Government Securities, and other securities
limited generally with respect to any one issuer to not more than 5% of the
total assets of the Portfolio and not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any issuer (other than U.S. Government
Securities). In order to receive the favorable tax treatment accorded
regulated investment companies and their shareholders, moreover, a Portfolio
must in general distribute at least 90% of its interest, dividends, net
short-term capital gain, and certain other income each year.
With respect to investment income and gains received by a Portfolio from
sources outside the United States, such income and gains may be subject to
foreign taxes which are withheld at the source. The effective rate of foreign
taxes in which a Portfolio will be subject depends on the specific countries
in which its assets will be invested and the extent of the assets invested in
each such country and therefore cannot be determined in advance.
A Portfolio's ability to use options, futures, and forward contracts and
other hedging techniques, and to engage in certain other transactions, may be
limited by tax considerations. A Portfolio's transactions in
foreign-currency-denominated debt instruments and its hedging activities will
likely produce a difference between its book income and its taxable income.
This difference may cause a portion of the Portfolio's distributions of book
income to constitute returns of capital for tax purposes or require the
Portfolio to make distributions exceeding book income in order to permit the
Trust to continue to qualify, and be taxed under Subchapter M of the Code, as
a regulated investment company.
Under federal income tax law, a portion of the difference between the
purchase price of zero-coupon securities in which a Portfolio has invested and
their face value ("original issue discount") is considered to be income to the
Portfolio each year, even though the Portfolio will not receive cash interest
payments from these securities. This original issue discount (imputed income)
will comprise a part of the net investment income of the Portfolio which must
be distributed to shareholders in order to maintain the qualification of the
Portfolio as a regulated investment company and to avoid federal income tax at
the level of the Portfolio.
It is the policy of each of the Portfolios to meet the requirements of the
Code to qualify as a regulated investment company that is taxed pursuant to
Subchapter M of the Code. One of these requirements is that less than 30% of a
Portfolio's gross income must be derived from gains from sale or other
disposition of securities held for less than three months (with special rules
applying to so-called designated hedges). Accordingly, a Portfolio will be
restricted in selling securities held or considered under Code rules to have
been held less than three months, and in engaging in hedging or other
activities (including entering into options, futures, or short-sale
transactions) which may cause the Trust's holding period in certain of its
assets to be less than three months.
This discussion of the federal income tax and state tax treatment of the
Trust and its shareholders is based on the law as of the date of this SAI. It
does not describe in any respect the tax treatment or offsets of any insurance
or other product pursuant to which investments in the Trust may be made.
DIVIDENDS AND DISTRIBUTIONS
Each of the Portfolios will declare and distribute dividends from net
investment income, if any, and will distribute its net realized capital gains,
if any, at least annually. Both dividends and capital gain distributions will
be made in shares of such Portfolios unless an election is made on behalf of a
separate account to receive dividends and capital gain distributions in cash.
PERFORMANCE INFORMATION
A Portfolio's yield is presented for a specified 30-day period (the "base
period"). Yield is based on the amount determined by (i) calculating the
aggregate of dividends and interest earned by the Portfolio during the base
period less expenses accrued for that period, and (ii) dividing that amount by
the product of (A) the average daily number of shares of the Portfolio
outstanding during the base period and entitled to receive dividends and (B)
the net asset value per share of the Portfolio on the last day of the base
period. The result is annualized on a compounding basis to determine the
Portfolio's yield. For this calculation, interest earned on debt obligations
held by a Portfolio is generally calculated using the yield to maturity (or
first expected call date) of such obligations based on their market values
(or, in the case of receivables-backed securities such as Ginnie Maes, based
on cost). Dividends on equity securities are accrued daily at their stated
dividend rates.
From time to time the Salomon Money Market Portfolio may make available
information as to its "yield" and "effective yield." The "yield" of the
Salomon Money Market Portfolio refers to the income generated by an investment
in the Portfolio over a seven-day period. 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 the Salomon Money
Market Portfolio is assumed to be reinvested. The effective yield will be
slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
Total return of a Portfolio for periods longer than one year is determined by
calculating the actual dollar amount of investment return on a $1,000
investment in the Portfolio made at the beginning of each period, then
calculating the average annual compounded rate of return which would produce
the same investment return on the $1,000 investment over the same period.
Total return for a period of one year or less is equal to the actual
investment return on a $1,000 investment in the Portfolio during that period.
Total return calculations assume that all Portfolio distributions are
reinvested at net asset value on their respective reinvestment dates.
From time to time, the Adviser may reduce its compensation or assume expenses
in respect of the operations of a Portfolio in order to reduce the Portfolio's
expenses. Any such waiver or assumption would increase a Portfolio's yield
and total return during the period of the waiver or assumption.
The performance of the Portfolios may, from time to time, be compared to that
of other mutual funds tracked by mutual fund rating services, to broad groups
of comparable mutual funds, or to unmanaged indices which may assume
investment of dividends but generally do not reflect deductions for
administrative and management costs.
The Prospectus contains historical performance information of Strong Growth
Fund, Value Portfolio of the MAS Funds, MFS Total Return Fund, Strong
International Stock Fund, Govett Smaller Companies Fund which are public
mutual funds which have the same investment objective and follow substantially
the same investment strategies as Strong Growth Portfolio, MAS Value
Portfolio, MFS Total Return Portfolio, Strong International Stock Portfolio,
Berkeley Smaller Companies Portfolio, respectively.
The performance of those public mutual funds is commonly measured as total
return. An average annual compounded rate of return ("T") may be computed by
using the redeemable value at the end of a specified period ("ERV") of a
hypothetical initial investment of $1,000 ("P") over a period of time ["n"]
according to the formula:
n
P (1 + T) = ERV
The Prospectus contains comparative performance information with respect to
the S&P 500 Composite Stock Price Index ("S&P 500 Index"). The S&P 500 Index
is a broad index of common stock prices which assumes reinvestment of
distributions and is calcualted without regard to tax consequences or the
costs of investing.
Investors should not consider this performance data as an indication of the
future performance of any of the Portfolios in the Trust.
From time to time indications of the Portfolios' past performance may be
published. Such performance will be measured by independent sources such as
(but not limited to) Lipper Analytical Services, Incorporated, Weisenberger
Investment Companies Service, Bank Rate Monitor, Financial Planning Magazine,
Standard & Poor's Indices, Dow Jones Industrial Averages, VARDS, Barron's,
Business Week, Changing Times, Financial World, Forbes, Fortune, Money,
Personal Investor, Sylvia Porter's Personal Finance and The Wall Street
Journal. Information provided to the NASD for review may be used as
advertisements for publication in regional and local newspapers. In addition,
Portfolio performance may be advertised relative to certain indices and
benchmark investments, including: (a) the Lipper Analytical Services, Inc.
Mutual Fund Performance Analysis, Fixed-Income Analysis and Mutual Fund
indices (which measure total return and average current yield for the mutual
fund industry and rank mutual fund performance); (b) the CDA Mutual Fund
Report published by CDA Investment Technologies, Inc. (which analyzes price,
risk and various measures of return for the mutual fund industry); (c) the
Consumer Price Index published by the U.S. Bureau of Labor Statistics (which
measures changes in the price of goods and services); (d) Stocks, Bonds, Bills
and Inflation published by Ibbotson Associates (which provides historical
performance figures for stocks, government securities and inflation); (e) the
Hambrecht & Quist Growth Stock Index; (f) the NASDAQ OTC Composite Prime
Return; (g) the Russell Midcap Index; (h) the Russell 2000 Index - Total
Return; (i) the ValueLine Composite-Price Return; (j) the Wilshire 4500 Index;
(k) the Salomon Brothers' World Bond Index (which measures the total return in
U.S. dollar terms of government bonds, Eurobonds and non-U.S. bonds of ten
countries, with all such bonds having a minimum maturity of five years); (l)
the Shearson Lehman Brothers Aggregate Bond Index or its component indices
(the Aggregate Bond Index measures the performance of Treasury, U.S.
Government agencies, mortgage and Yankee bonds); (m) the S&P Bond indices
(which measure yield and price of corporate, municipal and U.S. Government
bonds); (n) the J.P. Morgan Global Government Bond Index; (o) other taxable
investments including certificates of deposit, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds and repurchase
agreements; (p) historical investment data supplied by the research
departments of Goldman Sachs, Lehman Brothers, First Boston Corporation,
Morgan Stanley (including EAFE), Salomon Brothers, Merrill Lynch, Donaldson
Lufkin and Jenrette or other providers of such data; (q) the FT-Actuaries
Europe and Pacific Index; (r) mutual fund performance indices published by
Variable Annuity Research & Data Service; and (s) mutual fund performance
indices published by Morningstar, Inc. The composition of the investment in
such indices and the characteristics of such benchmark investments are not
identical to, and in some cases are very different from, those of a Portfolio.
These indices and averages are generally unmanaged and the items included in
the calculations of such indices and averages may be different from those of
the equations used by the Trust to calculate a Portfolio's performance
figures.
A Portfolio's investment results will vary from time to time depending upon
market conditions, the composition of its investment portfolio and its
operating expenses. Yield and performance information of any Portfolio will
not be compared with such information for funds that offer their shares
directly to the public, because Portfolio performance data does not reflect
charges imposed by the Life Company on the variable contracts. The effective
yield and total return for a Portfolio should be distinguished from the rate
of return of a corresponding division of the Life Company's separate account,
which rate will reflect the deduction of additional charges, including
mortality and expense risk charges, and will therefore be lower. Accordingly,
performance figures for a Portfolio will only be advertised if comparable
performance figures for the corresponding division of the separate account are
included in the advertisements. Variable annuity contractholders should
consult the variable annuity contract prospectus for further information.
Each Portfolio's results also should be considered relative to the risks
associated with its investment objectives and policies.
SHAREHOLDER COMMUNICATIONS
Owners of VA contracts issued by the Life Company for which shares of one or
more Portfolios are the investment vehicle are entitled to receive from the
Life Company unaudited semi-annual financial statements and audited year-end
financial statements certified by the Trust's independent public accountants.
Each report will show the investments owned by the Portfolio and the market
value thereof and will provide other information about the Portfolio and its
operations.
ORGANIZATION AND CAPITALIZATION
The Trust is an open-end investment company established under the laws of The
Commonwealth of Massachusetts by a Declaration of Trust dated January 23,
1995, as amended.
Shares entitle their holders to one vote per share, with fractional shares
voting proportionally; however, a separate vote will be taken by each
Portfolio on matters affecting an individual Portfolio. For example, a change
in a fundamental investment policy for the Strong Growth Portfolio would be
voted upon only by shareholders of the Strong Growth Portfolio. Additionally,
approval of the Investment Advisory Agreement is a matter to be determined
separately by each Portfolio. Approval by the shareholders of one Portfolio
is effective as to that Portfolio. Shares have noncumulative voting rights.
Although the Trust is not required to hold annual meetings of its
shareholders, shareholders have the right to call a meeting to elect or remove
Trustees or to take other actions as provided in the Declaration of Trust.
Shares have no preemptive or subscription rights, and are transferable.
Shares are entitled to dividends as declared by the Trustees, and if a
Portfolio were liquidated, the shares of that Portfolio would receive the net
assets of that Portfolio. The Trust may suspend the sale of shares at any
time and may refuse any order to purchase shares.
The Trust is authorized to subdivide each series (Portfolio) into two or more
classes. Currently, shares of the Portfolios are divided into Class A and
Class B. Each class of shares of a Portfolio is entitled to the same rights
and privileges as all other classes of the Portfolio, provided however, that
each class bears the expenses related to its distribution arrangements, as
well as any other expenses attributable to the class and unrelated to managing
the Portfolio's portfolio securities. Any matter that affects only the
holders of a particular class of shares may be voted on only by such
shareholders.
Additional Portfolios may be created from time to time with different
investment objectives or for use as funding vehicles for variable life
insurance policies or for different variable annuity contracts. Any
additional Portfolios may be managed by investment advisers or sub-advisers
other than the current Adviser and Sub-Advisers. In addition, the Trustees
have the right, subject to any necessary regulatory approvals, to create
additional classes of shares in a Portfolio, with the classes being subject
to different charges and expenses and having such other different rights as
the Trustees may prescribe and to terminate any Portfolio of the Trust.
PORTFOLIO TURNOVER
The portfolio turnover rate of a Portfolio is defined by the Securities and
Exchange Commission as the ratio of the lesser of annual sales or purchases to
the monthly average value of the portfolio, excluding from both the numerator
and the denominator securities with maturities at the time of acquisition of
one year or less. Portfolio turnover generally involves some expense to a
Portfolio, including brokerage commissions or dealer mark-ups and other
transaction costs on the sale of securities and reinvestment in other
securities.
The Trust's Board of Trustees periodically reviews the Adviser's and
Sub-Advisers' performance of their respective responsibilities in connection
with the placement of portfolio transactions on behalf of the Portfolios, and
reviews the commissions paid by the Portfolios to determine whether such
commissions are reasonable in relation to what the Trustees believe are the
benefits for the Portfolios.
CUSTODIAN
State Street Bank and Trust Company is the custodian of the Trust's assets.
The custodian's responsibilities include safeguarding and controlling the
Trust's cash and securities, handling the receipt and delivery of securities,
and collecting interest and dividends on the Trust's investments. The Trust
may employ foreign sub-custodians that are approved by the Board of Trustees
to hold foreign assets.
LEGAL COUNSEL
Legal matters in connection with the offering are being passed upon by
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut.
INDEPENDENT ACCOUNTANTS
The Trust has selected Price Waterhouse LLP as the independent accountants who
will audit the annual financial statements of the Trust.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances, 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
the Trustees. The Declaration of Trust provides for indemnification out of a
Portfolio's property for all loss and expense of any shareholder held
personally liable for the obligations of a Portfolio. Thus the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Portfolio would be unable to meet its
obligations.
DESCRIPTION OF NRSRO RATINGS
DESCRIPTION OF MOODY'S CORPORATE 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 risks appear somewhat larger than in 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 sometime 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 represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are the lowest rated class of bonds. Issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
DESCRIPTION OF S&P CORPORATE RATINGS
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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 bonds in this category than for bonds in higher rated
categories.
BB-B-CCC-CC AND C -- Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligation. 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. A C rating is typically applied
to debt subordinated to senior debt which is assigned an actual or implied CCC
rating. It may also be used to cover a situation where a bankruptcy petition
has been filed, but debt service payments are continued.
DESCRIPTION OF DUFF CORPORATE RATINGS
AAA - Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA - 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.
BBB - Investment grade. Considerable variability in risk during economic
cycles.
BB - Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according
to industry conditions or company fortunes. 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. Financial protection factors will fluctuate widely according
to economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in quality rating within this category or into a
higher or lower quality rating grade.
SUBSTANTIAL RISK - Well below investment grade securities. May be in
default or have considerable uncertainty as to timely payment of interest,
preferred dividends and/or principal. Protection factors are narrow and risk
can be substantial with unfavorable economic/industry conditions, and/or with
favorable company developments.
DESCRIPTION OF FITCH CORPORATE 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 very 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 issues is generally
rated "[-]+."
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 considered speculative and of low investment grade. The
obligor's ability to pay interest and repay principal is not strong and is
considered likely to be affected over time by adverse economic changes.
B - Bonds considered highly speculative. Bonds in this class are lightly
protected as to the obligor's ability to pay interest over the life of the
issue and repay principal when due.
CCC - Bonds which may have certain identifiable characteristics which, if
not remedied, could lead to the possibility of default in either principal or
interest payments.
CC - Bonds which are minimally protected. Default in payment of interest
and/or principal seems probable.
C - Bonds which are in imminent default in payment of interest or
principal.
DESCRIPTION OF THOMSON BANKWATCH, INC. CORPORATE RATINGS
AAA - Long-term fixed income securities that are rated AAA indicate that
the ability to repay principal and interest on a timely basis is very high.
AA - Long-term fixed income securities that are rated AA indicate a
superior ability to repay principal and interest on a timely basis with
limited incremental risk versus issues rated in the highest category.
TBW may apply plus ("+") and minus ("-") modifiers in the AAA and AA
categories to indicate where within the respective category the issue is
placed.
DESCRIPTION OF IBCA LIMITED AND IBCA INC. CORPORATE RATINGS
AAA - Obligations which are rated AAA are considered to be of the lowest
expectation of investment risk. Capacity for timely repayment of principal
and interest is substantial such that adverse changes in business, economic,
or financial conditions are unlikely to increase investment risk
significantly.
AA - Obligations which are rated AA are considered to be of a very low
expectation of investment risk. Capacity for timely repayment of principal
and interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payments is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1. An A-3
designation indicates an adequate capacity for timely payment. Issues with
this designation, however, are more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations. B
issues are regarded as having only speculative capacity for timely payment. C
issues have a doubtful capacity for payment. D issues are in payment default.
The D rating category is used when interest payments or principal payments
are not made on the due date, even if the applicable grace period has not
expired, unless Standard & Poor's believes that such payments will be made
during such grace period.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) are considered to
have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics of issuers
rated Prime-1 but to a lesser degree. Earnings trend and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained. P-3 issuers have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained. Not Prime issuers do not fall within any of the Prime rating
categories.
DESCRIPTION OF DUFF'S COMMERCIAL PAPER RATINGS
The rating Duff-1 is the highest commercial paper rating assigned by Duff &
Phelps. Paper rated Duff-1 is regarded as having very high certainty of
timely payment with excellent liquidity factors which are supported by ample
asset protection. Risk factors are minor. Paper rated Duff-2 is regarded as
having good certainty of timely payment, good access to capital markets and
sound liquidity factors and company fundamentals. Risk factors are small.
DESCRIPTION OF FITCH'S COMMERCIAL PAPER RATINGS
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade)
is the second highest commercial paper rating assigned by Fitch which reflects
an assurance of timely payment only slightly less in degree than the strongest
issues.
DESCRIPTION OF IBCA LIMITED AND IBCA INC. COMMERCIAL PAPER RATINGS
A1 - Short-term obligations rated A1 are supported by a very strong
capacity for timely repayment. A plus ("+") sign is added to those issues
determined to possess the highest capacity for timely payment.
A2 - Short-term obligations rated A2 are supported by a strong capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
DESCRIPTION OF THOMSON BANKWATCH, INC. COMMERCIAL PAPER RATINGS
TBW-1 - Short-term obligations rated TBW-1 indicate a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2 - Short-term obligations rated TBW-2 indicate that while the degree
of safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated TBW-1.
FINANCIAL STATEMENTS
PART C
OTHER INFORMATION
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS:
Not Applicable. Registrant has not yet commenced investment operations.
(B) EXHIBITS
<TABLE>
<CAPTION>
<C> <S>
(1) (a) Declaration of Trust*
(b) Amendment to Declaration of Trust**
(c) Amended and Restated Declaration of Trust
(2) By-laws of Trust**
(3) Not Applicable
(4) Not Applicable
(5) (a) Investment Advisory Agreement
(b) Sub-Advisory Agreements**
(6) Not Applicable
(7) Not Applicable
(8) Form of Custodian Agreement and Fund Accounting Agreement
between the Registrant and the Custodian**
(9) Form of Subadministration Agreement for Reporting and
Accounting Services between the Registrant and the
Subadministrator (to be filed by amendment)
(10) Consent and Opinion of Counsel*
(11) Not Applicable
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
<FN>
* incorporated by reference to Registrant's Registration Statement on
Form N-1A (File No. 33-88792), as filed on January 25, 1995.
** incorporated by reference to Registrant's Registration Statement on
Form N-1A (File No. 33-88792), as filed August 7, 1995.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
None
ITEM 27. INDEMNIFICATION
Each officer, Trustee or agent of the Trust shall be indemnified by the Trust
to the full extent permitted under the General Laws of The Commonwealth of
Massachusetts and the Investment Company Act of 1940 ("1940 Act"), as amended,
except that such indemnity shall not protect any such person against any
liability to the Trust or any shareholder thereof to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office ("disabling conduct"). Indemnification shall be made when (i) a final
decision on the merits, by a court or other body before whom the proceeding
was brought, that the person to be indemnified was not liable by reason of
disabling conduct or, (ii) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the person to be
indemnified was not liable by reason of disabling conduct, by (a) the vote of
a majority of a quorum of Trustees who are neither "interested persons" of the
company as defined in section 2(a)(19) of the 1940 Act, nor parties to the
proceedings or (b) an independent legal counsel in a written opinion. The
Trust may, by vote of a majority of a quorum of Trustees who are not
interested persons, advance attorneys' fees or other expenses incurred by
officers, Trustees, investment advisers or principal underwriters, in
defending a proceeding upon the undertaking by or on behalf of the person to
be indemnified to repay the advance unless it is ultimately determined that he
is entitled to indemnification. Such advance shall be subject to at least one
of the following: (1) the person to be indemnified shall provide a security
for his undertaking, (2) the Trust shall be insured against losses arising by
reason of any lawful advances, or (3) a majority of a quorum of the
disinterested, non-party Trustees of the Trust,or an independent legal counsel
in a written opinion, shall determine, based on a review of readily available
facts, that there is reason to believe that the person to be indemnified
ultimately will be found entitled to indemnification. The law of
Massachusetts is superseded by the 1940 Act insofar as it conflicts with the
1940 Act or rules published thereunder.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a trustee, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such trustee, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND SUB-
ADVISERS
There is set forth below information as to any other business, profession,
vocation or employment of a substantial nature in which each director or
officer of the Registrant's Investment Adviser is, or at any time during the
past two years has been, engaged for his own account or in the capacity of
director, officer, employee, partner or trustee.
<TABLE>
<CAPTION>
<S> <C>
NAME AND PRINCIPAL
BUSINESS ADDRESS BUSINESS AND OTHER CONNECTIONS
- ----------------------- ------------------------------------------------
Ian K. Whitehead President, Chief Executive Officer and Director
1755 Creekside Oaks Dr. of the Adviser; President, Chief Executive
Sacramento, CA 95833 Officer and Director - Life Company; Chairman and
Director - London Pacific Financial & Insurance
Services; Chief Financial Officer - Govett & Company
Limited; Chairman - North American Trust
Company, an affiliate of the Life Company
Arthur I. Trueger Chairman of the Board and Director of the
650 California St. Adviser; Chairman of the Board and Director -
San Francisco, CA 94108 Life Company; Executive Chairman - Govett &
Company Limited
George C. Nicholson Chief Financial Officer and Director of the
3109 Poplarwood Court Adviser; Chief Financial Officer, Secretary
Raleigh, NC 27604 and Director - Life Company; Treasurer and
Director (since September 1994) - London Pacific
Financial & Insurance Services; Senior Manager
- Ernst & Young, Louisville, Kentucky from
January 1985 to August 1994
Mark E. Prillaman Executive Vice President and Chief Marketing
1755 Creekside Oaks Dr. Officer of the Adviser and the Life Company
Sacramento, CA 95833 (since February 1994); Regional Marketing
Director - American Skandia Assurance Company,
from August 1989 to February 1994
Susan Y. Gressel Vice President and Treasurer of the Adviser;
3109 Poplarwood Court Vice President and Treasurer - Life Company
Raleigh, NC 27604
Charles M. King Vice President and Controller of the Adviser;
3109 Poplarwood Court Vice President and Controller - Life Company
Raleigh, NC 27604
William J. McCarthy Vice President and Chief Actuary of the Adviser;
3109 Poplarwood Court Vice President and Chief Actuary - Life Company
Raleigh, NC 27604
Charlotte M. Stott Vice President, Marketing of the Adviser; Vice
1755 Creekside Oaks Dr. President, Marketing - Life Company
Sacramento, CA 95833
Jerry T. Tamura Vice President - Administrative Services of the
1755 Creekside Oaks Dr. Adviser; Vice President - Administrative
Sacramento, CA 95833 Services - Life Company; Chairman, President and
Chief Executive Officer - London Pacific
Financial & Insurance Services
Jerry S. Waters Vice President, Technology Services of the
1755 Creekside Oaks Dr. Adviser; Vice President, Technology Services -
Sacramento, CA 95833 Life Company
</TABLE>
The principal address of Registrant's Investment Adviser is 1755 Creekside
Oaks Drive, Sacramento, California 95833.
With respect to information regarding the Sub-Advisers, reference is hereby
made to "Management of the Trust" in the Prospectus. For information as to
the business, profession, vocation or employment of a substantial nature of
each of the officers and directors of the Sub-Advisers, reference is made to
the current Form ADVs of the Sub-Advisers filed under the Investment Advisers
Act of 1940, incorporated herein by reference, the file numbers of which are
as follows:
Berkeley Capital Management Company
File No. 801-45598
Lexington Management Corporation
File No. 801-8281
Miller Anderson & Sherrerd, LLP
File No. 801-10437
Strong Capital Management, Inc.
File No. 801-10724
Massachusetts Financial Services Company
File No. 801-17352
Salomon Brothers Asset Management Inc.
File No. 801-32046
ITEM 29. PRINCIPAL UNDERWRITER
Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Persons maintaining physical possession of accounts, books, and other
documents required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and the Rules promulgated thereunder include the Registrant's
Secretary; the Registrant's investment adviser, LPIMC Insurance Marketing
Services; and the Registrant's custodian, State Street Bank and Trust Company.
The address of the Secretary and LPIMC Insurance Marketing Services is 31
Poplarwood Court, Raleigh, NC 27604.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth in Parts A and B of this Registration Statement, the
Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant undertakes to file a Post-Effective Amendment to this Registration
Statement, using financial statements which need not be certified, within four
to six months from the effective date of Registrant's 1933 Act Registration
Statement.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Pre-Effective
Amendment No. 2 to its Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Sacramento, and
State of California on the 18th day of January, 1996.
LPT VARIABLE INSURANCE SERIES TRUST
By: /S/ MARK E. PRILLAMAN
__________________________________________
Mark E. Prillaman
President and Trustee
Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective
Amendment No. 2 has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
/S/ MARK E. PRILLAMAN President, Principal January 18, 1996
- ------------------------------- ----------------
Mark E. Prillaman Executive Officer and
Trustee
/S/ GEORGE C. NICHOLSON Vice President, Treasurer, January 18, 1996
- ------------------------------- ----------------
George C. Nicholson Principal Financial
Officer and Principal
Accounting Officer
/S/ LAWRENCE F. GRAHAM January 18, 1996
- ------------------------------- Trustee ----------------
Lawrence F. Graham
/S/ STEPHEN J. KLEIN Trustee January 18, 1996
- ------------------------------- ----------------
Stephen J. Klein
/S/ RAYMOND L. PFEISTER Trustee January 18, 1996
- ------------------------------- ----------------
Raymond L. Pfeister
- ------------------------------- Trustee ----------------
James Winther
</TABLE>
File No. 33-88792
811-8960
PART II
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. TWO
TO
FORM N-1A
FOR
LPT VARIABLE INSURANCE SERIES TRUST
INDEX TO EXHIBITS
PAGE
99.B1 Amended and Restated Declaration of Trust
99.B5 Investment Advisory Agreement
EXHIBIT - 99.B1
AMENDED AND RESTATED DECLARATION OF TRUST
LPT VARIABLE INSURANCE SERIES TRUST
DATED JANUARY 9, 1996
TABLE OF CONTENTS
PAGE
ARTICLE I THE TRUST
SECTION 1.1 Name
SECTION 1.2 Location
SECTION 1.3 Nature of Trust
SECTION 1.4 Definitions
ARTICLE II POWERS OF TRUSTEES
SECTION 2.1 General
SECTION 2.2 Investments
SECTION 2.3 Legal Title
SECTION 2.4 Disposition of Assets
SECTION 2.5 Taxes
SECTION 2.6 Rights as Holder of Securities
SECTION 2.7 Delegation; Committees
SECTION 2.8 Collection
SECTION 2.9 Expenses
SECTION 2.10 Borrowing
SECTION 2.11 Deposits
SECTION 2.12 Allocation
SECTION 2.13 Valuation
SECTION 2.14 Fiscal Year
SECTION 2.15 Concerning the Trust and Certain Affiliates
SECTION 2.16 Power to Contract
SECTION 2.17 Insurance
SECTION 2.18 Pension and Other Plans
SECTION 2.19 Seal
SECTION 2.20 Charitable Contributions
SECTION 2.21 Indemnification
SECTION 2.22 Remedies
SECTION 2.23 Separate Accounting
SECTION 2.24 Further Powers
ARTICLE III ADVISER AND DISTRIBUTOR
SECTION 3.1 Appointment
SECTION 3.2 Provisions of Agreement
ARTICLE IV INVESTMENTS
SECTION 4.1 Statement of Investment Objectives and Policies
SECTION 4.2 Restrictions
SECTION 4.3 Percentage Restrictions
SECTION 4.4 Amendment of Investment Objectives and Policies and of
Investment Limitations
ARTICLE V LIMITATIONS OF LIABILITY
SECTION 5.1 Liability to Third Persons
SECTION 5.2 Liability to Trust or to Shareholders
SECTION 5.3 Indemnification
SECTION 5.4 Surety Bonds
SECTION 5.5 Apparent Authority
SECTION 5.6 Recitals
SECTION 5.7 Reliance on Experts, Etc.
SECTION 5.8 Liability Insurance
ARTICLE VI CHARACTERISTICS OF SHARES
SECTION 6.1 General
SECTION 6.2 Classes of Stock
SECTION 6.3 Evidence of Share Ownership
SECTION 6.4 Death of Shareholders
SECTION 6.5 Repurchase of Shares
SECTION 6.6 Trustees as Shareholders
SECTION 6.7 Redemption and Stop Transfers for Tax Purposes;
Redemption to Maintain Constant Net Asset Value
SECTION 6.8 Information from Shareholders
SECTION 6.9 Redemptions
SECTION 6.10 Suspension of Redemption; Postponement of Payment
ARTICLE VII RECORD AND TRANSFER OF SHARES
SECTION 7.1 Share Register
SECTION 7.2 Transfer Agent
SECTION 7.3 Owner of Record
SECTION 7.4 Transfers of Shares
SECTION 7.5 Limitation of Fiduciary Responsibility
SECTION 7.6 Notices
ARTICLE VIII SHAREHOLDERS
SECTION 8.1 Meetings of Shareholders
SECTION 8.2 Quorums
SECTION 8.3 Notice of Meetings
SECTION 8.4 Record Date for Meetings
SECTION 8.5 Proxies, Etc.
SECTION 8.6 Reports
SECTION 8.7 Inspection of Records
SECTION 8.8 Shareholder Action by Written Consent
SECTION 8.9 Voting Rights of Shareholders
ARTICLE IX TRUSTEES
SECTION 9.1 Number and Qualification
SECTION 9.2 Term and Election
SECTION 9.3 Resignation and Removal
SECTION 9.4 Vacancies
SECTION 9.5 Meetings
SECTION 9.6 Officers
SECTION 9.7 By-laws
ARTICLE X DISTRIBUTIONS TO SHAREHOLDERS ANDDETERMINATION
OF NET ASSET VALUE AND NET INCOME
SECTION 10.1 General
SECTION 10.2 Retained Earnings
SECTION 10.3 Source of Distributions
SECTION 10.4 Net Asset Value
SECTION 10.5 Power to Modify Valuation Procedures
ARTICLE XI CUSTODIAN
SECTION 11.1 Appointment and Duties
SECTION 11.2 Central Certificate System
ARTICLE XII RECORDING OF DECLARATION OF TRUST
SECTION 12.1 Recording
ARTICLE XIII AMENDMENT OR TERMINATION OF THE TRUST
SECTION 13.1 Amendment or Termination
SECTION 13.2 Power to Effect Reorganization
ARTICLE XIV MISCELLANEOUS
SECTION 14.1 Governing Law
SECTION 14.2 Counterparts
SECTION 14.3 Reliance by Third Parties
SECTION 14.4 Provisions in Conflict with Law or Regulations
SECTION 14.5 Section Headings
ARTICLE XV DURATION OF TRUST
SECTION 15.1 Duration
AMENDED AND RESTATED DECLARATION OF TRUST
OF
LPT VARIABLE INSURANCE SERIES TRUST
This Amended and Restated Declaration of Trust made the 9th day of January,
1996 by Mark E. Prillaman, Lawrence F. Graham, Stephen J. Klein, Raymond L.
Pfeister and James Winther the undersigned Trustees of LPT VARIABLE INSURANCE
SERIES TRUST.
WITNESSETH:
WHEREAS, the Trustees desire to establish an unincorporated voluntary
association commonly known as a business trust, as described in the provisions
of Chapter 182 of the General Laws of Massachusetts, for the principal purpose
of the investment and reinvestment of funds contributed thereto; and
WHEREAS, the Trustees desire that such trust be a registered open-end
investment company under the Investment Company Act of 1940; and
WHEREAS, the Trustees have acknowledged the receipt of and investment of
Two Hundred Thousand ($200,000.00) Dollars by means of an Agreement Governing
Contribution and have agreed to hold, invest, and dispose of the same and any
property acquired or otherwise added thereto as such Trustees as hereinafter
stated; and
WHEREAS, it is proposed that the beneficial interest in the Trust's
assets shall be divided into transferable shares of beneficial interest, which
shall be evidenced by the Share Register maintained by the Trust or its agent,
or, in the discretion of the Trustees, be evidenced by certificates therefor,
as hereinafter provided;
NOW, THEREFORE, the Trustees hereby declare that they will hold all
property of every type and description which they are acquiring or may
hereafter acquire as such Trustees, together with the proceeds thereof, in
trust, to manage and dispose of the same for the benefit of the holders of
record from time to time of the Shares being issued and to be issued hereunder
and in the manner and subject to the provisions hereof.
ARTICLE I
THE TRUST
1.1 NAME . The name of the trust created by this Declaration of Trust
shall be LPT VARIABLE INSURANCE SERIES TRUST (hereinafter called the "Trust")
and so far as may be practicable the Trustees shall conduct the Trust's
activities, execute all documents and sue or be sued under that name, which
name (and the word "Trust" wherever used in this Declaration of Trust, except
where the context otherwise requires) shall refer to the Trustees in their
capacity as Trustees, and not individually or personally and shall not refer
to the officers, agents, employees or Shareholders of the Trust or of such
Trustees. Should the Trustees determine that the use of such name is not
practicable, legal or convenient, they may use such other designation or they
may adopt such other name for the Trust as they deem proper and the Trust may
hold property and conduct its activities under such designation or name.
1.2 LOCATION . The Trust shall maintain a registered office in Boston,
Massachusetts, and may maintain such other offices or places of business as
the Trustees may from time to time determine.
1.3 NATURE OF TRUST . The Trust shall be of the type commonly termed a
"business" trust. The Trust is not intended to be, shall not be deemed to be
and shall not be treated as, a general partnership, limited partnership, joint
venture, corporation or joint stock company. The Shareholders shall be
beneficiaries and their relationship to the Trustees shall be solely in that
capacity in accordance with the rights conferred upon them hereunder. The
Trust is intended to have the status of a registered open-end investment
company under the Investment Company Act of 1940 and of a "regulated
investment company" as that term is defined in Section 851 of the Internal
Revenue Code of 1986, as amended, and this Declaration of Trust and all
actions of the Trustees hereunder shall be construed in accordance with such
intent.
1.4 DEFINITIONS . As used in this Declaration of Trust, the following
terms shall have the following meanings unless the context hereof otherwise
requires:
"1940 Act" shall mean the Investment Company Act of 1940, as amended from
time to time.
"Adviser" and "Distributor" shall mean any Person or Persons appointed,
employed or contracted with by the Trustees under the applicable provisions of
Section 3.1 hereof.
"Affiliate" shall have the same meaning as the term Affiliated Person
under the 1940 Act.
"Assignment," "Commission," and "Prospectus" shall have the meanings
given them in the 1940 Act.
"Declaration of Trust" shall mean this Declaration of Trust as amended,
restated, or modified from time to time. References in this Declaration of
Trust to "Declaration," "hereof," "herein," "hereby" and "hereunder" shall be
deemed to refer to the Declaration of Trust and shall not be limited to the
particular text, article, or section in which such words appear.
"Person" shall mean and include individuals, corporations, limited
partnerships, general partnerships, joint stock companies or associations,
joint ventures, associations, companies, trusts, banks, trust companies, land
trusts, business trusts or other entities whether or not legal entities and
governments and agencies and political subdivisions thereof.
"Portfolio" shall mean any subdivision of the Trust so designated as such
by the Trustees.
"Securities" shall mean any stock, shares, voting trust certificates,
bonds, debentures, notes, or other evidences of indebtedness, secured or
unsecured, convertible, subordinated or otherwise or, in general, any
instruments commonly known as "securities" or any certificates of interest,
shares or participations in temporary or interim certificates for, guarantees
of, or any right to subscribe to, purchase or acquire any of the foregoing.
"Shareholders" shall mean, as of any particular time, all holders of
record of outstanding Shares at such time.
"Shares" shall mean the shares of beneficial interest of the Trust as
described in Article VI.
"Trust Property" shall mean, as of any particular time, any and all
property, real, personal, or otherwise, tangible or intangible, which is
transferred, conveyed or paid to the Trust or Trustees and all income, profits
and gains therefrom and which at such time is owned or held by, or for the
account of, the Trust or the Trustees.
ARTICLE II
POWERS OF TRUSTEES
2.1 GENERAL . The Trustees shall have, without other or further
authorization, full, exclusive and absolute power, control and authority over
the Trust Property and over the business of the Trust to the same extent as if
the Trustees were the sole and absolute owners of the Trust Property and
business in their own right, and with such powers of delegation as may be
permitted by this Declaration of Trust. The Trustees may do and perform such
acts and things as in their sole judgment and discretion are necessary and
proper for conducting the business and affairs of the Trust or promoting the
interests of the Trust and the Shareholders. The enumeration of any specific
power or authority herein shall not be construed as limiting the aforesaid
power or authority or any specific power or authority. The Trustees shall
have the power to enter into commitments to make any investment, purchase or
acquisition, or to exercise any power authorized by this Declaration of Trust.
Such powers of the Trustees may be exercised without order of or resort to
any court.
2.2 INVESTMENTS . The Trustees shall have power, subject in all
respects to Article IV hereof,
(a) to conduct, operate and carry on the business of an investment
company; and
(b) for such consideration as they may deem proper, to subscribe for,
invest in, reinvest in, purchase or otherwise acquire, hold, pledge, sell,
assign, transfer, exchange, distribute or otherwise deal in or dispose of
negotiable or nonnegotiable instruments, obligations, evidences of
indebtedness, bankers' acceptances, certificates of deposit or indebtedness,
commercial paper, securities subject to repurchase agreements and other money
market securities, including, without limitation, those issued, guaranteed or
sponsored by the United States Government or its agencies or
instrumentalities, or international instrumentalities, or by any of the
several states of the United States of America or their political
subdivisions, agencies or instrumentalities, or any bank or savings
institution, or by any corporation organized under the laws of the United
States or of any state, territory or possession thereof, or by corporations
organized under foreign laws; marketable straight debt securities; securities
(payable in U.S. dollars) of, or guaranteed by, the government of Canada or of
a Province of Canada; common stock, securities convertible into common stock,
purchase rights, warrants and options; and nothing herein shall be construed
to mean the Trustees shall not have the foregoing powers with respect to any
Securities in which the Trust may invest in accordance with Article IV hereof.
In the exercise of their powers, the Trustees shall not be limited, except as
otherwise provided hereunder, to investing in Securities maturing before the
possible termination of the Trust, nor shall the Trustees be limited by any
law now or hereafter in effect limiting the investments which may be held or
retained by trustees or other fiduciaries, but they shall have full authority
and power to make any and all investments within the limitations of this
Declaration of Trust, that they, in their absolute discretion, shall
determine, and without liability for loss, even though such investments shall
be of a character or an amount not considered proper for the investment of
trust funds.
2.3 LEGAL TITLE . Legal title to all the Trust Property shall be vested
in the Trustees as joint tenants and held by and transferred to the Trustees,
except that the Trustees shall have power to cause legal title to any Trust
Property to be held by, or in the name of, one or more of the Trustees with
suitable reference to their trustee status, or in the name of the Trust, or in
the name of any other Person as nominee, on such terms, in such manner and
with such powers as the Trustees may determine, so long as in their judgment
the interest of the Trust is adequately protected.
The right, title and interest of the Trustees in and to the Trust
Property shall vest automatically in all persons who may hereafter become
Trustees upon their due election and qualification without any further act.
Upon the resignation, removal or death of a Trustee, he (and in the event of
his death, his estate) shall automatically cease to have any right, title or
interest in or to any of the Trust Property, and the right, title and interest
of such Trustee in and to the Trust Property shall vest automatically in the
remaining Trustees without any further act.
2.4 DISPOSITION OF ASSETS . Subject in all respects to Article IV
hereof, the Trustees shall have power to sell, lease, exchange or otherwise
dispose of or grant options with respect to any and all Trust Property free
and clear of any and all encumbrances, at public or private sale, for cash or
on terms, without advertisement, and subject to such restrictions,
stipulations, agreements and reservations as they shall deem proper, and to
execute and deliver any deed or other instrument in connection with the
foregoing. The Trustees shall also have the power, subject in all respects to
Article IV hereof, to:
(a) rent, lease or hire from others for terms which may extend beyond
the termination of this Declaration of Trust any property or rights to
property, real, personal or mixed, tangible or intangible, and, except for
real property, to own, manage, use and hold such property and such rights;
(b) give consents and make contracts relating to Trust Property or its
use;
(c) grant security interests in or otherwise encumber Trust Property in
connection with borrowings; and
(d) release any Trust Property.
2.5 TAXES . The Trustees shall have power to pay all taxes or
assessments, of whatever kind or nature, imposed upon or against the Trust or
the Trustees in connection with the Trust Property or upon or against the
Trust Property or income or any part thereof, to settle and compromise
disputed tax liabilities and, for the foregoing purposes, to make such returns
and do all other such acts and things as may be deemed by the Trustees to be
necessary or desirable.
2.6 RIGHTS AS HOLDER OF SECURITIES . The Trustees shall have the power
to exercise all the rights, powers and privileges appertaining to the
ownership of all or any Securities or other property forming part of the Trust
Property to the same extent that any individual might, and, without limiting
the generality of the foregoing, to vote or give any consent, request or
notice or waive any notice either in person or by proxy or power of attorney
with or without power of substitution, to one or more Persons, which proxies
and powers of attorney may be for meetings or action generally or for any
particular meetings or action, and may include the exercise of discretionary
powers.
2.7 DELEGATION; COMMITTEES . The Trustees shall have power, consistent
with their continuing exclusive authority over the management of the Trust,
the conduct of its affairs and the management and disposition of Trust
Property, to delegate from time to time to such one or more of their number
(who may be designated as constituting a Committee of the Trustees) or to
officers, employees or agents of the Trust the doing of such things and the
execution of such instruments either in the name of the Trust or the names of
the Trustees or as their attorney or attorneys or otherwise as the Trustees
may from time to time deem expedient.
2.8 COLLECTION . The Trustees shall have power to collect, sue for,
receive and receipt for all sums of money or other property due to the Trust,
to consent to extensions of the time for payment, or to the renewal of any
Securities or obligations; to engage or intervene in, prosecute, defend,
compound, compromise, abandon or adjust by arbitration or otherwise any
actions, suits, proceedings, disputes, claims, demands or things relating to
the Trust Property; to foreclose any Security or other instrument securing any
notes, debentures, bonds, obligations or contracts, by virtue of which any
sums of money are owed to the Trust; to exercise any power of sale held by
them, and to convey good title thereunder free of any and all trusts, and in
connection with any such foreclosure or sale, to purchase or otherwise acquire
title to any property; to be parties to reorganization and to transfer to and
deposit with any corporation, committee, voting trustee or other Person any
Securities or obligations of any corporation, trust, association or other
organization, the Securities of which form a part of the Trust Property, for
the purpose of any reorganization of any such corporation, trust, association
or other organization, or otherwise, to participate in any arrangement for
enforcing or protecting the interests of the Trustees as the owners or holders
of such Securities or obligations and to pay any assessment levied in
connection with such reorganization or arrangement; to extend the time (with
or without security) for the payment or delivery of any debts or property and
to execute and enter into releases, agreements and other instruments; and to
pay or satisfy any debts or claims upon any evidence that the Trustees shall
think sufficient.
2.9 EXPENSES . The Trustees shall have power to incur and pay any
charges or expenses which, in the opinion of the Trustees, are necessary or
incidental to or proper for carrying out any of the purposes of this
Declaration of Trust, and to reimburse others for the payment therefor, and to
pay appropriate compensation or fees from the funds of the Trust to themselves
as Trustees and to Persons with whom the Trust has contracted or transacted
business. The Trustees shall fix the compensation of all officers, employees
and Trustees. The Trustees may be paid reasonable compensation for their
general services as Trustees and officers hereunder, and the Trustees may pay
themselves or any one or more of themselves such compensation for special
services, including legal services, as they in good faith may deem reasonable
and reimbursement for expenses reasonably incurred by themselves or any one or
more of themselves on behalf of the Trust. Each Portfolio must pay the
expenses directly attributable to it. However, to the extent that the
Trustees can effect cost savings by the sharing of expenses they are
authorized to do so. Such general administrative expenses will be allocated
on the basis of the asset size of the respective Portfolios.
2.10 BORROWING . The Trustees shall have power to borrow money only to
the extent, for the purposes and in the manner authorized by Article IV
hereof.
2.11 DEPOSITS . The Trustees shall have power to deposit any monies or
Securities included in the Trust Property with one or more banks, trust
companies or other banking institutions whether or not such deposits will draw
interest. Such deposits are to be subject to withdrawal in such manner as the
Trustees may determine, and the Trustees shall have no responsibility for any
loss which may occur by reason of the failure of the bank, trust company or
other banking institution with whom the monies or Securities have been
deposited.
2.12 ALLOCATION . The Trustees shall have power to determine whether
monies or other assets received by the Trust shall be charged or credited to
income or capital or allocated between income and capital, including the power
to amortize or fail to amortize any part or all of any premium or discount, to
treat any part or all of the profit resulting from the maturity or sale of any
assets, whether purchased at a premium or at a discount, as income or capital
or apportion the same between income and capital, to apportion the sale price
of any asset between income and capital and to determine in what manner any
expenses or disbursements are to be borne as between income and capital,
whether or not in the absence of the power and authority conferred by this
Section 2.12, such assets would be regarded as income or as capital or such
expense or disbursement would be charged to income or to capital; to treat any
dividend or other distribution on any investment as income or capital or
apportion the same between income and capital; to provide or fail to provide
reserves for depreciation, amortization or obsolescence in respect of any
Trust Property in such amounts and by such methods and for such purposes as
they shall determine, and to allocate to the share of beneficial interest
account less than all of the consideration received for Shares (but not less
than the par value thereof) and to allocate the balance thereof to paid-in
capital, all as the Trustees may reasonably deem proper.
2.13 VALUATION . The Trustees shall have power to determine in good
faith, conclusively, the value of any of the Trust Property and of any
services, Securities, assets or other consideration hereafter to be acquired
or disposed of by the Trust, and to revalue the Trust Property.
2.14 FISCAL YEAR . The Trustees shall have power to determine the
fiscal year of the Trust and the method or form in which its accounts shall be
kept and, from time to time, to change the fiscal year or method or form of
accounts.
2.15 CONCERNING THE TRUST AND CERTAIN AFFILIATES .
(a) The Trust may enter into transactions with any Affiliate of the
Trust or of the Adviser or any Affiliate of any Trustee, director, officer or
employee of the Trust or of the Adviser if (i) each such transaction has,
after disclosure of such affiliation, been approved or ratified by the
affirmative vote of a majority of the Trustees, including a majority of the
Trustees who are not Affiliates of any Person (other than the Trust) who is a
party to the transaction with the Trust, (ii) such transaction is, in the
opinion of the Trustees, on terms fair and reasonable to the Trust and the
Shareholders and at least as favorable to them as similar arrangements for
comparable transactions (of which the Trustees have knowledge) with
organizations unaffiliated with the Trust or with the Person who is a party to
the transaction with the Trust, and (iii) such transaction is in accordance
with the 1940 Act or an exemption granted thereunder.
(b) Except as otherwise provided by this Declaration of Trust and in the
absence of fraud, a contract, act or other transaction, between the Trust and
any other Person, or in which the Trust is interested, is valid and no
Trustee, officer, employee or agent of the Trust shall have any liability as a
result of entering into any such contract, act or transaction even though (a)
one or more of the Trustees, officers, employees or agents of the Trust is
directly or indirectly interested in or affiliated with, or are trustees,
partners, directors, employees, officers or agents of such other Person, or
(b) one or more of the Trustees, officers, employees or agents of the Trust,
individually or jointly with others, is a party or are parties to, or directly
interested in, or affiliated with, such contract, act or transaction, provided
that (i) such interest or affiliation is disclosed to the Trustees and the
Trustees authorized such contract, act or other transaction by a vote of a
majority of the unaffiliated Trustees, or (ii) such interest or affiliation is
disclosed to the Shareholders, and such contract, act or transaction is
approved by the Shareholders.
(c) Any Trustee or officer, employee or agent of the Trust may acquire,
own, hold and dispose of Shares for his individual account, and may exercise
all rights of a holder of such Shares to the same extent and in the same
manner as if he were not such a Trustee or officer, employee or agent. The
Trustees shall use their best efforts to obtain through the Adviser or other
Persons a continuing and suitable investment program, consistent with the
investment policies and objectives of the Trust, and the Trustees shall be
responsible for reviewing and approving or rejecting investment opportunities
presented by the Adviser or such other Persons. Any Trustee or officer,
employee or agent of the Trust may, in his personal capacity, or in a capacity
as trustee, officer, director, stockholder, partner, member, adviser or
employee of any Person, have business interests and engage in business
activities in addition to those relating to the Trust, which interests and
activities may be similar to those of the Trust and include the acquisition,
syndication, holding, management, operation or disposition, of his own account
or for the account of such Person, and each Trustee, officer, employee and
agent of the Trust shall be free of any obligation to present to the Trust any
investment opportunity which comes to him in any capacity other than solely as
Trustee, officer, employee or agent of the Trust, even if such opportunity is
of a character which, if presented to the Trust, could be taken by the Trust.
Subject to the provisions of Article III hereof, any Trustee or officer,
employee or agent of the Trust may be interested as Trustee, officer,
director, stockholder, partner, member, adviser or employee of, or otherwise
have a direct or indirect interest in, any Person who may be engaged to render
advice or services to the Trust, and may receive compensation from such Person
as well as compensation as Trustee, officer, employee or agent of the Trust or
otherwise hereunder. None of the activities referred to in this paragraph
shall be deemed to conflict with his duties and powers as Trustee, officer,
employee or agent of the Trust. To the extent that any other provision of
this Declaration of Trust conflicts with, or is otherwise contrary to, the
provisions of this Section 2.15, the provisions of this Section shall be
deemed controlling.
2.16 POWER TO CONTRACT . Subject to the provisions of Section 3.1
hereof with respect to delegation of authority by the Trustees, the Trustees
shall have power to appoint, employ or contract with any Person (including one
or more of themselves and any corporation, partnership or trust of which one
or more of them may be an Affiliate, subject to the applicable requirements of
Section 2.15 hereof) as the Trustees may deem necessary or desirable for the
transaction of the business of the Trust, including any Person who, under the
supervision of the Trustees, may, among other things: serve as the Trust's
investment adviser and consultant in connection with policy decisions made by
the Trustees; furnish reports to the Trustees and provide research, economic
and statistical data in connection with the Trust's investments; act as
consultants, accountants, technical advisers, attorneys, brokers,
underwriters, corporation fiduciaries, escrow agents, depositaries, custodians
or agents for collection, insurers or insurance agents, transfer agents or
registrars for Shares or in any other capacity deemed by the Trustees
necessary or desirable; investigate, select, and, on behalf of the Trust,
conduct relations with Persons acting in such capacities and pay appropriate
fees to, and enter into appropriate contracts with, or employ, or retain
services performed or to be performed by, any of them in connection with the
investments acquired, sold, or otherwise disposed of, or committed,
negotiated, or contemplated to be acquired, sold or otherwise disposed of;
substitute any other Person for any such Person; act as attorney-in-fact or
agent in the purchase or sale or other disposition of investments, and in the
handling, prosecuting or settling of any claims of the Trust, including the
foreclosure or other enforcement of any lien or security securing investments;
and assist in the performance of such ministerial functions necessary in the
management of the Trust as may be agreed upon with the Trustees or officers of
the Trust.
2.17 INSURANCE . The Trustees shall have the power to purchase and pay
for, entirely out of Trust Property, insurance policies insuring the
Shareholders, Trustees, officers, employees, agents, investment advisers,
including the Adviser or independent contractors of the Trust, individually
against all claims and liabilities of every nature arising by reason of
holding, being or having held any such office or position, or by reason of any
action alleged to have been taken or omitted by any such person as
Shareholder, Trustee, officer, employee, agent, investment adviser or
independent contractor, including any action taken or omitted that may be
determined to constitute negligence. However, such policies shall not pay or
reimburse any director, officer, investment adviser or principal underwriter
for any liability arising by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of duties. Such policies are to set forth a
reasonable and fair means for determining whether payment or reimbursement
shall be made.
2.18 PENSION AND OTHER PLANS . The Trustees shall have the power to pay
pensions for faithful service, as deemed appropriate by the Trustees, and to
adopt, establish and carry out pension, profit-sharing, savings, thrift and
other retirement, incentive and benefit plans, trusts and provisions,
including, without limitation, the purchasing of life insurance and annuity
contracts as a means of providing such retirement and other benefits, for any
or all of the Trustees, officers, employees and agents of the Trust.
2.19 SEAL . The Trustees shall have the power to adopt and use a seal
for the Trust, but, unless otherwise required by the Trustees, it shall not be
necessary for the seal to be placed on, and its absence shall not impair the
validity of, any document, instrument or other paper executed and delivered by
or on behalf of the Trust.
2.20 CHARITABLE CONTRIBUTIONS . The Trustees shall have the power to
make donations, irrespective of benefit to the Trust, for the public welfare
or for community fund, hospital, charitable, religious, educational,
scientific, literary, civic or similar purpose and, in time of war or other
national emergency, in aid thereof.
2.21 INDEMNIFICATION . In addition to the mandatory indemnification
provided for in Section 5.3 hereof, the Trustees shall have power, to the
extent permitted by law, to indemnify or enter into agreements with respect to
indemnification with any Person with whom the Trust has dealings, including,
without limitation, any investment adviser, including the Adviser, or
independent contractor, to such extent as the Trustees shall determine.
2.22 REMEDIES . Notwithstanding any provision in this Declaration of
Trust, when the Trustees deem that there is a significant risk that an obligor
to the Trust may default or is in default under the terms of any obligation to
the Trust, the Trustees shall have power to pursue any remedies permitted by
law which, in their sole judgment, are in the best interests of the Trust, and
the Trustees shall have the power to enter into any investment, commitment or
obligation of the Trust resulting from the pursuit of such remedies as is
necessary or desirable to dispose of property acquired in the pursuit of such
remedies.
2.23 SEPARATE ACCOUNTING . The Trustees shall establish the books and
records for each Portfolio and maintain such records separately as if each
Portfolio were a separate legal entity.
2.24 FURTHER POWERS . The Trustees shall have power to do all such
other matters and things and execute all such instruments as they deem
necessary, proper or desirable in order to carry out, promote or advance the
interests of the Trust although such matters or things are not herein
specifically mentioned. Any determination as to what is in the best interests
of the Trust made by the Trustees in good faith shall be conclusive. In
construing the provisions of this Declaration of Trust, the presumption shall
be in favor of a grant of power to the Trustees. The Trustees will not be
required to obtain any court order to deal with the Trust Property.
ARTICLE III
ADVISER AND DISTRIBUTOR
3.1 APPOINTMENT . The Trustees are responsible for the general
investment policy of the Trust, the distribution of its Shares and for the
general supervision of the business of the Trust conducted by officers,
agents, employees, investment advisers, distributors or independent
contractors of the Trust. However, the Trustees are not required personally
to conduct all of the business of the Trust and, consistent with their
ultimate responsibility as stated herein, the Trustees may appoint, employ or
contract with an investment adviser (the "Adviser") and/or a distributor and
underwriter for the Trust's Shares (the "Distributor"), and may grant or
delegate such authority to the Adviser and/or Distributor (pursuant to the
terms of Section 2.16 hereof) or to any other Person the services of whom are
obtained by the Adviser or Distributor, as the Trustees may, in their sole
discretion, deem to be necessary or desirable, without regard to whether such
authority is normally granted or delegated by trustees.
3.2 PROVISIONS OF AGREEMENT . The Trustees shall not enter into any
agreement with the Adviser or Distributor pursuant to the provisions of
Section 3.1 hereof unless such agreement is consistent with the provisions of
Section 15 of the 1940 Act.
ARTICLE IV
INVESTMENTS
4.1 STATEMENT OF INVESTMENT OBJECTIVES AND POLICIES . The Trustees
shall be guided in their actions by the Investment Objectives and Policies as
set forth in the most current effective registration statement for the Trust
as filed with the Securities and Exchange Commission. Because the Trust is
divided into separate Portfolios, the Trustees shall supervise the investments
and the recordkeeping for each Portfolio within the Trust as if it was a
separate legal entity. In addition to any other power granted to the
Trustees, the Trustees may, as they deem appropriate, provide for additional
Portfolios in a manner consistent with the 1940 Act.
4.2 RESTRICTIONS . Notwithstanding anything in this Declaration of
Trust which may be deemed to authorize the contrary, the Trust, with respect
to each Portfolio, shall conduct its affairs in accordance with the Investment
Limitations (Restrictions) as set forth in the most current, effective
registration statement for the Trust as filed with the Securities and Exchange
Commission.
4.3 PERCENTAGE RESTRICTIONS . If the percentage restrictions as set
forth in the Investment Limitations described in Section 4.2 above are adhered
to at the time of each investment, a later increase or decrease in percentage
resulting from a change in the value of the Trust's assets is not a violation
of such investment restrictions.
4.4 AMENDMENT OF INVESTMENT OBJECTIVES AND POLICIES AND OF INVESTMENT
LIMITATIONS . Any Investment Objectives and Policies or Investment
Limitations which are deemed in the most current, effective registration
statement for the Trust as filed with the Securities and Exchange Commission
to be fundamental policies may not be changed without the approval of the
holders of a majority of the outstanding voting shares of each Portfolio
affected which, for purposes herein, shall mean the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares are present or represented by proxy and (ii) more than 50% of the
outstanding shares. A change in a fundamental policy affecting only one
Portfolio may be affected only with the approval of a majority of the
outstanding shares of such Portfolio.
ARTICLE V
LIMITATIONS OF LIABILITY
5.1 LIABILITY TO THIRD PERSONS . No Shareholder shall be subject to any
personal liability whatsoever, in tort, contract or otherwise, to any other
Person or Persons in connection with the Trust Property or the affairs of the
Trust; and no Trustee, officer, employee or agent of the Trust shall be
subject to any personal liability whatsoever, in tort, contract or otherwise;
to any other Person or Persons in connection with Trust Property or the
affairs of the Trust, except for that arising from his bad faith, willful
misconduct, gross negligence or reckless disregard of his duties or for his
failure to act in good faith in the reasonable belief that his action was in
the best interest of the Trust; and all such other Persons shall look solely
to the Trust Property for satisfaction of claims of any nature arising in
connection with the affairs of the Trust. If any Shareholder, Trustee,
officer, employee or agent, as such, of the Trust is made a party to any suit
or proceedings to enforce any such liability, he shall not on account thereof
be held to any personal liability.
5.2 LIABILITY TO TRUST OR TO SHAREHOLDERS . No Trustee, officer,
employee or agent of the Trust shall be liable to the Trust or to any
Shareholder, Trustee, officer, employee or agent of the Trust for any action
or failure to act (including, without limitation, the failure to compel in any
way any former or acting Trustee to redress any breach of trust) except for
his own bad faith, willful misfeasance, gross negligence or reckless disregard
for his duties.
5.3 INDEMNIFICATION . The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and liabilities, whether they
proceed to judgment or are settled or otherwise brought to a conclusion, to
which such Shareholder may become subject by reason of his being or having
been a Shareholder, and shall reimburse such Shareholder for all legal and
other expenses reasonably incurred by him in connection with any such claim or
liability. The rights accruing to a Shareholder under this Section 5.3 shall
not exclude any other right to which such Shareholder may be lawfully
entitled, nor shall anything herein contained restrict the right of the Trust
to indemnify or reimburse a Shareholder in any appropriate situation even
though not specifically provided herein; provided, however, that the Trust
shall have no liability to reimburse Shareholders for taxes assessed against
them by reason of their ownership of Shares, nor for any losses suffered by
reason of changes in the market value of Shares.
Each officer, Trustee or agent of the Trust shall be indemnified by the
Trust to the full extent permitted under the General Laws of the Commonwealth
of Massachusetts and the 1940 Act, except that such indemnity shall not
protect any such person against any liability to the Trust or any Shareholder
thereof to which such person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office ("disabling conduct"). Indemnification
shall be made when (i) a final decision on the merits, by a court or other
body before whom the proceeding was brought, that the person to be indemnified
was not liable by reason of disabling conduct, or (ii) in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the person to be indemnified was not liable by reason of disabling conduct, by
(a) the vote of a majority of a quorum of Trustees who are neither "interested
persons" of the Trust as defined in section 2(a)(19) of the 1940 Act, nor
parties to the proceedings or (b) an independent legal counsel in a written
opinion. The Trust may, by vote of a majority of a quorum of Trustees who are
not interested persons, advance attorneys' fees or other expenses incurred by
officers, Trustees, investment advisers or principal underwriters, in
defending a proceeding upon the undertaking by or on behalf of the person to
be indemnified to repay the advance unless it is ultimately determined that he
is entitled to indemnification. Such advance shall be subject to at least one
of the following: (1) the person to be indemnified shall provide a security
for his undertaking, (2) the Trust shall be insured against losses arising by
reason of any lawful advances, or (3) a majority of a quorum of the
disinterested, non-party Trustees of the Trust, or an independent legal
counsel in a written opinion, shall determine, based on a review of readily
available facts, that there is reason to believe that the person to be
indemnified ultimately will be found entitled to indemnification. The law of
Massachusetts is superseded by the 1940 Act insofar as it conflicts with the
1940 Act or rules published thereunder.
5.4 SURETY BONDS . No Trustee shall, as such, be obligated to give any
bond or surety or other security for the performance of his duties.
5.5 APPARENT AUTHORITY . No purchaser, lender, transfer agent or other
Person dealing with the Trustees or any officer, employee or agent of the
Trust shall be bound to make any inquiry concerning the validity of any
transaction purporting to be made by the Trustees or by such officer, employee
or agent or make inquiry concerning or be liable for the application of money
or property paid, loaned or delivered to or on the order of the Trustees or of
such officer, employee or agent.
5.6 RECITALS . Any written instrument creating an obligation of the
Trust shall be conclusively taken to have been executed or done by a Trustee
or Trustees or an officer, employee or agent of the Trust only in their or his
capacity as Trustees or Trustee under this Declaration of Trust or in the
capacity of officer, employee or agent of the Trust. Any written instrument
creating an obligation of the Trust shall refer to this Declaration of Trust
and contain a recital to the effect that the obligations thereunder are not
personally binding upon, nor shall resort be had to the private property of,
any of the Trustees, Shareholders, officers, employees or agents of the Trust,
but the Trust Property or a specific portion thereof only shall be bound, and
may contain any further recital which they or he may deem appropriate, but the
omission of such recital shall not operate to impose personal liability on any
of the Trustees, Shareholders, officers, employees or agents of the Trust.
5.7 RELIANCE ON EXPERTS, ETC. Each Trustee and each officer of the
Trust shall, in the performance of his duties, be fully and completely
justified and protected with regard to any act or any failure to act resulting
from reliance in good faith upon the books of account or other records of the
Trust, upon an opinion of counsel or upon reports made to the Trust by any of
its officers or employees or by the Adviser, accountants, appraisers or other
experts or consultants selected with reasonable care by the Trustees or
officers of the Trust, regardless of whether such counsel or expert may also
be a Trustee.
5.8 LIABILITY INSURANCE . The Trustees shall, at all times, maintain
insurance for the protection of the Trust Property, its Shareholders,
Trustees, officers, employees and agents in such amount as the Trustees shall
deem adequate to cover all foreseeable tort liability to the extent available
at reasonable rates.
ARTICLE VI
CHARACTERISTICS OF SHARES
6.1 GENERAL . The interest of the Shareholders hereunder shall be
divided into Shares, all of one class and having a par value of $.01 per
Share. The number of Shares authorized hereunder is unlimited. All Shares
shall have equal noncumulative voting and other rights, shall be fully paid
and non-assessable, and shall not entitle the holder to preference,
preemptive, appraisal, conversion or exchange rights of any kind. The
ownership of the Trust Property of every description and the right to conduct
any business hereinbefore described are vested exclusively in the Trustees,
and the Shareholders shall have no interest therein other than the beneficial
interest conferred by their Shares, and they shall have no right to call for
any partition or division of any property, profits, rights or interests of the
Trust nor can they be called upon to share or assume any losses of the Trust
or suffer an assessment of any kind by virtue of their ownership of Shares,
except as provided in Section 10.5 hereof. The Shares shall be personal
property giving only the rights specifically set forth in this Declaration of
Trust.
6.2 CLASSES OF STOCK .
(a) The Shares shall be divided into ten classes of common stock and
designated Classes A, B, C, D, E, F, G, H, I and J, respectively.
(b) The holders of each Share of stock of the Trust shall be entitled to
one vote for each full Share, and a fractional vote for each fractional Share
of stock, irrespective of the Class, then standing in his name on the books of
the Trust. On any matter submitted to a vote of Shareholders, all Shares of
the Trust then issued and outstanding and entitled to vote shall be voted in
the aggregate and not by class except that (1) when otherwise expressly
required by Massachusetts Law, the 1940 Act, or this Declaration of Trust,
Shares shall be voted by individual class; (2) Shares of the respective
Classes are entitled to vote in matters concerning only that Class; (3)
fundamental policies, as specified in Article IV hereof, may not be changed,
unless a change affects only one Class, without the approval of the holders of
a majority of the Trust's outstanding voting shares, including a majority (as
defined under the 1940 Act) of the Shares of each Class.
(c) Each Class of stock of the Trust shall have the following powers,
preferences or other special rights, and qualifications, restrictions, and
limitations thereof shall be as follows:
(1) The Trustees may from time to time declare and pay dividends or
distributions, in stock or in cash, on any or all Classes of stock, the amount
of such dividends and distributions and the payment of them being wholly in
the discretion of the Trustees.
(i) Dividends or distributions on shares of any Class of stock
shall be paid only out of earned surplus or other lawfully available assets
belonging to such Class.
(ii) Inasmuch as one goal of the Trust is to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended, or
any successor or comparable statute thereto, and Regulations promulgated
thereunder, and inasmuch as the computation of net income and gains for
Federal income tax purposes may vary from the computation thereof on the books
of the Trust, the Trustees shall have the power in their discretion to
distribute in any fiscal years as dividends, including dividends designated in
whole or in part as capital gains distributions, amounts sufficient in the
opinion of the Trustees, to enable the Trust to qualify as a regulated
investment company and to avoid liability for the Trust for Federal income tax
in respect of that year. In furtherance, and not in limitation of the
foregoing, in the event that a Class of shares has a net capital loss for a
fiscal year, and to the extent that a net capital loss for a fiscal year
offsets net capital gains from one or more of the other classes, the amount to
be deemed available for distribution to the Class or Classes with the net
capital gain may be reduced by the amount offset.
(2) The assets belonging to any Class of stock shall be charged with
the liabilities in respect to such Class, and shall also be charged with its
share of the general liabilities of the Trust in proportion to the asset
values of the respective Classes. The determination of the Trustees shall be
conclusive as to the amount of liabilities, the allocation of the same as to a
given Class and as to whether the same or general assets of the Trust are
allocable to one or more Classes.
(3) Prior to the issuance of any shares of a Class, the Trustees may
by resolution change the designation of such Class to the name of the
Portfolio of the Trust with respect to which such shares will be issued.
(4) The assets belonging to any Class of stock shall be available
only to the Shareholders of that Class in the event of a liquidation.
6.3 EVIDENCE OF SHARE OWNERSHIP . Evidence of Share ownership shall be
reflected in the Share Register maintained by or on behalf of the Trust
pursuant to Section 7.1 hereof, and the Trust shall not be required to issue
certificates as evidence of Share ownership; provided, however, that the
Trustees may, in their discretion, authorize the use of certificates as a
means of evidencing the ownership of Shares by setting forth in the Trust's
By-laws or in a resolution, provisions for the form of certificates and
regulations governing their execution, issuance and transfer. Subject to
Section 6.7 hereof, such certificates shall be treated as negotiable and title
thereto and to the Shares represented thereby shall be transferred by delivery
thereof to the same extent in all respects as a stock certificate, and the
Shares represented thereby, of a Massachusetts business corporation.
6.4 DEATH OF SHAREHOLDERS . The death of a Shareholder during the
continuance of the Trust shall not terminate this Declaration of Trust nor
give such Shareholder's legal representatives a right to an accounting or to
take any action in the courts or otherwise against other Shareholders or the
Trustees or the Trust Property, but shall simply entitle the legal
representatives of the deceased Shareholder to require the recordation of such
legal representative's ownership of or rights in the deceased Shareholder's
Shares, and, upon the acceptance thereof, such legal representative shall
succeed to all the rights of the deceased Shareholder under this Declaration
of Trust.
6.5 REPURCHASE OF SHARES . The Trustees may, on behalf of the Trust,
purchase or otherwise acquire outstanding Shares from time to time for such
consideration and on such terms as they may deem proper. Shares so purchased
or acquired by the Trustees for the account of the Trust shall not, so long as
they belong to the Trust, receive distributions (other than, at the option of
the Trustees, distributions in Shares) or be entitled to any voting rights.
Such Shares may, in the discretion of the Trustees, be cancelled and the
number of Shares issued thereby reduced, or such Shares may, in the discretion
of the Trustees, be held in the treasury and may be disposed of by the
Trustees at such time or times, to such party or parties and for such
considerations as the Trustees may determine.
6.6 TRUSTEES AS SHAREHOLDERS . Any Trustee in his individual capacity
may purchase and otherwise acquire or sell and otherwise dispose of Shares or
other Securities issued by the Trust, and may exercise all the rights of a
Shareholder to the same extent as though he were not a Trustee.
6.7 REDEMPTION AND STOP TRANSFERS FOR TAX PURPOSES; REDEMPTION TO
MAINTAIN CONSTANT NET ASSET VALUE . If the Trustees shall, at any time and in
good faith, be of the opinion that direct or indirect ownership of Shares or
other Securities of the Trust has or may become concentrated in any person to
an extent which would disqualify the Trust as a regulated investment company
under the Internal Revenue Code, then the Trustees shall have the power by lot
or other means deemed equitable by them (i) to call for redemption a number,
or principal amount, of Shares or other Securities of the Trust sufficient, in
the opinion of the Trustees, to maintain or bring the direct or indirect
ownership of Shares or other Securities of the Trust into conformity with the
requirements for such qualification and (ii) to refuse to transfer or issue
Shares or other Securities of the Trust to any Person whose acquisition of the
Shares or other Securities of the Trust in question which would, in the
opinion of the Trustees, result in such disqualification. The redemption
shall be effected at a redemption price determined in accordance with Section
6.9.
The Shares of one or more Classes of stock may also be subject to
redemption pursuant to the procedure for reduction of outstanding Shares set
forth in Section 10.5 hereof in order to maintain the constant net asset value
per share.
6.8 INFORMATION FROM SHAREHOLDERS . The holders of Shares or other
Securities of the Trust shall, upon demand, disclose to the Trustees in
writing such information with respect to direct and indirect ownership of
Shares or other Securities of the Trust, as the Trustees reasonably deem
necessary, to comply with the provisions of the Internal Revenue Code, or to
comply with the requirements of any other taxing authority.
6.9 REDEMPTIONS . All outstanding Shares may be redeemed at the option
of the holders thereof, upon and subject to the terms and conditions provided
in this Declaration of Trust. The Trust shall, upon application of any
Shareholder, redeem or repurchase from such Shareholder outstanding Shares for
an amount per share determined by the application of a formula adopted for
such purpose by the Trustees (which formula shall be consistent with the 1940
Act and the rules and regulations promulgated thereunder); provided that such
amount per Share shall not exceed the cash equivalent of the proportionate
interest of each Share in the assets of the Portfolio of the Trust at the time
of the purchase or redemption. The procedures for effecting redemption shall
be as adopted by the Trustees and set forth in the Prospectus for the Trust
from time to time.
6.10 SUSPENSION OF REDEMPTION; POSTPONEMENT OF PAYMENT . The Trustees
may suspend the right of redemption or postpone the date of payment for the
whole or any part of any period (i) during which the New York Stock Exchange
is closed other than customary weekend and holiday closings, (ii) during which
trading on the New York Stock Exchange is restricted, (iii) during which an
emergency exists as a result of which disposal by the Trust of Securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Trust to determine fairly the value of its net assets, or (iv) during
any other period when the Securities and Exchange Commission (or any
succeeding governmental authority) may for the protection of security holders
of the Trust by order permit suspension of the right of redemption or
postponement of the date of payment on redemption; provided that applicable
rules and regulations of the Commission (or any succeeding governmental
authority) shall govern as to whether the conditions prescribed in (ii), (iii)
or (iv) exist. Such suspensions shall take effect at such time as the
Trustees shall specify but not later than the close of business on the
business day next following the declaration of suspension, and thereafter
there shall be no right of redemption or payment until the Trustees shall
declare the suspension at an end, except that the suspension shall terminate
in any event on the first day on which said stock exchange shall have reopened
or the period specified in (ii), (iii) or (iv) shall have expired (as to which
in the absence of an official ruling by said Commission or succeeding
authority, the determination of the Trustees shall be conclusive). In the
case of a suspension of the right of redemption, a Shareholder may either
withdraw his request for redemption or receive payment based on the net asset
value existing after the termination of the suspension.
ARTICLE VII
RECORD AND TRANSFER OF SHARES
7.1 SHARE REGISTER . A register shall be kept by or on behalf of the
Trustees, under the direction of the Trustees, which shall contain the names
and addresses of the Shareholders and the number and Class of Shares held by
them respectively and a record of all transfers thereof. Such register shall
be conclusive as to who are the holders of the Shares. Only Shareholders
whose ownership of Shares is recorded on such register shall be entitled to
vote or to receive distributions or otherwise to exercise or enjoy the rights
of Shareholders. No Shareholder shall be entitled to receive any
distribution, nor to have notice given to him as herein provided, until he has
given his address to a transfer agent or such other officer or agent of the
Trust as shall keep the register for entry thereon.
7.2 TRANSFER AGENT . The Trustees shall have power to employ, within or
without the Commonwealth of Massachusetts, a transfer agent or transfer agents
and, if they so determine, a registrar or registrars. The transfer agent or
transfer agents may keep the registrar and record therein the original issues
and transfers of Shares. Any such transfer agents and registrars shall
perform the duties usually performed by transfer agents and registrars of
certificates and shares of stock in a corporation, except as modified by the
Trustees.
7.3 OWNER OF RECORD . Any person becoming entitled to any Share in
consequence of the death, bankruptcy or insolvency of any Shareholder, or
otherwise, by operation of law, shall be recorded as holder of such Shares.
But until such record is made, the Shareholder of record shall be deemed to be
the holder of such Shares for all purposes hereof and neither the Trustees nor
any transfer agent or registrar nor any officer or agent of the Trust shall be
affected by any notice of such death, bankruptcy, insolvency or other event.
7.4 TRANSFERS OF SHARES . Shares shall be transferable on the records
of the Trust (other than by operation of law) only by the record holder
thereof or by his agent thereunto duly authorized in writing upon delivery to
the Trust or a transfer agent of the Trust of a duly executed instrument of
transfer, together with such evidence of the genuineness of execution and
authorization and of other matters as may reasonably be required by the Trust
or the transfer agent. Upon such delivery, the transfer shall be recorded on
the register of the Trust. But until such record is made, the Shareholder of
record shall be deemed to be the holder of such Shares for all purposes hereof
and neither the Trustees nor the Trust nor any transfer agent or registrar nor
any officer or agent of the Trust shall be affected by any notice of the
proposed transfer. This Section 7.4 and Section 7.3 hereof are subject in all
respects to the provisions of Section 6.7 hereof.
7.5 LIMITATION OF FIDUCIARY RESPONSIBILITY . The Trustees shall not,
nor shall the Shareholders or any officer, transfer agent or other agent of
the Trust, be bound to see to the execution of any trust, express, implied or
constructive, or of any charge, pledge or equity to which any of the Shares or
any interest therein are subject, or to ascertain or inquire whether any sale
or transfer of any such Shares or interest therein by any such Shareholder or
his personal representative is authorized by such trust, charge, pledge or
equity, or to recognize any Person as having any interest therein except the
Persons recorded as such Shareholders. The receipt of the Person in whose
name any Share is recorded, or, if such Share is recorded in the names of more
than one Person, the receipt of any one such Persons or of the duly authorized
agent of any such Person shall be a sufficient discharge for all money,
Securities and other property payable, issuable or deliverable in respect of
such Share and from all liability to see the proper application thereof.
7.6 NOTICES . Any and all notices to which Shareholders hereunder may
be entitled, and any and all communications, shall be deemed duly served or
given if mailed, postage prepaid, addressed to Shareholders of record at their
last known post office addresses as recorded on the Share register provided
for in Section 7.1 hereof.
ARTICLE VIII
SHAREHOLDERS
8.1 MEETINGS OF SHAREHOLDERS . Meetings of the Shareholders may be
called at any time by a majority of the Trustees and shall be called by any
Trustee upon written request of Shareholders holding in the aggregate not less
than ten (10%) percent of the outstanding Shares having voting rights, such
request specifying the purpose or purposes for which such meeting is to be
called. Any such meeting shall be held within or without the Commonwealth of
Massachusetts on such day and at such time as the Trustees shall designate.
In the event that the number of Trustees elected by vote of the Shareholders
shall, at any time, fall below a majority, a Special Meeting shall be called
at the earliest practicable time for the election of Trustees; provided,
however, that such meeting shall, in any event be held within sixty (60) days
of the date on which the number of Trustees elected by vote of the
Shareholders falls below a majority.
8.2 QUORUMS . The holders of a majority of outstanding Shares, entitled
to vote at such a meeting, present in person or by proxy shall constitute a
quorum at any meeting of Shareholders.
8.3 NOTICE OF MEETINGS . Notice of all meetings of the Shareholders
entitled to vote at such a meeting, stating the time, place and purposes of
the meeting, shall be given by the Trustees by mail to each Shareholder at his
registered address, mailed at least ten (10) days and not more than sixty (60)
days before the meeting. Only the business stated in the notice of the
meeting shall be considered at such meeting. Any adjourned meeting may be
held as adjourned without further notice.
8.4 RECORD DATE FOR MEETINGS . For the purposes of determining the
Shareholders who are entitled to vote or act at any meeting or any adjournment
thereof, or who are entitled to participate in any dividend or distribution,
or for the purpose of any other action, the Trustees may from time to time
close the transfer books for such period, not exceeding thirty (30) days, as
the Trustees may determine; or without closing the transfer books, the
Trustees may fix a date not more than sixty (60) days prior to the date of any
meeting of Shareholders or other actions as a record date for the
determination of Shareholders entitled to vote at such meeting or any
adjournment thereof or to be treated as Shareholders of record for purposes of
such other action, except for dividend payments which shall be governed by
Section 10.1, and any Shareholder who was a Shareholder at the time so fixed
shall be entitled to vote at such meeting or any adjournment thereof, even
though he has since that date disposed of his Shares, and no Shareholder
becoming such after that date shall be so entitled to vote at such meeting or
any adjournment thereof or to be treated as a Shareholder of record for
purposes of such other action.
8.5 PROXIES, ETC. At any meeting of Shareholders, any holder of Shares
entitled to vote thereat may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary
may direct, for the verification prior to the time at which such vote shall be
taken. Pursuant to a resolution of a majority of the Trustees, proxies may be
solicited in the name of one or more Trustees or one or more of the officers
of the Trust. Only Shareholders of record shall be entitled to vote and each
full Share shall be entitled to one vote and fractional Shares shall be
entitled to fractional votes. When any Share is held jointly by several
persons, any one of them may vote at any meeting in person or by proxy in
respect of such Share, but if more than one of them shall be present at such
meeting in person or by proxy, and such joint owners or their proxies so
present disagree as to any vote to be cast, such vote shall not be received in
respect of such Share. A proxy purporting to be executed by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its
exercise, and the burden of proving invalidity shall rest on the challenger.
If the holder of any such Share is a minor or a person of unsound mind, and
subject to guardianship or to the legal control of any other person as regards
the charge or management of such Share, he may vote by his guardian or such
other person appointed or having such control, and such vote may be given in
person or by proxy.
8.6 REPORTS . The Trustees shall cause to be prepared at least annually
a report of operations containing a balance sheet and statements of income and
undistributed income of the Trust prepared in conformity with generally
accepted accounting principles and an opinion of an independent certified
public accountant on such financial statements based on an examination of the
books and records of the Trust, and made in accordance with generally accepted
auditing standards. A signed copy of such report and opinion shall be filed
with the Trustees within sixty (60) days after the close of the period covered
thereby. Copies of such reports shall be mailed to all Shareholders of record
within the time required by the 1940 Act and in any event within a reasonable
period preceding the annual meeting of Shareholders. The Trustees shall, in
addition, furnish to the Shareholders, at least semi-annually, an interim
report containing an unaudited balance sheet of the Trust as at the end of
such semi-annual period and a statement of income and surplus for the period
from the beginning of the current fiscal year to the end of such semi-annual
period.
8.7 INSPECTION OF RECORDS . The records of the Trust shall be open to
inspections by Shareholders to the same extent as is permitted shareholders of
a Massachusetts business corporation.
8.8 SHAREHOLDER ACTION BY WRITTEN CONSENT . Any action taken by
Shareholders may be taken without a meeting if a majority of Shareholders
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust) consent to the
action in writing and the written consents are filed with the records of the
meetings of Shareholders. Such consent shall be treated for all purposes as a
vote taken at a meeting of Shareholders.
8.9 VOTING RIGHTS OF SHAREHOLDERS . The Shareholders shall be entitled
to vote only upon the following matters: (a) election of Trustees as provided
in Sections 9.2, 9.3 and 9.4 hereof; (b) amendment of the Declaration of Trust
or termination of this Trust as provided in Section 4.4 and Section 13.1
hereof; (c) reorganization of this Trust as provided in Section 13.2 hereof;
and (d) all matters for which the approval of the Shareholders of the Trust is
required by the 1940 Act, as amended. Except with respect to the foregoing
matters specified in this Section 8.9, no action taken by the Shareholders at
any meeting shall in any way bind the Trustees.
ARTICLE IX
TRUSTEES
9.1 NUMBER AND QUALIFICATION . The number of Trustees shall be fixed
from time to time by resolution of a majority of the Trustees then in office,
provided, however, that subsequent to any sale of Shares pursuant to a public
offering, there shall not be fewer than three (3) Trustees. Any vacancy
created by an increase in Trustees may be filled by the appointment of an
individual having the qualifications described in this Section 9.1 made by a
resolution of a majority of the Trustees then in office. Any such appointment
shall not become effective, however, until the individual named in the
resolution of appointment shall have accepted in writing such appointment and
agreed in writing to be bound by the terms of this Declaration of Trust. No
reduction in the number of Trustees shall have the effect of removing any
Trustee from office prior to the expiration of his term. Whenever a vacancy
in the number of Trustees shall occur, until such vacancy is filled as
provided in Section 9.4 hereof, the Trustees or Trustee continuing in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by this
Declaration of Trust. A Trustee shall be an individual at least twenty-one
(21) years of age who is not under legal disability. The Trustees, in their
capacity as Trustees, shall not be required to devote their entire time to the
business and affairs of the Trust.
9.2 TERM AND ELECTION . Each Trustee named herein, or elected or
appointed as provided in Section 9.1 and 9.4 hereof shall (except in the event
of resignations or removals or vacancies pursuant to Sections 9.3 or 9.4
hereof) hold office until his successor has been elected and has qualified to
serve as Trustee. Election of Trustees shall be by the affirmative vote of
the holders of at least a majority of the Shares entitled to vote present in
person or by proxy at such meeting. The election of any Trustee (other than
an individual who was serving as a Trustee immediately prior to such election)
pursuant to this Section 9.2 shall not become effective unless and until such
person shall have in writing accepted his election and agreed to be bound by
the terms of this Declaration of Trust. Trustees may, but need not, own
Shares.
9.3 RESIGNATION AND REMOVAL . Any Trustee may resign (without need for
prior or subsequent accounting) by an instrument in writing signed by him and
delivered or mailed to the Chairman, the President or the Secretary (referred
to in Section 9.6 hereof) and such resignation shall be effective upon such
delivery, or at a later date according to the terms of the notice. Any of the
Trustees may be removed (provided the aggregate number of Trustees after such
removal shall not be less than the number required by Section 9.1 hereof) with
cause, by the action of two-thirds (2/3) of the remaining Trustees. Upon the
resignation or removal of a Trustee, or his otherwise ceasing to be a Trustee,
he shall execute and deliver such documents as the remaining Trustees shall
require for the purpose of conveying to the Trust or the remaining Trustees
any Trust Property held in the name of the resigning or removed Trustee. Upon
the incapacity or death of any Trustee, his legal representative shall execute
and deliver on his behalf such documents as the remaining Trustees shall
require as provided in the preceding sentence.
No natural person shall serve as Trustee after the holders of record of
not less than two-thirds of the outstanding Shares of beneficial interest in
the Trust have declared that he be removed from that office either by
declaration in writing filed with the Custodian of the securities of the Trust
or by votes cast in person or by proxy at a meeting called for the purpose.
The Trustees shall promptly call a meeting of Shareholders for the
purpose of voting upon the question of removal if any such Trustee or Trustees
are requested in writing to do so by the recordholders of not less than ten
(10) per centum of the outstanding Shares.
Whenever ten or more Shareholders of record, who have been such for at
least six months preceding the date of application, and who hold in the
aggregate either Shares having a net asset value of at least $50,000 or at
least one (1) per centum of the outstanding Shares, whichever is less, shall
apply to the Trustees in writing, stating that they wish to communicate with
other Shareholders with a view to obtaining signatures to a request for a
meeting for the purposes of removing Trustee(s) and accompanied by a form of
communication and request which they wish to transmit, the Trustees shall
within five (5) business days after receipt of such application either:
(1) afford to such applicants access to a list of the names and
addresses of all Shareholders as recorded on the books of the Trust; or
(2) inform such applicants as to the approximate number of
Shareholders of record, and the approximate cost of mailing to them the
proposed communication and form of request.
If the Trustees elect to follow the course specified in (2) above, upon
the written request of such applicants, accompanied by a tender of the
material to be mailed and of the reasonable expenses of mailing, the Trustees
shall, with reasonable promptness, mail such material to all Shareholders of
record at their addresses as recorded on the books, unless within five (5)
business days after such tender the Trustees shall mail to such applicants and
file with the Securities and Exchange Commission, together with a copy of the
material to be mailed, a written statement signed by at least a majority of
the Trustees to the effect that in their opinion either such material contains
untrue statements of fact or omits to state facts necessary to make the
statements contained therein not misleading, or would be in violation of
applicable law, and specifying the basis of such opinion.
9.4 VACANCIES . The term of office of a Trustee shall terminate and a
vacancy shall occur in the event of the death, resignation, bankruptcy,
adjudicated incompetence or other incapacity to exercise the duties of the
office, or removal of a Trustee. No such vacancy shall operate to annul this
Declaration of Trust or to revoke any existing agency created pursuant to the
terms of this Declaration of Trust, and title to any Trust Property held in
the name of any Trustee alone, jointly with one or more of the other Trustees
or otherwise, shall, in the event of the death, resignation, removal,
bankruptcy, adjudicated incompetence or other incapacity to exercise the
duties of the office of such Trustee, vest in the continuing or surviving
Trustees without necessity of any further act or conveyance. In the case of
an existing vacancy (other than by reason of increase in the number of
Trustees) the holders of at least a majority of the Shares entitled to vote,
acting at any meeting of Shareholders called for the purpose, or a majority of
the Trustees continuing in office acting by resolution, may fill such vacancy,
and any Trustee so elected by the Trustees shall hold office until his
successor has been elected and has qualified to serve as Trustee. Upon the
effectiveness of any such appointment as provided in this Section, the Trust
Property shall vest in such new Trustee jointly with the continuing or
surviving Trustees without the necessity of any further act or conveyance;
provided, however, that no such election or appointment as provided in this
Section 9.4 shall become effective unless or until the new Trustee shall have
accepted in writing his appointment and agreed to be bound by the terms of
this Declaration of Trust.
9.5 MEETINGS . Meetings of the Trustees shall be held from time to time
upon the call of the Chairman, the President, the Secretary or any two
Trustees. Regular meetings of the Trustees may be held without call or notice
at a time and place fixed by the By-laws or by resolution of the Trustees.
Notice of any other meeting shall be mailed or otherwise given not less than
forty-eight (48) hours before the meeting but may be waived in writing by any
Trustee either before or after such meeting. The attendance of a Trustee at a
meeting shall constitute a waiver of such notice except where a Trustee
attends a meeting for the express purpose of objecting to the transaction of
any business on the grounds that the meeting has not been lawfully called or
convened. The Trustees may act with or without a meeting. A quorum for all
meetings of the Trustees shall be a majority of the Trustees. Subject to
Section 2.15 hereof and unless specifically provided otherwise in this
Declaration of Trust, any action of the Trustees may be taken at a meeting by
vote of a majority of the Trustees present (a quorum being present) or,
without a meeting, by written consents of a majority of the Trustees. Any
agreement, or other instrument or writing executed by one or more of the
Trustees or by any authorized Person shall be valid and binding upon the
Trustees and upon the Trust when authorized or ratified by action of the
Trustees as provided in this Declaration of Trust.
Any committee of the Trustees, including an Executive Committee, if any,
may act with or without a meeting. A quorum for all meetings of any such
committee shall be a majority of the members thereof. Unless otherwise
specifically provided in this Declaration of Trust, any action of any such
committee may be taken at a meeting by vote of a majority of the members
present (a quorum being present) or, without a meeting, by written consent of
a majority of the members.
With respect to actions of the Trustees and any committee thereof,
Trustees who are affiliated within the meaning of Section 2.15 hereof or
otherwise interested in any action to be taken may be counted for quorum
purposes under this Section 9.5 and shall be entitled to vote to the extent
permitted by the 1940 Act.
All or any one or more Trustees may participate in a meeting of the
Trustees or any committee thereof by utilizing conference, telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other and participation in a meeting pursuant to
such communications shall constitute presence in person at such meeting. The
minutes of any meeting of Trustees held by utilizing such communications
equipment shall be prepared in the same manner as those of a meeting of
Trustees held in person.
9.6 OFFICERS . The Trustees shall elect a Chairman from among their
number and shall appoint a President, Secretary and Treasurer and such other
officers as they deem necessary or appropriate to carry out the business of
the Trust. Such officers shall be appointed and hold office in accordance
with By-law provisions.
9.7 BY-LAWS . The Trustees may adopt and, from time to time, amend or
repeal By-laws for the conduct of the business of the Trust, and in such
By-laws may define the duties of the respective officers, agents, employees
and representatives.
ARTICLE X
DISTRIBUTIONS TO SHAREHOLDERS AND
DETERMINATION OF NET ASSET VALUE AND NET INCOME
10.1 GENERAL . The Trustees may, from time to time, declare and pay to
the Shareholders, in proportion to their respective ownership of Shares in
each class, out of the earnings, net profits or surplus (including paid-in
capital), capital or assets of the respective Portfolio in the hands of the
Trustees, such dividends or other distributions as they may determine. The
declaration and payment of such dividends or other distributions and the
determination of earnings, profits, surplus (including paid-in capital) and
capital available for dividends and other purposes shall lie wholly in the
discretion of the Trustees and no Shareholder shall be entitled to receive or
be paid any dividends or to receive any distributions except as determined by
the Trustees in the exercise of said discretion. The Trustees may, in
addition, from time to time in their discretion, declare and pay as dividends
or other distributions such additional amounts, whether or not out of
earnings, profits and surplus available therefor, sufficient to enable the
Trust to avoid or reduce its liability for Federal income taxes, inasmuch as
the computations of net income and gains for Federal income tax purposes may
vary from the computations thereof on the books of the Trust. Any or all such
dividends or other distributions may be made, in whole or in part, in cash,
property or other assets or obligations of the Trust, as the Trustees may in
their sole discretion from time to time determine. The Trustees may also
distribute to the Shareholders of a class, in proportion to their respective
ownership of Shares in the class, additional Shares issuable hereunder in such
manner and on such terms as they may deem proper. Any or all such dividends
or distributions may be made among the Shareholders of the class of record at
the time of declaring a distribution or among the Shareholders of record at
such later date as the Trustees shall determine.
10.2 RETAINED EARNINGS . The Trustees, except as provided in Section
10.1 hereof, may retain from the net profits such amount as they may deem
necessary to pay the debts or expenses of the Trust, to meet obligations of
the Trust, to establish reserves or as they may deem desirable to use in the
conduct of its affairs or to retain for future requirements or extensions of
the business of the Trust.
10.3 SOURCE OF DISTRIBUTIONS . Shareholders shall receive annually a
statement in writing advising the Shareholders of the source of the funds so
distributed so that distributions of ordinary income, return of capital and
capital gains income will be clearly distinguished.
10.4 NET ASSET VALUE . The net asset value of each outstanding Share of
the Trust shall be determined once on each business day, as of the close of
trading on the New York Stock Exchange or at any other time as the Trustees,
by resolution, may determine and which is in compliance with the 1940 Act.
The method of determination of net asset value shall be determined by the
Trustees and shall be set forth in the Prospectus. The power and duty to make
the daily calculations may be delegated by the Trustees to the Adviser, the
Custodian, the Transfer Agent, the Distributor or such other person as the
Trustees by resolution may determine. The Trustees may suspend the daily
determination of net asset value to the extent permitted by the 1940 Act.
10.5 POWER TO MODIFY VALUATION PROCEDURES . Notwithstanding any of the
foregoing provisions of this Article X, the Trustees may prescribe, in their
absolute discretion, such other bases and times for determining the per Share
net asset value of the Trust's Shares or net income, or the declaration and
payment of dividends and distributions as they may deem necessary or desirable
to enable the Trust to comply with any provision of the 1940 Act, or any rule
or regulation thereunder, including any rule or regulation adopted pursuant to
Section 22 of the 1940 Act by the Commission or any securities association
registered under the Securities Exchange Act of 1934, or any order of
exemption issued by said Commission, all as in effect now or as hereafter
amended or modified.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT AND DUTIES . The Trustees shall, at all times, employ
a bank or trust company organized under the laws of the United States of
America or one of the several states thereof having a capital, surplus and
undivided profits of at least two million dollars ($2,000,000) as Custodian
with authority as its agent, but subject to such restrictions, limitations and
other requirements, if any, as may be contained in the By-laws of the Trust
and the 1940 Act:
(a) to hold the securities owned by the Trust and deliver the same
upon written order;
(b) to receive and receipt for any monies due to the Trust and
deposit the same in its own banking department or elsewhere as the Trustees
may direct;
(c) to disburse such funds upon orders or vouchers;
(d) if authorized by the Trustees, to keep the books and accounts of
the Trust and furnish clerical and accounting services;
(e) if authorized to do so by the Trustees, to compute the net income
of the Trust;
all upon such basis of compensation as may be agreed upon between the Trustees
and Custodian.
The Trust may also employ the Custodian as its agent for other purposes.
The Trustees may also authorize the Custodian to employ one or more
Sub-Custodians (including a foreign Sub-Custodian(s)) from time to time to
perform such of the acts and services of the Custodian and upon such terms and
conditions, as may be agreed upon between the Custodian and such Sub-Custodian
and approved by the Trustees, provided that, in every case, such Sub-Custodian
shall meet the applicable requirements under the 1940 Act, and the regulations
thereunder to act as such.
11.2 CENTRAL CERTIFICATE SYSTEM . Subject to such rules, regulations
and orders as the Commission may adopt, the Trustees may direct the Custodian
to deposit all or any part of the Securities owned by the Trust in a system
for the central handling of Securities established by a national securities
exchange or a national securities association registered with the Commission
under the Securities Exchange Act of 1934, or such other person as may be
permitted by the Commission, or otherwise in accordance with the 1940 Act,
pursuant to which system all securities of any particular class or series of
any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal
only upon the order of the Trust.
ARTICLE XII
RECORDING OF DECLARATION OF TRUST
12.1 RECORDING . This Declaration of Trust and any amendment hereto
shall be filed in the office of the Secretary of the Commonwealth of
Massachusetts and may also be filed or recorded in such other places as the
Trustees deem appropriate. Each amendment so filed shall be accompanied by a
certificate signed and acknowledged by a Trustee stating that such action was
duly taken in a manner provided herein; and unless such amendment or such
certificate filed with the Secretary of the Commonwealth of Massachusetts sets
forth some earlier or later time for the effectiveness of such amendment, such
amendment shall be effective upon its filing with the Secretary of said
Commonwealth. An amended Declaration, containing the original Declaration and
all amendments theretofore made, may be executed any time or from time to time
by a majority of the Trustees and shall, upon filing with the Secretary of the
Commonwealth of Massachusetts, be conclusive evidence of all amendments
contained therein and may thereafter be referred to in lieu of the original
Declaration and the various amendments thereto.
ARTICLE XIII
AMENDMENT OR TERMINATION OF THE TRUST
13.1 AMENDMENT OR TERMINATION . The provisions of this Declaration of
Trust may be amended or altered (except as to the limitations on personal
liability of the Shareholders and Trustees and the prohibition of assessments
upon Shareholders), or the Trust may be terminated, at any meeting of the
Shareholders called for the purpose, by the affirmative vote of the holders of
a majority of the Shares then outstanding and entitled to vote, or by an
instrument or instruments in writing, without a meeting, signed by a majority
of the Trustees and the holders of a majority of such Shares; provided,
however, that the Trustees may, from time to time by a two-thirds (2/3) vote
of the Trustees, and after fifteen (15) days prior written notice to the
Shareholders, amend or alter the provisions of this Declaration of Trust,
without the vote or assent of the Shareholders, to the extent deemed by the
Trustees in good faith to be necessary to conform this Declaration to the
requirements of the regulated investment company provisions of the Internal
Revenue Code or the requirements of applicable federal laws or regulations or
any interpretation thereof by a court or other governmental agency of
competent jurisdiction but the Trustees shall not be liable for failing so to
do. Notwithstanding the foregoing, (i) no amendment may be made pursuant to
this Section 13.1 which would change any rights with respect to any
outstanding Shares of the Trust by reducing the amount payable thereon upon
liquidation of the Trust or by diminishing or eliminating any voting rights
pertaining thereto, except with the vote or written consent of the holders of
two-thirds (2/3) of the outstanding Shares entitled to vote thereon; and (ii)
no amendment may be made with respect to the investment restrictions contained
in Section 4.2 hereof without the affirmative vote of the holders of a
majority (as defined in the 1940 Act) of the Shares of the Class of stock
affected by such change. Upon the termination of the Trust pursuant to this
Section 13.1:
(a) The Trust shall carry on no business except for the purpose of
winding up its affairs.
(b) The Trustees shall proceed to wind up the affairs of the Trust
and all of the powers of the Trustees under this Declaration of Trust shall
continue until the affairs of the Trust shall have been wound up, including
the power to fulfill or discharge the contracts of the Trust, collect its
assets, sell, convey, assign, exchange, transfer or otherwise dispose of all
or any part of the remaining Trust Property to one or more persons at public
or private sale for consideration which may consist in whole or in part of
cash, securities or other property of any kind, discharge or pay its
liabilities, and do all other acts appropriate to liquidate its business;
provided that any sale, conveyance, assignment, exchange, transfer or other
disposition of all or substantially all of the Trust Property shall require
approval of the principal terms of the transaction and the nature and amount
of the consideration by affirmative vote of not less than a majority of all
outstanding Shares entitled to vote.
(c) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and refunding
agreements, as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property, in cash or in kind or partly of each,
among the Shareholders according to their respective rights.
Upon termination of the Trust and distribution to the Shareholders as
herein provided, a majority of the Trustees shall execute and lodge among the
records of the Trust an instrument in writing setting forth the fact of such
termination, and the Trustees shall thereupon be discharged from all further
liabilities and duties hereunder, and the right, title and interest of all
Shareholders shall cease and be cancelled and discharged.
A certification in recordable form signed by a majority of the Trustees
setting forth an amendment and reciting that it was duly adopted by the
Shareholders or by the Trustees as aforesaid or a copy of the Declaration, as
amended, in recordable form, and executed by a majority of the Trustees, shall
be conclusive evidence of such amendment when lodged among the records of the
Trust.
Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of Shares shall have become effective, this
Declaration of Trust may be terminated or amended in any respect by the
affirmative vote of a majority of the Trustees or by an instrument signed by a
majority of the Trustees.
13.2 POWER TO EFFECT REORGANIZATION . The Trustees, by vote or written
approval of a majority of the Trustees, may select or direct the organization
of a corporation, association, trust or other organization with which the
Trust may merge, or which shall take over the Trust Property and carry on the
affairs of the Trust, and after receiving an affirmative vote of not less than
a majority of the outstanding Shares entitled to vote at any meeting of
Shareholders, the notice for which included a statement of such proposed
action, the Trustees may effect such merger or may sell, convey and transfer
the Trust Property to any such corporation, association, trust or organization
in exchange for cash or shares or securities thereof, or beneficial interest
therein with the assumption by such transferee of the liabilities of the
Trust; and thereupon the Trustees shall terminate the Trust and deliver such
cash, shares, securities or beneficial interest ratably among the Shareholders
of this Trust in redemption of their Shares.
ARTICLE XIV
MISCELLANEOUS
14.1 GOVERNING LAW . This Declaration of Trust is executed by the
Trustees and delivered in the Commonwealth of Massachusetts and with reference
to the laws thereof, and the rights of all parties and the validity,
construction and effect of every provision hereof shall be subject to and
construed according to the laws of said Commonwealth and reference shall be
specifically made to the Business Corporation Law of the Commonwealth of
Massachusetts as to the construction of matters not specifically covered
herein or as to which an ambiguity exists.
14.2 COUNTERPARTS . This Declaration of Trust may be simultaneously
executed in several counterparts, each of which so executed shall be deemed to
be an original, and such counterparts, together, shall constitute but one and
the same instrument, which shall be sufficiently evidenced by any such
original counterpart.
14.3 RELIANCE BY THIRD PARTIES . Any certificate executed by an
individual who, according to the records of the Trust, or of any recording
office in which this Declaration may be recorded, appears to be a Trustee
hereunder, certifying to: (a) the number or identity of Trustees or
Shareholders, (b) the due authorization of the execution of any instrument or
writing, (c) the form of any vote passed at a meeting of Trustees or
Shareholders, (d) the fact that the number of Trustees or Shareholders present
at any meeting or executing any written instrument satisfies the requirements
of this Declaration of Trust, (e) the form of any By-law adopted by or the
identity of any officers elected by the Trustees, or (f) the existence of any
fact or facts which in any manner relate to the affairs of the Trust, shall be
conclusive evidence as to the matters so certified in favor of any person
dealing with the Trustees or any of them and the successors of such person.
14.4 PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS .
(a) The provisions of this Declaration of Trust are severable and if
the Trustees shall determine, with the advice of counsel, that any one or more
of such provisions (the "Conflicting Provisions") are in conflict with the
regulated investment company provisions of the Internal Revenue Code or with
other applicable federal or state laws and regulations, the Conflicting
Provisions shall be deemed never to have constituted a part of this
Declaration of Trust; provided, however, that such determination by the
Trustees shall not affect or impair any of the remaining provisions of this
Declaration of Trust or render invalid or improper any action taken or omitted
(including, but not limited to, the election of Trustees) prior to such
determination.
(b) If any provisions of this Declaration of Trust shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any manner affect or render invalid or unenforceable such
provision in any other jurisdiction or any other provision of this Declaration
of Trust in any jurisdiction.
14.5 SECTION HEADINGS . Section headings have been inserted for
convenience only and are not a part of this Declaration of Trust.
ARTICLE XV
DURATION OF TRUST
15.1 DURATION . Subject to possible termination in accordance with the
provisions of Article XIII hereof, the Trust shall be of unlimited duration.
IN WITNESS WHEREOF, the undersigned majority of all of the Trustees of
the Trust have caused these presents to be executed as of the 9th day of
January, 1996.
<TABLE>
<CAPTION>
<S> <C> <C>
Position with
Name Trust Address
/S/ MARK E. PRILLAMAN
- ---------------------- President and 1755 Creekside Oaks Drive
Mark E. Prillaman Trustee Sacramento, CA 95833
/S/LAWRENCE F. GRAHAM
- ---------------------- Trustee c/o Olympia & York
Lawrence F. Graham 237 Park Avenue
New York, NY 10017
/S/STEPHEN J. KLEIN
- ---------------------- Trustee 20 Old Hyde Road
Stephen J. Klein Weston, CT 06883
/S/RAYMOND L. PFEISTER
- ---------------------- Trustee c/o Fred Alger Management, Inc.
Raymond L. Pfeister 75 Maiden Lane
New York, NY 10038
- ---------------------- Trustee P.O. Box CJ
James Winther Williamsburg, VA 23187
</TABLE>
EXHIBIT - 99.B5
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of the 9th day of January, 1996 between LPT VARIABLE
INSURANCE SERIES TRUST, an unincorporated business trust organized under the
laws of the Commonwealth of Massachusetts (the "Trust"), and LPIMC INSURANCE
MARKETING SERVICES, a California Corporation (the "Adviser").
W I T N E S S E T H :
WHEREAS, the Trust is engaged in business as an open-end management
investment company and is registered as such under the Investment Company Act
of 1940, as amended (the "Act");
WHEREAS, the Trust is authorized to issue separate series, each of which
offers a separate class of shares of common stock, each having its own
investment objective or objectives, policies and limitations;
WHEREAS, the Trust currently offers shares in eight series, designated as
the Strong International Stock Portfolio, Strong Growth Portfolio, MAS Value
Portfolio, Berkeley Smaller Companies Portfolio, Lexington Corporate Leaders
Portfolio, MFS Total Return Portfolio, Salomon U.S. Quality Bond Portfolio and
Salomon Money Market Portfolio ("Current Series"), and the Trust may offer
shares of one or more additional series in the future;
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940; and
WHEREAS, the Trust desires to retain the Adviser to render investment
management and administrative services to the Trust with respect to each
Current Series as indicated on the signature page in the manner and on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, the parties hereto agree as follows:
1. SERVICES OF THE ADVISER.
1.1 INVESTMENT MANAGEMENT SERVICES. The Adviser shall act as the
investment adviser to the Trust and, as such, shall (i) obtain and evaluate
such information relating to the economy, industries, business, securities
markets and securities as it may deem necessary or useful in discharging its
responsibilities hereunder, (ii) formulate a continuing program for the
investment of the assets of the Trust in a manner consistent with its
investment objectives, policies and restrictions, and (iii) determine from
time to time securities to be purchased, sold, retained or lent by the Trust,
and implement those decisions, including the selection of entities with or
through which such purchases, sales or loans are to be effected; provided,
that the Adviser will place orders pursuant to its investment determinations
either directly with the issuer or with a broker or dealer, and if with a
broker or dealer, (a) will attempt to obtain the best net price and most
favorable execution of its orders, and (b) may nevertheless in its discretion
purchase and sell portfolio securities from and to brokers and dealers who
provide the Adviser with research, analysis, advice and similar services and
pay such brokers and dealers in return a higher commission or spread than may
be charged by other brokers or dealers.
The Trust hereby authorizes any entity or person associated with the
Adviser or any Sub-Adviser retained by Adviser pursuant to Section 7 of this
Agreement, which is a member of a national securities exchange, to effect any
transaction on the exchange for the account of the Trust which is permitted by
Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T)
thereunder, and the Trust hereby consents to the retention of compensation for
such transactions in accordance with Rule 11a2-2(T)(a)(iv).
The Adviser shall carry out its duties with respect to the Trust's
investments in accordance with applicable law and the investment objectives,
policies and restrictions set forth in the Trust's then-current Prospectus and
Statement of Additional Information, and subject to such further limitations
as the Trust may from time to time impose by written notice to the Adviser.
1.2 ADMINISTRATIVE SERVICES. The Adviser shall manage the Trust's
business and affairs and shall provide such services required for effective
administration of the Trust as are not provided by employees or other agents
engaged by the Trust; provided, that the Adviser shall not have any obligation
to provide under this Agreement, any direct or indirect services to Trust
shareholders, any services related to the distribution of Trust shares, or any
other services which are the subject of a separate agreement or arrangement
between the Trust and the Adviser. Subject to the foregoing, in providing
administrative services hereunder, the Adviser shall:
1.2.1 OFFICE SPACE, EQUIPMENT AND FACILITIES. Furnish without cost to
the Trust, or pay the cost of, such office space, office equipment and office
facilities as are adequate for the Trust's needs.
1.2.2 PERSONNEL. Provide, without remuneration from or other cost to
the Trust, the services of individuals competent to perform all of the Trust's
executive, administrative and clerical functions which are not performed by
employees or other agents engaged by the Trust or by the Adviser acting in
some other capacity pursuant to a separate agreement or arrangement with the
Trust.
1.2.3 AGENTS. Assist the Trust in selecting and coordinating the
activities of the other agents engaged by the Trust, including the Trust's
shareholder servicing agent, custodian, independent accountants and legal
counsel.
1.2.4 TRUSTEES AND OFFICERS. Authorize and permit the Adviser's
directors, officers and employees who may be elected or appointed as Trustees
or officers of the Trust to serve in such capacities, without remuneration
from or other cost to the Trust.
1.2.5 BOOKS AND RECORDS. Assure that all financial, accounting and
other records required to be maintained and preserved by the Trust are
maintained and preserved by it or on its behalf in accordance with applicable
laws and regulations.
1.2.6 REPORTS AND FILINGS. Assist in the preparation of (but not pay
for) all periodic reports by the Trust to its shareholders and all reports and
filings required to maintain the registration and qualification of the Trust
and Trust shares, or to meet other regulatory or tax requirements applicable
to the Trust, under federal and state securities and tax laws.
1.3 ADDITIONAL SERIES. In the event that the Trust from time to time
designates one or more series in addition to the Current Series ("Additional
Series"), it shall notify the Adviser in writing. If the Adviser is willing to
perform services hereunder to the Additional Series, it shall so notify the
Trust in writing. Thereupon, the Trust and the Adviser shall enter into an
Addendum to this Agreement for the Additional Series and the Additional Series
shall be subject to this Agreement.
2.0 EXPENSES OF THE TRUST.
2.1 EXPENSES TO BE PAID BY ADVISER. The Adviser shall pay all salaries,
expenses and fees of the officers, Trustees and employees of the Trust who are
officers, directors or employees of the Adviser.
In the event that the Adviser pays or assumes any expenses of the Trust
not required to be paid or assumed by the Adviser under this Agreement, the
Adviser shall not be obligated hereby to pay or assume the same or any similar
expense in the future; provided, that nothing herein contained shall be deemed
to relieve the Adviser of any obligation to the Trust under any separate
agreement or arrangement between the parties.
2.2 EXPENSES TO BE PAID BY THE TRUST. The Trust shall bear all expenses
of its operation, except those specifically allocated to the Adviser under
this Agreement or under any separate agreement between the Trust and the
Adviser. Subject to any separate agreement or arrangement between the Trust
and the Adviser, the expenses hereby allocated to the Trust, and not to the
Adviser, include, but are not limited to:
2.2.1 CUSTODY. All charges of depositories, custodians, and other
agents for the transfer, receipt, safekeeping, and servicing of its cash,
securities, and other property.
2.2.2 SHAREHOLDER SERVICING. All expenses of maintaining and servicing
shareholder accounts, including but not limited to the charges of any
shareholder servicing agent, dividend disbursing agent or other agent engaged
by the Trust to service shareholder accounts.
2.2.3 SHAREHOLDER REPORTS. All expenses of preparing, setting in type,
printing and distributing reports and other communications to shareholders.
2.2.4 PROSPECTUSES. All expenses of preparing, setting in type,
printing and mailing annual or more frequent revisions of the Trust's Pros
pectus and Statement of Additional Information and any supplements thereto and
of supplying them to shareholders.
2.2.5 PRICING AND PORTFOLIO VALUATION. All expenses of computing the
Trust's net asset value per share, including any equipment or services
obtained for the purpose of pricing shares or valuing the Trust's investment
portfolio.
2.2.6 COMMUNICATIONS. All charges for equipment or services used for
communications between the Adviser or the Trust and any custodian, shareholder
servicing agent, portfolio accounting services agent, or other agent engaged
by the Trust.
2.2.7 LEGAL AND ACCOUNTING FEES. All charges for services and expenses
of the Trust's legal counsel and independent accountants.
2.2.8 TRUSTEES' FEES AND EXPENSES. All compensation of Trustees other
than those affiliated with the Adviser, all expenses incurred in connection
with such unaffiliated Trustees' services as Trustees, and all other expenses
of meetings of the Trustees and committees of the Trustees.
2.2.9 SHAREHOLDER MEETINGS. All expenses incidental to holding meetings
of shareholders, including the printing of notices and proxy materials, and
proxy solicitation therefor.
2.2.10 FEDERAL REGISTRATION FEES. All fees and expenses of registering
and maintaining the registration of the Trust under the Act and the
registration of the Trust's shares under the Securities Act of 1933 (the "1933
Act"), including all fees and expenses incurred in connection with the
preparation, setting in type, printing, and filing of any Registration
Statement, Prospectus and Statement of Additional Information under the 1933
Act or the Act, and any amendments or supplements that may be made from time
to time.
2.2.11 STATE REGISTRATION FEES. All fees and expenses of qualifying and
maintaining the qualification of the Trust and of the Trust's shares for sale
under securities laws of various states or jurisdictions, and of registration
and qualification of the Trust under all other laws applicable to the Trust or
its business activities (including registering the Trust as a broker-dealer,
or any officer of the Trust or any person as agent or salesman of the Trust in
any state).
2.2.12 BONDING AND INSURANCE. All expenses of bond, liability, and
other insurance coverage required by law or regulation or deemed advisable by
the Trustees of the Trust, including, without limitation, such bond, liability
and other insurance expenses that may from time to time be allocated to the
Trust in a manner approved by its Trustees.
2.2.13 BROKERAGE COMMISSIONS. All brokers' commissions and other
charges incident to the purchase, sale or lending of the Trust's portfolio
securities.
2.2.14 TAXES. All taxes or governmental fees payable by or with respect
to the Trust to federal, state or other governmental agencies, domestic or
foreign, including stamp or other transfer taxes.
2.2.15 TRADE ASSOCIATION FEES. All fees, dues and other expenses
incurred in connection with the Trust's membership in any trade association or
other investment organization.
2.2.16 NONRECURRING AND EXTRAORDINARY EXPENSES. Such nonrecurring and
extraordinary expenses as may arise including the costs of actions, suits, or
proceedings to which the Trust is a party and the expenses the Trust may incur
as a result of its legal obligation to provide indemnification to its
officers, Trustees and agents.
3. ADVISORY FEE.
3.1 FEE. As compensation for all services rendered facilities provided
and expenses paid or assumed by the Adviser under this Agreement, the Trust
shall pay the Adviser on the last day of each month, or as promptly as
possible thereafter, a fee calculated at the annual rate of the average daily
net assets during such month of each series of the Trust as set forth below:
<TABLE>
<CAPTION>
<S> <C> <C>
Annual
Advisory
Fee
as a %
of Average
Daily
Portfolio Net Assets Net Asset Size
3.1.1 Strong International Stock .75% Less than $150 million
.70% $150 million to $500
million
.65% Over $500 million
3.1.2 Strong Growth .75% Less than $150 million
.70% $150 million to $500
million
.65% Over $500 million
3.1.3 MAS Value .875% Less than $25 million
.625% $25 million to $100
million
.50% $100 million to $500
million
.45% Over $500 million
3.1.4 Berkeley Smaller Companies 1.00% Less than $10 million
.75% Over $10 million
3.1.5 Lexington Corporate Leaders .65% Less than $10 million
.60% 10 million to $100 million
.55% Over $100 million
3.1.6 MFS Total Return .75% Less than $200 million
.70% $200 million to 1.3
billion
.65% Over 1.3 billion
3.1.7 Salomon U.S. Quality Bond .55% Less than $50 million
.525% $50 million to $150
million
.50% $150 million to $300
million
.45% $300 million to $500
million
.425% Over $500 million
3.1.8 Salomon Money Market .45% Less than $50 million
.425% $50 million to $150
million
.40% $150 million to $300
million
.35% $300 million to $500
million
.325% Over $500 million
</TABLE>
4. RECORDS.
4.1 TAX TREATMENT. The Adviser shall maintain the books and records of
the Trust in such a manner that treats each series as a separate entity for
federal income tax purposes.
4.2 OWNERSHIP. All records required to be maintained and preserved by
the Trust pursuant to the provisions or rules or regulations of the Securities
and Exchange Commission under Section 31(a) of the Act and maintained and
preserved by the Adviser on behalf of the Trust are the property of the Trust
and shall be surrendered by the Adviser promptly on request by the Trust;
provided, that the Adviser may at its own expense make and retain copies of
any such records.
5. REPORTS TO ADVISER.
The Trust shall furnish or otherwise make available to the Adviser such
copies of the Trust's Prospectus, Statement of Additional Information,
financial statements, proxy statements, reports, and other information
relating to its business and affairs as the Adviser may, at any time or from
time to time, reasonably require in order to discharge its obligations under
this Agreement.
6. REPORTS TO THE TRUST.
The Adviser shall prepare and furnish to the Trust such reports,
statistical data and other information in such form and at such intervals as
the Trust may reasonably request.
7. RETENTION OF SUB-ADVISER(S).
Subject to the Trust's obtaining the initial and periodic approvals
required under Section 15 of the Act, the Adviser may retain one or more
sub-advisers, at the Adviser's own cost and expense, for the purpose of
managing the investments of the assets of one or more Series of the Trust.
Retention of one or more sub-advisers shall in no way reduce the
responsibilities or obligations of the Adviser under this Agreement and the
Adviser shall be responsible to the Trust for all acts or omissions of any
sub-adviser in connection with the performance of the Adviser's duties
hereunder.
8. SERVICES TO OTHER CLIENTS.
Nothing herein contained shall limit the freedom of the Adviser or any
affiliated person of the Adviser to render investment management and
administrative services to other investment companies, to act as investment
adviser or investment counselor to other persons, firms or corporations, or to
engage in other business activities.
9. LIMITATION OF LIABILITY OF ADVISER AND ITS PERSONNEL.
Neither the Adviser nor any director, officer or employee of the Adviser
performing services for the Trust at the direction or request of the Adviser
in connection with the Adviser's discharge of its obligations hereunder shall
be liable for any error of judgment or mistake of law or for any loss suffered
by the Trust in connection with any matter to which this Agreement relates,
and the Adviser shall not be responsible for any action of the Trustees of the
Trust in following or declining to follow any advice or recommendation of the
Adviser; PROVIDED, that nothing herein contained shall be construed (i) to
protect the Adviser against any liability to the Trust or its shareholders to
which the Adviser would otherwise be subject by reason of willful misfeasance,
bad faith, or gross negligence in the performance of the Adviser's duties, or
by reason of the Adviser's reckless disregard of its obligations and duties
under this Agreement, or (ii) to protect any director, officer or employee of
the Adviser who is or was a Trustee or officer of the Trust against any
liability of the Trust or its shareholders to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
person's office with the Trust.
10. INDEMNIFICATION.
The Trust shall indemnify and hold harmless the Adviser, its officers and
directors and each person, if any, who controls the Adviser within the meaning
of Section 15 of the Securities Act of 1933 ("1933 Act") (any and all such
persons shall be referred to as "Indemnified Party"), against any loss,
liability, claim, damage or expense (including the reasonable cost of
investigating or defending any alleged loss, liability, claim, damages or
expense and reasonable counsel fees incurred in connection therewith), arising
by reason of any matter to which this Investment Advisory Agreement relates.
However, in no case (i) is this indemnity to be deemed to protect any
particular Indemnified Party against any liability to which such Indemnified
Party would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of its duties or by reason of reckless
disregard of its obligations and duties under this Investment Advisory
Agreement or (ii) is the Trust to be liable under this indemnity with respect
to any claim made against any particular Indemnified Party unless such
Indemnified Party shall have notified the Trust in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon the Adviser or such
controlling persons.
The Adviser shall indemnify and hold harmless the Trust and each of its
directors and officers and each person if any who controls the Trust within
the meaning of Section 15 of the 1933 Act, against any loss, liability, claim,
damage or expense described in the foregoing indemnity, but only with respect
to the Adviser's willful misfeasance, bad faith or gross negligence in the
performance of its duties under this Investment Advisory Agreement. In case
any action shall be brought against the Trust or any person so indemnified, in
respect of which indemnity may be sought against the Adviser, the Adviser
shall have the rights and duties given to the Trust, and the Trust and each
person so indemnified shall have the rights and duties given to the Adviser by
the provisions of subsections (i) and (ii) of this section.
11. NO PERSONAL LIABILITY OF TRUSTEES OR SHAREHOLDERS.
This Agreement is made by the Trust on behalf of its various Current
Series pursuant to authority granted by the Trustees, and the obligations
created hereby are not binding on any of the Trustees or shareholders of the
Trust individually, but bind only the property of each Current Series of the
Trust.
12. EFFECT OF AGREEMENT.
Nothing herein contained shall be deemed to require the Trust to take any
action contrary to its Declaration of Trust or its By-Laws or any applicable
law, regulation or order to which it is subject or by which it is bound, or to
relieve or deprive the Trustees of the Trust of their responsibility for and
control of the conduct of the business and affairs of the Trust.
13. TERM OF AGREEMENT.
The term of this Agreement shall begin on the date first above written,
and unless sooner terminated as hereinafter provided, this Agreement shall
remain in effect through January 8, 1998. Thereafter, this Agreement shall
continue in effect with respect to the Trust from year to year, subject to the
termination provisions and all other terms and conditions hereof; PROVIDED,
such continuance with respect to the Trust is approved at least annually by
vote of the holders of a majority of the outstanding voting securities of the
Trust or by the Trustees of the Trust; PROVIDED, that in either event such
continuance is also approved annually 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 parties to this Agreement or interested
persons of either party hereto; and PROVIDED FURTHER that the Adviser shall
not have notified the Trust in writing at least sixty (60) days prior to
January 8, 1998, or at least sixty (60) days prior to January 8th of any year
thereafter that it does not desire such continuation. The Adviser shall
furnish to the Trust, promptly upon its request, such information as may
reasonably be necessary to evaluate the terms of this Agreement or any
extension, renewal or amendment thereof.
14. AMENDMENT OR ASSIGNMENT OF AGREEMENT.
Any amendment to this Agreement shall be in writing signed by the parties
hereto; PROVIDED, that no such amendment shall be effective unless authorized
on behalf of the Trust (i) by resolution of the Trust's Trustees, including
the vote or written consent of a majority of the Trust's Trustees who are not
parties to this Agreement or interested persons of either party hereto, and
(ii) by vote of a majority of the outstanding voting securities of the Trust.
This Agreement shall terminate automatically and immediately in the event of
its assignment.
15. TERMINATION OF AGREEMENT.
This Agreement may be terminated at any time by either party hereto,
without the payment of any penalty, upon sixty (60) days' prior written notice
to the other party; PROVIDED, that in the case of termination by the Trust,
such action shall have been authorized (i) by resolution of the Trust's Board
of Trustees, including the vote or written consent of Trustees of the Trust
who are not parties to this Agreement or interested persons of either party
hereto, or (ii) by vote of a majority of the outstanding voting securities of
the Trust.
16. INTERPRETATION AND DEFINITION OF TERMS.
Any question of interpretation of any term or provision of this Agreement
having a counterpart in or otherwise derived from a term or provision of the
Act shall be resolved by reference to such term or provision of the Act and to
interpretation thereof, if any, by the United States courts, or, in the
absence of any controlling decision of any such court, by rules, regulations
or orders of the Securities and Exchange Commission validly issued pursuant to
the Act. Specifically, the terms "vote of a majority of the outstanding voting
securities," "interested persons," "assignment" and "affiliated person," as
used in this Agreement shall have the meanings assigned to them by Section
2(a) of the Act. In addition, when the effect of a requirement of the Act
reflected in any provision of this Agreement is modified, interpreted or
relaxed by a rule, regulation or order of the Securities and Exchange
Commission, whether of special or of general application, such provision shall
be deemed to incorporate the effect of such rule, regulation or order.
17. CAPTIONS.
The captions in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
18. EXECUTION IN COUNTERPARTS.
This Agreement may be executed simultaneously in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized and their
respective seals to be hereunto affixed, as of the date and year first above
written.
<TABLE>
<CAPTION>
<S> <C>
LPT VARIABLE INSURANCE SERIES
TRUST for its Strong International Stock
Portfolio, Strong Growth Portfolio,
MAS Value Portfolio, Berkeley Smaller
Companies Portfolio, Lexington
Corporate Leaders Portfolio, MFS
Total Return Portfolio, Salomon U.S.
Quality Bond Portfolio and Salomon
Money Market Portfolio.
Attest:
- ---------------------------------- By:------------------------------------
Secretary President
LPIMC INSURANCE MARKETING
SERVICES
Attest:
- ---------------------------------- By:-------------------------------------
Secretary Executive Vice President & Chief
Marketing Officer
</TABLE>