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 May 1, 1998 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 MAY 1, 1998
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TABLE OF CONTENTS
PAGE
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FINANCIAL HIGHLIGHTS.......................................................................1
INVESTMENT OBJECTIVE AND POLICIES..........................................................2
Investment Objective and Policies.................................................2
Other Investment Practices and Risk Considerations................................3
Investments in Smaller Companies.........................................3
Short Sales..............................................................3
Foreign Securities.......................................................3
Debt Securities..........................................................4
Options and Futures......................................................4
Index Futures and Options................................................4
Risks Related to Options and Futures Strategies..........................5
Securities Loans and Repurchase Agreements...............................5
Borrowing................................................................5
Defensive Strategies.....................................................5
MANAGEMENT OF THE TRUST....................................................................5
Investment Adviser................................................................5
Expense Reimbursement.............................................................6
Sub-Adviser.......................................................................6
Sub-Advisory Fees.................................................................7
Allocation of Portfolio Transactions..............................................7
Portfolio Turnover................................................................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
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FINANCIAL HIGHLIGHTS
The following information 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.
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LPT VARIABLE INSURANCE SERIES TRUST
ROBERTSON STEPHENS DIVERSIFIED GROWTH PORTFOLIO(1)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996*
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Net asset value, beginning of period $8.58 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (0.07) 2.10
Net realized and unrealized gain
(loss) on investments 1.71 (1.69)
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Total from investment operations 1.64 0.41
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LESS DISTRIBUTIONS:
Dividends from net investment income 0.00 (1.83)
Distributions from net realized capital gains 0.00 (0.00)
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Total distributions 0.00 (1.83)
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Net asset value, end of period $10.22 $8.58
TOTAL RETURN ++ 19.12% 2.42%
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $3,452 $1,441
Ratio of operating expenses to average net assets 1.39% 1.36%+
Ratio of net investment income to average net assets (0.72%) 20.30%+
Portfolio turnover rate 234.54% 2242.85%
Average commission rate per share+++ $0.0540 $0.0478
Ratio of operating expenses to average net assets before
waiver of fees and expense reimbursements 4.53% 7.02%+
Net investment income (loss) per share before
waiver of fees and expense reimbursements(a) ($0.35) $1.51
<FN>
+ Annualized
++ Total return represents aggregate total return for the year ended December
31, 1997 and 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.
(a) Based on the average daily shares outstanding throughout the period.
(1) Formerly Berkeley Smaller Companies Portfolio.
* For the period January 31, 1996 (Commencement of Operations) to December
31, 1996.
</FN>
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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 ("Investment
Advisory Agreement"), 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.
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PORTFOLIO ADVISORY FEE
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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
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EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 1998 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, the ratio of expenses to average
net assets would have been 4.53% for the year ended December 31, 1997.
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 an indirect
wholly-owned subsidiary of BankAmerica Corporation. BankAmerica Corporation is a
global financial services company with $250 billion in assets and an equity
capital base of $20 billion. The Sub-Adviser and its investment advisory
affiliates have in excess of $20 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.
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PORTFOLIO SUB-ADVISORY FEE
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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
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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 year ended December 31, 1997 was 234.54%. (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 year ended December 31, 1997 and the fiscal period February
9, 1996 (effective date of Trust's Registration Statement) through December 31,
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 12/31/97
FEBRUARY 9, 1996
PORTFOLIO ONE YEAR TO DECEMBER 31, 1997
--------- -------- --------------------
Robertson Stephens Diversified Growth Portfolio,
<S> <C> <C>
(formerly, Berkeley Smaller Companies Portfolio) 19.12% 11.07%
Standard & Poor's 500 Stock Index 33.36% 25.42%
Russell 2000 Small Company Index 22.24% 17.31%
</TABLE>
The performance results obtained prior to May 1, 1997 were achieved by the
former sub-adviser. Prior to May 1, 1997, the Portfolio had different investment
objectives, policies and restrictions and a different 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
ended December 31, 1997 and the period August 1, 1996 (inception date) to
December 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 and the Russell 2000 Small Company Index, an unmanaged index of
2000 small company stocks.
<TABLE>
<CAPTION>
FUND 1 YEAR SINCE INCEPTION
---- ------ ---------------
<S> <C> <C>
The Robertson Stephens Diversified Growth Fund 29.55% 39.82%
Standard & Poor's 500 Stock Index 33.36% 35.24%
Russell 2000 Small Company Index 22.24% 17.08%
</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 May 1, 1998 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 MAY 1, 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
FINANCIAL HIGHLIGHTS........................................................................1
INVESTMENT OBJECTIVE AND POLICIES...........................................................2
COMMON TYPES OF SECURITIES AND MANAGEMENT PRACTICES.........................................3
Asset-Backed Securities............................................................3
Borrowing..........................................................................3
Lending............................................................................4
Cash Position......................................................................4
Fixed Income Securities............................................................4
Foreign Securities.................................................................4
Futures and Options................................................................4
Illiquid Securities................................................................4
Hybrid Instruments.................................................................4
Mortgage-Backed Securities.........................................................5
Adjustable Rate Mortgage Securities................................................5
Privately-Issued Mortgage Securities...............................................5
Collateralized Mortgage Obligations................................................6
Mortgage Rolls.....................................................................6
Portfolio Turnover.................................................................6
Repurchase Agreements and Reverse Repurchase Agreements............................7
Firm Commitments and When-Issued Securities........................................7
Zero Coupon and Pay-In-Kind Bonds..................................................7
INVESTMENT RISKS............................................................................7
Foreign Securities.................................................................7
Futures, Options and Other Derivative Instruments..................................8
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....................................................................11
Performance of the Portfolio......................................................11
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS...................................................12
ADDITIONAL INFORMATION.....................................................................12
APPENDIX A - RATINGS OF INVESTMENTS.......................................................A-1
</TABLE>
FINANCIAL HIGHLIGHTS
The following information 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.
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
BERKELEY U.S. QUALITY BOND PORTFOLIO (1)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996*
----------------- ------------------
<S> <C> <C>
Net asset value, beginning of period $9.81 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.58 0.49
Net realized and unrealized gain
(loss) on investments 0.34 (0.25)
---- -----
Total from investment operations 0.92 0.24
Dividends from net investment income (0.82) (0.43)
Distributions from net realized capital gains 0.00 (0.00)
---- -----
Total distributions (0.82) (0.43)
----- -----
Net asset value, end of period $9.91 $9.81
TOTAL RETURN++ 9.45% 2.27%
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $1,082 $1,553
Ratio of operating expenses to average net assets 0.99% 0.97%+
Ratio of net investment income to average net assets 5.79% 5.41%+
Portfolio turnover rate 431.63% 231.03%
Average commission rate per share+++ N/A N/A
Ratio of operating expenses to average net assets
before waiver of fees and expense reimbursements 5.09% 5.79%+
Net investment income (loss) per share before
waiver of fees and expense reimbursements(a) $0.17 $0.05
<FN>
+ Annualized
++ Total return represents aggregate total return for the year ended December
31, 1997 and 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.
(a) Based on the average daily shares outstanding throughout the year.
(1) Formerly Salomon U.S. Quality Bond Portfolio.
* For the period January 31, 1996 (Commencement of Operations) to December
31, 1996.
</FN>
</TABLE>
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. 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 year ended
December 31, 1997 was 431.63%. (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 ("Investment
Advisory Agreement"), 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>
PORTFOLIO ADVISORY FEE
--------- ------------
<S> <C> <C>
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, 1998 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, the ratio of expenses to average
net assets would have been 5.09% for the year ended December 31, 1997.
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, Suite 2800, San Francisco,
California 94108. The Sub-Adviser has been engaged in the investment management
business since 1972, and currently manages approximately $1.6 billion in assets
for both institutional and retail clients. Its investment management activities
include investment in equities utilizing large capitalization growth equity and
value equity investment styles, 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 $210
million. The London Pacific Group Limited, which manages or administers funds
valued at approximately $7.3 billion (including the assets managed by the
Sub-Adviser) as of December 31, 1997, maintains offices in Jersey (Channel
Islands), Sacramento, Raleigh, San Francisco, and San Diego.
The portfolio manger for the Portfolio is William F. Cox, CFA, who has been a
portfolio manager with the Sub-Adviser since 1992. Mr. Cox has 11 years of
investment experience. Prior to working for the Sub-Adviser, Mr. Cox was the
manager of the Financial Analysis Unit of the Western Region for the Office of
Thrift and Supervision. Mr. Cox has a B.S. from the University of California at
Berkeley and a M.B.A. from the University of California at Los Angeles.
SUB-ADVISORY FEES. Under the terms of the Sub-Advisory Agreement, the Adviser
shall pay to the Sub-Adviser, as full compensation for services rendered under
the Sub-Advisory Agreement with respect to the Portfolio, monthly fees at the
following annual rates based on the average daily net assets of the Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISORY FEE
--------- ----------------
<S> <C> <C>
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 for the year ended December 31, 1997 and the fiscal period February
9, 1996 (the effective date of the Trust's Registration Statement) to December
31, 1997 of an investment in the Berkeley U.S. Quality Bond Portfolio, formerly
Salomon U.S. Quality Bond Portfolio, 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 12/31/97
FEBRUARY 9, 1996
PORTFOLIO ONE YEAR TO DECEMBER 31, 1997
--------- -------- --------------------
<S> <C> <C>
Berkeley U.S. Quality Bond Portfolio 9.45% 6.14%
(formerly, Salomon U.S. Quality Bond)
Lipper Government Intermediate Fund Index 8.21% 5.50%
</TABLE>
The performance results obtained prior to November 3, 1997 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.
[THIS PAGE INTENTIONALLY LEFT BLANK]
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 that a prospective investor should
know before investing.
A Statement of Additional Information ("SAI") dated May 1, 1998 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 MAY 1, 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
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.................................................................8
SALES AND REDEMPTIONS......................................................................8
NET ASSET VALUE............................................................................8
PERFORMANCE INFORMATION....................................................................9
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS...................................................9
ADDITIONAL INFORMATION.....................................................................9
APPENDIX A - RATINGS OF INVESTMENTS......................................................A-1
</TABLE>
FINANCIAL HIGHLIGHTS
The following information 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.
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
BERKELEY MONEY MARKET PORTFOLIO(1)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996*
----------------- ------------------
<S> <C> <C>
Net asset value, beginning of period $1.00 $1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.05 0.04
Net realized and unrealized gain
(loss) on investments 0.00 0.00
---- ----
Total from investment operations 0.05 0.04
---- ----
Dividends from net investment income (0.05) (0.04)
Distributions from net realized capital gains (0.00) (0.00)
----- -----
Total distributions (0.05) (0.04)
---- ----
Net asset value, end of period $1.00 $1.00
TOTAL RETURN ++ 4.58% 3.93%
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $1,373 $1,178
Ratio of operating expenses to average net assets 0.89% 0.87%+
Ratio of net investment income to average net assets 4.58% 4.43%+
Portfolio turnover rate N/A N/A
Average commission rate per share+++ N/A N/A
Ratio of operating expenses to average net assets before
waiver of fees and expense reimbursements 4.30 %6.67 %+
Net investment income (loss) per share before
waiver of fees and expense reimbursements(a) $0.01 ($0.01)
<FN>
+ Annualized
++ Total return represents aggregate total return for the year ended December
31, 1997 and 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.
(a) Based on the average of the daily shares outstanding throughout the year.
(1) Formerly Salomon Money Market Portfolio.
* For the period January 31, 1996 (Commencement of Operations) to December
31, 1996.
</FN>
</TABLE>
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 ("Investment
Advisory Agreement"), 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>
PORTFOLIO ADVISORY FEE
--------- ------------
<S> <C> <C>
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, 1998 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, the ratio of expenses to average
net assets would have been 4.30% for the year ended December 31, 1997.
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, Suite 2800, San Francisco,
California 94108. The Sub-Adviser has been engaged in the investment management
business since 1972, and currently manages approximately $1.6 billion in assets
for both institutional and retail clients. Its investment management activities
include investment in equities utilizing large capitalization growth equity and
value equity investment styles, 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 $210
million. The London Pacific Group Limited, which manages or administers funds
valued at approximately $7.3 billion (including the assets managed by the
Sub-Adviser) as of December 31, 1997, maintains offices in Jersey (Channel
Islands), Sacramento, Raleigh, San Francisco, and San Diego.
The portfolio manger for the Portfolio is William F. Cox, CFA, who has been a
portfolio manager with the Sub-Adviser since 1992. Mr. Cox has 11 years of
investment experience. Prior to working for the Sub-Adviser, Mr. Cox was the
manager of the Financial Analysis Unit of the Western Region for the Office of
Thrift and Supervision. Mr. Cox has a B.S. from the University of California at
Berkeley, and a M.B.A. from the University of California at Los Angeles.
SUB-ADVISORY FEES. Under the terms of the Sub-Advisory Agreement, the Adviser
shall pay to the Sub-Adviser, as full compensation for services rendered under
the Sub-Advisory Agreement with respect to the Portfolio, monthly fees at the
following annual rates based on the average daily net assets of the Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISORY FEE
--------- ----------------
<S> <C> <C>
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 May 1, 1998, 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 MAY 1, 1998
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HARRIS ASSOCIATES VALUE PORTFOLIO
TABLE OF CONTENTS
PAGE
<S> <C>
FINANCIAL HIGHLIGHTS.......................................................................1
INVESTMENT OBJECTIVE AND POLICIES..........................................................2
INVESTMENT TECHNIQUES......................................................................2
Equity Securities.................................................................2
Debt Securities...................................................................3
Short Sales.......................................................................3
Currency Exchange Transactions....................................................3
Other Investment Companies........................................................3
When-Issued and Forward Commitment Securities.....................................3
Private Placements................................................................3
Options...........................................................................3
Cash Reserves.....................................................................4
RISK FACTORS...............................................................................4
General...........................................................................4
Small Cap Companies...............................................................4
International Investing...........................................................4
Debt Securities...................................................................4
PORTFOLIO TURNOVER.........................................................................5
RESTRICTIONS ON THE PORTFOLIO'S INVESTMENTS................................................5
MANAGEMENT OF THE TRUST....................................................................6
Investment Adviser................................................................6
Expense Reimbursement.............................................................6
Sub-Adviser.......................................................................6
Sub-Advisory Fees.................................................................7
Portfolio Transactions............................................................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...................................................9
ADDITIONAL INFORMATION....................................................................10
</TABLE>
FINANCIAL HIGHLIGHTS
The following information 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.
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LPT VARIABLE INSURANCE SERIES TRUST
HARRIS ASSOCIATES VALUE PORTFOLIO(1)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996*
----------------- -----------------
<S> <C> <C>
Net asset value, beginning of period $11.86 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.08 0.10
Net realized and unrealized gain
(loss) on investments 2.94 2.13
---- ----
Total from investment operations 3.02 2.23
---- ----
Dividends from net investment income (0.05) (0.10)
Distributions from net realized (1.38) (0.27)
capital gains ---- ----
Total distributions (1.43) (0.37)
---- ----
Net asset value, end of period $13.45 $11.86
TOTAL RETURN ++ 25.56% 20.39%
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $3,523 $1,421
Ratio of operating expenses to average net assets 1.29% 1.26%+
Ratio of net investment income to average net assets 0.56% 1.01%+
Portfolio turnover rate 84.94% 41.08%
Average commission rate per share +++ $0.0595 $0.0542
Ratio of operating expenses to average net assets
before waiver of fees and expense reimbursements 4.22 %7.55 %+
Net investment income (loss) per share before waiver
of fees and expense reimbursements (a) ($0.32) ($0.52)
<FN>
+ Annualized
++ Total return represents aggregate total return for the year ended December
31, 1997 and 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.
(a) Based on the average of the daily shares outstanding throughout the year.
(1) Formerly MAS Value Portfolio.
* For the period January 31, 1996 (Commencement of Operations) to December
31, 1996.
</FN>
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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 IBCA, Inc. ("Fitch") and Thomson Bankwatch, 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. The Portfolio may sell short securities it owns or has the right to
acquire without further consideration. Short sales 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 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.
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 year ended December 31, 1997 was 84.94%. (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 ("Investment
Advisory Agreement"), 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.
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PORTFOLIO ADVISORY FEE
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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, 1998 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, the ratio of expenses to average
net assets would have been 4.22% for the year ended December 31, 1997.
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>
PORTFOLIO SUB-ADVISORY FEE
--------- ----------------
<S> <C> <C>
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 year ended December 31, 1997 and the fiscal period February
9, 1996 (the effective date of the Trust's Registration Statement) to December
31, 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 12/31/97
FEBRUARY 9, 1996
PORTFOLIO ONE YEAR TO DECEMBER 31, 1997
--------- -------- --------------------
Harris Associates Value,
<S> <C> <C>
(formerly, MAS Value) 25.56% 24.59%
Standard & Poor's 500 Stock Index 33.36% 25.42%
Lipper Growth & Income Index 26.96% 22.02%
</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, 1997, 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>
SINCE INCEPTION
FUND 1 YEAR 5 YEAR INCEPTION DATE
---- ------ ------ --------- ----
The Oakmark Fund of the Harris
<S> <C> <C> <C> <C> <C>
Associates Investment Trust 32.59% 22.78% 30.14% 8/5/91
Standard & Poor's 500 Stock Index 33.36% 20.24% 18.38% N/A
Lipper Growth & Income Index 26.96% 18.06% 16.89% 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 May 1, 1998 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 MAY 1, 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
FINANCIAL HIGHLIGHTS.......................................................................1
INVESTMENT OBJECTIVE AND POLICIES..........................................................2
Temporary Investments.............................................................5
Investment Restrictions...........................................................5
Repurchase Agreements.............................................................5
Investment Risks..................................................................5
Portfolio Turnover................................................................5
MANAGEMENT OF THE TRUST....................................................................6
Investment Adviser................................................................6
Expense Reimbursement.............................................................6
Sub-Adviser.......................................................................6
Sub-Advisory Fees.................................................................7
SALES AND REDEMPTIONS......................................................................7
NET ASSET VALUE............................................................................8
PERFORMANCE INFORMATION....................................................................8
Performance of the Portfolio......................................................9
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS...................................................8
ADDITIONAL INFORMATION.....................................................................9
</TABLE>
FINANCIAL HIGHLIGHTS
The following information 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.
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
LEXINGTON CORPORATE LEADERS PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996*
----------------- ------------------
<S> <C> <C>
Net asset value, beginning of period $11.44 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.13 0.14
Net realized and unrealized gain
(loss) on investments 2.70 1.42
---- ----
Total from investment operations 2.83 1.56
---- ----
LESS DISTRIBUTIONS:
Dividends from net investment income (0.08) (0.12)
Distributions from net realized (0.80) (0.00)
capital gains ---- ----
Total distributions (0.88) (0.12)
---- ----
Net asset value, end of period $13.39 $11.44
TOTAL RETURN++ 24.71% 12.84%
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $3,453 $1,323
Ratio of operating expenses to average net assets 1.29% 1.26%+
Ratio of net investment income to average net assets 0.99% 1.40%+
Portfolio turnover rate 35.69% 0.00%
Average commission rate per share+++ $0.0622 $0.0500
Ratio of operating expenses to average net assets before
waiver of fees and expense reimbursements 4.08% 6.86%+
Net investment income (loss) per share before waiver
of fees and expense reimbursements(a) ($0.24) ($0.41)
<FN>
+ Annualized
++ Total return represents aggregate total return for the year ended December
31, 1997 and 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.
(a) Based on the average of the daily shares outstanding throughout the year. *
For the period January 31, 1996 (Commencement of Operations) to December
31, 1996.
</FN>
</TABLE>
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 IBCA, Inc. ("Fitch") and Thomson Bankwatch, 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>
BROADCASTING
CBS Corp.
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
ENERGY
Columbia Energy Group 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, Corp. 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.
MISC. INDUSTRIAL (CONTINUED)
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 Inc. 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 year ended December 31, 1997 was 35.69%. (See "Portfolio
Turnover" in the SAI.)
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER:
Under an Investment Advisory Agreement dated January 9, 1996 ("Investment
Advisory Agreement"), 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>
PORTFOLIO ADVISORY FEE
--------- ------------
<S> <C> <C>
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, 1998 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, the ratio of expenses to average
net assets would have been 4.08% for the year ended December 31, 1997.
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 28 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>
PORTFOLIO SUB-ADVISORY FEE
--------- ----------------
<S> <C> <C>
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 year ended December 31, 1997 and the fiscal period February
9, 1996 (the effective date of the Trust's Registration Statement) to December
31, 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 12/31/97
FEBRUARY 9, 1996
PORTFOLIO ONE YEAR TO DECEMBER 31, 1997
--------- -------- --------------------
<S> <C> <C>
Lexington Corporate Leaders Portfolio 24.71% 19.82%
Standard & Poor's 500 Stock Index 33.36% 25.42%
Lipper Growth & Income Index 26.96% 22.02%
</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.
[THIS PAGE INTENTIONALLY LEFT BLANK]
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 May 1, 1998 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 MAY 1, 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
FINANCIAL HIGHLIGHTS.......................................................................1
INVESTMENT OBJECTIVE AND POLICIES..........................................................2
IMPLEMENTATION OF POLICIES AND RISKS.......................................................3
Foreign Securities and Currencies.................................................4
Foreign Investment Companies...............................................................5
Derivative Instruments............................................................5
Illiquid Securities...............................................................5
Small and Medium Companies........................................................5
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......................................................................8
NET ASSET VALUE............................................................................8
PERFORMANCE INFORMATION....................................................................9
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 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
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
STRONG GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996*
----------------- -------- ---------
<S> <C> <C>
Net asset value, beginning of period $11.92 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (0.04) 0.25
Net realized and unrealized gain
(loss) on investments 3.07 2.49
--- ---
Total from investment operations 3.03 2.74
--- ---
LESS DISTRIBUTIONS:
Dividends from net investment income 0.00 (0.22)
Distributions from net realized capital gains (1.48) (0.60)
--- ---
Total distributions (1.48) (0.82)
Net asset value, end of period $13.47 $11.92
TOTAL RETURN ++ 25.56% 20.27%
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $2,912 $1,513
Ratio of operating expenses to
average net assets 1.29% 1.26%+
Ratio of net investment income to
average net assets (0.26%) 2.25%+
Portfolio turnover rate 270.11% 422.67%
Average commission rate per share +++ $0.0662 $0.0575
Ratio of operating expenses to average
net assets before waiver of fees and
expense reimbursements 4.44% 7.09%+
Net investment income (loss) per share before
waiver of fees and expense reimbursements (a) ($0.46) ($0.39)
<FN>
+ Annualized
++ Total return represents aggregate total return for the year ended December
31, 1997 and 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.
(a) Based on the average of the daily shares outstanding throughout the year. *
For the period January 31, 1996 (Commencement of Operations) to December
31, 1996.
</FN>
</TABLE>
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 IBCA, Inc. ("Fitch") and Thomson Bankwatch, 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, 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 additional risks such as 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. Derivative
instruments may include elements of leverage and, accordingly, the fluctuation
of the value of the derivative instrument in relation to the underlying asset
may be magnified. 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
a variety of factors, particularly 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 AND MEDIUM COMPANIES. The Portfolio may, from time to time, invest a
substantial portion of its assets in small and medium capitalization companies.
While small and medium companies generally have potential for rapid growth,
investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium 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 small and medium 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 small and medium 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 year ended December 31, 1997 was 270.11%. (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 ("Investment
Advisory Agreement"), 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>
PORTFOLIO ADVISORY FEE
--------- ------------
<S> <C> <C>
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, 1998 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, the ratio of expenses to average
net assets would have been 4.44% for the year ended December 31, 1997.
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 February 28, 1998, the Sub-Adviser had approximately
$29.8 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 26 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>
PORTFOLIO SUB-ADVISORY FEE
--------- ----------------
<S> <C> <C>
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 year ended December 31, 1997 and the fiscal period February
9, 1996 (the effective date of the Trust's Registration Statement) to December
31, 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 12/31/97
FEBRUARY 9, 1996
PORTFOLIO ONE YEAR TO DECEMBER 31, 1997
--------- -------- --------------------
<S> <C> <C>
Strong Growth Portfolio 25.56% 24.42%
Standard & Poor's 500 Stock Index 33.36% 25.42%
Russell 2000 Small Company Index 22.24% 17.31%
</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, 1997, 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> <C>
Strong Growth Fund 19.05% 23.85% 12-31-93
Standard & Poor's 500 Stock Index 33.36% 22.96% From 1-1-94
Russell 2000 Small Company Index 22.24% 15.79% 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
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. SHARES OF THE STRONG INTERNATIONAL STOCK PORTFOLIO ARE NO LONGER AVAILABLE
FOR INVESTMENT. This Portfolio is currently available to the public only through
variable annuity contracts ("VA Contracts") issued by London Pacific Life and
Annuity Company ("Life Company").
Please read this Prospectus before investing in the Strong International Stock
Portfolio and keep it for future reference. The Prospectus contains information
about the Strong International Stock Portfolio that a prospective investor
should know before investing.
A Statement of Additional Information ("SAI") dated May 1, 1998 is available
without charge upon request and may be obtained by calling the Life Company at
(800) 852-3152 or by writing to the Life Company's Annuity Service Center, P.O.
Box 29564, Raleigh, North Carolina 27626. Some of the discussions contained in
this Prospectus refer to the more detailed descriptions contained in the SAI,
which is incorporated by reference into this Prospectus and has been filed with
the Securities and Exchange Commission.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THE PORTFOLIO MAY ENGAGE IN SUBSTANTIAL SHORT-TERM TRADING, WHICH MAY INCREASE
THE PORTFOLIO'S EXPENSES. THE PORTFOLIO MAY INVEST A SIGNIFICANT PORTION OF ITS
ASSETS IN ILLIQUID SECURITIES. THESE INVESTMENT POLICIES INVOLVE SUBSTANTIAL
RISK AND MAY BE CONSIDERED SPECULATIVE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE PURCHASER OF A VA CONTRACT SHOULD READ THIS PROSPECTUS IN CONJUNCTION WITH
THE PROSPECTUS FOR HIS OR HER VA CONTRACT.
PROSPECTUS DATED MAY 1, 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
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 and Medium 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.............................................................8
Sub-Adviser.......................................................................8
Sub-Advisory Fees.................................................................8
SALES AND REDEMPTIONS......................................................................9
NET ASSET VALUE............................................................................9
PERFORMANCE INFORMATION...................................................................10
Performance of the Portfolio.....................................................10
Comparable Public Fund Performance...............................................11
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS..................................................11
ADDITIONAL INFORMATION....................................................................12
</TABLE>
FINANCIAL HIGHLIGHTS
The following information 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.
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
STRONG INTERNATIONAL STOCK PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996*
----------------- ------------------
<S> <C> <C>
Net asset value, beginning of period $10.58 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.07 0.03
Net realized and unrealized gain
(loss) on investments (1.30) 0.61
---- ----
Total from investment operations (1.23) 0.64
---- ----
Dividends from net investment income (0.06) (0.01)
Distributions from net realized capital gains (0.39) (0.05)
---- ----
Total distributions (0.45) (0.06)
---- ----
Net asset value, end of period $8.90 $10.58
TOTAL RETURN ++ (11.62%) 5.85%
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $1,492 $1,221
Ratio of operating expenses to average net assets 1.49% 1.45%+
Ratio of net investment income to average net assets 0.68% 0.27%+
Portfolio turnover rate 165.59% 49.32%
Average commission rate per share+++ $0.0108 $0.0096
Ratio of operating expenses to average net assets
before waiver of fees and expense reimbursements 6.81% 7.74%+
Net investment income (loss) per share
before waiver of fees and expense reimbursements(a) ($0.49) ($0.58)
<FN>
+ Annualized
++ Total return represents aggregate total return for the year ended December
31, 1997 and 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.
(a) Based on the average of the daily shares outstanding throughout the year. *
For the period January 31, 1996 (Commencement of Operations) to December
31, 1996.
</FN>
</TABLE>
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 ICBA, Inc. ("Fitch") and Thomson Bankwatch, 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, 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 additional risks such as 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. Derivative
instruments may include elements of leverage and, accordingly, the value of the
derivative instrument to the underlying asset may be magnified. 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
a variety of factors, particularly 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 AND MEDIUM COMPANIES. The Portfolio may, from time to time, invest a
substantial portion of its assets in small and capitalization companies. While
small and medium companies generally have potential for rapid growth,
investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium 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 small and medium 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 small and medium 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 year ended December 31, 1997 was 165.59%. (See
"Portfolio Turnover" in the SAI.)
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER:
Under an Investment Advisory Agreement dated January 9, 1996 ("Investment
Advisory Agreement"), 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>
PORTFOLIO ADVISORY FEE
--------- ------------
<S> <C> <C>
Strong International Stock Porftolio .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, 1998 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, the ratio of expenses to average
net assets would have been 6.81% for the year ended December 31, 1997.
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 February 28, 1998, the Sub-Adviser had approximately
$29.8 billion under management. Mr. Richard S. Strong is the controlling
shareholder of the Sub-Adviser. The Sub-Adviser also acts as investment adviser
for each of the mutual funds comprising the Strong Family of Funds.
Anthony L.T. Cragg is the portfolio manager of the Sub-Adviser for the
Portfolio. Mr. Cragg joined the Sub-Adviser in April, 1993 to develop the
Sub-Adviser's international investment activities. During the prior seven years,
he helped establish Dillon, Read International Asset Management, where he was in
charge of Japanese, Asian, and Australian investments. A graduate of Christ
Church, Oxford University, Mr. Cragg began his investment career in 1980 at
Gartmore, Ltd., as an international investment manager, where his tenure
included assignments in London, Hong Kong, and Tokyo.
SUB-ADVISORY FEES. Under the terms of the Sub-Advisory Agreement, the Adviser
shall pay to the Sub-Adviser, as full compensation for services rendered under
the Sub-Advisory Agreement with respect to the Portfolio, monthly fees at the
following annual rates based on the average daily net assets of the Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISORY FEE
--------- ----------------
<S> <C> <C>
Strong International Stock Portfolio .50% of first $150 million of average daily net assets
.45% of the next $350 million of average daily net assets
.40% of average daily net assets over and above $500 million
</TABLE>
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the Trust
will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees and
charges relating to the VA Contract.)
The separate account of the Life Company places orders to purchase and redeem
shares of each Portfolio based on, among other things, the amount of
contributions to be invested and surrender and transfer requests to be effected
on that day pursuant to the VA Contracts issued by the Life Company. Orders
received by the Trust are effected on days on which the New York Stock Exchange
is open for trading, at the net asset value per share next determined after
receipt of the order. For orders received before 4:00 p.m. 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 year ended December 31, 1997 and the fiscal period February
9, 1996 (the effective date of the Trust's Registration Statement) to December
31, 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 12/31/97
FEBRUARY 9, 1996
PORTFOLIO ONE YEAR TO DECEMBER 31, 1997
--------- -------- --------------------
<S> <C> <C>
Strong International Stock Portfolio (11.62%) (3.43%)
Standard & Poor's 500 Stock Index 33.36% 25.42%
Morgan Stanley Capital International
Europe, Asia, and Far East (EAFE) Index 1.78% 3.81%
Lipper International Fund Index 7.27% 9.68%
</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, 1997, 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>
SINCE INCEPTION
FUND 1 YEAR INCEPTION DATE
---- ------ --------- ----
<S> <C> <C> <C> <C>
Strong International Stock Fund (5.71%) 6.40% 3-4-92
Standard & Poor's 500 Stock Index 32.11% 19.45% 4-1-92
Morgan Stanley Capital International
Europe, Asia, and Far East (EAFE) Index 4.63% 9.77% 4-1-92
Lipper International Fund Index 13.35% 11.01% 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.
[THIS PAGE INTENTIONALLY LEFT BLANK]
MFS TOTAL RETURN
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 May 1, 1998 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 MAY 1, 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
FINANCIAL HIGHLIGHTS.......................................................................1
INVESTMENT OBJECTIVE AND POLICIES..........................................................2
Investment Objective..............................................................2
Investment Policies...............................................................2
U.S. Government Securities........................................................3
Mortgage Pass-Through Securities..................................................3
Zero Coupon Bonds, Deferred Interest Bonds, and PIK Bonds.........................3
Foreign Securities................................................................3
Emerging Market Securities........................................................3
Brady Bonds.......................................................................4
American Depository Receipts......................................................4
Repurchase Agreements.............................................................4
Lending of Securities.............................................................4
When-Issued Securities............................................................4
Indexed Securities................................................................4
Mortgage Dollar Roll Transactions.................................................4
Loan Participations And Other Direct Indebtedness.................................5
Swaps And Related Transactions....................................................5
Restricted Securities.............................................................5
Corporate Asset-Backed Securities.................................................6
Options on Securities.............................................................5
Options on Stock Indices..........................................................6
Options on Foreign Currencies.....................................................7
Futures Contracts.................................................................7
Options on Futures Contracts......................................................7
Forward Contracts.................................................................7
Risk Factors......................................................................7
Lower Rated Bonds........................................................7
Options, Future Contracts, and Forward Contracts.........................8
Emerging Market Securities...............................................8
Portfolio Trading........................................................9
MANAGEMENT OF THE TRUST....................................................................9
Investment Adviser................................................................9
Expense Reimbursement............................................................10
Sub-Adviser......................................................................10
Sub-Advisory Fees................................................................10
SALES AND REDEMPTIONS.....................................................................11
NET ASSET VALUE...........................................................................11
PERFORMANCE INFORMATION...................................................................12
Performance of the Portfolio.....................................................12
Comparable Public Fund Performance...............................................13
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS..................................................13
ADDITIONAL INFORMATION....................................................................14
APPENDIX A...............................................................................A-1
Description of Bond Ratings.....................................................A-1
</TABLE>
FINANCIAL HIGHLIGHTS
The following information 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.
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
MFS TOTAL RETURN PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996*
----------------- ------------------
<S> <C> <C>
Net asset value, beginning of period $10.90 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.35 0.25
Net realized and unrealized gain
(loss) on investments 1.95 0.85
--- ---
Total from investment operations 2.30 1.10
--- ---
Dividends from net investment income (0.19) (0.20)
Distributions from net realized capital gains (0.21) (0.00)
Total distributions (0.40) (0.20)
--- ---
Net asset value, end of period $12.80 $10.90
TOTAL RETURN ++ 21.18% 9.81%
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $5,973 $1,529
Ratio of operating expenses to average net assets 1.29% 1.26%+
Ratio of net investment income to average net assets 2.80% 2.59%+
Portfolio turnover rate 103.75% 53.91%
Average commission rate per share+++ $0.0532 $0.0571
Ratio of operating expenses to average net assets
before waiver of fees and expense reimbursements 3.88% 7.84%+
Net investment income (loss) per share before waiver
of fees and expense reimbursements(a) ($0.03) ($0.38)
<FN>
+ Annualized
++ Total return represents aggregate total return for the year ended December
31, 1997 and 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.
(a) Based on the average of the daily shares outstanding throughout the year. *
For the period January 31, 1996 (Commencement of Operations) to December
31, 1996.
</FN>
</TABLE>
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 IBCA, 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, Crotia, Dominican Republic, Ecuador, Jordan, Mexico, Morocco,
Nigeria, Panama, Peru, the Philippines, Poland, Slovia, 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. While awaiting delivery of
securities purchased on such basis, the Portfolio will segregate liquid assets
sufficient to cover its commitments.
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 and could involve
the loss of all or a portion of the principal amount of, or interest on, the
instrument.
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
liquidity 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.
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 year ended December 31, 1997 was 103.75%. (See "Portfolio
Turnover" in the SAI.)
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER:
Under an Investment Advisory Agreement dated January 9, 1996 ("Investment
Advisory Agreement"), 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>
PORTFOLIO ADVISORY FEE
--------- ------------
<S> <C> <C>
MFS Total Return Portfolio .75% of first $200 million of average daily net assets
.70% of the next $1.1 billion of average daily net assets
.65% of average daily net assets over and above $1.3 billion
</TABLE>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 1998 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, the ratio of expenses to average
net assets would have been 3.88% for the year ended December 31, 1997.
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
$77.6 billion on behalf of approximately 2.9 million investor accounts as of
February 28, 1998. As of such date, the Sub-Adviser managed approximately $52.6
billion of assets in equity securities and $20.4 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 of Canada (U.S.), Financial Service Holdings, Inc., which
in turn is a wholly-owned subsidiary of Sun Life Assurance Company of Canada
("Sun Life"). The Directors of the Sub-Adviser are Jeffrey L. Shames, John W.
Ballen, Arnold D. Scott, John D. McNeil and Donald A. Stewart. Mr. Shames is the
Chairman and President and Mr. Scott is the Secretary and a Senior Executive
Vice President of the Sub-Adviser. Mr. Ballen is an Executive Vice President and
Chief Financial Officer. 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 Senior Vice President of the Sub-Adviser, Geoffrey L.
Kurinsky, a Senior Vice President of the Sub-Adviser, Castantinos G. Mokas, 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. Mr. Mokas has been the manager of the Portfolio's
convertible securities since April 1, 1998, has been employed by the Sub-Adviser
as a portfolio manager since 1990 and served as an analyst with U.S. Trust 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.
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>
PORTFOLIO SUB-ADVISORY FEES
--------- -----------------
<S> <C> <C>
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 year ended December 31, 1997 and the fiscal period February
9, 1996 (the effective date of the Trust's Registration Statement) to December
31, 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 12/31/97
FEBRUARY 9, 1996
PORTFOLIO ONE YEAR TO DECEMBER 31, 1997
--------- -------- --------------------
<S> <C> <C>
MFS Total Return Portfolio 21.18% 16.26%
Standard & Poor's 500 Stock Index 33.36% 25.42%
Lehman Brothers Aggregate Bond Index 9.65% 6.65%
Lipper Balanced Fund Index 20.05% 15.53%
</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, 1997, 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>
SINCE INCEPTION
FUND 1 YEAR 5 YEAR 10 YEAR INCEPTION DATE
---- ------ ------ ------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
MFS Total Return Fund 25.27% 14.52% 11.80% 12.08% 10-6-70
Standard & Poor's 500 Stock Index 40.45% 20.77% 14.75% 13.58% 9-30-70
Lehman Brothers Aggregate Bond Index 9.59% 6.95% 9.42% 9.72% From 1-1-70
Lipper Balanced Fund Index 24.92% 14.52% 11.15% 11.73% 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.
