As filed with the Securities and Exchange Commission
on September 5, 1997.
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. [ ]
Post-Effective Amendment No. 4 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 6 [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
It is proposed that this filing will become effective (Check appropriate
space):
_____ immediately upon filing pursuant to paragraph (b) of Rule 485
_____ on (date) pursuant to paragraph (b) of Rule 485
__X__ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
_____ on (date) pursuant to paragraph (a)(1) of Rule 485
_____ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
_____ This post-effective amendment designates a new effective date
for a previously filed post-effective amendment
Registrant has declared that it has registered an indefinite number or amount of
securities under the Securities Act of 1933 pursuant to Rule 24f-2 of the
Investment Company Act of 1940, and the Rule 24f-2 Notice for Registrant's
fiscal year 1996 was filed on or about February 27, 1997.
==============================================================================
LPT VARIABLE INSURANCE SERIES TRUST
CROSS REFERENCE SHEET
(as required by rule 404(c))
<TABLE>
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PART A
N-1A
- --------
Item No. Location
- -------- ---------
1. Cover Page......................... Cover Page
2. Synopsis........................... Not Applicable
3. Condensed Financial Information.... Financial Highlights
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))
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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 and
Other Practices.............. 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. Calculation of Performance Data.... Performance Information
23. Financial Statements............... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of the Registration Statement.
ROBERTSON STEPHENS DIVERSIFIED 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 ROBERTSON
STEPHENS DIVERSIFIED 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 carefully before investing in the Robertson Stephens
Diversified Growth Portfolio and keep it for future reference. The Prospectus
contains information about the Robertson Stephens Diversified Growth Portfolio
that a prospective investor should know before investing.
A Statement of Additional Information ("SAI") dated November 3, 1997 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 NOVEMBER 3, 1997
<TABLE>
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TABLE OF CONTENTS
<S> <C>
PAGE
----
FINANCIAL HIGHLIGHTS......................................................................... 1
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS....................................... 2
Investment Objectives and Policies....................................................... 2
Other Investment Practices and Risk Considerations ...................................... 3
MANAGEMENT OF THE TRUST...................................................................... 6
Investment Adviser....................................................................... 6
Expense Reimbursement.................................................................... 6
Sub-Adviser.............................................................................. 6
Sub-Advisory Fees........................................................................ 7
Allocation of Portfolio Transactions..................................................... 7
Portfolio Turnover....................................................................... 7
SALES AND REDEMPTIONS........................................................................ 8
NET ASSET VALUE.............................................................................. 8
PERFORMANCE INFORMATION...................................................................... 8
Performance of the Portfolio............................................................. 9
Comparable Public Fund Performance....................................................... 9
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS..................................................... 9
ADDITIONAL INFORMATION....................................................................... 10
</TABLE>
FINANCIAL HIGHLIGHTS
The following information for the period ended December 31, 1996, has been
audited by Price Waterhouse LLP, Independent Accountants, whose unqualified
report thereon is included in the Annual Report, which is incorporated
by reference into the SAI. The Financial Highlights should be read in
conjunction with the Financial Statements and Notes thereto included in
the Annual Report. The information for the six months ended June 30, 1997
is unaudited and should be read in conjunction with the Financial Statements
and Notes thereto included in the Semi-Annual Report which is incorporated by
reference into the SAI.
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LPT VARIABLE INSURANCE SERIES TRUST
ROBERTSON STEPHENS DIVERSIFIED GROWTH
FINANCIAL HIGHLIGHTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
ROBERTSON STEPHENS
DIVERSIFIED GROWTH
PORTFOLIO(1)
--------------------
<S> <C>
Net asset value, beginning of period $ 8.58
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (0.02)
Net realized and unrealized gain (loss) on
investments (0.54)
--------------------
Total from investment operations (0.56)
--------------------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.00
Distributions from net realized capital gains 0.00
--------------------
Total distributions 0.00
--------------------
Net asset value, end of period $ 8.02
====================
TOTAL RETURN ++ (6.53%)
====================
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 1,548
Ratio of operating expenses to average net
assets + 1.39%
Ratio of net investment income to average net
assets + (0.64%)
Portfolio turnover rate 107.85%
Average commission rate per share +++ $ 0.0531
Ratio of operating expenses to average net
assets before expense reimbursements + 6.28%
Net investment income (loss) per share before
expense reimbursements ($0.21)
<FN>
+ Annualized
++ Total returns represents aggregate total return for the six months ended June
30, 1997. The total return would have been lower if certain expenses had not
been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
(1) Formerly Berkeley Smaller Companies Portfolio
</FN>
</TABLE>
See Notes to Financial Statements
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
ROBERTSON STEPHENS DIVERSIFIED GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE PERIOD JANUARY 31, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
ROBERTSON STEPHENS
DIVERSIFIED GROWTH
PORTFOLIO(1)
--------------------
<S> <C>
Net asset value, beginning of period $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 2.10
Net realized and unrealized gain (loss) on
Investments (1.69)
--------------------
Total from investment operations 0.41
--------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (1.83)
Distributions from net realized capital gains (0.00)
--------------------
Total distributions (1.83)
--------------------
Net asset value, end of period $ 8.58
====================
TOTAL RETURN ++ 2.42%
====================
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 1,441
Ratio of operating expenses to average net
Assets + 1.36%
Ratio of net investment income to average net
Assets + 20.30%
Portfolio turnover rate 2242.85%
Average commission rate per share +++ $ 0.0478
Ratio of operating expenses to average net
Assets before waiver of fees and expense
Reimbursements + 7.02%
Net investment income (loss) per share before
Waiver of fees and expense reimbursements $ 1.51
<FN>
+ Annualized
++ Total return represents aggregate total return for the period February 9,
1996 (effective date) to December 31, 1996. The total return would have been
lower if certain fees had not been waived by the investment advisor, and if
certain expenses had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
(1) Formerly Berkeley Smaller Companies Portfolio
</FN>
</TABLE>
See Notes to Financial Statements
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 Robertson Stephens Diversified Growth Portfolio is not fundamental and
may be changed without the approval of a majority of the outstanding shares of
the Portfolio. Prior to May 1, 1997, the Robertson Stephens Diversified Growth
Portfolio had different investment objectives, policies and restrictions and a
different sub-adviser. All other investment policies and 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") 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 OBJECTIVE AND POLICIES. The Robertson Stephens Diversified Growth
Portfolio's investment objective is to seek long-term capital growth. In
selecting investments for the Portfolio, the Sub-Adviser focuses on small- and
mid-cap companies, to create a portfolio of investments broadly diversified over
industry sectors and companies.
The Portfolio will invest primarily in common and preferred stocks and warrants.
Although the Portfolio intends to focus on companies with market capitalizations
of up to $3 billion, the Portfolio will remain flexible and may invest in
securities of larger companies. The Portfolio may also purchase debt securities
which the Sub-Adviser believes are consistent with the Portfolio's investment
objective, and may engage in short sales of securities it expects to decline in
price.
Small- and mid-cap companies may present greater opportunities for investment
return than do larger companies, but also involve greater risks. They may have
limited product lines, markets, or financial resources, or may depend on a
limited management group. Their securities may trade less frequently and in
limited volume. As a result, the prices of these securities may fluctuate more
than prices of securities of larger, widely traded companies. See "Investments
in Smaller Companies," below.
The Portfolio's investment strategies and portfolio investments will differ from
those of most other mutual funds. The Sub-Adviser seeks aggressively to identify
favorable securities, economic and market sectors, and investment opportunities
that other investors and investment advisers may not have identified. The
Sub-Adviser may devote more of the Portfolio's assets to pursuing an investment
opportunity than many other mutual funds might; it may buy or sell an investment
at times different from when most other mutual funds might do so; and it may
select investments for the Portfolio that would be inappropriate for less
aggressive mutual funds. In addition, unlike most other mutual funds, the
Portfolio may engage in short sales of securities which involve special risks.
The Portfolio does not invest for current income. The Portfolio may hold a
portion of its assets in cash or money market investments.
All percentage limitations on investments will apply at the time of investment
and will not be considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of the investment.
For a description of certain risks associated with the Portfolio's investment
practices, see "Other Investments Practices and Risk Considerations," below.
OTHER INVESTMENT PRACTICES AND RISK CONSIDERATIONS:
The Portfolio may also engage in the following investment practices, each of
which involves certain special risks. The SAI contains more detailed information
about these practices (some of which, including, for example, options and
futures contracts, and certain debt securities, may be considered "derivative"
investments), including limitations designed to reduce these risks.
INVESTMENTS IN SMALLER COMPANIES. The Portfolio may invest a substantial portion
of its assets in securities issued by small companies. Such companies may offer
greater opportunities for capital appreciation than larger companies, but
investments in such companies may involve certain special risks. Such companies
may have limited product lines, markets, or financial resources and may be
dependent on a limited management group. While the markets in securities of such
companies have grown rapidly in recent years, such securities may trade less
frequently and in smaller volume than more widely held securities. The values of
these securities may fluctuate more sharply than those of other securities, and
the Portfolio may experience some difficulty in establishing or closing out
positions in these securities at prevailing market prices. There may be less
publicly available information about the issuers of these securities or less
market interest in such securities than in the case of larger companies, and it
may take a longer period of time for the prices of such securities to reflect
the full value of their issuers' underlying earnings potential or assets.
Some securities of smaller issuers may be restricted as to resale or may
otherwise be highly illiquid. The ability of the Portfolio to dispose of such
securities may be greatly limited, and the Portfolio may have to continue to
hold such securities during periods when the Sub-Adviser would otherwise have
sold the security. It is possible that the Sub-Adviser or its affiliates or
clients may hold securities issued by the same issuers, and may in some cases
have acquired the securities at different times, on more favorable terms, or at
more favorable prices, than the Portfolio.
SHORT SALES. The Portfolio may seek to hedge investments or realize additional
gains through short sales. When the Sub-Adviser anticipates that the price of a
security will decline, it may sell the security short and borrow the same
security from a broker or other institution to complete the sale. The Portfolio
may make a profit or incur a loss depending upon whether the market price of the
security decreases or increases between the date of the short sale and the date
on which the Portfolio must replace the borrowed security. An increase in the
value of a security sold short by the Portfolio over the price at which it was
sold short will result in a loss to the Portfolio, and there can be no assurance
that the Portfolio will be able to close out the position at any particular time
or at an acceptable price. All short sales must be fully collateralized and
marked to market daily. The Portfolio will not sell securities short if,
immediately after and as a result of the sale, the value of the securities sold
short by the Portfolio exceeds 25% of its total assets. The Portfolio will limit
short sales of any one issuer's securities to 2% of the Portfolio's total assets
and to 2% of any one class of the issuer's securities. The net proceeds of the
short sale will be retained by the broker (or by the Trust's custodian in a
special custody account), to the extent necessary to meet margin requirements,
until the short position is closed out. The Portfolio also will incur
transaction costs in effecting short sales.
FOREIGN SECURITIES. The Portfolio may invest in securities principally traded in
foreign markets. Because foreign securities are normally denominated and traded
in foreign currencies, the value of the Portfolio's assets may be affected
favorably or unfavorably by currency exchange rates and exchange control
regulations. There may be less information publicly available about a foreign
company than about a U.S. company, and foreign companies are not generally
subject to accounting, auditing, and financial reporting standards and practices
comparable to those in the United States. The securities of some foreign
companies are less liquid and at times more volatile than securities of
comparable U.S. companies. Foreign brokerage commissions and other fees are also
generally higher than in the United States. Foreign settlement procedures and
trade regulations may involve certain risks (such as delay in payment or
delivery of securities or in the recovery of the Portfolio's assets held abroad)
and expenses not present in the settlement of domestic investments.
In addition, there may be a possibility of nationalization or expropriation of
assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability, and diplomatic developments that could
affect the value of the Portfolio's investments in certain foreign countries.
Legal remedies available to investors in certain foreign countries may be more
limited than those available with respect to investments in the United States or
in other foreign countries. In the case of securities issued by a foreign
governmental entity, the issuer may in certain circumstances be unable or
unwilling to meet its obligations on the securities in accordance with their
terms, and the Portfolio may have limited recourse available to it in the event
of default. The laws of some foreign countries may limit the Portfolio's ability
to invest in securities of certain issuers located in those foreign countries.
Special tax considerations apply to foreign securities. The Portfolio may buy or
sell foreign currencies and options and futures contracts on foreign currencies
for hedging purposes in connection with its foreign investments. Except as
otherwise provided in this Prospectus, there is no limit on the amount of the
Portfolio's assets that may be invested in foreign securities.
The Portfolio may invest in securities of issuers in developing countries. The
Portfolio may at times invest a substantial portion of its assets in such
securities. Investments in developing countries are subject to the same risks
applicable to foreign investments generally, although those risks may be
increased due to conditions in such countries. For example, the securities
markets and legal systems in developing countries may only be in a developmental
stage and may provide few, or none, of the advantages or protections of markets
or legal systems available in more developed countries. Although many of the
securities in which the Portfolio may invest are traded on securities exchanges,
these securities may trade in limited volume, and the exchanges may not provide
all of the conveniences or protections provided by securities exchanges in more
developed markets. The Portfolio may also invest a substantial portion of its
assets in securities traded in the over-the-counter markets in such countries
and not on any exchange, which may affect the liquidity of the investment and
expose the Portfolio to the credit risk of its counterparties in trading those
investments.
DEBT SECURITIES. The Portfolio may invest in debt securities from time to time,
if the Sub-Adviser believes investing in such securities might help achieve the
Portfolio's objective. The Portfolio may invest in debt securities to the extent
consistent with its investment policies, although the Sub-Adviser expects that
under normal circumstances the Portfolio would not likely invest a substantial
portion of its assets in debt securities.
The Portfolio may invest in lower-quality, high-yielding debt securities.
Lower-rated debt securities (commonly called "junk bonds") are considered to be
of poor standing and predominantly speculative. Securities in the lowest rating
categories may have extremely poor prospects of attaining any real investment
standing, and some of those securities in which the Portfolio may invest may be
in default. The rating services' descriptions of securities in the lower rating
categories, including their speculative characteristics, are set forth in the
SAI.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. In addition, the
lower ratings of such securities reflect a greater possibility that adverse
changes in the financial condition of the issuer, or in general economic
conditions, or both, or an unanticipated rise in interest rates, may impair the
ability of the issuer to make payments of interest and principal. Changes by
recognized rating services in their ratings of any fixed-income security and in
the ability or perceived inability of an issuer to make payments of interest and
principal may also affect the value of these investments. See the SAI.
The Portfolio may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount
from face value and pay interest only at maturity rather than at intervals
during the life of the security. Payment-in-kind bonds allow the issuer, at its
option, to make current interest payments on the bonds either in cash or in
additional bonds. The values of zero-coupon bonds and payment-in-kind bonds are
subject to greater fluctuation in response to changes in market interest rates
than bonds which pay interest currently, and may involve greater credit risk
than such bonds.
The Portfolio will not necessarily dispose of a security when its debt rating is
reduced below its rating at the time of purchase, although the Sub-Adviser will
monitor the investment to determine whether continued investment in the security
will assist in meeting the Portfolio's investment objective. If a security's
rating is reduced below investment grade, an investment in that security may
entail the risks of lower-rated securities described below.
OPTIONS AND FUTURES. The Portfolio may buy and sell call and put options to
hedge against changes in net asset value or to attempt to realize a greater
current return. In addition, through the purchase and sale of futures contracts
and related options, the Portfolio may at times seek to hedge against
fluctuations in net asset value and to attempt to increase its investment
return.
The Portfolio's ability to engage in options and futures strategies will depend
on the availability of liquid markets in such instruments. It is impossible to
predict the amount of trading interest that may exist in various types of
options or futures contracts. Therefore, there is no assurance that the
Portfolio will be able to utilize these instruments effectively for the purposes
stated above. Options and futures transactions involve certain risks which are
described below and in the SAI.
Transactions in options and futures contracts involve brokerage costs and may
require the Portfolio to segregate assets to cover its outstanding positions.
For more information, see the SAI.
INDEX FUTURES AND OPTIONS. The Portfolio may buy and sell index futures
contracts ("index futures") and options on index futures and on indices (or may
purchase investments whose values are based on the value from time to time of
one or more securities indices) for hedging purposes. An index future is a
contract to buy or sell units of a particular bond or stock index at an agreed
price on a specified future date. Depending on the change in value of the index
between the time when the Portfolio enters into and terminates an index futures
or option transaction, the Portfolio realizes a gain or loss. The Portfolio may
also buy and sell index futures and options to increase its investment return.
RISKS RELATED TO OPTIONS AND FUTURES STRATEGIES. Options and futures
transactions involve costs and may result in losses. Certain risks arise because
of the possibility of imperfect correlations between movements in the prices of
futures and options and movements in the prices of the underlying security or
index or of the securities held by the Portfolio that are the subject of a
hedge. The successful use by the Portfolio of the strategies described above
further depends on the ability of the Sub-Adviser to forecast market movements
correctly. Other risks arise from the Portfolio's potential inability to close
out futures or options positions. Although the Portfolio will enter into options
or futures transactions only if the Sub-Adviser believes that a liquid secondary
market exists for such option or futures contract, there can be no assurance
that the Portfolio will be able to effect closing transactions at any particular
time or at an acceptable price. Certain provisions of the Internal Revenue Code
may limit the Portfolio's ability to engage in options and futures transactions.
The Portfolio expects that its options and futures transactions generally will
be conducted on recognized exchanges. The Portfolio may in certain instances
purchase and sell options in the over-the-counter markets. The Portfolio's
ability to terminate options in the over-the-counter markets may be more limited
than for exchange-traded options, and such transactions also involve the risk
that securities dealers participating in such transactions would be unable to
meet their obligations to the Portfolio. The Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of the Sub-Adviser, the pricing
mechanism and liquidity of the over-the-counter markets are satisfactory and the
participants are responsible parties likely to meet their obligations.
The Portfolio will not purchase futures or options on futures or sell futures
if, as a result, the sum of the initial margin deposits on the Portfolio's
existing futures positions and premiums paid for outstanding options on futures
contracts would exceed 5% of the Portfolio's assets. (For options that are
"in-the-money" at the time of purchase, the amount by which the option is
"in-the-money" is excluded from this calculation.)
SECURITIES LOANS AND REPURCHASE AGREEMENTS. The Portfolio may lend portfolio
securities to broker-dealers and may enter into repurchase agreements. These
transactions must be fully collateralized at all times, but involve some risk to
the Portfolio if the other party should default on its obligations and the
Portfolio is delayed or prevented from recovering the collateral.
BORROWING. The Portfolio may borrow money up to one-third of its total assets
less all liabilities and indebtedness (other than such borrowings) for temporary
or emergency purposes. The Portfolio may borrow for leveraging or investment
with respect to reverse repurchase agreements and dollar roll transactions
(including covered rolls), to the extent such investments are permitted under
the Portfolio's investment objective and policies. If the Portfolio borrows
money, its share price may be subject to greater fluctuation until the borrowing
is paid off. If the Portfolio makes additional investments while borrowings are
outstanding, this may be construed as a form of leverage.
Borrowing, including reverse repurchase agreements and, in certain
circumstances, dollar rolls, creates leverage which increases the Portfolio's
investment risk. If the income and gains on the securities purchased with the
proceeds of borrowings exceed the cost of the arrangements, the Portfolio's
earnings or net asset value will increase faster than would be the case
otherwise. Conversely, if the income and gains fail to exceed the costs,
earnings or net asset value will decline faster than would otherwise be the
case.
DEFENSIVE STRATEGIES. At times, the Sub-Adviser may judge that market conditions
make pursuing the Portfolio's basic investment strategy inconsistent with the
best interests of its shareholders. At such times, the Sub-Adviser may
temporarily use alternative strategies, primarily designed to reduce
fluctuations in the values of the Portfolio's assets. In implementing these
"defensive" strategies, the Portfolio may invest in U.S. Government securities,
other high-quality debt instruments, and other securities the Sub-Adviser
believes to be consistent with the Portfolio's best interests.
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 not 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 Robertson Stephens Diversified 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
- --------- ------------
Robertson Stephens Diversified Growth Portfolio .95% of first $10 million of average daily
net assets
.90% of the next $25 million of average
daily net assets
.85% of the next $165 million of average
daily net assets
.80% of average daily net assets over and
above $200 million
</TABLE>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 1997 to reimburse the Portfolio for certain expenses (excluding brokerage
commissions) in excess of 1.39% as to average net assets. The Life Company has
reserved the right to withdraw or modify its policy of expense reimbursement for
the Portfolio. If expenses were not reimbursed and certain advisory fees had not
been waived, the ratio of expenses to average net assets, on an annualized
basis, would have been 7.02% for the period January 31, 1996 (commencement of
operations) through December 31, 1996.
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 Robertson, Stephens & Company Investment
Management, L.P., 555 California Street, San Francisco, CA 94104. Robertson,
Stephens & Company Investment Management, L.P., a California limited
partnership, was formed in 1993 and is registered as an investment adviser with
the Securities and Exchange Commission. The Sub-Adviser is a wholly-owned
subsidiary of BankAmerica Corporation. BankAmerica Corporation is a global
financial services company with $__ billion in assets and an equity capital base
of $__ billion. The Sub-Adviser and its investment advisory affiliates have in
excess of $_____ billion under management in public and private investment
funds.
The portfolio manager for the Portfolio is John L. Wallace who has been a
portfolio manager with the Sub-Adviser since July 1995. He holds a B.A. from the
University of Idaho and an M.B.A. from Pace University.
Prior to joining the Sub-Adviser, Mr. Wallace was Vice President of Oppenheimer
Funds, Inc., where he was portfolio manager of the Oppenheimer Main Street
Income and Growth Fund from 1991 through June 1995 and of the Oppenheimer Total
Return Fund from 1990 through June 1995.
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
- --------- ----------------
Robertson Stephens Diversified Growth Portfolio .70% of first $10 million of average daily
net assets
.65% of the next $25 million of average
daily net assets
.60% of the next $165 million of average
daily net assets
.55% of average daily net assets over and
above $200 million
</TABLE>
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.
Some securities considered for investment by the Portfolio may also be
appropriate for other clients served by the Sub-Adviser. If a 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.
PORTFOLIO TURNOVER. The length of time the Portfolio has held a particular
security is not generally a consideration in investment decisions. The
investment policies of the Portfolio may lead to frequent changes in the
Portfolio's investments, particularly in periods of volatile market movements. A
change in the securities held by the Portfolio is known as "portfolio turnover."
Portfolio turnover generally involves some expense to the Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. Such sales may result in
realization of taxable capital gains. High rates of portfolio turnover
necessarily result in correspondingly greater brokerage and portfolio trading
costs, which are paid by the Portfolio. The portfolio turnover rate for the
Portfolio for the period ended December 31, 1996 was 2242.85%. (See "Portfolio
Turnover" in the SAI.)
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. Eastern Standard
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
("Business Days"). 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
involves valuing a portfolio security initially at its cost, and, thereafter,
assuming a constant amortization to maturity of any discount or premium. 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 above. 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,
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.
PERFORMANCE OF THE PORTFOLIO. The following table shows the average annualized
total return for the periods February 9, 1996 (effective date of Trust's
Registration Statement) through December 31, 1996 and February 9, 1996 to June
30, 1997, of an investment in the Robertson Stephens Diversified Growth
Portfolio, formerly Berkeley Smaller Companies Portfolio, 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.
The performance figures shown for the Portfolio in the chart below reflect the
actual fees and expenses paid by the Portfolio.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1996
AND JUNE 30, 1997
<S> <C>
TOTAL RETURN FOR PERIOD TOTAL RETURN FOR
FEBRUARY 9, 1996 TO PERIOD FEBRUARY 9, 1996
PORTFOLIO DECEMBER 31, 1996 TO JUNE 30, 1997
--------- ----------------- ----------------
Robertson Stephens Diversified Growth Portfolio,
formerly Berkeley Smaller Companies Portfolio _____% ________%
Standard & Poor's 500 Stock Index 15.14% ________%
</TABLE>
The performance results obtained prior to May 1, 1997 were achieved by the
former sub-adviser.
COMPARABLE PUBLIC FUND PERFORMANCE.
The Robertson Stephens Diversified Portfolio has a substantially similar
investment objective and follows substantially the same investment strategies as
The Robertson Stephens Diversified Growth Fund of the Robertson Stephens Mutual
Funds, a mutual fund whose shares are sold to the public. The Sub-Adviser for
the Robertson Stephens Diversified Growth Portfolio is the investment adviser of
The Robertson Stephens Diversified Growth Fund of the Robertson Stephens Mutual
Funds.
Set forth below is the historical performance of The Robertson Stephens
Diversified Growth Fund. Investors should not consider this performance data as
an indication of the future performance of the Robertson Stephens Diversified
Growth Portfolio. The performance figures shown below reflect the deduction of
the historical fees and expenses paid by The Robertson Stephens Diversified
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.
Additionally, although it is anticipated that the Portfolio and its
corresponding public fund series will hold similar securities, their investment
results are expected to differ. In particular, differences in asset size and in
cash flow resulting from purchases and redemptions of Portfolio shares may
result in different security selections, differences in the relative weightings
of securities or differences in the price paid for particular portfolio
holdings. The results shown reflect the reinvestment of dividends and
distributions, and were calculated in the same manner that will be used by the
Robertson Stephens Diversified Growth Portfolio to calculate its own
performance.
The following table shows the average annualized total return for the one year
period August 1, 1996 (inception date) to July 31, 1997 of an investment in The
Robertson Stephens Diversified 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>
Fund 1 Year
- ---------------------------------- ---------
The Robertson Stephens Diversified _____%
Growth Fund
Standard & Poor's 500 Stock 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 net ordinary
income and net short term capital 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. To date, the
Trust has never offered its Class B shares for sale.
The Trust's custodian is State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
BERKELEY 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 (referred to as the "Portfolios" and individually as
the "Portfolio"), 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 U.S. QUALITY BOND
PORTFOLIO ONLY, formerly the Salomon U.S. Quality Bond Portfolio. 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 U.S. Quality Bond
Portfolio and keep it for future reference. The Prospectus contains information
about the Berkeley U.S. Quality Bond Portfolio that a prospective investor
should know before investing.
A Statement of Additional Information ("SAI") dated November 3, 1997 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 NOVEMBER 3, 1997
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE
----
FINANCIAL HIGHLIGHTS......................................................................... 1
INVESTMENT OBJECTIVE AND POLICIES............................................................ 2
COMMON TYPES OF SECURITIES AND MANAGEMENT PRACTICES.......................................... 3
INVESTMENT RISKS............................................................................. 7
Foreign Securities........................................................................ 7
Futures, Options and Other Derivative Instruments......................................... 7
Hybrid Instruments........................................................................ 8
When-Issued Securities.................................................................... 8
MANAGEMENT OF THE TRUST...................................................................... 8
Investment Adviser........................................................................ 8
Expense Reimbursement..................................................................... 9
Sub-Adviser............................................................................... 9
Sub-Advisory Fees......................................................................... 9
SALES AND REDEMPTIONS........................................................................ 10
NET ASSET VALUE.............................................................................. 10
PERFORMANCE INFORMATION...................................................................... 10
Performance of the Portfolio.............................................................. 11
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS..................................................... 11
ADDITIONAL INFORMATION....................................................................... 12
APPENDIX A - RATINGS OF INVESTMENTS.......................................................... A-1
</TABLE>
FINANCIAL HIGHLIGHTS
The following information for the period ended December 31, 1996, has been
audited by Price Waterhouse LLP, Independent Accountants, whose unqualified
report thereon is included in the Annual Report, which is incorporated by
reference into the SAI. The Financial Highlights should be read in conjunction
with the Financial Statements and Notes thereto included in the Annual
Report. The information for the six months ended June 30, 1997 is unaudited
and should be read in conjunction with the Financial Statements and Notes
thereto included in the Semi-Annual Report which is incorporated by reference
into the SAI.
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
BERKELEY U.S. QUALITY BOND PORTFOLIO
(FORMERLY SALOMON U.S. QUALITY BOND PORTFOLIO)
FINANCIAL HIGHLIGHTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
SALOMON U. S.
QUALITY BOND
PORTFOLIO
---------------
<S> <C>
Net asset value, beginning of period $ 9.81
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.28
Net realized and unrealized gain (loss) on
investments (0.02)
---------------
Total from investment operations 0.26
---------------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.00
Distributions from net realized capital gains 0.00
---------------
Total distributions 0.00
---------------
Net asset value, end of period $ 10.07
===============
TOTAL RETURN ++ 2.65%
===============
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 1,574
Ratio of operating expenses to average net
assets + 0.99%
Ratio of net investment income to average net
assets + 5.66%
Portfolio turnover rate 130.24%
Average commission rate per share +++ N/A
Ratio of operating expenses to average net
assets before expense reimbursements + 4.77%
Net investment income (loss) per share before
expense reimbursements $ 0.09
<FN>
+ Annualized
++ Total returns represents aggregate total return for the six months ended June
30, 1997. The total return would have been lower if certain expenses had not
been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
</FN>
</TABLE>
See Notes to Financial Statements
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
BERKELEY U.S. QUALITY BOND PORTFOLIO
(FORMERLY SALOMON U.S. QUALITY BOND PORTFOLIO)
FINANCIAL HIGHLIGHTS
FOR THE PERIOD JANUARY 31, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
SALOMON U. S.
QUALITY BOND
PORTFOLIO
---------------
<S> <C>
Net asset value, beginning of period $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.49
Net realized and unrealized gain (loss) on
Investments (0.25)
---------------
Total from investment operations 0.24
---------------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.43)
Distributions from net realized capital gains (0.00)
---------------
Total distributions (0.43)
---------------
Net asset value, end of period $ 9.81
===============
TOTAL RETURN ++ 2.27%
===============
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 1,553
Ratio of operating expenses to average net
Assets + 0.97%
Ratio of net investment income to average net
Assets + 5.41%
Portfolio turnover rate 231.03%
Average commission rate per share +++ N/A
Ratio of operating expenses to average net
Assets before waiver of fees and expense
Reimbursements + 5.79%
Net investment income (loss) per share before
Waiver of fees and expense reimbursements $ 0.05
<FN>
+ Annualized
++ Total return represents aggregate total return for the period February 9,
1996 (effective date) to December 31, 1996. The total return would have been
lower if certain fees had not been waived by the investment advisor, and if
certain expenses had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
</FN>
</TABLE>
See Notes to Financial Statements
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 Berkeley 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 to 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 25% 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
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 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 an NRSRO, 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 on 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 obligations 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. The portfolio turnover rate for the Portfolio for the period ended
December 31, 1996 was 231.03%. (See "Portfolio Turnover" in the SAI.)
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,
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 not 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 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>
<S> <C>
PORTFOLIO ADVISORY FEE
- --------- ------------
Berkeley 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>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 1997 to reimburse the Portfolio for certain expenses (excluding brokerage
commissions) in excess of 0.99% as to average net assets. The Life Company has
reserved the right to withdraw or modify its policy of expense reimbursement for
the Portfolio. If expenses were not reimbursed and certain advisory fees had not
been waived, the ratio of expenses to average net assets, on an annualized
basis, would have been 5.79% for the period January 31, 1996 (commencement of
operations) through December 31, 1996.
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 an affiliate of the Life Company and the Adviser. The business
address of the Sub-Adviser is 650 California Street, San Francisco, California
94108. The Sub-Adviser has been engaged in the investment management business
since 1972, and currently manages approximately $1.5 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. The Sub-Adviser 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 $____
million. The London Pacific Group, which manages or administers funds valued at
approximately $6.6 billion (including the assets managed by Berkeley) as of June
30, 1997, maintains offices in Jersey (Channel Islands), Sacramento, Raleigh,
San Francisco and San Diego.
The portfolio manager for the Portfolio is William F. Cox who has been a
portfolio manager with the Sub-Adviser since 1992. From 1988 to July 1992, he
was employed as Manager, Financial Analysis Unit of the Office of Thrift and
Supervision.
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
- --------- ----------------
Berkeley U.S. Quality Bond Portfolio .30% of first $50 million of average daily
net assets
.275% of next $100 million of average
daily net assets
.25% of next $150 million of average daily
net assets
.20% of next $200 million of average daily
net assets
.175% 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 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. Eastern Standard
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
("Business Days"). 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
involves valuing a portfolio security initially at its cost, and, thereafter,
assuming a constant amortization to maturity of any discount or premium. 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 above.
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 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.
PERFORMANCE OF THE PORTFOLIO. The following table shows the average annualized
total return of an investment in the Portfolio for the fiscal periods February
9, 1996 (the effective date of the Trust's Registration Statement) to December
31, 1996 and February 9, 1996 to June 30, 1997, as well as a comparison with
the Lipper Government Intermediate Fund Index, a non-weighted index of funds
investing in intermediate government bonds. The performance figures shown
for the Portfolio in the chart below reflect the actual fees and expenses paid
by the Portfolio.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1996
AND JUNE 30, 1997
TOTAL RETURN FOR PERIOD TOTAL RETURN FOR PERIOD
FEBRUARY 31, 1996 TO FEBRUARY 9, 1996 TO
PORTFOLIO DECEMBER 31, 1996 JUNE 30, 1997 (INCEPTION DATE)
--------- ------------------ ------------------------------
<S> <C> <C>
Berkeley U.S. Quality Bond Portfolio _____ ____%
(formerly, Salomon U.S. Quality Bond
Portfolio)
Lipper Government Intermediate Fund Index _____ ____%
</TABLE>
The performance results shown above were achieved by the former sub-adviser.
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, 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 net ordinary
income and net short term capital 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. To date, the
Trust has never offered its Class B shares for sale.
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.
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.
BERKELEY 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 (referred to as the "Portfolios" or individually as the
"Portfolio"), 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 MONEY MARKET PORTFOLIO ONLY,
FORMERLY THE SALOMON MONEY MARKET PORTFOLIO. 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 Money Market
Portfolio and keep it for future reference. The Prospectus contains information
about the Berkeley Money Market Portfolio, formerly the Salomon Money Market
Portfolio, that a prospective investor should know before investing.
A Statement of Additional Information ("SAI") dated November 3, 1997 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 BERKELEY MONEY MARKET
PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE
NO ASSURANCE THAT THE BERKELEY 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 NOVEMBER 3, 1997
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE
----
FINANCIAL HIGHLIGHTS........................................................................ 1
INVESTMENT OBJECTIVE AND POLICIES........................................................... 2
INVESTMENT LIMITATIONS...................................................................... 4
ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS........................................... 5
Bank Obligations......................................................................... 5
Repurchase Agreements.................................................................... 5
Firm Commitments and When-Issued Securities.............................................. 5
Restricted Securities and Securities with Limited Trading Markets........................ 5
Foreign Securities....................................................................... 6
Borrowing................................................................................ 6
Portfolio Turnover....................................................................... 6
MANAGEMENT OF THE TRUST..................................................................... 6
Investment Adviser....................................................................... 6
Expense Reimbursement.................................................................... 7
Sub-Adviser.............................................................................. 7
Sub-Advisory Fees........................................................................ 7
SALES AND REDEMPTIONS....................................................................... 8
NET ASSET VALUE............................................................................. 8
PERFORMANCE INFORMATION..................................................................... 8
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS.................................................... 9
ADDITIONAL INFORMATION...................................................................... 9
APPENDIX A - RATINGS OF INVESTMENTS......................................................... A-1
</TABLE>
FINANCIAL HIGHLIGHTS
The following information for the period ended December 31, 1996, has been
audited by Price Waterhouse LLP, Independent Accountants, whose unqualified
report thereon is included in the Annual Report, which is incorporated
by reference into the SAI. The Financial Highlights should be read in
conjunction with the Financial Statements and Notes thereto included
in the Annual Report. The information for the six months ended June 30,
1997 is unaudited and should be read in conjunction with the Financial
Statements and Notes thereto included in the Semi-Annual Report which is
incorporated by reference into the SAI.
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
BERKELEY MONEY MARKET PORTFOLIO
(FORMERLY, SALOMON MONEY MARKET PORTFOLIO)
FINANCIAL HIGHLIGHTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
SALOMON MONEY
MARKET PORTFOLIO
------------------
<S> <C>
Net asset value, beginning of period $ 1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.02
Net realized and unrealized gain (loss) on
investments 0.00
------------------
Total from investment operations 0.02
------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.02)
Distributions from net realized capital gains (0.00)
------------------
Total distributions (0.02)
------------------
Net asset value, end of period $ 1.00
==================
TOTAL RETURN ++ 2.30%
==================
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 2,173
Ratio of operating expenses to average net
assets + 0.89%
Ratio of net investment income to average net
assets + 4.64%
Portfolio turnover rate N/A
Average commission rate per share +++ N/A
Ratio of operating expenses to average net
assets before expense reimbursements + 5.41%
Net investment income (loss) per share before
expense reimbursements $ 0.00
<FN>
+ Annualized
++ Total returns represents aggregate total return for the six months ended June
30, 1997. The total return would have been lower if certain expenses had not
been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
</FN>
</TABLE>
See Notes to Financial Statements
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
BERKELEY MONEY MARKET PORTFOLIO
(FORMERLY, SALOMON MONEY MARKET PORTFOLIO)
FINANCIAL HIGHLIGHTS
FOR THE PERIOD JANUARY 31, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
SALOMON MONEY
MARKET PORTFOLIO
------------------
<S> <C>
Net asset value, beginning of period $ 1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.04
Net realized and unrealized gain (loss) on
Investments 0.00
------------------
Total from investment operations 0.04
------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.04)
Distributions from net realized capital gains (0.00)
------------------
Total distributions (0.04)
------------------
Net asset value, end of period $ 1.00
==================
TOTAL RETURN ++ 3.93%
==================
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 1,178
Ratio of operating expenses to average net
Assets + 0.87%
Ratio of net investment income to average net
Assets + 4.43%
Portfolio turnover rate N/A
Average commission rate per share +++ N/A
Ratio of operating expenses to average net
Assets before waiver of fees and expense
Reimbursements + 6.67%
Net investment income (loss) per share before
Waiver of fees and expense reimbursements ($0.01)
<FN>
+ Annualized
++ Total return represents aggregate total return for the period February 9,
1996 (effective date) to December 31, 1996. The total return would have been
lower if certain fees had not been waived by the investment advisor, and if
certain expenses had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
</FN>
</TABLE>
See Notes to Financial Statements
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 Berkeley 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:
- - Securities issued or guaranteed by the U.S. Government or by agencies or
instrumentalities thereof;
- - Obligations issued or guaranteed by U.S. and foreign banks ("Bank
Obligations");
- - Commercial paper;
- - Corporate debt obligations, including variable rate obligations;
- - Short-term credit facilities;
- - Asset-backed securities; and
- - 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 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.
The 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.
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 commitment 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 SAI 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 SAI, the other policies and
percentage limitations referred to in this Prospectus and in the SAI 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 not 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 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>
<S> <C>
PORTFOLIO ADVISORY FEE
- --------- ------------
Berkeley 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>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 1997 to reimburse the Portfolio for certain expenses (excluding brokerage
commissions) in excess of 0.89% as to average net assets. The Life Company has
reserved the right to withdraw or modify its policy of expense reimbursement for
the Portfolio. If expenses were not reimbursed and certain advisory fees were
not waived, the ratio of expenses to average net assets, on an annualized basis,
would have been 6.67% for the period January 31, 1996 (commencement of
operations) through December 31, 1996.
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 an affiliate of the Life Company and the Adviser. The business
address of the Sub-Adviser is 650 California Street, San Francisco, California
94108. The Sub-Adviser has been engaged in the investment management business
since 1972, and currently manages approximately $1.5 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. The Sub-Adviser 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 $____
million. The London Pacific Group, which manages or administers funds valued at
approximately $6.6 billion (including the assets managed by Berkeley) as of June
30, 1997, maintains offices in Jersey (Channel Islands), Sacramento, Raleigh,
San Francisco and San Diego.
The portfolio manager for the Portfolio is William F. Cox who has been a
portfolio manager with the Sub-Adviser since 1992. From 1988 to July 1992, he
was employed as Manager, Financial Analysis Unit of the Office of Thrift and
Supervision.
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
- --------- ----------------
Berkeley Money Market Portfolio .20% of first $50 million of average daily
net assets
.175% of next $100 million of average
daily net assets
.15% of next $150 million of average daily
net assets
.10% of next $200 million of average daily
net assets
.075% 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. Eastern Standard
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 SAI
for a more complete description of the amortized cost method.
PERFORMANCE INFORMATION
From time to time the Berkeley Money Market Portfolio may make available
information as to its "yield" and "effective yield." The "yield" of the Berkeley
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 Berkeley 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 net ordinary income
and net short term capital gains are distributed to the separate account of the
Life Company which holds 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. To date, the
Trust has never offered Class B shares for sale.
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.
HARRIS ASSOCIATES 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 (referred to as the "Portfolios" or individually as the
"Portfolio"), 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 HARRIS ASSOCIATES 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 carefully before investing in the Harris Associates
Value Portfolio and keep it for future reference. The Prospectus contains
information about the Harris Associates Value Portfolio that a prospective
investor should know before investing.
A Statement of Additional Information ("SAI") dated November 3, 1997, 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 NOVEMBER 3, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
----
FINANCIAL HIGHLIGHTS............................................................................ 1
INVESTMENT OBJECTIVE AND POLICIES............................................................... 2
Harris Associates Value Portfolio........................................................... 2
INVESTMENT TECHNIQUES........................................................................... 2
RISK FACTORS.................................................................................... 4
PORTFOLIO TURNOVER.............................................................................. 5
RESTRICTIONS ON THE PORTFOLIO'S INVESTMENTS..................................................... 5
MANAGEMENT OF THE TRUST......................................................................... 5
Investment Adviser.......................................................................... 5
Expense Reimbursement....................................................................... 6
Sub-Adviser................................................................................. 6
Sub-Advisory Fees........................................................................... 6
Portfolio Transactions...................................................................... 7
SALES AND REDEMPTIONS........................................................................... 7
NET ASSET VALUE................................................................................. 7
PERFORMANCE INFORMATION......................................................................... 8
Performance of the Portfolio................................................................ 8
Comparable Public Fund Performance.......................................................... 9
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS........................................................ 9
ADDITIONAL INFORMATION.......................................................................... 9
</TABLE>
FINANCIAL HIGHLIGHTS
The following information for the period ended December 31, 1996, has been
audited by Price Waterhouse LLP, Independent Accountants, whose unqualified
report thereon is included in the Annual Report, which is incorporated
by reference into the SAI. The Financial Highlights should be read in
conjunction with the Financial Statements and Notes thereto included
in the Annual Report. The information for the six months ended June 30,
1997 is unaudited and should be read in conjunction with the Financial
Statements and Notes thereto included in the Semi-Annual Report which is
incorporated by reference into the SAI.
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
HARRIS ASSOCIATES PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
HARRIS ASSOCIATES
VALUE
PORTFOLIO(1)
-------------------
<S> <C>
Net asset value, beginning of period $ 11.86
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.04
Net realized and unrealized gain (loss) on
investments 1.66
-------------------
Total from investment operations 1.70
-------------------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.00
Distributions from net realized capital gains 0.00
-------------------
Total distributions 0.00
-------------------
Net asset value, end of period $ 13.56
===================
TOTAL RETURN ++ 14.33%
===================
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 2,050
Ratio of operating expenses to average net
assets + 1.29%
Ratio of net investment income to average net
assets + 0.64%
Portfolio turnover rate 87.00%
Average commission rate per share +++ $ 0.0584
Ratio of operating expenses to average net
assets before expense reimbursements + 5.45%
Net investment income (loss) per share before
expense reimbursements ($0.22)
<FN>
+ Annualized
++ Total returns represents aggregate total return for the six months ended June
30, 1997. The total return would have been lower if certain expenses had not
been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
(1) Formerly MAS Value Portfolio
</FN>
</TABLE>
See Notes to Financial Statements
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
HARRIS ASSOCIATES PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE PERIOD JANUARY 31, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
HARRIS ASSOCIATES
VALUE
PORTFOLIO(1)
-------------------
<S> <C>
Net asset value, beginning of period $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.10
Net realized and unrealized gain (loss) on
Investments 2.13
-------------------
Total from investment operations 2.23
-------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.10)
Distributions from net realized capital gains (0.27)
-------------------
Total distributions (0.37)
-------------------
Net asset value, end of period $ 11.86
===================
TOTAL RETURN ++ 20.39%
===================
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 1,421
Ratio of operating expenses to average net
Assets + 1.26%
Ratio of net investment income to average net
Assets + 1.01%
Portfolio turnover rate 41.08%
Average commission rate per share +++ $ 0.0542
Ratio of operating expenses to average net
Assets before waiver of fees and expense
Reimbursements + 7.55%
Net investment income (loss) per share before
Waiver of fees and expense reimbursements ($0.52)
<FN>
+ Annualized
++ Total return represents aggregate total return for the period February 9,
1996 (effective date) to December 31, 1996. The total return would have been
lower if certain fees had not been waived by the investment advisor, and if
certain expenses had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
(1) Formerly MAS Value Portfolio
</FN>
</TABLE>
See Notes to Financial Statements
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 Harris Associates 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 and 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. Prior to May 1, 1997, the Harris Associates Value
Portfolio had different investment objectives, policies and restrictions and a
different sub-adviser. 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.
HARRIS ASSOCIATES VALUE PORTFOLIO:
OBJECTIVE. To seek long-term capital appreciation by investing primarily in
equity securities. Although income is considered in the selection of securities,
the Portfolio is not designed for investors whose primary investment objective
is income.
HOW THE PORTFOLIO INVESTS. The Portfolio invests principally in securities of
U.S. issuers. However, it may invest up to 25% of its total assets (valued at
the time of investment) in securities of non-U.S. issuers, including foreign
government obligations and foreign equity and debt securities that are traded
over-the-counter or on foreign exchanges. There are no geographic limits on the
Portfolio's foreign investments, but the Portfolio does not expect to invest
more than 5% of its assets in securities of issuers based in emerging markets.
See "Risk Factors - International Investing" below.
INVESTMENT TECHNIQUES
EQUITY SECURITIES. The equity securities in which the Portfolio may invest
include common and preferred stocks and warrants or other similar rights and
convertible securities. The chief consideration in the selection of equity
securities for the Portfolio is the size of the discount of market price
relative to the economic value of the security as determined by the Sub-Adviser.
The Sub-Adviser's investment philosophy for those investments is predicated on
the belief that over time market price and value converge and that investment in
securities priced significantly below long-term value presents the best
opportunity to achieve long-term capital appreciation.
The Sub-Adviser uses several qualitative and quantitative methods in analyzing
economic value, but considers the primary determinant of value to be the
enterprise's long-run ability to generate cash for its owners. Once the
Sub-Adviser has determined that a security is undervalued, the Sub-Adviser will
consider it for purchase by the Portfolio, taking into account the quality and
motivation of the management, the firm's market position within its industry and
its degree of pricing power. The Sub-Adviser believes that the risks of equity
investing are often reduced if management's interests are strongly aligned with
the interests of its stockholders.
DEBT SECURITIES. The Portfolio may invest in debt securities of both
governmental and corporate issuers. The Portfolio may invest up to 25% of its
assets (valued at the time of investment), in debt securities that are rated
below investment grade, without a minimum rating requirement. Lower-grade debt
securities (commonly called "junk bonds") are obligations of issuers rated BB or
lower by S&P or Ba or lower by Moody's. Lower-grade debt securities are
considered speculative and may be in poor standing or actually in default.
Medium-grade debt securities are those rated BBB by S&P or Baa by Moody's.
Securities so rated are considered to have speculative characteristics. See
"Risk Factors." A description of the ratings used by S&P and Moody's is included
as an appendix to the SAI.
SHORT SALES AGAINST THE BOX. The Portfolio may sell short securities it owns or
has the right to acquire without further consideration, a technique called
selling short "against the box." Short sales against the box may protect the
Portfolio against the risk of losses in the value of its portfolio securities
because any unrealized losses with respect to such securities should be wholly
or partially offset by a corresponding gain in the short position. However, any
potential gains in such securities should be wholly or partially offset by a
corresponding loss in the short position. Short sales against the box may be
used to lock in a profit on a security when, for tax reasons or otherwise, the
Sub-Adviser does not want to sell the security. The Trust does not currently
expect that more than 20% of the Portfolio's total assets would be involved in
short sales against the box. For a more complete explanation, please refer to
the SAI.
CURRENCY EXCHANGE TRANSACTIONS. The Portfolio may engage in currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate for purchasing
or selling currency prevailing in the foreign exchange market or through a
forward currency exchange contract ("forward contract"). A forward contract is
an agreement to purchase or sell a specified currency at a specified future date
(or within a specified time period) and price set at the time of the contract.
Forward contracts are usually entered into with banks and broker-dealers, are
not exchange-traded and are usually for less than one year, but may be renewed.
Forward currency transactions may involve currencies of the different countries
in which the Portfolio may invest, and serve as hedges against possible
variations in the exchange rate between these currencies. The Portfolio's
forward transactions are limited to transaction hedging and portfolio hedging
involving either specific transactions or actual or anticipated portfolio
positions. Transaction hedging is the purchase or sale of a forward contract
with respect to a specified receivable or payable of the Portfolio accruing in
connection with the purchase or sale of portfolio securities. Portfolio hedging
is the use of a forward contract with respect to an actual or anticipated
portfolio security position denominated or quoted in a particular currency. The
Portfolio may engage in portfolio hedging with respect to the currency of a
particular country in amounts approximating actual or anticipated positions in
securities denominated in such currency. When the Portfolio owns or anticipates
owning securities in countries whose currencies are linked, the Sub-Adviser may
aggregate such positions as to the currency hedged. Although forward contracts
may be used to protect the Portfolio from adverse currency movements, the use of
such hedges may reduce or eliminate the potentially positive effect of currency
revaluations on the Portfolio's total return.
OTHER INVESTMENT COMPANIES. Certain markets are closed in whole or in part to
equity investments by foreigners. The Portfolio may be able to invest in such
markets solely or primarily through governmentally authorized investment
vehicles or companies. The Portfolio generally may invest up to 10% of its
assets in the aggregate in shares of other investment companies and up to 5% of
its assets in any one investment company, as long as no investment represents
more than 3% of the outstanding voting stock of the acquired investment company
at the time of investment.
Investment in another investment company may involve the payment of a premium
above the value of such issuers' portfolio securities, and is subject to market
availability. The Portfolio does not intend to invest in such vehicles or funds
unless, in the judgment of the Sub-Adviser, the potential benefits of the
investment justify the payment of any applicable premium or sales charge. As a
shareholder in an investment company, the Portfolio would bear its ratable share
of that investment company's expenses, including its advisory and administration
fees. At the same time the Portfolio would continue to pay its own management
fees and other expenses.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices. There is a risk that the securities may not be
delivered or that they may decline in value before the settlement date.
PRIVATE PLACEMENTS. The Portfolio may acquire securities in private placements.
Because an active trading market may not exist for such securities, the sale of
such securities may be subject to delay and additional costs. The Portfolio will
not purchase such a security if more than 15% of the value of the Portfolio's
net assets would be invested in illiquid securities.
OPTIONS. The Portfolio may purchase both call options and put options on
securities. A call or put option is a contract that gives the Portfolio, in
return for a premium paid on purchase of the option, the right to buy from, or
to sell to, the seller of the option the security underlying the option at a
specified exercise price during the term of the option.
CASH RESERVES. To meet liquidity needs or for temporary defensive purposes, the
Portfolio may hold cash in domestic and foreign currencies and may invest in
domestic and foreign money market securities.
RISK FACTORS
GENERAL. All investments, including those in mutual funds, have risks, and no
investment is suitable for all investors. The Portfolio is intended for
long-term investors.
SMALL CAP COMPANIES. During some periods, the securities of small cap companies,
as a class, have performed better than the securities of large companies, and in
some periods they have performed worse. Stocks of small cap companies tend to be
more volatile and less liquid than stocks of large companies. Small cap
companies, as compared to larger companies, may have a shorter history of
operations, may not have as great an ability to raise additional capital, may
have a less diversified product line making them susceptible to market pressure,
and may have a smaller public market for their shares.
INTERNATIONAL INVESTING. The Portfolio may invest up to 25% of its assets in
securities of non-U.S. issuers. International investing allows you to achieve
greater diversification and to take advantage of changes in foreign economies
and market conditions. Many foreign economies have, from time to time, grown
faster than the U.S. economy, and the returns on investments in these countries
have exceeded those of similar U.S. investments, although there can be no
assurance that these conditions will continue.
You should understand and consider carefully the greater risks involved in
investing internationally. Investing in securities of non-U.S. issuers,
positions in which are generally denominated in foreign currencies, and
utilization of forward foreign currency exchange contracts involve both
opportunities and risks not typically associated with investing in U.S.
securities. These include: fluctuations in exchange rates of foreign currencies;
possible imposition of exchange control regulation or currency restrictions that
would prevent cash from being brought back to the United States; less public
information with respect to issuers of securities; less governmental supervision
of stock exchanges, securities brokers and issuers of securities; different
accounting, auditing and financial reporting standards; different settlement
periods and trading practices; less liquidity and frequently greater price
volatility in foreign markets than in the United States; imposition of foreign
taxes; and sometimes less advantageous legal, operational and financial
protections applicable to foreign subcustodial arrangements.
Although the Portfolio tries to invest in companies and governments of countries
having stable political environments, there is the possibility of restriction of
foreign investment, expropriation of assets, or confiscatory taxation, seizure
or nationalization of foreign bank deposits or other assets, establishment of
exchange controls, the adoption of foreign government restrictions, or other
adverse political, social or diplomatic developments that could affect
investment in these nations. Economics in individual emerging markets may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross domestic products, rates of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments positions. Many
emerging market countries have experienced high rates of inflation for many
years, which has had and may continue to have very negative effects on the
economies and securities markets of those countries.
The securities markets of emerging countries are substantially smaller, less
developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure and regulatory
standards in many respects are less stringent than in the U.S. and other major
markets. There also may be a lower level of monitoring and regulation of
emerging markets and the activities of investors in such markets, and
enforcement of existing regulations has been extremely limited.
The Portfolio may invest in American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs) or Global Depositary Receipts (GDRs) that are not
sponsored by the issuer of the underlying security. To the extent it does so,
the Portfolio would probably bear its proportionate share of the expenses of the
depository and might have greater difficulty in receiving copies of the issuer's
shareholder communications than would be the case with a sponsored ADR, EDR or
GDR.
The cost of investing in securities of non-U.S. issuers is higher than the cost
of investing in U.S. securities.
DEBT SECURITIES. As noted above, the Portfolio may invest to a limited extent in
debt securities that are rated below investment grade or, if unrated, are
considered by the Portfolio's Sub-Adviser to be of comparable quality. A decline
in prevailing levels of interest rates generally increases the value of debt
securities in a Portfolio's portfolio, while an increase in rates usually
reduces the value of those securities. As a result, to the extent that the
Portfolio invests in debt securities, interest rate fluctuations will affect its
net asset value, but not the income it receives from its debt securities. In
addition, if the debt securities contain call, prepayment or redemption
provisions, during a period of declining interest rates, those securities are
likely to be redeemed, and the Portfolio would probably be unable to replace
them with securities having as great a yield.
Investment in medium- or lower-grade debt securities involves greater investment
risk, including the possibility of issuer default or bankruptcy. An economic
downturn could severely disrupt this market and adversely affect the value of
outstanding bonds and the ability of the issuers to repay principal and
interest. In addition, lower-quality bonds are less sensitive to interest rates
changes than higher-quality instruments and generally are more sensitive to
adverse economic changes or individual corporate developments. During a period
of adverse economic changes, including a period of rising interest rates,
issuers of such bonds may reexperience difficulty in servicing their principal
and interest payment obligations.
Furthermore, medium- and lower-grade debt securities tend to be less marketable
than higher-quality debt securities because the market for them is less broad.
The market for unrated debt securities is even narrower. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to
increase significantly, and the Portfolio may have greater difficulty selling
its portfolio securities. The market value of these securities and their
liquidity may be affected by adverse publicity and investor perceptions.
PORTFOLIO TURNOVER
The annual portfolio turnover rate indicates changes in the Portfolio's
investments. The turnover rate may vary from year to year, or within a year. It
may also be effected by sales of portfolio securities necessary to meet cash
requirements for redemptions of shares. High rates of portfolio turnover
necessarily result in correspondingly greater brokerage and portfolio trading
costs, which are paid by the Portfolio. The portfolio turnover rate for the
Portfolio for the period ended December 31, 1996 was 41.08%. (See "Portfolio
Turnover" in the SAI.)
RESTRICTIONS ON THE PORTFOLIO'S INVESTMENTS
The Portfolio will not:
1. In regard to 75% of its assets, invest more than 5% of its assets
(valued at the time of investment) in securities of any one issuer,
except in U.S. government obligations;
2. Acquire securities of any one issuer which at the time of investment
(a) represent more than 10% of the voting securities of the issuer, or
(b) have a value greater than 10% of the value of the outstanding
securities of the issuer;
3. Borrow money except from banks for temporary or emergency purposes in
amounts not exceeding 10% of the value of the Portfolio's assets at the
time of borrowing [the Portfolio will not purchase additional
securities when its borrowings, less receivables from portfolio
securities sold, exceed 5% of its total assets];
4. Issue any senior security except in connection with permitted
borrowings; or
5. Make loans, except that the Portfolio may invest in debt obligations
and repurchase agreements. [A repurchase agreement involves a sale of
securities to the Portfolio with the concurrent agreement of the
seller (bank or securities dealer) to repurchase the securities at the
same price plus an amount equal to an agreed-upon interest rate within
a specified time. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, the Portfolio could experience both
delays in liquidating the underlying securities and losses. The
Portfolio may not invest more than 15% of its net assets in repurchase
agreements maturing in more than seven days and other illiquid
securities.]
These restrictions, except for the bracketed portions, and certain other
restrictions described in the SAI 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 restrictions described here and in the SAI 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.
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 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 Harris Associates 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>
<S> <C>
PORTFOLIO ADVISORY FEE
--------- ------------
Harris Associates Value Portfolio 1.00% of first $25 million of average
daily net assets
.85% of next $75 million of average daily
net assets
.75% of average daily net assets over and
above $100 million
</TABLE>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 1997 to reimburse the Portfolio for certain expenses (excluding brokerage
commissions) in excess of 1.29% as to average net assets. The Life Company has
reserved the right to withdraw or modify its policy of expense reimbursement for
the Portfolio. If expenses were not reimbursed and certain advisory fees had not
been waived, the ratio of expenses to average net assets, on an annualized
basis, would have been 7.55% for the period January 31, 1996 (commencement of
operations) through December 31, 1996.
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 Harris Associates L.P., a limited
partnership, managed by its general partner, Harris Associates, Inc., a
wholly-owned subsidiary of New England Investment Companies, L.P. ("NEIC"). NEIC
owns all of the limited partnership interests in the Sub-Adviser. NEIC is a
publicly traded limited partnership that owns investment management firms. A
majority of the limited partnership interests in NEIC is owned by Metropolitan
Life Insurance Company. The Sub-Adviser is located at 2 North LaSalle Street,
Chicago, IL 60602.
The investment professionals of the Sub-Adviser who are primarily responsible
for the day-to-day management of the Portfolio are Robert Sanborn and Floyd
Bellman. Mr. Sanborn, a portfolio manager of the Sub-Adviser, joined the
Sub-Adviser in August 1988 and has managed The Oakmark Fund of the Harris
Associates Investment Trust since its inception in 1991. Mr. Bellman, a
portfolio manager at the Sub-Adviser, joined the firm in 1995. Prior to joining
the Sub-Adviser, Mr. Bellman was a Vice President and Senior Portfolio Manager
at Harris Trust and Savings Bank.
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
--------- ----------------
Harris Associates Value Portfolio .75% of first $25 million of average daily
net assets
.60% of next $75 million of average daily
net assets
.50% of average daily net assets over and
above $100 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.
Some securities considered for investment by the Portfolio may also be
appropriate for other clients served by the Sub-Adviser. If a 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. Eastern Standard
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
("Business Days"). 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
involves valuing a portfolio security initially at its cost, and, thereafter,
assuming a constant amortization to maturity of any discount or premium. 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 above. 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,
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.
PERFORMANCE OF THE PORTFOLIO. The following table shows the average annualized
total return for the fiscal periods February 9, 1996 (the effective date of the
Trust's Registration Statement) to December 31, 1996 and February 9, 1996 to
June 30, 1997 of an investment in the Harris Associates Value Portfolio,
formerly the MAS Value Portfolio, as well as comparisons with the Standard &
Poor's 500 Composite Stock Price Index, an unmanaged index generally considered
to be representative of the stock market and the Lipper Growth & Income Index, a
non-weighted index of 139 funds investing in stocks and corporate and government
bonds. The performance figures shown for the portfolio in the chart below
reflect the actual fees and expenses paid by the Portfolio.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR
THE PERIODS ENDED 12/31/96 AND 6/30/97
<S> <C> <C>
TOTAL RETURN FOR TOTAL RETURN FOR THE PERIOD
THE PERIOD FEBRUARY 9, 1996 TO FEBRUARY 9, 1996 TO
PORTFOLIO DECEMBER 31, 1996 JUNE 30, 1997
- ---------
Harris Associates Value,
formerly MAS Value ________% __________%
Standard & Poor's 500 Stock Index ________% __________%
Lipper Growth & Income Index ________% __________%
</TABLE>
On May 1, 1997, Harris Associates LP became the sub-adviser for the Portfolio.
Prior to that date, performance results were achieved by the former sub-adviser
and the Portfolio had a different investment objective and certain of its
investment policies and restrictions were different.
COMPARABLE PUBLIC FUND PERFORMANCE. The Harris Associates Value Portfolio has
the same investment objective and follows substantially the same investment
strategies as The Oakmark Fund of the Harris Associates Investment Trust, a
mutual fund whose shares are sold to the public, the investment adviser of which
is the Sub-Adviser.
Set forth below is the historical performance of The Oakmark Fund. Investors
should not consider this performance data as an indication of the future
performance of the Harris Associates Value Portfolio. The performance figures
shown below reflect the deduction of the historical fees and expenses paid by
The Oakmark 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. Additionally, although it is anticipated that the Portfolio and its
corresponding public fund series will hold similar securities, their investment
results are expected to differ. In particular, differences in asset size and in
cash flow resulting from purchases and redemptions of Portfolio shares may
result in different security selections, differences in the relative weightings
of securities or differences in the price paid for particular portfolio
holdings. The results shown reflect the reinvestment of dividends and
distributions, and were calculated in the same manner that will be used by the
Harris Associates Value Portfolio to calculate its own performance.
The following table shows the average annualized total returns for the fiscal
year ended December 31, 1996, of a 1-year and 5-year investment and of an
investment since inception in The Oakmark Fund, as well as comparisons with the
Standard & Poor's 500 Composite Stock Price Index, an unmanaged index generally
considered to be representative of the stock market and the Lipper Growth &
Income Index, a non-weighted index of 139 funds investing in stocks and
corporate and government bonds.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SINCE INCEPTION
FUND 1 YEAR 5 YEAR INCEPTION DATE
---- ------ ------ --------- ----
The Oakmark Fund of the Harris
Associates Investment Trust 16.7% 23.6% 29.12% 8/5/91
Standard & Poor's 500 Stock Index 19.8% 16.4% 15.6% N/A
Lipper Growth & Income Index 20.69% 14.63% 14.97% N/A
</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 net ordinary
income and net short term capital 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. To date, the
Trust has never offered its Class B shares for sale.
The Trust's custodian is State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
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 (referred to as the "Portfolios" or individually as the
"Portfolio"), 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 November 3, 1997 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 NOVEMBER 3, 1997
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE
FINANCIAL HIGHLIGHTS........................................................................ 1
INVESTMENT OBJECTIVE AND POLICIES........................................................... 2
Temporary Investments.................................................................... 4
Investment Restrictions.................................................................. 4
Repurchase Agreements.................................................................... 4
Investment Risks......................................................................... 5
Portfolio Turnover....................................................................... 5
MANAGEMENT OF THE TRUST..................................................................... 5
Investment Adviser....................................................................... 5
Expense Reimbursement.................................................................... 5
Sub-Adviser.............................................................................. 6
Sub-Advisory Fees........................................................................ 6
SALES AND REDEMPTIONS....................................................................... 6
NET ASSET VALUE............................................................................. 7
PERFORMANCE INFORMATION..................................................................... 7
Performance of the Portfolio............................................................. 8
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS.................................................... 8
ADDITIONAL INFORMATION...................................................................... 8
</TABLE>
FINANCIAL HIGHLIGHTS
The following information for the period ended December 31, 1996, has been
audited by Price Waterhouse LLP, Independent Accountants, whose unqualified
report thereon is included in the Annual Report, which is incorporated
by reference into the SAI. The Financial Highlights should be read in
conjunction with the Financial Statements and Notes thereto included
in the Annual Report. The information for the six months ended June 30,
1997 is unaudited and should be read in conjunction with the Financial
Statements and Notes thereto included in the Semi-Annual Report which is
incorporated by reference into the SAI.
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
LEXINGTON CORPORATE LEADERS PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
LEXINGTON
CORPORATE LEADERS
PORTFOLIO
-------------------
<S> <C>
Net asset value, beginning of period $ 11.44
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.06
Net realized and unrealized gain (loss) on
investments 2.07
-------------------
Total from investment operations 2.13
-------------------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.00
Distributions from net realized capital gains 0.00
-------------------
Total distributions 0.00
-------------------
Net asset value, end of period $ 13.57
===================
TOTAL RETURN ++ 18.62%
===================
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 1,909
Ratio of operating expenses to average net
assets + 1.29%
Ratio of net investment income to average net
assets + 0.95%
Portfolio turnover rate 24.03%
Average commission rate per share +++ $ 0.0637
Ratio of operating expenses to average net
assets before expense reimbursements + 5.04%
Net investment income (loss) per share before
expense reimbursements ($0.17)
<FN>
+ Annualized
++ Total returns represents aggregate total return for the six months ended June
30, 1997. The total return would have been lower if certain expenses had not
been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
</FN>
</TABLE>
See Notes to Financial Statements
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
LEXINGTON CORPORATE LEADERS PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE PERIOD JANUARY 31, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
LEXINGTON
CORPORATE
LEADERS
PORTFOLIO
-----------
<S> <C>
Net asset value, beginning of period $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.14
Net realized and unrealized gain (loss) on
Investments 1.42
-----------
Total from investment operations 1.56
-----------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.12)
Distributions from net realized capital gains (0.00)
-----------
Total distributions (0.12)
-----------
Net asset value, end of period $ 11.44
===========
TOTAL RETURN ++ 12.84%
===========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 1,323
Ratio of operating expenses to average net
Assets + 1.26%
Ratio of net investment income to average net
Assets + 1.40%
Portfolio turnover rate 0.00%
Average commission rate per share +++ $ 0.0500
Ratio of operating expenses to average net
Assets before waiver of fees and expense
Reimbursements + 6.86%
Net investment income (loss) per share before
Waiver of fees and expense reimbursements ($0.41)
<FN>
+ Annualized
++ Total return represents aggregate total return for the period February 9,
1996 (effective date) to December 31, 1996. The total return would have been
lower if certain fees had not been waived by the investment advisor, and if
certain expenses had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
</FN>
</TABLE>
See Notes to Financial Statements
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.
The 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> <C>
CHEMICAL & FERTILIZERS
- ----------------------
Du Pont (E.I. ) deNemours & Co. Inc. Hercules Inc. Lubrizol Corp.
Morton International Union Carbide Corp.
COMMUNICATIONS
- --------------
AT & T Cable & Wireless PLC Lucent Technologies, Inc.
Motorola Inc. Polygram NV Telecom of New Zealand
CONSUMER PRODUCTS
- -----------------
American Brands, Inc. Boise Cascade Corp. Bowater Inc.
Coca Cola Co. Conagra Walt Disney Company
Eastman Kodak Co. Federal Paper Board Gillette Co.
International Paper Co. Minnesota Mining & Mfg. Pepsico
Philip Morris Cos. 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.
J.P. Morgan & Co. Inc. Star Banc Corp. Travelers Group
Wells Fargo & Co.
HEALTH
- ------
Abbott Laboratories Johnson & Johnson Merck & Co. Inc.
Mylan Laboratories Pfizer Inc. Schering Plough Corp.
MISC. INDUSTRIAL
- ----------------
Allied Signal, Inc. Aluminum Co. of America Bethlehem Steel Corp.
Black & Decker Corp. British Steel PLC ADR Caterpillar Inc.
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.
Royal Dutch Petroleum Schlumberger LTD Texaco Inc.
United Pacific Group, Inc.
RAILROADS
- ---------
Burlington Northern Santa Fe CSX Corp. Union Pacific Corp.
RETAILING
- ---------
McDonalds Corp. Sears, Roebuck & Co. Wal-Mart Stores, Inc.
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 Co. Houston Industries
PG & E Corporation 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. Management maintains
the flexibility to sell portfolio securities regardless of how long they have
been held by the Portfolio. High portfolio turnover rates can result in
corresponding increases in brokerage costs. The portfolio turnover rate for the
Portfolio for the period ended December 31, 1996 was 0%. (See "Portfolio
Turnover" in the SAI.)
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 not 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>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 1997 to reimburse the Portfolio for certain expenses (excluding brokerage
commissions) in excess of 1.29% as to average net assets. The Life Company has
reserved the right to withdraw or modify its policy of expense reimbursement for
the Portfolio. If expenses were not reimbursed and certain advisory fees had not
been waived, the ratio of expenses to average net assets, on an annualized
basis, would have been 6.86% for the period January 31, 1996 (commencement of
operations) through December 31, 1996.
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 $3.5 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% over and above $100 million of
average daily net assets
</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
("Business Days"). 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
involves valuing a portfolio security initially at its cost, and, thereafter,
assuming a constant amortization to maturity of any discount or premium. 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 above. 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.
PERFORMANCE OF THE PORTFOLIO. The following table shows the average annualized
total return for the fiscal periods February 9, 1996 (the effective date of the
Trust's Registration Statement) to December 31, 1996 and February 9, 1996 to
June 30, 1997 of an investment in the Lexington Corporate Leaders Portfolio, as
well as comparisons with the Standard & Poor's 500 Composite Stock Price Index,
an unmanaged index generally considered to be representative of the stock
market, and the Lipper Growth & Income Index, a non-weighted index of Funds
investing in stocks and corporate and government bonds. The performance figures
shown for the Portfolio in the chart below reflect the actual fees and expenses
paid by the Portfolio.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED 12/31/96 AND 6/30/97
<S> <C> <C>
TOTAL RETURN FOR TOTAL RETURN FOR THE PERIOD
THE PERIOD FEBRUARY 9, 1996 TO FEBRUARY 9, 1996 TO
PORTFOLIO DECEMBER 31, 1996 JUNE 30, 1997
---------
Lexington Corporate Leaders Portfolio ________% __________%
Standard & Poor's 500 Stock Index ________% __________%
Lipper Growth & Income 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. To date, the
Trust has never offered its Class B shares for sale.
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 (referred to as the "Portfolios" or individually as the
"Portfolio"), 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 November 3, 1997 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 NOVEMBER 3, 1997
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE
----
FINANCIAL HIGHLIGHTS.......................................................................... 1
INVESTMENT OBJECTIVE AND POLICIES............................................................. 2
IMPLEMENTATION OF POLICIES AND RISKS.......................................................... 3
Foreign Securities and Currencies.......................................................... 3
Foreign Investment Companies............................................................... 4
Derivative Instruments..................................................................... 4
Illiquid Securities........................................................................ 4
Small Companies............................................................................ 4
Debt Obligations........................................................................... 5
Government Securities...................................................................... 5
When-Issued Securities..................................................................... 6
Portfolio Turnover......................................................................... 6
MANAGEMENT OF THE TRUST....................................................................... 6
Investment Adviser......................................................................... 6
Expense Reimbursement...................................................................... 7
Sub-Adviser................................................................................ 7
Sub-Advisory Fees.......................................................................... 7
SALES AND REDEMPTIONS......................................................................... 7
NET ASSET VALUE............................................................................... 8
PERFORMANCE INFORMATION....................................................................... 8
Performance of the Portfolio............................................................... 9
Comparable Public Fund Performance......................................................... 9
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS...................................................... 10
ADDITIONAL INFORMATION........................................................................ 10
</TABLE>
FINANCIAL HIGHLIGHTS
The following information for the period ended December 31, 1996, has been
audited by Price Waterhouse LLP, Independent Accountants, whose unqualified
report thereon is included in the Annual Report, which is incorporated
by reference into the SAI. The Financial Highlights should be read in
conjunction with the Financial Statements and Notes thereto included
in the Annual Report. The information for the six months ended June 30,
1997 is unaudited and should be read in conjunction with the Financial
Statements and Notes thereto included in the Semi-Annual Report which is
incorporated by reference into the SAI.
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
STRONG GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
STRONG
GROWTH
PORTFOLIO
-----------
<S> <C>
Net asset value, beginning of period $ 11.92
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.00
Net realized and unrealized gain (loss) on
investments 1.48
-----------
Total from investment operations 1.48
-----------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.00
Distributions from net realized capital gains 0.00
-----------
Total distributions 0.00
-----------
Net asset value, end of period $ 13.40
===========
TOTAL RETURN ++ 12.42%
===========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 2,336
Ratio of operating expenses to average net
assets + 1.29%
Ratio of net investment income to average net
assets + 0.03%
Portfolio turnover rate 134.24%
Average commission rate per share +++ $ 0.0678
Ratio of operating expenses to average net
assets before expense reimbursements + 5.25%
Net investment income (loss) per share before
expense reimbursements ($0.24)
<FN>
+ Annualized
++ Total returns represents aggregate total return for the six months ended June
30, 1997. The total return would have been lower if certain expenses had not
been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
</FN>
</TABLE>
See Notes to Financial Statements
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
STRONG GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE PERIOD JANUARY 31, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
STRONG
GROWTH
PORTFOLIO
-----------
<S> <C>
Net asset value, beginning of period $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.25
Net realized and unrealized gain (loss) on
Investments 2.49
-----------
Total from investment operations 2.74
-----------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.22)
Distributions from net realized capital gains (0.60)
-----------
Total distributions (0.82)
-----------
Net asset value, end of period $ 11.92
===========
TOTAL RETURN ++ 20.27%
===========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 1,513
Ratio of operating expenses to average net
Assets + 1.26%
Ratio of net investment income to average net
Assets + 2.25%
Portfolio turnover rate 422.67%
Average commission rate per share +++ $ 0.0575
Ratio of operating expenses to average net
Assets before waiver of fees and expense
Reimbursements + 7.09%
Net investment income (loss) per share before
Waiver of fees and expense reimbursements ($0.39)
<FN>
+ Annualized
++ Total return represents aggregate total return for the period February 9,
1996 (effective date) to December 31, 1996. The total return would have been
lower if certain fees had not been waived by the investment advisor, and if
certain expenses had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
</FN>
</TABLE>
See Notes to Financial Statements
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 structures 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.
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. (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 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. 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. The portfolio turnover rate
for the Portfolio for the period ended December 31, 1996 was 422.67%. (See
"Portfolio Turnover" in the SAI.) High rates of portfolio turnover necessarily
result in correspondingly greater brokerage and portfolio trading costs, which
are paid by the Portfolio.
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 not 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>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 1997 to reimburse the Portfolio for certain expenses (excluding brokerage
commissions) in excess of 1.29% as to average net assets. The Life Company has
reserved the right to withdraw or modify its policy of expense reimbursement for
the Portfolio. If expenses were not reimbursed and certain advisory fees had not
been waived, the ratio of expenses to average net assets, on an annualized
basis, would have been 7.09% for the period January 31, 1996 (commencement of
operations) ending December 31, 1996.
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, 1996, the Sub-Adviser had approximately
$24.2 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.
Ronald C. Ognar is the portfolio manager of the Sub-Adviser for the Portfolio.
Mr. 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
("Business Days"). 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
involves valuing a portfolio security initially at its cost, and, thereafter,
assuming a constant amortization to maturity of any discount or premium. 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 above. 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.
PERFORMANCE OF THE PORTFOLIO. The following table shows the average annualized
total return for the fiscal periods February 9, 1996 (the effective date of the
Trust's Registration Statement) to December 31, 1996 and February 9, 1996 to
June 30, 1997 of an investment in the Strong Growth Portfolio, 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 Russell 2000 Small Company Index, an unmanaged index of 2000 small
company stocks. The performance figures shown for the Portfolio in the chart
below reflect the actual fees and expenses paid by the Portfolio.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED 12/31/96 AND 6/30/97
<S> <C> <C>
TOTAL RETURN FOR TOTAL RETURN FOR THE PERIOD
THE PERIOD FEBRUARY 9, 1996 TO FEBRUARY 9, 1996 TO
PORTFOLIO DECEMBER 31, 1996 JUNE 30, 1997
---------
Strong Growth Portfolio ________% __________%
Standard & Poor's 500 Stock Index ________% __________%
Russell 2000 Small Company Index ________% __________%
</TABLE>
COMPARABLE PUBLIC FUND PERFORMANCE. The Strong Growth Portfolio 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. Additionally, although it is anticipated that the Portfolio and its
corresponding public fund series will hold similar securities, their investment
results are expected to differ. In particular, differences in asset size and in
cash flow resulting from purchases and redemptions of Portfolio shares may
result in different security selections, differences in the relative weightings
of securities or differences in the price paid for particular portfolio
holdings. 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, 1996, 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 and the Russell 2000 Small Company
Index, an unmanaged index of 2000 small company stocks.
<TABLE>
<CAPTION>
SINCE INCEPTION
FUND 1 YEAR INCEPTION DATE
---- ------ --------- ---------
<S> <C> <C> <C>
Strong Growth Fund 19.52% 25.49% 12-31-93
Standard & Poor's 500 Stock Index 19.8% 19.68% From 1-1-94
Russell 2000 Small Company Index 16.49% 13.68% 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 net ordinary
income and net short term capital gains are distributed to the separate account
of the Life Company which holds 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. To date, the
Trust has never offered its Class B shares for sale.
The Trust's custodian is State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
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 (referred to as the "Portfolios" or individually as the
"Portfolio"), 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 carefully 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 November 3, 1997, 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 NOVEMBER 3, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
----
FINANCIAL HIGHLIGHTS............................................................................ 1
INVESTMENT OBJECTIVE AND POLICIES............................................................... 2
IMPLEMENTATION OF POLICIES AND RISKS............................................................ 3
Foreign Securities and Currencies........................................................... 3
Foreign Investment Companies................................................................ 4
Derivative Instruments...................................................................... 4
Illiquid Securities......................................................................... 5
Small Companies............................................................................. 5
Debt Obligations............................................................................ 5
Government Securities....................................................................... 6
When-Issued Securities...................................................................... 6
Mortgage Dollar Rolls and Reverse Repurchase Agreements..................................... 6
Portfolio Turnover.......................................................................... 7
MANAGEMENT OF THE TRUST......................................................................... 7
Investment Adviser.......................................................................... 7
Expense Reimbursement....................................................................... 7
Sub-Adviser................................................................................. 7
Sub-Advisory Fees........................................................................... 8
SALES AND REDEMPTIONS........................................................................... 8
NET ASSET VALUE................................................................................. 8
PERFORMANCE INFORMATION......................................................................... 9
Performance of the Portfolio................................................................ 9
Comparable Public Fund Performance.......................................................... 10
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS........................................................ 11
ADDITIONAL INFORMATION.......................................................................... 11
</TABLE>
FINANCIAL HIGHLIGHTS
The following information for the period ended December 31, 1996, has been
audited by Price Waterhouse LLP, Independent Accountants, whose unqualified
report thereon is included in the Annual Report, which is incorporated
by reference into the SAI. The Financial Highlights should be read in
conjunction with the Financial Statements and Notes thereto included
in the Annual Report. The information for the six months ended June 30,
1997 is unaudited and should be read in conjunction with the Financial
Statements and Notes thereto included in the Semi-Annual Report which is
incorporated by reference into the SAI.
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
STRONG INTERNATIONAL STOCK PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
STRONG
INTERNATIONAL
STOCK PORTFOLIO
-----------------
<S> <C>
Net asset value, beginning of period $ 10.58
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.06
Net realized and unrealized gain (loss) on
investments 0.75
-----------------
Total from investment operations 0.81
-----------------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.00
Distributions from net realized capital gains 0.00
-----------------
Total distributions 0.00
-----------------
Net asset value, end of period $ 11.39
=================
TOTAL RETURN ++ 7.75%
=================
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 1,600
Ratio of operating expenses to average net
assets + 1.49%
Ratio of net investment income to average net
assets + 1.11%
Portfolio turnover rate 70.94%
Average commission rate per share +++ $ 0.0114
Ratio of operating expenses to average net
assets before expense reimbursements + 7.33%
Net investment income (loss) per share before
expense reimbursements ($0.25)
<FN>
+ Annualized
++ Total returns represents aggregate total return for the six months ended June
30, 1997. The total return would have been lower if certain expenses had not
been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
</FN>
</TABLE>
See Notes to Financial Statements
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
STRONG INTERNATIONAL STOCK PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE PERIOD JANUARY 31, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
STRONG
INTERNATIONAL
STOCK PORTFOLIO
-----------------
<S> <C>
Net asset value, beginning of period $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.03
Net realized and unrealized gain (loss) on
Investments 0.61
-----------------
Total from investment operations 0.64
-----------------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.01)
Distributions from net realized capital gains (0.05)
-----------------
Total distributions (0.06)
-----------------
Net asset value, end of period $ 10.58
=================
TOTAL RETURN ++ 5.85%
=================
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 1,221
Ratio of operating expenses to average net
Assets + 1.45%
Ratio of net investment income to average net
Assets + 0.27%
Portfolio turnover rate 49.32%
Average commission rate per share +++ $ 0.0096
Ratio of operating expenses to average net
Assets before waiver of fees and expense
Reimbursements + 7.74%
Net investment income (loss) per share before
Waiver of fees and expense reimbursements ($0.58)
<FN>
+ Annualized
++ Total return represents aggregate total return for the period February 9,
1996 (effective date) to December 31, 1996. The total return would have been
lower if certain fees had not been waived by the investment advisor, and if
certain expenses had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
</FN>
</TABLE>
See Notes to Financial Statements
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 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 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, 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 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 in 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 rates necessarily result in correspondingly greater brokerage and
portfolio trading costs, which are paid by the Portfolio. The portfolio turnover
rate for the Portfolio for the period ended December 31, 1996 was 49.32%. (See
"Portfolio Turnover" in the SAI.)
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 not 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 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>
<S> <C>
PORTFOLIO ADVISORY FEE
--------- ------------
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>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 1997 to reimburse the Portfolio for certain expenses (excluding brokerage
commissions) in excess of 1.49% as to average net assets. The Life Company has
reserved the right to withdraw or modify its policy of expense reimbursement for
the Portfolio. If expenses were not reimbursed and certain advisory fees had not
been waived, the ratio of expenses to average net assets, on an annualized
basis, would have been 7.74% for the period January 31, 1996 (commencement of
operations) through December 31, 1996.
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, 1996, the Sub-Adviser had approximately
$23 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>
<S> <C>
PORTFOLIO SUB-ADVISORY FEE
--------- ----------------
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. Eastern Standard
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
("Business Days"). 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
involves valuing a portfolio security initially at its cost, and, thereafter,
assuming a constant amortization to maturity of any discount or premium. 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 above. 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.
PERFORMANCE OF THE PORTFOLIO. The following table shows the average annualized
total return for the fiscal periods February 9, 1996 (the effective date of the
Trust's Registration Statement) to December 31, 1996 and February 9, 1996 to
June 30, 1997 of an investment in the Strong International Stock Portfolio, as
well as comparisons with the Standard & Poor's 500 Composite Stock Price Index,
an unmanaged index generally considered to be representative of the stock
market, the Morgan Stanley Capital International Europe, Asia and Far East
(EAFE) Index, an unmanaged index of leading international stocks and Lipper
International Fund Index, a non-weighted index of 115 funds that invest assets
in securities whose primary market is outside the U.S. The performance figures
shown for the Portfolio in the chart below reflect the actual fees and expenses
paid by the Portfolio.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED 12/31/96 AND 6/30/97
<S> <C> <C>
PORTFOLIO TOTAL RETURN FOR TOTAL RETURN FOR THE PERIOD
--------- THE PERIOD FEBRUARY 9, 1996 TO FEBRUARY 9, 1996 TO
DECEMBER 31, 1996 JUNE 30, 1997
Strong International Stock Portfolio ________% __________%
Standard & Poor's 500 Stock Index ________% __________%
</TABLE>
COMPARABLE PUBLIC FUND PERFORMANCE. The Strong International Stock Portfolio 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. Additionally, although it is anticipated
that the Portfolio and its corresponding public fund series will hold similar
securities, their investment results are expected to differ. In particular,
differences in asset size and in cash flow resulting from purchases and
redemptions of Portfolio shares may result in different security selections,
differences in the relative weightings of securities or differences in the price
paid for particular portfolio holdings. 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 October 31, 1996, 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, the Morgan
Stanley Capital International Europe, Asia and Far East (EAFE) Index, an
unmanaged index of leading international stocks and Lipper International Fund
Index, a non-weighted index of 115 funds that invest assets in securities whose
primary market is outside the U.S. The performance figures shown for the
Portfolio in the chart below reflect the actual fees and expenses paid by the
Portfolio.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SINCE INCEPTION
FUND 1 YEAR INCEPTION DATE
---- ------ --------- ---------
Strong International Stock Fund 9.83% 10.99% 3-4-92
Standard & Poor's 500 Stock Index 24.09% 16.02% 4-1-92
Morgan Stanley Capital International
Europe, Asia, and Far East (EAFE) Index 10.47% 11.34% 4-1-92
Lipper International Fund Index 13.14% 10.56% 4-1-92
</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 net ordinary
income and net short term capital 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. To date, the
Trust has never offered its Class B shares for sale.
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 (referred to as the "Portfolios" or individually as the
"Portfolio"), 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 November 3, 1997 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 NOVEMBER 3, 1997
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE
----
FINANCIAL HIGHLIGHTS.......................................................................... 1
INVESTMENT OBJECTIVE AND POLICIES............................................................. 2
Investment Objective...................................................................... 2
Investment Policies....................................................................... 2
Risk Factors.............................................................................. 7
MANAGEMENT OF THE TRUST....................................................................... 9
Investment Adviser........................................................................ 9
Expense Reimbursement..................................................................... 9
Sub-Adviser............................................................................... 9
Sub-Advisory Fees......................................................................... 10
SALES AND REDEMPTIONS......................................................................... 11
NET ASSET VALUE............................................................................... 11
PERFORMANCE INFORMATION....................................................................... 11
Performance of the Portfolio.............................................................. 12
Comparable Public Fund Performance........................................................ 12
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS...................................................... 13
ADDITIONAL INFORMATION........................................................................ 13
APPENDIX A....................................................................................A-1
Description of Bond Ratings...............................................................A-1
</TABLE>
FINANCIAL HIGHLIGHTS
The following information for the period ended December 31, 1996, has been
audited by Price Waterhouse LLP, Independent Accountants, whose unqualified
report thereon is included in the Annual Report, which is incorporated
by reference into the SAI. The Financial Highlights should be read in
conjunction with the Financial Statements and Notes thereto included
in the Annual Report. The information for the six months ended June 30,
1997 is unaudited and should be read in conjunction with the Financial
Statements and Notes thereto included in the Semi-Annual Report which is
incorporated by reference into the SAI.
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
MFS TOTAL RETURN PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
MFS TOTAL
RETURN PORTFOLIO
------------------
<S> <C>
Net asset value, beginning of period $ 10.90
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.16
Net realized and unrealized gain (loss) on
investments 1.08
------------------
Total from investment operations 1.24
------------------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.00
Distributions from net realized capital gains 0.00
------------------
Total distributions 0.00
------------------
Net asset value, end of period $ 12.14
==================
TOTAL RETURN ++ 11.38%
==================
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 2,333
Ratio of operating expenses to average net
assets + 1.29%
Ratio of net investment income to average net
assets + 2.81%
Portfolio turnover rate 44.22%
Average commission rate per share +++ $ 0.0534
Ratio of operating expenses to average net
assets before expense reimbursements + 5.76%
Net investment income (loss) per share before
expense reimbursements ($0.09)
<FN>
+ Annualized
++ Total returns represents aggregate total return for the six months ended June
30, 1997. The total return would have been lower if certain expenses had not
been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
</FN>
</TABLE>
See Notes to Financial Statements
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
MFS TOTAL RETURN PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE PERIOD JANUARY 31, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
MFS TOTAL
RETURN PORTFOLIO
------------------
<S> <C>
Net asset value, beginning of period $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.25
Net realized and unrealized gain (loss) on
Investments 0.85
------------------
Total from investment operations 1.10
------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.20)
Distributions from net realized capital gains (0.00)
------------------
Total distributions (0.20)
------------------
Net asset value, end of period $ 10.90
==================
TOTAL RETURN ++ 9.81%
==================
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA
Net assets, end of period (in 000's) $ 1,529
Ratio of operating expenses to average net
Assets + 1.26%
Ratio of net investment income to average net
Assets + 2.59%
Portfolio turnover rate 53.91%
Average commission rate per share +++ $ 0.0571
Ratio of operating expenses to average net
Assets before waiver of fees and expense
Reimbursements + 7.84%
Net investment income (loss) per share before
Waiver of fees and expense reimbursements ($0.38)
<FN>
+ Annualized
++ Total return represents aggregate total return for the period February 9,
1996 (effective date) to December 31, 1996. The total return would have been
lower if certain fees had not been waived by the investment advisor, and if
certain expenses had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
</FN>
</TABLE>
See Notes to Financial Statements
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 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 OBJECTIVE. The Portfolio's investment objective is to seek total
return by investment in securities which will provide above-average income
(compared to a portfolio entirely invested in equity securities) and
opportunities for growth of capital and income, consistent with the prudent
employment of capital. Under normal market conditions, 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 objective.
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
("ADRs")). 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 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) or a letter of credit.
"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 liquid assets.
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. Investment in
mortgage dollar rolls in excess of 5% of the Portfolio's assets may result in
leveraging. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Portfolio's net
asset value. Money borrowed will be subject to interest and other costs which
may or may not exceed the income received from the securities purchased with
borrowed funds.
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"). A determination is made, 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 factors, such as valuation, liquidity and
availability of information. Investing in Rule 144A securities 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.
Investment 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. 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. The portfolio turnover rate for
the Portfolio for the period ended December 31, 1996 was 53.91%. (See "Portfolio
Turnover" in the SAI.)
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 not 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>
<S> <C>
PORTFOLIO ADVISORY FEE
--------- ------------
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>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 1997 to reimburse the Portfolio for certain expenses (excluding brokerage
commissions) in excess of 1.29% as to average net assets. The Life Company has
reserved the right to withdraw or modify its policy of expense reimbursement for
the Portfolio. If expenses were not reimbursed and if certain advisory fees had
not been waived, the ratio of expenses to average net assets, on an annualized
basis, would have been 7.84% for the period January 31, 1996 (commencement of
operations) through December 31, 1996.
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
$52.8 billion on behalf of approximately 2.3 million investor accounts as of
February 27, 1997. As of such date, the Sub-Adviser managed approximately $28.9
billion of assets in equity securities and $19.9 billion of assets in fixed
income securities. Approximately $4.0 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, Arnold
D. Scott, John D. McNeil and Donald A. Stewart. 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 Stewart 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 Sub-Adviser, Geoffrey L. Kurinsky, a
Senior Vice President of the Sub-Adviser, Judith N. Lamb, a Vice President of
the Sub-Adviser, Lisa B. Nurme, a Vice President of the Sub-Adviser, and Maura
A. Shaughnessy, a Vice President of the Sub-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 Sub-Adviser as a portfolio manager 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 Sub-Adviser as a portfolio manager since
1987. Ms. Lamb, the manager of the Portfolio's convertible securities, has been
employed by the Sub-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 Sub-Adviser as a
portfolio manager since 1987. Ms. Shaughnessy, also a manager of the common
stock portion of the Portfolio's portfolio, has been employed by the Sub-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 has 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. MFS and Foreign
& Colonial each have investment personnel working in each other's offices in
Boston and London, respectively.
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 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>
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
("Business Days"). 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
involves valuing a portfolio security initially at its cost, and, thereafter,
assuming a constant amortization to maturity of any discount or premium. 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 above. 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.
PERFORMANCE OF THE PORTFOLIO. The following table shows the average annualized
total return for the fiscal periods February 9, 1996 (the effective date of the
Trust's Registration Statement) to December 31, 1996 and February 9, 1996 to
June 30, 1997 of an investment in the MFS Total Return Portfolio, as well as
comparisons with the Standard & Poor's 500 Composite Stock Price Index, an
unmanaged index generally considered to be representative of the stock market,
the Lehman Brothers Aggregate Bond Index, an unmanaged index of average yield
U.S. investment grade bonds and the Lipper Balanced Fund Index, a non-weighted
index of 210 funds investing in stocks and corporate and government bonds. The
performance figures shown for the Portfolio in the chart below reflect the
actual fees and expenses paid by the Portfolio.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED 12/31/96 AND 6/30/97
<S> <C> <C>
TOTAL RETURN FOR TOTAL RETURN FOR THE PERIOD
THE PERIOD FEBRUARY 9, 1996 TO FEBRUARY 9, 1996 TO
DECEMBER 31, 1996 JUNE 30, 1997
PORTFOLIO
--------- ________% __________%
MFS Total Return Portfolio ________% __________%
Standard & Poor's 500 Stock Index ________% __________%
Lehman Brothers Aggregate Bond Index ________% __________%
Lipper Balanced Fund Index ________% __________%
</TABLE>
COMPARABLE PUBLIC FUND PERFORMANCE. The MFS Total Return Portfolio has a
substantially similar 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. Additionally, although it is anticipated that the
Portfolio and its corresponding public fund series will hold similar securities,
their investment results are expected to differ. In particular, differences in
asset size and in cash flow resulting from purchases and redemptions of
Portfolio shares may result in different security selections, differences in the
relative weightings of securities or differences in the price paid for
particular portfolio holdings. 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, 1996, 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
and with the Lehman Brothers Aggregate Bond Index, an unmanaged index of average
yield U.S. investment grade bonds and the Lipper Balanced Fund Index, a
non-weighted index of 210 funds investing in stocks and corporate and government
bonds.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
SINCE INCEPTION
FUND 1 YEAR 5 YEAR 10 YEAR INCEPTION DATE
---- ------ ------ ------- --------- ---------
MFS Total Return Fund 13.50% 12.03% 11.98% 11.75% 10-6-70
Standard & Poor's 500 Stock Index 20.32% 15.17% 14.93% 12.64% 9-30-70
Lehman Brothers Aggregate Bond Index 4.90% 7.46% 8.50% 9.72% From 1-1-70
Lipper Balanced Fund Index 11.83% 10.99% 11.13% 11.25% 9-30-70
</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 net ordinary
income and net short term capital gains are distributed to the separate account
of the Life Company which holds its shares. For further information concerning
federal income tax consequences for the holders of the VA Contracts of the Life
Company's, 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. To date, the
Trust has never offered its Class B shares for sale.
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.
PART B
LPT VARIABLE INSURANCE SERIES TRUST
FORM N-1A
PART B
STATEMENT OF ADDITIONAL INFORMATION
November 3, 1997
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 November 3, 1997. 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
Stripped Mortgage 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
Legislation
U.S. Government Obligations
U.S. Government Agency Securities
Bank Obligations
Savings and Loan Obligations
Debt 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
Berkeley U.S. Quality Bond Portfolio
Berkeley Money Market Portfolio
Harris Associates Value Portfolio
Lexington Corporate Leaders Portfolio
Robertson Stephens Diversified Growth Portfolio
MFS Total Return Portfolio
Non-Fundamental Investment Restrictions
Strong International Stock Portfolio and Strong Growth Portfolio
Berkeley U.S. Quality Bond Portfolio
Harris Associates Value Portfolio
Lexington Corporate Leaders Portfolio
Robertson Stephens Diversified Growth 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 Berkeley 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
Berkeley Money Market 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. A 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
("NRSRO").
In addition to the stripped mortgage securities described above, a
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
Except with respect to the Harris Associates Value Portfolio and the Salomon
Money Market Portfolio, each 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 Berkeley Money Market Portfolio and the Harris Associates Value
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 Berkeley 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.
LEGISLATION. 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 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 any 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.
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.
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.
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 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 have been implemented to date in various
countries including Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic,
Ecuador, Jordan, Mexico, Nigeria, Panama, the Philippines, Poland, Uruguay and
Venezuela. 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 Berkeley 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. Proposed
legislation would require recognition of unrealized gains from short sales
against the box and other constructive sales.
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 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.
BERKELEY U.S. QUALITY BOND PORTFOLIO
The Berkeley 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.
BERKELEY MONEY MARKET PORTFOLIO
The Berkeley 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 Berkeley 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.
HARRIS ASSOCIATES VALUE PORTFOLIO
The Harris Associates Value Portfolio may not:
1. In regard to 75% of its assets, invest more than 5% of its assets
(valued at the time of investment) in securities of any one issuer, except in
U.S. government obligations;
2. Acquire securities of any one issuer which at the time of investment (a)
represent more than 10% of the voting securities of the issuer, or (b) have a
value greater than 10% of the value of the outstanding securities of the issuer;
3. Invest more than 25% of its assets (valued at the time of investment) in
securities of companies in any one industry, except that this restriction does
not apply to investments in U.S. government obligations;
4. Borrow money except from banks for temporary or emergency purposes in
amounts not exceeding 10% of the value of the Portfolio's assets at the time of
borrowing;
5. Issue any senior security except in connection with permitted
borrowings; or
6. Underwrite the distribution of securities of other issuers; however the
Portfolio may acquire "restricted" securities which, in the event of a resale,
might be required to be registered under the Securities Act of 1933 on the
ground that the Portfolio could be regarded as an underwriter as defined by that
Act with respect to such resale;
7. Make loans, but this restriction shall not prevent the Portfolio from
(a) investing in debt obligations, (b) investing in repurchase agreements (A
repurchase agreement involves a sale of securities to the Portfolio with the
concurrent agreement of the seller (bank or securities dealer) to repurchase the
securities at the same price plus an amount equal to an agreed-upon interest
rate within a specified time. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, the Portfolio could experience both delays in
liquidating the underlying securities and losses);
8. Purchase and sell real estate or interests in real estate, although it
may invest in marketable securities of enterprises which invest in real estate
or interests in real estate;
9. Purchase and sell commodities or commodity contracts, except that it may
enter into forward foreign currency contracts;
10. Acquire securities of other investment companies except (a) by purchase
in the open market, where no commission or profit to a sponsor or dealer results
from such purchase other than the customary broker's commission or (b) where the
acquisition results from a dividend or a merger, consolidation or other
reorganization. (In addition to this investment restriction, the Investment
Company Act of 1940 provides that the Portfolio may neither purchase more than
3% of the voting securities of any one investment company nor invest more than
10% of the Portfolio's assets (valued at the time of investment) in all
investment company securities purchased by the Portfolio. Investment in the
shares of another investment company would require the Portfolio to bear a
portion of the management and advisory fees paid by that investment company,
which might duplicate the fees paid by the Portfolio.)
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.
ROBERTSON STEPHENS DIVERSIFIED GROWTH PORTFOLIO
The Robertson Stephens Diversified Growth Portfolio may not:
1. issue any class of securities which is senior to the Portfolio's shares
of beneficial interest, except that the Portfolio may borrow money to the extent
contemplated by Restriction 3 below;
2. purchase securities on margin (but may obtain such short-term credits as
may be necessary for the clearance of transactions). (Margin payments or other
arrangements in connection with transactions in short sales, futures contracts,
options, and other financial instruments are not considered to constitute the
purchase of securities on margin for this purpose.);
3. borrow more than one-third of the value of its total assets less all
liabilities and indebtedness (other than such borrowings) not represented by
senior securities;
4. act as underwriter of securities of other issuers except to the extent
that, in connection with the disposition of portfolio securities, it may be
deemed to be an underwriter under certain federal securities laws;
5. (i) as to 75% of the Portfolio's total assets, purchase any security
(other than obligations of the U.S. Government, its agencies or
instrumentalities) if as a result more than 5% of the Portfolio's total assets
(taken at current value) would then be invested in securities of a single
issuer, or (ii) purchase any security if as a result 25% or more of the
Portfolio's total assets (taken at current value) would be invested in a single
industry;
6. make loans, except by purchase of debt obligations or other financial
instruments in which the Portfolio may invest consistent with its investment
policies, by entering into repurchase agreements, or through the lending of its
portfolio securities;
7. purchase or sell commodities or commodity contracts, except that the
Portfolio may purchase or sell financial futures contracts, options on financial
futures contracts, and futures contracts, forward contracts, and options with
respect to foreign currencies, and may enter into swap transactions or other
financial transactions, and except as required in connection with otherwise
permissible options, futures, and commodity activities as described elsewhere in
the prospectus or this SAI at the time;
8. purchase or sell real estate or interests in real estate, including real
estate mortgage loans, although it may purchase and sell securities which are
secured by real estate and securities of companies, including limited
partnership interests, that invest or deal in real estate and it may purchase
interests in real estate investment trusts. (For purposes of this restriction,
investments by the Portfolio in mortgage-backed securities and other securities
representing interests in mortgage pools shall not constitute the purchase or
sale of real estate or interests in real estate or real estate mortgage loans.)
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
Portfolio 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
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.
BERKELEY U.S. QUALITY BOND PORTFOLIO
The Berkeley 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.
HARRIS ASSOCIATES VALUE PORTFOLIO
The Harris Associates Value Portfolio will not:
1. Invest more than (a) 5% of its total assets (valued at the time of
investment) in securities of issuers (other than issuers of federal agency
obligations or securities issued or guaranteed by any foreign country or
asset-backed securities) that, together with any predecessors or unconditional
guarantors, have been in continuous operation for less than three years
("unseasoned issuers") or (b) more than 15% of its total assets (valued at time
of investment) in restricted securities and securities of unseasoned issuers;
2. Pledge, mortgage or hypothecate its assets, except for temporary or
emergency purposes and then to an extent not greater than 15% of its assets at
cost;
3. Make margin purchases or participate in a joint or on a joint or several
basis in any trading account in securities;
4. Invest in companies for the purpose of management or the exercise of
control;
5. Invest more than 15% of its net assets (valued at time of investment) in
illiquid securities, including repurchase agreements maturing in more than seven
days;
6. Invest in oil, gas or other mineral leases or exploration or development
programs, although it may invest in marketable securities of enterprises engaged
in oil, gas or mineral exploration;
7. Invest more than 25% of its total assets (valued at time of investment)
in securities of non-U.S. issuers (other than securities represented by American
Depository Receipts);
8. Make short sales of securities unless the Portfolio owns at least an
equal amount of such securities, or owns securities that are convertible or
exchangeable, without payment of further consideration, into at least an equal
amount of such securities;
9. Purchase a call option or a put option if the aggregate premium paid for
all call and put options then held exceeds 20% of its net assets (less the
amount by which any such positions are in-the-money);
10. Invest in futures or options on futures, except that it may invest in
forward foreign currency contracts.
11. Purchase additional securities when its borrowings, less receivables
from portfolio securities sold, exceed 5% of the Portfolio's total assets.
Notwithstanding the foregoing investment restrictions, the Portfolio may
purchase securities pursuant to the exercise of subscription rights, provided
that such purchase will not result in the Portfolio's ceasing to be a
diversified investment company. Japanese and European corporations frequently
issue additional capital stock by means of subscription rights offerings to
existing shareholders at a price substantially below the market price of the
shares. The failure to exercise such rights would result in a Portfolio's
interest in the issuing company being diluted. The market for such rights is not
well developed in all cases and, accordingly, the Portfolio may not always
realize full value on the sale of rights. The exception applies in cases where
the limits set forth in the investment restrictions would otherwise be exceeded
by exercising rights or would have already been exceeded as a result of
fluctuations in the market value of a Portfolio's portfolio securities with the
result that the Portfolio would be forced either to sell securities at a time
when it might not otherwise have done so, or to forego exercising the rights.
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.
ROBERTSON STEPHENS DIVERSIFIED GROWTH PORTFOLIO
The Robertson Stephens Diversified Growth Portfolio does not currently intend
to:
1. purchase securities restricted as to resale if, as a result, (i) more
than 10% of the Portfolio's total assets would be invested in such securities,
or (ii) more than 5% of the Portfolio's total assets (excluding any securities
eligible for resale under Rule 144A under the Securities Act of 1933) would be
invested in such securities;
2. invest in (a) securities which at the time of such investment are not
readily marketable, (b) securities restricted as to resale, and (c) repurchase
agreements maturing in more than seven days, if, as a result, more than 15% of
the Portfolio's net assets (taken at current value) would then be invested in
the aggregate in securities described in (a), (b), and (c) above;
3. invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 10% of its total assets (taken at current
value) would be invested in such securities, or except as part of a merger,
consolidation, or other acquisition;
4. invest in real estate limited partnerships;
5. purchase any security if, as a result, the Portfolio would then have
more than 5% of its total assets (taken at current value) invested in securities
of companies (including predecessors) less than three years old;
6. make investments for the purpose of exercising control or management;
7. invest in interests in oil, gas or other mineral exploration or
development programs or leases, although it may invest in the common stocks of
companies that invest in or sponsor such programs;
8. acquire more than 10% of the voting securities of any issuer;
9. invest more than 15%, in the aggregate, of its total assets in the
securities of issuers which, together with any predecessors, have a record of
less than three years continuous operation and securities restricted as to
resale (including any securities eligible for resale under Rule 144A under the
Securities Act of 1933);
10. purchase or sell puts, calls, straddles, spreads, or any combination
thereof, if, as a result, the aggregate amount of premiums paid or received by
the Portfolio in respect of any such transactions then outstanding would exceed
5% of its total assets.
In addition, the Portfolio will only sell short securities that are traded
on a national securities exchange in the U.S. (including the National
Association of Securities Dealers' Automated Quotation National Market System)
or in the country where the principal trading market in the securities is
located. (This limitation does not apply to short sales against the box).
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>
Name and Business Position Held Principal Occupation
Address With the Trust During Past 5 Years
- ------------------- ---------------------- -------------------------------
George C. Nicholson Vice President, Chief Financial Officer,
3109 Poplar Wood Court Treasurer & Principal Secretary and Director - Life
Raleigh, NC 27604 Financial Officer and Company and Adviser; Treasurer
Age: 40 Principal Accounting and Director (since September
Officer 1994) - London Pacific Financial
& Insurance Services; Senior
Manager - Ernst & Young,
Louisville, Kentucky from
January 1985 to August 1994
Mark E. Prillaman* President, Principal Executive Vice President
1755 Creekside Oaks Dr. Executive Officer and and Chief Marketing Officer of
Sacramento, CA 95833 Trustee the Life Company and Adviser
Age: 42 since February 1994;
prior thereto, Regional
Marketing Director, American
Skandia Assurance Company
Raymond L. Pfeister Trustee Principal, Chief Marketing
75 Maiden Lane Officer of Fred Alger
New York, NY 10038 Management, Inc.
Age: 50
Robert H. Singletary Trustee Senior Capital Markets Advisor
1800 N. Kent Street of U.S. Agency for International
Arlington, VA 22209 Development since 1996; Chief of
Age: 40 Enforcement, San Francisco
Office, U.S. Securities and
Exchange Commission from 1990
to 1996.
Jerry T. Tamura Vice President and Vice President - Administrative
1755 Creekside Oaks Dr. Secretary Services of the Life Company
Sacramento, CA 95833 since 1989.
Age: 50
James A. Winther Trustee President of WMI Corporation since
11000 Placidia Road 1983
Placidia, FL 33946
Age: 59
<FN>
* Interested person of the Trust within the meaning of the 1940 Act.
</FN>
</TABLE>
Each Trustee of the Trust who is not an interested person of the Trust or
Adviser or Sub-Adviser receives an annual fee of $5,000 and an additional fee of
$1,250 per meeting for attendance at each Trustees' meeting. Each Trustee is
also reimbursed for expenses incurred in connection with attending Trustees'
meetings. No Trustee receives any other compensation directly from the Trust.
For the period ended December 31, 1996, the disinterested trustees received the
following fees for service as Trustee:
Pension or Total
Aggregate Retirement Benefits Compensation
Compensation Accrued As Part of from Trust and
Trustee From Trust Trust Expenses Fund Complex
Raymond L. Pfeister 10,000 -0- 10,000
Robert H. Singletary 7,500 -0- 7,500
James Winther 7,500 -0- 7,500
Substantial Shareholders
Shares of the Portfolios are issued and redeemed in connection with investments
in and payments under the Variable Contracts issued through separate accounts of
London pacific Life & Annuity Company (collectively, the "Life Company"). As of
March 31, 1997, LPLA Separate Account One, the separate account of London
Pacific Life & Annuity Company were each known to the Board of Trustees and the
management of the Trust to own of record the following percentages of the
various Portfolios of the Trust.
Separate Account Life Company
Percentage Percentage
Portfolio Ownership Ownership
--------- --------------- -------------
Harris Associates Value 58.4% 41.6%
MFS Total Return 75.3% 24.7%
Berkeley U.S. Quality Bond 66.4% 33.6%
Berkeley Money Market 45.0% 55.0%
Robertson Stephens Diversified Growth 51.0% 49.0%
Lexington Corporate Leaders 43.2% 56.8%
Strong Growth 57.1% 42.9%
Strong International Stock 49.7% 50.3%
As of June 30, 1997, one officer and Trustee of the Trust owned a Variable
Contract representing less than 5% of the shares in the Portfolios.
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.
For the period ended December 31, 1996, the Adviser was paid advisory fees as
follows: $6,330 for the Strong International Stock Portfolio; $7,229 for the
Strong Growth Portfolio; $6,141 for the Harris Associates Value Portfolio;
$6,607 for the Robertson Stephens Diversified Growth Portfolio; $3,543 for the
Berkeley U.S. Quality Bond Portfolio; $2,019 for the Berkeley Money Market
Portfolio; $3,967 for the MFS Total Return Portfolio; and $5,213 for the
Lexington Corporate Leaders Portfolio.
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.
During the Trust's fiscal year ended December 31, 1996, the Portfolios paid the
following amounts in brokerage commissions:
Harris Associates Value Portfolio $1,119
Lexington Corporate Leaders Portfolio $126
Strong Growth Portfolio $7,310
Strong International Stock Portfolio $4,829
Robertson Stephens Diversified Growth Portfolio $88,128
MFS Total Return Portfolio $566
Berkeley U.S. Quality Bond Portfolio -0-
Berkeley Money Market Portfolio -0-
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.
Portfolio securities that are primarily traded on foreign exchanges are
generally valued at the most recent closing values of such securities on their
respective exchanges, except when an occurrence subsequent to the time a value
was so established is likely to have changed the value, then the fair value of
those securities will be determined by the Board of Trustees or its delegates.
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 the closing bid price. 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. To the extent that a
Portfolio does not annually distribute substantially all taxable income and
realized gains, it is subject to an excise tax. Each Portfolio intends to avoid
this tax except when the cost of processing the distribution is greater than the
tax.
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.
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.
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 Berkeley Money Market Portfolio may make available
information as to its "yield" and "effective yield." The "yield" of the Berkeley
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 Berkeley 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, MFS Total Return Fund, Strong International Stock Fund, The Oakmark Fund
and the Robertson Stephens Diversified Growth Fund, which are public mutual
funds which have the same investment objective and follow substantially the same
investment strategies as Strong Growth Portfolio, MFS Total Return Portfolio,
Strong International Stock Portfolio, and Harris Associates Value Portfolio and
the Robertson Stephens Diversified Growth 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 calculated 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 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. To date,
the Trust has never offered any Class B shares for sale.
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.
TRANSFER AGENT
The Adviser serves as the transfer agent for the Trust's shares. The Adviser
receives no payment for providing this service.
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
The Trust's unaudited Financial Statements and notes thereto for the six months
ended June 30, 1997 appear in the Trust's Semi-Annual Report which is
incorporated by reference in this Statement of Additional Information.
The Trust's Financial Statements and notes thereto for the period January 31,
1996 (commencement of operations) through December 31, 1996 and the report of
Price Waterhouse LLP, Independent Auditors, with respect thereto, appear in the
Trust's Annual Report for the period ended December 31, 1996, which is
incorporated by reference into this Statement of Additional Information. The
Trust delivers a copy of the Annual Report and Semi-Annual Report to investors
along with the Statement of Additional Information. In addition, the Trust will
furnish, without charge, additional copies of such Annual Report or Semi-Annual
Report to investors which may be obtained without charge by calling the Life
Company at (800) 852-3152.
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS:
The Financial Statements filed as part of this Registration Statement are
as follows:
Statements of Assets and Liabilities as of December 31, 1996*
Statements of Operations, Period Ended December 31, 1996*
Statements of Changes in Net Assets, For the Period Ended December 31,
1996*
Schedules of Investments, December 31, 1996*
Strong International Stock Portfolio
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
Notes to Financial Statements - December 31, 1996*
Financial Highlights**
Statements of Assets and Liabilities June 30, 1997 (unaudited)***
Statements of Operations for the Six Months ended June 30, 1997
(unaudited)***
Statements of Changes in Net Assets for the Six Months ended June 30, 1997
(unaudited) and the Period ended December 31, 1996***
Financial Highlights for the Six Months ended June 30, 1997 (unaudited)****
Financial Highlights for the Period January 31, 1996 (Commencement of
Operations) to December 31, 1996****
Schedules of Investments (unaudited), June 30, 1997***
Strong International Stock Portfolio
Strong Growth Portfolio
Salomon U.S. Quality Bond Portfolio
Salomon Money Market Portfolio
Harris Associates Value Portfolio
Lexington Corporate Leaders Portfolio
Robertson Stephens Diversified Growth Portfolio
MFS Total Return Portfolio
Notes to Financial Statements (unaudited) June 30, 1997***
Report
Report of Independent Accountants - Price Waterhouse LLP
__________________
* Included in the Trust's Annual Report, dated December 31, 1996,
filed as Exhibit 12 hereto.
** Included in Part A of this Registration Statement and in the Trust's
Annual Report, dated December 31, 1996 filed as Exhibit 12 hereto.
***Included in the Trust's Semi-Annual Report dated June 30, 1997, filed
as Exhibit 12 hereto.
****Included in Part A of this Registration Statement and in the Trust's
Semi-Annual Report dated June 30, 1997, filed as Exhibit 12 hereto.
(B) EXHIBITS
(1) (c) Amended and Restated Declaration of Trust**
(2) By-laws of Trust*
(3) Not Applicable
(4) Not Applicable
(5) (a) Investment Advisory Agreement**
(b) Form of Amendment to Investment Advisory Agreement
(c) (i) Sub-Advisory Agreement dated as of July 14, 1995, among
Salomon Brothers Asset Management Inc, the Adviser and
the Trust*
(ii) Sub-Advisory Agreement dated as of July 24, 1995, among
Strong Capital Management, Inc., the Adviser and the Trust*
(iii) Sub-Advisory Agreement dated as of July 7, 1995, among
Lexington Management Corporation, the Adviser and the
Trust*
(iv) Sub-Advisory Agreement dated as of July 17, 1995, among
Massachusetts Financial Services Company, the Adviser
and the Trust*
(v) Sub-Advisory Agreement dated as of July 7, 1995, among
Govett Asset Management Company, the Adviser and the
Trust*
(vi) Sub-Advisory Agreement dated as of July 26, 1995, by and
among Miller Anderson & Sherrerd, LLP, the Adviser and
the Trust*
(vii) Form of Sub-Advisory Agreement among Harris Associates
L.P., the Adviser and the Trust*****
(viii) Form of Sub-Advisory Agreement among Robertson, Stephens
& Company (RSC) Investment Management, L.P., the Adviser
and the Trust
(ix) Form of Sub-Advisory Agreement among Berkeley Capital Management,
the Adviser and the Trust
(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***
(10) Consent and Opinion of Counsel****
(11) Consent of Independent Accountants
(12) Financial Statements, incorporated herein by reference to the Trust's
Annual Report dated December 31, 1996, as filed electronically with the
Securities and Exchange Commission on March 10, 1997 and to the Trust's
Semi-Annual Report dated June 30, 1997, as filed electronically with
the Securities and Exchange Commission on September 4, 1997.
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Calculation of Performance Information****
(27) Not Applicable
* incorporated by reference to Registrant's Registration Statement on Form
N-1A (File No. 33-88792), as filed August 7, 1995.
** incorporated by reference to Registrant's Pre-Effective Amendment No. 2
to Form N-1A (File No. 33-88792), as filed electronically on January 26,
1996.
*** incorporated by reference to Registrant's Post-Effective Amendment No.
1 to Form N-1A (File No. 33-88792), as filed electronically on September
13, 1996.
**** incorporated by reference to Registrant's Post-Effective Amendment No.
2 to Form N-1A (File No. 33-88792), as filed electronically on March 7,
1997.
***** incorporated by reference to Registrant's Post Effective Amendment
No. 3 to Form N-1A (File No. 33-88792), as filed electronically on April
25, 1997.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The shares of the Trust are currently sold to LPLA Separate Account One.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
The general account of London Pacific Life & Annuity Company and LPLA Separate
Account One are the shareholders of the Trust.
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
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)
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:
Robertson, Stephens & Company Investment Management, L.P.
File No. 801-144125
Harris Associates L.P.
File No. 801-50333
Lexington Management Corporation
File No. 801-8281
Strong Capital Management, Inc.
File No. 801-10724
Massachusetts Financial Services Company
File No. 801-17352
Capital Management Inc
File No. 801-40598
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
Not Applicable.
SIGNATURES
Pursuant to the Securities Act of 1933 and the Investment Company Act of 1940,
the Registrant has duly caused this Post-Effective Amendment No. 4 to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Raleigh, and State of North Carolina on the 5th
day of September, 1997.
LPT VARIABLE INSURANCE SERIES TRUST
By: /s/ GEORGE C. NICHOLSON
__________________________________________
George C. Nicholson
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 4 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 September 5, 1997
- ------------------------------- ----------------
Mark E. Prillaman Executive Officer and
Trustee
/s/ GEORGE C. NICHOLSON Vice President, Treasurer, September 5, 1997
- ------------------------------- ----------------
George C. Nicholson Principal Financial
Officer and Principal
Accounting Officer
/S/ RAYMOND L. PFEISTER* Trustee September 5, 1997
- ------------------------------- -----------------
Raymond L. Pfeister
/S/ ROBERT H. SINGLETARY* September 5, 1997
- ------------------------------- Trustee -----------------
Robert H. Singletary
/S/ JAMES WINTHER* Trustee September 5, 1997
- ------------------------------- ----------------
James Winther
</TABLE>
*By: /s/ GEORGE C. NICHOLSON
-------------------------
George C. Nicholson
Attorney-in-Fact
PART II
EXHIBITS
TO
POST-EFFECTIVE AMENDMENT NO. 4
TO
FORM N-1A
FOR
LPT VARIABLE INSURANCE SERIES TRUST
INDEX TO EXHIBITS
PAGE
EX-99.B5(c)(viii) Form of Sub-Advisory Agreement among Robertson
Stephens & Company (RSC) Investment Management,
L.P., the Adviser and the Trust
EX-99.B5(c)(ix) Form of Sub-Advisory Agreement among Berkeley Capital
Management, the Adviser and the Trust
EX-99.B11 Consent of Independent Accountants
LPT VARIABLE INSURANCE SERIES TRUST
FORM OF PROPOSED SUB-ADVISORY AGREEMENT
AGREEMENT dated as of ______________, 1997, among Robertson, Stephens &
Company Investment Management, L.P. [("RSIM")], a [California limited]
partnership (the "Sub-Adviser"), LPIMC Insurance Marketing Services, a
California corporation (the "Adviser"), and LPT Variable Insurance Series Trust,
a Massachusetts business trust (the "Trust").
WHEREAS, Adviser has entered into an Investment Advisory Agreement
(referred to herein as the "Advisory Agreement"), dated January 9, 1996, as
amended, with the Trust, under which Adviser has agreed to act as investment
adviser to the Trust, which is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Advisory Agreement provides that the Adviser may engage a
sub-adviser or sub-advisers for the purpose of managing the investments of the
Portfolios of the Trust; and
WHEREAS, the Adviser desires to retain Sub-Adviser, which is engaged in the
business of rendering investment management services, to provide certain
sub-investment advisory services for the investment portfolio(s) of the Trust
listed on EXHIBIT A hereto (the "Portfolio") of the Trust as more fully
described below; and
WHEREAS, it is the purpose of this Agreement to express the mutual
agreements of the parties hereto with respect to the services to be provided by
Sub-Adviser to Adviser with respect to the Portfolio and the terms and
conditions under which such services will be rendered.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereto agree as follows:
1. SERVICES OF SUB-ADVISER. The Sub-Adviser shall act as investment
sub-adviser to the Adviser with respect to the Portfolio. In this capacity,
Sub-Adviser shall have the following responsibilities:
(a) [to render investment management services to and manage the
Portfolio in a manner consistent with the investment objectives and
other information provided to Sub-Adviser by Adviser. Subject to any
restrictions imposed by Adviser or the Board of Trustees of the Trust,
Adviser grants Sub-Adviser full discretion as to all investment
decisions regarding the Portfolio, including, but not limited to,
authority to deal in all securities and intangible investment
instruments of any kind ("Securities") and full authority to exercise
all rights incidental to ownership of such Securities. To enable
Sub-Adviser to exercise fully such discretion, Adviser hereby appoints
Sub-Adviser as agent and attorney-in-fact for the Portfolio with full
power and authority to sell and otherwise deal in securities contracts
relating to the same for the Portfolio];
(b) to cause its officers to attend meetings of the Adviser or the
Trust and furnish oral or written reports, as the Adviser may
reasonably require, in order to keep the Adviser and its officers and
the Trustees of the Trust and appropriate officers of the Trust fully
informed as to the condition of the investment securities of the
Portfolio, the investment recommendations of the Sub-Adviser, and the
investment considerations which have given rise to those
recommendations; and
(c) to furnish such statistical and analytical information and reports
as may reasonably be required by the Adviser from time to time.
2. OBLIGATIONS OF THE ADVISER. The Adviser shall have the following
obligations under this Agreement:
(a) to keep the Sub-Adviser continually and fully advised of the
Portfolio's investment objectives, and any modifications and changes
thereto, as well as any specific investment restrictions or
limitations;
(b) to furnish the Sub-Adviser with a certified copy of any financial
statement or report prepared for the Trust with respect to the
Portfolio by certified or independent public accountants, and with
copies of any financial statements or reports made by the Trust to
shareholders or to any governmental body or securities exchange and to
inform the Sub-Adviser of the results of any audits or examinations by
regulatory authorities pertaining to the Portfolio, if these results
affect the services provided by the Sub-Adviser pursuant to this
Agreement;
(c) to furnish the Sub-Adviser with any further materials or
information which the Sub-Adviser may reasonably request to enable it
to perform its functions under this Agreement;
(d) to compensate the Sub-Adviser for its services under this
Agreement by the payment of fees as set forth in EXHIBIT B attached
hereto; and
[(e) to furnish the Sub-Adviser with copies of the Trust's Declaration
of Trust and By-Laws and all amendments and supplements thereto, and
the most recent prospectus and the related statement of additional
information for the Portfolio (such prospectus and statement of
additional information, as currently in effect, and all amendments and
supplements thereto, are herein called the "Prospectus"). The Adviser
or the Trust will furnish the Sub-Adviser with any amendments or
supplements to the foregoing, including drafts of any revisions to the
Prospectus for the Portfolio.]
3. PORTFOLIO TRANSACTIONS. The Sub-Adviser shall place all orders for the
purchase and sale of portfolio securities for the account of the Portfolio with
broker-dealers selected by the Sub-Adviser. In executing portfolio transactions
and selecting broker-dealers, the Sub-Adviser will use its best efforts to seek
best execution on behalf of the Portfolio. In assessing the best execution
available for any transaction, the Sub-Adviser shall consider all factors it
deems relevant, including the breadth of the market in the security, the price
of the security, the financial condition and execution capability of the
broker-dealer, and the reasonableness of the commission, if any (all for the
specific transaction and on a continuing basis). In evaluating the best
execution available, and in selecting the broker/dealer to execute a particular
transaction, the Sub-Adviser may also consider the brokerage and research
services (as those terms are used in Section 28(e) of the Securities Exchange
Act of 1934) provided to the Portfolio and/or other accounts over which the
Sub-Adviser, an affiliate of the Sub-Adviser (to the extent permitted by law) or
another investment adviser of the Portfolio exercises investment discretion. The
Sub-Adviser is authorized to cause the Portfolio to pay a broker-dealer who
provides such brokerage and research services a commission for executing a
portfolio transaction for the Portfolio which is in excess of the amount of the
commission another broker-dealer would have charged for effecting that
transaction if, but only if, 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.
4. MARKETING SUPPORT. The Sub-Adviser shall provide marketing support to
the Adviser in connection with the sale of Trust shares and/or the sale of
variable annuity and variable life insurance contracts issued by London Pacific
Life & Annuity Company and its affiliates which may invest in the Trust
(collectively, the "Life Company") which relate to the Portfolio, as reasonably
requested by the Adviser. Such support shall include, but not necessarily be
limited to, presentations by representatives of the Sub-Adviser at investment
seminars, conferences and other industry meetings. Any materials utilized by the
Adviser which contain any information relating to the Sub-Adviser shall be
submitted to the Sub-Adviser for approval prior to use, not less than five (5)
business days before such approval is needed by the Adviser. Any materials
utilized by the Sub-Adviser which contain any information relating to the
Adviser, the Life Company (including any information relating to its separate
accounts or variable annuity or variable life insurance contracts) or the Trust
shall be submitted to the Adviser for approval prior to use, not less than five
(5) business days before such approval is needed by the Sub-Adviser.
5. SERVICE MARK. RSIM, as the owner of the service mark "Robertson,
Stephens Diversified Growth", has sublicensed the Robertson, Stephens
Diversified Growth Portfolio to include the words "Robertson, Stephens" and
"Diversified Growth" as part of its corporate name, subject to revocation by
[RSIM] in the event that the Portfolio ceases to engage RSIM or its affiliates
as sub-adviser. The Portfolio will be required upon demand of RSIM to change its
corporate name to delete the words "Robertson, Stephens" and "Diversified
Growth" therefrom. This Agreement will thereupon automatically terminate and a
new contract will, at such time, be submitted to a vote of the shareholders of
the Portfolio.
6. GOVERNING LAW. The Agreement shall be construed in accordance with and
governed by the laws of the State of California.
7. EXECUTION OF AGREEMENT. This Agreement will become binding on the
parties hereto upon their execution of the attached Exhibit B to this Agreement.
8. COMPLIANCE WITH LAWS. The Sub-Adviser represents that it is, and will
continue to be throughout the term of this Agreement, an investment adviser
registered under all applicable federal and state laws. In all matters relating
to the performance of this Agreement, the Sub-Adviser will act in conformity
with the Trust's Declaration of Trust, Bylaws and current registration statement
applicable to the Portfolio, current copies of which shall be provided to the
Sub-Adviser by Adviser, and with the instructions and direction of the Adviser
and the Trust's Trustees, and will conform to and comply with the 1940 Act and
all other applicable federal or state laws and regulations.
9. TERMINATION. This Agreement may be terminated at any time, without
penalty, by the Adviser or by the Trust by giving sixty (60) days' written
notice of such termination to the Sub-Adviser at its principal place of
business, provided that such termination is approved by the Board of Trustees of
the Trust or by vote of a majority of the outstanding voting securities (as that
phrase is defined in Section 2(a)(42) of the 1940 Act) of the Portfolio. This
Agreement may be terminated at any time by the Sub-Adviser by giving 60 days
written notice of such termination to the Trust and the Adviser at their
respective principal places of business.
10. ASSIGNMENT. This Agreement shall terminate automatically in the event
of any assignment (as that term is defined in Section 2(a)(4) of the 1940 Act)
of this Agreement.
11. TERM. This Agreement shall begin on the date of its execution and
unless sooner terminated in accordance with its terms shall continue in effect
for two years from that date and from year to year thereafter provided
continuance is specifically approved at least annually by the vote of a majority
of the Trustees of the Trust who are not parties hereto or interested persons
(as the term is defined in Section 2(a)(19) of the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of voting on the approval of
the terms of such renewal, and by either the Trustees of the Trust or the
affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act).
12. AMENDMENTS. This Agreement may be amended only with the approval by the
affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act) and
the approval by the vote of a majority of the Trustees of the Trust who are not
parties hereto or interested persons (as that term is defined in Section
2(a)(19) of the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of voting on the approval of such amendment, unless otherwise
permitted in accordance with the 1940 Act.
13. INDEMNIFICATION. The Adviser shall indemnify and hold harmless the
Sub-Adviser, its affiliates, and their respective officers, directors,
principals, employees, members, agents and each person, if any, who controls the
Sub-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 (i) any matter to which the Sub-Advisory
Agreement relates, (ii) any breach by the Adviser, or its directors, officers,
partners, employees or agents of any fiduciary duty owed to the Trust, (iii) any
violation by the Adviser of any federal or state securities law or any other
applicable law or regulation relating to its activities contemplated hereunder
or (iv) the gross negligence, malfeasance or bad faith of the Adviser or any of
its affiliates, directors, officers, partners, employees, members or agents.
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 Sub-Advisory Agreement or (ii) is the
Adviser 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 Adviser in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the claim shall
have been served upon the Sub-Adviser or such controlling persons; provided that
failure to provide such notice shall not affect Adviser's obligation under this
paragraph unless the failure to notify materially precludes the defense of such
claim. In the event that the Adviser, within 20 days of receiving such notice,
fails to assume the defense of the Indemnified Party, the Indemnified Party
shall have the right to undertake the defense, compromise or settlement of such
action, on behalf of and for the account and risk of the Adviser.
The Sub-Adviser shall indemnify and hold harmless the Adviser and each of
its directors and officers and each person if any who controls the Adviser
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 Sub-Adviser's willful misfeasance, bad faith or gross negligence
in the performance of its duties under this Sub-Advisory Agreement. In case any
action shall be brought against the Adviser or any person so indemnified, in
respect of which indemnity may be sought against the Sub-Adviser, the
Sub-Adviser shall have the rights and duties given to the Adviser, and the
Adviser and each person so indemnified shall have the rights and duties given to
the Sub-Adviser by the provisions of subsections (i) and (ii) of the last
sentence of the previous paragraph.
[14. LIMITATION OF LIABILITY. (a) The Sub-Adviser will use its best efforts in
performing its duties under this Agreement, and shall not be liable to the Trust
or the Portfolio for any error of judgment including, but not limited to any
error in judgment with respect to buying or selling securities on behalf of the
Portfolio; for any mistake of law; for any act or omission by the Sub-Adviser,
or for any losses sustained by the Trust, unless said error, mistake, act or
omission by the Sub-Adviser is the result of willful misfeasance, bad faith or
gross negligence in its performance under this Agreement or reckless disregard
of its obligations under this Agreement. The Sub-Adviser shall not be liable for
any change in applicable law, which by its terms takes effect on a retroactive
basis, and which, as a result, causes the Sub-Adviser to have failed to comply
with such law in the performance of its duties under this Agreement during any
period which such law has been retroactively applied.
(b) The Sub-Adviser shall have no responsibility for and shall incur no
liability to the Trust, any shareholder of the Trust or the Adviser relating to
(1) the selection or establishment by the Trust of its investment objectives,
fundamental policies and restrictions; (2) the Trust's registration or duty to
register with any government or governmental agency, (3) the administration of
any plans, trusts or accounts investing through the Trust or (4) the Trust's
compliance with requirements of the 1940 Act and Sub-chapter M of the Internal
Revenue Code, except where the failure to comply with the provisions of the 1940
Act or Sub-chapter M of the Internal Revenue Code arises out of or results from
the Sub-Adviser's performance of or failure to perform its duties under this
Agreement. The Sub-Adviser shall not be liable for any act or omission of the
Adviser or any custodian, broker, agent or other party selected by the Adviser
to provide services for the Trust or the Portfolio, except such as arise from
the Sub-Adviser's performance of or failure to perform its duties under this
Agreement or of the Sub-Adviser's fiduciary duty to the Adviser or to the Trust.
15. SERVICES TO OTHER CLIENTS. The Adviser and the Trust acknowledge and
understand that the Sub-Adviser engages in an investment advisory business apart
from managing the Portfolio. This will create conflict of interest with the
Portfolio over the Sub-Adviser's time devoted to managing the Portfolio and the
allocation of investment opportunities among accounts (including the Portfolio)
managed by the Sub-Adviser. The Sub-Adviser will attempt to resolve all such
conflicts in a manner that is generally fair to all of its clients. The Adviser
and the Trust confirm that the Sub-Adviser may give advice and take action with
respect to any of its other clients that may differ from advice given or the
timing or nature of action taken with respect to the Portfolio so long as it is
the Sub-Adviser's policy, to the extent practicable, to allocate investment
opportunities to the Portfolio over a period of time on a fair and equitable
basis relative to other clients. Nothing in this Agreement shall be deemed to
obligate the Sub-Adviser to acquire any security for its or their own accounts
or for the account of any other client if, in the absolute discretion of the
Sub-Adviser, it is not practical or desirable to acquire a position in such
security for the Portfolio.]
[16]. DISPUTES. The parties waive their right to seek remedies in court,
including any right to a jury trial. The parties agree that in the event of any
dispute arising between or among the parties or any of their affiliates arising
out of, relating to or in connection with this Agreement, such dispute shall be
resolved exclusively by arbitration to be conducted only in San Francisco,
California in accordance with the rules of the Judicial Arbitration and
Mediation Service ("JAMS"), applying the laws of California. The parties agree
that such arbitration shall be conducted by a retired judge who is experienced
in resolving disputes, regarding the securities business, that discovery shall
not be permitted except as required by the rules of JAMS, that the arbitration
award shall not include factual findings or conclusions of law and that no
punitive damages shall be awarded. The parties understand that any party's right
to appeal or seek modification of any ruling or award of the arbitrator is
severely limited. Any award rendered by the arbitrator shall be final and
binding, and judgment may be entered on it in any court of competent
jurisdiction.
[17. DELIVERY OF BROCHURE. The Adviser and the Trust acknowledge that the
Adviser and the Trust have received the Sub-Adviser's brochure required to be
delivered under the Investment Advisers Act of 1940 (including the information
in Part II of the Sub-Adviser's Form ADV). Upon written request, without
charge, the Sub-Adviser agrees to deliver annually the Sub-Adviser's brochure
required by the Advisers Act.
18. NOTICES. Any notice under this Agreement shall be given in writing,
addressed and delivered, telecopied with acknowledgment of receipt, or mailed
postage prepaid, to the other parties hereto at the addresses set forth below:
(a) If to the Sub-Adviser:
Robertson, Stephens Investment Management, L.P.
555 California Street
San Francisco, CA 94104
Attention: Dana Welch, Esq.
Facsimile: (415) 676-2675
(b) If to the Adviser:
LPIMC Insurance Marketing Services
1755 Creekside Oaks Drive
Sacramento, CA 95833
Attention: Mr. Mark E. Prillaman
(c) If to the Trust:
LPT Variable Insurance Series Trust
1755 Creekside Oaks Drive
Sacramento, CA 95833
Attention: Mr. Mark E. Prillaman]
LPT VARIABLE INSURANCE SERIES TRUST
By: _______________________________
Title: ______________________________
LPIMC INSURANCE MARKETING SERVICES
By: _______________________________
Title: ______________________________
ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P.
By: ______________________________
Title: _____________________________
EXHIBIT A
LPT VARIABLE INSURANCE SERIES TRUST
The following Portfolio of LPT Variable Insurance Series Trust is subject
to this Agreement:
Robertson Stephens Diversified Growth Portfolio
EXHIBIT B
LPT VARIABLE INSURANCE SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Adviser hereunder, Adviser shall pay to
Sub-Adviser and Sub-Adviser agrees to accept as full compensation for all
services rendered hereunder, monthly a fee of:
Robertson Stephens Diversified Growth Portfolio
.70% of first $10 million on an annualized basis of average daily
net assets under management
.65% of next $25 million on an annualized basis of average daily
net assets under management
.60% of next $165 million on an annualized basis of average daily
net assets under management
.55% on an annualized basis of average daily net assets under
management over and above $200 million.
LPT VARIABLE INSURANCE SERIES TRUST
By: _______________________________
Title: ____________________________
LPIMC INSURANCE MARKETING SERVICES
By: _______________________________
Title: ____________________________
ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P.
By: ______________________________
Title: ___________________________
A Copy of the document establishing the Trust is filed with the Secretary of the
Commonwealth of Massachusetts. This Agreement is executed by officers not as
individuals and is not binding upon any of the Trustees, officers or
shareholders of the Trust individually but only upon the assets of each
Portfolio.
LPT VARIABLE INSURANCE SERIES TRUST
FORM OF PROPOSED SUB-ADVISORY AGREEMENT
AGREEMENT dated as of _________, 1997, among [Berkeley Capital Management (BCM),
a California corporation] (the "Sub-Adviser"), LPIMC Insurance Marketing
Services, a California corporation (the "Adviser"), and LPT Variable Insurance
Series Trust, a Massachusetts business trust (the "Trust").
WHEREAS, Adviser has entered into an Investment Advisory Agreement (referred to
herein as the "Advisory Agreement"), dated January 9, 1996, as amended, with the
Trust, under which Adviser has agreed to act as investment adviser to the Trust,
which is registered as an open-end management investment company
under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Advisory Agreement provides that the Adviser may engage a
sub-adviser or sub-advisers for the purpose of managing the investments of the
Portfolios of the Trust; and
WHEREAS, the Adviser desires to retain Sub-Adviser, which is engaged in the
business of rendering investment management services, to provide certain
sub-investment advisory services for the investment portfolio(s) of the Trust
listed on Exhibit A hereto (the "Portfolio") of the Trust as more fully
described below; and
WHEREAS, it is the purpose of this Agreement to express the mutual agreements of
the parties hereto with respect to the services to be provided by Sub-Adviser to
Adviser with respect to the Portfolio and the terms and conditions under which
such services will be rendered.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereto agree as follows:
1. Services of Sub-Adviser. The Sub-Adviser shall act as investment
sub-adviser to the Adviser with respect to the Portfolio. In this capacity,
Sub-Adviser shall have the following responsibilities:
(a) to furnish continuous investment information, advice and
recommendations to the Adviser as to the acquisition, holding or
disposition of any or all of the securities or other assets which the
Portfolio may own or contemplate acquiring from time to time;
(b) to cause its officers to attend meetings of the Adviser or the
Trust and furnish oral or written reports, as the Adviser may reasonably
require, in order to keep the Adviser and its officers and the Trustees of
the Trust and appropriate officers of the Trust fully informed as to the
condition of the investment securities of the Portfolio, the investment
recommendations of the Sub-Adviser, and the investment considerations which
have given rise to those recommendations;
(c) to furnish such statistical and analytical information and reports
as may reasonably be required by the Adviser from time to time; and
(d) to supervise and place orders for the purchase, sale, exchange and
conversion of securities as directed by the appropriate officers of the
Trust or of the Adviser.
2. Obligations of the Adviser. The Adviser shall have the following
obligations under this Agreement:
(a) to keep the Sub-Adviser continuously and fully informed as to the
composition of the Portfolio's investment securities and the nature of the
Portfolio's assets and liabilities;
(b) to keep the Sub-Adviser continually and fully advised of the
Portfolio's investment objectives, and any modifications and changes
thereto, as well as any specific investment restrictions or limitations;
(c) to furnish the Sub-Adviser with a certified copy of any financial
statement or report prepared for the Trust with respect to the Portfolio by
certified or independent public accountants, and with copies of any
financial statements or reports made by the Trust to shareholders or to any
governmental body or securities exchange and to inform the Sub-Adviser of
the results of any audits or examinations by regulatory authorities
pertaining to the Portfolio, if these results affect the services provided
by the Sub-Adviser pursuant to this Agreement.
(d) to furnish the Sub-Adviser with any further materials or
information which the Sub-Adviser may reasonably request to enable it to
perform its functions under this Agreement; and
(e) to compensate the Sub-Adviser for its services under this
Agreement by the payment of fees as set forth in Exhibit B attached hereto.
3. Portfolio Transactions. The Sub-Adviser shall place all orders for the
purchase and sale of portfolio securities for the account of the Portfolio with
broker-dealers selected by the Sub-Adviser. In executing portfolio transactions
and selecting broker-dealers, the Sub-Adviser will use its best efforts to seek
best execution on behalf of the Portfolio. In assessing the best execution
available for any transaction, the Sub-Adviser shall consider all factors it
deems relevant, including the breadth of the market in the security, the price
of the security, the financial condition and execution capability of the
broker-dealer, and the reasonableness of the commission, if any (all for the
specific transaction and on a continuing basis). In evaluating the best
execution available, and in selecting the broker/dealer to execute a particular
transaction, the Sub-Adviser may also consider the brokerage and research
services (as those terms are used in Section 28(e) of the Securities Exchange
Act of 1934) provided to the Portfolio and/or other accounts over which the
Sub-Adviser, an affiliate of the Sub-Adviser (to the extent permitted by law) or
another investment adviser of the Portfolio exercises investment discretion. The
Sub-Adviser is authorized to cause the Portfolio to pay a broker-dealer who
provides such brokerage and research services a commission for executing a
portfolio transaction for the Portfolio which is in excess of the amount of the
commission another broker-dealer would have charged for effecting that
transaction if, but only if, 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.
4. Marketing Support. The Sub-Adviser shall provide marketing support to
the Adviser in connection with the sale of Trust shares and/or the sale of
variable annuity and variable life insurance contracts issued by London Pacific
Life & Annuity Company and its affiliates which may invest in the Trust
(collectively, the "Life Company"), as reasonably requested by the Adviser. Such
support shall include, but not necessarily be limited to, presentations by
representatives of the Sub-Adviser at investment seminars, conferences and other
industry meetings. Any materials utilized by the Adviser which contain any
information relating to the Sub-Adviser shall be submitted to the Sub-Adviser
for approval prior to use, not less than five (5) business days before such
approval is needed by the Adviser. Any materials utilized by the Sub-Adviser
which contain any information relating to the Adviser, the Life Company
(including any information relating to its separate accounts or variable annuity
or variable life insurance contracts) or the Trust shall be submitted to the
Adviser for approval prior to use, not less than five (5) business days before
such approval is needed by the Sub-Adviser.
5. Governing Law. The Agreement shall be construed in accordance with and
governed by laws of the [Commonwealth of Massachusetts].
6. Execution of Agreement. This Agreement will become binding on the
parties hereto upon their execution of the attached Exhibit B to this Agreement.
7. Compliance With Laws. The Sub-Adviser represents that it is, and will
continue to be throughout the term of this Agreement, an investment adviser
registered under all applicable federal and state laws. In all matters relating
to the performance of this Agreement, the Sub-Adviser will act in conformity
with the Trust's Declaration of Trust, Bylaws, and current registration
statement applicable to the Portfolio and with the instructions and direction of
the Adviser and the Trust's Trustees, and will conform to and comply with the
1940 Act and all other applicable federal and state laws and regulations.
8. Terminations. This Agreement shall terminate automatically upon the
termination of the Advisory Agreement. This Agreement may be terminated at any
time, without penalty, by the Adviser or by the Trust by giving sixty (60) days'
written notice of such termination to the Sub-Adviser at its principal place of
business, provided that such termination is approved by the Board of Trustees of
the Trust or by vote of a majority of the outstanding voting securities (as that
phrase is defined in Section 2(a)(42) of the 1940 Act)of the Portfolio. This
Agreement may be terminated at any time by the Sub-Adviser by giving 60
days' written notice of such termination to the Trust and the Adviser
at their respective principal places of business.
9. Assignment. This Agreement shall terminate automatically in the event
of any assignment (as that term is defined in Section 2(a)(4) of the 1940 Act)
of this Agreement).
10. Term. This Agreement shall begin on the date of its execution and
unless sooner terminated in accordance with its terms shall continue in effect
for two years from that date and from year to year thereafter provided
continuance is specifically approved at least annually by the vote of a majority
of the Trustees of the Trust who are not parties hereto or interested persons
(as the term is defined in Section 2(a)(19) of the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of voting on the approval of
the terms of such renewal, and by either the Trustees of the Trust or the
affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act).
11. Amendments. This Agreement may be amended only with the approval by the
affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act) and
the approval by the vote of a majority of the Trustees of the Trust who are not
parties hereto or interested persons (as that term is defined in Section
2(a)(19) of the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of voting on the approval of such amendment, unless otherwise
permitted in accordance with the 1940 Act.
12. Indemnification. The Adviser shall indemnify and hold harmless the
Sub-Adviser, its officers and directors and each person, if any, who controls
the Sub-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 the Sub-Advisory Agreement
relates. However, in no case (i) is the 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 Sub-Advisory Agreement or
(ii) is the Adviser 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 Adviser in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon the Sub-Adviser or such controlling persons.
The Sub Adviser shall indemnify and hold harmless the Adviser and each of
its directors and officers and each person if any who controls the Adviser
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 Sub-Adviser's willful misfeasance, bad faith, or gross negligence
in the performance of its duties under this Sub-Advisory Agreement. In case any
action shall be brought against the Adviser or any person so indemnified, in
respect of which indemnity may be sought against the Sub-Adviser, the
Sub-Adviser shall have the rights and duties given to the Adviser, and the
Adviser and each person so indemnified shall have the rights and duties given to
the Sub-Adviser by the provisions of subsections (i) and (ii) of this section.
EXHIBIT A
LPT VARIABLE INSURANCE SERIES TRUST
The following Portfolios of LPT Variable Insurance Series Trust are subject
to this Agreement.
Berkeley U.S. Quality Bond Portfolio
Berkeley Money Market Portfolio
EXHIBIT B
LPT VARIABLE INSURANCE SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Adviser hereunder, Adviser shall pay to
Sub-Adviser and Sub-Adviser agrees to accept as full compensation for all
services rendered hereunder, payable monthly, at an annual rate of each
Portfolio's average daily net assets, commencing on ________, 1997 as follows:
Berkeley U.S. Quality Bond Portfolio
.30% of first $50 million
.275% of next $100 million
.25% of next $150 million
.20% of next $200 million
.175% of average daily net assets over and above $500 million
Berkeley Money Market Portfolio
.20% of first $50 million
.175% of next $100 million
.15% of next $150 million
.10% of next $200 million
.075% of average daily net assets over and above $500 million
LPT VARIABLE INSURANCE SERIES TRUST
By:________________________________
Title:_____________________________
LPIMC INSURANCE MARKETING SERVICES
By: ______________________________
Title: ___________________________
BERKELEY CAPITAL MANAGEMENT
By: ______________________________
Title: ___________________________
A Copy of the document establishing the Trust is filed with the Secretary of the
Commonwealth of Massachusetts. This Agreement is executed by officers not as
individuals and is not binding upon any of the Trustees, officers or
shareholders of the Trust individually but only upon the assets of each
Portfolio.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Statement of
Additional Information constituting parts of this Post-Effective Amendment No. 4
to the Registration Statement on Form N-1A (the "Registration Statement") of our
report dated February 10, 1997, relating to the financial statements and
financial highlights appearing in the December 31, 1996 Annual Report of the LPT
Variable Insurance Series Trust, which is also incorporated by reference into
the Registration Statement. We also consent to the references to us under the
heading "Financial Highlights" in the Prospectuses and under the headings
"Independent Accountants" and "Financial Statements" in the Statement of
Additional Information.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 5, 1997
